News Column

CENTRAL EUROPEAN MEDIA ENTERPRISES LTD - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 30, 2014

As used herein, 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 "2017 PIK Notes" refers to the 15.0% senior secured notes due 2017; the term "2015 Convertible Notes" refers to our 5.0% senior convertible notes due 2015; the term "Senior Debt" refers collectively to the 2015 Convertible Notes, 2016 Fixed Rate Notes, 2017 Fixed Rate Notes and the 2017 PIK Notes; the term "2017 Term Loan" refers to the 15.0% term loan due 2017; the term "2017 Revolving Credit Facility" refers to our senior secured floating rate revolving credit facility due 2017; the term "Framework Agreement" refers to the framework agreement dated February 28, 2014 among Time Warner, TW Investor and the Company, pursuant to which the Company conducted a rights offering (the "Rights Offering") and certain related financing transactions; the term "2014 Warrants" refers to the warrants issued under the Rights Offering and certain related financing transactions. The term "Time Warner" refers to Time Warner Inc. The term "TW Investor" refers to Time Warner Media Holdings B.V. The exchange rates used in this report are as at June 30, 2014, unless otherwise indicated. Contents I. Forward-looking Statements II. Overview



III. Analysis of the Results of Operations and Financial Position

IV. Liquidity and Capital Resources

V. Critical Accounting Policies and Estimates

I. Forward-looking Statements This report contains forward-looking statements, including those relating to our capital needs, business strategy, expectations and intentions. Statements that use the terms "believe", "anticipate", "trend", "expect", "plan", "estimate", "forecast", "should","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: our continuing significant liquidity constraints; the success of our efforts to increase our revenues and recapture advertising market share in the Czech Republic; decreases in television advertising spending and the rate of development of the advertising markets in the countries in which we operate; our ability to refinance our existing indebtedness; the effect of the global economic slowdown and Eurozone instability in our markets and the extent and timing of any recovery; our success in implementing our initiatives to diversify and enhance our revenue streams; the extent to which our debt service obligations restrict our business; our ability to make cost-effective investments in television broadcast operations, including investments in programming; our ability to develop and acquire necessary programming and attract audiences; changes in the political and regulatory environments where we operate and application of relevant laws and regulations; and the timely renewal of broadcasting licenses and our ability to obtain additional frequencies and licenses. 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. 36



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II. Overview Central European Media Enterprises Ltd. ("CME Ltd.") is a media and entertainment company operating mainly in six countries in Central and Eastern Europe. We manage our business on a geographical basis, with six operating segments: Bulgaria, Croatia, the Czech Republic, Romania, the Slovak Republic and Slovenia, which are also our reportable segments. These operating segments reflect how CME Ltd.'s operating performance is evaluated by our chief operating decision makers, who we have identified as our co-Chief Executive Officers; how our operations are managed by segment managers; and the structure of our internal financial reporting. We evaluate the performance of our segments based on Net Revenues and OIBDA. OIBDA, which includes amortization and impairment of program rights, is determined as operating income / loss before depreciation, amortization of intangible assets and impairments of assets and certain unusual or infrequent items that are not considered by our chief operating decision makers when evaluating our performance. 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. Free cash flow is defined as cash flows from continuing 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. OIBDA, as defined above, and free cash flow 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 19, "Segment Data". The following analysis contains references to like-for-like or constant currency percentage movements ("% Lfl"). 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 percentage movements ("% Act") (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 between the three and six months ended June 30, 2014 and 2013. Executive Summary Our financial results for the first six months of 2014 reflect continuing progress on management's top priorities: increasing and diversifying revenues, improving operating leverage, maintaining audience share leadership, and addressing our liquidity needs. Net revenues during the three and six months ended June 30, 2014 increased 17% and 16% compared to the same periods in 2013, respectively, primarily due to significant increases in both television advertising revenue and carriage fees and subscription revenues. The changes made to the sales policy for 2014 in the Czech Republic have resulted in a significant increase in the consumption of advertising on our channels in that country when compared to the same periods in 2013. Carriage fees and subscription revenues also increased significantly following the successful negotiation of contracts with major cable and satellite operators in Bulgaria toward the beginning of 2013 and in Romania in the second half of 2013. On a constant currency basis, OIBDA improved at a faster pace than net revenues due to our focus on improving the cost base of the Company. Costs charged in arriving at OIBDA during the first half of 2014 decreased 3% at constant rates compared to the same period in 2013, despite including US$ 8.3 million of restructuring charges incurred this year compared to US$ 4.7 million in the same period last year. Content costs declined 6% at constant rates during the second quarter of 2014 compared to 2013 as efficiencies in production and savings on costs associated with MTV Czech more than offset the additional content costs of US$ 3.1 million recognized during the second quarter of 2014 resulting from a prospective change in estimate regarding the amortization of produced program rights. This change in estimate will result in additional content costs for the full year 2014. However, we expect these additional costs to be largely offset by savings and anticipate content costs overall in 2014 will remain broadly in line with 2013 prior to that year's impairment charges. Costs charged in arriving at OIBDA during the second quarter exclude a one-off charge of US$ 6.9 million for a fine the competition agency in Slovenia is seeking to impose relating to operations there prior to 2012. The cost will not be considered by our chief operating decision makers when assessing the performance of the business. We intend to appeal the decision (see Item 1, Note 20, "Commitments and Contingencies"). We ended the quarter with US$ 87.8 million of cash. Our free cash flow in the six months ended June 30, 2014 was negative US$ 31.0 million, compared to free cash flow of negative US$ 51.8 million in the same period in 2013. Following the closing of the Rights Offering and related financing transactions during the second quarter of 2014, we have been making higher payments to suppliers of foreign programming in order to improve our payables position. This, together with cash paid for interest during the second quarter of 2014, reversed the positive free cash flow realized in the first quarter. We expect to continue reducing our programming liabilities during the remainder of 2014, utilizing the liquidity available to us under the 2017 Revolving Credit Facility as necessary. As a result, we expect free cash flow for the full year 2014 to be more negative than that of 2013. We expect the refinancing of the 2016 Fixed Rate Notes completed in the quarter will reduce cash interest costs by approximately US$ 25.5 million during 2014 because interest on the 2017 PIK Notes will be paid in-kind until November 15, 2015 and may be paid in-kind at our election thereafter. Following closing of the financing transactions, we believe we are positioned to be free cash flow positive beginning in 2015. We continue to make progress on the disposal of certain non-core assets, including our theatrical and home video distribution businesses, and we believe that the Company is better served by a focus on our core broadcast businesses in each country. We completed the divestiture of Bontonfilm during the three months ended June 30, 2014 for nominal consideration. Additionally, we now expect to complete the divestiture of the home video distribution business in Romania during the second half of 2014 and therefore the results of this business have been included as discontinued operations for the periods presented. We remain actively engaged in a process involving a number of interested parties to sell other non-core assets. We continue to expect a significant improvement in net revenues in the Czech Republic in 2014 when compared to 2013, but do not expect to reach 2012 levels this year as it will take more than one year for us to regain the market share lost during 2013. Given the significance of this segment to the Company, we expect a similar trend in the consolidated results. We do not anticipate the year-to-date rate of growth in television advertising revenue in the Czech Republic and carriage fees and subscription revenues in Romania will continue at these same levels for the full year 2014 because certain clients began advertising in the Czech Republic again during the second half of 2013, and similarly we began realizing the benefit of certain carriage agreements in Romania concluded in 2013 toward the end of last year. 37



