**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 
 **FORM
10-K/A**
 **AMENDMENT
NO. 1 TO FORM 10-K**
 
 x **ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934**
 
 **For
the fiscal year ended December 31, 2004**
 
 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.)Clarendon
      House, Church Street, Hamilton
    
    HM
      CX Bermuda(Address
      of principal executive offices)
    
    (Zip
      Code)
 
 Registrant's
telephone number, including area code: 441-296-1431
 
 **Securities
registered pursuant to Section 12(b) of the Act: NONE**
 
 **Securities
registered pursuant to Section 12(g) of the Act: NONE**
 
 Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for each shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES x NO o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934)  Yes x  No o
 
 The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2004 (based on the closing sale price of US$ 22.63 of
the Registrant’s Common Stock, as reported by the Nasdaq Exchange on such date)
was approximately US$ 460 million
 
 Number
of shares of Class A Common Stock outstanding as of February 18, 2005 :
21,049,400
 Number
of shares of Class B Common Stock outstanding as of February 18, 2005 :
7,334,768




**EXPLANATORY
NOTE**
 
 This is
Amendment No. 1 to the Annual Report on Form 10-K of Central European Media
Enterprises Ltd., as originally filed on March 15, 2005.
 
 Modifications
have been made only to “Contractual Cash Obligations” in Note V of Item 7, which
is set out in its entirety below.
 
 We have
not updated the Annual Report on Form 10-K/A to modify disclosures in Annual
Report on Form 10-K for events occurring subsequent to the original March 15,
2005 filing date. This Amendment No. 1 to the Annual Report on Form 10-K/A
continues to speak as of March 15, 2005.
  *Page
2*
  
 **ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS**
 
 The
following discussion should be read in conjunction with the sections entitled
“Forward Looking Statements” and "Risk Factors" in Part I, Item 1.
 
 ***Contents***
 
 ***I.***
    ***Executive
      Summary******II.***
    ***General
      Market Information******III.***
    ***Analysis
      of Segment Results******IV.***
    ***Analysis
      of the Results of Consolidated Operations******V.***
    ***Liquidity
      and Capital Resources******VI.***
    ***Critical
      Accounting Policies and Estimates******VII.***
    ***Related
      Party Matters***
 
 ***I.
Executive Summary***
 
 *Management
Changes*
 
 ·
    On
      February 2, 2004, Michael N. Garin was appointed Chief Executive Officer,
      succeeding Fred T. Klinkhammer who will retire as Vice-Chairman on March
      22, 2005.
 
 ·
    On
      November 22, 2004, Marina Williams was appointed as Executive
      Vice-President responsible for overseeing existing broadcast assets, the
      development of new regional business opportunities, and the integration of
      acquired properties into our operating
structure.
 
 *Continuing
Operations*
 
 The
following table provides a summary of our consolidated results for each of the
three years ended December 31, 2004:


**For
      the year ended December 31, (US$000's)****2004**
    
    **2003**
    
    **Movement**
    
    **2003**
    
    **2002**
    
    **Movement**Net
      Revenues
    
    
    182,339
    
    
    124,978
    
    
    *57,361*
    
    
    124,978
    
    
    99,143
    
    
    *25,835*Operating
      income/(loss)
    
    
    18,740
    
    
    (4,410
    )
    
    *23,150*
    
    
    (4,410
    )
    
    1,466
    
    
    *(5,876*
    *)*Net
      income/(loss) from continuing operations
    
    
    16,007
    
    
    (24,201
    )
    
    *40,208*
    
    
    (24,201
    )
    
    (25,106
    )
    
    *905***Net
      income/(loss)**
    
    
    **18,531**
    
    
    **346,012**
    
    
    ***(327,481***
    ***)***
    
    **346,012**
    
    
    **(14,184**
    **)**
    
    ***360,196***
 The
principal events of 2004 are as follows:
 
 ·
    In
      the twelve months ended December 31, 2004, our total Segment EBITDA margin
      (defined as the ratio of Segment EBITDA to Segment Net Revenues) reached
      30% as compared to 26% for the twelve months ended December 31, 2003
      (Segment EBITDA is defined and reconciled to
      our consolidated US GAAP results in Part II, Item 8, Note 20, "Segment
      Data").
 
 ·
    On
      February 9, 2004 we entered into an agreement with the Dutch tax
      authorities to settle our tax liabilities in the Netherlands, including
      for the award we received in the arbitration against the Czech Republic,
      through 2003 for a payment of US$ 9 million (see Part II, Item 8, Note 14,
      "Commitments and Contingencies").
 
 *Page
3*
  ·
    On
      March 29, 2004, we increased our holding in our Romanian operations to
      80.0% for a total consideration of US$ 20.3
million.
 
 ·
    On
      April 19, 2004 our Romanian operations launched with minimal additional
      investment our second cable channel PRO CINEMA, which broadcasts series,
      films and documentaries.
 
 ·
    OnJuly
      1, 2004, the
      Supreme Court of Ukraine rejected an appeal lodged by AITI, a Ukrainian
      broadcasting company, which had sought to challenge the validity of the
      grant of the 15-hour per day broadcasting license awarded to Studio 1+1 in
      1996.
 
 ·
    On
      July 16, 2004,we
      acquired 100% ofNova
      TV(Croatia)and
      OK in Croatia for Euro 20.3 million (approximately US$ 24.7 million at the
      time of acquisition) (for further information, seePart
      II, Item 8, Note 9, "Acquisitions and Disposals").
 
 ·
    On
      July 21, 2004 the Ukrainian Media Councilawarded
      Studio 1+1, our Ukrainian operation, the license to broadcast for the
      remaining nine hours per day(for
      further information, seePart
      II, Item 8, Note 1, "Organization and
Business").
 
 ·
    On
      October 14, 2004 we celebrated the 10thanniversary of our listing on the NASDAQ
exchange.
 
 ·
    On
      December 13, 2004 weentered into an agreement to acquire from PPF an 85% ownership interest in
      the TV Nova (Czech Republic) Group, which operates TV NOVA (Czech
      Republic), the most-watched television channel in Central and Eastern
      Europe in terms of audience share (the "TV Nova (Czech Republic)
      Acquisition"). The principal operating companies of the TV Nova (Czech
      Republic) group are CP 2000, a.s., Mag Media 99 a.s., and CET 21 s.r.o.
      (“CET 21”). In addition, on February 24, 2005, we entered into an
      agreement with Peter Krsak to acquire his entire ownership interest in CET
      21, the company holding the broadcasting license for TV NOVA (Czech
      Republic) (the “Krsak Agreement”)(for
      further information, seePart
      I, Item 1, "Operations by Country, Expected
  Acquisitions").
 
 *Future
Trends*
 
 ·
    Our
      Board, after extensive discussions with both management and outside
      advisors in 2003, agreed on a strategic plan to expand our business. It
      was decided that our geographic focus would remain in Central and Eastern
      Europe, and that our core business would remain television. We identified
      three categories of development:
 
 ·
    Acquisition
      of additional ownership in our present operations, which is regarded as
      the strategy with the least
      risk due to our knowledge of these
operations;
 ·
    Acquisition
      of one or more established businesses in the Balkans, particularly in the
      states of the former Yugoslavia, which would allow us to capitalize on our
      success in Slovenia;
      and
 ·
    Acquisition
      of a broadcaster in one of the substantially larger markets of Central or
      Eastern Europe, which would likely give rise to a significant increase in
      the scale of our business.
 
 ·
    We
      achieved success in all three categories during the course of
      2004.
 ·
    In
      March 2004, we increased our interest in our Romanian operations from 66%
      to 80%;
 ·
    In
      July 2004, we acquired Nova TV(Croatia);
      and
 ·
    On
      December 13, 2004, we entered into a definitive agreement with the PPF
      Group to acquire a controlling interest in TV NOVA(Czech
      Republic).
 
