Index

 
 
 
 
 
 
 
 

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

FORM 10-Q

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

For the quarterly period ended June 30, 2012

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

Commission File Number: 0-24796

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

BERMUDA
 
98-0438382
(State or other jurisdiction of incorporation and organization)
 
(IRS Employer Identification No.)
 
 
 
Mintflower Place, 4th floor
8 Par-La-Ville Rd, Hamilton, Bermuda
 
HM 08 Bermuda
(Address of principal executive offices)
 
(Zip Code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer” or “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer T
Accelerated filer £
Non-accelerated filer £
Smaller reporting company £

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding as of July 30, 2012
Class A Common Stock, par value $0.08
77,185,129





 
 
 
 
 
 
 
 







Index


THIS PAGE INTENTIONALLY LEFT BLANK

Index


CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.

FORM 10-Q

For the quarterly period ended June 30, 2012


 
Page
Part I Financial Information
 
 
Item 1. Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II. Other Information
 
 
 
 
 
 
 
 


Index





Part I. Financial Information

Item 1. Financial Statements

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

 
June 30, 2012

 
December 31, 2011

ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
124,814

 
$
186,386

Accounts receivable, net (Note 6)
201,723

 
192,157

Program rights, net (Note 5)
107,432

 
101,741

Other current assets (Note 7)
90,445

 
58,005

Total current assets
524,414

 
538,289

Non-current assets
 

 
 

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

 
217,367

Program rights, net (Note 5)
283,890

 
266,217

Goodwill (Note 3)
1,068,381

 
1,095,193

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

 
538,195

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

 
26,508

Total non-current assets
2,073,309

 
2,143,480

Total assets
$
2,597,723

 
$
2,681,769


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


4
Index

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


 
June 30, 2012

 
December 31, 2011

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

 
$
240,048

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

 
1,058

Other current liabilities (Note 10)
28,639

 
14,469

Total current liabilities
379,268

 
255,575

Non-current liabilities
 

 
 

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

 
1,323,311

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

 
84,941

Total non-current liabilities
1,174,802

 
1,408,252

Commitments and contingencies (Note 17)


 


EQUITY
 

 
 

CME Ltd. shareholders’ equity:
 

 
 

Nil shares of Preferred Stock of $0.08 each (December 31, 2011 – nil)
—

 
—

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

 
4,551

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

 
600

Additional paid-in capital
1,493,231

 
1,404,648

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

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

 
1,001,692

Noncontrolling interests
14,513

 
16,250

Total equity
1,043,653

 
1,017,942

Total liabilities and equity
$
2,597,723

 
$
2,681,769


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


5
Index

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

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


2011

 
2012


2011

Net revenues
$
211,222

 
$
249,656

 
$
378,655

 
$
422,428

Operating expenses:
 
 
 
 
 
 
 
Operating costs
42,240

 
34,536

 
71,366

 
68,191

Cost of programming
95,685

 
122,730

 
193,409

 
218,761

Depreciation of property, plant and equipment
9,867

 
14,493

 
20,942

 
27,910

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

 
7,809

 
25,198

 
15,436

Cost of revenues
160,507

 
179,568

 
310,915

 
330,298

Selling, general and administrative expenses
27,065

 
30,615

 
54,393

 
60,322

Operating income
23,650

 
39,473

 
13,347

 
31,808

Interest income
171

 
637

 
385


1,765

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

 
(16,918
)
 
47,371

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

 
1,161

 
48,325

 
1,121

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

 
(802
)
Income / (loss) before tax
68

 
7,530

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

 
(6,718
)
 
6,643

 
(7,650
)
Net income / (loss)
3,141

 
812

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

 
156

 
1,236

 
37

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

 
$
968

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

 
812

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

 
(31,462
)
 
131,246

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

 
$
(42,134
)
 
$
111,063

Comprehensive loss / (income) attributable to noncontrolling interests
750

 
89

 
1,177

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

 
$
(40,957
)
 
$
110,553



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

 
2011

 
2012

 
2011

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

 
$
0.02

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

 
$
0.02

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

 
64,384

 
65,447

 
64,377

Diluted
66,532

 
64,501

 
65,447

 
64,377



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


6
Index

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(US$ 000’s, except share data)
(Unaudited)

 
 
 
 
 
CME Ltd.
 
 
 
 
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional Paid-In Capital

 
Accumulated Deficit

 
Accumulated Other Comprehensive Income / (Loss)

 
Noncontrolling Interest

 
Total Equity

 
Number of shares
 
Par value
 
Number of shares
 
Par value
 
 
 
 
 
BALANCE December 31, 2011
56,892,114

 
$
4,551

 
7,500,936

 
$
600

 
$
1,404,648

 
$
(425,702
)
 
$
17,595

 
$
16,250

 
$
1,017,942

Stock-based compensation
—

 
—

 
—

 
—

 
2,091

 
—

 
—

 
—

 
2,091

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

 
601

 
(7,516,936
)
 
(601
)
 
—

 
—

 
—

 
—

 
—

Share issuance (Note 12)
11,901,260

 
952

 
—

 
—

 
66,564

 
—

 
—

 
—

 
67,516

Repurchase of 2013 Convertible Notes (Note 4)
—

 
—

 
—

 
—

 
(868
)
 
—

 
—

 
—

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

 
—

 
—

 
—

 
21,131

 
(21,131
)
 
—

 
—

 
—

Options exercised
—

 
—

 
16,000

 
1

 
32

 
—

 
—

 
—

 
33

Dividends
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(560
)
 
(560
)
Other
—

 
—

 
—

 
—

 
(367
)
 
—

 
—

 
—

 
(367
)
Net loss
—

 
—

 
—

 
—

 
—

 
(9,436
)
 
—

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

 
—

 
—

 
—

 
—

 
—

 
(31,521
)
 
59

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


$
6,104


—


$
—


$
1,493,231


$
(456,269
)

$
(13,926
)

$
14,513

 
$
1,043,653



 
 
 
 
 
CME Ltd.
 
 

 
 

 
Class A
Common Stock
 
Class B
Common Stock
 
 

 
 

 
 

 
 

 
 

 
Number of shares
 
Par value
 
Number of shares
 
Par value
 
Additional Paid-In Capital

 
Accumulated Deficit

 
Accumulated Other Comprehensive Income

 
Noncontrolling Interest

 
Total Equity

BALANCE December 31, 2010
56,878,489

 
$
4,550

 
7,490,936

 
$
599

 
$
1,377,803

 
$
(233,818
)
 
$
77,745

 
$
20,873

 
$
1,247,752

Stock-based compensation
—

 
—

 
—

 
—

 
3,104

 
—

 
—

 
—

 
3,104

Repurchase of 2013 Convertible Notes
—

 
—

 
—

 
—

 
(7,106
)
 
—

 
—

 
—

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

 
—

 
—

 
—

 
11,848

 
—

 
—

 
—

 
11,848

Reclassification of capped call options
—

 
—

 
—

 
—

 
16,940

 
(16,940
)
 
—

 
—

 
—

Stock options exercised
13,625

 
1

 
10,000

 
1

 
240

 
—

 
—

 
—

 
242

Dividends
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(362
)
 
(362
)
Net loss
—

 
—

 
—

 
—

 
—

 
(20,146
)
 
—

 
(37
)
 
(20,183
)
Currency translation adjustment
—

 
—

 
—

 
—

 
—

 
—

 
130,699

 
547

 
131,246

BALANCE June 30, 2011
56,892,114

 
$
4,551

 
7,500,936

 
$
600

 
$
1,402,829

 
$
(270,904
)
 
$
208,444

 
$
21,021

 
$
1,366,541


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


7

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

 
2011

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

 
 
Amortization of program rights
122,504

 
136,905

Depreciation and other amortization
57,960

 
57,445

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

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

Stock-based compensation (Note 14)
2,091

 
3,104

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

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

 
 

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

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

 
3,463

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

 
2,514

Deferred revenue
13,451

 
30,495

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

 
5,212

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

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

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

 
94

Investments in subsidiaries, net of cash acquired
—

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

 
 

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

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

 
13,194

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

 
—

Proceeds from exercise of stock options
33

 
242

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

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

 
244,050

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

 
$
197,505

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

 
$
—


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

8

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

1.  ORGANIZATION AND BUSINESS

Central European Media Enterprises Ltd., a Bermuda company limited by shares, is a media and entertainment company operating leading broadcast, production and distribution, and new media businesses in Central and Eastern Europe. Our assets are held through a series of Dutch and Curaçao holding companies. At June 30, 2012 , we operated mainly in Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic and Slovenia.

We manage our business on a divisional basis, with three operating segments, Broadcast, Media Pro Entertainment, our production and distribution business, and New Media, which are also our reportable segments.

Broadcast

Our Broadcast segment consists of 32 television channels primarily in six countries.  We generate advertising revenues in our Broadcast segment primarily through entering into agreements with advertisers, advertising agencies and sponsors to place advertising on the television channels that we operate. Our main general entertainment television channels in each country are distributed on a free-to-air basis terrestrially in analog, digital or both, depending on the digitalization status in each country, and are also distributed via cable and satellite. Our other channels are generally distributed via cable and satellite.  Unless otherwise indicated, we own 100% of our broadcast operating and license companies in each country.

Bulgaria

We operate one general entertainment channel, BTV, and five other channels, BTV CINEMA, BTV COMEDY, RING.BG, BTV ACTION and BTV LADY, a female-oriented cable channel that was launched on January 28, 2012. We also own several radio channels. We currently own 94.0% of CME Bulgaria B.V. ("CME Bulgaria"), the subsidiary that owns our Bulgaria Broadcast operations. Top Tone Media Holdings Limited ("Top Tone Holdings"), the third party that owns the remaining interest in CME Bulgaria, has exercised its right to acquire additional equity in CME Bulgaria, however the closing of this transaction has not yet occurred. Upon consummation of the equity transfer, we will own 90.0% of our Bulgaria Broadcast operations.

Croatia

We operate one general entertainment channel, NOVA TV (Croatia), one female-oriented channel, DOMA (Croatia), and an international channel, NOVA WORLD.

Czech Republic

We operate one general entertainment channel, TV NOVA (Czech Republic), and three other channels, NOVA CINEMA, NOVA SPORT and MTV CZECH. On July 14, 2012, we launched a male-oriented channel, FANDA.

Romania

We operate two general entertainment channels, PRO TV and ACASA, three other channels, PRO CINEMA, SPORT.RO, MTV ROMANIA, and an international channel, PRO TV INTERNATIONAL, as well as a general entertainment channel broadcasting in Moldova, PRO TV CHISINAU. On April 15, 2012, we launched an additional channel in Romania, ACASA GOLD, which is a female-oriented cable channel.

Slovak Republic

We operate one general entertainment channel, TV MARKIZA, and one female-orientated channel, DOMA (Slovak Republic).

Slovenia

We operate two general entertainment channels, POP TV and KANAL A, and POP NON STOP, a subscription package of six channels which includes POP KINO, POP KINO2, POP BRIO, POP FANI, POP OTO and POP SPOT.

Media Pro Entertainment

Media Pro Entertainment (“MPE”), our production and distribution business, leverages creative talent across all our countries and focuses on the development, production and distribution of content for our television channels and to third parties, both within our region and globally.

MPE is organized into two businesses:

Production : This business provides assets and expertise to produce a range of fiction, reality and entertainment programming, and films, using both licensed formats as well as original formats and content developed by the business. The content produced can be easily adapted for use across several markets and in many revenue-generating windows.

Distribution : In addition to having responsibility for selling finished content and formats developed by our production operations to third parties, this business acquires rights to international film and television content across our region and distributes them both to third party clients and to our Broadcast operations. Our distribution operations are also able to generate third-party revenue by distributing content through the theatrical and home video operations. MPE owns and operates sixteen cinema screens in Romania. In addition, a home video distribution business sells DVD and Blu Ray discs to wholesale and retail clients in the Czech Republic, the Slovak Republic, Romania and Hungary. A significant portion of our distribution revenues are to third parties, which are expected to generate a significant portion of MPE’s consolidated profits in the short-term.


9

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


The MPE segment currently generates the majority of its revenues from sales to our Broadcast segment. For that reason, the financial results of the segment are dependent to an extent on the performance of the television advertising market, although the long-term nature of the production process is such that it takes time for significant market changes to be reflected in this segment's results.

New Media

We own and operate more than 75 websites across our markets as well as our video-on-demand service, Voyo, in order to build strong online channels to distribute popular content and to operate an efficient marketing tool for our Broadcast operations.  The New Media segment focuses on offering viewers the choice of watching our premium television content anytime, anywhere, and operates a series of news portals, ranging from general information to sports or niche sites. Voyo is an internet-based content aggregation and distribution platform that offers consumers both free and paid content in multiple distribution windows. During the first six months of 2012, Voyo completed the introduction of a subscription based video-on-demand service in all of its regions, offering premium locally produced productions as well as hundreds of local and foreign feature films. It also offers an embedded transactional video-on-demand element devoted to movie content from major Hollywood and independent studios. Revenues generated by the New Media segment are primarily derived from the sale of advertising.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Quarterly Report on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles in the United States of America (“US GAAP”). Amounts as at December 31, 2011 included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission ("SEC") on February 22, 2012 as amended by our Form 10-K/A filed with the SEC on April 20, 2012. Our significant accounting policies have not changed since December 31, 2011.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with US GAAP for complete financial statements.  The condensed consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

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

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and assumptions. Certain amounts included in the accompanying condensed consolidated financial statements have been adjusted or reclassified to conform to the current period presentation. In the condensed consolidated statements of cash flows, we increased disclosure to present amounts for the adjustments to reconcile net income to cash flows from operating activities relating to the amortization of program rights and the change in accrued interest and have presented the comparative amounts for all periods presented.

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

On January 1, 2012, we adopted guidance issued in June 2011, which gives entities the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. Our condensed consolidated financial statements already presented the components of net income and other comprehensive income in two separate but consecutive statements. In December 2011, additional guidance was released deferring the requirement to present reclassifications out of accumulated other comprehensive income.

Program Rights

Purchased program rights

The costs incurred to acquire program rights are capitalized and amortized over their expected useful lives in a manner which reflects the pattern we expect to use and benefit from the programming. If the initial airing of content allowed by a license is expected to provide more value than subsequent airings, we apply an accelerated method of amortization. These accelerated methods of amortization depend on the estimated number of runs the content is expected to receive, and are determined based on a study of historical results for similar programming. For programming that is not advertising supported, each program's costs are amortized on a straight-line basis over the license period. For content that is expected to be aired only once, the entire cost is recognized as an expense on the first run.

During the third quarter of 2011, we concluded a comprehensive examination of the appropriateness of our program rights policy. This review included a study of the relative value generated by all runs of a license in past periods. We concluded that the existing allocation for films and series with an estimated two runs of 65% on showing the first run and 35% on showing the second run was still appropriate. However, past performance showed that content with an estimated three runs generated more relative value on the third run than our previous estimate. Consequently, from July 1, 2011 these titles were amortized 50% on showing the first run, 28% on showing the second run and 22% on showing the third run. The impact of this change is a lower amortization charge of approximately US$ 1.8

10

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


million and US$ 3.8 million for the three and six months ended June 30, 2012 , respectively. Had we continued with our estimate to amortize content with an estimated three runs by 60% on the first run, 30% on the second run and 10% on the third run from January 1, 2012 to June 30, 2012 our net income attributable to CME Ltd., basic net income per common share and diluted net income per common share would have been US$ 2.2 million , US$ 0.03 and US$ 0.03 for the three months ended June 30, 2012 , respectively, and our net loss attributable to CME Ltd., basic net loss per common share and diluted net loss per common share would have been US$ (13.2) million , US$ (0.20) and US$ (0.20) , respectively, for the six months ended June 30, 2012 .

Goodwill

On January 1, 2012, we adopted guidance issued in September 2011 to simplify how entities test goodwill for impairment by providing an option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not necessary. The adoption of this guidance may impact how we perform our goodwill testing, but not the amount of impairment recognized in the financial statements if goodwill is found to be impaired.

Financial Instruments

On January 1, 2012, we adopted guidance issued in May 2011, which represents clarifications of common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP. It also includes instances where a particular principle or requirement for measuring fair value has changed. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows, but did result in additional disclosure.

Recent Accounting Pronouncements

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


3. GOODWILL AND INTANGIBLE ASSETS

Goodwill:

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

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

$
(117,460
)
$
58,934

$
(1,590
)
$
57,344

$
(117,460
)
$
174,804

Croatia
11,116

(10,454
)
662

(17
)
645

(10,454
)
11,099

Czech Republic
862,457

—

862,457

(17,855
)
844,602

—

844,602

Romania
62,078

—

62,078

(3,414
)
58,664

—

58,664

Slovak Republic
56,575

—

56,575

(1,526
)
55,049

—

55,049

Slovenia
18,321

—

18,321

(494
)
17,827

—

17,827

Media Pro
Entertainment segment:
 
 
 
 
 
 
 

Fiction and reality and entertainment
17,502

—

17,502

(920
)
16,582

—

16,582

Production services
11,028

(11,028
)
—

—

—

(11,028
)
11,028

Distribution
18,664

—

18,664

(996
)
17,668

—

17,668

Total
$
1,234,135

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

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

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



11

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


Broadcast licenses and other intangible assets:

The net book value of our broadcast licenses and other intangible assets as at June 30, 2012 and December 31, 2011 is summarized as follows:

 
Indefinite-Lived Broadcast Licenses

 
Amortized Broadcast Licenses

 
Trademarks

 
Customer Relationships

 
Other

 
Total

Balance, December 31, 2011
$
51,800

 
$
280,210

 
$
126,645

 
$
74,346

 
$
5,194

 
$
538,195

Reclassifications
(51,800
)
 
51,800

 
—

 
—

 
—

 
—

Additions
—

 
—

 
—

 
—

 
201

 
201

Amortization
—

 
(20,506
)
 
—

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

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

 
$
303,949

 
$
122,545

 
$
68,138

 
$
4,891

 
$
499,523


Until December 31, 2011 , our broadcast licenses in Croatia, Romania and Slovenia were determined to have indefinite lives and were subject to annual impairment reviews.  Due to the change in estimates discussed below, these balances were reclassified from indefinite-lived to amortized on January 1, 2012. The indefinite-lived licenses were not impaired as at January 1, 2012. Prior to December 31, 2011, the licenses in Bulgaria were determined to have an estimated economic useful life of, and were amortized on a straight-line basis over, twenty-four years.  Licenses in the Czech Republic were determined to have an economic useful life of, and were amortized on a straight-line basis over, twenty years.  The license in the Slovak Republic was determined to have an economic useful life of, and was amortized on a straight-line basis over, thirteen years.

We revised our estimate of the remaining useful life of certain of our Broadcast licenses as of January 1, 2012, and now amortize the remaining balances on a straight-line basis over the following periods, which are generally the remaining contractual life of the license: twelve years in Bulgaria, thirteen years in the Czech Republic, three years in Romania, eight years in the Slovak Republic, and ten years in Slovenia. The license in Croatia was previously written down to a nominal value. The impact of this change in estimates is a higher amortization charge of approximately US$ 4.2 million recorded during the three months ended June 30, 2012 or US$ 0.06 and US$ 0.06 per basic common share and diluted common share and US$ 9.5 million recorded during the six months ended June 30, 2012 , or US$ 0.14 and US$ 0.14 per basic common share and diluted common share, respectively.

Customer relationships are deemed to have an economic useful life of, and are amortized on a straight-line basis over, five to fifteen years.  Trademarks have an indefinite life.

The gross value and accumulated amortization of broadcast licenses and other intangible assets was as follows at June 30, 2012 and December 31, 2011 :

 
June 30, 2012

 
December 31, 2011

Gross value
$
543,381

 
$
514,641

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

 
359,750

Indefinite-lived broadcast licenses and trademarks
122,545

 
178,445

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

 
$
538,195




12

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


4.  LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

Summary

 
June 30, 2012

 
December 31, 2011

Senior debt
$
1,045,325

 
$
1,243,207

Total credit facilities and capital leases
170,703

 
81,162

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

 
1,324,369

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

 
$
1,323,311


Senior Debt

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

 
Carrying Value
 
Fair Value
 
June 30,
2012

 
December 31,
2011

 
June 30,
2012

 
December 31,
2011

USD 20.6 million 2013 Convertible Notes
$
19,828

 
$
121,230

 
$
20,672

 
$
117,926

EUR 87.5 million 2014 Floating Rate Notes
110,163

 
191,497

 
102,729

 
141,708

USD 261.0 million 2015 Convertible Notes
227,468

 
223,341

 
226,400

 
163,276

EUR 374.6 million 2016 Fixed Rate Notes
473,834

 
487,176

 
484,016

 
373,215

EUR 170.0 million 2017 Fixed Rate Notes
214,032

 
219,963

 
224,657

 
206,765

 
$
1,045,325

 
$
1,243,207

 
$
1,058,474

 
$
1,002,890


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

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





13

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



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

2014 Floating Rate Notes

Total

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

$
448

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

527

897

Adjustment to additional paid-in capital
$
868

$
—

$
868


Convertible Notes

2013 Convertible Notes

On March 10, 2008, we issued US$ 475.0 million of 2013 Convertible Notes, which mature on March 15, 2013. As discussed above, in May 2012 we accepted for repurchase US$ 109.0 million in principal amount of our 2013 Convertible Notes at par plus accrued interest. During 2011, we completed privately negotiated exchanges totaling US$ 261.0 million in aggregate principal amount of our 2013 Convertible Notes for US$ 261.0 million in aggregate principal amount of our 5.0% Senior Convertible Notes due 2015 (the “2015 Convertible Notes” and collectively with the 2013 Convertible Notes, the “Convertible Notes”). The exchanging holders of the 2013 Convertible Notes also received cash consideration of approximately US$ 35.4 million , including accrued interest of US$ 3.3 million . We also repurchased US$ 49.5 million aggregate principal amount of our 2013 Convertible Notes for US$ 47.4 million including accrued interest in September 2011, and US$ 34.8 million aggregate principal amount for US$ 30.7 million plus accrued interest in October 2010.

Interest on the 2013 Convertible Notes is payable semi-annually in arrears on each March 15 and September 15.  The fair value of the 2013 Convertible Notes as at June 30, 2012 and December 31, 2011 was calculated by multiplying the outstanding debt by the traded market price because we considered the embedded conversion option to have no value since the market price of our shares was so far below the conversion price. This measurement of estimated fair value uses Level 2 inputs as described in Note 11, "Financial Instruments and Fair Value Measurements".

The 2013 Convertible Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by our wholly owned subsidiaries CME Media Enterprises N.V. (“CME NV”) and CME Media Enterprises B.V. ("CME BV") and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.

Prior to December 15, 2012, the 2013 Convertible Notes are convertible following certain events and from that date, at any time, based on an initial conversion rate of 9.5238 shares of our Class A common stock per US$ 1,000 principal amount of 2013 Convertible Notes (which is equivalent to an initial conversion price of approximately US$ 105.00 per share). The conversion rate is subject to adjustment if we make certain distributions to the holders of our Class A common stock, undergo certain corporate transactions or a fundamental change, and in other circumstances specified in the 2013 Convertible Notes.   From time to time up to and including December 15, 2012, we will have the right to elect to deliver (i) shares of our Class A common stock or (ii) cash and, if applicable, shares of our Class A common stock upon conversion of the 2013 Convertible Notes. At present, we have elected to deliver cash and, if applicable, shares of our Class A common stock. As at June 30, 2012 , the 2013 Convertible Notes could not be converted.  In addition, the holders of the 2013 Convertible Notes have the right to put the 2013 Convertible Notes to us for cash equal to the aggregate principal amount of the 2013 Convertible Notes plus accrued but unpaid interest thereon following the occurrence of certain specified fundamental changes (including a change of control (which includes the acquisition by a person or group (as such term is defined in Section 13(d)(3) of the Securities and Exchange Act of 1934 (the "Exchange Act")) of beneficial ownership of more than 50% of the outstanding shares of our Class A common stock), certain mergers, insolvency and a delisting).

As at June 30, 2012 , we had capped call options over 2,940,477 shares of our Class A common stock, 1,583,333 shares from BNP Paribas (“BNP”), and 1,357,144 shares from Deutsche Bank Securities Inc. (“DB”). The amount of shares corresponded to the number of shares of our Class A common stock that we would be entitled to receive on a conversion of the 2013 Convertible Notes at the initial conversion price if we elected to settle the capped call options solely in shares of Class A common stock. The options entitle us to receive, at our election, cash or shares of Class A common stock with a value equal approximately to the difference between the trading price of our shares at the time the option is exercised and US$ 105.00 , up to a maximum trading price of US$ 151.20 . These options expire on March 15, 2013. At present, we have elected to receive shares of our Class A common stock on exercise of the capped call options.

At the date of purchase, we determined that all of these capped call options met the definition of an equity instrument and consequently recognized them on issuance at fair value within additional paid-in capital. This classification is still correct and we have continued to recognize them within equity. Subsequent changes in fair value have not been, and will not be, recognized as long as the instruments continue to be classified in equity.

We recorded adjustments to equity during 2012 totaling US$ 21.1 million in respect of the portion of the capped call options that were no longer exercisable following the 2013 Convertible Notes accepted for repurchase.

At June 30, 2012 , 196,638 capped call options, which correspond to the number of shares that would be issued upon conversion of the 2013 Convertible Notes, could not be exercised because no conversion of 2013 Convertible Notes had occurred. The aggregate fair value of the remaining capped call options with DB and BNP at June 30, 2012 was US$ nil .

We separately account for the liability and equity components of the 2013 Convertible Notes.  The embedded conversion option is not accounted for as a derivative.

14

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


 
Principal Amount of Liability Component

 
Unamortized Discount

 
Net Carrying Value

 
Equity Component

BALANCE December 31, 2011
$
129,660

 
$
(8,430
)
 
$
121,230

 
$
102,369

Extinguishment of debt
(109,013
)
 
4,537

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

 
3,074

 
3,074

 
—

BALANCE June 30, 2012
$
20,647

 
$
(819
)
 
$
19,828

 
$
101,501


The remaining issuance discount is being amortized over the life of the 2013 Convertible Notes, which mature on March 15, 2013, using the effective interest method.  The effective interest rate on the liability component for all periods presented was 10.3% .

Certain other derivative instruments have been identified as being embedded in the 2013 Convertible Notes, but as they are considered to be clearly and closely related to the 2013 Convertible Notes they are not accounted for separately.

2015 Convertible Notes

During 2011, we completed privately negotiated exchanges totaling US$ 261.0 million in aggregate principal amount of our 2013 Convertible Notes for US$ 261.0 million in aggregate principal amount of our 2015 Convertible Notes.  The 2015 Convertible Notes mature on November 15, 2015.

Interest is payable semi-annually in arrears on each May 15 and November 15.  The fair value of the liability component of the 2015 Convertible Notes as at June 30, 2012 was calculated as the present value of the future cash flows associated with the liability component discounted using the rate of return an investor would have required on our non-convertible debt with other terms substantially similar to the 2015 Convertible Notes. This measurement of estimated fair value uses Level 2 inputs as described in Note 11, "Financial Instruments and Fair Value Measurements".

The 2015 Convertible Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by CME NV and CME BV and are secured by a pledge of shares of those companies.

Prior to August 15, 2015, the 2015 Convertible Notes are convertible following certain events and from that date, at any time, based on an initial conversion rate of 20 shares of our Class A common stock per US$ 1,000 principal amount of 2015 Convertible Notes (which is equivalent to an initial conversion price of US$ 50.00 per share). The conversion rate is subject to adjustment if we make certain distributions to the holders of shares of our Class A common stock, undergo certain corporate transactions or a fundamental change, and in other circumstances specified in the 2015 Convertible Notes.   From time to time up to and including August 15, 2015, we will have the right to elect  to deliver (i) shares of our Class A common stock, (ii) cash, or (iii) cash and, if applicable, shares of our Class A common stock upon conversion of the 2015 Convertible Notes.  At present, we have elected to deliver cash and, if applicable, shares of our Class A common stock.  As at June 30, 2012 , the 2015 Convertible Notes may not be converted.  In addition, the holders of the 2015 Convertible Notes have the right to put the 2015 Convertible Notes to us for cash equal to the aggregate principal amount of the 2015 Convertible Notes plus accrued but unpaid interest thereon following the occurrence of certain specified fundamental changes (including a change of control (which includes the acquisition by a person or group (as such term is defined in Section 13(d)(3) of the Exchange Act) of beneficial ownership of more than 50% of the outstanding shares of our Class A common stock), certain mergers, insolvency and a delisting).

We separately account for the liability and equity components of the 2015 Convertible Notes.  The embedded conversion option is not accounted for as a derivative.
 
Principal Amount of Liability Component

 
Unamortized Discount

 
Net Carrying Value

 
Equity Component

BALANCE December 31, 2011
$
261,034

 
$
(37,693
)
 
$
223,341

 
$
11,907

Amortization of debt issuance discount
—

 
4,127

 
4,127

 
—

BALANCE June 30, 2012
$
261,034

 
$
(33,566
)
 
$
227,468

 
$
11,907


The issuance discount is being amortized over the life of the 2015 Convertible Notes using the effective interest method.  The effective interest rate on the liability component was 10.0% .

Certain other derivative instruments have been identified as being embedded in the 2015 Convertible Notes, but as they are considered to be clearly and closely related to the 2015 Convertible Notes they are not accounted for separately.

Floating Rate Notes

On May 16, 2007, we issued EUR 150.0 million of 2014 Floating Rate Notes which bear interest at the six-month Euro Inter Bank Offered Rate (“EURIBOR”) plus 1.625% (the applicable rate at June 30, 2012 was 2.60% ). The 2014 Floating Rate Notes mature on May 15, 2014. As discussed above, in June 2012 we accepted for repurchase EUR 60.5 million (approximately US$ 75.8 million at the date of repurchase) in principal amount of our 2014 Floating Rate Notes for EUR 56.7 million (approximately US$ 71.1 million at the date of repurchase) plus accrued interest. In 2010, we repurchased EUR 2.0 million (approximately US

15

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


$ 2.8 million at the date of repurchase) aggregate principal amount of our 2014 Floating Rate Notes for EUR 1.6 million (approximately US$ 2.3 million at date of repurchase) plus accrued interest.

Interest on the 2014 Floating Rate Notes is payable semi-annually in arrears on each May 15 and November 15.  The fair value of the 2014 Floating Rate Notes as at June 30, 2012 and December 31, 2011 was equal to the outstanding debt multiplied by the traded market price. This measurement of estimated fair value uses Level 2 inputs as described in Note 11, "Financial Instruments and Fair Value Measurements".

The 2014 Floating Rate Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries. The amounts outstanding are guaranteed by CME NV and CME BV and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.  The terms of our 2014 Floating Rate Notes restrict the manner in which our business is conducted, including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets (see Note 19, “Indenture Covenants”).

In the event that (A) there is a change in control by which (i) any party other than one of our present shareholders becomes the beneficial owner of more than 35.0% of our total voting power; (ii) we agree to sell substantially all of our operating assets; or (iii) there is a change in the composition of a majority of our Board of Directors; and (B) on the 60th   day following any such change of control the rating of the 2014 Floating Rate Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of control, we can be required to repurchase the 2014 Floating Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the 2014 Floating Rate Notes plus accrued and unpaid interest to the date of purchase.

The 2014 Floating Rate Notes are redeemable at our option for the remainder of their life, in whole or in part, at 100.0% of their face value.

Certain derivative instruments, including redemption call options and change of control and asset disposition put options, have been identified as being embedded in the 2014 Floating Rate Notes but as they are considered clearly and closely related to the 2014 Floating Rate Notes, they are not accounted for separately.
 
Fixed Rate Notes

2016 Fixed Rate Notes

On September 17, 2009, we issued EUR 200.0 million of 11.625% senior notes due 2016 at an issue price of 98.261% , and on September 29, 2009, we issued an additional EUR 240.0 million tranche of 11.625% senior notes due 2016 at an issue price of 102.75% (collectively, the "2016 Fixed Rate Notes"). The 2016 Fixed Rate Notes mature on September 15, 2016.  In 2010, we repurchased a total of EUR 48.4 million (approximately US$ 67.1 million at the date of repurchase) aggregate principal amount of our 2016 Fixed Rate Notes for EUR 49.3 million (approximately US$ 68.5 million at the date of repurchase) plus accrued interest.  In 2011, we repurchased an additional EUR 17.0 million (approximately US$ 24.0 million at the date of repurchase) aggregate principal amount of our 2016 Fixed Rate Notes for EUR 18.6 million (approximately US$ 26.3 million at the date of repurchase) plus accrued interest.

Interest on the 2016 Fixed Rate Notes is payable semi-annually in arrears on each March 15 and September 15.  The fair value of the 2016 Fixed Rate Notes as at June 30, 2012 and December 31, 2011 was calculated by multiplying the outstanding debt by the traded market price. This measurement of estimated fair value uses Level 2 inputs as described in Note 11, "Financial Instruments and Fair Value Measurements".

The 2016 Fixed Rate Notes are secured senior obligations and rank pari passu with all existing and future senior indebtedness and are effectively subordinated to all existing and future indebtedness of our subsidiaries.  The amounts outstanding are guaranteed by CME NV and CME BV and are secured by a pledge of shares of those subsidiaries as well as an assignment of certain contractual rights.  The terms of our 2016 Fixed Rate Notes restrict the manner in which our business is conducted, including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets (see also Note 19, “Indenture Covenants”).

In the event that (A) there is a change in control by which (i) any party other than certain of our present shareholders becomes the beneficial owner of more than 35.0% of our total voting power; (ii) we agree to sell substantially all of our operating assets; or (iii) there is a change in the composition of a majority of our Board of Directors; and (B) on the 60th   day following any such change of control the rating of the 2016 Fixed Rate Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of control, we can be required to repurchase the 2016 Fixed Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the 2016 Fixed Rate Notes plus accrued and unpaid interest to the date of purchase.

The 2016 Fixed Rate Notes are redeemable at our option, in whole or in part, at the redemption prices set forth below:
 
From
Fixed Rate Notes
Redemption Price

 
 
September 15, 2013 to September  14, 2014
105.813
%
September 15, 2014 to September  14, 2015
102.906
%
September 15, 2015 and thereafter
100.000
%

Certain derivative instruments, including redemption call options and change of control and asset disposition put options, have been identified as being embedded in the 2016 Fixed Rate Notes but as they are considered clearly and closely related to the 2016 Fixed Rate Notes, they are not accounted for separately. We have included the net issuance premium within the carrying value of the 2016 Fixed Rate Notes and are amortizing it through interest expense using the effective interest method.


16

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


2017 Fixed Rate Notes

On October 21, 2010, our wholly-owned subsidiary, CET 21 spol. s r.o. (“CET 21”), issued EUR 170.0 million (approximately US$ 214.0 million ) of 9.0% Senior Secured Notes due 2017 (the “2017 Fixed Rate Notes”, and collectively with the 2014 Floating Rate Notes and 2016 Fixed Rate Notes, the “Senior Notes”). The 2017 Fixed Rate Notes mature on November 1, 2017.

Interest is payable semi-annually in arrears on each May 1 and November 1.  The fair value of the 2017 Fixed Rate Notes as at June 30, 2012 and December 31, 2011 was calculated by multiplying the outstanding debt by the traded market price. This measurement of estimated fair value uses Level 2 inputs as described in Note 11, "Financial Instruments and Fair Value Measurements".

The 2017 Fixed Rate Notes are secured senior obligations of CET 21 and rank equally with CET 21’s obligations under the Secured Revolving Credit Facility (defined below). The 2017 Fixed Rate Notes rank pari passu with all existing and future senior indebtedness of CET 21 and are effectively subordinated to all existing and future indebtedness of our other subsidiaries.  The amounts outstanding are guaranteed by CME Ltd. and by our wholly-owned subsidiaries CME NV, CME BV, CME Investments B.V., CME Slovak Holdings B.V. (“CME SH”) and MARKÍZA-SLOVAKIA, spol. s r.o. (“Markiza”) and are secured by a pledge of the shares of CME NV, CME BV, CET 21, CME SH, and Media Pro Pictures s.r.o., as well as an assignment of certain contractual rights.  The terms of the 2017 Fixed Rate Notes restrict the manner in which the Company’s and CET 21’s business is conducted, including the incurrence of additional indebtedness, the making of investments, the payment of dividends or the making of other distributions, entering into certain affiliate transactions and the sale of assets (see also Note 19, “Indenture Covenants”).

In the event that (A) there is a change in control by which (i) any party other than certain of our present shareholders becomes the beneficial owner of more than 35% of our total voting power; (ii) we agree to sell substantially all of our operating assets; or (iii) there is a change in the composition of a majority of our Board of Directors; and (B) on the 60th   day following any such change of control the rating of the 2017 Fixed Rate Notes is either withdrawn or downgraded from the rating in effect prior to the announcement of such change of control, we can be required to repurchase the 2017 Fixed Rate Notes at a purchase price in cash equal to 101.0% of the principal amount of the 2017 Fixed Rate Notes plus accrued and unpaid interest to the date of purchase.

The 2017 Fixed Rate Notes are redeemable at our option, in whole or in part, at the redemption prices set forth below:

 
From
Fixed Rate Notes
Redemption Price

 
 
November 1, 2014 to October 31, 2015
104.50
%
November 1, 2015 to October 31, 2016
102.25
%
November 1, 2016 and thereafter
100.00
%

Prior to November 1, 2013, up to 35.0% of the original principal amount of the 2017 Fixed Rate Notes can be redeemed at a price of 109.0% of the principal amount, plus accrued and unpaid interest if certain conditions are met.

Certain derivative instruments, including redemption call options and change of control and asset disposition put options, have been identified as being embedded in the 2017 Fixed Rate Notes but as they are considered clearly and closely related to the 2017 Fixed Rate Notes, they are not accounted for separately.


17

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


Credit Facilities and Capital Lease Obligations

Credit facilities and capital lease obligations comprised the following at June 30, 2012 and December 31, 2011 :

 
 
 
June 30, 2012

 
December 31, 2011

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

 
$
77,464

Capital leases
 
 
4,029

 
3,698

Total credit facilities and capital leases
 
 
170,703

 
81,162

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

 
$
80,104


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

(b) We have a cash pooling arrangement with Bank Mendes Gans (“BMG”), a subsidiary of ING Bank N.V. (“ING”), which enables us to receive credit across the group in respect of cash balances which our subsidiaries in The Netherlands, Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic and Slovenia deposit with BMG. Cash deposited by our subsidiaries with BMG is pledged as security against the drawings of other subsidiaries up to the amount deposited.  

As at June 30, 2012 , we had deposits of US$ 21.2 million in and drawings of US$ nil on the BMG cash pool. Interest is earned on deposits at the relevant money market rate and interest is payable on all drawings at the relevant money market rate plus 2.0% . As at December 31, 2011 , we had deposits of US$ 37.0 million in and drawings of US$ nil on the BMG cash pool.

(c) On October 21, 2010, CET 21 entered into a five-year CZK 1.5 billion (approximately US$ 73.7 million ) secured revolving credit facility (the “Secured Revolving Credit Facility”) with BNP Paribas S.A., J.P. Morgan plc, Citigroup Global Markets Limited, ING and Ceska Sporitelna, a.s. (“CSAS”), as mandated lead arrangers and original lenders, BNP Paribas S.A., as agent, BNP Paribas Trust Corporation UK Limited, as security agent, and CME Ltd., CME NV, CME BV, CME Investments B.V., CME SH and Markiza as the original guarantors. Interest under the facility is calculated at a rate per annum of 5% above Prague Interbank Offered Rate ("PRIBOR") for the relevant interest period (the applicable rate at June 30, 2012 and December 31, 2011 was 6.08% and 5.97% , respectively). The Secured Revolving Credit Facility will decrease to CZK 750.0 million (approximately US$ 36.8 million ) on the fourth anniversary of the signing date.  Drawings under the facility by CET 21 may be used for working capital requirements and for general corporate purposes. The Secured Revolving Credit Facility contains customary representations, warranties, covenants and events of default. The covenants include limitations on CET 21's ability to incur additional indebtedness, create liens, make disposals and to carry out certain other types of transactions. Drawings on the Secured Revolving Credit Facility amounted to CZK 1.5 billion (approximately US$ 73.7 million ) as at June 30, 2012 and December 31, 2011. As at June 30, 2012 , CET 21 had an interest rate swap to hedge the interest rate exposure on the future outstanding principal under the Secured Revolving Credit Facility (see Note 11, “Financial Instruments and Fair Value Measurements”).