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Market Information The following table sets out our estimates of the year-on-year changes in real GDP, real private consumption and the television advertising market, net of discounts, in our countries for the six months ended June 30, 2014: For the Six Months Ended June 30, 2014 Real Private Net TV Ad Consumption Market Country Real GDP Growth Growth Growth Bulgaria 1.7 % 2.0 % (6 )% Croatia (0.3 )% (0.4 )% 9 % Czech Republic 2.6 % 1.1 % 8 % Romania* 3.6 % 3.8 % 4 % Slovak Republic 2.3 % 1.9 % (5 )% Slovenia 0.6 % 0.0 % (7 )% Total CME Markets 2.3 % 1.8 % 2 % *Romanian market excludes Moldova. Source: CME estimates based on market consensus for real GDP and real private consumption, and internal estimates for TV ad market growth. After adjusting for inflation, we estimate that overall GDP growth in the countries in which we operate accelerated during the second quarter as the export driven economies in these countries benefited from improvements seen in the more developed countries of the European Union during the second half of 2013. Real private consumption is estimated to have increased overall during the six months ended June 30, 2014. Retail sales have improved most notably in the Czech Republic during 2014, but overall consumer spending has remained cautious. The market consensus for full year 2014 real GDP growth and real private consumption in our three largest markets has improved during the last three months, but we remain cautious given the level of uncertainty in the global economy and we believe a sustained improvement in these markets is necessary to provide an added benefit to our results. We estimate that the TV advertising markets in the countries in which we operate increased by 2% on average in the six months ended June 30, 2014 compared to the previous year. The most notable increase was in the Czech Republic where the market was estimated to have increased by 8% due in large part to an increase in the consumption of GRPs from our channels following the changes made to our sales policy in that country. These changes also had a positive impact on the consumption of television advertising in the Slovak Republic; however the television advertising market there is estimated to have decreased overall primarily due to lower average market prices. The magnitude of the increase in the advertising market in Croatia is not expected to persist for the duration of 2014. Romania continued to benefit from increased demand for advertising while Bulgaria and Slovenia remain very competitive resulting in pressure on prices. Segment Performance Our total Net Revenues and OIBDA by segment are as follows: NET REVENUES For the Three Months Ended June 30, (US$ 000's) Movement 2014 2013 % Act % Lfl Bulgaria $ 23,912$ 24,245 (1.4 )% (6.6 )% Croatia 19,470 17,796 9.4 % 4.3 % Czech Republic 59,299 42,733 38.8 % 40.0 % Romania 62,858 52,046 20.8 % 15.5 % Slovak Republic 24,211 22,000 10.1 % 4.2 % Slovenia 17,585 18,724 (6.1 )% (11.0 )% Intersegment revenues (2,465 ) (1,978 ) NM (1) NM (1) Total net revenues $ 204,870$ 175,566 16.7 % 12.6 % (1) Number is not meaningful. 38



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Index NET REVENUES For the Six Months Ended June 30, (US$ 000's) Movement 2014 2013 % Act % Lfl Bulgaria $ 43,188$ 40,669 6.2 % 1.1 % Croatia 32,967 29,889 10.3 % 5.8 % Czech Republic 98,332 74,811 31.4 % 33.7 % Romania 110,704 92,027 20.3 % 16.3 % Slovak Republic 42,357 38,923 8.8 % 3.8 % Slovenia 31,846 33,200 (4.1 )% (8.5 )% Intersegment revenues (3,287 ) (3,293 ) NM (1) NM (1) Total net revenues $ 356,107$ 306,226 16.3 % 13.1 %



(1) Number is not meaningful.