 ·
    In
      2005, we will be focused on enhancing the performance of our Croatian
      operations and on the completion of the TV Nova (Czech Republic)
      Acquisition and the integration of the TV Nova (Czech Republic) Group into
      our operations.
 
 *Page
4*
  ·
    We
      are planning on further investment in our Croatian operations. We expect
      to increase our audience share by acquiring higher quality programming and
      making additional strategic investments in local productions as well as by
      making limited capital investment in order to extend our technical reach.
      We expect total investment to be in excess of US$ 15
    million.
 
 ·
    In
      the Czech Republic we anticipate that we will complete the TV Nova (Czech
      Republic) Acquisition in the second quarter of 2005. A successful
      implementation of the Krsak Agreement in connection with the TV Nova
      (Czech Republic) Acquisition will allow us to terminate most of the
      litigation surrounding the TV Nova (Czech Republic) Group and simplify the
      ownership and operating structure of the TV Nova (Czech Republic) Group,
      which will facilitate the integration of the TV Nova (Czech Republic)
      Group into our operations. The TV Nova (Czech Republic) Group reported
      total net revenues of US$ 207.8 million, operating profit of US$ 92.7
      million and net income of US$ 55.0 million. For the twelve months ended
      December 31, 2004, the TV Nova (Czech Republic) Group reported a
      depreciation charge of US$ 6.7 million and a net debt position of US$ 67
      million as at December 31, 2004. (All of these figures are determined in
      accordance with US GAAP. The accounting policies used in compiling the
      combined accounts for the TV Nova (Czech Republic) Group may differfrom
      those used by us, and the basis of combination of the entities included in
      the TV Nova (Czech Republic) Group may differ from the basis of
      consolidation that we apply to the inclusion of those entities in our
      accounts following completion.)
 
 ·
    With
      the addition of the TV Nova(Czech
      Republic)Group
      to our operations, we would be operating a business with estimated net
      revenues nearly two times our current levels and we would expect to
      generate significant positive net income and cash-flow from our
      operations. We will also have a large amount of debt on our balance sheet
      as a result of the TV Nova(Czech
      Republic)Acquisition
      (including indebtedness of the TV Nova (Czech Republic) Group) and the
      related financing. However, we believe that the results of operations and
      our cash flows will be sufficient to meet our debt service
      obligations.
 
 ***II.
General Market Information***
 
 *Markets*
 
 Our
revenue generating operations are located in Central and Eastern Europe, namely
Croatia, Romania, the Slovak Republic, Slovenia and Ukraine. Revenues primarily
result from the sale of advertising time.
 
 We, like
other television operators, experience seasonality, with advertising sales
tending to be lowest during the third quarter of each calendar year due to the
summer holiday period (typically July and August), and highest during the fourth
quarter of each calendar year. See Part II, Item 6, “Quarterly Results and
Seasonality” for further discussion.
 
 *Television
Advertising Markets*
 
 There is
no objective source for reliable information on the size of television
advertising spending in our markets. The following table sets out our estimates
of the development of advertising spending by market in US$
millions.
 
 Country
    
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Croatia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90
      - 100Romania
    
    
    65
      - 75
    
    
    65
      - 75
    
    
    60
      - 70
    
    
    65
      - 75
    
    
    85
      - 95
    
    
    110
      - 120Slovak
      Republic
    
    
    35
      - 45
    
    
    35
      - 45
    
    
    35
      -45
    
    
    40
      - 50
    
    
    60
      - 70
    
    
    75
      - 85Slovenia
    
    
    40
      - 50
    
    
    40
      - 50
    
    
    45
      - 55
    
    
    45
      - 55
    
    
    45
      - 55
    
    
    50
      - 60Ukraine
    
    
    25
      - 35
    
    
    40
      - 55
    
    
    70
      - 85
    
    
    85
      - 100
    
    
    100
      - 115
    
    
    130
      - 140
 
 *Page
5*
 
 *European
Union Expansion*
 
 Slovenia
and the Slovak Republic acceded to the European Union ("EU") in May 2004. It is
currently anticipated that Romania and Croatia will accede after 2007. Accession
to the EU is likely to bring certain positive developments. All countries
joining the EU become subject to EU legislation and we believe that the ongoing
progress towards EU entry reduces the political and economic risks of operating
in the emerging markets of Central and Eastern Europe. The reduction in
political risk factors may encourage increased foreign investment that will be
supportive of economic growth. Accession to the EU may also bring certain
negative developments. The adoption of EU compliant legislation in connection
with accession may result in the introduction of new standards affecting
industry and employment and compliance with such new standards may require
increased spending.
 
 
 ***III.
Analysis of Segment Results***
 
 **OVERVIEW**
 
 We manage
our business on a country-by-country basis and review the performance of each
business segment using data that reflects 100% of operating and license company
results. Our segments are comprised of Croatia, Romania, the Slovak Republic,
Slovenia and Ukraine.
 
 We
evaluate the performance of our segments based on Segment EBITDA. Segment EBITDA
includes STS and Markiza (our operating and license companies in the Slovak
Republic) and certain Romanian operations which are not consolidated under US
GAAP.
 
 Our key
performance measure of the efficiency of our business segments is EBITDA margin.
We define Segment EBITDA margin as the ratio of Segment EBITDA to Segment Net
Revenue. We believe a 30% Segment EBITDA margin can be achieved and sustained by
each station.
 
 Our
assets and liabilities are managed centrally and are reported internally in the
same manner as the consolidated financial statements, consequently no additional
segment information is provided in respect of assets and liabilities.
 
 Segment
EBITDA is determined as segment net income/loss, which includes costs for
program rights amortization, before interest, taxes, depreciation and
amortization of intangible assets. Items that are not allocated to our segments
for purposes of evaluating their performance, and therefore are not included in
Segment EBITDA, include:
 
 ·
    expenses
      presented as corporate expenses in our consolidated statements of
      operations (i.e., corporate operating costs, stock based compensation and
      amortization of intangibles);
 
 ·
    changes
      in the fair value of derivatives;
 
 ·
    foreign
      currency exchange gains and losses; and
 
 ·
    certain
      unusual or infrequent items (e.g., extraordinary gains and losses,
      impairments on assets or investments).
 
 We use
Segment EBITDA as a component in determining management bonuses.
 
 For a
full reconciliation of our Segment Net Revenues and Segment EBITDA by operation
to our consolidated US GAAP results for the years ended December 31, 2004, 2003
and 2002 see Part II, Item 8, Note 20, "Segment Data".
 
 A summary
of our total Segment Net Revenues, Segment EBITDA and Segment EBITDA margin
showing the relative contribution of each Segment, is as follows.
 
 *Page
6*
  **SEGMENT
      FINANCIAL INFORMATION****For
      the Years Ended December 31, (US $000's)**2004
    
    (1)
    
    2003
    
    (1)
    
    2002
    
    (1)**Segment
      Net Revenue**Croatia
      (NOVA TV)
    
    $
    9,757
    
    
    4
    %
    $
    -
    
    
    -
    %
    $
    -
    
    
    -
    %Romania
      (2)
    
    
    76,463
    
    
    31
    %
    
    51,177
    
    
    29
    %
    
    33,547
    
    
    24
    %Slovak
      Republic (MARKIZA TV)
    
    
    61,576
    
    
    25
    %
    
    50,814
    
    
    29
    %
    
    38,397
    
    
    28
    %Slovenia
      (POP TV and KANAL A)
    
    
    45,388
    
    
    18
    %
    
    37,168
    
    
    21
    %
    
    33,864
    
    
    25
    %Ukraine
      (STUDIO 1+1)
    
    
    53,351
    
    
    22
    %
    
    36,633
    
    
    21
    %
    
    31,732
    
    
    23
    %**Total
      Segment Net Revenue**
    
    **$**
    **246,535**
    
    
    **100**
    **%**
    **$**
    **175,792**
    
    
    **100**
    **%**
    **$**
    **137,540**
    
    
    **100**
    **%****Segment
      EBITDA**Croatia
      (NOVA TV)
    
    $
    (3,756
    )
    