(d) As at June 30, 2012 , and December 31, 2011 , there were no drawings outstanding under a CZK 300.0 million (approximately US$ 14.7 million ) working capital credit facility with Factoring Ceska Sporitelna (“FCS”).  This facility is secured by a pledge of receivables under a factoring agreement with FCS and is available indefinitely, subject to a three-month notice period.  The facility bears interest at one-month PRIBOR plus 2.5% for the period that actively assigned accounts receivable are outstanding.

(e) At June 30, 2012 , Media Pro Entertainment had an aggregate principal amount of RON 10.7 million (approximately US$ 3.0 million ) ( December 31, 2011 , RON 10.6 million , approximately US$ 3.0 million ) of loans outstanding with the Central National al Cinematografei ("CNC"), a Romanian governmental organization which provides financing for qualifying filmmaking projects. Upon acceptance of a particular project, the CNC awards an agreed level of funding to each project in the form of an interest-free loan. Loans from the CNC are typically advanced for a period of ten years and are repaid through the proceeds from the distribution of the film content.  At June 30, 2012 , we had 13 loans outstanding with the CNC with maturity dates ranging from 2014 to 2020. The carrying amounts at June 30, 2012 and December 31, 2011 are net of a fair value adjustment of US$ 1.0 million and US$ 1.0 million , respectively, arising on acquisition.


18

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


Total Group

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

2012 (1)
$
90,887

2013
20,725

2014
147,391

2015
297,868

2016
471,621

2017 and thereafter
216,197

Total Senior Debt and credit facilities
1,244,689

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


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

As at June 30, 2012 , we had US$ 20.6 million in principal amount of 2013 Convertible Notes due for payment on March 15, 2013 and believe that our financial resources are sufficient to meet this as well as our other external financial obligations. 

Capital Lease Commitments

We lease certain of our office and broadcast facilities as well as machinery and equipment under various leasing arrangements. The future minimum lease payments, by year and in the aggregate, under capital leases with initial or remaining non-cancellable lease terms in excess of one year, consisted of the following at June 30, 2012 :

2012
$
614

2013
1,048

2014
956

2015
370

2016
348

2017 and thereafter
1,132

Total undiscounted payments
4,468

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

 


19

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


5.  PROGRAM RIGHTS

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

 
June 30, 2012

 
December 31, 2011

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

 
$
266,884

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

 
165,143

Produced program rights – Feature Films:
 
 
 

Released, net of amortization
2,672

 
3,197

Completed and not released
1,293

 
776

In production
659

 
708

Development and pre-production
534

 
279

Produced program rights – Television Programs:
 

 
 

Released, net of amortization
80,168

 
70,383

Completed and not released
4,377

 
9,136

In production
10,052

 
12,457

Development and pre-production
4,723

 
4,138

Total produced program rights
104,478

 
101,074

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

 
$
266,217

 



6.  ACCOUNTS RECEIVABLE

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

 
June 30, 2012

 
December 31, 2011

Unrelated customers
$
217,002

 
$
204,747

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

 
1,020

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

 
$
192,157


At June 30, 2012 , CZK 476.2 million (approximately US$ 23.4 million ) ( December 31, 2011 : CZK 719.9 million , approximately US$ 35.4 million ), of receivables were pledged as collateral under the Secured Revolving Credit Facility, the 2017 Fixed Rate Notes and the factoring agreement.  Of this amount, CZK 333.3 million (approximately US$ 16.4 million ) ( December 31, 2011 : CZK 545.8 million , approximately US$ 26.8 million ), of receivables in the Czech Republic were pledged as collateral under the factoring agreement (see Note 4, “Long-Term Debt and Other Financing Arrangements”).



20

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


7.  OTHER ASSETS

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

 
June 30, 2012

 
December 31, 2011

  Current:
 
 
 
Prepaid acquired programming
$
20,384

 
$
23,479

Other prepaid expenses
10,154

 
9,422

Derivative asset
29,489

 
—

Deferred tax
11,497

 
3,893

Capitalized debt costs
4,624

 
5,023

VAT recoverable
4,440

 
6,857

Inventory
5,542

 
5,226

Income taxes recoverable
631

 
2,632

Restricted cash
372

 
381

Other
3,312

 
1,092

Total other current assets
$
90,445

 
$
58,005

 
 
 
 
 
June 30, 2012

 
December 31, 2011

Non-current:
 

 
 

Capitalized debt costs
$
17,242

 
$
19,350

Deferred tax
2,759

 
4,232

Other
3,202

 
2,926

Total other non-current assets
$
23,203

 
$
26,508


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

Capitalized debt costs primarily comprise the costs incurred in connection with the issuance of our Senior Notes and Convertible Notes (see Note 4, “Long-Term Debt and Other Financing Arrangements”), and are being amortized over the term of the Senior Notes and Convertible Notes using either the straight-line method, which approximates the effective interest method, or the effective interest method.



21

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


8.  PROPERTY, PLANT AND EQUIPMENT

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

 
June 30, 2012

 
December 31, 2011

Land and buildings
$
154,193

 
$
160,183

Machinery, fixtures and equipment
199,414

 
197,047

Other equipment
34,261

 
31,970

Software licenses
42,447

 
39,993

Construction in progress
15,780

 
17,894

Total cost
446,095

 
447,087

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

 
$
217,367

 
 
 
 
Assets held under capital leases (included in the above)
 

 
 

Land and buildings
$
4,386

 
$
4,508

Machinery, fixtures and equipment
3,160

 
3,146

Total cost
7,546

 
7,654

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

 
$
4,934


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

 
2011

Opening balance
$
217,367

 
$
250,902

Cash additions
11,340

 
14,321

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

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

 
$
258,968




22

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


9.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

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

 
June 30, 2012

 
December 31, 2011

Accounts payable
$
42,390

 
$
47,676

Related party accounts payable
713

 
1,955

Programming liabilities
37,604

 
32,532

Related party programming liabilities
71,009

 
68,573

Duties and other taxes payable
16,751

 
13,462

Accrued staff costs
15,952

 
24,532

Accrued interest payable
22,119

 
24,108

Income taxes payable
623

 
1,379

Accrued services and other supplies
5,840

 
4,303

Accrued legal contingencies and professional fees
4,396

 
3,409

Authors’ rights
7,123

 
6,367

Other accrued liabilities
14,526

 
11,752

Total accounts payable and accrued liabilities
$
239,046

 
$
240,048



10.  OTHER LIABILITIES

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

 
June 30, 2012

 
December 31, 2011

Current:
 
 
 
Deferred revenue
$
21,164

 
$
10,977

Deferred tax
1,516

 
1,094

Derivative liabilities
—

 
2,375

Other
5,959

 
23

Total other current liabilities
$
28,639

 
$
14,469

 
 
 
 
 
June 30, 2012

 
December 31, 2011

Non-current:
 

 
 

Deferred tax
$
68,774

 
$
74,672

Related party programming liabilities
—

 
9,363

Derivative liabilities
340

 
694

Other
1,243

 
212

Total other non-current liabilities
$
70,357

 
$
84,941




23

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


11.  FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

ASC 820, “Fair Value Measurements and Disclosure”, establishes a hierarchy that prioritizes the inputs to those valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are:

Basis of Fair Value Measurement

Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted instruments.
Level 2
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

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

We evaluate the position of each financial instrument measured at fair value in the hierarchy individually based on the valuation methodology we apply. The carrying value of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities, approximate their fair value due to the short-term nature of these items.  The fair value of our Senior Debt (as defined therein) is included in Note 4, “Long-Term Debt and Other Financing Arrangements”.

At June 30, 2012 , we had the following option and interest rate swap agreements carried at fair value using significant level 2 inputs. The previously outstanding currency swap agreement (see "Currency Risk" section below) was recorded at fair value using significant level 2 inputs and the call option issued in connection with the restructuring of our Bulgarian operations in 2010 (see “Other” section below), was carried at fair value using significant level 3 inputs.

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

 
2011

 
2012

 
2011

Share Subscription Agreement
$
22,836

 
$
—

 
$
22,836

 
$
—

Company option
24,467

 
—

 
24,467

 
—

Interest rate swap
121

 
(60
)
 
357

 
301

Currency swap
(26
)
 
1,221

 
665

 
640

Call option
—

 
—

 
—

 
180

Change in fair value of derivatives
$
47,398

 
$
1,161

 
$
48,325

 
$
1,121


Share Subscription Agreement

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

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

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

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


24

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


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

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

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

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

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

Interest Rate Risk

On February 9, 2010, we entered into an interest rate swap agreement with UniCredit Bank Czech Republic, a.s. (“UniCredit”) and CSAS, expiring in April 2013, to reduce the impact of changing interest rates on our floating rate debt that is denominated in CZK.  The interest rate swap is a financial instrument that is used to minimize interest rate risk and is considered an economic hedge. The interest rate swap has not been designated as a hedging instrument so changes in the fair value of the derivative are recorded in the condensed consolidated statement of operations and other comprehensive income and in the condensed consolidated balance sheet in other non-current liabilities.

We value the interest rate swap agreement using a valuation model which calculates the fair value on the basis of the net present value of the estimated future cash flows. The most significant input used in the valuation model is the expected PRIBOR-based yield curve. This instrument is allocated to level 2 of the fair value hierarchy because the critical inputs to this model, including current interest rates, relevant yield curves and the known contractual terms of the instrument, are readily observable.

The fair value of the interest rate swap as at June 30, 2012 , was a US$ 0.3 million liability, which represented a net decrease of US$ 0.4 million from the US$ 0.7 million liability as at December 31, 2011 , and was recognized as a derivative gain in the condensed consolidated statement of operations and other comprehensive income amounting to US$ 0.4 million .

Currency Risk

On April 27, 2006, we entered into currency swap agreements with two counterparties whereby we swapped a fixed annual coupon interest rate (of 9.0% ) on notional principal of CZK 10.7 billion (approximately US$ 525.5 million ), payable on each July 15, October 15, January 15, and April 15, for a fixed annual coupon interest rate (of 9.0% ) on notional principal of EUR 375.9 million (approximately US$ 473.3 million ) receivable on each July 15, October 15, January 15, and April 15 up to the termination date of April 15, 2012.

These currency swap agreements reduced our exposure to movements in foreign exchange rates on part of the CZK-denominated cash flows generated by our Czech Republic operations, which corresponded to a significant proportion of the Euro-denominated interest payments on our Senior Notes (see Note 4, “Long-Term Debt and Other Financing Arrangements”). These financial instruments were used to minimize currency risk and were considered an economic hedge of foreign exchange rates.  These instruments were not designated as hedging instruments, and so changes in their fair value were recorded in the condensed consolidated statement of operations and other comprehensive income and in the condensed consolidated balance sheet in other current liabilities.

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

The fair value of the liability on April 15, 2012, immediately prior to the final payments being made and received was US$ 1.7 million ,which represented a net decrease of US$ 0.7 million from the US$ 2.4 million liability as at December 31, 2011 . This change was recognized as a derivative gain in the condensed consolidated statement of operations and other comprehensive income amounting to US$ 0.7 million . There will be no impact on earnings from this instrument subsequent to April 15, 2012.


25

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


Other

We issued a call option to Top Tone Holdings in 2010 in connection with the restructuring of our Bulgarian Broadcast operations. We used a binomial option pricing model to value the call option liability at US$ 3.0 million as at April 19, 2010, the date we acquired the bTV group. The option was allocated to level 3 of the fair value hierarchy due to the significance of the unobservable inputs used in the valuation model.

The fair value of the call option as at June 30, 2012 and December 31, 2011 was US$ nil because the option strike price is the fair value of the equity in CME Bulgaria. There will be no further changes in the carrying value of the option liability.
 
Top Tone Holdings exercised the call option earlier this year, which will increase its noncontrolling interest in CME Bulgaria. The closing of this transaction has not yet occurred.



26

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


12.  EQUITY

Preferred Stock

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

Class A and B Common Stock

200,000,000 and 100,000,000 shares of Class A common Stock were authorized as at June 30, 2012 and December 31, 2011 , respectively, and 15,000,000 shares of Class B common stock were authorized as at June 30, 2012 and December 31, 2011 . The rights of the holders of Class A common stock and Class B common stock are identical except for voting rights. The shares of Class A common stock are entitled to one vote per share and the shares of Class B common stock are entitled to ten votes per share. Shares of Class B common stock are convertible into shares of Class A common stock for no additional consideration on a one-for-one basis. Holders of each class of shares are entitled to receive dividends and upon liquidation or dissolution are entitled to receive all assets available for distribution to shareholders. Under our bye-laws, the holders of each class have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares.

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

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

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

Warrants to purchase up to 600,000 and 250,000 shares of Class A common stock for a six year period terminating December 2015 at a price of US$ 21.75 per share, are held by Alerria Management Company S.A. and Metrodome B.V., respectively, each of which is controlled by Adrian Sarbu, our President and Chief Executive Officer, and a member of our Board of Directors.



27

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


13.  INTEREST EXPENSE

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

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

 
2011

 
2012

 
2011

Interest on Senior Notes
$
19,981

 
$
23,105

 
$
41,173

 
$
45,652

Interest on Convertible Notes
4,077

 
4,574

 
8,475

 
8,795

Interest on capital leases and other financing arrangements
1,716

 
701

 
3,170

 
1,694

 
25,774

 
28,380

 
52,818

 
56,141

 
 
 
 
 
 
 
 
Amortization of capitalized debt issuance costs
6,945

 
1,451

 
8,167

 
3,427

Amortization of debt issuance discount and premium
(1,590
)
 
4,502

 
1,968

 
9,249

(Gain) / loss on extinguishment of debt
(448
)
 
3,424

 
(448
)
 
24,979

 
4,907

 
9,377

 
9,687

 
37,655

Total interest expense
$
30,681

 
$
37,757

 
$
62,505

 
$
93,796


The (gain) / loss on extinguishment of debt comprised the following for the three and six months ended June 30, 2012 and 2011 (see Note 4 "Long-Term Debt and Other Financing Arrangements"):

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


2011

 
2012

 
2011

2013 Convertible Notes
$
3,763

 
$
3,424

 
$
3,763

 
$
22,591

2014 Floating Rate Notes
(4,211
)
 
—

 
(4,211
)
 
—

2016 Fixed Rate Notes
—

 
—

 
—

 
2,388

(Gain) / loss on extinguishment
$
(448
)
 
$
3,424

 
$
(448
)
 
$
24,979





28

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


14.  STOCK-BASED COMPENSATION

7,500,000 shares have been authorized for issuance in respect of equity awards under our Amended and Restated Stock Incentive Plan (“the Plan”). Under the Plan, awards are made to employees at the discretion of the Compensation Committee and to directors pursuant to an annual automatic grant under the Plan or at the discretion of the Board of Directors.

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

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

 
2011

 
2012

 
2011

Stock-based compensation charged
$
1,004

 
$
1,583

 
$
2,091

 
$
3,104

Income tax benefit recognized
—

 
—

 
—

 
—


Stock Options

A summary of option activity for the six months ended June 30, 2012 is presented below:

 
Shares

 
Weighted Average Exercise Price per Share

 
Weighted Average Remaining Contractual Term (years)

 
Aggregate Intrinsic Value

Outstanding at January 1, 2012
2,901,687

 
$
32.86

 
4.49

 
$
71

Exercised
(16,000
)
 
2.06

 
 
 
 
Forfeited
(593,687
)
 
35.85

 
 
 
 
Expired
(30,000
)
 
$
90.54

 
 
 
 
Outstanding at June 30, 2012
2,262,000

 
$
31.53

 
4.58

 
$
—

Vested or expected to vest
2,177,956

 
31.86

 
4.51

 
—

Exercisable at June 30, 2012
1,566,375

 
$
35.06

 
3.89

 
$
—


The fair value of stock options is estimated on the grant date using the Black-Scholes option-pricing model and recognized ratably over the requisite service period.

The exercise of stock options has generated a net operating loss brought forward in our Delaware subsidiary of US$ 5.3 million at January 1, 2012. In the six months ended June 30, 2012 and 2011 , tax benefits of US$ nil and US$ nil , respectively, were recognized in respect of the utilization of part of this loss, and were recorded as additional paid-in capital, net of US$ 0.4 million and US$ nil of transfers related to the write-off of deferred tax assets arising upon forfeitures for the periods ending June 30, 2012 and 2011 , respectively. The losses are subject to examination by the tax authorities and to restriction on their utilization.

The aggregate intrinsic value (the difference between the stock price on the last day of trading of the second quarter of 2012 and the exercise prices multiplied by the number of in-the-money options) represents the total intrinsic value that would have been received by the option holders had they exercised all in-the-money options as at June 30, 2012 . This amount changes based on the fair value of our common stock.  As at June 30, 2012 , there was US$ 6.7 million of total unrecognized compensation expense related to options.  

At the annual general meeting of CME Ltd on June 13, 2012, the shareholders approved the exchange of up to 1.7 million options for up to 0.9 million restricted stock units ("RSUs"). While we have yet to set the terms of any such exchange, and can not be assured of the number of options likely to be tendered, we expect the number of outstanding options to decrease significantly following the completion of the exchange program.

Restricted Stock Units

Pursuant to the Plan, we may grant RSUs to our employees and non-employee directors. Each RSU represents a right to receive one share of class A common stock of the Company for each RSU that vests in accordance with the vesting schedule, generally between one to four years from the date of grant. Upon vesting, shares of CME Class A common stock are issued from authorized but unissued shares. Holders of RSU awards are not entitled to receive cash dividend equivalents. The grant date fair value of RSUs is calculated as the closing price of our class A common shares on the date of grant.

29

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


The following table summarizes information about unvested RSUs as at June 30, 2012 :

 
Number of
Shares/Units


 
Weighted-
Average
Grant Date
Fair Value


Unvested at December 31, 2011
—

 
—

Granted
600,000

 
5.61

Unvested at June 30, 2012
600,000

 
5.61


As at June 30, 2012 , the intrinsic value of unvested RSUs was US$ 3.0 million . Total unrecognized compensation cost related to unvested RSUs as at June 30, 2012 , was US$ 2.9 million and is expected to be recognized over a weighted-average period of 2.21 years.




15.  EARNINGS PER SHARE

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

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

 
2011

 
2012

 
2011

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

 
$
968

 
$
(9,436
)
 
$
(20,146
)
 
 
 
 
 
 
 
 
Weighted average outstanding shares of common stock
66,501

 
64,384

 
65,447

 
64,377

Dilutive effect of employee stock options and RSUs
31

 
117

 
—

 
—

Common stock and common stock equivalents
66,532

 
64,501

 
65,447

 
64,377

 
 
 
 
 
 
 
 
Net income / (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.06

 
$
0.02

 
$
(0.14
)
 
$
(0.31
)
Diluted
$
0.06

 
$
0.02

 
$
(0.14
)
 
$
(0.31
)

At June 30, 2012 , 3,193,869 ( December 31, 2011 : 3,763,481 ) stock options and warrants were antidilutive to income from continuing operations and excluded from the calculation of earnings per share. These may become dilutive in the future. Shares of Class A common stock potentially issuable under our Convertible Notes may also become dilutive in the future, although they were antidilutive to income at June 30, 2012 .



30

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


16.  SEGMENT DATA

We manage our business on a divisional basis, with three reportable segments: Broadcast, Media Pro Entertainment and New Media.  The business segments reflect how CME Ltd.’s operations are managed by segment managers, how operating performance within the Company is evaluated by senior management and the structure of our internal financial reporting.  Supplemental geographic information on the performance of our Broadcast segment is provided due to the significance of our broadcast operations to CME Ltd. Management believes this information is useful to users of the financial statements.

Our Broadcast segment generates revenues from the sale of advertising and sponsorship and our New Media segment generates revenues from display and video advertising, paid premium content and subscriptions. Our Media Pro Entertainment segment generates revenues through the sale of production services to independent film-makers and through the sale of broadcast and distribution rights to third parties. Media Pro Entertainment also develops, produces and distributes television and film content which is shown on our television channels. In addition, the distribution activities of Media Pro Entertainment generate revenues from the distribution of rights to film content to third party clients, from the exhibition of films in our theaters and from the sale of DVD and Blu Ray discs to wholesale and retail clients.

We evaluate the performance of our segments based on Net Revenues and OIBDA. OIBDA, which includes program rights amortization costs, is determined as operating income / (loss) before depreciation, amortization of intangible assets and impairments of assets. Items that are not allocated to our segments for purposes of evaluating their performance and therefore are not included in their OIBDA, include stock-based compensation and certain other items.

Our key performance measure of the efficiency of our segments is OIBDA margin. OIBDA margin is the ratio of OIBDA to Net Revenues.

We believe OIBDA is useful to investors because it provides a more meaningful representation of our performance as it excludes certain items that either do not impact our cash flows or the operating results of our operations. OIBDA is also used as a component in determining management bonuses. Intersegment revenues and profits have been eliminated in consolidation.

OIBDA may not be comparable to similar measures reported by other companies.

Below are tables showing our Net Revenues and OIBDA by segment for the three and six months ended June 30, 2012 and 2011 .
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
Net revenues
2012

 
2011

 
2012

 
2011

Broadcast:
 
 
 
 
 
 
 
Bulgaria
$
21,970

 
$
26,662

 
$
40,898

 
$
45,999

Croatia
15,314

 
19,979

 
27,187

 
32,490

Czech Republic
66,386

 
82,668

 
118,084

 
140,374

Romania
36,317

 
47,015

 
67,516

 
81,369

Slovak Republic
23,036

 
29,845

 
41,671

 
48,935

Slovenia
19,314

 
22,799

 
33,778

 
37,318

Total Broadcast
182,337

 
228,968

 
329,134

 
386,485

Media Pro Entertainment
53,455

 
51,254

 
96,860

 
91,434

New Media
5,212

 
4,612

 
8,891

 
7,233

Intersegment revenues (1)
(29,782
)
 
(35,178
)
 
(56,230
)
 
(62,724
)
Total net revenues
$
211,222

 
$
249,656

 
$
378,655

 
$
422,428


(1) Reflects revenues earned by the Media Pro Entertainment segment through sales to the Broadcast segment.  All other revenues are third party revenues.


31

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


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

 
2011

 
2012

 
2011

Broadcast:
 
 
 
 
 
 
 
Bulgaria
$
3,460

 
$
5,768

 
$
2,358

 
$
5,930

Croatia
3,924

 
3,153

 
4,945

 
2,821

Czech Republic
31,375

 
43,846

 
51,569

 
66,514

Romania
5,179

 
9,297

 
7,074

 
12,746

Slovak Republic
1,990

 
5,737

 
1,533

 
3,231

Slovenia
5,741

 
8,553

 
8,518

 
11,769

Divisional operating costs
(1,187
)
 
(238
)
 
(2,637
)
 
(745
)
Total Broadcast
50,482

 
76,116

 
73,360

 
102,266

Media Pro Entertainment
5,417

 
761

 
7,088

 
1,485

New Media
(787
)
 
(489
)
 
(2,235
)
 
(2,089
)
Central
(7,031
)
 
(12,397
)
 
(15,272
)
 
(22,244
)
Elimination
(969
)
 
(1,298
)
 
(1,769
)
 
(2,479
)
Total OIBDA
$
47,112

 
$
62,693

 
$
61,172

 
$
76,939


Reconciliation to condensed consolidated statement of operations and comprehensive income:

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

 
2011

 
2012

 
2011

Total OIBDA
$
47,112

 
$
62,693

 
$
61,172

 
$
76,939

Depreciation of property, plant and equipment
(10,747
)
 
(15,411
)
 
(22,627
)
 
(29,695
)
Amortization of intangible assets
(12,715
)
 
(7,809
)
 
(25,198
)
 
(15,436
)
Operating income
23,650

 
39,473

 
13,347

 
31,808

Interest expense, net
(30,510
)
 
(37,120
)
 
(62,120
)
 
(92,031
)
Foreign currency exchange (loss) / gain, net
(40,312
)
 
4,106

 
(16,918
)
 
47,371

Change in fair value of derivatives
47,398

 
1,161

 
48,325

 
1,121

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

 
(802
)
Credit / (provision) for income taxes
3,073

 
(6,718
)
 
6,643

 
(7,650
)
Net income / (loss)
$
3,141

 
$
812

 
$
(10,672
)
 
$
(20,183
)


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




32

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


17.  COMMITMENTS AND CONTINGENCIES

Commitments

a)  Programming Rights Agreements

At June 30, 2012 , we had total commitments of US$ 354.6 million ( December 31, 2011 : US$ 361.8 million ) in respect of our broadcast and distribution operations for future programming, including contracts signed with license periods starting after the balance sheet date. The amounts are payable as follows:

 
Total

 
Less than 1 year

 
1-3 years

 
3-5 years

 
More than 5 years

Programming purchase obligations
$
354,619

 
$
138,142

 
$
173,872

 
$
42,605

 
$
—

 

b) Operating Lease Commitments

For the six months ended June 30, 2012 and 2011 , we incurred aggregate rent expense on all facilities of US$ 7.9 million and US$ 7.2 million , respectively.  Future minimum operating lease payments at June 30, 2012 for non-cancellable operating leases with remaining terms in excess of one year (net of amounts to be recharged to third parties) are payable as follows:

 
June 30, 2012

2012
$
3,795

2013
4,047

2014
3,055

2015
1,957

2016
1,593

2017 and thereafter
10,481

Total
$
24,928


c) Factoring of Trade Receivables

CET 21 has a working capital credit facility of CZK 300 million (approximately US$ 14.7 million ) with FCS. This facility is secured by a pledge of receivables under a factoring agreement with FCS. As at June 30, 2012 and December 31, 2011, there were no drawings under this facility (see also Note 4, “Long-Term Debt and Other Financing Arrangements” and Note 6, “Accounts Receivable”).

The transfer of the receivables is accounted for as a secured borrowing, with the proceeds received recorded in the condensed consolidated balance sheet as a liability and included in current credit facilities and obligations under capital leases. The corresponding receivables are a part of accounts receivable, as we retain the risks of ownership.

d) Call option

Top Tone Holdings has exercised its right to acquire additional equity in CME Bulgaria, however the closing of this transaction has not yet occurred. Upon consummation of the equity transfer, we will own 90.0% of our Bulgaria Broadcast operations.

Contingencies
 
a) Litigation

While we are, from time to time, a party to litigation or arbitration proceedings arising in the normal course of our business operations, we are not presently a party to any such litigation or arbitration which could reasonably be expected to have a material effect on our business or consolidated financial statements, including proceedings described here and in (b) below.

Video International Termination

On March 18, 2009, Video International Company Group, CGSC (“VI”), a Russian legal entity, filed a claim in the London Court of International Arbitration (“LCIA”) against our wholly-owned subsidiary CME BV, which was, at the time the claim was filed, the principal holding company of our former Ukrainian operations. The claim relates to the termination of an agreement between VI and CME BV dated November 30, 2006 (the “parent agreement”), which was one of four related contracts by which VI subsidiaries, including LLC Video International-Prioritet (“Prioritet”), supplied advertising and marketing services to Studio 1+1 LLC (“Studio 1+1”) and certain affiliates. Following the termination of these agreements on March 24, 2009, Studio 1+1 was required to pay a termination penalty. On June 1, 2009, Studio 1+1 paid UAH 13.5 million (approximately US$ 1.7 million ) to Prioritet and set off UAH 7.4 million (approximately US$ 0.9 million ) against amounts owing to Studio 1+1 under the advertising and marketing services agreements. In its LCIA claim, VI sought payment of a separate indemnity from CME BV under the parent agreement of US$ 58.5 million . On September 30, 2010, a partial award was issued in the arbitration proceedings,

33

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


pursuant to which VI’s claim for relief in the amount of US$ 58.5 million was dismissed. The partial award does permit VI to bring a subsequent claim against CME BV as parent guarantor in the event that VI establishes that it is entitled to certain additional compensation under the advertising and marketing services agreements with Studio 1+1 and that such compensation is not satisfied by Studio 1+1. On July 13, 2011, Prioritet filed claims against Studio 1+1 in the Commercial Court of Kiev relating to alleged violations of the advertising services agreement and marketing services agreement and sought relief of approximately UAH 201.0 million (approximately US$ 25.4 million ). On September 23, 2011, the Commercial Court of Kiev dismissed Prioritet's claims. On November 7, 2011, the Commercial Court of Appeal of Kiev dismissed an appeal by Prioritet of the lower court's decision. On December 13, 2011, the Superior Commercial Court of Ukraine dismissed an appeal of Prioritet following the decision of the appellate court. On June 5, 2012, the Superior Commercial Court of Ukraine denied Prioritet's request to appeal to the Supreme Court of Ukraine. Subsequently, VI or an affiliate has filed an application against the government of Ukraine in the European Court of Human Rights seeking review of these court decisions; and on June 18, 2012 Prioritet filed a claim against Studio 1+1 that alleges violations of one of the advertising and marketing services agreements and seeks relief of approximately UAH 42.3 million (approximately US$ 5.3 million ). We do not believe that it is likely that we will be required to make any further payment.

b) Lehman Brothers Bankruptcy Claim

On March 4, 2008, we purchased for cash consideration of US$ 22.2 million , capped call options from Lehman OTC over 1,583,333 shares of our Class A common stock which entitled us to receive, at our election following a conversion under the 2013 Convertible Notes, cash or shares of Class A common stock with a value equal to the difference between the trading price of our shares at the time the option is exercised and US$ 105.00 , up to a maximum trading price of US$ 151.20 (see Note 4, “Long-Term Debt and Other Financing Arrangements”).

On September 15, 2008, Lehman Holdings, the guarantor of the obligations of Lehman OTC under the capped call agreement, filed for protection under Chapter 11 of the United States Bankruptcy Code. The bankruptcy filing of Lehman Holdings, as guarantor, was an event of default and gave us the right to terminate the capped call agreement with Lehman OTC and claim for losses. We exercised this right on September 16, 2008 and claimed an amount of US$ 19.9 million , which bears interest at a rate equal to CME’s estimate of its cost of funding plus 1.0% per annum.

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

On March 3, 2009 we assigned our claim in the bankruptcy proceedings of Lehman Holdings and Lehman OTC to an unrelated third party for cash consideration of US$ 3.4 million , or 17.0% of the claim value. Under the terms of the agreement, in certain circumstances, including if our claim is subsequently disallowed or adjusted by the bankruptcy court, the counterparty would be able to recoup the corresponding portion of the purchase price from us. Likewise, if the amount of recovery exceeds the amount of our claim, we may receive a portion of that recovery from the claim purchaser.

On March 14, 2011, Lehman Brothers filed an objection to our bankruptcy claim, contending that our claim is worth US$ 14.7 million . On April 12, 2011, a response was filed with the bankruptcy court reasserting our claim of US$ 19.9 million .

c) Restrictions on dividends from Consolidated Subsidiaries and Unconsolidated Affiliates

Corporate law in the Central and Eastern European countries in which we have operations stipulates generally that dividends may be declared by shareholders, out of yearly profits, subject to the maintenance of registered capital and required reserves after the recovery of accumulated losses. The reserve requirement restriction generally provides that before dividends may be distributed, a portion of annual net profits (typically 5.0% ) be allocated to a reserve, which reserve is capped at a proportion of the registered capital of a company (ranging from 5.0% to 25.0% ). The restricted net assets of our consolidated subsidiaries and equity in earnings of investments accounted for under the equity method together are less than 25.0% of consolidated net assets.




34

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


18. RELATED PARTY TRANSACTIONS

Overview
 
There is a limited local market for many specialty broadcasting and production services in the countries in which we operate; many of these services are provided by parties known to be connected to our local shareholders, members of our management and board of directors or our equity investees.  Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist.  We continue to review all of these arrangements.
 
Related Party Groups
 
We consider our related parties to be those shareholders who have direct control and/or influence and other parties that can significantly influence management as well as our officers and directors; a “connected” party is one in relation to whom we are aware of the existence of a family or business connection to a shareholder, director or officer. We have identified transactions with individuals or entities associated with the following individuals or entities as material related party transactions: Adrian Sarbu, our President and Chief Executive Officer, a member of our Board of Directors and beneficial owner of approximately 3.2% of our outstanding shares of Class A common stock as at June 30, 2012; and Time Warner, who is represented on our Board of Directors and was the beneficial owner of approximately 42.0% of our outstanding shares of Class A common stock as at June 30, 2012.

Related Party Transactions
 
Adrian Sarbu

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

 
2011

 
2012

 
2011

Purchases of services
$
872

 
$
1,250

 
$
1,962

 
$
2,407

Sales
240

 
559

 
601

 
735


 
As at June 30,

 
As at December 31,

 
2012

 
2011

Accounts payable
$
521

 
$
512

Accounts receivable
754

 
765



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

 
2011

 
2012

 
2011

Purchases of programming
$
16,052

 
$
11,628

 
$
24,257

 
$
16,233

Sales
67

 
40

 
167

 
60


 
As at June 30,

 
As at December 31,

 
2012

 
2011

Accounts payable
$
70,513

 
$
78,016

Accounts receivable
131

 
159


See Note 4, "Long-Term Debt and Other Financing Arrangements" and Note 11, "Financial Instruments and Fair Value Measurements" for discussion of transactions with Time Warner to reduce our indebtedness. The TW Loan was repaid on July 3, 2012, see Note 20, "Subsequent Events".


35

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


19. INDENTURE CONVENANTS

Under the terms of the indentures governing the 2014 Floating Rate Notes, the 2016 Fixed Rate Notes and the 2017 Fixed Rate Notes (the “2014 Indenture”, the “2016 Indenture” and the “2017 Indenture”, respectively), we are largely restricted from raising debt at the corporate level or making certain payments or investments if the ratio of Consolidated EBITDA to Consolidated Interest Expense (both as defined in the 2014 Indenture and 2016 Indenture) (the “Coverage Ratio”) is less than 2.0 times. For this purpose, the calculation includes CME Ltd. and its subsidiaries that are “Restricted Subsidiaries.” In addition, under the 2017 Indenture, CET 21 is restricted from incurring indebtedness if the ratio of Consolidated Indebtedness to Consolidated EBITDA of CET 21 (both as defined in the 2017 Indenture) and its Restricted Subsidiaries would exceed 2.25 times.

Subsidiaries may be designated as “Unrestricted Subsidiaries” and excluded from the calculation of Coverage Ratio by our Board of Directors. As at June 30, 2012 , our Unrestricted Subsidiaries consisted of certain subsidiaries that formerly comprised the Pro.BG business in Bulgaria, CME Development Financing B.V. , the entity that funded those operations, and CME Austria GmbH. The integration of the operations of the Pro.BG business with the bTV group was completed in May 2011, and as a result, the Unrestricted Subsidiaries do not require additional financial support. As at June 30, 2012 , there was US$ 1.4 million of cash remaining in the Unrestricted Subsidiaries. There is no requirement to maintain a minimum cash balance in any of our Unrestricted Subsidiaries and we may choose to transfer the remaining funds to our Restricted Subsidiaries at any time.

Below is selected financial information for CME Ltd., its Restricted Subsidiaries and its Unrestricted Subsidiaries as required by the 2014 Indenture, the 2016 Indenture and the 2017 Indenture:

 
Issuer and Restricted Subsidiaries

 
Unrestricted Subsidiaries

 
Inter-group eliminations

 
Total

Consolidated Statement of Operations:
 
 
 
 
 
 
 
 
For the Three Months Ended June 30, 2012
Net revenues
$
211,222

 
$
—

 
$
—

 
$
211,222

Depreciation of property, plant and equipment
9,867

 
—

 
—

 
9,867

Amortization of broadcast licenses and other intangibles
12,715

 
—

 
—

 
12,715

Operating income
23,653

 
(3
)
 
—

 
23,650

Net income attributable to CME Ltd.
$
2,985

 
$
971

 
$
—

 
$
3,956

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2012
Net revenues
$
378,655

 
$
—

 
$
—

 
$
378,655

Depreciation of property, plant and equipment
20,942

 
—

 
—

 
20,942

Amortization of broadcast licenses and other intangibles
25,198

 
—

 
—

 
25,198

Operating income
13,354

 
(7
)
 
—

 
13,347

Net (loss) / income attributable to CME Ltd.
$
(9,932
)
 
$
496

 
$
—

 
$
(9,436
)
 
 
 
 
 
 
 
 
Consolidated Balance Sheet:
 
As at June 30, 2012
Cash and cash equivalents
$
123,387

 
$
1,427

 
$
—

 
$
124,814

Third party debt (1)
1,216,028

 
—

 
—

 
1,216,028

Total assets
2,596,917

 
1,474

 
(668
)
 
2,597,723

Total CME Ltd. shareholders' equity
$
1,028,435

 
$
705

 
$
—

 
$
1,029,140


(1)
Third party debt is defined as credit facilities and capital leases or debt with entities that are not part of the CME Ltd. consolidated group.


36

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


 
Issuer and Restricted Subsidiaries

 
Unrestricted Subsidiaries

 
Inter-group eliminations

 
Total

Consolidated Statement of Operations:
 
 
For the Three Months Ended June 30, 2011
Net revenues
$
247,754

 
$
1,943

 
$
(41
)
 
$
249,656

Depreciation of property, plant and equipment
13,960

 
533

 
—

 
14,493

Amortization of broadcast licenses and other intangibles
7,809

 
—

 
—

 
7,809

Operating income / (loss)
41,158

 
(1,685
)
 
—

 
39,473

Net income / (loss) attributable to CME Ltd.
$
4,859

 
$
(3,891
)
 
$
—

 
$
968

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended June 30, 2011
Net revenues
$
419,377

 
$
3,092

 
$
(41
)
 
$
422,428

Depreciation of property, plant and equipment
26,595

 
1,315

 
—

 
27,910

Amortization of broadcast licenses and other intangibles
15,436

 
—

 
—

 
15,436

Operating income / (loss)
37,042

 
(5,234
)
 
—

 
31,808

Net loss attributable to CME Ltd.
$
(9,800
)
 
$
(10,346
)
 
$
—

 
$
(20,146
)
 
 
 
 
 
 
 
 
Consolidated Balance Sheet:
 
As at December 31, 2011
Cash and cash equivalents
$
184,935

 
$
1,451

 
$
—

 
$
186,386

Third party debt (1)
1,324,369

 
—

 
—

 
1,324,369

Total assets
2,864,664

 
1,451

 
(184,346
)
 
2,681,769

Total CME Ltd. shareholders' equity
$
1,183,974

 
$
1,327

 
$
(183,609
)
 
$
1,001,692


(1)
Third party debt is defined as credit facilities and capital leases or debt with entities that are not part of the CME Ltd consolidated group.



37

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


20. SUBSEQUENT EVENTS

On June 27, 2012, we exercised our option under the Equity Commitment Agreement to sell shares of the Company to TW Investor. That transaction subsequently settled on July 3, 2012, at which point we issued 874,819 shares of our Class A common stock and one share of Series A convertible preferred stock of the Company, par value US$ 0.08 per share (the “Preferred Share”), at a price per share of Class A common stock (including those underlying the Preferred Share) of US$ 7.51 , to TW Investor for aggregate consideration of approximately US$ 90.8 million (collectively, the “Equity Subscriptions”). The consideration was utilized to repay the remaining loan outstanding under the TW Credit Agreement. The difference between the fair value of the consideration, calculated based on the closing share price of our Class A shares of common stock on the date of extinguishment, and the outstanding principal amount of the TW Loan was offset by the derivative asset related to the Option Shares (see Note 11, "Financial Instruments and Fair Value Measurements").

The Preferred Share, which is convertible into 11,211,449 shares of Class A common stock, was issued pursuant to the Equity Commitment Agreement, which provides that if the issuance of shares of Class A common stock to TW Investor upon the exercise of the Company Option, when aggregated with the outstanding shares of Class A common stock of any group (as such term  is defined in Section 13(d)(3) of the Exchange Act) that includes TW Investor and its affiliates would have resulted in TW Investor beneficially owning more than 49.9% of the outstanding number of shares of Class A common stock, the Company agreed to issue to TW Investor the Preferred Share, which is convertible into the number of shares of Class A common stock that TW Investor was not able to acquire because of this limitation.

The Preferred Share is automatically convertible into shares of Class A common stock on the date that is 61 days after the date on which the ownership of our outstanding shares of Class A common stock by a group that includes TW Investor would not be greater than 49.9% , which is expected to occur following the termination of the Irrevocable Voting Deed and Corporate Representative Appointment among TW Investor, RSL Savannah, LLC, Ronald S. Lauder and the Company, dated May 18, 2009 (the "Voting Agreement"). The Preferred Share is entitled to one vote per each share of Class A common stock into which it is convertible and has such other rights, powers and preferences, including potential adjustments to the number of Class A common stock to be issued, as are set forth in the Certificate of Designation of the Preferred Share.