OIBDA For the Three Months Ended June 30, (US$ 000's) Movement 2014 2013 % Act % Lfl Bulgaria $ 5,634$ 3,931 43.3 % 35.4 % Croatia 4,858 4,176 16.3 % 10.7 % Czech Republic 20,700 933 NM (1) NM (1) Romania 12,580 8,085 55.6 % 48.9 % Slovak Republic 3,060 (556 ) NM (1) NM (1) Slovenia 2,690 4,235 (36.5 )% (39.9 )% Eliminations (102 ) 380 NM (1) NM (1) Total operating segments 49,420 21,184 133.3 % 120.1 % Corporate (7,841 ) (13,229 ) 40.7 % 41.5 % Consolidated OIBDA $ 41,579$ 7,955 NM (1) NM (1)



(1) Number is not meaningful.

OIBDA For the Six Months Ended June 30, (US$ 000's) Movement 2014 2013 % Act % Lfl Bulgaria $ 2,888$ 1,504 92.0 % 68.6 % Croatia 5,527 3,569 54.9 % 46.1 % Czech Republic 23,413 (5,950 ) NM (1) NM (1) Romania 18,002 9,179 96.1 % 86.2 % Slovak Republic (102 ) (4,124 ) 97.5 % 97.6 % Slovenia 3,205 6,072 (47.2 )% (50.1 )% Eliminations 276 400 NM (1) NM (1) Total operating segments 53,209 10,650 NM (1) NM (1) Corporate (13,942 ) (23,404 ) 40.4 % 40.8 % Consolidated OIBDA $ 39,267$ (12,754 ) NM (1) NM (1)



(1) Number is not meaningful.

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Index Bulgaria For the Three Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 17,329$ 18,951 (8.6 )% (13.5 )% Carriage fees and subscriptions 5,052 3,932 28.5 % 21.8 % Other 1,531 1,362 12.4 % 6.8 % Net revenues 23,912 24,245 (1.4 )% (6.6 )% Costs charged in arriving at OIBDA 18,278 20,314 (10.0 )% (14.8 )% OIBDA $ 5,634$ 3,931 43.3 % 35.4 % For the Six Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 30,045$ 31,279 (3.9 )% (8.6 )% Carriage fees and subscriptions 9,996 7,237 38.1 % 31.8 % Other 3,147 2,153 46.2 % 39.6 % Net revenues 43,188 40,669 6.2 % 1.1 % Costs charged in arriving at OIBDA 40,300 39,165 2.9 % (1.7 )% OIBDA $ 2,888$ 1,504 92.0 % 68.6 % The television advertising market in Bulgaria declined 6% in the six months ended June 30, 2014 compared to the same period in 2013. The Bulgaria segment reported net revenues of US$ 23.9 million and US$ 43.2 million for the three and six months ended June 30, 2014, respectively, compared to US$ 24.2 million and US$ 40.7 million in the same periods in 2013, a decrease of 1% and an increase of 6%, respectively, on an actual basis, or a decrease of 7% and an increase of 1% on a constant currency basis. The decrease in net revenues during the second quarter of 2014 was due to continued softness in the advertising market, as heavy competition has resulted in sustained downward pressure on prices, as well as lower advertising spending by telecom operators. This decrease in television advertising revenues during the three months ended June 30, 2014 was only partially offset by an increase in carriage fees from agreements with cable, satellite and IPTV operators that were concluded during 2013. Net revenues for the six months ended June 30, 2014 increased when compared to the same period in 2013 because an increase in carriage fees as well as an increase in other revenues, due primarily to higher theatrical distribution revenue, more than offset the decrease in television advertising revenues. Costs charged in arriving at OIBDA for the three and six months ended June 30, 2014 decreased by 10% and increased by 3%, respectively, compared to the same periods in 2013. On a constant currency basis, costs decreased by 15% during the second quarter of 2014 due to lower transmission costs following the transition from analogue to digital as well as operating fewer channels. Costs decreased by 2% on a constant currency basis during the first half of 2014 due primarily to a decrease in operating and content costs, which more than offset restructuring charges of US$ 3.4 million. Our Bulgaria segment reported OIBDA of US$ 5.6 million and US$ 2.9 million for the three and six months ended June 30, 2014, respectively, compared to US$ 3.9 million and US$ 1.5 million in the same periods in 2013, an increase of US$ 1.7 million and US$ 1.4 million. 40