    (5
    )%
    $
    -
    
    
    -
    %
    $
    -
    
    
    -
    %Romania
      (2)
    
    
    25,198
    
    
    34
    %
    
    12,206
    
    
    27
    %
    
    6,347
    
    
    20
    %Slovak
      Republic (MARKIZA TV)
    
    
    18,975
    
    
    25
    %
    
    11,657
    
    
    26
    %
    
    7,132
    
    
    23
    %Slovenia
      (POP TV and KANAL A)
    
    
    19,077
    
    
    26
    %
    
    13,173
    
    
    29
    %
    
    11,052
    
    
    35
    %Ukraine
      (STUDIO 1+1)
    
    
    14,729
    
    
    20
    %
    
    7,999
    
    
    18
    %
    
    6,890
    
    
    22
    %**Total
      Segment EBITDA**
    
    **$**
    **74,223**
    
    
    **100**
    **%**
    **$**
    **45,035**
    
    
    **100**
    **%**
    **$**
    **31,421**
    
    
    **100**
    **%****Segment
      EBITDA Margin**
    
    
    **30**
    **%**
    
    
    
    
    **26**
    **%**
    
    
    
    
    **23**
    **%**(1)
      Percentage of Total Segment Net Revenue / Total Segment
    EBITDA(2)
      Romanian channels are PRO TV, PRO CINEMA, ACASA, PRO TV INTERNATIONAL, PRO
      FM and INFOPRO.(3)
      We defined Segment EBITDA margin as the ratio of Segment EBITDA to Segment
      Net Revenue.
 
 **ANALYSIS
BY GEOGRAPHIC SEGMENT**
 
 **(A)
CROATIA**
 
 **SEGMENT
      FINANCIAL INFORMATION****For
      the Year Ended December 31, (US $000's) (1)****2004**Croatian
      Net Revenues
    $
      9,757Croatian
      EBITDA
    $
      (3,756)Croatian
      EBITDA Margin
    (38)%(1)
      The results shown are for the period since acquisition of the Croatian
      operations in July 2004
 
 **Market
Background:** Croatia
is our newest market; we acquired our Croatian operations on July 16, 2004. The
television advertising market in Croatia has shown growth of approximately 4% in
2004 and is expected to grow at a single digit percentage in 2005. It is
expected that Croatia will accede to the EU after 2007.
 
 NOVA TV
(Croatia) is ranked fourth (of four channels ranked) in the market based on its
national all-day audience share of 14.3% for 2004. The major competitors are the
two state-owned channels HRT1 and HRT2, with national all-day audience shares
for 2004 of 39.1% and 17.8%, respectively, and RTL with 16.7%.
 
 *Page
7*
  ·
    **Net
      Revenues**for
      2004 consisted in part of barter revenue, principally generated from
      contracts already in existence at the date of acquisition. Most such
      contracts expired at the end of 2004. New management appointed in
      September 2004 continues to focus on converting revenues derived from
      barter to cash.
 
 ·
    **Croatian
      Segment EBITDA**for
      2004 was a loss of US$ 3.8 million which is substantially attributable to
      a lack of investment in quality programming during the first half of 2004
      as well as the impact of advertising agreements entered into on
      unfavorable terms that were assumed at the completion of our acquisition
      of the Croatian operations.
 
 Costs
charged in arriving at Segment EBITDA for 2004 included US$ 6.0 million of
programming costs and US$ 2.1 million of salaries and related
costs.
 
 **(B)
ROMANIA**
 
 **SEGMENT
      FINANCIAL INFORMATION****For
      the Years Ended December 31, (US $000's)****2004**
    
    **2003**
    
    ***Movement***
    
    **2003**
    
    **2002**
    
    ***Movement***Romanian
      Net Revenues
    
    
    76,463
    
    
    51,177
    
    
    *25,286*
    
    
    51,177
    
    
    33,547
    
    
    *17,630*Romanian
      EBITDA
    
    
    25,198
    
    
    12,206
    
    
    *12,992*
    
    
    12,206
    
    
    6,347
    
    
    *5,859*Romanian
      EBITDA Margin
    
    
    33
    %
    
    24
    %
    
    *9*
    *%*
    
    24
    %
    
    19
    %
    
    *5*
    *%*
 
 **Market
Background:** Romania
is one of the fastest growing economies in Central and Eastern Europe. The
television advertising market showed growth of approximately 28% for 2004 and we
expect it to show continued strong growth in 2005. We believe that Romania’s
preparations to accede to the EU after 2007 will continue to support strong
growth rates in television advertising spending in the period running up to
accession, as has been the experience with earlier entrants.
 
 PRO TV,
our main channel, and ACASA, a cable channel, are ranked second and fourth in
the market based on their national all day audience shares for 2004 of 15.8% and
7.4%, respectively. The major competitors are the state channel TVR1 with a
national all-day audience share of 22.0% and Antena 1, a privately owned
channel, with 12.4%. One of the reasons for TVR1’s higher all-day audience share
is that it is the only significant broadcaster with coverage across almost the
entire country. Advertisers, however, evaluate audience share within a channel's
coverage area and by this measure PRO TV ranks first and ACASA fourth (of seven
stations ranked) in all-day audience share. Both of our stations cover the
important urban markets, which are targeted by advertisers.
 
 In April
2004 our Romanian operation launched a second cable channel PRO CINEMA. It had a
national all day audience share of 0.6% for 2004.
 
 ·
    **Net
      Revenues**for
      2004****increased
      by 49% over 2003 due to several factors. The increase in revenues was
      primarily due to the growth in the television advertising market, which
      contributed approximately US$ 14.0 million. The balance of the increase in
      net revenues, approximately US$ 11.3 million, was due to an increase in
      prices charged for advertising, additional inventory for advertising spots
      created by the launch of PRO CINEMA and greater sales of inventory across
      all of our channels.
 
 Net
Revenues for 2003 increased by 53% over 2002, reflecting the increase in
advertising prices and revenues from a conversion of a related-party barter
agreement into a cash generating arrangement.
 
 ·
    **Romanian
      Segment EBITDA**for
      2004 increased by 106% over 2003, delivering an EBITDA margin of 33%,
      which represents a significant increase over the 24% margin delivered in
      the prior year.
 
 *Page
8*
 
 Costs
charged in arriving at 2004 EBITDA grew by US$ 12.3 million or 32% over 2003.
The cost of programming in 2004 increased by US$ 9.4 million or 46% over 2003
due to a 47% increase in the charge for amortization of acquired programming
rights and an increase of 46% in local production costs. The increase in
amortization of acquired programming was the result of a combination of planned
investment in more popular programming, an increase in the price of acquired
programming and an increase in hours amortized due to the introduction of the
new PRO CINEMA channel. Other operating costs and expenses in 2004 increased by
US$ 1.8 million over 2003 mainly as a result of the increase in salary costs and
bonuses. In 2003 we recorded a decrease in expenses as a result of bad debt
reversals.
 
 EBITDA
for 2003 increased by US$ 5.9 million compared to 2002. Costs charged in
arriving at EBITDA for 2003 increased by 43% over 2002, mainly due to higher
amortization of programming rights and staff costs.
 