As a result of the Equity Subscriptions, TW Investor owns 42.6% of the outstanding shares of Class A common stock and has a 49.9% economic interest in the Company. The shares issued to TW Investor in the Equity Subscriptions are subject to the Voting Agreement.







38


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

Contents

I.
Forward-looking Statements
II.
Overview
III.
Our Business
IV.
Analysis of the Results of Operations and Financial Position
V.
Liquidity and Capital Resources
VI.
Critical Accounting Policies and Estimates

Key Financing Defined Terms

As used herein, the term “2014 Floating Rate Notes” refers to our floating rate senior notes due 2014; the term “2016 Fixed Rate Notes” refers to our 11.625% senior notes due 2016; the term “2017 Fixed Rate Notes” refers to the 9.0% senior secured notes due 2017 issued by our wholly owned subsidiary, CET 21 spol. s r.o. (“CET 21”); the term “Senior Notes” refers collectively to the 2014 Floating Rate Notes, 2016 Fixed Rate Notes and 2017 Fixed Rate Notes; the term “2015 Convertible Notes” refers to our 5.0% senior convertible notes due 2015, the term “2013 Convertible Notes” refers to our 3.50% senior convertible notes due 2013 and the term “Convertible Notes” refers collectively to the 2013 Convertible Notes and the 2015 Convertible Notes. The term “Secured Revolving Credit Facility” refers to the five-year CZK 1.5 billion secured revolving credit facility entered into on October 21, 2010 by CET 21 with BNP Paribas, S.A., J.P. Morgan plc, Citigroup Global Markets Limited, ING Bank N.V. and Ceska Sporitelna a.s. ("CSAS") as mandated lead arrangers and original lenders, BNP Paribas, S.A. as agent, BNP Paribas Trust Corporation UK Limited as security agent, and Central European Media Enterprises Ltd. ("CME Ltd.") and our wholly-owned subsidiaries Central European Media Enterprises N.V., CME Media Enterprises B.V. ("CME BV"), CME Investments B.V., CME Slovak Holdings B.V. and MARKÍZA-SLOVAKIA, spol. s r.o., as the original guarantors. The term "TW Loans" refers to amounts drawn under the Term Loan Facilities Credit Agreement dated April 30, 2012 with Time Warner Inc.


I. Forward-looking Statements

This report contains forward-looking statements, including those relating to our capital needs, business strategy, expectations and intentions. Statements that use the terms “believe”, “anticipate”, “expect”, “plan”, “estimate”, “intend” and similar expressions of a future or forward-looking nature identify forward-looking statements for purposes of the U.S. federal securities laws or otherwise. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or are otherwise beyond our control and some of which might not even be anticipated.  Forward-looking statements reflect our current views with respect to future events and because our business is subject to such risks and uncertainties, actual results, our strategic plan, our financial position, results of operations and cash flows could differ materially from those described in or contemplated by the forward-looking statements contained in this report.

Important factors that contribute to such risks include, but are not limited to, those factors set forth under "Risk Factors” as well as the following: the effect of the economic downturn and Eurozone instability in our markets and the extent and timing of any recovery; the extent to which our debt service obligations restrict our business; decreases in TV advertising spending and the rate of development of the advertising markets in the countries in which we operate; our ability to make future investments in television broadcast operations; changes in the political and regulatory environments where we operate and application of relevant laws and regulations; the timely renewal of broadcasting licenses and our ability to obtain additional frequencies and licenses; and our ability to develop and acquire necessary programming and attract audiences. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes included elsewhere in this report.










39
Index

II. Overview

CME Ltd. is a media and entertainment company that operates broadcasting, content and new media businesses in Central and Eastern Europe.

The following tables provide a summary of our consolidated results for the three and six months ended June 30, 2012 and 2011 :
 
For the Three Months Ended June 30, (US$ 000's)
 
2012

 
2011

 
Movement

Net revenues
$
211,222

 
$
249,656

 
(15.4
)%
Cost of revenues
(160,507
)
 
(179,568
)
 
10.6
 %
Selling, general and administrative expenses
(27,065
)
 
(30,615
)
 
11.6
 %
Operating income
23,650

 
39,473

 
(40.1
)%
Net income
$
3,141

 
$
812

 
286.8
 %
Net loss attributable to noncontrolling interests
$
815

 
$
156

 
422.4
 %
Net income attributable to CME Ltd.
$
3,956

 
$
968

 
308.7
 %
 
 
For the Six Months Ended June 30, (US$ 000's)
 
2012

 
2011

 
Movement

Net revenues
$
378,655

 
$
422,428

 
(10.4
)%
Cost of revenues
(310,915
)
 
(330,298
)
 
5.9
 %
Selling, general and administrative expenses
(54,393
)
 
(60,322
)
 
9.8
 %
Operating income
13,347

 
31,808

 
(58.0
)%
Net loss
$
(10,672
)
 
$
(20,183
)
 
47.1
 %
Net loss attributable to noncontrolling interests
$
1,236

 
$
37

 
Nm (2)

Net loss attributable to CME Ltd.
$
(9,436
)
 
$
(20,146
)
 
53.2
 %
 
 
 
 
 
 
Net cash (used in) / generated from operating activities
$
(48,193
)
 
$
29,050

 
Nm (2)

Capital expenditures, net
(11,149
)
 
(14,227
)
 
21.6
 %
Free cash flow (1)
$
(59,342
)
 
$
14,823

 
Nm (2)

(1) Free cash flow is defined as cash flows from operating activities less purchases of property, plant and equipment, net of disposals of property, plant and equipment and is useful as a measure of our ability to generate cash.
(2) Number is not meaningful.

Our financial results for the three and six months ended June 30, 2012 reflect the acquisition of Bontonfilm on June 30, 2011; the initial benefits from the roll-out of Voyo, our subscription video-on-demand service in all our territories; and the impact from the continued general lack of confidence in the growth of the economies in our region. On a constant currency basis, the television advertising spending in our markets declined by 7% in the six months ended June 30, 2012 impacting the advertising revenues in our Broadcast division. Overall, on a constant currency basis, our consolidated net revenues remained flat compared to the corresponding period in 2011 due to the growth in revenues in our Media Pro Entertainment ("MPE") and New Media divisions. We currently believe that, on a constant currency basis, our full year OIBDA, as defined in III. Our Business, will grow when compared to the prior year.

Our negative free cash flow of US$ 59.3 million for the six months ended June 30, 2012 , compared to positive free cash flow of US$ 14.8 million for the corresponding  period in 2011 , was lower mainly due to the unusually high cash flow in 2011. In the first quarter of 2011 , we implemented an advance collection program that generated US$ 47 million of cash receipts from customers that were granted discounts to pay much earlier than our normal terms. Most of these advances were accelerated receipts from the second half of 2011 . We did not repeat this program in the first half of 2012 and therefore our free cash flow is more in line with the seasonal nature of our business. Furthermore, we continued to invest in our content production resulting in higher local programming payments in the first half of 2012. Notwithstanding these working capital and programming outflows in the first half of 2012, we remain committed to achieving our goal to deliver positive free cash flow for the full year in 2012.

We reduced our debt by US$ 184.8 million primarily with proceeds from the issuance of equity in the amount of US$ 180.2 million as described below:
•
On April 30, 2012, we entered into a series of agreements with our major shareholders, Time Warner Inc. ("Time Warner") and RSL Capital LLC (“RSL” an affiliate of Ronald Lauder), to enable us to fund tender offers to purchase up to an aggregate of US$ 300 million of our 2013 Convertible Notes, 2014 Floating Rate Notes and 2016 Fixed Rate Notes.
•
On May 31, 2012, we completed the purchase of US$ 109.0 million in aggregate principal of 2013 Convertible Notes for cash consideration of US$ 109.0 million plus accrued interest.
•
On June 14, 2012, we completed the purchase of EUR 60.5 million (approximately US$ 75.8 million at the date of repurchase) aggregate principal amount of 2014 Floating Rate Notes for EUR 56.7 million (approximately US$ 71.1 million at the date of repurchase) plus accrued interest.

40
Index

•
On June 15, 2012, we issued 2,000,000 shares of Class A common stock to RSL Capital LLC and 9,901,260 shares of Class A common stock to Time Warner Media Holdings B.V. ("TW Investor"), each at a price of US$ 7.51 per share, for aggregate proceeds to the Company of approximately US$ 89.4 million . The proceeds were applied to repay TW Loan amounts drawn to repurchase the 2013 Convertible Notes and the 2014 Floating Rate Notes.
•
On June 15, 2012, Time Warner and Ronald Lauder converted their shares of Class B common stock into an equivalent number of shares of Class A common stock for no additional consideration. There are no shares of Class B common stock outstanding.
•
On July 3, 2012, we issued 874,819 shares of our Class A common stock and one share of Series A Convertible Preferred Stock of the Company, par value US$ 0.08 per share (the “Preferred Share”) (collectively, the “Option Shares”), at a price per share of Class A common stock (including those underlying the Preferred Share) of US$ 7.51, to TW Investor for aggregate consideration of approximately US$ 90.8 million (collectively, the “Equity Subscriptions”), each pursuant to the Equity Commitment Agreement. The consideration for the Equity Subscriptions was applied to repay in full the TW Loans. As a result of the Equity Subscriptions, TW Investor owns 42.6% of the outstanding shares of Class A common stock and has a 49.9% economic interest in the Company.
We will continue to look for further deleveraging opportunities in the second half of this year.




41
Index


III. Our Business

We manage our business on a divisional basis with three operating segments: Broadcast, Media Pro Entertainment, our production and distribution business, and New Media.  These operating segments, which are also our reportable segments, reflect how our operations are managed by segment managers, how our operating performance is evaluated by senior management and the structure of our internal financial reporting. We provide supplemental geographic information on the performance of our Broadcast operating segment due to the significance of our broadcast operations to CME Ltd. and management believes this provides users of the financial statements with useful information.

We evaluate the performance of our segments based on Net Revenues and OIBDA.

OIBDA, which includes program rights amortization costs, is determined as operating income / (loss) before depreciation, amortization of intangible assets and impairments of assets. Items that are not allocated to our segments for purposes of evaluating their performance and therefore are not included in their OIBDA, include stock-based compensation and certain other items.

Our key performance measure of the efficiency of our segments is OIBDA margin.  We define OIBDA margin as the ratio of OIBDA to Net Revenues.  We believe OIBDA is useful to investors because it provides a meaningful representation of our performance as it excludes certain items that either do not impact our cash flows or the operating results of our operations.  OIBDA is also used as a component in determining management bonuses. Intersegment revenues and profits have been eliminated on consolidation.

OIBDA, as defined above, and free cash flow, as defined in II. Overview, may not be comparable to similar measures reported by other companies.  Non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, US GAAP financial measures.  For additional information regarding our business segments, see Item 1, Note 16, “Segment Data”.

The following analysis contains references to like-for-like (“% Lfl”) or constant currency percentage movements. These references reflect the impact of applying the current period average exchange rates to the prior period revenues and costs. Given the significant movement of the currencies in the markets in which we operate against the dollar, we believe that it is useful to provide percentage movements based on like-for-like or constant currency percentage movements as well as actual (“% Act”) percentage movements (which includes the effect of foreign exchange). Unless otherwise stated, all percentage increases or decreases in the following analysis refer to year-on-year percentage changes, that is, changes between the three and six months ended June 30, 2012 and June 30, 2011 .

A summary of our total Net Revenues and OIBDA by segment is as follows:
 
NET REVENUES
 
For the Three Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast
$
182,337

 
$
228,968

 
(20.4
)%
 
(7.6
)%
Media Pro Entertainment
53,455

 
51,254

 
4.3
 %
 
23.2
 %
New Media
5,212

 
4,612

 
13.0
 %
 
30.9
 %
Intersegment revenues (1)
(29,782
)
 
(35,178
)
 
15.3
 %
 
0.9
 %
Total Net Revenues
$
211,222

 
$
249,656

 
(15.4
)%
 
(1.6
)%

 
NET REVENUES
 
For the Six Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast
$
329,134

 
$
386,485

 
(14.8
)%
 
(5.0
)%
Media Pro Entertainment
96,860

 
91,434

 
5.9
 %
 
19.5
 %
New Media
8,891

 
7,233

 
22.9
 %
 
37.5
 %
Intersegment revenues (1)
(56,230
)
 
(62,724
)
 
10.4
 %
 
(0.5
)%
Total Net Revenues
$
378,655

 
$
422,428

 
(10.4
)%
 
0.2
 %

 (1) Reflects revenues earned by the Media Pro Entertainment segment through sales to the Broadcast segment.  All other revenues are third party revenues.

42
Index

 
OIBDA
 
For the Three Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast
$
50,482

 
$
76,116

 
(33.7
)%
 
(22.8
)%
Media Pro Entertainment
5,417

 
761

 
611.8
 %
 
751.7
 %
New Media
(787
)
 
(489
)
 
(60.9
)%
 
(81.8
)%
Central
(7,031
)
 
(12,397
)
 
43.3
 %
 
40.8
 %
Intersegment elimination
(969
)
 
(1,298
)
 
25.3
 %
 
9.9
 %
Consolidated OIBDA
$
47,112

 
$
62,693

 
(24.9
)%
 
(10.5
)%

 
OIBDA
 
For the Six Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast
$
73,360

 
$
102,266

 
(28.3
)%
 
(18.4
)%
Media Pro Entertainment
7,088

 
1,485

 
377.3
 %
 
452.0
 %
New Media
(2,235
)
 
(2,089
)
 
(7.0
)%
 
(14.7
)%
Central
(15,272
)
 
(22,244
)
 
31.3
 %
 
28.8
 %
Intersegment elimination
(1,769
)
 
(2,479
)
 
28.6
 %
 
18.9
 %
Consolidated OIBDA
$
61,172

 
$
76,939

 
(20.5
)%
 
(6.7
)%

Broadcast
 
Our Broadcast segment comprises our broadcast channel operations in Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic and Slovenia.

After adjusting for inflation, we estimate that GDP in our territories grew slightly overall during the six months ended June 30, 2012 , but was down from the 1.5% growth rate reported in the second half of 2011 following the combination of a slowdown in export growth and ongoing tight fiscal measures in some of the countries in our region. Real private consumption is estimated to have declined slightly overall during the six months ended June 30, 2012 . On a constant currency basis, television advertising spending in our markets declined by 7% in the six months ended June 30, 2012 , with variances ranging from negative 14% in Croatia to negative 1% in the Slovak Republic. In Croatia, the decline in advertising spending was primarily due to a reduction in spending by advertisers in the telecoms industry, while in the Slovak Republic, television advertising spending benefited from additional advertising spending ahead of parliamentary elections.  A full recovery in our region continues to be hampered by continuing concerns surrounding the levels of European sovereign debt, uncertainty about the future of the Euro and a general lack of confidence about economic growth in our countries. All of these issues are contributing to the reluctance of advertisers to spend.
 
The following table sets out our estimates of real GDP, real private consumption and television advertising market growth / (decline) in our countries for the six months ended June 30, 2012 :
 
For the Six Months Ended June 30, 2012
Country
Real GDP Growth

Real Private Consumption Growth

TV Ad Market Growth

Bulgaria
0.6
 %
1.4
 %
(5
)%
Croatia
(1.1
)%
(0.8
)%
(14
)%
Czech Republic
(0.4
)%
(2.1
)%
(6
)%
Romania*
0.4
 %
0.6
 %
(10
)%
Slovak Republic
2.7
 %
(0.1
)%
(1
)%
Slovenia
(0.8
)%
0.8
 %
(3
)%
Total CME Markets
0.3
 %
(0.4
)%
(7
)%
* Romania market excludes Moldova.
Source: CME estimates

We are continuing our actions to maintain our leadership in audience and market shares across all of our Broadcast operations, which provides us with a unique competitive advantage and is essential to achieving high operating leverage when our television advertising markets recover.  During the first half of this year, we maintained our overall share of the television advertising markets compared to the same period in 2011 in conditions where our competitors discounted heavily in certain markets.

43
Index

The Broadcast segment reported net revenues for the three and six months ended June 30, 2012 of US$ 182.3 million and US$ 329.1 million compared to US$ 229.0 million and US$ 386.5 million in the same periods in 2011 , decreases of 20% and 15% , respectively. On a constant currency basis, net revenues for the three and six months ended June 30, 2012 decreased 8% and 5% , respectively compared to the same periods in 2011 . This decrease in net revenues was primarily due to the continuing difficult trading conditions that existed in television advertising spending in our markets in the first half of this year and was in line with the decrease in the overall television advertising spending in our region.
Costs charged in arriving at OIBDA for the three and six months ended June 30, 2012 decreased by 14% and 10% compared to the same periods in 2011 . On a constant currency basis, costs for the three and six months ended June 30, 2012 remained flat compared to the same periods in 2011 , reflecting our ability to optimize our costs charged in arriving at OIBDA during the past two financial years. We continue to implement cost efficiencies and we are able to control our local content production costs, which represents a large proportion of our programming costs. We intend to continue to invest in local programming to maintain our audience leadership and deliver the necessary output of gross rating points, in line with the demands of the markets in which we operate, without increasing our overall costs.
Our Broadcast segment generated OIBDA of US$ 50.5 million and US$ 73.4 million for the three and six months ended June 30, 2012 compared to US$ 76.1 million and US$ 102.3 million for the corresponding periods in 2011 , decreases of 34% and 28% for the three and six months ended June 30, 2012 , respectively. On a constant currency basis, OIBDA decreased 23% and 18% for the three and six months ended June 30, 2012 , respectively compared to the same periods in 2011 .
Our current view of television advertising spending in the second half of this year indicates that the trend will improve, with a lower rate of decline than the first half of the year, with some advertisers fulfilling their annual committed budgets in the market. Our focus remains on investing in our audience share, particularly in the Czech and Slovak Republic, and in Romania where competition is intense, in order to support our premium pricing model and maintain our market leadership.
We believe that our market leadership and the strength of our existing brands leave us well positioned to face the challenging TV advertising market conditions and competitor behavior, and we intend to continue to build on our channel portfolio with an increased focus on pay and subscription TV channels, as well as exploiting our own content on multiple distribution platforms and devices as these new technologies develop.
 
Media Pro Entertainment
 
Our Media Pro Entertainment (“MPE”) segment is comprised of production and distribution businesses.

MPE’s revenues for the three and six months ended June 30, 2012 and 2011 predominantly represent sales of finished content to our broadcasters and revenues from third parties from our production and distribution operations. The MPE segment reported net revenues for the three and six months ended June 30, 2012 of US$ 53.5 million and US$ 96.9 million , respectively, compared to US$ 51.3 million and US$ 91.4 million for the same periods in 2011 , increases of 4% and 6% , respectively. On constant currency basis, net revenues increased by 23% and 20% for the three and six months ended June 30, 2012 , respectively, compared to the same periods in 2011 .

We generated approximately US$ 24.8 million ( 46% of total MPE segment revenues) and US$ 42.4 million ( 44% of total MPE revenues) of our revenues from third parties during the three and six months ended June 30, 2012 respectively, compared to US$ 16.5 million ( 32% of total MPE segment revenues) and US$ 29.3 million ( 32% of total MPE segment revenues) during the corresponding periods in 2011 . The increase in our revenues and the increase in the proportion of our third party revenues primarily reflects our acquisition of Bontonfilm in the second quarter of 2011 .
 
The Media Pro Entertainment segment generated OIBDA of US$ 5.4 million and US$ 7.1 million during the three and six months ended June 30, 2012 , respectively compared to US$ 0.8 million and US$ 1.5 million in the corresponding periods of 2011 , increasing by US$ 4.7 million and US$ 5.6 million , respectively. On a constant currency basis, OIBDA increased US$ 4.8 million and US$ 5.8 million for the three and six months ended June 30, 2012 compared to the same periods in 2011 .

Production
 
For the three and six months ended June 30, 2012 , we delivered 233 hours and 510 hours of fiction programming to our Broadcast operations, compared to 262 hours and 533 hours for the same periods in 2011 . This programming comprised telenovellas, soap opera shows and comedy series such as 'Lara's Choice' in Croatia, 'Home Wars' in Bulgaria, 'Second Chance' in the Slovak Republic, 'Helena' and ‘The Street’ in the Czech Republic and 'Las Fierbinti' in Romania; and drama series such as ‘Rose Garden Clinic’ in the Czech Republic and the Slovak Republic and 'Bet With Life' in Romania.

We delivered a total of 473 hours and 824 hours of reality and entertainment programming to our Broadcast operations during the three and six months ended June 30, 2012 compared to 422 hours and 739 hours for the same periods in 2011 , with shows such as 'Got Talent' and 'Master Chef' in Romania, and 'X Factor' in Slovenia, 'The Voice' and 'Wife Swap' in the Czech and Slovak Republics and 'The Farm' in the Slovak Republic.  

The hours delivered by our production operations for the three and six months ended June 30, 2012 reflects the demand from our Broadcast operations.

Distribution
 
Following the integration of Bontonfilm, we now have distribution operations in the Czech Republic, the Slovak Republic, Hungary and Romania, where we are the market leader.

Our distribution business continues to focus on delivering third party revenues through theatrical and home video distribution. Our theatrical distribution unit maintained its leadership position in Romania with an estimated 22% share of the theatrical market and currently holds an estimated 40% market share in the Czech and Slovak Republics. Our home video distribution unit maintained its leadership position in Romania with an estimated 62% share of the home video market and currently holds an estimated 44% market share in the Czech and Slovak Republics.


44
Index

The evolution in MPE confirms our commitment to invest in our local content as the core of our business model and the performance of our production and distribution businesses reflect the growing importance of locally-generated content in our markets. MPE is well positioned to develop, produce and distribute our content, presenting us with significant opportunities in the future that will increasingly place a premium on content distributed in new and emerging distribution platforms, supporting our strategy of one content, multiple distribution. Furthermore, we remain focused on increasing our third party revenues across all of our MPE operations.
 
New Media
 
Our New Media segment comprises an internet content and distribution business in each of our markets.

During the six months ended June 30, 2012 , we completed the introduction of Voyo, our subscription video-on-demand distribution service, into all of our territories. Voyo delivers premium, locally-produced content as well as many local and foreign feature films. It also offers an embedded transactional video-on-demand element devoted to movie content from major Hollywood and independent studios. Following our actions to improve the library of available content and to increase distribution, we reached 78,000 subscriptions as at June 30, 2012, an increase from 20,000 subscriptions as at December 31, 2011. We believe that Voyo is now the leading video-on-demand distribution platform in the region, based on the number of subscribers, and is the future engine of growth for our New Media Division.

Our content business comprises a website portfolio in each of our markets in order to build strong online channels to distribute popular content and to operate as an efficient marketing tool for our Broadcast operations. We currently operate over 75 websites and we continue to launch new targeted products to establish and grow our online presence and market share and ultimately provide our products on multiple distribution platforms. Our target is to achieve consistent growth of monthly and daily visitors in order to increase revenues and the number of advertising clients and as a result, to outperform the local internet advertising market growth. We recently launched a series of products for smart phones and tablets as part of our strategy to increase the time our users spend consuming content that we deliver. During the six months ended June 30, 2012 , we increased the number of average daily non-duplicated unique visitors by 13% year-on-year in the countries where we operate.

On a constant currency basis, internet advertising spending in our markets increased by 1% overall in the six months ended June 30, 2012 , with variances ranging from negative 27% in Croatia to positive 12% in the Slovak Republic. The decline of the internet advertising spending in Croatia largely reflects the decline in spending by advertisers in the telecoms industry which also affected the television advertising market in the first half. 

The following table sets out our estimates of internet advertising market growth / (decline) in our countries for the six months ended June 30, 2012 .
Country
For the Six Months Ended June 30, 2012
Bulgaria
3
 %
Croatia
(27
)%
Czech Republic
1
 %
Romania*
7
 %
Slovak Republic
12
 %
Slovenia
7
 %
Total CME Markets
1
 %
* Romania market excludes Moldova.
Source: CME estimates

Our New Media segment reported net revenues for the three and six months ended June 30, 2012 of US$ 5.2 million and US$ 8.9 million compared to US$ 4.6 million and US$ 7.2 million in the same periods in 2011 , increases of 13% and 23% , respectively. On a constant currency basis, net revenues for the three and six months ended June 30, 2012 increased 31% and 38% compared to the same periods in 2011 . We reported similar OIBDA losses for the three and six months ended June 30, 2012 of US$ 0.8 million and US$ 2.2 million compared to losses of US$ 0.5 million and US$ 2.1 million in the same periods in 2011 . On a constant currency basis, OIBDA loss increased US$ 0.4 million and US$ 0.3 million for the three and six months ended June 30, 2012 compared to the same periods in 2011 .

Internet broadband penetration and internet usage continues to show promising signs of growth in 2012 but remains low in most of our markets in comparison to Western European and U.S. markets. We are confident that our actions that led to the current audience and advertising revenue growth in the six months ended June 30, 2012 will enable us to continue to outperform the internet advertising markets in our operating territories in 2012. We believe that we will benefit from the shift of advertising spending from print and other media to our New Media and Broadcast operations, and that Voyo will be a key factor in building the paid content market in our territories.

We anticipate that broadband penetration and internet usage will increase significantly over the medium term and will foster the development of significant new opportunities for generating advertising and other revenues in new media. We intend to continue to develop our new media activities further and attract higher advertising revenues by increasing and enhancing our content production on our websites, thereby generating a larger audience with a more targeted demographic profile. We will also continue with our further development of Voyo which involves moving our content online with different distribution platforms to attract all types of new media audience in order to generate multiple revenue streams including video advertising and paid premium content.


45
Index



IV. Analysis of the Results of Operations and Financial Position

IV (a) Net Revenues for the three and six months ended June 30, 2012 and 2011 .
 
NET REVENUES
 
For the Three Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast:
 
 
 
 
 
 
 
Bulgaria
$
21,970

 
$
26,662

 
(17.6
)%
 
(7.0
)%
Croatia
15,314

 
19,979

 
(23.3
)%
 
(12.1
)%
Czech Republic
66,386

 
82,668

 
(19.7
)%
 
(6.3
)%
Romania
36,317

 
47,015

 
(22.8
)%
 
(6.6
)%
Slovak Republic
23,036

 
29,845

 
(22.8
)%
 
(12.8
)%
Slovenia
19,314

 
22,799

 
(15.3
)%
 
(4.3
)%
Total Broadcast
182,337

 
228,968

 
(20.4
)%
 
(7.6
)%
Media Pro Entertainment
53,455

 
51,254

 
4.3
 %
 
23.2
 %
New Media
5,212

 
4,612

 
13.0
 %
 
30.9
 %
Elimination
(29,782
)
 
(35,178
)
 
15.3
 %
 
0.9
 %
Total Net Revenues
$
211,222

 
$
249,656

 
(15.4
)%
 
(1.6
)%

 
NET REVENUES
 
For the Six Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast:
 
 
 
 
 
 
 
Bulgaria
$
40,898

 
$
45,999

 
(11.1
)%
 
(3.2
)%
Croatia
27,187

 
32,490

 
(16.3
)%
 
(7.2
)%
Czech Republic
118,084

 
140,374

 
(15.9
)%
 
(5.6
)%
Romania
67,516

 
81,369

 
(17.0
)%
 
(4.8
)%
Slovak Republic
41,671

 
48,935

 
(14.8
)%
 
(7.0
)%
Slovenia
33,778

 
37,318

 
(9.5
)%
 
(1.1
)%
Total Broadcast
329,134

 
386,485

 
(14.8
)%
 
(5.0
)%
Media Pro Entertainment
96,860

 
91,434

 
5.9
 %
 
19.5
 %
New Media
8,891

 
7,233

 
22.9
 %
 
37.5
 %
Elimination
(56,230
)
 
(62,724
)
 
10.4
 %
 
(0.5
)%
Total Net Revenues
$
378,655

 
$
422,428

 
(10.4
)%
 
0.2
 %

Our Broadcast segment reported revenues US$ 182.3 million and US$ 329.1 million in the three and six months ended June 30, 2012 , representing decreases of 20% and 15% , respectively, compared to the same periods in 2011 . On a constant currency basis, we experienced decreases in revenues for the three and six months ended June 30, 2012 of 8% and 5% , respectively, broadly in line with the decline in television advertising spending in our markets.

Our Media Pro Entertainment segment reported revenues of US$ 53.5 million and US$ 96.9 million in the three and six months ended June 30, 2012 , representing increases of 4% and 6% , respectively compared to the same periods in 2011 . Revenues increased by 23% and 20% on a constant currency basis in the three and six months ended June 30, 2012 , respectively, compared to the same periods in 2011 , primarily reflecting the acquisition of Bontonfilm in the second quarter of 2011.

Our New Media segment reported revenues of US$ 5.2 million and US$ 8.9 million in the three and six months ended June 30, 2012 , representing increases of 13% and 23% , respectively, compared to the same periods in 2011 . On a constant currency basis, revenues increased by 31% and 38% in the three and six months ended June 30, 2012 , respectively, compared to the same periods in 2011 , reflecting the initial benefits associated with the launch of Voyo in all our territories.


46
Index

IV (b) Cost of Revenues for the three and six months ended June 30, 2012 and 2011 .
 
Cost of Revenues
 
For the Three Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Operating costs
$
42,240

 
$
34,536

 
22.3
 %
 
41.9
 %
Cost of programming
95,685

 
122,730

 
(22.0
)%
 
(9.4
)%
Depreciation of  property, plant and equipment
9,867

 
14,493

 
(31.9
)%
 
(20.8
)%
Amortization of broadcast licenses and other intangibles
12,715

 
7,809

 
62.8
 %
 
87.5
 %
Total Cost of Revenues
$
160,507

 
$
179,568

 
(10.6
)%
 
3.8
 %
 
 
Cost of Revenues
 
For the Six Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Operating costs
$
71,366

 
$
68,191

 
4.7
 %
 
15.7
 %
Cost of programming
193,409

 
218,761

 
(11.6
)%
 
(1.6
)%
Depreciation of  property, plant and equipment
20,942

 
27,910

 
(25.0
)%
 
(16.8
)%
Amortization of broadcast licenses and other intangibles
25,198

 
15,436

 
63.2
 %
 
79.6
 %
Total Cost of Revenues
$
310,915

 
$
330,298

 
(5.9
)%
 
4.6
 %

Cost of revenues: Our total cost of revenues for the three and six months ended June 30, 2012 decreased by US$ 19.1 million and US$ 19.4 million or 11% and 6% compared to the corresponding periods in 2011 . On a constant currency basis, our total cost of revenues increased by 4% and 5% for the respective periods, reflecting decreases in the cost of programming and depreciation of property, plant and equipment offset by increases in operating costs and increases in the amortization of broadcast licenses and other intangibles following the revision of our estimate of the remaining useful life of certain of our Broadcast licenses as of January 1, 2012 (see Item 1, Note 3, "Goodwill and Intangible Assets").
 
OPERATING COSTS
 
For the Three Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast:
 
 
 
 
 
 
 
Bulgaria
$
5,451

 
$
4,580

 
19.0
 %
 
34.0
 %
Croatia
2,445

 
3,156

 
(22.5
)%
 
(10.6
)%
Czech Republic
6,241

 
9,052

 
(31.1
)%
 
(19.5
)%
Romania
3,729

 
4,722

 
(21.0
)%
 
(4.1
)%
Slovak Republic
5,477

 
5,496

 
(0.3
)%
 
13.7
 %
Slovenia
2,846

 
2,391

 
19.0
 %
 
34.8
 %
Total Broadcast
26,189

 
29,397

 
(10.9
)%
 
3.2
 %
Media Pro Entertainment
15,448

 
3,860

 
300.2
 %
 
371.6
 %
New Media
1,751

 
1,279

 
36.9
 %
 
57.6
 %
Elimination
(1,148
)
 
—

 
Nm  (1)

 
Nm (1)

Total Operating Costs
$
42,240

 
$
34,536

 
22.3
 %
 
41.9
 %
(1) Number is not meaningful.


47
Index

 
OPERATING COSTS
 
For the Six Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast:
 
 
 
 
 
 
 
Bulgaria
$
9,152

 
$
8,711

 
5.1
 %
 
13.7
 %
Croatia
4,894

 
5,711

 
(14.3
)%
 
(5.0
)%
Czech Republic
12,469

 
17,906

 
(30.4
)%
 
(22.4
)%
Romania
8,533

 
10,352

 
(17.6
)%
 
(6.8
)%
Slovak Republic
9,901

 
11,211

 
(11.7
)%
 
(4.2
)%
Slovenia
5,370

 
5,164

 
4.0
 %
 
12.4
 %
Total Broadcast
50,319

 
59,055

 
(14.8
)%
 
(6.0
)%
Media Pro Entertainment
18,974

 
6,805

 
178.8
 %
 
213.5
 %
New Media
3,282

 
2,331

 
40.8
 %
 
55.5
 %
Elimination
(1,209
)
 
—

 
Nm (1)

 
Nm (1)

Total Operating Costs
$
71,366

 
$
68,191

 
4.7
 %
 
15.7
 %
(1) Number is not meaningful.

Operating costs:  Total operating costs (excluding programming costs, depreciation of property, plant and equipment, amortization of broadcast licenses and other intangibles as well as selling, general and administrative expenses) for the three and six months ended June 30, 2012 increased by US$ 7.7 million and US$ 3.2 million , or 22% and 5% , compared to the same periods in 2011 . On a constant currency basis, operating costs increased by 42% and 16% , for the three and six months ended June 30, 2012 compared to the same periods in 2011 , primarily due to a decrease in transmission and staff-related costs in our Broadcast operations more than offset by new channel launches, higher costs associated with third party revenues in MPE resulting from the acquisition of Bontonfilm and with the launch of Voyo in our New Media division.
 
COST OF PROGRAMMING
 
For the Three Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast:
 
 
 
 
 
 
 
Bulgaria
$
10,837

 
$
14,861

 
(27.1
)%
 
(17.9
)%
Croatia
7,922

 
12,497

 
(36.6
)%
 
(27.6
)%
Czech Republic
24,441

 
26,626

 
(8.2
)%
 
6.8
 %
Romania
23,749

 
29,508

 
(19.5
)%
 
(2.7
)%
Slovak Republic
14,351

 
16,700

 
(14.1
)%
 
(3.1
)%
Slovenia
9,616

 
10,518

 
(8.6
)%
 
3.0
 %
Total Broadcast
90,916

 
110,710

 
(17.9
)%
 
(4.9
)%
Media Pro Entertainment
29,500

 
43,139

 
(31.6
)%
 
(19.4
)%
New Media
1,688

 
2,448

 
(31.0
)%
 
(20.5
)%
Elimination
(26,419
)
 
(33,567
)
 
21.3
 %
 
8.0
 %
Total Cost of Programming
$
95,685

 
$
122,730

 
(22.0
)%
 
(9.4
)%


48
Index

 
COST OF PROGRAMMING
 
For the Six Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast:
 
 
 
 
 
 
 
Bulgaria
$
25,561

 
$
26,899

 
(5.0
)%
 
3.1
 %
Croatia
15,216

 
21,248

 
(28.4
)%
 
(21.0
)%
Czech Republic
45,095

 
48,511

 
(7.0
)%
 
3.8
 %
Romania
45,573

 
51,772

 
(12.0
)%
 
0.8
 %
Slovak Republic
26,337

 
30,371

 
(13.3
)%
 
(5.8
)%
Slovenia
17,781

 
18,014

 
(1.3
)%
 
7.4
 %
Total Broadcast
175,563

 
196,815

 
(10.8
)%
 
(0.9
)%
Media Pro Entertainment
65,676

 
77,439

 
(15.2
)%
 
(4.5
)%
New Media
4,175

 
4,440

 
(6.0
)%
 
3.8
 %
Elimination
(52,005
)
 
(59,933
)
 
13.2
 %
 
2.8
 %
Total Cost of Programming
$
193,409

 
$
218,761

 
(11.6
)%
 
(1.6
)%

Cost of programming:  Programming costs (including production costs and amortization of programming rights) decreased by US$ 27.0 million and US$ 25.4 million , or 22% and 12% , during the three and six months ended June 30, 2012 compared to the same periods in 2011 . On a constant currency basis, the decreases of 9% and 2% for the three and six months ended June 30, 2012 reflects our ability to control our local content production costs, which represents a large proportion of our programming costs. We increased the investment in our programming schedules to maintain our audience leadership in some of our territories where competition has been intense and we intend to continue to invest in local programming to maintain our audience leadership and deliver the necessary output of gross rating points, in line with the demands of the markets in which we operate, without increasing our overall costs. Programming costs in our New Media division include the costs associated with providing content for the launch of Voyo. We prospectively applied a change in estimates in respect of programming expense during the second half of 2011. The impact of this change is a lower amortization charge of approximately US$ 1.8 million and US$ 3.8 million for the three and six months ended June 30, 2012 (see Item 1, Note 2, "Summary of Significant Accounting Policies").

Depreciation of property, plant and equipment:  Total depreciation of property, plant and equipment for the three and six months ended June 30, 2012 decreased by US$ 4.7 million and US$ 7.0 million , or 32% and 25% . On a constant currency basis, depreciation decreased 21% and 17% , reflecting a decrease in capital expenditures in recent years.

Amortization of broadcast licenses and other intangibles: Total amortization of broadcast licenses and other intangibles increased by US$ 4.9 million and US$ 9.8 million during the three and six months ended June 30, 2012 , or 63% and 63% , compared to the same periods in 2011 . On a constant currency basis, the increase of 87% and 80% reflects additional amortization of broadcast licenses due to the change in the remaining estimated useful life of our broadcast licenses in Bulgaria, Romania and Slovenia. The impact of this change in estimates is a higher amortization charge amounting to approximately US$ 4.2 million and US$ 9.5 million for the three and six months ended June 30, 2012, compared to the corresponding periods of 2011 (see Item 1, Note 3, "Goodwill and Intangible Assets").

49
Index


IV (c) Selling, General and Administrative Expenses for the three and six months ended June 30, 2012 and 2011 .
 
SELLING, GENERAL and ADMINISTRATIVE EXPENSES
 
For the Three Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast:
 
 
 
 
 
 
 
Bulgaria
$
2,222

 
$
1,453

 
52.9
 %
 
72.8
 %
Croatia
1,023

 
1,173

 
(12.8
)%
 
—
 %
Czech Republic
4,329

 
3,144

 
37.7
 %
 
57.4
 %
Romania
3,660

 
3,488

 
4.9
 %
 
26.0
 %
Slovak Republic
1,218

 
1,912

 
(36.3
)%
 
(28.6
)%
Slovenia
1,111

 
1,336

 
(16.8
)%
 
(6.2
)%
Divisional operating costs
1,187

 
238

 
Nm (1)

 
Nm (1)

Total Broadcast
14,750

 
12,744

 
15.7
 %
 
33.5
 %
Media Pro Entertainment
3,970

 
4,298

 
(7.6
)%
 
11.2
 %
New Media
2,560

 
1,373

 
86.5
 %
 
115.5
 %
Central
7,032

 
12,514

 
(43.8
)%
 
(41.4
)%
Elimination
(1,247
)
 
(314
)
 
Nm (1)

 
Nm (1)

Total Selling, General and Administrative Expenses
$
27,065

 
$
30,615

 
(11.6
)%
 
(1.7
)%
(1) Number is not meaningful.

 
SELLING, GENERAL and ADMINISTRATIVE EXPENSES
 
For the Six Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Broadcast:
 
 
 
 
 
 
 
Bulgaria
$
3,827

 
$
4,460

 
(14.2
)%
 
(8.4
)%
Croatia
2,132

 
2,710

 
(21.3
)%
 
(14.0
)%
Czech Republic
8,951

 
7,444

 
20.2
 %
 
32.3
 %
Romania
6,336

 
6,499

 
(2.5
)%
 
10.6
 %
Slovak Republic
3,900

 
4,122

 
(5.4
)%
 
1.7
 %
Slovenia
2,109

 
2,371

 
(11.1
)%
 
(3.3
)%
Divisional operating costs
2,637

 
745

 
254.0
 %
 
290.1
 %
Total Broadcast
29,892

 
28,351

 
5.4
 %
 
15.6
 %
Media Pro Entertainment
6,658

 
7,256

 
(8.2
)%
 
4.8
 %
New Media
3,669

 
2,551

 
43.8
 %
 
59.7
 %
Central
15,421

 
22,477

 
(31.4
)%
 
(28.9
)%
Elimination
(1,247
)
 
(313
)
 
(298.4
)%
 
(363.6
)%
Total Selling, General and Administrative Expenses
$
54,393

 
$
60,322

 
(9.8
)%
 
(2.7
)%

Selling, general and administrative expenses decreased by US$ 3.6 million and US$ 5.9 million during the three and six months ended June 30, 2012 compared to the same periods in 2011 , primarily due to a reduction in staff-related expenses.