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Index Croatia For the Three Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 17,977$ 15,569 15.5 % 10.0 % Carriage fees and subscriptions 520 420 23.8 % 18.2 % Other 973 1,807 (46.2 )% (48.7 )% Net revenues 19,470 17,796 9.4 % 4.3 % Costs charged in arriving at OIBDA 14,612 13,620 7.3 % 2.3 % OIBDA $ 4,858$ 4,176 16.3 % 10.7 % For the Six Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 29,973$ 25,977 15.4 % 10.6 % Carriage fees and subscriptions 1,008 866 16.4 % 12.1 % Other 1,986 3,046 (34.8 )% (37.4 )% Net revenues 32,967 29,889 10.3 % 5.8 % Costs charged in arriving at OIBDA 27,440 26,320 4.3 % 0.2 % OIBDA $ 5,527$ 3,569 54.9 % 46.1 % The television advertising market in Croatia increased 9% in the six months ended June 30, 2014 compared to the same period in 2013. The Croatia segment reported net revenues of US$ 19.5 million and US$ 33.0 million for the three and six months ended June 30, 2014, respectively, compared to US$ 17.8 million and US$ 29.9 million in the same periods in 2013, increases of 9% and 10% on an actual basis, or 4% and 6% on a constant currency basis. This primarily reflected an increase in television advertising revenues resulting from an increase in our advertising prices coupled with an increase in the volume of GRPs sold during the first half of 2014 compared to 2013. We do not anticipate the rate of growth in television advertising revenues during the first half of 2014 will continue for the full year because we have not seen a corresponding increase in the level of annual commitments for advertising spending compared to last year. The decrease in other revenues during the first half of 2014 compared to 2013 was due primarily to a decrease in the sale of original programming during the second quarter. Costs charged in arriving at OIBDA for the three and six months ended June 30, 2014 increased by 7% and 4%, respectively, compared to the same periods in 2013. On a constant currency basis costs increased by 2% during the second quarter due to an increase in staff related costs, which offset a decrease in content costs during the first quarter so costs were broadly flat during the first half of 2014. Our Croatia segment generated OIBDA of US$ 4.9 million and US$ 5.5 million for the three and six months ended June 30, 2014, respectively, compared to US$ 4.2 million and US$ 3.6 million in the same periods in 2013, an increase of US$ 0.7 million and US$ 1.9 million. 41



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Index Czech Republic For the Three Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 53,997$ 37,293 44.8 % 46.1 % Carriage fees and subscriptions 2,009 2,741 (26.7 )% (26.0 )% Other 3,293 2,699 22.0 % 22.8 % Net revenues 59,299 42,733 38.8 % 40.0 % Costs charged in arriving at OIBDA 38,599 41,800 (7.7 )% (6.8 )% OIBDA $ 20,700$ 933 NM (1) NM (1) (1) Number is not meaningful For the Six Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 88,500$ 64,317 37.6 % 39.8 % Carriage fees and subscriptions 4,208 5,649 (25.5 )% (23.8 )% Other 5,624 4,845 16.1 % 18.2 % Net revenues 98,332 74,811 31.4 % 33.7 % Costs charged in arriving at OIBDA 74,919 80,761 (7.2 )% (5.3 )% OIBDA $ 23,413$ (5,950 ) NM (1) NM (1) (1) Number is not meaningful. Following the changes made to the sales policy for 2014 in the Czech Republic, the consumption of the volume of advertising on our channels increased significantly in the first half of 2014 compared to the same period in 2013. Since the increase in our GRPs consumed is estimated to have outpaced the decline in competitor's GRPs consumed, the television advertising market in the Czech Republic is estimated to have increased by 8% in the six months ended June 30, 2014 compared to the prior year. Net revenues from our Czech Republic segment amounted to US$ 59.3 million and US$ 98.3 million for the three and six months ended June 30, 2014, respectively, compared to US$ 42.7 million and US$ 74.8 million in the same periods in 2013, increases of 39% and 31% on an actual basis. On a constant currency basis, net revenues increased 40% and 34% due primarily to the increase in television advertising revenues. The rate of decline of our television advertising revenues during 2013, when compared to 2012, began to reverse during the third quarter of 2013 and therefore we do not expect the trend of the first half of 2014 to be representative of the expected results for the full year. Carriage fees and subscription revenues decreased during the first half of 2014 because we stopped transmitting MTV Czech at the end of 2013. Nova Sport is no longer carried by one cable operator in the Czech Republic, which also impacted the results of the second quarter of 2014. The results for Bontonfilm are not included in segment performance and are presented as discontinued operations for all periods. Costs charged in arriving at OIBDA for the three and six months ended June 30, 2014 decreased by 8% and 7% compared to the same periods in 2013. On a constant currency basis costs decreased 7% and 5%, primarily reflecting lower content and transmission costs, including cost savings from our discontinuing the transmission of MTV Czech. Our Czech Republic segment reported OIBDA of US$ 20.7 million and US$ 23.4 million for the three and six months ended June 30, 2014, respectively, compared to OIBDA of US$ 0.9 million and an OIBDA loss of US$ 6.0 million in the same periods in 2013, an increase of US$ 19.8 million and US$ 29.4 million. 42