 **(C)
SLOVAK REPUBLIC**
 
 **SEGMENT
      FINANCIAL INFORMATION****For
      the Years Ended December 31, (US $000's)****2004**
    
    **2003**
    
    ***Movement***
    
    **2003**
    
    **2002**
    
    ***Movement***Slovak
      Republic Net Revenues
    
    
    61,576
    
    
    50,814
    
    
    *10,762*
    
    
    50,814
    
    
    38,397
    
    
    *12,417*Slovak
      Republic EBITDA
    
    
    18,975
    
    
    11,657
    
    
    *7,318*
    
    
    11,657
    
    
    7,132
    
    
    *4,525*Slovak
      Republic EBITDA Margin
    
    
    31
    %
    
    23
    %
    
    *8*
    *%*
    
    23
    %
    
    19
    %
    
    *4*
    *%*
 
 **Market
Background:** The
television advertising market showed growth of approximately 11% in local
currency terms in 2004. Growth rates were driven by local inflation and the
re-allocation of advertising spending to the television advertising market from
other advertising media. Measured in US dollars, the television advertising
market grew by an estimated 20% in 2004 with the difference in growth from the
local market growth being due to the weakening of the US dollar in the period.
We anticipate the television advertising market will grow between 10% and 20% in
2005. The Slovak Republic acceded to the EU in May 2004.
 
 MARKIZA
TV is the leading broadcaster in the Slovak Republic with a national all-day
audience share for 2004 of 39.8%. The major competitor is the state channel
STV1, with a national all-day audience share of 20.0%. The national all-day
audience share of TV JOJ, the only other significant privately owned
broadcaster, grew from 11.3% in 2003 to 12.9% in 2004. Following the recent
introduction of peoplemeters, the national all-day audience share of MARKIZA TV
has been 35%.
 
 ·
    **Net
      Revenues**increased
      by 21% in 2004 compared to 2003. Revenue growth in local currency terms in
      2004 was 7%. This was attributable to an expansion of the television
      advertising market and an increase in our prices early in 2004.
 
 Net
Revenues increased 32% in 2003 compared to 2002, largely due to a weakening US
dollar. In local currency terms, revenues grew by 7% in 2003 compared to 2002,
in line with the growth of the television advertising market in that period.
 
 ·
    **Slovak
      Republic Segment EBITDA**increased
      63% in 2004 compared to 2003 and the EBITDA margin increased to 31% in
      2004 from 23% in 2003. Local currency EBITDA growth was 43% in 2004
      compared to 2003. Costs charged in arriving at EBITDA in 2003 include a
      US$ 1.1 million provision for a disagreement over distributions to
      partners. This expense was reversed in 2004 following a resolution of the
      disagreement. Significant programming amortization savings were also made
      in 2004.
 
 EBITDA in 2003
increased by 63% over 2002, with underlying local currency growth of 36% against
2002. The EBITDA margin increased from 19% in 2002 to 23% in 2003.
 
 *Page
9*
 
 **(D)
SLOVENIA**
 
 **SEGMENT
      FINANCIAL INFORMATION****For
      the Years Ended December 31, (US $000's)****2004**
    
    **2003**
    
    ***Movement***
    
    **2003**
    
    **2002**
    
    ***Movement***Slovenian
      Net Revenues
    
    
    45,388
    
    
    37,168
    
    
    *8,220*
    
    
    37,168
    
    
    33,864
    
    
    *3,304*Slovenian
      EBITDA
    
    
    19,077
    
    
    13,173
    
    
    *5,904*
    
    
    13,173
    
    
    11,052
    
    
    *2,121*Slovenian
      EBITDA Margin
    
    
    42
    %
    
    35
    %
    
    *7*
    *%*
    
    35
    %
    
    33
    %
    
    *2*
    *%*
 
 **Market
Background** : The
television advertising market in 2004 showed growth of approximately 9% in local
currency terms and 21% in Euros, the currency in which the majority of our sales
are denominated. Measured in US dollars, the television advertising market grew
by an estimated 10% in 2004 compared to 2003 with the difference in growth from
the Euro-denominated growth being the weakening of the US dollar in the period.
We expect the market to show slow growth in 2005.
 
 Our
channels POP TV and KANAL A were ranked first and fourth (of four stations
ranked) in the market based on national all-day audience shares of 27.6% and
8.3%, respectively. The main competitors are state broadcasters SLO1 and SLO2,
with national all-day audience shares of 25.8% and 10.6%,
respectively.
 
 ·
    **Net
      Revenues**increased
      by 22% in 2004 over 2003, due in part to the weaker US dollar compared to
      the Euro. In local currency terms, revenues increased by 14% in 2004
      compared to 2003. The increase in advertising revenues is a result of
      higher average spot prices and increased advertising spending by major
      advertisers (including Danone, Benckiser Adriatic, Unilever and mobile
      phone operator Planet). Approximately US$ 3.0 million (7.4%) was due to
      higher spot prices and approximately US$ 1.6 million ( 4%) was due to
      higher sales volumes.
 
 Net
revenues increased 10% in 2003 compared to 2002. This was due to a weakening US
dollar. In local currency terms, revenues decreased by 6% in 2003 compared to
2002, in line with the decrease in the television advertising market compared to
2002, when additional revenues were generated by our broadcast of the 2002
soccer World Cup in which Slovenia participated.
 
 ·
    **Slovenian
      Segment EBITDA**increased
      by 45% in 2004 over 2003, resulting in an EBITDA margin of 42% in 2004
      compared to 35% in 2003. This reflects an increase in revenues as well as
      reductions in operating costs resulting from local management's cost
      control measures.
 
 Costs
charged in arriving at segment EBITDA in 2004 increased by 10% compared to 2003.
In local currency terms, costs charged in arriving at Segment EBITDA increased
by 2%. Expenditure on programming was reduced by US$ 0.3 million through changes
to the programming schedule. Resolution of uncertainties affecting transmission
fees resulted in both lower costs and a provision write-back which together
generated a saving of US$ 0.4 million compared to the year 2003.
 
 EBITDA
increased by 19% in 2003 over 2002 following the implementation of cost control
measures limiting cost base growth to
5%. Consequently, the EBITDA margin in 2003 increased to 35%, an improvement of
2% over 2002.
 
 *Page
10*
 
 **(E)
UKRAINE**
 
 **SEGMENT
      FINANCIAL INFORMATION****For
      the Years Ended December 31, (US $000's)****2004**
    
    **2003**
    
    ***Movement***
    
    **2003**
    
    **2002**
    
    ***Movement***Ukrainian
      Net Revenues
    
    
    53,351
    
    
    36,633
    
    
    *16,718*
    
    
    36,633
    
    
    31,732
    
    
    *4,901*Ukrainian
      EBITDA
    
    
    14,729
    
    
    7,999
    
    
    *6,730*
    
    
    7,999
    
    
    6,890
    
    
    *1,109*Ukrainian
      EBITDA Margin
    
    
    28
    %
    
    22
    %
    
    *6*
    *%*
    
    22
    %
    
    22
    %
    
    *-*
    *%*
 
 **Market
Background:** The
television advertising market showed growth of approximately 24% for 2004, and
we currently anticipate that it will continue to show strong growth in 2005.
 
 STUDIO
1+1 was ranked second based on a national all-day audience share of 21.2%.
Following the award of a license for nine additional broadcasting hours, Studio
1+1 increased its broadcasting time from 15 to 24 hours per day since September
2004. The main competitors of Studio 1+1 are Inter, with a national all-day
audience share of 23.2%, and Novi Kanal, with 10%. STUDIO 1+1's prime time
audience share is 27.2% compared to Inter's 26.0%.
 
 ·
    **Net
      Revenues**increased
      by 46% in 2004 over 2003 due to an increase in prime time audience share
      from 25.8% to 27.2% and an exceptionally strong growth rate in the
      television advertising market.
 
 Net
revenues for 2003 increased by 15% over 2002, which was below the rate of growth
for the television advertising market due to weaker ratings for STUDIO 1+1 in
2003.
 
 ·
    **Ukrainian
      Segment EBITDA**for
      2004 increased by 84% over 2003 to US$ 14.7 million, resulting in an
      EBITDA margin of 28% for 2004, 6% above
2003.
 