Central costs decreased by US$ 5.5 million and US$ 7.1 million , or 44% and 31% during the three and six months ended June 30, 2012 compared to the same periods in 2011 , primarily reflecting a reduction in staff-related expenses following redeployment of central headcount into operational positions. Central costs for the six months ended June 30, 2012 include a charge of US$ 2.1 million in respect of non-cash stock-based compensation, a decrease of US$ 1.0 million compared to the same period in 2011 (see Item 1, Note 14, “Stock-Based Compensation”).




50
Index

IV (d) Operating income for the three and six months ended June 30, 2012 and 2011 .
 
Operating Income
 
For the Three Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Operating income
$
23,650

 
$
39,473

 
(40.1
)%
 
(28.2
)%

 
Operating Income
 
For the Six Months Ended June 30, (US$ 000's)
 
 
 
 
 
Movement
 
2012

 
2011

 
% Act

 
% Lfl

Operating income
$
13,347

 
$
31,808

 
(58.0
)%
 
(46.1
)%

Operating income for the three and six months ended June 30, 2012 decreased by US$ 15.8 million and US$ 18.5 million compared to the same periods in 2011 , as a result of the decrease in net revenues and the increase in operating costs. Excluding the impact of the change in estimates related to amortization of program rights (see Item 1, Note 2, "Summary of Significant Accounting Policies") and broadcast licenses (see Item 1, Note 3, "Goodwill and Intangible Assets"), our operating income for the three and six months ended June 30, 2012 would have been approximately US$ 27.8 million and US$ 22.8 million , respectively.

Our operating margin was 11% and 4% during the three and six months ended June 30, 2012 , compared to 16% and 8% for the same periods in 2011 .

51

IV (e) Other income / (expense) items for the three and six months ended June 30, 2012 and 2011 .
 
Other Income / (Expense)
 
For the Three Months Ended June 30, (US$ 000's)
 
2012

 
2011

 
% Act

Interest income
$
171

 
$
637

 
(73.2
)%
Interest expense
(30,681
)
 
(37,757
)
 
18.7
 %
Foreign currency exchange (loss) / gain, net
(40,312
)
 
4,106

 
Nm (1)

Change in fair value of derivatives
47,398

 
1,161

 
Nm (1)

Other expense
(158
)
 
(90
)
 
Nm (1)

Credit / (provision) for income taxes
3,073

 
(6,718
)
 
145.7
 %
Net loss attributable to noncontrolling interests
815

 
156

 
Nm (1)

Currency translation adjustment, net
(98,552
)
 
22,851

 
Nm (1)

(1) Number is not meaningful.
 
Other Income / (Expense)
 
For the Six Months Ended June 30, (US$ 000's)
 
2012

 
2011

 
% Act

Interest income
$
385

 
$
1,765

 
(78.2
)%
Interest expense
(62,505
)
 
(93,796
)
 
33.4
 %
Foreign currency exchange (loss) / gain, net
(16,918
)
 
47,371

 
Nm (1)

Change in fair value of derivatives
48,325

 
1,121

 
Nm (1)

Other income / (expense)
51

 
(802
)
 
Nm (1)

Credit / (provision) for income taxes
6,643

 
(7,650
)
 
Nm (1)

Net loss attributable to noncontrolling interests
1,236

 
37

 
Nm (1)

Currency translation adjustment, net
(31,462
)
 
131,246

 
Nm (1)

(1) Number is not meaningful.

Interest income for the six months ended June 30, 2012 decreased by US$ 1.4 million compared to the same period in 2011 , primarily as a result of lower average cash balances.

Interest expense for the six months ended June 30, 2012 decreased by US$ 31.3 million compared to the same period in 2011 , primarily due to the loss on extinguishment of debt recorded during the six months ended June 30, 2011. The repurchase of 2013 Convertible Notes and 2014 Floating Rate Notes during the three months ended June 30, 2012 resulted in a net gain on extinguishment (see Item 1, Note 4, "Long-Term Debt and Other Financing Arrangements" and Note 13, "Interest Expense").

Foreign currency exchange (loss) / gain, net:   We are exposed to fluctuations in foreign exchange rates on the revaluation of monetary assets and liabilities denominated in currencies other than the local functional currency of the relevant subsidiary. This includes third party receivables and payables, including our Senior Notes, which are denominated in Euros, as well as our intercompany loans.  Our subsidiaries generally receive funding via loans that are denominated in currencies other than the dollar, and any change in the relevant exchange rate will require us to recognize a transaction gain or loss on revaluation.

During the six months ended June 30, 2012 , we recognized a net loss of US$ 16.9 million , comprised of transaction losses of US$ 26.9 million relating to the revaluation of intercompany loans; a transaction gain of approximately US$ 17.6 million on the Senior Notes due to the overall strengthening of the dollar against the Euro between January 1, 2012 and June 30, 2012 , and transaction losses of US$ 7.6 million relating to the revaluation of monetary assets and liabilities denominated in currencies other than the local functional currency of the relevant subsidiary.

During the six months ended June 30, 2011 , we recognized a net gain of US$ 47.4 million , comprised of transaction gains of US$ 68.8 million relating to the revaluation of intercompany loans; a transaction loss of approximately US$ 52.5 million on the Senior Notes due to the overall weakening of the dollar against the Euro between January 1, 2011 and June 30, 2011 , and transaction gains of US$ 31.1 million relating to the revaluation of monetary assets and liabilities denominated in currencies other than the local functional currency of the relevant subsidiary.

Change in fair value of derivatives: During the six months ended June 30, 2012 , we recognized a net gain of US$ 22.8 million related to the forward sale of shares to TW Investor and US$ 24.5 million related to the derivative for Option Shares with TW Investor. We also recognized US$ 0.4 million as a result of the change in the fair value of the interest rate swap entered into on February 9, 2010 and a gain of US$ 0.7 million as a result of the change in fair value of the currency swaps entered into on April 27, 2006. See Item 1, Note 11, “Financial Instruments and Fair Value Measurements”. The currency swap terminated on April 15, 2012, and the forward sale was completed on June 15, 2012, so there will be no further impact on earnings from these instruments. We exercised the Company Option on June 27, 2012, and the transaction settled on July 3, 2012 (see Item 1, Note 20, "Subsequent Events"). The fair value of the derivative for Option Shares on July 3, 2012, was US$ 30.0 million . The difference of US$ 0.5 million from the fair value at June 30, 2012, will be recognized as a derivative gain in the condensed consolidated statement of operations and other comprehensive income for the period ended September 30, 2012. There will be no impact on earnings from this instrument subsequent to July 3, 2012.


52

During the six months ended June 30, 2011 we recognized a gain of US$ 0.3 million as a result of the change in the fair value of the interest rate swap entered into on February 9, 2010 and a gain of US$ 0.2 million as a result of the change in fair value of the call option entered into in connection with the restructuring of the Pro.BG business. We also recognized a gain of US$ 0.6 million as a result of the change in fair value of the currency swaps entered into on April 27, 2006.

Other income / (expense): We recognized other income of US$ 0.1 million during the six months ended June 30, 2012 compared to other expenses of US$ 0.8 million in the six months ended June 30, 2011 .

Credit / (provision) for income taxes:  The credit for income taxes during the six months ended June 30, 2012 of US$ 6.6 million reflects the value of tax losses that we expect to realize in future periods. The reduction in income tax expense from the six months ended June 30, 2011 compared to the six months ended June 30, 2012 reflects a change in the profit mix across jurisdictions.  During the six months ended June 30, 2012, there was an overall loss in jurisdictions where a tax benefit can be recognized and during the same period in 2011, there was an overall profit in these same jurisdictions on which a tax expense accrued.  Other jurisdictions have a full valuation allowance or do not have income tax. 

Our subsidiaries are subject to income taxes at statutory rates ranging from 10.0% in Bulgaria to 20.0% in Slovenia.

Net loss attributable to noncontrolling interests:  During the six months ended June 30, 2012 , the loss of US$ 1.2 million in respect of the noncontrolling interest in consolidated subsidiaries related primarily to the noncontrolling interest share of losses in the Bulgaria Broadcast reporting unit. During the six months ended June 30, 2011 , the income of US$ 37.0 thousand primarily reflected the noncontrolling interest portion of income generated by the Bulgaria Broadcast reporting unit.

Currency translation adjustment, net:   The underlying equity value of our investments (which are denominated in the functional currency of the relevant entity) are converted into dollars at each balance sheet date, with any change in value of the underlying assets and liabilities being recorded as a currency translation adjustment to the balance sheet rather than the statement of operations.
 
The dollar appreciated against the functional currencies of our operations during the six months ended June 30, 2012 . In the six months ended June 30, 2012 , we recognized a loss of US$ 31.5 million on the revaluation of our net investments in subsidiaries compared to a gain of US$ 131.2 million for the same period in 2011 .
 
The following table illustrates the amount by which the exchange rate between the dollar and the functional currencies of our operations moved between January 1 and June 30 in 2012 and 2011 , respectively:
 
 
For the Six Months Ended June 30,
 
2012

 
2011

Bulgarian Lev
3
%
 
(8
)%
Croatian Kuna
3
%
 
(8
)%
Czech Koruna
2
%
 
(10
)%
Euro
3
%
 
(8
)%
New Romanian Lei
6
%
 
(9
)%

The dollar strengthened against the functional currencies of our operations between January 1 and June 30, 2012 , and was, on average, stronger than it was during the same period in 2011 .  The following table illustrates the change in the average exchange rates between the dollar and the functional currencies of our operations for the six months ended June 30, 2012 and 2011 .

 
Change in Average Rates
Bulgarian Lev
8
%
Croatian Kuna
10
%
Czech Koruna
12
%
Euro
8
%
New Romanian Lei
14
%

To the extent that our subsidiaries incur transaction losses in their local functional currency income statement on the revaluation of monetary assets and liabilities denominated in dollars, we recognize a gain of the same amount as a currency translation adjustment within equity when we retranslate our net investment in that subsidiary into dollars. Similarly, any exchange gain or loss arising on the retranslation of intercompany loans in the functional currency of the relevant subsidiary or the dollar will be offset by an equivalent loss or gain on consolidation.


53

IV (f) Condensed consolidated balance sheet as at June 30, 2012 and December 31, 2011 .

 
Summarized Condensed Consolidated Balance Sheet (US$ 000’s)
 
June 30, 2012

 
December 31, 2011

 
Movement

Current assets
$
524,414

 
$
538,289

 
(2.6
)%
Non-current assets
2,073,309

 
2,143,480

 
(3.3
)%
Current liabilities
379,268

 
255,575

 
48.4
 %
Non-current liabilities
1,174,802

 
1,408,252

 
(16.6
)%
CME Ltd. shareholders’ equity
1,029,140

 
1,001,692

 
2.7
 %
Noncontrolling interests in consolidated subsidiaries
14,513

 
16,250

 
(10.7
)%

Current assets:   Current assets at June 30, 2012 decreased by US$ 13.9 million compared to December 31, 2011 , primarily as a result of the net decrease in cash resulting from changes in working capital and the payment of interest.

Non-current assets:   Non-current assets at June 30, 2012 decreased by US$ 70.2 million compared to December 31, 2011 , primarily due to the impact of currency translation adjustments on our goodwill and intangible assets, partially offset by an increase in program rights.

Current liabilities:   Current liabilities at June 30, 2012 increased by US$ 123.7 million compared to December 31, 2011 , primarily as a result of the inclusion of our 2013 Convertible Notes, which are due in March 2013, and the balance outstanding on the TW Loan, which was repaid on July 3, 2012 (see Item 1, Note 20, "Subsequent Events").

Non-current liabilities:   Non-current liabilities at June 30, 2012 decreased by US$ 233.5 million compared to December 31, 2011 , primarily as a result of the repurchase of 2013 Convertible Notes and 2014 Floating Rate Notes (see Item 1, Note 4, Long-Term Debt and Other Financing Arrangements") and the presentation of the remaining 2013 Convertible Notes in current liabilities, as well as a decrease in the value of our Euro denominated debt as a result of the strengthening of the dollar in relation to the Euro between January 1, 2012 and June 30, 2012 .

CME Ltd. shareholders’ equity: CME Ltd. shareholders’ equity increased by US$ 27.4 million compared to December 31, 2011 , primarily due to the issuance of 11.9 million shares to TW Investor and RSL Capital LLC (see Item 1, Note 12, "Equity").  This increase was partially offset by a decrease in other comprehensive income of US$ 31.5 million due to the overall impact of the strengthening of the dollar on our foreign currency denominated assets, and a net loss of US$ 9.4 million for the six months ended June 30, 2012 . We also recognized a stock-based compensation charge of US$ 2.1 million during 2012 .

Noncontrolling interests in consolidated subsidiaries:   Noncontrolling interests in consolidated subsidiaries at June 30, 2012 decreased US$ 1.7 million compared to December 31, 2011 , primarily due to the net loss attributable to noncontrolling interests and dividends paid.


54
Index

V. Liquidity and Capital Resources

V (a) Summary of Cash Flows

Cash and cash equivalents decreased by US$ 61.6 million during the six months ended June 30, 2012 . The change in cash and cash equivalents for the periods presented below is summarized as follows:
 
For the Six Months Ended June 30, (US$ 000's)
 
2012

 
2011

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

Net cash used in investing activities
(11,149
)
 
(23,074
)
Net cash used in financing activities
(1,533
)
 
(59,755
)
Impact of exchange rate fluctuations on cash
(697
)
 
7,234

Net decrease in cash and cash equivalents
$
(61,572
)
 
$
(46,545
)

Operating Activities

Cash used in operations during the six months ended June 30, 2012 was US$ 48.2 million , compared to cash generated in the six months ended June 30, 2011 of US$ 29.1 million , reflecting advance payments received from customers in prior year and other changes in working capital. We paid interest of US$ 54.6 million on our Senior Notes, Convertible Notes and credit facilities during the six months ended June 30, 2012 compared to US$ 57.2 million during the same period in 2011 .

Investing Activities

Our investing cash flows in the six months ended June 30, 2012 primarily comprised US$ 11.3 million relating to capital expenditures. Our investing cash flows in the six months ended June 30, 2011 primarily comprised US$ 14.3 million relating to capital expenditures, and net cash paid for Bontonfilm of US$ 8.0 million.

Financing Activities

Cash used in financing activities during the six months ended June 30, 2012 was US$ 1.5 million compared to cash used of US$ 59.8 million for the same period of 2011 . The amount of net cash used in financing activities in the six months ended June 30, 2012 reflected proceeds from the issuance of shares (see Item 1, Note 12, "Equity") and credit facilities, more than offset by payments made for purchases of our 2013 Convertible Notes and 2014 Floating Rate Notes (see Item 1, Note 4, "Long-Term Debt and Other Financing Arrangements"). The amount of net cash used in the six months ended June 30, 2011 reflects cash paid in connection with the exchange of 2013 Convertible Notes and the repurchase of 2016 Fixed Rate Notes.



V (b) Sources and Uses of Cash

We believe that our current cash resources are sufficient to allow us to continue operating for at least the next twelve months, after considering the matters disclosed under “Contractual Obligations, Commitments and Off-Balance Sheet Arrangements” and “Cash Outlook” below.

Our ongoing source of cash at our broadcast and new media operations is primarily the receipt of payments from advertisers, advertising agencies and sponsors. This may be supplemented from time to time by local borrowing. Surplus cash, after funding the ongoing station operations, may be remitted to us, where appropriate.  Surplus cash is remitted to us in the form of debt interest payments and capital repayments, dividends, and other distributions and loans from our subsidiaries.

Corporate law in the Central and Eastern European countries in which we operate stipulates generally that dividends may be declared by the partners or shareholders out of yearly profits subject to the maintenance of registered capital, required reserves and after the recovery of accumulated losses. The reserve requirement restriction generally provides that before dividends may be distributed, a portion of annual net profits (typically 5.0% ) be allocated to a reserve, which is capped at a proportion of the registered capital of a company (ranging from 5.0% to 25.0% ).  The restricted net assets of our consolidated subsidiaries and equity in earnings of investments accounted for under the equity method together are less than 25.0% of consolidated net assets.



55
Index

V (c) Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

Our future contractual obligations as at June 30, 2012 are as follows:

 
Payments due by period (US$ 000’s)
 
Total

 
Less than 1 year

 
1-3 years

 
3-5 years

 
More than 5 years

Long-Term Debt – principal
$
1,244,689

 
$
111,534

 
$
147,468

 
$
769,490

 
$
216,197

Long-Term Debt – interest (1)
417,527

 
95,430

 
184,926

 
128,018

 
9,153

Unconditional Purchase Obligations
361,021

 
140,022

 
166,319

 
53,052

 
1,628

Operating Leases
24,928

 
5,239

 
6,440

 
4,852

 
8,397

Capital Lease Obligations
4,468

 
1,211

 
1,098

 
2,159

 
—

Other Long-Term Obligations
59,679

 
13,195

 
23,764

 
14,647

 
8,073

Total Contractual Obligations
$
2,112,312

 
$
366,631

 
$
530,015

 
$
972,218

 
$
243,448


(1) Interest obligations on variable rate debt are calculated using the rate applicable at the balance sheet date.

Long-Term Debt

For more information on our Long-Term Debt, see Item 1, Note 4, “Long-Term Debt and Other Financing Arrangements”. The table above includes US$ 90.8 million of principal repaid on July 3, 2012, see Item 1, Note 20, "Subsequent Events". Interest payable on our Long-Term Debt is calculated using interest rates and exchange rates as at June 30, 2012 .

Unconditional Purchase Obligations

Unconditional purchase obligations primarily comprise future programming commitments.  At June 30, 2012 , we had commitments in respect of future programming of US$ 354.6 million . This includes contracts signed with license periods starting after June 30, 2012 .

Other Long-Term Obligations

Other long-term obligations include US$ 59.3 million of digital transmission commitments and US $ 0.3 million related to an interest rate swap (see Item 1, Note 11, “Financial Instruments and Fair Value Measurements”).

Operating Leases

For more information on our operating lease commitments see Item 1, Note 17, “Commitments and Contingencies”.

Other

Top Tone Media Holdings Limited has exercised its right to acquire additional equity in CME Bulgaria. Upon consummation of the equity transfer, we will own 90.0% of our Bulgaria Broadcast operations. The option strike price is the fair value of the equity in CME Bulgaria, as determined by an independent valuation. The closing of this transaction has not yet occurred.


V (d) Cash Outlook

Historically, our Broadcast operations in the Czech Republic, Slovenia and Romania have generated positive cash flows sufficient, in conjunction with new equity and debt financing, to fund our operations, launch new channels, acquire non-controlling interests in our existing channels and for other investment activities. During the difficult economic conditions that we have experienced since the end of 2008, operating cash flows in the aggregate have declined, yet remain positive. We still expect our businesses to continue to generate sufficient cash, in conjunction with our current cash and available facilities, to fund our operations for the next twelve months as well as to meet our other external financial obligations. As at June 30, 2012 , we had US$ 139.5 million available in cash and credit facilities.

We continue to take steps to improve our liquidity position. These steps have included targeted reductions to our operating cost base through headcount reductions and cost optimization programs, the deferral of programming commitments and capital expenditure, the rescheduling of expansion plans and increasing our cash resources through additional debt facilities and refinancing existing credit facilities.


56
Index

Improving our liquidity position and extending the maturity of our debt

As at June 30, 2012 , the principal amount of our Senior Notes and Convertible Notes together represented 86.2% of the total principal amount of our total debt outstanding. US$ 20.6 million in principal amount of 2013 Convertible Notes is due for repayment on March 15, 2013. The TW Loan balance outstanding at June 30, 2012 of US$ 90.8 million was repaid on July 3, 2012 (see Item 1, Note 20, "Subsequent Events").

We have no maintenance covenants under our Senior Notes or Convertible Notes, which means that there is no event of default if we fail to meet a minimum level of EBITDA, leverage or any other EBITDA-related ratio (as defined in the indentures governing our Senior Notes). The indentures governing the Senior Notes each contain a covenant which restricts the incurrence of additional debt if our Coverage Ratio (see Item 1, Note 19, "Indenture Covenants") is less than 2.0 times, or if the raising of new debt would cause us to fall below this ratio. As at June 30, 2012 , our Coverage Ratio was 1.4 times. Notwithstanding this restriction, we are able to incur debt at either the Restricted Subsidiary or holding company level of up to EUR 250.0 million (approximately US$ 314.8 million ) pursuant to “baskets” set forth in the indentures governing the Senior Notes. We have utilized US$ 291.1 million of this amount for borrowings, mainly in the Czech Republic and Romania, including CZK 1.5 billion (approximately US$ 73.7 million ) in connection with the Secured Revolving Credit Facility, which was fully drawn as at June 30, 2012 . There was approximately US$ 23.6 million of additional borrowing capacity available to us at June 30, 2012 . Under the Secured Revolving Credit Facility, CET 21 is subject to maintenance covenants (see Item 1, Note 4, "Long-Term Debt and Other Financing Arrangements").  Other than the restrictions noted above, there are no significant constraints under our Senior Notes, Convertible Notes, or Secured Revolving Credit Facility on our ability to refinance existing debt.

Credit ratings and future debt issuances

Our corporate credit is rated B3 with positive outlook by Moody's and B- with the stable outlook by S&P. Ratings agencies have indicated that retention of these ratings is dependent on maintaining an adequate liquidity profile, including maintaining at least US$ 125.0 million of cash in our Restricted Subsidiaries. We intend to stay within a range of this liquidity parameter.  The availability of additional liquidity is dependent upon the overall status of the debt and equity capital markets as well as on our continued financial performance, operating performance and credit ratings. We are currently able to raise limited additional debt and there are no indenture constraints on our ability to refinance existing debt.

Credit rating agencies have made liquidity and the related key ratios a particular priority. One of the key indicators used by the ratings agencies in assigning credit ratings to us is our gross leverage ratio, which was 7.6 times at June 30, 2012 and is calculated as our gross debt divided by our trailing twelve-month OIBDA (calculated in accordance with our indentures excluding stock based compensation and OIBDA of our unrestricted entities, and including, on a pro forma basis, twelve-months of operations of Bontonfilm) (“pro forma OIBDA”). As at June 30, 2012 , our total gross debt of US$ 1,249.5 million was the sum of our Senior Notes, Convertible Notes, the outstanding TW Loan balance, other credit facilities and obligations under capital leases and the liabilities under our interest rate swap agreement as disclosed in our condensed consolidated financial statements. Our pro forma OIBDA was US$ 164.6 million and the ratio of gross debt less cash to pro forma OIBDA was 6.8 at June 30, 2012 , which is a measure of our leverage after considering our cash balance. Another measure of our leverage, typically applied by ratings agencies, is the ratio of net debt to reported OIBDA, which is calculated as gross debt less cash divided by trailing twelve months OIBDA. The ratio of net debt to trailing twelve months OIBDA was 7.4 as at June 30, 2012 .

Unrestricted and Restricted Subsidiaries

For the purposes of the indentures governing the Senior Notes, the calculation of the Coverage Ratio includes only entities that are “Restricted Subsidiaries.” Subsidiaries may be designated as “Unrestricted Subsidiaries” and excluded from the calculation of Coverage Ratio. As at June 30, 2012 , our Unrestricted Subsidiaries consist of certain subsidiaries that formerly comprised the Pro.BG business in Bulgaria, CME Development Financing B.V., the entity that funded these operations, and CME Austria GmbH. The integration of the operations of the Pro.BG business with the bTV group was completed in May 2011, and as a result, the Unrestricted Subsidiaries do not require additional financial support. As at June 30, 2012 , there was US$ 1.4 million of cash remaining in the Unrestricted Subsidiaries. There is no requirement to maintain a minimum cash balance in any of our Unrestricted Subsidiaries and we may choose to transfer the remaining funds to our Restricted Subsidiaries at any time.

Credit risk of financial counterparties

We have entered into a number of significant contracts with financial counterparties as follows:

Interest Rate Swap

On February 9, 2010, we entered into an interest rate swap agreement with UniCredit Bank Czech Republic, a.s. and CSAS expiring in April 2013 to reduce the impact of changing interest rates on our floating rate debt (see Item 1, Note 11, “Financial Instruments and Fair Value Measurements”). This reduces the risk of interest rate volatility affecting our future cash flows. We do not consider that there is any substantial risk to our liquidity if our counterparties were unable to meet their respective rights under the interest swap agreement.


57
Index

Capped Call Options

On September 15, 2008, Lehman Brothers Holdings Inc, (“Lehman Holdings”, and collectively with Lehman Brothers OTC Derivatives Inc., “Lehman Brothers”), filed for protection under Chapter 11 of the United States Bankruptcy Code. The bankruptcy filing of Lehman Holdings, as guarantor, was an event of default that gave us the right to early termination of capped call options we had purchased from Lehman Brothers to increase the effective conversion price of our 2013 Convertible Notes. We exercised this right and have claimed an amount of US$ 19.9 million . We subsequently assigned our claim to an unrelated third party for cash consideration of US$ 3.4 million .  On March 14, 2011, Lehman Brothers filed an objection to our bankruptcy claim, contending that our claim is worth US $ 14.7 million . On April 12, 2011, a response was filed with the bankruptcy court reasserting our claim of US$ 19.9 million .

We had purchased similar capped call options from BNP Paribas (“BNP”) and Deutsche Bank Securities Inc. (“DB”), however we consider the likelihood of similar loss on the BNP or DB capped calls to be significantly less following the coordinated response of Europe’s central banks to the global liquidity crisis and the pivotal positions that each of these banks occupies in its respective country. In the event of any similar default, there would be no impact on our current liquidity since the purchase price of the options has already been paid and we have no further obligation under the terms of the capped calls to deliver cash or other assets to the counterparties.  Any default would increase the dilutive effect to our existing shareholders resulting from the issuance of shares of Class A common stock upon any conversion of the 2013 Convertible Notes.

Cash Deposits

We deposit cash in the global money markets with a range of bank counterparties and review the counterparties we choose weekly.  The maximum period of deposit is three months but we have more recently held amounts on deposit for shorter periods, from overnight to one month. The credit rating of a bank is a critical factor in determining the size of cash deposits and we will only deposit cash with banks of an investment grade of A or A2 or higher. In addition we also closely monitor the credit default swap spreads and other market information for each of the banks with which we consider depositing or have deposited funds.

V (e) Off-Balance Sheet Arrangements

None.


VI. Critical Accounting Policies and Estimates

Our accounting policies affecting our financial condition and results of operations are more fully described in Part II, Item 8 of our Annual Report form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission ("SEC") on February 22, 2012 as amended by our Form 10-K/A filed with the SEC on April 20, 2012. The preparation of these financial statements requires us to make judgments in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable. Using these estimates we make judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe our critical accounting policies are as follows: program rights, goodwill and intangible assets, impairment or disposal of long-lived assets, revenue recognition, income taxes, foreign exchange and contingencies. These critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. See Item 1, Note 2, “Summary of Significant Accounting Policies” for a discussion of accounting standards and changes in accounting estimates adopted since December 31, 2011 and recently issued accounting standards not yet adopted.


58
Index


Item 3.  Quantitative and Qualitative Disclosures about Market Risk

We engage in activities that expose us to various market risks, including the effect of changes in foreign currency exchange rates and interest rates.  We do not engage in speculative transactions, nor do we hold or issue financial instruments for trading purposes.

Foreign Currency Exchange Risk Management

Although our functional currency is the dollar, we conduct business in a number of foreign currencies, our Senior Notes are denominated in Euros, and the Secured Revolving Credit Facility is denominated in CZK.  As a result, we are subject to foreign currency exchange rate risk due to the effects that foreign exchange rate movements of these currencies have on our costs and on the cash flows we receive from our subsidiaries.  In limited instances, we enter into forward foreign exchange contracts to minimize foreign currency exchange rate risk.

We have not attempted to hedge the Senior Notes or the Secured Revolving Credit Facility and therefore may continue to experience significant gains and losses on the translation of the Senior Notes and the amounts outstanding under the Secured Revolving Credit Facility into dollars due to movements in exchange rates between the Euro, the Czech Koruna and the dollar.

Interest Rate Risk Management

We are party to an interest rate swap agreement intended to reduce our exposure to interest rate movements (see Item 1, Note 11, “Financial Instruments and Fair Value Measurements”).
 
As at June 30, 2012 , approximately 15% of the carrying value of our debt provides for interest at a spread above a base rate of EURIBOR or PRIBOR, which mitigates the impact of an increase in interbank rates on our overall debt.
 
Interest Rate Table as at June 30, 2012

Expected Maturity Dates
2012
 
2013
 
2014
 
2015
 
2016
 
Thereafter
Total debt in Euro (000's)
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
—

 
—

 
—

 
—

 
374,600

 
170,000

Average interest rate (%)
—

 
—

 
—

 
—

 
11.63
%
 
9.00
%
Variable rate
—

 
—

 
87,500

 
—

 
—

 
—

Average interest rate (%)
—

 
—

 
2.60
%
 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Total debt in US$ (000's) (1)
 

 
 

 
 

 
 

 
 
 
 

Fixed rate
—

 
20,647

 
—

 
261,034

 
—

 
—

Average interest rate (%)
—

 
3.50
%
 
—

 
5.00
%
 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Total debt in CZK (000's)
 
 
 
 
 
 
 
 
 
 
 
Variable rate
—

 
—

 
750,000

 
750,000

 
—

 
—

Average interest rate (%)
—

 
—

 
6.08
%
 
6.08
%
 
—

 
—


(1) The TW Loans were repaid on July 3, 2012 and are therefore excluded from this table (see Item 1, Note 20, "Subsequent Events").

Variable Interest Rate Sensitivity as at June 30, 2012

 
 
 
 
 
 
Yearly interest charge if interest rates increase by (US$ 000s):
Value of Debt as at June 30, 2012 (US$ 000's)
 
Interest Rate as at June 30, 2012
 
Yearly Interest Charge
(US$ 000’s)
 
1%
 
2%
 
3%
 
4%
 
5%
US$ 110.16 million
(EUR 87.5 million)
 
2.60
%
 
$
2,866

 
$
3,968

 
$
5,070

 
$
6,171

 
$
7,273

 
$
8,375

US$ 73.67 million (CZK 1.5 billion)
 
6.08
%
 
4,479

 
5,216

 
5,953

 
6,689

 
7,426

 
8,163


59
Index

Item 4.  Controls and procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures designed to ensure that information required to be disclosed in our Quarterly Report on Form 10-Q is recorded, processed, summarized and reported within the specified time periods and is designed to ensure that information required to be disclosed is accumulated and communicated to management, including the President and Chief Executive Officer and the Chief Financial Officer to allow timely decisions regarding required disclosure.

Our President and Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2012 and concluded that our disclosure controls and procedures were effective as of that date. There has been no change in our internal control over financial reporting during the six months ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



60
Index


PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings

General

While we are, from time to time, a party to litigation or arbitration proceedings arising in the normal course of our business operations, we are not presently a party to any such litigation or arbitration which could reasonably be expected to have a material effect on our business or condensed consolidated financial statements, including the proceeding described below.

Video International termination

On March 18, 2009, Video International Company Group, CGSC (“VI”), a Russian legal entity, filed a claim in the London Court of International Arbitration (“LCIA”) against our wholly-owned subsidiary CME BV, which was, at the time the claim was filed, the principal holding company of our former Ukrainian operations. The claim relates to the termination of an agreement between VI and CME BV dated November 30, 2006 (the “parent agreement”), which was one of four related contracts by which VI subsidiaries, including LLC Video International-Prioritet (“Prioritet”), supplied advertising and marketing services to Studio 1+1 LLC (“Studio 1+1”) and certain affiliates. Following the termination of these agreements on March 24, 2009, Studio 1+1 was required to pay a termination penalty. On June 1, 2009, Studio 1+1 paid UAH 13.5 million (approximately US$ 1.7 million) to Prioritet and set off UAH 7.4 million (approximately US$ 0.9 million) against amounts owing to Studio 1+1 under the advertising and marketing services agreements. In its LCIA claim, VI sought payment of a separate indemnity from CME BV under the parent agreement of US$ 58.5 million. On September 30, 2010, a partial award was issued in the arbitration proceedings, pursuant to which VI’s claim for relief in the amount of US$ 58.5 million was dismissed. The partial award does permit VI to bring a subsequent claim against CME BV as parent guarantor in the event that VI establishes that it is entitled to certain additional compensation under the advertising and marketing services agreements with Studio 1+1 and that such compensation is not satisfied by Studio 1+1. On July 13, 2011, Prioritet filed claims against Studio 1+1 in the Commercial Court of Kiev relating to alleged violations of the advertising services agreement and marketing services agreement and sought relief of approximately UAH 201.0 million (approximately US$ 25.4 million ). On September 23, 2011, the Commercial Court of Kiev dismissed Prioritet's claims. On November 7, 2011, the Commercial Court of Appeal of Kiev dismissed an appeal by Prioritet of the lower court's decision. On December 13, 2011, the Superior Commercial Court of Ukraine dismissed an appeal of Prioritet following the decision of the appellate court. On June 5, 2012, the Superior Commercial Court of Ukraine denied Prioritet's request to appeal to the Supreme Court of Ukraine. Subsequently, VI or an affiliate has filed an application against the government of Ukraine in the European Court of Human Rights seeking review of these court decisions; and on June 18, 2012 Prioritet filed a claim against Studio 1+1 that alleges violations of one of the advertising and marketing services agreements and seeks relief of approximately UAH 42.3 million (approximately US$ 5.3 million). We do not believe that it is likely that we will be required to make any further payment.


Item 1A.  Risk Factors

This report and the following discussion of risk factors contain forward-looking statements as discussed in Part 1, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations". Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks and uncertainties described below and elsewhere in this report. These risks and uncertainties are not the only ones we may face. Additional risks and uncertainties of which we are not aware, or that we currently deem immaterial, may also become important factors that affect our financial condition, results of operations and cash flows.

Risks Relating to our Financial Position

The global recession, credit crisis and concerns regarding the Eurozone have adversely affected our financial position and results of operations; we cannot predict if or when economic conditions in the countries in which we operate will recover or how long any recovery may last. A failure to achieve prompt and lasting recoveries will continue to adversely affect our results of operations.

The results of our operations depend heavily on advertising revenue, and demand for advertising is affected by prevailing general and regional economic conditions. The economic uncertainty affecting the global financial markets and banking system since the beginning of 2009 has had an adverse impact on economic growth in our operating countries across Central and Eastern Europe, some of which are still emerging from recession. There has been a widespread withdrawal of investment funding from the Central and Eastern European markets and companies with investments in them, particularly in Bulgaria and Romania. Furthermore, the economic downturn has adversely affected consumer and business spending, access to credit, liquidity, investments, asset values and employment rates. These adverse economic conditions have had a material negative impact on the advertising industries in our markets, leading our customers to continue to spend less on advertising than at the peak period in 2008. This has negatively impacted our financial position, results of operations and cash flows. While GDP and private consumption returned to growth in 2011 in most of our operating countries, they have weakened again during the first six months of this year due to continuing concerns regarding Europe's sovereign debt crisis, the stability of the Eurozone, the sustainability of the Euro as a common currency, and the growth prospects of major emerging market and developed market economies globally. As a result, the economies of our operating countries could return to recession. Furthermore, recent economic events such as the continuing sovereign debt crisis in several EU countries have highlighted issues relating to the short- and long-term stability of the Euro as a single currency. The departure of a country from the Euro or the dissolution of the Euro by its members could negatively impact our business, as well as cause significant volatility and disruption in the global economy. Any of these developments would have a significant negative effect on our financial position, results of operations and cash flows.


61
Index

Our operating results will be adversely affected if we cannot generate strong advertising sales.

We generate most of our revenues from the sale of advertising airtime on our television channels. In addition to general economic conditions, other factors that may affect our advertising sales are the pricing of advertising time as well as audience ratings, changes in programming strategy, changes in audience preferences, our channels' technical reach, technological developments relating to media and broadcasting, competition from other broadcasters and operators of other media platforms, seasonal trends in the advertising market, increased competition for the leisure time of audiences and shifts in population and other demographics. In addition, the occurrence of disasters, acts of terrorism, civil or military conflicts or general political instability may create further economic uncertainty that reduces
advertising spending. The reduction in advertising spending in our markets has had a negative effect on the prices at which we sell television advertising because of pressure to reduce prices from advertisers and discounting by competitors. Reduced advertising spending, discounting of the price of television advertising in our markets and competition from broadcasters seeking to attract similar audiences have had and may continue to have an adverse impact on our ability to maintain our advertising sales. Our ability to maintain audience ratings and to generate gross rating points, our main unit of sales, depends in part on our maintaining investments in television programming and productions at a sufficient level to continue to attract these audiences. Significant or sustained reductions in investments in programming, production or other operating costs in response to reduced advertising spending in our markets have had and may continue to have an adverse impact on television viewing levels. The significant decline in advertising sales has had and could continue to have a material adverse effect on our financial position, results of operations and cash flows.

We may be unable to repay or refinance our existing indebtedness or obtain favorable refinancing terms.

We face the risk that we may not be able to renew, repay or refinance our indebtedness when due, or that the terms of any renewal or refinancing will not be as favorable as the terms of such indebtedness being refinanced. This risk is exacerbated by the volatility in the capital markets, which has resulted in tightened lending requirements and in some cases the inability to refinance indebtedness. As of July 3, 2012, we have successfully completed previously announced transactions to repurchase approximately $184.8 million aggregate principal amount of our 2013 Convertible Notes and 2014 Floating Rate Notes. Nonetheless, we still have a substantial amount of indebtedness. We can give no assurances that we will be able to raise sufficient funds to repay or refinance all outstanding amounts of our current indebtedness. If we are unable to raise sufficient funds or otherwise repay or refinance our indebtedness on acceptable terms, we may be forced to dispose of assets on disadvantageous terms or reduce or suspend operations, any of which would materially and adversely affect our financial condition and results of operations.

Even after the repurchase of certain of our indebtedness with near-term maturities, we may still require additional external sources of capital for future debt service and other obligations, which may not be available or may not be available on acceptable terms.

If our cash flows from operations continue to be insufficient to cover operating expenses and interest payments, and if our cash flow together with other capital resources, including proceeds received from offerings of debt or equity and the disposition of assets, were to prove insufficient to fund our debt service obligations as they became due, we would face substantial liquidity problems. The availability of credit and the impact of a slow economic recovery on our operations may constrain our ability to obtain financing, whether through public or private debt or equity offerings, proceeds from the sale of assets or other financing arrangements. If economic conditions in our markets do not improve, if our assumptions regarding future operating results prove to be inaccurate, if our costs increase due to competitive pressures or other unanticipated developments or if our investment plans change, we may need to obtain additional financing to fund our operations or acquisitions, and to repay or refinance our outstanding indebtedness. It is not possible to ensure that additional debt financings will be available within the limitations on the incurrence of additional indebtedness contained in the indentures governing our Senior Notes and the agreement governing the Secured Revolving Credit Facility. Moreover, such financings, if available at all, may not be available on acceptable terms. Our inability to obtain financing as it is needed would mean that we may be obliged to reduce or delay capital or other material expenditures or dispose of material assets or businesses. If we cannot obtain adequate capital or obtain it on acceptable terms, this would have an adverse effect on our financial position, results of operations and cash flows.

A downgrading of our ratings may adversely affect our ability to raise additional financing.

Our corporate credit is currently rated B3 with a positive outlook, our 2014 Floating Rate Notes are rated Caa1, and our 2017 Fixed Rate Notes are rated Ba3 by Moody's Investors Services. Our 2014 Floating Rate Notes, 2016 Fixed Rate Notes and 2013 Convertible Notes are rated CCC+, our 2017 Fixed Rate Notes are rated B- and corporate credit is rated B- with a stable outlook by Standard & Poor's. These ratings reflect each agency's opinion of our financial strength, operating performance and ability to meet our debt obligations as they become due. Credit rating agencies now monitor companies much more closely and have made liquidity and the key ratios associated with liquidity, such as gross leverage ratio, a particular priority. We intend to operate with sufficient liquidity to maintain our current ratings. However, this is dependent on a variety of factors, some of which may be beyond our control. The repurchase of a portion of 2013 Convertible Notes and 2014 Floating Rate Notes and subsequent repayment of the TW Loans has resulted in an improvement in our balance sheet. However, we may still be subject to potential downgrades if we fail to maintain adequate levels of liquidity. In the event our debt or corporate credit ratings are lowered by the ratings agencies, it will be more difficult for us to raise additional indebtedness, and we will have to pay higher interest rates, which would have an adverse effect on our financial position, results of operations and cash flows.