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Index Romania For the Three Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 34,667$ 31,898 8.7 % 4.0 % Carriage fees and subscriptions 12,341 5,316 132.1 % 122.0 % Other 15,850 14,832 6.9 % 2.1 % Net revenues 62,858 52,046 20.8 % 15.5 % Costs charged in arriving at OIBDA 50,278 43,961 14.4 % 9.4 % OIBDA $ 12,580$ 8,085 55.6 % 48.9 % (1) Number is not meaningful For the Six Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 59,103$ 56,216 5.1 % 1.6 % Carriage fees and subscriptions 23,083 10,409 121.8 % 115.2 % Other 28,518 25,402 12.3 % 8.6 % Net revenues 110,704 92,027 20.3 % 16.3 % Costs charged in arriving at OIBDA 92,702 82,848 11.9 % 8.4 % OIBDA $ 18,002$ 9,179 96.1 % 86.2 % (1) Number is not meaningful. The television advertising market in Romania increased 4% in the six months ended June 30, 2014 compared to the same period in 2013. The Romania segment reported net revenues of US$ 62.9 million and US$ 110.7 million for the three and six months ended June 30, 2014, respectively, compared to US$ 52.0 million and US$ 92.0 million in the same periods in 2013, increases of 21% and 20% on an actual basis, or 16% and 16% on a constant currency basis. Net revenues benefited primarily from an increase in carriage fees and subscription revenues following the successful negotiation of contracts with all major cable and satellite operators in Romania during 2013. We expect to continue to benefit from strong year-on-year growth in carriage fees in Romania; however, we do not expect the trend of the first half of 2014 to be representative of the expected results for the full year because we began realizing the benefit of certain agreements concluded in 2013 during the second half of last year. The increase in television advertising revenues during the second quarter of 2014 at constant rates was in-line with the growth in the television ad market. The increase in other revenues during the first half of 2014 was due primarily to the strong performance of titles distributed to theaters during the first quarter of 2014. The results for our home video distribution businesses are not included in segment performance and are presented as discontinued operations for all periods. Costs charged in arriving at OIBDA for the three and six months ended June 30, 2014 increased by 14% and 12% compared to the same periods in 2013. On a constant currency basis costs increased 9% and 8%, primarily as a result of restructuring charges and an increase in content costs due to the change in estimate regarding the amortization of produced program rights. Our Romania segment generated OIBDA of US$ 12.6 million and US$ 18.0 million for the three and six months ended June 30, 2014, respectively, compared to OIBDA of US$ 8.1 million and US$ 9.2 million in the same periods in 2013, an increase of US$ 4.5 million and US$ 8.8 million. 43



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Index Slovak Republic For the Three Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 22,391$ 20,726 8.0 % 2.3 % Carriage fees and subscriptions 268 269 (0.4 )% (5.3 )% Other 1,552 1,005 54.4 % 46.1 % Net revenues 24,211 22,000 10.1 % 4.2 % Costs charged in arriving at OIBDA 21,151 22,556 (6.2 )% (11.2 )% OIBDA $ 3,060$ (556 ) NM (1) NM (1) For the Six Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 39,667$ 36,626 8.3 % 3.3 % Carriage fees and subscriptions 543 518 4.8 % 0.2 % Other 2,147 1,779 20.7 % 15.1 % Net revenues 42,357 38,923 8.8 % 3.8 % Costs charged in arriving at OIBDA 42,459 43,047 (1.4 )% (5.8 )% OIBDA $ (102 )$ (4,124 ) 97.5 % 97.6 % The television advertising market in the Slovak Republic declined 5% in the six months ended June 30, 2014 compared to the same period in 2013. The television advertising market in the Slovak Republic remains extremely competitive, causing average market prices to decrease. Our Slovak Republic operations reported net revenues of US$ 24.2 million and US$ 42.4 million for the three and six months ended June 30, 2014, respectively, compared to US$ 22.0 million and US$ 38.9 million in the same periods in 2013, increases of 10% and 9% on an actual basis, or 4% and 4% on a constant currency basis. Despite the decrease in average market prices, our television advertising revenues increased during the second quarter and first half of 2014 due to an increase in consumption of advertising on our channels. Costs charged in arriving at OIBDA for the three and six months ended June 30, 2014 decreased by 6% and 1%, respectively, compared to the same periods in 2013. On a constant currency basis costs decreased by 11% and 6% reflecting lower content costs, including the closure of a channel at the end of 2013. Our Slovak Republic segment reported OIBDA of US$ 3.1 million and an OIBDA loss of US$ 0.1 million for the three and six months ended June 30, 2014, respectively, compared to an OIBDA loss of US$ 0.6 million and US$ 4.1 million in the same period in 2013, an increase of US$ 3.7 million and US$ 4.0 million. 44



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Index Slovenia For the Three Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 15,251$ 16,326 (6.6 )% (11.5 )% Carriage fees and subscriptions 905 967 (6.4 )% (11.4 )% Other 1,429 1,431 (0.1 )% (5.3 )% Net revenues 17,585 18,724 (6.1 )% (11.0 )% Costs charged in arriving at OIBDA 14,895 14,489 2.8 % (2.6 )% OIBDA $ 2,690$ 4,235 (36.5 )% (39.9 )% For the Six Months Ended June 30, Movement 2014 2013 % Act % Lfl Television advertising $ 27,712$ 28,731 (3.5 )% (8.1 )% Carriage fees and subscriptions 2,083 2,012 3.5 % (1.0 )% Other 2,051 2,457 (16.5 )% (20.3 )% Net revenues 31,846 33,200 (4.1 )% (8.5 )% Costs charged in arriving at OIBDA 28,641 27,128 5.6 % 0.8 % OIBDA $ 3,205$ 6,072 (47.2 )% (50.1 )% The television advertising market in Slovenia declined 7% in the six months ended June 30, 2014 compared to the same period in 2013. Our Slovenia segment reported net revenues of US$ 17.6 million and US$ 31.8 million for the three and six months ended June 30, 2014, respectively, compared to US$ 18.7 million and US$ 33.2 million in the same periods in 2013, decreases of 6% and 4% on an actual basis, or decreases of 11% and 9% on a constant currency basis, reflecting a decline in television advertising revenues in the first half of 2014 in line with the decline in television advertising market during the same period. Costs charged in arriving at OIBDA for the three and six months ended June 30, 2014 increased by 3% and 6% compared to the same periods in 2013. On a constant currency basis costs decreased 3% during the second quarter due to savings on rent, but increased 1% during the first half of 2014 as these savings were offset by an increase in transmission costs and author's rights in the first quarter. Costs charged in arriving at OIBDA during the second quarter exclude a one-off charge of US$ 6.9 million for a fine the competition agency in Slovenia is seeking to impose relating to operations there prior to 2012. The cost will not be considered by our chief operating decision makers when assessing the performance of the business. We intend to appeal the decision (see Item 1, Note 20, "Commitments and Contingencies"). Our Slovenia segment generated OIBDA of US$ 2.7 million and US$ 3.2 million for the three and six months ended June 30, 2014, respectively, compared to OIBDA of US$ 4.2 million and US$ 6.1 million in the same periods in 2013, a decrease of US$ 1.5 million and US$ 2.9 million. Free Cash Flow For the Six Months Ended June 30, (US$ 000's) 2014 2013 Movement Net cash used in continuing operating activities $ (16,916 )$ (37,250 ) 54.6 % Capital expenditures, net (14,054 ) (14,544 ) 3.4 % Free cash flow $ (30,970 )$ (51,794 ) 40.2 % June 30, 2014 December 31, 2013