 Costs
charged in arriving at EBITDA increased by US$ 10.0 million in 2004 compared to
2003. This included a US$ 5.5 million increase in the cost of programming. The
increase related primarily to the increased investment in popular Russian
programming, the price of which has grown by approximately 40% year on year, as
well as the additional cost of programming broadcast on the expanded nine hour
schedule since September 2004. Russian programming continues to generate the
highest ratings and is essential to maintain strong prime time ratings. Salaries
and benefits increased by US$ 1.6 million, a large portion of which was staff
bonuses. Transmission costs increased by US$ 1.4 million due to additional hours
of broadcasting since September and changes to contractual prices with the
provider. Business taxes increased by US$ 0.9 million primarily due to increased
withholding tax on syndicated programming.
 
 EBITDA
for 2003 increased by 16% over 2002 to US$ 8.0 million, resulting in an EBITDA
margin of 22% for 2003, in line with 2002. Costs charged in arriving at EBITDA
grew by US$ 3.8 million in 2003 compared with 2002, an increase of 15%, in line
with revenue growth. This was principally due to the increased cost of
programming.
 
 *Page
11*
  **PROGRAMMING
PAYMENTS AND PROGRAM AMORTIZATION**
 
 Our
consolidated cost of programming for 2004, 2003 and 2002 were as
follows:
 
 **For
      the Years Ended December 31,**
      **(US$
      000’s)****2004**
    
    
    **2003
      (1)**
    ****
    
    **2002
      (1)**
    ****Production
      expenses
    
    $
    29,458
    
    $
    20,657
    
    $
    17,137Program
      amortization
    
    
    42,335
    
    
    30,090
    
    
    20,423**Cost
      of Programming**
    
    **$**
    **71,793**
    
    **$**
    **50,747**
    
    **$**
    **37,560**(1)
      Restated to reflect the adoption of FIN 46 (R).
 
 The
amortization of acquired programming for each of our consolidated operations and
for our operations in the Slovak Republic (MARKIZA TV) for 2004, 2003 and 2002
is set out in the table below. For comparison the table also shows the cash paid
for programming by each of our operations in the respective periods. The cash
paid for programming by our operations in Croatia, Romania, Slovenia and Ukraine
is reflected within net cash provided by/(used in) continuing operating
activities in our consolidated statement of cash flows.
 
 **For
      the Years Ended December 31,**
      **(US$
      000's)****2004**
    
    **2003
      (1)**
    
    **2002
      (1)**Program
      amortization:Croatia
      (NOVA TV)
    
    $
    3,695
    
    $
    -
    
    $
    -Romania
      (PRO TV, ACASA and PRO TV INTERNATIONAL)
    
    
    18,215
    
    
    12,413
    
    
    7,830Slovenia
      (POP TV and KANAL A)
    
    
    5,117
    
    
    5,326
    
    
    5,212Ukraine
      (STUDIO 1+1)
    
    
    15,308
    
    
    12,351
    
    
    7,381**42,335**
    
    
    **30,090**
    
    
    **20,423**Slovak
      Republic (MARKIZA TV)
    
    
    9,038
    
    
    9,392
    
    
    8,429**$**
    **51,373**
    
    **$**
    **39,482**
    
    **$**
    **28,852**Cash
      paid for programming:Croatia
      (NOVA TV)
    
    $
    3,076
    
    $
    -
    
    $
    -Romania
      (PRO TV, ACASA and PRO TV INTERNATIONAL)
    
    
    22,164
    
    
    14,876
    
    
    9,570Slovenia
      (POP TV and KANAL A)
    
    
    5,177
    
    
    5,587
    
    
    4,380Ukraine
      (STUDIO 1+1)
    
    
    21,022
    
    
    11,534
    
    
    9,343**51,439**
    
    
    **31,997**
    
    
    **23,293**Slovak
      Republic (MARKIZA TV)
    
    
    8,120
    
    
    9,088
    
    
    7,787**$**
    **59,559**
    
    **$**
    **41,085**
    
    **$**
    **31,080**(1)
      Restated to reflect the adoption of FIN 46 (R).
 
 *Page
12*
 
 ***IV.
Analysis of the Results of Consolidated Operations***
 
 **OVERVIEW**
 
 We
consolidate the financial statements of entities in which we hold more than a
majority voting interest and also those entities which are deemed to be a
Variable Interest Entity of which we are the primary beneficiary as defined by
FIN 46 (R). (For further discussion, see Part II, Item 8, Note 2, "Summary of
Significant Accounting Policies" and Note 25, “Subsidiaries and Investments”).
We consolidate our operations in Croatia, Romania (with the exception of Radio
Pro), Slovenia and Ukraine.
 
 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. We account for our operations in the Slovak Republic in this
manner.
 
 **IV
(a) Net Revenues comparative for 2004 - 2002**
 
 **Consolidated
      Net Revenues****For
      the Years Ended December 31, (US $000's)****2004**
    
    **2003**
    
    ***Movement***
    
    **2003**
    
    **2002**
    
    ***Movement***Croatia
    
    $
    9,757
    
    $
    -
    
    *$*
    *9,757*
    
    $
    -
    
    $
    -
    
    *$*
    *-*Romania
    
    
    73,843
    
    
    51,177
    
    
    *22,666*
    
    
    51,177
    
    
    33,547
    
    
    *17,630*Slovenia
    
    
    45,388
    
    
    37,168
    
    
    *8,220*
    
    
    37,168
    
    
    33,864
    
    
    *3,304*Ukraine
    
    
    53,351
    
    
    36,633
    
    
    *16,718*
    
    
    36,633
    
    
    31,732
    
    
    *4,901***Total
      Consolidated Net Revenues**
    
    **$**
    **182,339**
    
    **$**
    **124,978**
    
    ***$***
    ***57,361***
    
    **$**
    **124,978**
    
    **$**
    **99,143**
    
    ***$***
    ***25,835***
 
 Our
consolidated net revenues increased by 46% in 2004 over 2003 due
to:
 
 ·
    US$
      9.8 million of net revenues from our Croatian operations following the
      acquisition in July 2004 as described above in "Analysis of Segment
      Results";
 
 ·
    A
      44% increase in the net revenues of our Romanian operations as described
      above in "Analysis of Segment Results";
 
 ·
    A
      22% increase in the net revenues of Slovenian operations as described
      above in “Analysis of Segment Results"; and
 
 ·
    A
      46% increase in the net revenues of our Ukrainian operations as described
      above in “Analysis of Segment Results".
 
 Our
consolidated net revenues increased by 26% in 2003 over 2002 due to
a:
 
 ·
    53%
      increase in the net revenues of our Romanian operations as described above
      in "Analysis of Segment Results";
 
 ·
    10%
      increase in the net revenues of Slovenian operations as described above in
      “Analysis of Segment Results"; and
 
 ·
    15%
      increase in the net revenues of our Ukrainian operations as described
      above in "Analysis of Segment Results".
 