62
Index

Our debt service obligations may restrict our ability to fund our operations.

Even after the repurchase of a portion of the 2013 Convertible Notes and the 2014 Floating Rate Notes we continue to have significant debt service obligations under our Senior Notes, Convertible Notes and Secured Revolving Credit Facility. As a result of these debt service obligations, we are restricted in the manner in which our business is conducted, including but not limited to our ability to obtain additional financing to fund future working capital, capital expenditures, business opportunities and other corporate requirements. Furthermore, we may have a proportionally higher level of debt than our competitors, which may put us at a competitive disadvantage. Servicing our high level of debt may limit our flexibility in planning for, or reacting to, changes in our business, economic conditions and our industry.

A default under our obligations under the Senior Notes, the Convertible Notes or the Secured Revolving Credit Facility could result in our inability to continue to conduct our business.

Pursuant to the terms of the Secured Revolving Credit Facility agreement and the indentures governing the Senior Notes and the Convertible Notes, we have pledged shares in Central European Media Enterprises N.V. and CME BV, which own substantially all of our interests in our operating subsidiaries. In addition, pursuant to the indenture governing the 2017 Fixed Rate Notes and the Secured Revolving Credit Facility agreement, we have pledged our ownership interests in CET 21 and substantially all of CET 21's assets, including the shares of CME Slovak Holdings B.V. and the ownership interest in Media Pro Pictures s.r.o. If we were to default under the terms of any of our indentures, the Secured Revolving Credit Facility agreement, the secured parties under our indentures and the Secured Revolving Credit Facility agreement would have the right to enforce their security and to sell all or a portion of the assets pledged to them in order to pay amounts outstanding under such debt instruments.

If our goodwill, indefinite-lived intangible assets and long-lived assets become impaired, we may be required to record significant charges to earnings.

We review our long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill and indefinite-lived intangible assets are required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill, indefinite-lived intangible assets or long-lived assets may not be recoverable include slower growth rates in our markets, reduced expected future cash flows, increased country risk premia as a result of political uncertainty and a decline in stock price and market capitalization. We consider available current information in respect of calculating our impairment charge. If there are indicators of impairment, our long-term cash flow forecasts for our operations deteriorate, or discount rates increase, we may be required to recognize impairment charges in later periods.

Fluctuations in exchange rates may adversely affect our results of operations.

Our functional currency is the dollar but our consolidated revenues and costs, including programming rights expenses and interest on debt, are divided across a range of currencies. The Senior Notes are denominated in Euros and the Secured Revolving Credit Facility is denominated in Czech koruna. We have not attempted to hedge the foreign exchange on the principal amount of the Senior Notes or the outstanding amounts due under the Secured Revolving Credit Facility. Furthermore, continuing instability in the Eurozone may increase our exposure to currency fluctuations. We may continue to experience significant gains and losses on the translation of our revenues, the Senior Notes or the Secured Revolving Credit Facility into dollars due to movements in exchange rates between the Euro, the Czech koruna, the currencies of our local operations and the dollar.

Risks Relating to our Operations

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

We generate most of our revenues from the sale of advertising airtime on television channels in our markets. Television competes with various other media, such as print, radio, the internet and outdoor advertising, for advertising spending. 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 in our markets. Furthermore, there can be no assurances that changes in the regulatory environment or improvements in technology 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 and distribution could result in a decline in the appeal of television as an advertising medium generally or of our channels specifically. A decline in television advertising spending in any period or in specific markets would have an adverse effect on our financial position, results of operations and cash flows.

We may seek to make acquisitions of other channels, networks, content providers or other companies in the future and we may fail to acquire them on acceptable terms or successfully integrate them or we may fail to identify suitable targets.

Our business and operations have grown in part through acquisitions. While we continue to explore acquisition opportunities, prospective competitors may have greater financial resources than we do, and increased competition for target broadcasters or other media businesses may reduce the number of potential acquisitions that are available on acceptable terms. As we succeed in acquiring new businesses, their integration into our existing operations poses significant risks, including:

•
additional demands placed on our senior management, who are also responsible for managing our existing operations;
•
increased overall operating complexity of our businesses, requiring greater personnel and other resources;
•
difficulties in expanding beyond our core expertise in the event that we acquire ancillary businesses;
•
significant initial cash expenditures to acquire and integrate new businesses; and
•
in the event we are able to incur debt to finance acquisitions, additional debt service costs related thereto as well as limitations that may arise under the indentures governing our Senior Notes or under the Secured Revolving Credit Facility agreement.

To manage our growth effectively and achieve pre-acquisition performance objectives, we will need to integrate new acquisitions into our existing businesses, implement financial and management controls and produce required financial statements for those operations. The integration of new businesses may also be difficult due to differing cultures, languages or management styles, poor internal controls and an inability to establish control over cash flows. If any acquisition and integration is not implemented successfully, our ability to manage our growth will be impaired and we may have to make significant additional expenditures to address these issues, which could harm our financial position, results of operations and cash flows. Furthermore, even if we are successful in integrating new businesses, expected synergies and cost savings may not materialize, resulting in lower than expected cash flows and profit margins.


63
Index

Our programming content may become more expensive to produce or acquire or we may not be able to develop or acquire content that is attractive to our audiences .

Television programming is one of the most significant components of our operating costs. The ability of programming to generate advertising revenues depends substantially on our ability to develop, produce or acquire programming that matches audience tastes and attracts high audience shares, which is difficult to predict. The commercial success of a program depends on several tangible and intangible factors, including the impact of competing programs, the availability of alternate forms of entertainment and leisure time activities and general economic conditions. Furthermore, the cost of acquiring content attractive to our viewers, such as feature films and popular television series and formats, has increased as a result of greater competition from existing and new television broadcasting channels. Our expenditure in respect of locally produced programming may also increase due to the implementation of new laws and regulations mandating the broadcast of a greater number of locally produced programs, changes in audience tastes in our markets in favor of locally produced content, and competition for talent. In addition, we typically acquire syndicated programming rights under multi-year commitments before we can predict whether such programming will perform well in our markets. In the event any such programming does not attract adequate audience share, it may be necessary to increase our expenditures by investing in additional programming as well as to write down the value of such underperforming programming. Any increase in programming costs or write downs could have
a material adverse effect on our financial condition, results of operations and cash flows.

The transition to digital broadcasting may require substantial additional investments and the timing of such investments is uncertain.

Countries in which we have operations are migrating from analog terrestrial broadcasting to digital terrestrial broadcasting. Each country has independent plans for its digital switchover with its own timeframe, operating model and regulatory and investment regime. Croatia, the Czech Republic, the Slovak Republic and Slovenia have either completed or are in the final stages of the analog switch-off. The migration to digital broadcasting in Bulgaria is expected to be completed in 2013 and in Romania, which is in the initial stage, completion is expected by 2015. We cannot predict the full effect of the migration to digital terrestrial broadcasting on existing operations or the take up of digital terrestrial broadcasting by our audiences. We also cannot predict whether we will receive digital terrestrial broadcasting rights or licenses for any existing or additional channels if such additional rights or licenses should be required in those countries that have not completed the digital switchover. We may be required to make substantial investment and commit substantial other resources to implement digital terrestrial broadcasting and secure distribution in advance of knowing the take up of digital terrestrial broadcasting versus competing alternative distribution systems, such as direct-to-home platforms. We may not have access to resources sufficient to make such investments when required.

Our businesses are vulnerable to significant changes in technology that could adversely affect us.

The television broadcasting industry is affected by rapid innovations in technology. The implementation of new technologies and the introduction of broadcasting distribution systems other than analog terrestrial broadcasting, such as digital terrestrial broadcasting, direct-to-home cable and satellite distribution systems, the internet, video-on-demand, user-generated content sites and the availability of television programming on portable digital devices, have changed consumer behavior
by increasing the number of entertainment choices available to audiences. This has fragmented television audiences in more developed markets and could adversely affect our ability to retain audience share and attract advertisers as such technologies penetrate our markets. New technologies that enable viewers to choose when and what content to watch, as well as to fast-forward or skip advertisements, may cause changes in consumer behavior that could adversely impact our businesses. In addition, compression techniques and other technological developments allow for an increase in the number of channels that may be broadcast in our markets and expanded programming offerings that may be offered to highly targeted audiences. Reductions in the cost of launching additional channels could lower entry barriers for new channels and encourage the development of increasingly targeted niche programming on various distribution platforms. Our television broadcasting operations may be required to expend substantial financial and managerial resources to ensure necessary access to new broadcasting technologies or distribution systems. In addition, an expansion in competition due to technological innovation may increase competition for audiences and advertising revenue as well as the competitive demand for programming. Any requirement for substantial further investment to address competition that arises on account of technological innovations in broadcasting may have an adverse effect on our financial position, results of operations and cash flows.

We may not be aware of all related party transactions, which may involve risks of conflicts of interest that result in transactions being concluded on less favorable terms than could be obtained in arms-length transactions.

In certain of our markets, our officers, general directors or other members of the management of our operating companies may have other business interests, including interests in television and other media related companies. We may not be aware of all business interests or relationships that exist with respect to entities with which our operating companies enter into transactions. Transactions with companies, whether or not we are aware of any business relationship between our employees and third parties, may present conflicts of interest which may in turn result in the conclusion of transactions on terms that are not arm's length. It is likely that our subsidiaries will continue to enter into related party transactions in the future. In the event there are transactions with persons who subsequently are determined to be related parties, we may be required to make additional disclosure and, if such contracts are material, may not be in compliance with certain covenants under the indentures governing our Senior Notes. Any related party transaction that is entered into on terms that are not arm's length may result in a negative impact on our financial position, 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, other operating licenses as well as other authorizations from national regulatory authorities in our markets in order to conduct our broadcasting business. While the broadcast licenses for our operations in Slovenia and the Slovak Republic are valid for indefinite time periods, the majority of our broadcasting licenses expire at various times between January 2013 through January 2026. While we expect that our material licenses and authorizations will be renewed or extended as required to continue to operate our business, we cannot guarantee that this will occur or that they will not be subject to revocation, particularly in markets 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 or with applications filed in respect thereto may result in such licenses or other authorizations not being renewed or otherwise being terminated. Furthermore, no assurances can be given that renewals or extensions of existing 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 any other broadcasting or operating licenses or other authorizations or material modification of the terms of any renewed licenses may have a material adverse effect on our financial position, results of operations and cash flows.


64
Index

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. These markets pose different risks to those posed by investments in more developed markets and the impact in our markets of unforeseen circumstances on economic, political or social life is greater. The economic and political systems, legal and tax regimes, standards of corporate governance and business practices of countries in this region continue to develop. Government policies may be subject to significant adjustments, especially in the event of a change in leadership. This may result in social or political instability or disruptions, potential political influence on the media, inconsistent application of tax and legal regulations, arbitrary treatment before judicial or other regulatory authorities and other general business risks, any of which could have a material adverse effect on our financial position, results of operations and cash flows. Other potential risks inherent in markets with evolving economic and political environments include exchange controls, higher tariffs and other levies as well as longer payment cycles. The relative level of development of our markets and the influence of local political parties also present a potential for biased treatment of us before regulators or courts in the event of disputes involving our investments. If such a dispute occurs, those regulators or courts might favor local interests over our interests. Ultimately, this could lead to the loss of one or more of our business operations. The loss of a material business would have an adverse impact on our financial position, results of operations and cash flows.

Our success depends on attracting and retaining key personnel .

Our success depends partly upon the efforts and abilities of our key personnel and our ability to attract and retain key personnel. Our management teams have significant experience in the media industry and have made important contributions to our growth and success. Although we have been successful in attracting and retaining such people in the past, competition for highly skilled individuals is intense. There can be no assurance that we will continue to be successful in attracting and retaining such individuals in the future. The loss of the services of any of these individuals could have an adverse effect on our businesses, results of operations and cash flows.

Risks Relating to Enforcement Rights

We are a Bermuda company and enforcement of civil liabilities and judgments may be difficult.

CME Ltd. is a Bermuda company. Substantially all of our assets and all of our operations are located, and all of our revenues are derived, outside the United States. In addition, several of our directors and all of our officers are non-residents of the United States, and all or a substantial portion of the assets of such persons are or may be located outside the United States. As a result, investors may be unable to affect service of process within the United States upon such persons, or to enforce against them judgments obtained in the United States courts, including judgments predicated upon the civil liability provisions of the United States 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 courts obtained against us or such persons predicated upon the civil liability provisions of the United States federal and state securities laws or (ii) in original actions brought in such countries, liabilities against us or such persons predicated upon the United States federal and state securities laws.

Our bye-laws restrict shareholders from bringing legal action against our officers and directors.

Our bye-laws contain a broad waiver by our shareholders of any claim or right of action in Bermuda, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty.

Risks Relating to our Common Stock

Our controlling shareholder is in a position to decide corporate actions that require shareholder approval and may have interests that differ from those of other shareholders.

Ronald Lauder, our founder and Chairman of the Board of Directors, owns or has voting control over approximately 56.3% of our outstanding common stock. A portion of this voting power is attributable to a voting agreement among the Company, Mr. Lauder, RSL Savannah LLC, a company wholly owned by Mr. Lauder, and Time Warner Media Holdings B.V., an affiliate of Time Warner Inc. ("Time Warner"), whereby Mr. Lauder is entitled to vote all 32,898,443 shares of Class A common stock and the share of Series A convertible preferred stock (which is entitled to one vote for each share of Class A common stock into which it is convertible) beneficially owned by Time Warner, as well as any other of our shares acquired by Time Warner during the term of the voting agreement. Notwithstanding the foregoing, Time Warner reserves the right to vote certain shares in any transaction that would result in a change of control of the Company. Because of this voting power, Mr. Lauder is in a position to exercise significant influence over the outcome of corporate actions requiring shareholder approval, such as the election of directors or certain transactions, including issuances of common stock of the Company that may result in a dilution of the holders of shares of Class A common stock or in a change of control. The interests of Mr. Lauder may not be the same as those of other shareholders, and such shareholders will be unable to affect the outcome of such corporate actions for so long as Mr. Lauder retains voting control.

The price of our Class A common stock is likely to remain volatile.

The market price of shares of our Class A common stock may be influenced by many factors, many of which are beyond our control, including those described above under “Risks Relating to our Operations” as well as the following: general economic and business trends, variations in quarterly operating results, license renewals, regulatory and economic developments in our operating countries and the European Union, the condition of the media industry in our operating countries, the volume of trading in shares of our Class A common stock, future issuances of shares of our Class A common stock and investors' and securities analysts' perception of us and other companies that investors or securities analysts deem comparable in the television broadcasting industry. In addition, stock markets in general have 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 shares of our Class A common stock, regardless of our operating performance.


65
Index

Our share price may be adversely affected by sales of unrestricted shares or future issuances of shares of Class A common stock.

As at July 20, 2012, we had a total of 2.3 million options to purchase Class A common stock and 600,000 restricted stock units outstanding. In 2007 we issued 1,275,227 unregistered shares of Class A common stock to Igor Kolomoisky. Adrian Sarbu beneficially owns 2,443,867 unregistered shares of Class A common stock and warrants to purchase an additional 850,000 unregistered shares of Class A common stock. Time Warner beneficially holds 32,898,443 unregistered shares of Class A common stock and a share of preferred stock that is convertible into 11,211,449 shares of Class A common stock. Time Warner has registration rights with respect to a significant majority of its shares of Class A common stock. The 2015 Convertible Notes are convertible into shares of our Class A common stock and mature on November 15, 2015. Prior to August 15, 2015, the 2015 Convertible Notes will be convertible following certain events and from that date at any time to November 15, 2015. We cannot predict what effect, if any, an issuance of shares of our Class A common stock, or the entry into trading of previously issued unregistered or restricted shares of our Class A common stock, will have on the market price of our shares. If more shares of common stock are issued, the economic interest of current shareholders may be diluted and the price of our shares may be adversely affected.



66
Index


Item 6. Exhibits
3.01
 
Bye-Laws of Central European Media Enterprises Ltd., as amended and restated on June 13, 2012.
 
 
 
4.1*
 
Registration Rights Agreement, by and among Ronald S. Lauder, RSL Capital LLC and the Company, dated as of April 30, 2012 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
4.2*
 
Supplemental Indenture among the Company, Central European Media Enterprises N.V., CME Media Enterprises B.V. and The Bank of New York Mellon, dated May 29, 2012 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 1, 2012).
 
 
 
4.3*
 
Certificate of Designation of the Series A Convertible Preferred Stock of Central European Media Enterprises Ltd., dated July 2, 2012 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on July 3, 2012).
 
 
 
10.1*
 
Term Loan Facilities Credit Agreement, by and between Time Warner Inc. and the Company, dated as of April 30, 2012 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
10.2*
 
Subscription and Equity Commitment Agreement, by and between Time Warner Media Holdings B.V. and the Company, dated as of April 30, 2012 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
10.3*
 
Letter Agreement, by and among Time Warner Media Holdings B.V., the Company, RSL Savannah LLC, RSL Capital LLC, RSL Investments Corporation and Ronald S. Lauder, dated as of April 30, 2012 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
10.4*
 
Subscription Agreement, by and among Ronald S. Lauder, RSL Capital LLC and the Company, dated as of April 30, 2012 (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
10.5*
 
First Amendment to the Investor Rights Agreement, by and among the Company, Ronald S. Lauder, RSL Savannah LLC, RSL Capital LLC, RSL Investments Corporation and Time Warner Media Holdings B.V., dated as of April 30, 2012 (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
10.6*+
 
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 13, 2012).
 
 
 
10.7+
 
Central European Media Enterprises Ltd. Amended and Restated Stock Incentive Plan, as amended on June 13, 2012.
 
 
 
31.01
 
Certification of Principal  Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.02
 
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.01
 
Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished only).
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document

67
Index

 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document

* Previously filed exhibits
+ Exhibit is a management contract or compensatory plan



68
Index


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 1, 2012
/s/ David Sach
David Sach
Executive Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


69
Index


EXHIBIT INDEX
Exhibit Number
 
Description
3.01
 
Bye-Laws of Central European Media Enterprises Ltd., as amended and restated on June 13, 2012.
 
 
 
4.1*
 
Registration Rights Agreement, by and among Ronald S. Lauder, RSL Capital LLC and the Company, dated as of April 30, 2012 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
4.2*
 
Supplemental Indenture among the Company, Central European Media Enterprises N.V., CME Media Enterprises B.V. and The Bank of New York Mellon, dated May 29, 2012 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 1, 2012).
 
 
 
4.3*
 
Certificate of Designation of the Series A Convertible Preferred Stock of Central European Media Enterprises Ltd., dated July 2, 2012 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on July 3, 2012).
 
 
 
10.1*
 
Term Loan Facilities Credit Agreement, by and between Time Warner Inc. and the Company, dated as of April 30, 2012 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
10.2*
 
Subscription and Equity Commitment Agreement, by and between Time Warner Media Holdings B.V. and the Company, dated as of April 30, 2012 (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
10.3*
 
Letter Agreement, by and among Time Warner Media Holdings B.V., the Company, RSL Savannah LLC, RSL Capital LLC, RSL Investments Corporation and Ronald S. Lauder, dated as of April 30, 2012 (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
10.4*
 
Subscription Agreement, by and among Ronald S. Lauder, RSL Capital LLC and the Company, dated as of April 30, 2012 (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
10.5*
 
First Amendment to the Investor Rights Agreement, by and among the Company, Ronald S. Lauder, RSL Savannah LLC, RSL Capital LLC, RSL Investments Corporation and Time Warner Media Holdings B.V., dated as of April 30, 2012 (incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed on April 30, 2012).

 
 
 
10.6*+
 
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 13, 2012).
 
 
 
10.7+
 
Central European Media Enterprises Ltd. Amended and Restated Stock Incentive Plan, as amended on June 13, 2012.
 
 
 
31.01
 
Certification of Principal  Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.02
 
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.01
 
Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished only).
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Schema Document

70
Index

 
 
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document

* Previously filed exhibits
+ Exhibit is a management contract or compensatory plan




71
Exhibit 3.01

BYE-LAWS

OF

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD .
(first adopted pursuant to a written resolution of the sole member passed on 12th July, 1994 and amended at annual general meetings of 2nd May 1997, 14th December 1999, 25th May 2000, 15th May 2002, 3rd June, 2008 and 13th June 2012).

I N D E X
SUBJECT                                  BYE-LAW NO .

Interpretation                                1-2
Share Capital                                3
Alteration Of Capital                            4-7
Share Rights                                8-9A
Variation Of Rights                            10-11
Shares                                    12-15
Shares Certificates                            16-21
Lien                                    22-24
Calls On Shares                                25-33
Forfeiture Of Shares                            34-42
Register Of Members                            43-44
Record Dates                                45
Transfer Of Shares                            46-51
Transmission Of Shares                            52-54
Untraceable Members                            55
General Meetings                            56-58
Notice Of General Meetings                        59-60
Proceedings At General Meetings                        61-65
Voting                                    66-77
Proxies                                    78-83
Corporations Acting By Representatives                    84
Written Resolutions Of Members                        85
Board Of Directors                            86
Retirement Of Directors                            87-88
Disqualification Of Directors                        89
Executive Directors and Committee                        90-91A
Alternate Directors                            92-95
Directors' Fees And Expenses                        96-99
Directors' and Officers' Interests                        100-103
General Powers Of The Directors                        104-109
Borrowing Powers                            110-113
Proceedings Of The Directors                        114-123
Managers                                124-126
Officers                                    127-131
Register of Directors and Officers                        132
Minutes                                    133
Seal                                    134
Authentication Of Documents                        135
Destruction Of Documents                        136
Dividends And Other Payments                        137-146
Reserves                                147
Capitalisation                                148-149
Subscription Rights Reserve                        150
Accounting Records                            151-153
Audit                                    154-159
Notices                                    160-162
Signatures                                163
Winding Up                                164-165
Indemnity                                166
Alteration Of Bye-laws And Amendment To Memorandum of Association    167
Information                                168






INTERPRETATION

1.    In these Bye-laws, unless the context otherwise requires, the words standing in the first column of the following table shall bear the meaning set opposite them respectively in the second column.

WORD              MEANING

"Act"
The Companies Act 1981 of Bermuda, as amended from time to time.

"Auditor"
the auditor of the Company for the time being and may include any individual or partnership.

"Bye-laws"        these Bye-laws in their present form or as supplemented or amended or substituted from time to time.

"Board" or        the Board of Directors of the Company or the Directors present at a meeting of Directors at which a quorum is present.
"Directors"        

"capital"        the share capital from time to time of the Company.

"clear days"        in relation to the period of a notice that period excluding the day when the notice is given or deemed to be given and the day for which it is given or on which it is to take effect.

"clearing house"    a clearing house recognised by the laws of the jurisdiction in which the shares of the Company are listed or quoted on a stock exchange in such jurisdiction.

"Company"        Central European Media Enterprises Ltd.

"competent        a competent regulatory authority in the territory where the shares of the Company are listed or quoted on a stock
regulatory        exchange in such territory.
authority"
    

"debenture" and        include debenture stock and debenture stockholder respectively.
"debenture holder"    

"Designated Stock             a stock exchange which is an appointed stock exchange for the purposes of the Act in respect of which the shares of the
Exchange"            Company are listed or quoted and where such appointed stock exchange deems such listing or quotation to be the primary
listing or quotation of the shares of the Company.

"dollars" and "$"    dollars, the legal currency of the United States of America.

"head office"        such office of the Company as the Directors may from time to time determine to be the principal office of the Company.

"Immediate Family"    with respect to any individual, such individual's spouse, descendants (natural or adoptive), grandparents, parents, siblings of the whole or half blood.

"Member"
a duly registered holder from time to time of the shares in the capital of the Company.

"month"        a calendar month.

"Notice"        written notice unless otherwise specifically stated and as further defined in these Bye-laws.

"Office"        the registered office of the Company for the time being.

"paid up"        paid up or credited as paid up.

"Register"        the principal register and where applicable, any branch register of Members of the Company to be kept pursuant to the provisions of the Act.

"Registration Office"    in respect of any class of share capital such place as the Board may from time to time determine to keep a branch register of Members in respect of that class of share capital and where (except in cases where the Board otherwise directs) the transfers or other documents of title for such class of share capital are to be lodged for registration and are to be registered.

"Seal"            common seal or any one or more duplicate seals of the Company (including a securities seal) for use in Bermuda or in any place outside Bermuda.

"Secretary"        any person firm or corporation appointed by the Board to perform any of the duties of secretary of the Company and includes any assistant, deputy, temporary or acting secretary.

"Statutes"        the Act and every other act of the Legislature of Bermuda for the time being in force applying to or affecting the Company, its memorandum of association and/or these Bye-laws.

"year"            a calendar year.



#PageNum#



2.    In these Bye-laws, unless there be something within the subject or context inconsistent with such construction:

(a)    words importing the singular include the plural and vice versa;

(b)    words importing a gender include every gender;

(c)    words importing persons include companies, associations and bodies of persons whether corporate or not;

(d)    the words:

(i)    "may" shall be construed as permissive;

(ii)    "shall" or "will" shall be construed as imperative;

(e)    expressions referring to writing shall, unless the contrary intention appears, be construed as including printing, lithography, photography and other modes of representing words or figures in a visible form;

(f)
references to any act, ordinance, statute or statutory provision shall be interpreted as relating to any statutory modification or re-enactment thereof for the time being in force;

(g)
save as aforesaid words and expressions defined in the Statutes shall bear the same meanings in these Bye-laws if not inconsistent with the subject in the context;

(h)
a resolution shall be a special resolution when it has been passed by a majority of not less than three-fourths of votes cast by such Members as, being entitled so to do, vote in person or, in the case of such Members as are corporations, by their respective duly authorised representative or, where proxies are allowed, by proxy at a general meeting of which not less than twenty-one (21) clear days' notice, specifying (without prejudice to the power contained in these Bye-laws to amend the same) the intention to propose the resolution as a special resolution, has been duly given. Provided that, except in the case of an annual general meeting, if it is so agreed by a majority in number of the Members having the right to attend and vote at any such meeting, being a majority together holding not less than ninety-five (95) per cent. in nominal value of the shares giving that right, a resolution may be proposed and passed as a special resolution at a meeting of which less than twenty-one (21) clear days' Notice has been given;

(i)
a resolution shall be an ordinary resolution when it has been passed by a simple majority of votes cast by such Members as, being entitled so to do, vote in person or, in the case of any Member being a corporation, by its duly authorised representative or, where proxies are allowed, by proxy at a general meeting of which not less than fourteen (14) clear days' Notice has been duly given;

(j)    a special resolution shall be effective for any purpose for which an ordinary resolution is expressed to be required under any provision of these Bye-laws or the Statutes.

SHARE CAPITAL

3.    (1)    The capital of the Company shall be divided into three classes of shares, namely:

(a)
200,000,000 Shares of Class A Common Stock, par value $0.08 per share ("Class A Shares");

(b)    15,000,000 Shares of Class B Common Stock, par value $0.08 per share ("Class B Shares"); and

(c)    5,000,000 Shares of Preferred Stock, par value $0.08 per share ("Preferred Shares").

The Class A shares and the Class B Shares are together referred to as the "Common Shares".

(2)    The holders of Class A Shares shall, subject to the provisions of these Bye-laws:

(a)    be entitled to one vote per Class A Share;

(b)    be entitled to such dividends as the directors may from time to time declare on Class A Shares pari passu with the holders of Class B Shares; and

(c)
in the event of a winding-up or dissolution of the Company, whether voluntary or involuntary or for a reorganisation or otherwise or upon a distribution of capital, be entitled, after the satisfaction of the rights of the holders of Preferred Shares, to all the surplus assets of the Company pari passu with the holders of Class B Shares.

(3)    The holders of Class B Shares shall, subject to the provisions of these Bye-laws:

(a)    be entitled to ten votes per Class B Share;

(b)    be entitled to such dividends as the directors may from time to time declare on Class B Shares, pari passu with the holders of Class A Shares; and

(c)    in the event of a winding up or dissolution of the Company, whether voluntary or involuntary or for a re-organisation or otherwise or upon a distribution of capital, be entitled, after the satisfaction of the rights of the holders of Preferred Shares, to all the surplus assets


#PageNum#

of the Company pari passu with the holders of Class A Shares.

(4)    The Class B Shares shall be convertible into Class A Shares on a one for one basis at the option of the holder thereof. All of the issued and outstanding Class B Shares shall automatically convert into Class A Shares on a one for one basis when the number of issued and outstanding Class B Shares is less that ten per cent (10%) of the issued and outstanding Common Shares.

(5)    Class B Shares may only be transferred to the following (each a "Permitted Transferee"): (i) to other holders of Class B Shares who were holders of Class B shares prior to the consummation of the Company's public offering of Class A Shares, (ii) in the case where the holder of Class B Shares is an individual, to his or her Immediate Family by gift, devise or otherwise through laws of descent or distribution, to a trust established by holders of Class B Shares the beneficiaries of which are one or more of his or her Immediate Family, to a corporation or other entity the majority of beneficial owners of which are or will be owned by holders of Class B Shares, (iii) in the case where the holder of Class B Shares is a corporation, to its shareholders, (iv) in the case where the holder of Class B Shares is a partnership to its partners, and (v) to any person who would be a Permitted Transferee through a series of permitted transfers. Any other transfer of Class B Shares is void. However, nothing in this Bye-law prevents a holder of Class B Shares from converting his Class B Shares into Class A Shares as permitted by the Bye-laws and transferring such Class A Shares as permitted by law.

(6)    The transfer of more than fifty percent (50%) of the equity interest in a corporation or partnership which is a holder of Class B Shares to other than a Permitted Transferee shall cause all of the Class B Shares held by such corporation or partnership to automatically convert into Class A Shares on a one for one basis. The Company shall be entitled to seek specific enforcement of the conversion in the event the holder of the Class B Shares fails to comply with the requirements to effect such conversion, and shall be entitled to recover from the holder the court costs, reasonable attorneys' fees and other cost and expenses incurred by the Company in connection with obtaining such specific enforcement.

(7)    The Preferred Shares may be issued, subject to the Act, the Company's memorandum of association and these Bye-laws as from time to time amended, from time to time in one or more series of any number of shares, and with distinctive serial designations, all as shall hereafter be stated and expressed in the resolution or resolutions providing for the issuance of such Preferred Shares from time to time adopted by the Board of Directors pursuant to authority so to do which is hereby vested in the Board of Directors. Subject to the Act, the Company's memorandum of association and these Bye-laws, each series of Preferred Shares (a) may have such voting powers, (b) may be subject to redemption at such time or times, price or prices, or rate or rates, and with such adjustments, (c) may be entitled to receive dividends (which may be cumulative or noncumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or of any other series of stock, (d) may have such rights upon the dissolution of, or upon any distribution of the assets of, the Company, (e) may be made convertible into, or exchangeable for, shares of any other class or classes or any other series of the same or any other class or classes of shares of the Company, at such price or prices or at such rate or rates of exchange, and with such adjustments, (f) may be entitled to the benefit of a sinking fund with respect to the purchase or redemption of shares of such series, and (g) may have such other preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of such preferences and/or rights, all as shall be stated in said resolution or resolutions providing for the issue of such Preferred Shares.


Subject to the Act, the Company's memorandum of association and these Bye-laws as from time to time amended, with respect to the closing of the Register or the fixing of a record date for the determination of Members entitled to vote and except as otherwise provided the Act, the Company's memorandum of association and these Bye-laws as from time to time amended or by the resolution or resolutions providing for the issue of any series of Preferred Shares, the holders of outstanding Common Shares shall exclusively have the right to vote for the election of directors and for all other purposes. Except as otherwise provided by the Act, the Company's memorandum of association and these Bye-laws as from time to time amended or by the resolution or resolutions providing for the issue of any series of Preferred Shares, the holders of Common Shares shall be entitled, to the exclusion of the holders of Preferred Shares of any and all series, to receive such dividends as from time to time may be declared by the Board of Directors. Except as otherwise provided by the Act, the Company's memorandum of association and these Bye-laws as from time to time amended or by the resolution or resolutions providing for the issue of any series of Preferred Shares, in the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after payment shall have been made to the holders of Preferred Shares of the full amount, if any, for which they shall be entitled pursuant to the resolution or resolutions providing for the issue of any series of Preferred Shares, the holders of Common Shares shall be entitled, to the exclusion of the holders of Preferred Shares of any and all series, to share, rateably according to the number of Common Shares held by them, in all remaining assets of the Company available for distribution to its Members.

(8)    Subject to the Act, the Company's memorandum of association and, where applicable, the rules of any Designated Stock Exchange and/or any competent regulatory authority, any power of the Company to purchase or otherwise acquire its own shares shall be exercisable by the Board upon such terms and subject to such conditions as it thinks fit.

(9)    Neither the Company nor any of its subsidiaries shall directly or indirectly give financial assistance to a person who is acquiring or proposing to acquire shares in the Company for the purpose of that acquisition whether before or at the same time as the acquisition takes place or afterwards PROVIDED that nothing in this Bye-law shall prohibit transactions permitted by the Statutes.

ALTERATION OF CAPITAL

4.    The Company may from time to time by ordinary resolution passed by the holders of Common Shares in accordance with Section 45 of the Act:

(a)    increase its capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe;

(b)    consolidate and divide all or any of its capital into shares of larger amount than its existing shares;

(c)    divide its shares into several classes and without prejudice to any special rights previously conferred on the holders of existing shares attach thereto respectively any preferential, deferred, qualified or special rights, privileges, conditions or such restrictions which in the absence of any such determination by the Company in general meeting, as the Directors may determine provided always that where the Company issues shares which do not carry voting rights, the words "non-voting" shall appear in the designation of such shares;

(d)
sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum of association (subject, nevertheless, to the Act), and may by such resolution determine that, as between the holders of the shares resulting from such sub-division, one or more of the shares may have any such preferred rights or be subject to any such restrictions as compared with the other or others as the Company has power to attach to unissued or new shares;


#PageNum#


(e)     change the currency denomination of its share capital; and

(f)    cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person, and diminish the amount of its capital by the amount of the shares so cancelled.

5.    The Board may settle as it considers expedient any difficulty which arises in relation to any consolidation and division under the last preceding Bye-law and in particular but without prejudice to the generality of the foregoing may issue certificates in respect of fractions of shares or arrange for the sale of the shares representing fractions and the distribution of the net proceeds of sale (after deduction of the expenses of such sale) in due proportion amongst the Members who would have been entitled to the fractions, and for this purpose the Board may authorise some person to transfer the shares representing fractions to their purchaser or resolve that such net proceeds be paid to the Company for the Company's benefit. Such purchaser will not be bound to see to the application of the purchase money nor will his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale.

6.    The Company may from time to time by special resolution passed by the holders of Class A Shares and passed by the holders of Class B Shares, subject to any confirmation or consent required by law, reduce its authorised or issued share capital or any share premium account or other undistributable reserve in any manner permitted by law.

7.    Except so far as otherwise provided by the conditions of issue, or by these Bye-laws, any capital raised by the creation of new shares shall be treated as if it formed part of the original capital of the Company, and such shares shall be subject to the provisions contained in these Bye-laws with reference to the payment of calls and instalments, transfer and transmission, forfeiture, lien, cancellation, surrender, voting and otherwise.

SHARE RIGHTS

8.    Subject to any special rights conferred on the holders of any shares or class of shares, any share in the Company (whether forming part of the present capital or not) may be issued with or have attached thereto such rights or restrictions whether in regard to dividend, voting, return of capital or otherwise as the Company may by ordinary resolution determine or, if there has not been any such determination or so far as the same shall not make specific provision, as the Board may determine.

9.    Subject to Sections 42 and 43 of the Act, any preference shares may be issued or converted into shares that, at a determinable date or at the option of the Company or the holder if so authorised by its memorandum of association, are liable to be redeemed on such terms and in such manner as the Company before the issue or conversion may by ordinary resolution of the Members determine.

9A.    (1)    There shall be a class vote for the holders of Class A Shares and a class vote for the holders of Class B Shares to pass a resolution to approve a going private transaction, and unless such resolution is passed by a majority of the votes cast at the meeting of each class, the resolution shall not pass.

(2)    For the purposes of this bye-law, a "going private transaction" is any Rule 13e-3 transaction as such term is defined in Rule 13e-3 promulgated under the Securities Exchange Act of 1934 of the United States of America, as amended, between the Company and (i) Ronald S. Lauder (the "Principal Shareholder"), (ii) any Affiliate of the Principal Shareholder or (iii) any group consisting of the Principal Shareholder or Affiliates of the Principal Shareholder. For the purposes of this bye-law "Affiliate of the Principal Shareholder" means (i) any individual or entity who or that, directly or indirectly, controls, is controlled by, or is under common control with, the Principal Shareholder, (ii) any corporation or organisation (other than the Company or a majority-owned subsidiary of the Company) of which the Principal Shareholder is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of voting securities, or in which the Principal Shareholder has a substantial beneficial interest, (iii) any trust or other estate in which the Principal Shareholder has a substantial beneficial interest or as to which such Principal Shareholder serves as trustee or in a similar fiduciary capacity or (iv) any relative or spouse of a Principal Shareholder, or any relative of such spouse, who has the same residence as such Principal Shareholder.

VARIATION OF RIGHTS

10.    Subject to the Act and without prejudice to Bye-law 8, all or any of the special rights for the time being attached to the shares or any class of shares may, unless otherwise provided by the terms of issue of the shares of that class, from time to time (whether or not the Company is being wound up) be varied, modified or abrogated either with the consent in writing of the holders of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. To every such separate general meeting all the provisions of these Bye-laws relating to general meetings of the Company shall, mutatis mutandis, apply, but so that:

(a)    the necessary quorum (other than at an adjourned meeting) shall be two persons holding or representing by proxy not less than one-third in nominal value of the issued shares of that class and at any adjourned meeting of such holders, two holders present in person or by proxy (whatever the number of shares held by them) shall be a quorum;

(b)    every holder of shares of the class shall be entitled on a poll to one vote for every such share held by him or in the case of Class B Shares, ten votes for every such share held by him; and


(c)    any holder of shares of the class present in person or by proxy may demand a poll.

11.    The special rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be varied, modified or abrogated by the creation or issue of further shares ranking pari passu therewith.

SHARES

12.    (1)    Subject to the Act and these Bye-laws and without prejudice to any special rights or restrictions for the time being attached to any shares or any class of shares, the unissued shares of the Company (whether forming part of the original or any increased capital) shall be at the disposal of the Board, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times and for such consideration and upon such terms and conditions as the Board may in its absolute discretion determine but so that no shares shall be issued at a discount. Neither the Company nor the Board shall be obliged, when making or granting any allotment of, offer of, option over or disposal of shares, to make, or make available, any such offer, option or shares to Members or


#PageNum#

others with registered addresses in any particular territory or territories being a territory or territories where, in the absence of a registration statement or other special formalities, this would or might, in the opinion of the Board, be unlawful or impracticable. Members affected as a result of the foregoing sentence shall not be, or be deemed to be, a separate class of members for any purpose whatsoever.

(2)    The Board may issue warrants conferring the right upon the holders thereof to subscribe for any class of shares or securities in the capital of the Company on such terms as it may from time to time determine.

(3)    The Company may purchase its own shares for cancellation or acquire them as Treasury Shares in accordance with the Act on such terms as the Board may from time to time determine. All rights attaching to Treasury Shares shall be suspended and shall not be exercised by the Company while it holds such Treasury Shares and, except where required by the Act, all Treasury Shares shall be excluded from the calculation of any percentage or fraction of the share capital, or shares, of the Company. For the purposes of these Bye-Laws, “Treasury Share” shall mean a share of the Company that was or is treated as having been acquired and held by the Company and has been continuously held by the Company since it was so acquired and has not been cancelled.

13.    The Company may in connection with the issue of any shares exercise all powers of paying commission and brokerage conferred or permitted by the Act. Subject to the Act, the commission may be satisfied by the payment of cash or by the allotment of fully or partly paid shares or partly in one and partly in the other.

14.    Except as required by law, no person shall be recognised by the Company as holding any share upon any trust and the Company shall not be bound by or required in any way to recognise (even when having notice thereof) any equitable, contingent, future or partial interest in any share or any fractional part of a share or (except only as otherwise provided by these Bye-laws or by law) any other rights in respect of any share except an absolute right to the entirety thereof in the registered holder.