Movement

Cash and cash equivalents $ 87,824 $ 103,624



(15.2 )%

Our free cash flow in the six months ended June 30, 2014 was negative US$ 31.0 million, compared to free cash flow of negative US$ 51.8 million in the same period in 2013. Following the closing of the Rights Offering and related financing transactions during the second quarter of 2014, we have been making higher payments to suppliers of foreign programming in order to improve our payables position. This, together with cash paid for interest during the second quarter of 2014, reversed the positive free cash flow realized in the first quarter. We expect to continue reducing our programming liabilities during the remainder of 2014, utilizing the liquidity available to us under the 2017 Revolving Credit Facility as necessary. As a result, we expect free cash flow for the full year 2014 to be more negative than that of 2013. 45



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III. Analysis of the Results of Operations and Financial Position

For the Three Months Ended June 30, (US$ 000's) Movement 2014 2013 % Act % Lfl Revenue: Television advertising $ 161,612$ 140,763 14.8 % 10.9 % Carriage fees and subscriptions 21,095 13,645 54.6 % 48.9 % Other revenue 22,163 21,158 4.7 % 0.4 % Net Revenues 204,870 175,566 16.7 % 12.6 % Operating expenses: Content costs 93,913 96,736 (2.9 )% (6.2 )% Other operating costs 29,668 32,016 (7.3 )% (10.6 )% Depreciation of property, plant and equipment 8,877 8,902 (0.3 )% (3.5 )% Amortization of broadcast licenses and other intangibles 3,231 3,649 (11.5 )% (12.5 )% Cost of revenues 135,689 141,303 (4.0 )% (7.2 )% Selling, general and administrative expenses 43,688 34,161 27.9 % 24.7 % Restructuring costs 2,920 4,698 (37.8 )% (37.3 )% Operating income / (loss) $ 22,573$ (4,596 ) NM (1) NM (1)



(1) Number is not meaningful.

For the Six Months Ended June 30, (US$ 000's) Movement 2014 2013 % Act % Lfl Revenue: Television advertising $ 275,000$ 243,146 13.1 % 10.0 % Carriage fees and subscriptions 40,921 26,691 53.3 % 49.4 % Other revenue 40,186 36,389 10.4 % 7.1 % Net Revenues 356,107 306,226 16.3 % 13.1 % Operating expenses: Content costs 182,853 185,910 (1.6 )% (4.0 )% Other operating costs 56,770 61,793 (8.1 )% (10.3 )% Depreciation of property, plant and equipment 17,595 19,073 (7.7 )% (9.8 )% Amortization of broadcast licenses and other intangibles 6,511 7,627 (14.6 )% (14.6 )% Cost of revenues 263,729 274,403 (3.9 )% (6.1 )% Selling, general and administrative expenses 75,829 66,579 13.9 % 12.4 % Restructuring costs 8,286 4,698 76.4 % 78.0 % Operating income / (loss) $ 8,263$ (39,454 ) NM (1) NM (1) (1) Number is not meaningful. Television advertising revenues: On a constant currency basis, television advertising spending in our markets improved in the aggregate by 2% in the six months ended June 30, 2014, positively impacting our television advertising revenues, particularly in the Czech Republic following changes made to the sales policy for 2014. See "Segment Performance" above for additional information on television advertising revenues. Carriage fees and subscriptions: Carriage fees and subscriptions revenue increased by 49% on a constant currency basis during the three and six months ended June 30, 2014, respectively, as compared to the same periods in 2013, primarily as a result of successful negotiations in Bulgaria and Romania to increase carriage fees. See "Segment Performance" above for additional information on carriage fees and subscription revenues. Other revenues: Other revenues include primarily internet advertising and distribution revenues. On a constant currency basis, other revenues were broadly flat for the three months ended June 30, 2014 but increased 7% during the six months ended June 30, 2014 as compared to the same periods in the prior year, primarily due to the strong performance of titles distributed to theaters during the first quarter of 2014. 46