 *Page
13*
 
 **IV
(b) Station Operating Costs and Expenses comparative for 2004 -
2002**
 
 **Consolidated
      Station Operating Costs and Expenses****For
      the Years Ended December 31, (US $000's)****2004**
    
    **2003**
    
    ***Movement***
    
    **2003**
    
    **2002**
    
    ***Movement***Croatia
    
    $
    10,163
    
    $
    -
    
    *$*
    *10,163*
    
    $
    -
    
    $
    -
    
    *$*
    *-*Romania
    
    
    45,244
    
    
    36,329
    
    
    *8,915*
    
    
    36,329
    
    
    27,001
    
    
    *9,328*Slovenia
    
    
    23,388
    
    
    21,862
    
    
    *1,526*
    
    
    21,862
    
    
    20,926
    
    
    *936*Ukraine
    
    
    33,276
    
    
    24,440
    
    
    *8,836*
    
    
    24,440
    
    
    19,680
    
    
    *4,760***Total
      Consolidated Station Operating Costs and Expenses**
    
    **$**
    **112,071**
    
    **$**
    **82,631**
    
    ***$***
    ***29,440***
    
    **$**
    **82,631**
    
    **$**
    **67,607**
    
    ***$***
    ***15,024***
 
 Total
consolidated station operating costs and expenses (including amortization of
programming rights and depreciation of fixed assets and other intangibles)
increased by 36% in 2004 compared to 2003 primarily due to:
 
 ·
    US$
      10.2 million of station operating costs and expenses relating to our
      Croatian operations, acquired on July 16,
2004;
 
 ·
    A
      25% increase in the station operating costs and expenses of our Romanian
      operations. Programming amortization increased by US$ 5.8 million due to
      increases in the price of acquired programming, scheduling for extra hours
      of programming following the launch of PRO CINEMA, and a US$ 3.2 million
      increase in production expenses; and
 
 ·
    A
      36% increase in the station operating costs and expenses of our Ukrainian
      operations. Programming amortization increased by US$ 3.0 million and
      production expenses increased by US$ 2.7 million due to a combination of
      extra hours in the programming schedule from September 2004 and increases
      in the prices of Russian programming. Salaries and benefits increased by
      US$ 1.6 million, a large portion of which were staff bonuses. Transmission
      costs and business taxes increased by US$ 1.4 million and US$ 0.9 million
      respectively.
 
 Total
station operating costs and expenses (including amortization of program rights
and depreciation of fixed assets and other intangibles) increased by 22% in 2003
compared to 2002 primarily due to a:
 
 ·
    35%
      increase in the station operating costs and expenses of our Romanian
      operations, including an increase in programming amortization by US$ 4.6
      million due to increased investment in programming, including sports
      programming that was previously acquired pursuant to a related party
      barter agreement, and a US$ 5.5 million increase in salaries costs due to:
      (i) a change in domestic legislation effective in January 2003 which
      increased employers’ liability for social security charges; (ii) salary
      increases that had been deferred for two years; and (iii) bonus incentive
      payments reflecting outstanding performance;
and
 
 ·
    24%
      increase in the station operating costs and expenses of our Ukrainian
      operations, including an increase in programming amortization by US$ 5.2
      million primarily as a result of investment in additional Russian
      programming, the price of which increased by approximately 40% year on
      year.
 
 *Page
14*
  **IV
(c) Station Selling, General and Administrative Expenses comparative for 2004 -
2002**
 
 **Consolidated
      Station Selling, General and Administrative
    Expenses****For
      the Years Ended December 31, (US $000's)****2004**
    
    **2003**
    
    ***Movement***
    
    **2003**
    
    **2002**
    
    ***Movement***Croatia
    
    $
    4,524
    
    $
    -
    
    *$*
    *4,524*
    
    $
    -
    
    $
    -
    
    *$*
    *-*Romania
    
    
    6,442
    
    
    5,503
    
    
    *939*
    
    
    5,503
    
    
    5,125
    
    
    *378*Slovenia
    
    
    4,577
    
    
    3,518
    
    
    *1,059*
    
    
    3,518
    
    
    2,939
    
    
    *579*Ukraine
    
    
    6,569
    
    
    5,224
    
    
    *1,345*
    
    
    5,224
    
    
    6,192
    
    
    *(968*
    *)***Total
      Consolidated Station Selling, General and Administrative
      Expenses**
    
    **$**
    **22,112**
    
    **$**
    **14,245**
    
    ***$***
    ***7,867***
    
    **$**
    **14,245**
    
    **$**
    **14,256**
    
    ***$***
    ***(11***
    ***)***
 
 Total
consolidated station selling, general and administrative expenses increased by
55% in 2004 compared to 2003 primarily due to :
 
 ·
    US$
      4.5 million of station selling, general and administrative expenses from
      our newly acquired Croatian operations;
 
 ·
    A
      17% increase in the station selling, general and administrative expenses
      of our Romanian operations. This increase is primarily due to a lower
      release of bad debt provision compared to 2003 and an increase in
      marketing and research expenses;
 
 ·
    A
      30% increase in the station selling, general and administrative expenses
      of our Slovenian operations due to increased marketing and research
      expenses; and
 
 ·
    A
      26% increase in the station selling, general and administrative expenses
      of our Ukrainian operations due to an increase in operational taxes and
      additional market research to support our successful tender for the
      license to broadcast an additional nine hours per
day.
 
 Station
selling, general and administrative expenses decreased by $ 0.01 million in 2003
compared to 2002 primarily due to a :
 
 ·
    7%
      increase in the station selling, general and administrative expenses of
      our Romanian operations. This increase is primarily due to an increase in
      consulting services off-set by a decrease in our bad debt provision;
      and
 
 ·
    20%
      increase in the station selling, general and administrative expenses of
      our Slovenian operations due to the weakening of the US dollar. In local
      currency terms, costs increased by 3%;
 
 off-set
by a
 
 ·
    16%
      decrease in the station selling, general and administrative expenses of
      our Ukrainian operations. This decrease is primarily due to a charge in
      2002 for withholding tax and a reclassification to production
      costs.
  *Page
15*
  **IV
(d) Consolidated results excluding net revenues, station operating costs and
expenses and station selling, general and administrative expenses for 2004 -
2002**
 
 **For
      the Years Ended December 31, (US $000's)****2004**
    
    **2003**
    
    ***Movement***
    
    **2003**
    
    **2002**
    
    ***Movement***Corporate
      operating costs (including non-cash stock based
    compensation)
    
    
    29,185
    
    
    32,512
    
    
    *(3,327*
    *)*
    
    32,512
    
    
    15,814
    
    
    *16,698*Amortization
      of intangibles
    
    
    231
    
    
    -
    
    
    *231*
    
    
    -
    
    
    -
    
    
    *-*Interest
      income
    
    
    4,318
    
    
    5,507
    
    
    *(1,189*
    *)*
    
    5,507
    
    
    1,841
    
    
    *3,666*Interest
      expense
    
    
    (1,203
    )
    
    (12,010
    )
    
    *10,807*
    
    
    (12,010
    )
    
    (17,453
    )
    
    *5,443*Foreign
      currency exchange gain/(loss), net
    
    
    (574
    )
    
    (10,023
    )
    
    *9,449*
    
    
    (10,023
    )
    
    (10,247
    )
    
    *224*Other
      income/(expense)
    
    
    (698
    )
    
    (2,458
    )
    
    *1,760*
    
    
    (2,458
    )
    
    1,738
    
    
    *(4,196*
    *)*Change
      in fair value of derivative
    
    
    -
    
    
    -
    
    
    *-*
    
    
    -
    
    
    1,108
    
    
    *(1,108*
    *)*Loss
      on write down of investment
    
    
    -
    
    
    -
    
    
    *-*
    
    
    -
    
    
    (2,685
    )
    
    *2,685*Provision
      for income taxes
    
    
    (11,089
    )
    
    (3,760
    )
    
    *(7,329*
    *)*
    
    (3,760
    )
    
    (3,746
    )
    
    *(14*
    *)*Minority
      interest in (income)/loss of consolidated subsidiaries
    
    
    (4,106
    )
    
    (676
    )
    
    *(3,430*
    *)*
    
    (676
    )
    
    (576
    )
    
    *(100*
    *)*Equity
      in income/(loss) of unconsolidated affiliates
    
    
    10,619
    
    
    3,629
    
    
    *6,990*
    
    
    3,629
    
    
    3,448
    
    
    *181*Discontinued
      operations
    
    
    2,524
    
    
    370,213
    
    
    *(367,689*
    *)*
    
    370,213
    
    
    10,922
    
    
    *359,291*
 **Corporate
operating costs (including non-cash stock based
compensation)** for
2004, 2003 and 2002 were as follows:
 