15.    Subject to the Act and these Bye-laws, the Board may at any time after the allotment of shares but before any person has been entered in the Register as the holder, recognise a renunciation thereof by the allottee in favour of some other person and may accord to any allottee of a share a right to effect such renunciation upon and subject to such terms and conditions as the Board considers fit to impose.

SHARE CERTIFICATES

16.    The shares of the Company’s stock may be certificated or uncertificated, as provided under the Act. Every share certificate shall be issued under the Seal or a facsimile thereof and shall specify the number and class and distinguishing numbers (if any) of the shares to which it relates, and the amount paid up thereon and may otherwise be in such form as the Directors may from time to time determine. No certificate shall be issued representing shares of more than one class. The Board may by resolution determine, either generally or in any particular case or cases, that any signatures on any such certificates (or certificates in respect of other securities) need not be autographic but may be affixed to such certificates by some mechanical means or may be printed thereon or that such certificates need not be signed by any person.

17.    (1)    In the case of a share held jointly by several persons, the Company shall not be bound to issue more than one certificate therefor and delivery of a certificate to one of several joint holders shall be sufficient delivery to all such holders.

(2)    Where a share stands in the names of two or more persons, the person first named in the Register shall as regards service of notices and, subject to the provisions of these Bye-laws, all or any other matters connected with the Company, except the transfer of the shares, be deemed the sole holder thereof.

18.    Every person whose name is entered, upon an allotment of shares, as a Member in the Register shall be entitled, without payment, to receive one certificate for all such shares of any one class or several certificates each for one or more of such shares of such class upon request in writing to the Company and upon payment for every certificate after the first of such reasonable out-of-pocket expenses as the Board from time to time determines. A shareholder who does not submit such a request in writing to the Company shall receive uncertificated shares.

19.    Share certificates requested pursuant to Bye-Law 18 shall be issued in the case of an issue of shares within twenty-one (21) days (or such longer period as the terms of the issue provide) after such a request or in the case of a transfer of fully or partly paid shares within twenty-one (21) days after such a request following the lodgement of a transfer with the Company, not being a transfer which the Company is for the time being entitled to refuse to register and does not register.

20.    Upon every transfer of certificated shares, the certificate held by the transferor shall be given up to be cancelled, and shall forthwith be cancelled accordingly, and if requested by the tranferee pursuant to Bye-Law 18 a new certificate shall be issued to the transferee in respect of the shares transferred to him. If any of the shares included in the certificate so given up shall be retained by the transferor a new certificate for the balance shall be issued to him if so requested by the transferor pursuant to Bye-law 18.

21.    If a share certificate shall be damaged or defaced or alleged to have been lost, stolen or destroyed a new certificate representing the same shares may be issued to the relevant member upon request and on payment of such fee as the Designated Stock Exchange may determine to be the maximum payable or such lesser sum as the Board may determine and, subject to compliance with such terms (if any) as to evidence and indemnity and to payment of the costs and reasonable out-of-pocket expenses of the Company in investigating such evidence and preparing such indemnity as the Board may think fit and, in case of damage or defacement, on delivery of the old certificate to the Company provided always that where share warrants have been issued, no new share warrant shall be issued to replace one that has been lost unless the Directors are satisfied beyond reasonable doubt that the original has been destroyed.

LIEN

22.    The Company shall have a first and paramount lien on every share (not being a fully paid share) for all moneys (whether presently payable or not) called or payable at a fixed time in respect of that share. The Company shall also have a first and paramount lien on every share (not being a fully paid share) registered in the name of a Member (whether or not jointly with other Members) for all amounts of money presently payable by such Member or his estate to the Company whether the same shall have been incurred before or after notice to the Company of any equitable or other interest of any person other than such member, and whether the period for the payment or discharge of the same shall have actually arrived or not, and notwithstanding that the same are joint debts or liabilities of such Member or his estate and any other person, whether a Member of the Company or not. The Company's lien on a share shall extend to all dividends or other moneys payable thereon or in respect thereof. The Board may at any time, generally or in any particular case, waive any lien that has arisen or declare any


#PageNum#

share exempt in whole or in part, from the provisions of this Bye-law.

23.    Subject to these Bye-laws, the Company may sell in such manner as the Board determines any share on which the Company has a lien, but no sale shall be made unless some sum in respect of which the lien exists is presently payable, or the liability or engagement in respect of which such lien exists is liable to be presently fulfilled or discharged nor until the expiration of fourteen clear days after a notice in writing, stating and demanding payment of the sum presently payable, or specifying the liability or engagement and demanding fulfilment or discharge thereof and giving notice of the intention to sell in default, has been served on the registered holder for the time being of the share or the person entitled thereto by reason of his death or bankruptcy.

24.    The net proceeds of the sale shall be received by the Company and applied in or towards payment or discharge of the debt or liability in respect of which the lien exists, so far as the same is presently payable, and any residue shall (subject to a like lien for debts or liabilities not presently payable as existed upon the share prior to the sale) be paid to the person entitled to the share at the time of the sale. To give effect to any such sale the Board may authorise some person to transfer the shares sold to the purchaser thereof. The purchaser shall be registered as the holder of the shares so transferred and he shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale.

CALLS ON SHARES

25.    Subject to these Bye-laws and to the terms of allotment, the Board may from time to time make calls upon the Members in respect of any moneys unpaid on their shares (whether on account of the nominal value of the shares or by way of premium), and each Member shall (subject to being given at least fourteen (14) clear days' Notice specifying the time and place of payment) pay to the Company as required by such notice the amount called on his shares. A call may be extended, postponed or revoked in whole or in part as the Board determines but no member shall be entitled to any such extension, postponement or revocation except as a matter of grace and favour.

26.    A call shall be deemed to have been made at the time when the resolution of the Board authorising the call was passed and may be made payable either in one lump sum or by instalments. The Directors may make arrangements on the issue of shares for a difference between the shareholders in the amount of calls to be paid and in the times of payment.

27.    A person upon whom a call is made shall remain liable for calls made upon him notwithstanding the subsequent transfer of the shares in respect of which the call was made. The joint holders of a share shall be jointly and severally liable to pay all calls and instalments due in respect thereof or other moneys due in respect thereof.

28.    If a sum called in respect of a share is not paid before or on the day appointed for payment thereof, the person from whom the sum is due shall pay interest on the amount unpaid from the day appointed for payment thereof to the time of actual payment at such rate (not exceeding twenty per cent. (20%) per annum) as the Board may determine, but the Board may in its absolute discretion waive payment of such interest wholly or in part.

29.    No Member shall be entitled to receive any dividend or bonus or to be present and vote (save as proxy for another Member) at any General Meeting either personally or by proxy, or be reckoned in a quorum, or exercise any other privilege as a Member until all calls or instalments due by him to the Company, whether alone or jointly with any other person, together with interest and expenses (if any) shall have been paid.

30.    On the trial or hearing of any action or other proceedings for the recovery of any money due for any call, it shall be sufficient to prove that the name of the Member sued is entered in the Register as the holder, or one of the holders, of the shares in respect of which such debt accrued, that the resolution making the call is duly recorded in the minute book, and that notice of such call was duly given to the Member sued, in pursuance of these Bye-laws; and it shall not be necessary to prove the appointment of the Directors who made such call, nor any other matters whatsoever, but the proof of the matters aforesaid shall be conclusive evidence of the debt.

31.    Any amount payable in respect of a share upon allotment or at any fixed date, whether in respect of nominal value or premium or as an instalment of a call, shall be deemed to be a call duly made and payable on the date fixed for payment and if it is not paid the provisions of these Bye-laws shall apply as if that amount had become due and payable by virtue of a call duly made and notified.

32.    On the issue of shares the Board may differentiate between the allottees or holders as to the amount of calls to be paid and the times of payment.

33.    The Board may, if it thinks fit, receive from any Member willing to advance the same, and either in money or money's worth, all or any part of the moneys uncalled and unpaid or instalments payable upon any shares held by him and upon all or any of the moneys so advanced (until the same would, but for such advance, become presently payable) pay interest at such rate (if any) as the Board may decide. The Board may at any time repay the amount so advanced upon giving to such Member not less than one month's notice in writing of its intention in that behalf, unless before the expiration of such notice the amount so advanced shall have been called up on the shares in respect of which it was advanced. Such payment in advance shall not entitle the holder of such share or shares to participate in respect thereof in a dividend subsequently declared.

FORFEITURE OF SHARES

34.    (1)    If a call remains unpaid after it has become due and payable the Board may give to the person from whom it is due not less than fourteen (14) clear days' notice:

(a)    requiring payment of the amount unpaid together with any interest which may have accrued and which may still accrue up to the date of actual payment; and

(b)    stating that if the notice is not complied with the shares on which the call was made will be liable to be forfeited.

(2)    If the requirements of any such notice are not complied with, any share in respect of which such notice has been given may at any time thereafter, before payment of all calls and interest due in respect thereof has been made, be forfeited by a resolution of the Board to that effect, and such forfeiture shall include all dividends and bonuses declared in respect of the forfeited share but not actually paid before the forfeiture.

35.    When any share has been forfeited, notice of the forfeiture shall be served upon the person who was before forfeiture the holder of the share. No forfeiture shall be invalidated by any omission or neglect to give such notice.


#PageNum#


36.    The Board may accept the surrender of any share liable to be forfeited hereunder and, in such case, references in these Bye-laws to forfeiture will include surrender.

37.    Until cancelled in accordance with the requirements of the Act, a forfeited share shall be the property of the Company and may be sold, re-allotted or otherwise disposed of to such person, upon such terms and in such manner as the Board determines, and at any time before a sale, re-allotment or disposition the forfeiture may be annulled by the Board on such terms as the Board determines.

38.    A person whose shares have been forfeited shall cease to be a Member in respect of the forfeited shares but nevertheless shall remain liable to pay the Company all moneys which at the date of forfeiture were presently payable by him to the Company in respect of the shares, with (if the Directors shall in their discretion so require) interest thereon from the date of forfeiture until payment at such rate (not exceeding twenty per cent. (20%) per annum) as the Board determines. The Board may enforce payment thereof if it thinks fit, and without any deduction or allowance for the value of the forfeited shares, at the date of forfeiture, but his liability shall cease if and when the Company shall have received payment in full of all such moneys in respect of the shares. For the purposes of this Bye-law any sum which, by the terms of issue of a share, is payable thereon at a fixed time which is subsequent to the date of forfeiture, whether on account of the nominal value of the share or by way of premium, shall notwithstanding that time has not yet arrived be deemed to be payable at the date of forfeiture, and the same shall become due and payable immediately upon the forfeiture, but interest thereon shall only be payable in respect of any period between the said fixed time and the date of actual payment.

39.    A declaration by a Director or the Secretary that a share has been forfeited on a specified date shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share, and such declaration shall (subject to the execution of an instrument of transfer by the Company if necessary) constitute a good title to the share, and the person to whom the share is disposed of shall be registered as the holder of the share and shall not be bound to see to the application of the consideration (if any), nor shall his title to the share be affected by any irregularity in or invalidity of the proceedings in reference to the forfeiture, sale or disposal of the share. When any share shall have been forfeited, notice of the declaration shall be given to the member in whose name it stood immediately prior to the forfeiture, and an entry of the forfeiture, with the date thereof, shall forthwith be made in the register, but no forfeiture shall be in any manner invalidated by any omission or neglect to give such notice or make any such entry.

40.    Notwithstanding any such forfeiture as aforesaid the Board may at any time, before any shares so forfeited shall have been sold, re-allotted or otherwise disposed of, permit the shares forfeited to be bought back upon the terms of payment of all calls and interest due upon and expenses incurred in respect of the share, and upon such further terms (if any) as it thinks fit.

41.    The forfeiture of a share shall not prejudice the right of the Company to any call already made or instalment payable thereon.

42.    The provisions of these Bye-laws as to forfeiture shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether on account of the nominal value of the share or by way of premium, as if the same had been payable by virtue of a call duly made and notified.

REGISTER OF MEMBERS

43.    (1)    The Company shall keep in one or more books a Register of its Members and shall enter therein the following particulars, that is to say:

(a)    the name and address of each Member, the number and class of shares held by him and the amount paid or agreed to be considered as paid on such shares;

(b)    the date on which each person was entered in the Register; and

(c)    the date on which any person ceased to be a Member.

(2)    Subject to the Act, the Company may keep an overseas or local or other branch register of Members resident in any place, and the Board may make and vary such regulations as it determines in respect of the keeping of any such register and maintaining a Registration Office in connection therewith.

44.    The Register and branch register of Members, as the case may be, shall be open to inspection between 10 a.m. and 12 noon on every business day by Members without charge or by any other person, upon a maximum payment of five Bermuda dollars, at the Office or such other place in Bermuda at which the Register is kept in accordance with the Act or, if appropriate, upon a maximum payment of ten dollars at the Registration Office. The Register including any overseas or local or other branch register of Members may, after notice has been given by advertisement in an appointed newspaper and where applicable, any other newspapers in accordance with the requirements of any Designated Stock Exchange to that effect, be closed at such times or for such periods not exceeding in the whole thirty (30) days in each year as the Board may determine and either generally or in respect of any class of shares.

RECORD DATES

45.    Notwithstanding any other provision of these Bye-laws the Company or the Directors may fix any date as the record date for:

(a)    determining the Members entitled to receive any dividend, distribution, allotment or issue and such record date may be on, or at any time not more than 30 days before or after, any date on which such dividend, distribution, allotment or issue is declared, paid or made;

(b)    determining the Members entitled to receive notice of and to vote at any general meeting of the Company.

TRANSFER OF SHARES

46.    Subject to these Bye-laws, any Member may transfer all or any of his shares by an instrument of transfer in the usual or common form or in any other form approved by the Board and may be under hand only.

47.    The instrument of transfer shall be executed by or on behalf of the transferor and the transferee provided that the Board may dispense with the execution of the instrument of transfer by the transferee in any case which it thinks fit in its discretion to do so. The Board may also resolve, either generally or in any


#PageNum#

particular case, upon request by either the transferor or transferee, to accept mechanically executed transfers. The transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the Register in respect thereof. Nothing in these Bye-laws shall preclude the Board from recognising a renunciation of the allotment or provisional allotment of any share by the allottee in favour of some other person.

48.    (1)    The Board may, in its absolute discretion, and without giving any reason therefor, refuse to register a transfer of any share issued under any share scheme for employees upon which a restriction on transfer imposed thereby still subsists, and it may also refuse to register a transfer of any share to more than four (4) joint holders. Nothing in these Bye-laws shall impair the settlement of transactions entered into through the facilities of the National Association of Security Dealers Automated Quotations System or other Designate Stock Exchange except as provided by such exchanges.


(2)    No transfer shall be made to an infant or to a person of unsound mind or under other legal disability.

(3)    The Board in so far as permitted by any applicable law may, in its absolute discretion, at any time and from time to time transfer any share upon the Register to any branch register or any share on any branch register to the Register or any other branch register. In the event of any such transfer, the shareholder requesting such transfer shall bear the cost of effecting the transfer unless the Board otherwise determines.

(4)    Unless the Board otherwise agrees (which agreement may be on such terms and subject to such conditions as the Board in its absolute discretion may from time to time determine, and which agreement it shall, without giving any reason therefor, be entitled in its absolute discretion to give or withhold), no shares upon the Register shall be transferred to any branch register nor shall shares on any branch register be transferred to the Register or any other branch register and all transfers and other documents of title shall be lodged for registration, and registered, in the case of any shares on a branch register, at the relevant Registration Office, and, in the case of any shares on the Register, at the Office or such other place in Bermuda at which the Register is kept in accordance with the Act.

49.    Without limiting the generality of the last preceding Bye-law, the Board may decline to recognise any instrument of transfer unless:-

(a)    the instrument of transfer is in respect of only one class of share;

(b)    the instrument of transfer is lodged at the Office or such other place in Bermuda at which the Register is kept in accordance with the Act or the Registration Office (as the case may be) accompanied by the relevant share certificate(s) and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer (and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do); and

(c)    if applicable, the instrument of transfer is duly and properly stamped.

50.    If the Board refuses to register a transfer of any share in accordance with Bye-law 48, it shall, within two (2) months after the date on which the transfer was lodged with the Company, send to each of the transferor and transferee notice of the refusal.

51.    The registration of transfers of shares or of any class of shares may, after notice has been given by advertisement in an appointed newspaper and, where applicable, any other newspapers in accordance with the requirements of any Designated Stock Exchange to that effect be suspended at such times and for such periods (not exceeding thirty (30) days in any year) as the Board may determine.

TRANSMISSION OF SHARES

52.    If a Member dies, the survivor or survivors where the deceased was a joint holder, and his legal personal representatives where he was a sole or only surviving holder, will be the only persons recognised by the Company as having any title to his interest in the shares; but nothing in this Bye-law will release the estate of a deceased Member (whether sole or joint) from any liability in respect of any share which had been solely or jointly held by him.

53.    Subject to Section 52 of the Act, any person becoming entitled to a share in consequence of the death or bankruptcy or winding-up of a Member may, upon such evidence as to his title being produced as may be required by the Board, elect either to become the holder of the share or to have some person nominated by him registered as the transferee thereof. If he elects to become the holder he shall notify the Company in writing either at the Registration Office or Office, as the case may be, to that effect. If he elects to have another person registered he shall execute a transfer of the share in favour of that person. The provisions of these Bye-laws relating to the transfer and registration of transfers of shares shall apply to such notice or transfer as aforesaid as if the death or bankruptcy of the Member had not occurred and the notice or transfer were a transfer signed by such Member.

54.    A person becoming entitled to a share by reason of the death or bankruptcy or winding-up of a Member shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share. However, the Board may, if it thinks fit, withhold the payment of any dividend payable or other advantages in respect of such share until such person shall become the registered holder of the share or shall have effectually transferred such share, but, subject to the requirements of Bye- law 75(2) being met, such a person may vote at meetings.

UNTRACEABLE MEMBERS

55.    (1)    Without prejudice to the rights of the Company under paragraph (2) of this Bye-law, the Company may cease sending cheque for dividend entitlements or dividend warrants by post if such cheque or warrants have been left uncashed on two consecutive occasions. However, the Company may exercise the power to cease sending cheque for dividend entitlements or dividend warrants after the first occasion on which such a cheque or warrant is returned undelivered.

(2)    The Company shall have the power to sell, in such manner as the Board thinks fit, any shares of a Member who is untraceable, but no such sale shall be made unless:

(a)    all cheque or warrants in respect of dividends of the shares in question, being not less than three in total number, for any sum payable in cash to the holder of such shares in respect of them sent during the relevant period in the manner authorised by the Bye-laws of the Company have remained uncashed;

(b)    so far as it is aware at the end of the relevant period, the Company has not at any time during the relevant period received any indication


#PageNum#

of the existence of the Member who is the holder of such shares or of a person entitled to such shares by death, bankruptcy or operation of law; and

(c)    the Company, if so required by the rules governing the listing of shares on the Designated Stock Exchange, has given notice to, and caused advertisement in newspapers in accordance with the requirements of, the Designated Stock Exchange to be made of its intention to sell such shares in the manner required by the Designated Stock Exchange, and a period of three (3) months or such shorter period as may be allowed by the Designated Stock Exchange has elapsed since the date of such advertisement.

For the purpose of the foregoing, the "relevant period" means the period commencing twelve years before the date of publication of the advertisement referred to in paragraph (c) of this Bye-law and ending at the expiry of the period referred to in that paragraph.

(3)    To give effect to any such sale the Board may authorise some person to transfer the said shares and an instrument of transfer signed or otherwise executed by or on behalf of such person shall be as effective as if it had been executed by the registered holder or the person entitled by transmission to such shares, and the purchaser shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings relating to the sale. The net proceeds of the sale will belong to the Company and upon receipt by the Company of such net proceeds it shall become indebted to the former Member for an amount equal to such net proceeds. No trust shall be created in respect of such debt and no interest shall be payable in respect of it and the Company shall not be required to account for any money earned from the net proceeds which may be employed in the business of the Company or as it thinks fit. Any sale under this Bye-law shall be valid and effective notwithstanding that the Member holding the shares sold is dead, bankrupt or otherwise under any legal disability or incapacity.

GENERAL MEETINGS

56.    An annual general meeting of the Company shall be held in each year other than the year of incorporation at such time and place as may be determined by the Board.

57.    Each general meeting, other than an annual general meeting, shall be called a special general meeting. General meetings may be held in any part of the world as may be determined by the Board.

58.    (1)    The Board may whenever it thinks fit call special general meetings, and Members holding at the date of deposit of the requisition not less than one-tenth of the paid up capital of the Company carrying the right of voting at general meetings of the Company shall at all times have the right, by written requisition to the Board or the Secretary of the Company, to require a special general meeting to be called by the Board for the transaction of any business specified in such requisition; and such meeting shall be held within two (2) months after the deposit of such requisition. If within twenty-one (21) days of such deposit the Board fails to proceed to convene such meeting the requisitionists themselves may do so in accordance with the provisions of Section 74(3) of the Act.

(2)    A Member may raise business, including the nomination of a candidate for election as a Director, to be considered at annual and special general meetings of the Company, provided, however, that in order to be brought before a general meeting Member proposals must (i) be a proper matter for Member action under the Act and the rules and regulations promulgated by the U.S. Securities and Exchange Commission (the “Rules and Regulations”), (ii) comply with the requirements of this Bye-law 58 and (iii) with respect to Director nominees, the Member submitting such proposal shall have beneficially owned at least five percent of any class of the Company’s outstanding stock for a period of at least one year. Where a Member proposal is to be considered at an annual general meeting, notice of such Member proposal must be received by the Secretary not less than 120 days prior to the anniversary date of the prior year’s annual general meeting proxy statement. Where a Member proposal is to be considered at a special general meeting, such notice must be received not later than five (5) days following the earlier of the date on which notice of the special general meeting was given to Members in accordance with these Bye-laws or the date on which public disclosure of the date of the special general meeting was made. Any notice of a Member proposal shall contain (i) the name, address and relationship to the Company of the proposing Member and, with respect to director nominations, the proposed nominee, (ii) with respect to director nominations, a statement to the effect that the proposed nominee has no direct or indirect business conflict of interest with the Company, (iii) with respect to director nominations, a statement to the effect that the proposed nominee meets the Company’s published minimum criteria for consideration as a nominee for director of the Company, (iv) the form of resolution to be included in the proxy statement, (v) a brief description as to why the passing of the resolution is beneficial to the Company and (vi) any such other information as would be required under the rules and regulations of the U.S. Securities and Exchange Commission to be included in the Company’s proxy statement if such proposal were to be included therein. Notwithstanding the foregoing, in order to include information with respect to a Member proposal in the Company’s proxy statement and form of proxy for a general meeting, such Member must provide notice as required by, and otherwise comply with, the Act and the Rules and Regulations. The Company may exclude a Member’s proposal from the Company’s proxy statement and form of proxy in accordance with the Act and the Rules and Regulations.

NOTICE OF GENERAL MEETINGS

59.    (1)    An annual general meeting and any special general meeting shall be called by not less than fourteen (14) clear days' Notice but a general meeting may be called by shorter notice if it is so agreed:

(a)    in the case of a meeting called as an annual general meeting, by all the Members entitled to attend and vote thereat; and

(b)    in the case of any other meeting, by a majority in number of the Members having the right to attend and vote at the meeting, being a majority together holding not less than ninety-five per cent. (95%) in nominal value of the issued shares giving that right.

(2)    The period of notice shall be exclusive of the day on which it is served or deemed to be served and exclusive of the day on which the meeting is to be held, and the notice shall specify the time and place of the meeting and, in case of special business, the general nature of the business. The notice convening an annual general meeting shall specify the meeting as such. Notice of every general meeting shall be given to all Members other than to such Members as, under the provisions of these Bye-laws or the terms of issue of the shares they hold, are not entitled to receive such notices from the Company, to all persons entitled to a share in consequence of the death or bankruptcy or winding-up of a Member and to each of the Directors and the Auditors.

60.    The accidental omission to give Notice of a meeting or (in cases where instruments of proxy are sent out with the Notice) to send such instrument of proxy to, or the non-receipt of such Notice or such instrument of proxy by, any person entitled to receive such Notice shall not invalidate any resolution passed or the proceedings at that meeting.



#PageNum#



PROCEEDINGS AT GENERAL MEETINGS


61.    (1)    All business shall be deemed special that is transacted at a special general meeting, and also all business that is transacted at an annual general meeting, with the exception of sanctioning dividends, the reading, considering and adopting of the accounts and balance sheet and the reports of the Directors and Auditors and other documents required to be annexed to the balance sheet, the election of Directors and appointment of Auditors and other officers in the place of those retiring, the fixing of the remuneration of the Auditors, and the voting of remuneration or extra remuneration to the Directors.

(2)    No business other than the appointment of a chairman of a meeting shall be transacted at any general meeting unless a quorum is present at the commencement of the business. Such number of Members holding a majority of the votes of the Company and present in person or by proxy or (in the case of a member being a corporation) by its duly authorised representative shall form a quorum for all purposes.

62.    If within thirty (30) minutes (or such longer time not exceeding one hour as the chairman of the meeting may determine to wait) after the time appointed for the meeting a quorum is not present, the meeting, if convened on the requisition of Members, shall be dissolved. In any other case it shall stand adjourned to the same day in the next week at the same time and place or to such time and place as the Board may determine. If at such adjourned meeting a quorum is not present within half an hour from the time appointed for holding the meeting, the meeting shall be dissolved.

63.    The President of the Company or the Chairman shall preside as chairman at every general meeting. If at any meeting the President or the Chairman, as the case may be, is not present within fifteen (15) minutes after the time appointed for holding the meeting, or if neither of them is willing to act as chairman, the Directors present shall choose one of their number to act, or if one Director only is present he shall preside as chairman if willing to act. If no Director is present, or if each of the Directors present declines to take the chair, or if the Chairman chosen shall retire from the chair, the Members present in person or by proxy and entitled to vote shall elect one of their number to be chairman.

64.    The Chairman may, with the consent of any meeting at which a quorum is present (and shall if so directed by the meeting), adjourn the meeting from time to time and from place to place as the meeting shall determine, but no business shall be transacted at any adjourned meeting other than business which might lawfully have been transacted at the meeting had the adjournment not taken place. When a meeting is adjourned for fourteen (14) days or more, at least seven (7) clear days' notice of the adjourned meeting shall be given specifying the time and place of the adjourned meeting but it shall not be necessary to specify in such notice the nature of the business to be transacted at the adjourned meeting and the general nature of the business to be transacted. Save as aforesaid, it shall be unnecessary to give notice of an adjournment. No business shall be transacted at any such adjourned meeting other than the business which might have been transacted at the meeting from which the adjournment took place.

65.    If an amendment is proposed to any resolution under consideration but is in good faith ruled out of order by the chairman of the meeting, the proceedings on the substantive resolution shall not be invalidated by any error in such ruling. In the case of a resolution duly proposed as a special resolution, no amendment thereto (other than a mere clerical amendment to correct a patent error) may in any event be considered or voted upon.

VOTING

66.    Subject to any special rights or restrictions as to voting for the time being attached to any shares by or in accordance with these Bye-laws, at any general meeting on a show of hands every Member present in person or by proxy or (being a corporation) is present by a representative duly authorised under Section 78 of the Act shall have one vote and on a poll every Member present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy shall have such number of votes as are attached to every fully paid share of which he is the holder but so that no amount paid up or credited as paid up on a share in advance of calls or instalments is treated for the foregoing purposes as paid up on the share. A resolution put to the vote of a meeting shall be decided on a show of hands unless (before or on the declaration of the result of the show of hands or on the withdrawal of any other demand for a poll) a poll is demanded:

(a)    by the chairman of such meeting; or

(b)    by at least three Members present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy for the time being entitled to vote at the meeting; or

(c)    by a Member or Members present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy and representing not less than one-tenth of the total voting rights of all Members having the right to vote at the meeting; or

(d)    by a Member or Members present in person or in the case of a Member being a corporation by its duly authorised representative or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all shares conferring that right.

A demand by a person as proxy for a Member or in the case of a Member being a corporation by its duly authorised representative shall be deemed to be the same as a demand by a Member.

67.    Unless a poll is duly demanded and the demand is not withdrawn, a declaration by the chairman that a resolution has been carried, or carried unanimously, or by a particular majority, or not carried by a particular majority, or lost, and an entry to that effect made in the minute book of the Company, shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded for or against the resolution.

68.    If a poll is duly demanded the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. There shall be no requirement for the chairman to disclose the voting figures on a poll.

69.    A poll demanded on the election of a chairman, or on a question of adjournment, shall be taken forthwith. A poll demanded on any other question shall be taken in such manner (including the use of ballot or voting papers or tickets) and either forthwith or at such time (being not later than thirty (30) days after the date of the demand) and place as the Chairman directs. It shall not be necessary (unless the chairman otherwise directs) for notice to be given of a poll not taken immediately.


#PageNum#


70.    The demand for a poll shall not prevent the continuance of a meeting or the transaction of any business other than the question on which the poll has been demanded, and, with the consent of the chairman, it may be withdrawn at any time before the close of the meeting or the taking of the poll, whichever is the earlier.

71.    On a poll votes may be given either personally or by proxy.

72.    A person entitled to more than one vote on a poll need not use all his votes or cast all the votes he uses in the same way.

73.    In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of such meeting shall be entitled to a second or casting vote in addition to any other vote he may have.

74.    Where there are joint holders of any share any one of such joint holder may vote, either in person or by proxy, in respect of such share as if he were solely entitled thereto, but if more than one of such joint holders be present at any meeting the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the Register in respect of the joint holding. Several executors or administrators of a deceased Member in whose name any share stands shall for the purposes of this Bye-law be deemed joint holders thereof.

75.    (1)    A Member who is a patient for any purpose relating to mental health or in respect of whom an order has been made by any court having jurisdiction for the protection or management of the affairs of persons incapable of managing their own affairs may vote, whether on a show of hands or on a poll, by his receiver, committee, curator bonis or other person in the nature of a receiver, committee or curator bonis appointed by such court, and such receiver, committee, curator bonis or other person may vote on a poll by proxy, and may otherwise act and be treated as if he were the registered holder of such shares for the purposes of general meetings, provided that such evidence as the Board may require of the authority of the person claiming to vote shall have been deposited at the Office, head office or Registration Office, as appropriate, not less than forty-eight (48) hours before the time appointed for holding the meeting, or adjourned meeting or poll, as the case may be.

(2)    Any person entitled under Bye-law 53 to be registered as the holder of any shares may vote at any general meeting in respect thereof in the same manner as if he were the registered holder of such shares, provided that forty-eight (48) hours at least before the time of the holding of the meeting or adjourned meeting, as the case may be, at which he proposes to vote, he shall satisfy the Board of his entitlement to such shares, or the Board shall have previously admitted his right to vote at such meeting in respect thereof.

76.    No Member shall, unless the Board otherwise determines, be entitled to attend and vote and to be reckoned in a quorum at any General Meeting unless he is duly registered and all calls or other sums presently payable by him in respect of shares in the Company have been paid.

77.    If:

(a)    any objection shall be raised to the qualification of any voter; or

(b)    any votes have been counted which ought not to have been counted or which might have been rejected; or

(c)    any votes are not counted which ought to have been counted;

the objection or error shall not vitiate the decision of the meeting or adjourned meeting on any resolution unless the same is raised or pointed out at the meeting or, as the case may be, the adjourned meeting at which the vote objected to is given or tendered or at which the error occurs. Any objection or error shall be referred to the Chairman of the meeting and shall only vitiate the decision of the meeting on any resolution if the Chairman decides that the same may have affected the decision of the meeting. The decision of the Chairman on such matters shall be final and conclusive.

PROXIES

78.    Any Member entitled to attend and vote at a meeting of the Company shall be entitled to appoint another person as his proxy to attend and vote instead of him. A Member may appoint a proxy in respect of part only of his holding of shares in the Company. A proxy need not be a Member of the Company.
   
79.    If an instrument appointing a proxy is in writing, it shall be under the hand of the appointor or of his attorney duly authorised in writing or, if the appointor is a corporation, either under its seal or under the hand of an officer, attorney or other person authorised to sign the same. In the case of an instrument of proxy in writing purporting to be signed on behalf of a corporation by an officer thereof it shall be assumed, unless the contrary appears, that such officer was duly authorised to sign such instrument of proxy on behalf of the corporation without further evidence of the fact.

80.    Subject to the Act, the instrument appointing a proxy, whether in writing or in any other form as may be approved by the Board, and (if required by the Board) the power of attorney or other authority (if any) under which it is signed, or a certified copy of such power or authority, shall be delivered or otherwise submitted or communicated to the Company in such form and manner or to such place or one of such places (if any) as may be specified for that purpose in or by way of note to or in any document accompanying the notice convening the meeting (or, if no place is so specified for instruments in writing, at the Registration Office or the Office, as may be appropriate) not less than forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the instrument proposes to vote or, in the case of a poll taken subsequently to the date of a meeting or adjourned meeting, not less than twenty-four (24) hours before the time appointed for the taking of the poll and in default the instrument of proxy shall not be treated as valid. No instrument appointing a proxy shall be valid after the expiration of twelve (12) months from the date named in it as the date of its execution, if such instrument is in writing, or the date it is submitted or communicated to the Company, if such instrument is in a form other than in writing, except at an adjourned meeting or on a poll demanded at a meeting or an adjourned meeting in cases where the meeting was originally held within twelve (12) months from such date. Delivery, submission or communication, as the case may be, of an instrument appointing a proxy shall not preclude a Member from attending and voting in person at the meeting convened and in such event, the instrument appointing a proxy shall be deemed to be revoked.

81.    Instruments of proxy shall be in any common form or in such other form as the Board may approve (provided that this shall not preclude the use of the two-way form) and the Board may, if it thinks fit, send out or provide access to with the notice of any meeting forms of instrument of proxy for use at the meeting. The instrument of proxy shall be deemed to confer authority to demand or join in demanding a poll and to vote on any amendment of a resolution put


#PageNum#

to the meeting for which it is given as the proxy thinks fit. The instrument of proxy shall, unless the contrary is stated therein, be valid as well for any adjournment of the meeting as for the meeting to which it relates.

82.    A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal, or revocation of the instrument of proxy or of the authority under which it was executed, provided that no intimation in writing of such death, insanity or revocation shall have been received by the Company at the Office or the Registration Office (or such other place as may be specified for the delivery of instruments of proxy in the notice convening the meeting or other document sent therewith) two (2) hours at least before the commencement of the meeting or adjourned meeting, or the taking of the poll, at which the instrument of proxy is used.

83.    Anything which under these Bye-laws a Member may do by proxy he may likewise do by his duly appointed attorney and the provisions of these Bye-laws relating to proxies and instruments appointing proxies shall apply mutatis mutandis in relation to any such attorney and the instrument under which such attorney is appointed.

CORPORATIONS ACTING BY REPRESENTATIVES

84.    (1)    Any corporation which is a Member of the Company may by resolution of its directors or other governing body authorise such person as it thinks fit to act as its representative at any meeting of the Company or any class of Members of the Company. The person so authorised shall be entitled to exercise the same powers on behalf of such corporation as the corporation could exercise if it were an individual Member of the Company and such corporation shall for the purposes of these Bye-laws be deemed to be present in person at any such meeting if a person so authorised is present thereat. Any reference in these Bye-laws to a duly authorised representative of a Member being a corporation shall mean a representative authorised under the provisions of this Bye-law.

(2)    If a clearing house is a Member, it may authorise such person or persons as it thinks fit to act as its representative or representatives at any meeting of the Company or at any meeting of any class of Members provided that, if more than one person is so authorised, the authorization shall specify the number and class of shares in respect of which each such person is so authorised. A person so authorised under the provisions of this Bye-law shall be entitled to exercise the same powers on behalf of the clearing house (or its nominee) which he represents as that clearing house (or its nominee) could exercise if it were an individual Member.

WRITTEN RESOLUTIONS OF MEMBERS

85.    (1)    Subject to the Act, a resolution in writing signed (in such manner as to indicate, expressly or impliedly, unconditional approval) by or on behalf of all persons for the time being entitled to receive notice of and to attend and vote at general meetings of the Company shall, for the purposes of these Bye-laws, be treated as a resolution duly passed at a general meeting of the Company and, where relevant, as a special resolution so passed. Any such resolution shall be deemed to have been passed at a meeting held on the date on which it was signed by the last Member to sign, and where the resolution states a date as being the date of his signature thereof by any Member the statement shall be prima facie evidence that it was signed by him on that date. Such a resolution may consist of several documents in the like form, each signed by one or more relevant Members.

(2)    Notwithstanding any provisions contained in these Bye-laws, a resolution in writing shall not be passed for the purpose of removing a Director before the expiration of his term of office under Bye-law 86(4) or for the purposes set out in Bye-law 154(3) relating to the removal and appointment of the Auditor.

BOARD OF DIRECTORS


86.    (1)    Unless otherwise determined by the Board of Directors, the number of Directors shall not be less than three (3). At all times, at least two (2) Directors shall be independent directors. The Directors shall be elected or appointed by ordinary resolution in the first place at the statutory meeting of Members and thereafter at each annual general meeting of the Company subject to Bye-law 87 and shall hold office until the next appointment of Directors or until their successors are elected or appointed.

(2)    The Directors shall have the power from time to time and at any time to appoint any person as a Director either to fill a casual vacancy on the Board or as an addition to the existing Board but so that the number of Directors so appointed shall not exceed any maximum number determined from time to time by the Board of Directors. Any Director so appointed by the Board shall hold office only until the next following annual general meeting of the Company and shall then be eligible for re-election at that meeting.

(3)    Neither a Director nor an alternate Director shall be required to hold any shares of the Company by way of qualification and a Director or alternate Director (as the case may be) who is not a Member shall be entitled to receive notice of and to attend and speak at any general meeting of the Company and of all classes of shares of the Company.

(4)    Subject to any provision to the contrary in these Bye-laws the Members may, at any general meeting convened and held in accordance with these Bye-laws, by special resolution remove a Director at any time before the expiration of his period of office notwithstanding anything in these Bye-laws or in any agreement between the Company and such Director (but without prejudice to any claim for damages under any such agreement) provided that the notice of any such meeting convened for the purpose of removing a Director shall contain a statement of the intention so to do and be served on such Director fourteen (14) days before the meeting and at such meeting such Director shall be entitled to be heard on the motion for his removal.

(5)    A vacancy on the Board created by the removal of a Director under the provisions of subparagraph (4) above may be filled by the election or appointment by the Members at the meeting at which such Director is removed to hold office until the next appointment of Directors or until their successors are elected or appointed or, in the absence of such election or appointment the Board of Directors may fill any vacancy in the number left unfilled.

(6)    The Board of Directors may from time to time increase or reduce the number of Directors but so that the number of Directors shall never be less than two (2).

RETIREMENT OF DIRECTORS

87.    (1)    At each annual general meeting all of the Directors for the time being shall retire from office.


#PageNum#


(2)    A retiring Director shall be eligible for re-election.

88.    No person other than a Director retiring at the meeting shall, unless recommended by the Directors for election or nominated by a Member pursuant to Bye-Law 58(2), be eligible for election as a Director at any general meeting.

DISQUALIFICATION OF DIRECTORS

89.    The office of a Director shall be vacated if the Director:

(1)    resigns his office by notice in writing delivered to the Company at the Office or tendered at a meeting of the Board whereupon the Board resolves to accept such resignation;

(2)     becomes of unsound mind or dies;

(3)    without special leave of absence from the Board, is absent from meetings of the Board for six consecutive months, and his alternate Director, if any, shall not during such period have attended in his stead and the Board resolves that his office be vacated; or

(4)    becomes bankrupt or has a receiving order made against him or suspends payment or compounds with his creditors;

(5)     is prohibited by law from being a Director; or

(6)    ceases to be a Director by virtue of any provision of the Statutes or is removed from office pursuant to these Bye-laws.

EXECUTIVE DIRECTORS AND COMMITTEES

90.    The Board may from time to time appoint any one or more of its body to be a Managing Director, Joint Managing Director or Deputy Managing Director or to hold any other employment or executive office with the Company for such period (subject to their continuance as Directors) and upon such terms as the Board may determine and the Board may revoke or terminate any of such appointments. Any such revocation or termination as aforesaid shall be without prejudice to any claim for damages that such Director may have against the Company or the Company may have against such Director. A Director appointed to an office under this Bye-law shall be subject to the same provisions as to removal as the other Directors of the Company, and he shall (subject to the provisions of any contract between him and the Company) ipso facto and immediately cease to hold such office if he shall cease to hold the office of Director for any cause.