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Cost of revenues: Our total cost of revenues decreased by 4%, during the three and six months ended June 30, 2014, compared to the same periods in 2013. On a constant currency basis, our total cost of revenues decreased by 7% and 6% for the three and six months ended June 30, 2014, respectively, compared to the same period in 2013. This decrease reflects savings in operating costs as a result of our prior period cost optimization programs and restructuring efforts as well as decreased depreciation expense due to lower capital expenditures in recent years and lower amortization expense as a result of impairments recorded in the fourth quarter of 2013. Content costs: Content costs (including production costs; and amortization and impairment of programming rights) decreased by US$ 2.8 million and US$ 3.1 million during the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. On a constant currency basis, the decreases of 6% and 4% primarily reflect cost savings related to foreign acquired programs and restructuring efforts on local productions, which were partially offset by increased amortization of programming rights of US$ 3.1 million and US$ 5.8 million, respectively, due to the change in estimate of the relative value generated by each run of a program. Other operating costs: Other operating costs (excluding content costs, depreciation of property, plant and equipment, amortization of broadcast licenses and other intangibles as well as selling, general and administrative expenses) decreased by US$ 2.3 million, or 7%, and US$ 5.0 million, or 8% during the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. On a constant currency basis, costs decreased by 11% and 10% during the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013, primarily due to lower costs following the execution of cost optimization programs and restructuring efforts implemented subsequent to June 30, 2013. Depreciation of property, plant and equipment: On a constant currency basis, total depreciation of property, plant and equipment for the three and six months ended June 30, 2014 decreased by 4% and 10%, respectively, compared to the same period in 2013 reflecting a decrease in capital expenditures in recent years. Amortization of broadcast licenses and other intangibles: Total amortization of broadcast licenses and other intangibles decreased US$ 0.4 million and US$ 1.1 million during the three and six months ended June 30, 2014, or 12% and 15%, respectively, compared to the same periods in 2013. On a constant currency basis, the decreases of 13% and 15% reflect a decrease in amortization of broadcast licenses and customer relationship intangible assets following the impairments recorded in the fourth quarter of 2013. Selling, general and administrative expenses: Selling, general and administrative expenses increased by US$ 9.5 million and US$ 9.3 million during the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. The increase is primarily due to a fine the competition agency in Slovenia is seeking to impose, which was accrued in the second quarter of 2014 (see Item 1, Note 20, "Commitments and Contingencies"). Central costs decreased by US$ 1.8 million and US$ 5.9 million, or 19.0% and 29.8% during the three and six months ended June 30, 2014 compared to the same periods in 2013, reflecting savings due to lower headcount as a result of our restructuring efforts in the prior year. Central costs for the three and six months ended June 30, 2014 also include charges of US$ 0.3 million, in respect of non-cash stock-based compensation, a decrease of US$ 0.7 million as compared to 2013 (see Item 1, Note 17, "Stock-based Compensation"). Restructuring costs: Restructuring costs totaled US$ 2.9 million and US$ 8.3 million during the three and six months ended June 30, 2014, respectively, as we continue to streamline resources and operate with a more efficient cost base, specifically in our segment operations. We currently expect to incur total restructuring costs of approximately US$ 9.0 million in 2014. We expect to complete our restructuring efforts by the end of 2014. Operating income / loss: Operating income for the three and six months ended June 30, 2014 was US$ 22.6 million and US$ 8.3 million, respectively, compared to operating losses of US$ 4.6 million and US$ 39.5 million during the same periods in 2013, as television advertising, carriage fee and other revenues increased, while our cost control efforts were effective. Our operating margin, which is determined as operating income / loss divided by net revenues, was 11.0% and 2.3% during the three and six months ended June 30, 2014, respectively, compared to negative 2.6% and 12.9% during the same periods in 2013. For the Three



Months Ended June 30, (US$ 000's)

2014 2013 % Act Interest income $ 149 $ 180 (17.2 )% Interest expense (39,098 ) (31,179 ) (25.4 )% Loss on extinguishment of debt (24,161 ) (23,115 ) (4.5 )% Foreign currency exchange gain, net 26 15,047 NM (1) Change in fair value of derivatives 2,361 - NM (1) Other expense, net (1,775 ) (412 ) NM (1) (Provision) / credit for income taxes (2,487 ) 3,332 NM (1) Loss from discontinued operations, net of tax (10,095 ) (350 ) NM (1) Net loss attributable to noncontrolling interests 69 131 (47.3 )% Currency translation adjustment, net (8,308 ) (11,407 ) 27.2 %



(1) Number is not meaningful.

47



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For the Six



Months Ended June 30, (US$ 000's)