 **For
      the Years Ended December 31, (US $000's)****2004**
    
    **2003**
    
    ***Movement***
    
    **2003**
    
    **2002**
    
    ***Movement***Corporate
      operating costs(excluding non-cash stock based compensation and satellite
      costs)
    
    $
    19,083
    
    $
    16,006
    
    
    *3,077*
    
    $
    16,006
    
    $
    11,937
    
    *$*
    *4,069*Satellite
      costs
    
    
    -
    
    
    3,297
    
    
    *(3,297*
    *)*
    
    3,297
    
    
    123
    
    
    *3,174***Corporate
      operating costs (excluding non-cash stock based
      compensation)**
    
    **$**
    **19,083**
    
    **$**
    **19,303**
    
    
    ***(220***
    ***)***
    **$**
    **19,303**
    
    **$**
    **12,060**
    
    ***$***
    ***7,243***Non-cash
      stock based compensation
    
    
    10,102
    
    
    13,209
    
    
    *(3,107*
    *)*
    
    13,209
    
    
    3,754
    
    
    *9,455***Corporate
      operating costs (including non-cash stock based
      compensation)**
    
    **$**
    **29,185**
    
    **$**
    **32,512**
    
    
    ***(3,327***
    ***)***
    **$**
    **32,512**
    
    **$**
    **15,814**
    
    ***$***
    ***16,698***
 
 ·
    The
      increase in corporate costs (excluding non-cash based stock based
      compensation) in 2004 compared to 2003 was influenced by a 10%
      strengthening of the British pound (the currency in which most of our
      corporate expenses are denominated) against the US dollar. We estimate
      this added approximately US$ 1.0 million to corporate operating costs in
      the period. The main operating cost changes
were:
 
 1. An
increase in corporate operating costs of US$ 3.1 million principally due to:
 ·
    an
      increase in staff related costs caused in part by an increase in corporate
      staff from 20 to 27 (including three staff primarily focused on internal
      audit work related to Sarbanes-Oxley requirements);
  *Page
16*
  ·
    an
      increase in travel expenses as a result of implementation of
      Sarbanes-Oxley certification requirements in respect of internal controls
      and travel related to business development and station visits;
 ·
    an
      increase in press and public relations expenses due to the acquisition of
      our Croatian operations and the TV Nova (Czech Republic) Acquisition in
      the Czech Republic as well as costs associated with our celebration of the
      10thanniversary of our listing on NASDAQ; and
 ·
    increased
      business development expenses incurred in researching potential
      acquisition targets;
 partly
off-set by
 ·
    decreases
      in legal fees following the successful resolution of our arbitration in
      the Czech Republic and by a reduction in insurance
  costs.
 
 2.
Additionally, a charge of US$ 3.3 million was recognized in 2003 relating to the
termination of our remaining corporate satellite contracts. No such charge was
recognized in 2004.
 
 ·
    The
      increase in 2003 compared to 2002 is primarily due to the costs set out
      below and was further influenced by an 8% strengthening of the British
      pound (the currency in which most of our corporate expenses are
      denominated) against the US dollar. We estimate this added approximately
      US$ 0.7 million to corporate operating costs in the period. The main cost
      changes were:
 
 1. An
increase in corporate operating costs of US$ 4.1 million principally due to:
 ·
    an
      increase in staff-related costs due to an increase in the number of
      corporate staff from 18 to 20;
 ·
    an
      increase in travel expenses as a result of station visits and business
      development related travel; and
 ·
    an
      increase in legal and professional fees of US$ 2.5 million arising
      primarily from the implementation of Sarbanes-Oxley requirements,
      including additional audit, audit related and legal costs in respect of
      compliance, and recruitment costs, including CEO and CFO
      recruitment.
 
 2.
Additionally, a charge of US$ 3.3 million was recognized in 2003 relating to the
termination of our remaining corporate satellite contracts.
 
 Non-cash
stock-based compensation costs increased in 2004 over 2003 and 2003 over 2002
primarily due to an increase in the charge in respect of options awarded in
prior periods which are accounted for under FIN44. This charge is driven by the
movement in the price of our stock during the periods. Our stock price per share
increased by 125% in 2004 over 2003 and 201% in 2003 over 2002. (For further
discussion, see Part II, Item 8, Note 13, “Stock Option Plans”).
 
 **Amortization
of intangibles** for 2004
was US$ 0.2 million. This represents the charge for the period following the
purchase price allocation of our increased investment in our Romanian
operations. (For further discussion, see Part II, Item 8, Note 8, "Goodwill and
Intangible Assets"). There was no charge in 2003 or 2002 as a result of our
adoption of FAS 142 “Goodwill and Intangible Assets”. We have performed
impairment reviews on our intangible assets, which have indefinite lives, on an
annual basis and believe that they were not impaired in 2004, 2003 or
2002.
 
 **Interest
income** decreased by US$ 1.2 million in 2004 compared to 2003 primarily as a result of a
higher average cash balance in 2003 compared to 2004 and investments in
short-term securities. Interest income increased by US$ 3.7 million in 2003
compared to 2002 primarily as a result of US$ 4.1 million of interest income
resulting from the investment of our US$ 358.6 million UNCITRAL Award in May
2003 in short-term securities.
 
 **Interest
expense** decreased by US$ 10.8 million in 2004 compared to 2003 and by US$ 5.4 million in
2003 compared to 2002 primarily as a result of the repayment of all outstanding
corporate debt between May and August 2003: our US$ Senior Notes (US$ 100
million) and Euro Senior Notes (Euro 71.6 million, approximately US$ 96.8
million); our outstanding debt and accrued interest with GoldenTree Asset
Management in the sum of US$ 15.3 million; and our outstanding debt and accrued
interest to Czech Sporitelna Bank for a sum of CZK 253.3 million (approximately
US$ 11.3 million).
 
 *Page
17*
 ****
 **Foreign
currency loss:** The
foreign currency exchange loss in 2004 of US$ 0.6 million compared to US$ 10.0
million in 2003 was primarily the result of the impact of the Euro strengthening
by 6% against the US dollar in 2004. This affected the Euro denominated portion
of our Senior Notes which were retired in August 2003.
 
 The
foreign currency exchange losses in 2003 and 2002 are a result of a significant
weakening of the US dollar during 2003 against the Euro and the Czech koruna.
This weakening affected the Euro denominated portion of our Senior Notes
obligations and the outstanding Czech koruna denominated debt. The Euro
denominated Senior Notes and the Czech koruna denominated debt were retired in
August 2003 and May 2003, respectively, when the US dollar was particularly weak
against these currencies.
 
 **Other
income/(expense)** was an
expense of US$ 0.7 million in 2004 primarily as a result of a US$ 0.6 million
charge in relation to the put option regarding our Slovenian operations (for
further discussion, see Part II, Item 8, Note 14, "Commitments and
Contingencies") as well as penalties on withholding tax, partially off-set by a
write back of tax provisions no longer required.
 
 Other
income/(expense) was an expense of US$ 2.5 million in 2003 compared to an income
of US$ 1.7 million in 2002 that resulted from capital debt costs being written
off following the repurchase and early redemption of our Senior Notes in
2003.
 
 **Change
in fair value of derivative:** In
November 2001, we entered into a “swaption” agreement with the Royal Bank of
Scotland which was cancelled in the second quarter 2002. The net change in fair
value of derivative of US$ 1.1 million is the net result of the cancellation. No
such fair valuation was recorded in 2003.
 
 **Loss
on write down of investment** arose in
2002 because we wrote down our investment in STS by US$ 2.7 million in
connection with our acquiring an ownership interest of 34% in Markiza.
 
 **Provision
for income taxes:** Provision
for income taxes was US$ 11.1 million in 2004, US$ 3.8 million in 2003 and US$
3.7 million in 2002. The increase in 2004 is primarily due to our operations
having higher taxable profits.
 
 **Minority
interest in income of consolidated subsidiaries:** Minority
interest in the income of consolidated subsidiaries was US$ 4.1 million in 2004
compared to US$ 0.7 million in 2003 and US$ 0.6 million in 2002. Under US GAAP
the controlling shareholder normally consolidates all losses on the basis that
other shareholders cannot be compelled to and are not expected to be able to
fund the company’s losses. A cash contribution of US$ 1.3 million in 2002 by the
minority shareholders of MPI has allowed us to recoup a like amount of
previously recognized losses. Other small movements reflect changes in the
minority interest in other group companies.
 