91.    Notwithstanding Bye-laws 96, 97, 98 and 99, an executive Director appointed to an office under Bye-law 90 hereof shall receive such remuneration (whether by way of salary, commission, participation in profits or otherwise or by all or any of those modes) and such other benefits (including pension and/or gratuity and/or other benefits on retirement) and allowances as the Board may from time to time determine, and either in addition to or in lieu of his remuneration as a Director.

91A.    The Board may delegate any of its powers to a committee appointed by the Board and every such committee shall conform to such directions as the Board shall impose on them. The Board shall maintain an audit committee, a majority of the members of which shall be independent directors.

ALTERNATE DIRECTORS

92.    Any Director may at any time by Notice delivered to the Office or head office or at a meeting of the Directors appoint any person to be his alternate Director. Any person so appointed shall have all the rights and powers of the Director or Directors for whom such person is appointed in the alternative provided that such person shall not be counted more than once in determining whether or not a quorum is present. An alternate Director may be removed at any time by the body which appointed him and, subject thereto, the office of alternate Director shall continue until the next annual election of Directors or, if earlier, the date on which the relevant Director ceases to be a Director. Any appointment or removal of an alternate Director shall be effected by Notice signed by the appointor and delivered to the Office or head office or tendered at a meeting of the Board. An alternate Director may also be a Director in his own right and may act as alternate to more than one Director. An alternate Director shall, if his appointor so requests, be entitled to receive notices of meetings of the Board or of committees of the Board to the same extent as, but in lieu of, the Director appointing him and shall be entitled to such extent to attend and vote as a Director at any such meeting at which the Director appointing him is not personally present and generally at such meeting to exercise and discharge all the functions, powers and duties of his appointor as a Director and for the purposes of the proceedings at such meeting the provisions of these Bye-laws shall apply as if he were a Director save that as an alternate for more than one Director his voting rights shall be cumulative.

93.    An alternate Director shall only be a Director for the purposes of the Act and shall only be subject to the provisions of the Act insofar as they relate to the duties and obligations of a Director when performing the functions of the Director for whom he is appointed in the alternative and shall alone be responsible to the Company for his acts and defaults and shall not be deemed to be the agent of or for the Director appointing him. An alternate Director shall be entitled to contract and be interested in and benefit from contracts or arrangements or transactions and to be repaid expenses and to be indemnified by the Company to the same extent mutatis mutandis as if he were a Director but he shall not be entitled to receive from the Company any fee in his capacity as an alternate Director except only such part, if any, of the remuneration otherwise payable to his appointor as such appointor may by notice in writing to the Company from time to time direct.

94.    Every person acting as an alternate Director shall have one vote for each Director for whom he acts as alternate (in addition to his own vote if he is also a Director). If his appointor is for the time being absent from Hong Kong or otherwise not available or unable to act, the signature of an alternate Director to any resolution in writing of the Board or a committee of the Board of which his appointor is a member shall, unless the notice of his appointment provides to the contrary, be as effective as the signature of his appointor.

95.    An alternate Director shall ipso facto cease to be an alternate Director if his appointor ceases for any reason to be a Director, however, such alternate Director or any other person may be re-appointed by the Directors to serve as an alternate Director PROVIDED always that, if at any meeting any Director retires but is re-elected at the same meeting, any appointment of such alternate Director pursuant to these Bye-laws which was in force immediately before his retirement shall remain in force as though he had not retired.



#PageNum#



DIRECTORS' FEES AND EXPENSES

96.    The remuneration of the Directors shall from time to time be determined by the Directors and reported to the Members on an annual basis. Such remuneration shall be deemed to accrue from day to day.

97.    Each Director shall be entitled to be repaid or prepaid all travelling, hotel and incidental expenses reasonably incurred or expected to be incurred by him in attending meetings of the Board or committees of the Board or general meetings or separate meetings of any class of shares or of debentures of the Company or otherwise in connection with the discharge of his duties as a Director.

98.    Any Director who, by request, goes or resides abroad for any purpose of the Company or who performs services which in the opinion of the Board go beyond the ordinary duties of a Director may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as the Board may determine and such extra remuneration shall be in addition to or in substitution for any ordinary remuneration provided for by or pursuant to any other Bye-law.

99.    The Board shall obtain the approval of the Company in general meeting before making any payment to any Director or past Director of the Company by way of compensation for loss of office, or as consideration for or in connection with his retirement from office (not being payment to which the Director is contractually entitled).

DIRECTORS' AND OFFICERS' INTERESTS

100.    A Director may:

(a)     hold any other office or place of profit with the Company (except that of Auditor) in conjunction with his office of Director for such period and, subject to the relevant provisions of the Act, upon such terms as the Board may determine. Any remuneration (whether by way of salary, commission, participation in profits or otherwise) paid to any Director in respect of any such other office or place of profit shall be in addition to any remuneration provided for by or pursuant to any other Bye-law;

(b)    act by himself or his firm in a professional capacity for the Company (otherwise than as Auditor) and he or his firm may be remunerated for professional services as if he were not a Director;

(c)    continue to be or become a director, managing director, joint managing Director, deputy managing director, executive director, manager or other officer or member of any other company promoted by the Company or in which the Company may be interested as a vendor, shareholder or otherwise and (unless otherwise agreed) no such Director shall be accountable for any remuneration, profits or other benefits received by him as a director, managing director, joint managing director, deputy managing director, executive director, manager or other officer or member of or from his interests in any such other company. Subject as otherwise provided by these Bye-laws the Directors may exercise or cause to be exercised the voting powers conferred by the shares in any other company held or owned by the Company, or exercisable by them as Directors of such other company in such manner in all respects as they think fit (including the exercise thereof in favour of any resolution appointing themselves or any of them directors, managing directors, joint managing directors, deputy managing directors, executive directors, managers or other officers of such company) or voting or providing for the payment of remuneration to the director, managing director, joint managing director, deputy managing director, executive director, manager or other officers of such other company and any Director may vote in favour of the exercise of such voting rights in manner aforesaid notwithstanding that he may be, or about to be, appointed a director, managing director, joint managing director, deputy managing director, executive director, manager or other officer of such a company, and that as such he is or may become interested in the exercise of such voting rights in manner aforesaid.


101.    Subject to the Act and to these Bye-laws, no Director or officer or proposed or intending Director or officer shall be disqualified by his office from contracting with the Company, either with regard to his tenure of any office or place of profit or as vendor, purchaser or in any other manner whatever, nor shall any such contract or any other contract or arrangement in which any Director or officer is in any way interested be liable to be avoided, nor shall any Director or officer so contracting or being so interested be liable to account to the Company or the Members for any remuneration, profit or other benefits realised by any such contract or arrangement by reason of such Director or officer holding that office or of the fiduciary relationship thereby established provided that such Director or officer shall disclose the nature of his interest in any contract or arrangement in which he is interested in accordance with Bye-law 102 herein.

102.    A Director or officer who to his knowledge is in any way, whether directly or indirectly, interested in a contract or arrangement or proposed contract or arrangement with the Company shall declare the nature of his interest at the meeting of the Board at which the question of entering into the contract or arrangement is first considered, if he knows his interest then exists, or in any other case at the first meeting of the Board after he knows that he is or has become so interested. For the purposes of this Bye-law, a general notice to the Board by a Director to the effect that:

(a)    he is a member or officer of a specified company or firm and is to be regarded as interested in any contract or arrangement which may after the date of the notice be made with that company or firm; or

(b)    he is to be regarded as interested in any contract or arrangement which may after the date of the notice be made with a specified person who is connected with him;

shall be deemed to be a sufficient declaration of interest under this Bye-law in relation to any such contract or arrangement, provided that no such notice shall be effective unless either it is given at a meeting of the Board or the Director or officer takes reasonable steps to secure that it is brought up and read at the next Board meeting after it is given.

103.    (1)    A Director shall not vote (nor be counted in the quorum) on any resolution of the Board in respect of any contract or arrangement or any other proposal in which he is to his knowledge materially interested, but this prohibition shall not apply to any of the following matters namely:



#PageNum#

(i)    any contract or arrangement for giving to such Director any security or indemnity in respect of money lent by him or obligations incurred or undertaken by him at the request of or for the benefit of the Company or any of its subsidiaries;

(ii)    any contract or arrangement for the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which the Director has himself assumed responsibility in whole or in part whether alone or jointly under a guarantee or indemnity or by the giving of security;

(iii)    any contract or arrangement concerning an offer of shares or debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase, where the Director is or is to be interested as a participant in the underwriting or sub-underwriting of the offer;

(iv)    any contract or arrangement in which he is interested in the same manner as other holders of shares or debentures or other securities of the Company or any of its subsidiaries by virtue only of his interest in shares or debentures or other securities of the Company;

(v)    any contract or arrangement concerning any other company in which he is interested only, whether directly or indirectly, as an officer or executive or a shareholder other than a company in which the Director together with any of his associates (as defined by the rules, where applicable, of the Designated Stock Exchange) is beneficially interested in five (5) per cent or more of the issued shares or of the voting rights of any class of shares of such company (or any third company through which his interest is derived); or

(vi)    any proposal concerning the adoption, modification or operation of a share option scheme, a pension fund or retirement, death or disability benefits scheme or other arrangement which relates both to directors and employees of the Company or of any of its subsidiaries and does not provide in respect of any Director as such any privilege or advantage not accorded to the employees to which such scheme or fund relates.

(2)    A company shall be deemed to be a company in which a Director owns five (5) per cent. or more if and so long as (but only if and so long as) he and his associates (as defined by the rules, where applicable, of the Designated Stock Exchange), (either directly or indirectly) are the holders of or beneficially interested in five (5) per cent. or more of any class of the equity share capital of such company or of the voting rights available to members of such company (or of any third company through which his interest is derived). For the purpose of this paragraph there shall be disregarded any shares held by a Director as bare or custodian trustee and in which he has no beneficial interest, any shares comprised in a trust in which the Director's interest is in reversion or remainder if and so long as some other person is entitled to receive the income thereof, and any shares comprised in an authorised unit trust scheme in which the Director is interested only as a unit holder.

(3)    Where a company in which a Director together with his associates (as defined by the rules, where applicable, of the Designated Stock Exchange) holds five (5) per cent. or more is materially interested in a transaction, then that Director shall also be deemed materially interested in such transaction.

(4)    If any question shall arise at any meeting of the Board as to the materiality of the interest of a Director (other than the chairman of the meeting) or as to the entitlement of any Director (other than such chairman) to vote and such question is not resolved by his voluntarily agreeing to abstain from voting, such question shall be referred to the chairman of the meeting and his ruling in relation to such other Director shall be final and conclusive except in a case where the nature or extent of the interest of the Director concerned as known to such Director has not been fairly disclosed to the Board. If any question as aforesaid shall arise in respect of the chairman of the meeting such question shall be decided by a resolution of the Board (for which purpose such chairman shall not vote thereon) and such resolution shall be final and conclusive except in a case where the nature or extent of the interest of such chairman as known to such chairman has not been fairly disclosed to the Board.

GENERAL POWERS OF THE DIRECTORS

104.    (1)    The business of the Company shall be managed and conducted by the Board, which may pay all expenses incurred in forming and registering the Company and may exercise all powers of the Company (whether relating to the management of the business of the Company or otherwise) which are not by the Statutes or by these Bye-laws required to be exercised by the Company in general meeting, subject nevertheless to the provisions of the Statutes and of these Bye-laws and to such regulations being not inconsistent with such provisions, as may be prescribed by the Company in general meeting, but no regulations made by the Company in general meeting shall invalidate any prior act of the Board which would have been valid if such regulations had not been made. The general powers given by this Bye-law shall not be limited or restricted by any special authority or power given to the Board by any other Bye-law.

(2)    Without prejudice to the general powers conferred by these Bye-laws it is hereby expressly declared that the Board shall have the following powers:

(a)    To give to any person the right or option of requiring at a future date that an allotment shall be made to him of any share at par or at such premium as may be agreed.

(b)    To give to any Directors, officers or servants of the Company an interest in any particular business or transaction or participation in the profits thereof or in the general profits of the Company either in addition to or in substitution for a salary or other remuneration.

(c)    To resolve that the Company be discontinued in Bermuda and continued in a named country or jurisdiction outside Bermuda subject to the provisions of the Act.

105.    [Deleted]

106.    The Board may by power of attorney appoint under the Seal any company, firm or person or any fluctuating body of persons, whether nominated directly or indirectly by the Board, to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board under these Bye-laws) and for such period and subject to such conditions as it may think fit, and any such power of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Board may think fit, and may also authorise any such attorney to sub-delegate all or any of the powers, authorities and discretions vested in him. Such attorney or attorneys may, if so authorised under the Seal of the Company, execute any deed or instrument under their personal seal with the same effect as the affixation of the Company's Seal.


#PageNum#


107.    Except as specified in Bye-law 130 or unless expressly authorized by the Board in accordance with these Bye-laws, no Director or Officer may (a) enter into any contract or deed or other agreement pursuant to which the Company is obliged to make payment over such term or such amount as the Board may from time to time determine, or (b) issue or agree to issue any share of the Company. The Board may entrust to and confer upon any officer such powers, with such terms, conditions and restrictions, as the Board in its discretion deems appropriate.

108.    All cheque, promissory notes, drafts, bills of exchange and other instruments, whether negotiable or transferable or not, and all receipts for moneys paid to the Company shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as the Board shall from time to time by resolution determine. The Company's banking accounts shall be kept with such banker or bankers as the Board shall from time to time determine.

109.    (1)    The Board may establish or concur or join with other companies (being subsidiary companies of the Company or companies with which it is associated in business) in establishing and making contributions out of the Company's moneys to any schemes or funds for providing pensions, sickness or compassionate allowances, life assurance or other benefits for employees (which expression as used in this and the following paragraph shall include any Director or ex-Director who may hold or have held any executive office or any office of profit under the Company or any of its subsidiary companies) and ex-employees of the Company and their dependents or any class or classes of such person.

(2)    The Board may pay, enter into agreements to pay or make grants of revocable or irrevocable, and either subject or not subject to any terms or conditions, pensions or other benefits to employees and ex-employees and their dependents, or to any of such persons, including pensions or benefits additional to those, if any, to which such employees or ex-employees or their dependents are or may become entitled under any such scheme or fund as mentioned in the last preceding paragraph. Any such pension or benefit may, as the Board considers desirable, be granted to an employee either before and in anticipation of or upon or at any time after his actual retirement.

BORROWING POWERS

110.    The Board may exercise all the powers of the Company to raise or borrow money and to mortgage or charge all or any part of the undertaking, property and assets (present and future) and uncalled capital of the Company and, subject to the Act, to issue debentures, bonds and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party.

111.    Debentures, bonds and other securities may be made assignable free from any equities between the Company and the person to whom the same may be issued.

112.    Any debentures, bonds or other securities may be issued at a discount (other than shares), premium or otherwise and with any special privileges as to redemption, surrender, drawings, allotment of shares, attending and voting at general meetings of the Company, appointment of Directors and otherwise.

113.    (1)    Where any uncalled capital of the Company is charged, all persons taking any subsequent charge thereon shall take the same subject to such prior charge, and shall not be entitled, by notice to the members or otherwise, to obtain priority over such prior charge.

(2)    The Board shall cause a proper register to be kept, in accordance with the provisions of the Act, of all charges specifically affecting the property of the Company and of any series of debentures issued by the Company and shall duly comply with the requirements of the Act in regard to the registration of charges and debentures therein specified and otherwise.

PROCEEDINGS OF THE DIRECTORS

114.    The Board may meet for the despatch of business, adjourn and otherwise regulate its meetings as it considers appropriate. Questions arising at any meeting shall be determined by a majority of votes. A majority of the meetings of the Board of Directors of the Company that are held in any given fiscal year of the Company shall be held outside the United States.

115.    A meeting of the Board may be convened by the Secretary on request of a Director or by any Director. The Secretary shall convene a meeting of the Board of which notice may be given in writing or by telephone or in such other manner as the Board may from time to time determine whenever he shall be required so to do by the President or Chairman, as the case may be, or any Director. Any Director may waive notice of any meeting either prospectively or retrospectively.

116.    (1)    The quorum necessary for the transaction of the business of the Board may be fixed by the Board and, unless so fixed at any other number, shall be two (2). An alternate Director shall be counted in a quorum in the case of the absence of a Director for whom he is the alternate provided that he shall not be counted more than once for the purpose of determining whether or not a quorum is present.

(2)    Directors may participate in any meeting of the Board by means of a conference telephone or other communications equipment through which all persons participating in the meeting can communicate with each other simultaneously and instantaneously and, for the purpose of counting a quorum, such participation shall constitute presence at a Meeting as if those participating were present in person.

(3)    Any Director who ceases to be a Director at a Board meeting may continue to be present and to act as a Director and be counted in the quorum until the termination of such Board meeting if no other Director objects and if otherwise a quorum of Directors would not be present.
117.    The continuing Directors or a sole continuing Director may act notwithstanding any vacancy in the Board but, if and so long as the number of Directors is reduced below the minimum number fixed by or in accordance with these Bye-laws, the continuing Directors or Director, notwithstanding that the number of Directors is below the number fixed by or in accordance with these Bye-laws as the quorum or that there is only one continuing Director, may act for the purpose of filling vacancies in the Board or of summoning general meetings of the Company but not for any other purpose.

118.    The Board may elect a chairman and one or more deputy chairman of its meetings and determine the period for which they are respectively to hold such office. If no chairman or deputy chairman is elected, or if at any meeting neither the chairman nor any deputy chairman is present within five (5) minutes after the time appointed for holding the same, the Directors present may choose one of their number to be chairman of the meeting.

119.    A meeting of the Board at which a quorum is present shall be competent to exercise all the powers, authorities and discretions for the time being vested in or exercisable by the Board.


#PageNum#


120.    (1)    The Board may delegate any of its powers, authorities and discretions to committees, consisting of such Director, officer, Directors or officers as it thinks fit, and they may, from time to time, revoke such delegation or revoke the appointment of and discharge any such committees either wholly or in part, and either as to persons or purposes. Any committee so formed shall, in the exercise of the powers, authorities and discretions so delegated, conform to any regulations which may be imposed on it by the Board.

(2)    All acts done by any such committee in conformity with such regulations, and in fulfilment of the purposes for which it was appointed, but not otherwise, shall have like force and effect as if done by the Board, and the Board shall have power, with the consent of the Company in general meeting, to remunerate the members of any such committee, and charge such remuneration to the current expenses of the Company.

121.    The meetings and proceedings of any committee consisting of two or more members shall be governed by the provisions contained in these Bye-laws for regulating the meetings and proceedings of the Board so far as the same are applicable and are not superseded by any regulations imposed by the Board under the last preceding Bye-law.

122.    A resolution in writing signed by all the Directors except such as are temporarily unable to act through ill-health or disability, and all the alternate Directors, if appropriate, whose appointors are temporarily unable to act as aforesaid shall (provided that such number is sufficient to constitute a quorum and further provided that a copy of such resolution has been given or the contents thereof communicated to all the Directors for the time being entitled to receive notices of Board meetings in the same manner as notices of meetings are required to be given by these Bye-laws) be as valid and effectual as if a resolution had been passed at a meeting of the Board duly convened and held. Such resolution may be contained in one document or in several documents in like form each signed by one or more of the Directors or alternate Directors and for this purpose a facsimile signature of a Director or an alternate Director shall be treated as valid.

123.    All acts bona fide done by the Board or by any committee or by any person acting as a Director or members of a committee, shall, notwithstanding that it is afterwards discovered that there was some defect in the appointment of any member or the Board or such committee or person acting as aforesaid or that they or any of them were disqualified or had vacated office, be as valid as if every such person had been duly appointed and was qualified and had continued to be a Director or member of such committee.

MANAGERS

124.    The Board may from time to time appoint a General Manager, a Manager or Managers of the Company and may fix his or their remuneration either by way of salary or commission or by conferring the right to participation in the profits of the Company or by a combination of two or more of these modes and pay the working expenses of any of the staff of the General Manager, Manager or Managers who may be employed by him or them upon the business of the Company.

125.    The appointment of such General Manager, Manager or Managers may be for such period as the Board may decide, and the Board may confer upon him or them all or any of the powers of the Board as they may think fit.

126.    The Board may enter into such agreement or agreements with any such General Manager, Manager or Managers upon such terms and conditions in all respects as the Board may in their absolute discretion think fit, including a power for such General Manager, Manager or Managers to appoint an Assistant Manager or Managers or other employees whatsoever under them for the purpose of carrying on the business of the Company.

OFFICERS

127.    (1)    The officers of the Company shall consist of the president, vice-president, and Secretary and such additional officers (who may or may not be Directors) as the Board may from time to time determine, all of whom shall be deemed to be officers for the purposes of the Act and these Bye-laws as well as solely for the purposes of the Act, the chairman, deputy chairman and Directors.

(2)    The Directors shall, as soon as may be after each appointment or election of Directors, elect amongst the Directors a president and a vice-president or a chairman and a deputy chairman; and if more than one (1) Director is proposed for either of these offices, the election to such office shall take place in such manner as the Directors may determine.

(3)    The officers shall receive such remuneration as the Directors may from time to time determine.

(4)    Where the Company does not have a quorum of Directors ordinarily resident in Bermuda, the Company shall in accordance with the Act appoint and maintain a resident representative ordinarily resident in Bermuda and the resident representative shall maintain an office in Bermuda and comply with the provisions of the Act.

The Company shall provide the resident representative with such documents and information as the resident representative may require in order to be able to comply with the provisions of the Act.

The resident representative shall be entitled to have notice of, attend and be heard at any Directors' meetings or general meeting of the Company.

128.    (1)    The Secretary and additional officers, if any, shall be appointed by the Board and shall hold office on such terms and for such period as the Board may determine. If thought fit, two (2) or more persons may be appointed as joint Secretaries. The Board may also appoint from time to time on such terms as it thinks fit one or more assistant or deputy Secretaries.

(2)    The Secretary shall attend all meetings of the Members and shall keep correct minutes of such meetings and enter the same in the proper books provided for the purpose. He shall perform such other duties as are prescribed by the Act or these Bye-laws or as may be prescribed by the Board.

129.    The President or the Chairman, as the case may be, shall act as chairman at all meetings of the Members and of the Directors at which he is present. In his absence a chairman shall be appointed or elected by those present at the meeting.



#PageNum#

130.    The officers of the Company shall have such powers and perform such duties in the management, business and affairs of the Company as may be delegated to them by the Directors from time to time. In addition, the President of the Company shall have the power and is expressly authorized to enter into any contract, deed or other agreement that obliges the Company to make payments (or provide services or goods) in an amount (or having a fair value) not exceeding US$250,000 or, of such obligations is contemplated by and within the limits established by an Annual Budget and Operating Plan approved by the Board, obligates the Company to make payments (or provide services or goods) in an amount (or having a fair value) not exceeding US$1,000,000.

131.    A provision of the Act or of these Bye-laws requiring or authorising a thing to be done by or to a Director and the Secretary shall not be satisfied by its being done by or to the same person acting both as Director and as or in place of the Secretary.

REGISTER OF DIRECTORS AND OFFICERS


132.    (1)    The Board shall cause to be kept in one or more books at its Office a Register of Directors and officers and shall enter therein the following particulars with respect to each Director and officer, that is to say:

(a)    his or her first name and surname; and

(b)    his or her address.

(2)    The Board shall within a period of fourteen (14) days from the occurrence of -

(a)    any change among its Directors and officers; or

(b)    any change in the particulars contained in the Register of Directors and officers,

cause to be entered on the Register of Directors and officers the particulars of such change and of the date on which it occurred.

(3)    The Register of Directors and officers shall be open to inspection by members of the public without charge at the Office between 10:00 a.m. and 12:00 noon on every business day.

(4)    In this Bye-law "officer" has the meaning ascribed to it in Section 92A(7) of the Act.

MINUTES


133.    The Board shall cause Minutes to be duly entered in books provided for the purpose:

(a)    of all elections and appointments of Directors and officers;

(b)    of the names of the Directors present at each meeting of the Directors and of any committee of the Directors;

(c)    of all resolutions and proceedings of each general meeting of the Members, meetings of the Board and meetings of committees of the Board.

SEAL

134.    (1)    The Company shall have one or more Seals, as the Board may determine. For the purpose of sealing documents creating or evidencing securities issued by the Company, the Company may have a securities seal which is a facsimile of the Seal of the Company with the addition of the words "Securities Seal" on its face or in such other form as the Board may approve. The Board shall provide for the custody of each Seal and no Seal shall be used without the authority of the Board or of a committee of the Board authorised by the Board in that behalf. Subject as otherwise provided in these Bye-laws, any instrument to which a Seal is affixed shall be signed autographically by one Director and the Secretary or by two Directors or by such other person (including a Director) or persons as the Board may appoint, either generally or in any particular case, save that as regards any certificates for shares or debentures or other securities of the Company the Board may by resolution determine that such signatures or either of them shall be dispensed with or affixed by some method or system of mechanical signature. Every instrument executed in manner provided by this Bye-law shall be deemed to be sealed and executed with the authority of the Board previously given.

(2)    Where the Company has a Seal for use abroad, the Board may by writing under the Seal appoint any agent or committee abroad to be the duly authorised agent of the Company for the purpose of affixing and using such Seal and the Board may impose restrictions on the use thereof as may be thought fit. Wherever in these Bye-laws reference is made to the Seal, the reference shall, when and so far as may be applicable, be deemed to include any such other Seal as aforesaid.

AUTHENTICATION OF DOCUMENTS


135.    Any Director or the Secretary or any person appointed by the Board for the purpose may authenticate any documents affecting the constitution of the Company and any resolution passed by the Company or the Board or any committee, and any books, records, documents and accounts relating to the business of the Company, and to certify copies thereof or extracts there from as true copies or extracts, and if any books, records, documents or accounts are elsewhere than at the Office or the head office the local manager or other officer of the Company having the custody thereof shall be deemed to be a person so appointed by the Board. A document purporting to be a copy of a resolution, or an extract from the minutes of a meeting, of the Company or of the Board or any committee which is so certified shall be conclusive evidence in favour of all persons dealing with the Company upon the faith thereof that such resolution has been duly passed or, as the case may be, that such minutes or extract is a true and accurate record of proceedings at a duly constituted meeting.




#PageNum#



DESTRUCTION OF DOCUMENTS

136.    The Company shall be entitled to destroy the following documents at the following times:

(a)    any share certificate which has been cancelled at any time after the expiry of one (1) year from the date of such cancellation;

(b)    any dividend mandate or any variation or cancellation thereof or any notification of change of name or address at any time after the expiry
of two (2) years from the date such mandate variation cancellation or notification was recorded by the Company;

(c)    any instrument of transfer of shares which has been registered at any time after the expiry of seven (7) years from the date of registration;

(d)    any allotment letters after the expiry of seven (7) years from the date of issue thereof; and

(e)    copies of powers of attorney, grants of probate and letters of administration at any time after the expiry of seven (7) years after the account to which the relevant power of attorney, grant of probate or letters of administration related has been closed;

and it shall conclusively be presumed in favour of the Company that every entry in the Register purporting to be made on the basis of any such documents so destroyed was duly and properly made and every share certificate so destroyed was a valid certificate duly and properly cancelled and that every instrument of transfer so destroyed was a valid and effective instrument duly and properly registered and that every other document destroyed hereunder was a valid and effective document in accordance with the recorded particulars thereof in the books or records of the Company. Provided always that: (1) the foregoing provisions of this Bye-law shall apply only to the destruction of a document in good faith and without express notice to the Company that the preservation of such document was relevant to a claim; (2) nothing contained in this Bye-law shall be construed as imposing upon the Company any liability in respect of the destruction of any such document earlier than as aforesaid or in any case where the conditions of proviso (1) above are not fulfilled; and (3) references in this Bye-law to the destruction of any document include references to its disposal in any manner.

DIVIDENDS AND OTHER PAYMENTS

137.    Subject to the Act, the Company in General Meeting may from time to time declare dividends in any currency to be paid to the Members but no dividend shall be declared in excess of the amount recommended by the Board. The Company in general meeting may also make a distribution to the Members out of any contributed surplus (as ascertained in accordance with the Act).

138.    No dividend shall be paid or distribution made out of contributed surplus if to do so would render the Company unable to pay its liabilities as they become due or the realisable value of its assets would thereby become less than the aggregate of its liabilities and its issued share capital and share premium accounts.

139.    Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provide:

(a)    all dividends shall be declared and paid according to the amounts paid up on the shares in respect of which the dividend is paid, but no
amount paid up on a share in advance of calls shall be treated for the purposes of this Bye-law as paid up on the share; and

(b)    all dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid.

140.    The Board may from time to time pay to the Members such interim dividends as appear to the Board to be justified by the profits of the Company and in particular (but without prejudice to the generality of the foregoing) if at any time the share capital of the Company is divided into different classes, the Board may pay such interim dividends in respect of those shares in the capital of the Company which confer on the holders thereof deferred or non-preferential rights as well as in respect of those shares which confer on the holders thereof preferential rights with regard to dividend and provided that the Board acts bona fide the Board shall not incur any responsibility to the holders of shares conferring any preference for any damage that they may suffer by reason of the payment of an interim dividend on any shares having deferred or non-preferential rights and may also pay any fixed dividend which is payable on any shares of the Company half-yearly or on any other dates, whenever such profits, in the opinion of the Board, justifies such payment.

141.    The Board may deduct from any dividend or other moneys payable to a Member by the Company on or in respect of any shares all sums of money (if any) presently payable by him to the Company on account of calls or otherwise.

142.    No dividend or other moneys payable by the Company on or in respect of any share shall bear interest against the Company.

143.    Any dividend, interest or other sum payable in cash to the holder of shares may be paid by cheque or warrant sent through the post addressed to the holder at his registered address or, in the case of joint holders, addressed to the holder whose name stands first in the Register in respect of the shares at his address as appearing in the Register or addressed to such person and at such address as the holder or joint holders may in writing direct. Every such cheque or warrant shall, unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on the Register in respect of such shares, and shall be sent at his or their risk and payment of the cheque or warrant by the bank on which it is drawn shall constitute a good discharge to the Company notwithstanding that it may subsequently appear that the same has been stolen or that any endorsement thereon has been forged. Any one of two or more joint holders may give effectual receipts for any dividends or other moneys payable or property distributable in respect of the shares held by such joint holders.

144.    All dividends or bonuses unclaimed for one (1) year after having been declared may be invested or otherwise made use of by the Board for the benefit of the Company until claimed. Any dividend or bonuses unclaimed after a period of six (6) years from the date of declaration shall be forfeited and shall revert to the Company. The payment by the Board of any unclaimed dividend or other sums payable on or in respect of a share into a separate account shall not constitute the Company a trustee in respect thereof.

145.    Whenever the Board or the Company in general meeting has resolved that a dividend be paid or declared, the Board may further resolve that such


#PageNum#

dividend be satisfied wholly or in part by the distribution of specific assets of any kind and in particular of paid up shares, debentures or warrants to subscribe securities of the Company or any other company, or in any one or more of such ways, and where any difficulty arises in regard to the distribution the Board may settle the same as it thinks expedient, and in particular may issue certificates in respect of fractions of shares, disregard fractional entitlements or round the same up or down, and may fix the value for distribution of such specific assets, or any part thereof, and may determine that cash payments shall be made to any members upon the footing of the value so fixed in order to adjust the rights of all parties, and may vest any such specific assets in trustees as may seem expedient to the Board and may appoint any person to sign any requisite instruments of transfer and other documents on behalf of the persons entitled to the dividend, and such appointment shall be effective and binding on the Members. The Board may resolve that no such assets shall be made available to Members with registered addresses in any particular territory or territories where, in the absence of a registration statement or other special formalities, such distribution of assets would or might, in the opinion of the Board, be unlawful or impracticable and in such event the only entitlement of the Members aforesaid shall be to receive cash payments as aforesaid. Members affected as a result of the foregoing sentence shall not be or be deemed to be a separate class of Members for any purpose whatsoever.

146.    Intentionally Deleted

RESERVES

147.    Before recommending any dividend, the Board may set aside out of the profits of the Company such sums as it determines as reserves which shall, at the discretion of the Board, be applicable for any purpose to which the profits of the Company may be properly applied and pending such application may, also at such discretion, either be employed in the business of the Company or be invested in such investments as the Board may from time to time think fit and so that it shall not be necessary to keep any investments constituting the reserve or reserves separate or distinct from any other investments of the Company. The Board may also without placing the same to reserve carry forward any profits which it may think prudent not to distribute.

CAPITALISATION

148    (1).    The Board may resolve to capitalise any part of the amount for the time being standing to the credit of any of the Company's share premium or other reserve accounts or to the credit of the profit and loss account or otherwise available for dividend or distribution by applying such sum in paying up unissued shares to be allotted as fully paid bonus shares pro rata to the Members.

(2)    The Board may resolve to capitalise any sum standing to the credit of a reserve account or sums otherwise available for dividend or distribution by applying such amounts in paying up in full partly paid shares of those Members who would have been entitled to such sums if they were distributed by way of dividend or distribution.

149.    The Board may settle, as it considers appropriate, any difficulty arising in regard to any distribution under the last preceding Bye-law and in particular may issue certificates in respect of fractions of shares or authorise any person to sell and transfer any fractions or may resolve that the distribution should be as nearly as may be practicable in the correct proportion but not exactly so or may ignore fractions altogether, and may determine that cash payments shall be made to any Members in order to adjust the rights of all parties, as may seem expedient to the Board. The Board may appoint any person to sign on behalf of the persons entitled to participate in the distribution any contract necessary or desirable for giving effect thereto and such appointment shall be effective and binding upon the Members.

SUBSCRIPTION RIGHTS RESERVE

150.    The following provisions shall have effect to the extent that they are not prohibited by and are in compliance with the Act:

(1)    If, so long as any of the rights attached to any warrants issued by the Company to subscribe for shares of the Company shall remain exercisable, the Company does any act or engages in any transaction which, as a result of any adjustments to the subscription price in accordance with the provisions of the conditions of the warrants, would reduce the subscription price to below the par value of a share, then the following provisions shall apply:

(a)    as from the date of such act or transaction the Company shall establish and thereafter (subject as provided in this Bye-law) maintain in accordance with the provisions of this Bye-law a reserve (the "Subscription Rights Reserve") the amount of which shall at no time be less than the sum which for the time being would be required to be capitalised and applied in paying up in full the nominal amount of the additional shares required to be issued and allotted credited as fully paid pursuant to sub- paragraph (c) below on the exercise in full of all the subscription rights outstanding and shall apply the Subscription Rights Reserve in paying up such additional shares in full as and when the same are allotted;

(b)    the Subscription Rights Reserve shall not be used for any purpose other than that specified above unless all other reserves of the Company (other than share premium account) have been extinguished and will then only be used to make good losses of the Company if and so far as is required by law;

(c)    upon the exercise of all or any of the subscription rights represented by any warrant, the relevant subscription rights shall be exercisable in respect of a nominal amount of shares equal to the amount in cash which the holder of such warrant is required to pay on exercise of the subscription rights represented thereby (or, as the case may be the relevant portion thereof in the event of a partial exercise of the subscription rights) and, in addition, there shall be allotted in respect of such subscription rights to the exercising warrant holder, credited as fully paid, such additional nominal amount of shares as is equal to the difference between:

(i)    the said amount in cash which the holder of such warrant is required to pay on exercise of the subscription rights represented thereby (or, as the case may be, the relevant portion thereof in the event of a partial exercise of the subscription rights); and

(ii)    the nominal amount of shares in respect of which such subscription rights would have been exercisable having regard to the provisions of the conditions of the warrants, had it been possible for such subscription rights to represent the right to subscribe for shares at less than par

and immediately upon such exercise so much of the sum standing to the credit of the Subscription Rights Reserve as is required to pay up in full such additional nominal amount of shares shall be capitalised and applied in paying up in full such additional nominal amount


#PageNum#

of shares which shall forthwith be allotted credited as fully paid to the exercising warrant holders; and

(d)    if, upon the exercise of the subscription rights represented by any warrant, the amount standing to the credit of the Subscription Rights Reserve is not sufficient to pay up in full such additional nominal amount of shares equal to such difference as aforesaid to which the exercising warrant holder is entitled, the Board shall apply any profits or reserves then or thereafter becoming available (including, to the extent permitted by law, share premium account) for such purpose until such additional nominal amount of shares is paid up and allotted as aforesaid and until then no dividend or other distribution shall be paid or made on the fully paid shares of the Company then in issue. Pending such payment and allotment, the exercising warrant holder shall be issued by the Company with a certificate evidencing his right to the allotment of such additional nominal amount of shares. The rights represented by any such certificate shall be in registered form and shall be transferable in whole or in part in units of one share in the like manner as the shares for the time being are transferable, and the Company shall make such arrangements in relation to the maintenance of a register therefor and other matters in relation thereto as the Board may think fit and adequate particulars thereof shall be made known to each relevant exercising warrant holder upon the issue of such certificate.

(2)    Shares allotted pursuant to the provisions of this Bye-law shall rank pari passu in all respects with the other shares allotted on the relevant exercise of the subscription rights represented by the warrant concerned. Notwithstanding anything contained in paragraph (1) of this Bye-law, no fraction of any share shall be allotted on exercise of the subscription rights.

(3)    The provision of this Bye-law as to the establishment and maintenance of the Subscription Rights Reserve shall not be altered or added to in any way which would vary or abrogate, or which would have the effect of varying or abrogating the provisions for the benefit of any warrant holder or class of warrant holders under this Bye-law without the sanction of a special resolution of such warrant holders or class of warrant holders.

(4)    A certificate or report by the auditors for the time being of the Company as to whether or not the Subscription Rights Reserve is required to be established and maintained and if so the amount thereof so required to be established and maintained, as to the purposes for which the Subscription Rights Reserve has been used, as to the extent to which it has been used to make good losses of the Company, as to the additional nominal amount of shares required to be allotted to exercising warrant holders credited as fully paid, and as to any other matter concerning the Subscription Rights Reserve shall (in the absence of manifest error) be conclusive and binding upon the Company and all warrant holders and shareholders.

ACCOUNTING RECORDS

151.    The Board shall cause true accounts to be kept of the sums of money received and expended by the Company, and the matters in respect of which such receipt and expenditure take place, and of the property, assets, credits and liabilities of the Company and of all other matters required by the Act or necessary to give a true and fair view of the Company's affairs and to explain its transactions.

152.    The accounting records shall be kept at the Office or, subject to the Act, at such other place or places as the Board decides and shall always be open to inspection by the Directors of the Company. No Member (other than a Director of the Company) shall have any right of inspecting any accounting record or book or document of the Company except as conferred by law or authorised by the Board or the Company in general meeting.

153.    Subject to Section 88 of the Act, a printed copy of the Directors' report, accompanied by the balance sheet and profit and loss account, including every document required by law to be annexed thereto, made up to the end of the applicable financial year and containing a summary of the assets and liabilities of the Company under convenient heads and a statement of income and expenditure, together with a copy of the Auditors' report, shall be sent to each person entitled thereto at least twenty-one (21) days before the date of the general meeting and laid before the Company in general meeting in accordance with the requirements of the Act provided that this Bye-law shall not require a copy of those documents to be sent to any person whose address the Company is not aware or to more than one of the joint holders of any shares or debentures.

AUDIT

154.    (1)    Subject to Section 88 of the Act, at the annual general meeting or at a subsequent special general meeting in each year, the Members shall appoint an auditor to audit the accounts of the Company and such auditor shall hold office until the Members appoint another auditor. Such auditor may be a Member but no Director or officer or employee of the Company shall, during his continuance in office, be eligible to act as an auditor of the Company.

(2)    Subject to Section 89 of the Act, a person, other than a retiring Auditor, shall not be capable of being appointed Auditor at an annual general meeting unless notice in writing of an intention to nominate that person to the office of Auditor has been given not less than fourteen (14) days before the annual general meeting and furthermore, the Company shall send a copy of any such notice to the retiring Auditor.

(3)    The Members may, at any general meeting convened and held in accordance with these Bye-laws, by special resolution remove the Auditor at any time before the expiration of his term of office and shall by ordinary resolution at that meeting appoint another Auditor in his stead for the remainder of his term.

155.    Subject to Section 88 of the Act the accounts of the Company shall be audited at least once in every year.

156.    The remuneration of the Auditor shall be fixed by the Company in general meeting or in such manner as the Members may determine.