2014 2013 % Act Interest income $ 295 $ 413 (28.6 )% Interest expense (67,009 ) (63,186 ) (6.1 )% Loss on extinguishment of debt (24,161 ) (23,115 ) (4.5 )% Foreign currency exchange loss, net (392 ) (34,805 ) 98.9 % Change in fair value of derivatives 2,311 104 NM (1) Other expense, net (1,768 ) (425 ) NM (1) (Provision) / credit for income taxes (290 ) 11,313 NM (1) Loss from discontinued operations, net of tax (18,388 ) (896 ) NM (1) Net loss attributable to noncontrolling interests 786 813 (3.3 )% Currency translation adjustment, net (6,937 ) (8,944 ) 22.4 % (1) Number is not meaningful. Interest income: We recognized interest income of US$ 0.1 million and US$ 0.3 million during the three and six months ended June 30, 2014, respectively, compared to US$ 0.2 million and US$ 0.4 million in the three and six months ended June 30, 2013, respectively. Interest expense: Interest expense during the three and six months ended June 30, 2014 was US$ 39.1 million and US$ 67.0 million, respectively, compared to US$ 31.2 million and US$ 63.2 million in the three and six months ended June 30, 2013, respectively. The increase in interest expense is due to the amortization of debt issuance costs and discount on issuance of the 2017 PIK Notes and 2017 Term Loan. Loss on extinguishment of debt: During the three and six months ended June 30, 2014, we recognized a loss of US$ 24.2 million on the extinguishment of debt related to the repurchase of the remaining outstanding principal amount of our 2016 Fixed Rate Notes. During the three and six months ended June 30, 2013, we recognized a loss on extinguishment of debt of US$ 23.1 million related to the repurchase of a portion of our 2016 Fixed Rate Notes. Foreign currency exchange 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 2017 Fixed Rate Notes, which are denominated in Euros, as well as certain of our intercompany loans which are not considered of a long-term investment nature. 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. Beginning in the fourth quarter of 2013, we classified certain of our intercompany loans as long-term in nature, and therefore no longer record gains or losses on revaluation through the statement of operations and comprehensive income. See the discussion under "Currency translation adjustment, net" below. During the six months ended June 30, 2014, we recognized a net loss of US$ 0.4 million, comprised of transaction gains of US$ 4.1 million relating to the revaluation of intercompany loans; a transaction loss of approximately US$ 2.7 million on our senior debt, and transaction losses of US$ 1.8 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, 2013, we recognized a net loss of US$ 34.8 million, comprised of transaction losses of US$ 24.1 million relating to the revaluation of intercompany loans; a transaction loss of approximately US$ 4.2 million on our senior debt due to the overall strengthening of the dollar against the Euro between January 1, 2013 and June 30, 2013, and transaction losses of US$ 6.5 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 three and six months ended June 30, 2014, we recognized gains of US$ 2.4 million and US$ 2.3 million, respectively, as a result of the change in the fair value of a foreign currency forward contract which was settled during the second quarter. During the six months ended June 30, 2013, we recognized a gain of US$ 0.1 million as a result of the change in the fair value of the interest rate swap that terminated on April 15, 2013. See Note 12, "Financial Instruments and Fair Value Measurements". Other expense, net: We recognized other expense of US$ 1.8 million in both the three and six months ended June 30, 2014 compared to other expense of US$ 0.4 million for the same periods in 2013. (Provision) / credit for income taxes: The provision for income taxes for the three months ended June 30, 2014 was US$ 2.5 million, which principally reflects the reversal of the previous quarter's credit following a change in the mix of profits and losses between tax jurisdictions. The provision for income taxes for the six months ended June 30, 2014 was US$ 0.3 million, and was principally caused by the reversal of tax previously deferred on intercompany profit. The credit for income taxes for the three and six months ended June 30, 2013 was US$ 3.3 million and US$ 11.3 million, respectively. Our subsidiaries are subject to income taxes at statutory rates ranging from 10.0% in Bulgaria to 22.0% in Slovakia. Loss from discontinued operations, net of tax: The loss from discontinued operations during the three and six months ended June 30, 2014 was US$ 10.1 million and US$ 18.4 million, respectively, compared to losses from discontinued operations of US$ 0.4 million and US$ 0.9 million in the three and six months ended June 30, 2013, respectively. The increase is due to the loss on the sale of Bontonfilm and the fair value adjustment required to measure assets held for sale at fair value less costs to sell of our Pro Video businesses. Net loss attributable to noncontrolling interests: During the three and six months ended June 30, 2014, the net loss was US$ 0.1 million and US$ 0.8 million in respect of the noncontrolling interest in consolidated subsidiaries as compared to US$ 0.1 million and US$ 0.8 million for the same periods in 2013. The net loss attributable to noncontrolling interests relates primarily to the noncontrolling interest share of losses in Bulgaria. 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 net income. 48



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The dollar weakened slightly against the New Romanian Lei and was broadly flat against the functional currencies of our other operations for the six months ended June 30, 2014. In the six months ended June 30, 2014, we recognized other comprehensive income of US$ 6.9 million on the revaluation of our net investments in subsidiaries compared to other comprehensive income of US$ 8.9 million in the six months ended June 30, 2013. During the fourth quarter of 2013, we designated certain intercompany loans to be of a long-term investment nature as the repayment of these loans is neither planned nor anticipated for the foreseeable future. For the three and six months ended June 30, 2014, we recorded foreign exchange losses of US$ 12.5 million and US$ 11.7 million on the retranslation of these intercompany loans as an adjustment to accumulated other comprehensive loss, a component of shareholders' equity. The following table illustrates the amount by which the exchange rate of the dollar to the functional currencies of our operations moved between January 1 and June 30, 2014 and 2013, respectively: For the Six Months Ended June 30, 2014 2013 Bulgarian Lev 1 % 1 % Croatian Kuna 0 % 0 % Czech Koruna 1 % 4 % Euro 1 % 1 % New Romanian Lei (1 )% 2 % The dollar was broadly flat against the functional currencies of our operations between January 1 and June 30, 2014, as compared to a strengthening of the dollar in the same period in 2013. The following table illustrates the change in the average exchange rates of the dollar to the functional currencies of our operations between the six months ended June 30, 2014 and 2013. Change in Average Rates Bulgarian Lev (4 )% Croatian Kuna (4 )% Czech Koruna 2 % Euro (4 )% New Romanian Lei (3 )% 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. 49



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The following charts depict the movement of the functional currencies of our operations versus the dollar, based on monthly closing rates, during the six months ended June 30, 2014 and 2013. Percent Change During the Six Months Ended June 30, 2014 [[Image Removed]]


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