157.    If the office of auditor becomes vacant by the resignation or death of the Auditor, or by his becoming incapable of acting by reason of illness, other disability or other circumstances at a time when his services are required, the Directors may fill the vacancy.

158.    The Auditor shall at all reasonable times have access to all books kept by the Company and to all accounts and vouchers relating thereto; and he may call on the Directors or officers of the Company for any information in their possession relating to the books or affairs of the Company.

159.    The statement of income and expenditure and the balance sheet provided for by these Bye-Laws shall be examined by the Auditor and compared by him with the books, accounts and vouchers relating thereto; and he shall make a written report thereon stating whether such statement and balance sheet are drawn up so as to present fairly the financial position of the Company and the results of its operations for the period under review and, in case information shall have been called for from Directors or officers of the Company, whether the same has been furnished and has been satisfactory. The financial statements of the Company


#PageNum#

shall be audited by the Auditor in accordance with generally accepted auditing standards. The Auditor shall make a written report thereon in accordance with generally accepted auditing standards and the report of the Auditor shall be submitted to the Members in general meeting. The generally accepted auditing standards referred to herein may be those of a country or jurisdiction other than Bermuda. If so, the financial statements and the report of the Auditor should disclose this fact and name such country or jurisdiction.


NOTICES


160.    (1)    Any Notice from the Company to a Member may be given:

(a)     by delivering it to such Member in person; or
(b)
by sending it by letter mail or courier to such Member's address in the Register of Members; or
(c)
if consented to by the Member to whom such notice is given, by transmitting it by electronic means (including facsimile and electronic mail, but not telephone) in accordance with such directions as may be given by such Member to the Company for such purpose; or
(d)
if consented to by the Member to whom such notice is given, by posting on an electronic network together with a separate notice to the Member of the specific posting; or
(e)
if consented to by the Member to whom such notice is given, by any other form of electronic transmission.

(2)    Any consent given by a Member with respect to a method of notice set forth in Bye-laws 160 (1)(c)-(e) above may be given by letter mail, courier, or any form of electronic transmission and shall be revocable by the Member by notice to the Company given by letter mail, courier, or any form of electronic transmission. Any such consent shall be deemed revoked if the Company is unable to deliver three consecutive notices in accordance with such consent or when such inability to deliver notice becomes known to the Company’s secretary or transfer agent or other person responsible for the giving of notice.
(3)     Any Notice from a Member to the Company may be given in accordance with such directions as may be given by the Company for such purpose on its website or otherwise.

161.    (1)    Any notice delivered in accordance with Bye-laws 160(1)(a) or 160(1)(b) shall be deemed to have been served at the time when the same would be delivered in the ordinary course of transmission and, in proving such service, it shall be sufficient to prove that the notice was properly addressed and prepaid, if posted, and the time when it was posted or delivered to the courier.

(2)    Any notice delivered in accordance with Bye-law 160(1)(c) shall be deemed to have been served when directed to a number or an electronic mail address at which the Member has consented to receive notice.

(3)    Any notice delivered in accordance with Bye-laws 160(1)(d) or 160(1)(e) shall be deemed to have been served upon the later of (i) the notification of the Member in accordance with such Bye-law; and (ii) the publication of the information or document on the electronic network.

162.    Any notice required to be given to a Member shall, with respect to any shares held jointly by two or more persons, be given to whichever of such persons is named first in the Register of Members and notice so given shall be sufficient notice to all the holders of such shares.


SIGNATURES

163.    For the purposes of these Bye-laws, a cable or telex or facsimile transmission message purporting to come from a holder of shares or, as the case may be, a Director or alternate Director, or, in the case of a corporation which is a holder of shares from a director or the secretary thereof or a duly appointed attorney or duly authorised representative thereof for it and on its behalf, shall in the absence of express evidence to the contrary available to the person relying thereon at the relevant time be deemed to be a document or instrument in writing signed by such holder or Director or alternate Director in the terms in which it is received.

WINDING UP

164.    (1)    The Board shall have power in the name and on behalf of the Company to present a petition to the court for the Company to be wound up.

(2)    A resolution that the Company be wound up by the court or be wound up voluntarily shall be a special resolution.

165.    If the Company shall be wound up (whether the liquidation is voluntary or by the court) the liquidator may, with the authority of a special resolution and any other sanction required by the Act, divide among the Members in specie or kind the whole or any part of the assets of the Company and whether or not the assets shall consist of properties of one kind or shall consist of properties to be divided as aforesaid of different kinds, and may for such purpose set such value as he deems fair upon any one or more class or classes of property and may determine how such division shall be carried out as between the Members or different classes of Members. The liquidator may, with the like authority, vest any part of the assets in trustees upon such trusts for the benefit of the Members as the liquidator with the like authority shall think fit, and the liquidation of the Company may be closed and the Company dissolved, but so that no contributory shall be compelled to accept any shares or other property in respect of which there is a liability.

INDEMNITY

166.    (1)    The Directors, Secretary and other officers (such term to include, for the purposes of this Bye-law 166 any person appointed to any committee by the Board) for the time being and each such person who is or was or had agreed to become a Director or officer of the Company and each such person who is or was serving or who had agreed to serve as an employee or agent of the Company or as a Director, officer, employee or agent of another company, corporation, partnership, joint venture, trust or other enterprise in which the Company is or was engaged acting in relation to any of the affairs of the Company and the liquidator or trustees (if any) for the time being acting in relation to any of the affairs of the Company and every one of them, and their heirs, executors and administrators, shall be indemnified and secured harmless out of the assets and profits of the Company from and against all actions, costs, charges, losses, damages and expenses


#PageNum#

which they or any of them, their heirs, executors or administrators, shall or may incur or sustain by or by reason of any act done, purported to be done, concurred in or omitted in or about the execution of their duty, or supposed duty, or in their respective offices or trusts, or on behalf of the Company or purportedly on behalf of the Company, and none of them shall be answerable for the acts, receipts, neglects or defaults of the others of them or for joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any moneys or effects belonging to the Company shall or may be lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to the Company shall be placed out on or invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts, or in relation thereto, PROVIDED THAT this indemnity shall not extend to any matter in respect of any fraud or dishonesty which may attach to any of said persons. Subject to the provisions of the Act and without limiting the generality or the effect of the foregoing, the Company may enter into one or more agreements with any person which provide for indemnification greater or different than that provided in this Bye-law.

(2)    Each Member agrees to waive and release any claim or right of action such Member might have, whether individually or by or in the right of the Company, against any Director or officer on account of any act done, purported to be done, concurred in or omitted in or about the execution of their duty, or supposed duty, or in their respective offices or trusts by such Director or officer, or the failure of such Director or officer to take any action in the performance of his duties with or for the Company, PROVIDED THAT such waiver shall not extend to any matter in respect of any fraud or dishonesty which may attach to such Director or officer.

(3)    The indemnity provided by Bye-law 166(1) above shall extend, as a matter of contract between each Member and each former Director and officer of the Company and their heirs, executors and administrators, to any act done, purported to be done, concurred in or omitted in or about the execution of their duty, or supposed duty, or in their respective offices or trusts by the former Directors and officers of the Company. The waiver of claims or right of action by each Member provided by Bye-law 166(2) above shall extend, as a matter of contract between each Member and each former Director and officer of the Company and their heirs, executors and administrators, to any act done, purported to be done, concurred in or omitted in or about the execution of their duty, or supposed duty, or in their respective offices or trusts by the former Directors and officers of the Company.

(4)    Any repeal or modification of this Bye-law 166 shall not adversely affect any right or protection existing under this Bye-law 166 immediately prior to such repeal or modification.

(5)    The Company may advance moneys to an individual who is indemnified pursuant to Bye-law 166(1) above for the costs, charges and expenses incurred by such individual in defending any civil or criminal proceedings against them, on condition that such individual shall repay the advance if any allegation of fraud or dishonesty is proved against them.

ALTERATION OF BYE-LAWS & AMENDMENT TO MEMORANDUM OF ASSOCIATION

167.    No Bye-Law shall be rescinded, altered or amended and no new Bye-Law shall be made until the same has been approved by a resolution of the Directors and confirmed by an ordinary resolution of the holders of Common Shares.

INFORMATION

168.    No Member shall be entitled to require discovery of or any information respecting any detail of the Company's trading or any matter which is or may be in the nature of a trade secret or secret process which may relate to the conduct of the business of the Company and which in the opinion of the Directors it will be inexpedient in the interests of the members of the Company to communicate to the public.

*****
***
*



#PageNum#


Exhibit 10.7
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
AMENDED AND RESTATED STOCK INCENTIVE PLAN
1.      Purpose
The purpose of the Amended and Restated Stock Incentive Plan (the "Plan") is to induce employees and directors who are not employees of Central European Media Enterprises Ltd. (the "Company"), or its affiliates and its present and future subsidiaries (each a "Subsidiary"), as defined in Section 424(f) of the United States Internal Revenue Code of 1986, as amended (the "Code") to retain their association with the Company and its Subsidiaries, to attract new employees and non-employee directors and to encourage such employees and non-employee directors to secure or increase on reasonable terms their stock ownership in the Company. The Board of Directors of the Company (the "Board") believes that the granting of stock or stock-based awards (the "Awards") under the Plan will promote continuity of management and increased incentive and personal interest in the welfare of the Company by those who are or may become primarily responsible for shaping and carrying out the long range plans of the Company and securing its continued growth and financial success. Awards granted hereunder are intended to be either (a) Options, (b) Restricted Stock, (c) Restricted Stock Units (as these terms are defined below), or (d) a combination thereof, as determined by the Committee (as defined in Section 5 hereof) at the time of the grant thereof.
2.      Adoption of the Plan
The Plan was originally adopted in 1995 as the Central European Media Enterprises Ltd. 1995 Stock Option Plan, amended several times thereafter, and amended and restated in 2005 and 2009. The Plan was further amended by resolution of the Board on April 19, 2012 and approved by a majority of the votes cast by the Company's shareholders at the Company's annual general meeting of shareholders June 13, 2012. Unless the Plan is terminated earlier by the Board as provided herein, no Award shall be granted after June 1, 2015.
3.      Common Shares Subject to Plan
7,500,000 of the authorized but unissued shares of the Class A Common Stock (the "Class A Common Shares") and 250,000 of the authorized but unissued shares of the Class B Common Stock (the "Class B Common Shares", together with the Class A Common Shares, the “Common Shares”), are hereby reserved for issue with respect to the Awards granted under the Plan; provided, however , that the aggregate number of Common Shares that may be issued under the Plan shall not exceed 7,500,000; provided further, however, that the number of Class A Common Shares reserved shall be reduced by the number of Class B Common Shares that are delivered with respect to Awards granted hereunder. To the extent that Common Shares covered by an Award are not delivered because the Award expires, is forfeited, cancelled or otherwise terminated, or are not delivered because the Common Shares are instead used to pay the Company for tax withholding obligations with respect to the Award pursuant to Section 18 hereof, such Common Shares shall be deemed not to have been delivered for purposes of determining the maximum number of Common Shares available under the Plan and shall be included in the amount of shares available for Awards and such shares may be subject to further grants of Awards.
4.      Administration
The Plan shall be administered by the Committee as provided in Section 5 hereof. Subject to the express provisions of the Plan, the Committee shall have complete authority, in its discretion, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of the respective Award agreements or certificates (which need not be identical), to determine the individuals (each a "Participant") to whom and the times and the prices (if any) at which Awards shall be granted, the period during which each Award shall be exercisable (if applicable) and the vesting schedule therefor (which may vary with each Participant and may be granted on a basis less favorable to the Participant than that provided in Section 11 hereof), the number of Class A Common Shares or of Class B Common Shares to be subject to each Award and to make all other determinations necessary or advisable for the administration of the Plan (including whether any Option shall be an incentive stock option or a non-qualified stock option); provided, however, that Awards of, or relating to, Class B Common Shares shall be granted only to persons eligible to be a holder of Class B Common Shares pursuant to the Company's Bye-laws; and provided further, however , that only the Board shall grant Awards to non-employee directors, other than Awards granted to non-employee directors pursuant to Section 24.B. hereof, and determine the terms thereof. In making such determinations, the Committee or the Board, as the case may be, may take into account the nature of the services rendered by the respective employees and non-employee directors, their present and potential contributions to the success of the Company or any Subsidiary and such other factors as the Committee or the Board in its discretion shall deem relevant. The Committee's or Board's determination on the matters referred to in this Section 4 shall be conclusive. Any dispute or disagreement which may arise under or as a result of or with respect to any Award shall be determined by the Committee, in its sole discretion, and any interpretations by the Committee of the terms of any Award shall be final, binding and conclusive.
5.      Committee
The Committee shall mean the Compensation Committee of the Company as constituted by the Board of Directors from time to time and acting in accordance with its duly adopted charter.
6.      Eligibility
An Award may be granted only to an employee of the Company or a Subsidiary. A non-employee director of the Company or a Subsidiary shall be eligible to receive an Award, but only as provided in Sections 4 and 24 hereof.
OPTIONS
7.      Awards of Options
A.
Options (each an “Option”) may be granted alone or in addition to other Awards granted under the Plan and may, in accordance with Section 7.B. hereof, be of two types: “incentive stock options” (within the meaning of Section 422 of the Code) and “non-qualified stock options”. Any Option

1


granted under the Plan shall be in such form as the Committee may from time to time approve.

B.
The Committee shall have the authority to grant any Participant incentive stock options, non-qualified stock options or both types of Options (in each case with or without other Awards). Incentive stock options may be granted only to employees of the Company and its Subsidiaries. To the extent that any Option is not designated as an incentive stock option or, even if so designated, does not qualify as an incentive stock option, it shall constitute a non-qualified stock option. Incentive stock options may be granted only within 10 years from the date the Plan is originally adopted, or the date the Plan is approved by the Company's shareholders, whichever is earlier.

C.
Options shall be evidenced by option agreements in a form approved by the Committee. An option agreement shall indicate on its face whether it is intended to be an agreement for an incentive stock option or a non-qualified stock option. The grant date of an Option shall be the date the Committee determines to be the grant date; provided, that the grant complies in all respects with the pricing requirements in Section 8.
D.
Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to incentive stock options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any incentive stock option under Section 422 of the Code.
8.      Option Exercise Prices
A.
The initial per share option price of an Option which is an incentive stock option shall be the price determined by the Committee, but not less than the fair market value of a Class A Common Share or Class B Common Share on the date of grant; provided, however, that, in the case of a Participant who owns, or is deemed to own, Common Shares representing more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company, determined pursuant to rules applicable to Section 422(b)(6) of the Code (a “Ten-Percent Holder”), at the time an Option which is an incentive stock option is granted to him, the initial per share option price shall not be less than 110% of the fair market value of a Class A Common Share or Class B Common Share on the date of grant.
B.
The initial per share option price of any Option which is a non-qualified stock option granted to an employee shall be the price determined by the Committee, but not less than the fair market value of a Class A Common Share or Class B Common Share on the date of grant. The Committee may provide that the option price per share will increase to reflect the cost of the capital or any other objective measure or may set the initial exercise price at an amount in excess of the fair market value at the time of grant. The per share option price of any Option granted to a non-employee director pursuant to Section 24.A. shall be determined in the same manner as the per share option price for options granted to employees, and the per share option price of an Option granted to a non-employee director pursuant to Section 24.B. shall be determined as provided in Section 24.B.
C.
For all purposes of the Plan, the fair market value of a Class A Common Share or a Class B Common Share on any date shall be equal to (i) if, on such day, the Class A Common Shares shall be traded on a national securities exchange, the closing sales price of a Class A Common Share as published by such national securities exchange or if there is no sale of the Class A Common Shares on such date, the average of the bid and asked price on such exchange at the close of trading on such date, or (ii) if the Class A Common Shares are not listed on a national securities exchange on such date, and are traded on a national securities market, the average of the bid and asked price in the over-the-counter market at the close of trading on such date, or (iii) if the provisions of clause (i) and clause (ii) shall not be applicable, such amount as shall be determined in good faith by the Board; provided, that the exercise price shall not be less than the par value of a share of Common Stock.
9.      Option Term
Participants shall be granted Options for such term as the Committee shall determine, not in excess of ten years from the date of the granting thereof; provided, however, that, in the case of an incentive stock option granted to a Ten-Percent Holder, the term with respect to such Option shall not be in excess of five years from the date of the granting thereof. The Committee may provide that the length of the term of an Option will vary with the length of the period over which the Option first becomes exercisable.
10.      Limitations on Amount of Incentive Stock Options Granted
The aggregate fair market value of the Class A Common Shares or the Class B Common Shares for which any Participant may be granted incentive stock options which are exercisable for the first time in any calendar year (whether under the terms of the Plan or any other stock option plan of the Company) shall not exceed $100,000; provided that such grant be made on or before August 2, 2005.
11.      Exercise of Options
A.
Each Option shall be exercisable and the total number of shares subject thereto shall be purchasable in installments, which need not be equal, as specified in the Option. Except as otherwise determined by the Committee, the first installment shall not become exercisable during the period commencing on the date of the granting of such Option and ending on the day next preceding the first anniversary of such date. An installment once exercisable shall remain exercisable until the Option expires or is terminated.
B.
Except as hereinbefore otherwise set forth, an Option may be exercised either in whole at any time or in part from time to time.
C.
An Option may be exercised only by a written notice of intent to exercise such Option with respect to a specific number of Class A Common Shares or Class B Common Shares and payment to the Company of the amount of the option price for the number of Class A Common Shares or the Class B Common Shares so specified; provided, however, that all or any portion of such payment may be made in kind by the delivery of Class A Common Shares or Class B Common Shares, as the case may be, having a fair market value equal to the portion of the option price so paid; provided, further, however, that, subject to the requirements of Regulation T (as in effect from time to time) promulgated under the United States Securities Exchange Act of 1934, as amended, the Committee may implement procedures to allow a broker chosen by a Participant to make payment of all of any portion of the option price payable upon the exercise of an Option and receive, on behalf of such Participant, all or any portion of the Class A Common Shares or Class B Common Shares issuable upon such exercise; provided, further, however, that any such exercise shall not violate Section 402 of the United

2


States Sarbanes-Oxley Act of 2002.
D.
Notwithstanding the terms of this Section 11, the Board may, in its discretion, permit any Option to be exercised, in whole or in part, prior to the time when it would otherwise be exercisable.
12.      Transferability
No Option shall be assignable or transferable except by will and/or by the laws of descent and distribution and, during the life of any Participant, each Option granted to him may be exercised only by him; provided, however that the Board or Committee may provide that a Participant may transfer a non-qualified stock option for no consideration to any Family Member of such Participant. For this purpose, “Family Member” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law of a Participant (including adoptive relationships); any person sharing the Participant's household (other than a tenant or employee); any trust in which the Participant and any of these persons have all of the beneficial interest; any trust or foundation in which the Participant and any of these persons control the management of the assets; any corporation, partnership, limited liability company or other entity in which the Participant and any of these other persons are the direct and beneficial owners of all of the equity interests (provided the Participant and these other persons agree in writing to remain the direct and beneficial owners of all such equity interests); and any personal representative of the Participant upon the Participant's death for purposes of administration of the Participant's estate or upon the Participant's incompetency for purposes of the protection and management of the assets of the Participant.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
13.      Restricted Stock and Restricted Stock Units
A.
The Committee may make (1) Awards of Class A Common Shares (without any intervening Options) (“Restricted Stock”) or (2) Awards of units valued in US dollars by reference to Class A Common Shares or otherwise based on Class A Common Shares (“Restricted Stock Units”), in each case with such vesting, restrictions, forfeiture provisions, performance requirements, contingencies and other terms as provided herein or as the Committee shall determine.

B.
The Committee shall have the authority to grant any Participant Restricted Stock or Restricted Stock Units or both Restricted Stock and Restricted Stock Units (in each case with or without other Awards). The grant date of Restricted Stock or Restricted Stock Units shall be the date the Committee determines.

14.      Time-Based Awards and Performance-Based Awards
A.
Awards under Section 13 may be issued to vest in one or more installments over the Participant's period of employment or other service to the Company (“Time-Based Awards”), or the Committee may make Awards that entitle the Participant to receive a specified number of vested Class A Common Shares (or the equivalent in cash at the discretion of the Committee) upon the attainment of one or more performance goals or service requirements established by the Committee (“Performance-Based Awards”).

B.
The vesting schedule for any Time-Based Awards and the term for performance for any Performance-Based Awards shall be set by the Committee at the time of grant and shall not exceed ten years (the “Restricted Period”). The Committee, in its discretion, may structure such vesting schedule or term for performance so that it constitutes a “substantial risk of forfeiture” within the meaning of Section 409A of the Code, such that an Award and payment thereunder can constitute a "short-term deferral" within the meaning of Section 409A of the Code, or the Committee may choose other terms and conditions for the Award such that the Award will not constitute a short-term deferral under Section 409A of the Code.

C.
The performance criteria shall be determined by the Committee, in its discretion, and shall be used as a basis for payment with respect to an Award. Such criteria may include, but not be limited to, (i) attainment of or growth in a specified level of earnings per share, (ii) Common Shares price appreciation, (iii) attainment of or growth in a specified level of net income or net operating income, (iv) operating income before depreciation and amortization, (v) revenues, (vi) audience or market share, (vii) cost reduction goals, (viii) return on equity, (ix) operating cash flow, (x) return on assets, (xi) the completion of certain corporate transactions or other strategic objectives, or (xii) a combination or variation of the foregoing, including total shareholder return.

D.
An Award under Section 13 may be issued in exchange for any consideration which the Committee may deem appropriate in each individual instance, including, without limitation:
(i)
cash or cash equivalents;
(ii)
services to be rendered to the Company or any Subsidiary (provided that, in such case, the par value of the stock subject to such Award shall be paid in cash or cash equivalents, unless the Committee provides otherwise).

E.
The Committee shall determine at the time of the grant of an Award of Restricted Stock Units whether the Award shall be paid in Class A Common Shares or in cash (based on the fair market value of such Restricted Stock Unit as determined by reference to the fair market value of a Class A Common Share on the date the Restricted Stock Unit has vested).

15.      Restrictions on Awards, Exercise
A.
Participants who receive Awards of Restricted Stock shall deliver to the Company a restricted stock agreement in a form approved by the Committee. Restricted Stock Units shall be evidenced by a restricted stock unit agreement in a form approved by the Committee. Such forms need not be identical for all Participants.

B.
Shares representing an Award of Restricted Stock shall be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance of one or more certificates (which may bear appropriate legends referring to the terms, conditions and restrictions applicable to such Award). Shares underlying an Award of Restricted Stock Units shall be evidenced in such manner as the Committee may deem appropriate.


3


C.
The Committee may require that any certificates in respect of an Award of Restricted Stock be held in custody by the Company until any restrictions thereon shall have lapsed and that the Participant deliver a share transfer form, endorsed in blank, relating to the Common Stock covered by such Award that will permit the transfer to the Company of any or all shares of Restricted Stock that shall be forfeited by means of repurchase in accordance with the corresponding restricted stock agreement or shall not become vested in accordance with the Plan.

D.
A Participant who receives an Award of Restricted Stock shall on receipt of such Award be a shareholder of the Company with respect to all shares of Restricted Stock and be entitled to vote such shares, to receive all cash dividends made in respect of such shares and to exercise all other rights in respect of such Restricted Stock except that during the Restricted Period:

(i)
for any certificates for which the Committee requires that the Company retain custody, a Participant will not be entitled to delivery of the stock certificate or other evidence of such Restricted Stock before the end of such Restricted Period and unless all other vesting requirements shall have been satisfied;

(ii)
other than cash dividends, the Company will not issue any such distributions (“Retained Distributions”) made or declared with respect to such Restricted Stock until such time as the shares of Restricted Stock in respect of which such Retained Distributions shall have been made or declared shall have become vested (and such Retained Distributions shall be subject to the same restrictions and other terms and conditions as are applicable to the shares of Restricted Stock underlying such Restricted Distributions);

(iii)
a Participant who receives an Award of Restricted Stock shall not sell, assign, exchange, transfer, pledge, charge, hypothecate or otherwise dispose of or encumber any of the shares of Restricted Stock before the end of the Restricted Period and unless all other vesting requirements have been satisfied; and

(iv)
any breach of any restrictions or other terms or conditions of such Award of any Restricted Stock or any Retained Distributions in respect thereof will result in such Restricted Stock or Retained Distributions being forfeited by means of repurchase in accordance with the corresponding restricted stock agreement.

E.
A Participant who receives an Award of Restricted Stock Units shall not be a shareholder on receipt of such Award and such a Participant shall not be considered an owner of any Common Shares by virtue of such Award. During the Restricted Period and until all vesting requirements have been satisfied, a Participant who receives Restricted Stock Units shall not sell, assign, exchange, transfer, pledge, charge hypothecate or otherwise dispose of or encumber any Restricted Stock Units; and any breach of any restrictions or other terms or conditions of such Award of any Restricted Stock Units will result in such Restricted Stock Units being forfeited.

F.
Each Restricted Stock Unit shall be exercised on such date as specified in the restricted stock agreement and the total number of shares subject thereto or cash consideration to be received in respect thereof shall be receivable in a fixed scheme of installments, which need not be equal, as specified in the restricted stock unit agreement. In addition, except as otherwise specified in the restricted stock agreement, the first installment shall not be exercised during the period commencing on the date of the granting of such Restricted Stock Unit and ending on the day preceding the first anniversary of such grant date.

GENERAL PROVISIONS
16.      Termination of Employment or Service
In the event a Participant leaves the employ of the Company and the Subsidiaries, or the services or the contract of a non-employee consultant to the Company or a Subsidiary previously granted Awards of Options hereunder is terminated or a Participant ceases to serve as a non-employee director (a "Termination"), such Award may thereafter be exercised only as hereinafter provided:
(a)
If Termination occurs by reason of (i) disability, (ii) death or (iii) retirement at or after age 65, each Option theretofore granted to him which shall not have theretofore expired or otherwise been cancelled shall become fully vested and shall, to the extent not theretofore exercised, terminate upon the earlier to occur of the expiration of one (1) year after the date of such Termination and the date of termination specified in such Options;
(b)
If Termination occurs by reason of (i) termination by the Company or a Subsidiary other than for Cause or (ii) the Participant's voluntary termination, each Option theretofore granted to him that is fully vested which shall not have theretofore expired or otherwise have been cancelled shall, to the extent not theretofore exercised, terminate upon the earlier to occur of the expiration of ninety (90) days after the date of Termination and the date of termination specified in such Award; and
(c)
If Termination occurs by reason of termination by the Company for Cause, each Option theretofore granted to him which shall not have theretofore expired or otherwise been cancelled shall immediately terminate.
Notwithstanding the foregoing, the Committee may amend the period following Termination during which an Option may be exercised.
In the event of a Termination of a Participant who has received an Award of Restricted Stock or Restricted Stock Units, the vesting and exercise of such Awards, as applicable, shall be governed by the corresponding agreement in respect of such Awards.
"Cause" shall mean (i) the commission by a Participant of any act or omission that would constitute a felony under United States federal, state or equivalent foreign law, or an indictable offense under Bermuda law, (ii) a Participant's gross negligence, recklessness, dishonesty, fraud, disclosure of trade secrets or confidential information, willful malfeasance or willful misconduct in the performance of services to the Company or its Subsidiaries, (iii) willful misrepresentation to shareholders or directors which is injurious to the Company; (iv) a willful failure without reasonable justification to comply with reasonable directions of a Participant's supervisor; or (v) a willful and material breach of a Participant's duties or obligations under any agreement with the Company or a Subsidiary.

4


17.      Adjustment of Number of Shares
A.
Changes in Capitalization . In the event there is any change with respect to the outstanding Class A Common Shares by reason of any share dividend, share split, recapitalization, reclassification, split up, combination of shares, any distribution to holders of Class A Common Shares other than cash dividends, or any reorganization, amalgamation, merger, consolidation or similar corporate transaction affecting the Common Shares (other than a transaction described in Section 17.B), then (i) the number and type of Common Shares or other rights or securities available for issuance under the Plan (including in Section 24.B or such other rights or securities issuable in the event the Company is not the surviving entity in such reorganization, amalgamation, merger or consolidation), (ii) the number, class or price per share of any outstanding Awards, or (iii) any other affected term of any Award, shall be equitably adjusted by the Committee.

B.
Change of Control . Notwithstanding any other provision of this Plan, in connection with a Change of Control Trigger Event (as defined below), all Awards shall become vested and immediately exercisable or all forfeiture or transfer restrictions shall lapse following such Change of Control Trigger Event unless the Committee (i) determines that on such Change of Control Trigger Event, each Award outstanding hereunder shall terminate within a specified number of days after notice to the holder and such holder shall receive fair value for such Award; or (ii) provides for the issuance of substitute Awards that will substantially preserve the otherwise applicable terms of any affected Awards previously granted under the Plan. The Committee shall not be obligated to take the same action in respect of each Award.

For purposes of the Plan, a “ Change of Control Trigger Event ” shall be deemed to have occurred upon:
(i)
the consummation of any amalgamation, consolidation or merger of the Company pursuant to which the shareholders of the Company immediately prior to the amalgamation, merger or consolidation do not constitute, immediately after the amalgamation, consolidation or merger, the beneficial owners (within the meaning of Rule 13d-3 under the U.S. Exchange Act of 1934, as amended) of 50% or more of the voting power of the then outstanding securities of the Company (or the surviving entity) generally entitled to vote in the election of directors;

(ii)
the occurrence of an event the result of which is that any “person” or “group” of related persons (as defined in Section 13(d) and 14(d)(2) of the U.S. Securities Exchange Act of 1934, as amended), becomes the beneficial owner, directly or indirectly, of securities representing more than 50% of the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (excluding such ownership by a Permitted Holder);

(iii)
a change in the composition of the Board in any two-year period, such that a majority of the members of the Board of Directors are not (a) persons who were directors at the beginning of such period or (b) persons who are elected, or nominated for election, to the Board of Directors by an affirmative vote of the majority of the such directors (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Board of Directors);

(iv)
the sale or other disposition (in one transaction or a series of transactions) of substantially all of the assets of the Company and its subsidiaries to an unaffiliated third party or the liquidation or dissolution of the Company; or

(v)
the termination of service (other than for Cause) of a Participant within twelve months of any of the foregoing having occurred;

provided, that for any Award that is subject to Section 409A of the Code, a Change of Control Trigger Event shall only be deemed to have occurred if such change constitutes a “change of control” within the meaning of Section 409A of the Code or as otherwise provided in an Award agreement.
For purposes of the Plan, “Permitted Holders” means (a) RSL Investments Corporation, RAJ Family Partners, L.P. and each beneficial owner of the Class B Common Shares of the Company held by RSL Investments Corporation and RAJ Family Partners L.P.; (b) family members of any beneficial owner described in clause (a) above; (c) trusts, the only beneficiaries of which are persons or entities described in clauses (a) and (b) above; (d) the partners, shareholders or members of any entity described in clause (a) above that is a partnership, corporation or limited liability company; and (e) partnerships, corporations, or limited liability companies which are controlled by the persons or entities described in clauses (a) or (b) above.

C.
No adjustment or substitution provided for in this Section 17 shall require the Company to sell or issue a fractional share under any agreement or certificate.

D.
This Section 17 shall apply, mutatis mutandis, with respect to Class B Common Shares.

18.      Purchase for Investment, Withholding and Waivers
Unless the shares to be issued in connection with an Award to a Participant shall be registered prior to the issuance thereof under the United States Securities Act of 1933, as amended, such Participant shall, as a condition of the Company's obligation to issue such shares, be required to give a representation in writing that he is acquiring such shares for his own account as an investment and not with a view to, or for sale in connection with, the distribution of any thereof. In the event of the death of a Participant, the delivery to the Company of tax waivers and other documents may be required by the Committee. In connection with any Award, a Participant will enter into such arrangements with the Company with respect to all federal, state, local and foreign withholding tax requirements as the Committee may determine or the Company may require. The Committee may, to the extent permitted by law, deduct any such withholding tax obligations from any payment of any kind otherwise due to the Participant with respect to an Award. In the event that such withholding tax obligations is made by deducting shares of Class A Common Shares or Class B Common Shares, such Common Shares shall be valued at the fair market value of the Class A Common Shares or the Class B Common Shares, as the case may be, on the applicable date and determined in accordance with Section 8.C. hereof, and shall not exceed in amount the minimum statutory tax withholding obligation.
19.      No Shareholder Status
Except as provided in Section 15.D., neither any Participant nor his legal representatives, heirs, executors or assigns shall be or be deemed to be the holder of any Class A Common Share or Class B Common Share covered by an Award unless and until a certificate for such share has been issued and delivered in accordance with the Plan. Upon payment of the purchase price thereof (if any), a share issued in connection with any Award shall be fully paid and non-assessable.

5


20.      No Restrictions on Corporate Acts
Neither the existence of the Plan nor any Award shall in any way affect the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any amalgamations, merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Class A Common Shares or Class B Common Shares or the rights thereof, or dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding whether of a similar character or otherwise.
21.      No Employment Right or Right to Continued Service
Neither the existence of the Plan nor the grant of any Award shall require the Company or any Subsidiary to continue any Participant in the employ of the Company or such Subsidiary, as a non-employee consultant to the Company or a Subsidiary or as a director of the Company.
22.      Amendment and Termination of the Plan
The Board may at any time terminate the Plan or make such modifications of the Plan as it shall deem advisable; provided, however, that the Board may not without further approval of the holders of a majority of the Common Shares voting as a single class as provided in the Company's Bye-Laws present in person or by proxy at any special or annual meeting of the shareholders, increase the number of shares as to which Awards may be granted under the Plan (as adjusted in accordance with the provisions of Section 17 hereof), or change the manner of determining the option prices, or extend the period during which an Award may be granted or exercised or otherwise amend the Plan in contravention of any applicable law, rules or regulations, including the rules of any national securities exchange or market on which the Common Shares of the Company may be listed.
Except as otherwise provided in Section 17 hereof, no termination or amendment of the Plan may, without the consent of the Participant to whom any Award shall theretofore have been granted, adversely affect the rights of such Participant under such Award.
23.      Expiration and Termination of the Plan
The Plan shall terminate on the business day preceding the tenth anniversary of June 2, 2005 or at such earlier time as the Board may determine. Awards may be granted under the Plan at any time and from time to time prior to its termination. Any Award outstanding under the Plan at the time of the termination of the Plan shall remain in effect until such Award shall have been exercised or shall have expired in accordance with its terms.
24.      Options for Non-employee Directors
A.
In addition to any Award granted pursuant to Section 4, a non-employee director shall be eligible to receive an annual Award. Except as otherwise provided in this Section 24, any Award granted to a non-employee director shall be subject to all of the terms and conditions of the Plan.

B. (1)
At each annual meeting of the Company, each non-employee director who shall have served as a non-employee director since the immediately preceding annual meeting and any other non-employee director as determined by a vote of a majority of the members of the Board (excluding any such other non-employee director) shall be granted an annual Award of non-qualified stock options, Restricted Stock or Restricted Stock Units (or any combination thereof). The Compensation Committee shall have discretion to determine the amount and the form of the Awards. The determination of the Compensation Committee shall be final.
(2)
The initial per share option price of each Option granted to a non-employee director pursuant to this Section 24.B. shall be equal to the fair market value of a Class A Common Share on the date the Option is granted, or 105% of the fair market value of a Class B Common Share on the date the Option is granted. Notwithstanding the preceding sentence, the Committee may provide that the Option price per share will increase to reflect the cost of capital or any other objective measure or may set the initial exercise price at an amount in excess of the fair market value at the time of grant.
(3)
The term of each Option granted to a non-employee director pursuant to this Section 24.B. shall be for such term as the Committee shall determine, not in excess of ten years from the date of the granting thereof. The Board shall determine by a majority vote the number of installments in which an Option granted pursuant to this Section 24 shall be exercisable; provided, that the first installment shall not become exercisable during the period commencing on the date of the granting of such Option and ending on the day immediately preceding the first anniversary of such date. An installment once exercisable shall remain exercisable until such Option expires or is terminated.
(4)
Subject to the provisions (including any applicable solvency test) of the Companies Act 1981, all or any portion of the payment required upon the exercise of an Option granted to a non-employee director may be made in kind by the delivery of Class A Common Shares or Class B Common Shares, as the case may be, having a fair market value on the date the Option is exercised equal to the portion of the option price so paid.
C.
The provisions of this Section 24 may not be amended except by the vote of a majority of the members of the Board and by the vote of a majority of the members of the Board who are non-employee directors.
25.      Section 409A
The Plan is intended to comply with, or otherwise be exempt from, Section 409A of the Code and any regulations and U.S. Treasury guidance promulgated thereunder. If the Company determines in good faith that any provision of the Plan would cause a Participant to incur an additional tax, penalty or interest under Section 409A of the Code, the Company and the Participant will use reasonable efforts to reform such provision, if possible, in a mutually agreeable fashion to maintain to the maximum extent practicable the original intent of the applicable provision without violating the provisions of Section 409A of the Code. Notwithstanding other provisions of the Plan or any Award agreement thereunder, no Award shall be granted, deferred, accelerated, extended, paid out or modified

6


under this Plan in a manner that would reasonably be expected to result in the imposition of an additional tax on a Participant under Section 409A of the Code without the consent of such Participant.

26.      Miscellaneous
A.
Nothing contained in the Plan shall prevent the Company or any Subsidiary from adopting other or additional compensation arrangements for its employees.

B.
Unless otherwise determined by the Committee, any withholding obligations may be settled with Common Shares, including Common Shares that are part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant. The Committee may establish such procedures as it deems appropriate for the settlement of withholding obligations with Common Shares.

C.
The Committee shall establish such procedures as it deems appropriate for a Participant to designate a beneficiary to whom any amounts payable in the event of the Participant's death are to be paid.

D.
Any amounts owed to the Company or a Subsidiary by the Participant of whatever nature may be offset by the Company from the value of any Common Shares, cash or other thing of value under this Plan or an agreement or certificate to be transferred to the Participant, and no Common Shares, cash or other thing of value under this Plan or an agreement or certificate shall be transferred unless and until all disputes between the Company and the Participant have been fully and finally resolved and the Participant has waived all claims against the Company or a Subsidiary in respect thereof.

E.
To the extent that the Committee determines that the restrictions imposed by the Plan preclude the achievement of the material purposes of the awards in jurisdictions outside the United States of America, the Committee may in its discretion modify those restrictions as it determines to be necessary or appropriate to conform to applicable requirements or practices of such jurisdictions.

F.
The headings contained in the Plan are for reference purposes only and shall not affect the meaning or interpretation of this Plan.

G.
If any provision of this Plan shall for any reason be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereby, and this Plan shall be construed as if such invalid or unenforceable provision were omitted.

H.
This Plan shall inure to the benefit of and be binding on each successor and assign of the Company. All obligations imposed on a Participant, and all rights granted to the Company hereunder, shall be binding on the Participant's heirs, legal representatives, successors and assigns.

I.
This Plan and each agreement or certificate granting an Award constitute the entire agreement with respect to the subject matter hereof and thereof; provided , that in the event of any inconsistency between this Plan and such agreement or certificate, the terms and conditions of the Plan shall prevail.

J.
None of the Company, any Subsidiary or the Committee shall have any duty or obligation to disclose affirmatively in any manner to a registered or beneficial holder of Common Shares or an Option or other Award, and such holder shall have no right to be advised of, any material non-public information regarding the Company or any Subsidiary at any time prior to, upon or in connection with, the receipt or exercise of an Option or other Award.

27.      Governing Law
The Plan and all Awards, agreements and actions hereunder shall be governed by the laws of Bermuda.
* * * * *



7


Exhibit 31.01
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
 
I, Adrian Sarbu, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Central European Media Enterprises Ltd.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
/s/ Adrian Sarbu
 
Adrian Sarbu
 
President and Chief Executive Officer
 
August 1, 2012

 





Exhibit 31.02
 
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
 
I, David Sach, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Central European Media Enterprises Ltd.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report), that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
/s/ David Sach
 
David Sach
 
Chief Financial Officer
 
August 1, 2012
 
 





Exhibit 32.01
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Central European Media Enterprises Ltd. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Adrian Sarbu, President and Chief Executive Officer of the Company, and David Sach, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2
the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company as of the dates and for the periods explained in the Report.

 
/s/  Adrian Sarbu
 
/s/  David Sach
 
 
Adrian Sarbu
 
David Sach
 
 
President and Chief Executive Officer
 
Chief Financial Officer
 
 
(Principal Executive Officer)
 
(Principal Financial Officer)
 
 
August 1, 2012
 
August 1, 2012