 **Equity
in income of unconsolidated affiliates:** As
explained in Part I, Item 1, “Business” some of our broadcasting licenses are
held by unconsolidated affiliates over which we have minority blocking rights
but not majority control. These affiliates are accounted for using the equity
method.
 
 Equity in
income of unconsolidated affiliates was US$ 10.6 million for 2004 compared to
US$ 3.6 million for 2003 and US$ 3.4 million for 2002 as detailed
below:
 
 *Page
18*
  **For
      the Years Ended December 31, (US $000's)****2004**
    
    **2003**
    
    ***Movement***
    
    **2003**
    
    **2002**
    
    ***Movement***Slovak
      Republic operations
    
    $
    10,382
    
    $
    4,521
    
    *$*
    *5,861*
    
    $
    4,521
    
    $
    4,169
    
    *$*
    *352*Romanian
      operations
    
    
    237
    
    
    (215
    )
    
    *452*
    
    
    (215
    )
    
    (1,611
    )
    
    *1,396*Slovenian
      operations
    
    
    -
    
    
    (677
    )
    
    *677*
    
    
    (677
    )
    
    890
    
    
    *(1,567*
    *)***Equity
      in income of unconsolidated affiliates**
    
    **$**
    **10,619**
    
    **$**
    **3,629**
    
    ***$***
    ***6,990***
    
    **$**
    **3,629**
    
    **$**
    **3,448**
    
    ***$***
    ***181***
  **Discontinued
operations:** The
amounts charged to the consolidated income statement in respect of discontinued
operations are as follows:
 
 **For
      the Years Ended December 31, (US $000's)****2004**
    
    **2003**
    
    ***Movement***
    
    **2003**
    
    **2002**
    
    ***Movement***Czech
      RepublicGain/(loss)
      on disposal of discontinued operations
    
    $
    146
    
    $
    384,213
    
    
    *(384,067*
    *)*
    $
    384,213
    
    $
    11,922
    
    *$*
    *372,291*Tax
      on disposal of discontinued operations
    
    
    2,378
    
    
    (14,000
    )
    
    *16,378*
    
    
    (14,000
    )
    
    (1,000
    )
    
    *(13,000*
    *)*Discontinued
      operations
    
    **$**
    **2,524**
    
    **$**
    **370,213**
    
    
    ***(367,689***
    ***)***
    **$**
    **370,213**
    
    **$**
    **10,922**
    
    ***$***
    ***359,291***
 
 *Czech
Republic*
 
 On June
19, 2003, our Board of Directors decided to withdraw from operations in the
Czech Republic. On October 23, 2003 we sold our 93.2% participation interest in
CNTS, our Czech operating company, for US$ 53.2 million.
 
 The
revenues and expenses of the Czech operations and the award income and related
legal expenses have therefore all been treated as discontinued operations for
the year 2004 and the prior year comparatives have been
reclassified.
 
 For
additional information, see Part II, Item 8, Note 22, "Discontinued
Operations".
 
 
 **IV
(e) Consolidated balance sheet as at December 31, 2004 compared to December 31,
2003**
 
 Following
the acquisition of Nova TV (Croatia) and OK in Croatia and with respect to our
consolidated balance as at December 31, 2004, our consolidated current assets
increased by US$ 8.7 million, our consolidated non-current assets increased by
US$ 12.8 million, our consolidated current liabilities increased by US$ 18.7
million (US$ 17.0 million of which is included in accounts payable and accrued
liabilities) and our consolidated non-current liabilities increased by US$ 2.0
million. In addition to this we have recorded US$ 31.4 million of goodwill and
US$ 6.4 million of deferred consideration in our consolidated balance sheet as
at December 31, 2004 (for further information, see Part II, Item 8, Note 9,
"Acquisitions and Disposals").
 
 Our
current income taxes payable have decreased US$ 8.3 million primarily as a
result of our US$ 9.0 million payment to the Dutch Tax Authorities in February
2004 (for further information, see Part II, Item 8, Note 14, "Commitments and
Contingencies"). As at December 31, 2004 we have recorded a US$ 7.1 million
deferred tax liability (US$ 6.2 million in non-current liabilities and US$ 0.9
million in current liabilities) as a result of the impact of applying SFAS 109,
"Accounting for Income Taxes" to intangibles recognized in the period following
our fair value exercise in respect of recent acquisitions. As at December 31,
2004 we have also recorded US$ 10.8 million of acquisition costs in relation to
the TV Nova (Czech Republic) Acquisition (for further information, see Part II,
Item 8, Note 17, "Acquisition Costs").
 
 *Page
19*
 ******
 ***V.
Liquidity and Capital Resources***
 
 *Summary*
 
 As at
December 31, 2004, we had US$ 152.6 million of cash and cash equivalents
compared to US$ 192.2 million as at December 31, 2003. The principal reasons for
the decrease of US$ 39.6 million are as follows:
 
 ·
    US$
      20.3 million payments in connection with the acquisition of an additional
      14% interest in our Romanian operations (for further information, see Part
      II, Item 8, Note 9, "Acquisitions and
Disposals");
 
 ·
    US$
      19.0 million payments in connection with the first payment for our
      acquisition of Nova TV (Croatia) and a further US$ 10.3 million
      reclassified to restricted cash, representing money held in escrow as the
      maximum amount payable in respect of the remaining 25% of the acquisition
      price of Nova TV (Croatia) (for further information, see Part II, Item 8,
      Note 9, "Acquisitions and Disposals"); and
 
 ·
    US$
      11.0 million payments to the Dutch tax authorities (see Part II, Item 8,
      Note 14, "Commitments and Contingencies");
 
 offset
by
 
 ·
    A
      US$ 20.3 million receipt on July 14, 2004 pursuant to our sale of CNTS in
      October 2003 (for further information, see Part II, Item 8, Note 7, "Other
      Receivable").
 
 
 We
believe that our current cash resources are sufficient to allow us to continue
operating for at least the next 12 months and we do not anticipate additional
cash requirements in the near future subject to the matters disclosed under
"Contractual Cash Obligations" and "Cash Outlook", below.
 
 *Contractual
Cash Obligations*
 
 Our
future contractual obligations as at December 31, 2004 are as
follows:
 
 Contractual
      Obligations
    
    Payments
      due by period (US$ 000’s)Total
    
    Less
      than 1 year
    
    1-3
      years
    
    3-5
      years
    
    More
      than 5 yearsLong-Term
      Debt
    
    $
    21,018
    
    $
    2,921
    
    $
    13,662
    
    $
    4,114
    
    $
    321Capital
      Lease Obligations
    
    
    1,316
    
    
    464
    
    
    428
    
    
    272
    
    
    152Operating
      Leases
    
    
    6,829
    
    
    1,783
    
    
    3,011
    
    
    1,641
    
    
    394Unconditional
      Purchase Obligations
    
    
    19,423
    
    
    18,865
    
    
    425
    
    
    106
    
    
    27Other
      Long-Term Obligations
    
    
    9,296
    
    
    2,083
    
    
    4,165
    
    
    3,048
    
    
    -Total
      Contractual Obligations
    
    **$**
    **57,882**
    
    **$**
    **26,116**
    
    **$**
    **21,691**
    
    **$**
    **9,181**
    
    **$**
    **894**
 
 As at
December 31, 2004, we had the following debt:
 
 (1)
    A
      facility of up to Euro 8.0 million (approximately US$ 10.8 million)
      pursuant to a loan agreement among Pro Plus, Bank Austria Creditanstalt
      d.d. (“BACA”) and Nova Ljubljanska banka d.d. which matures in February
      2009. As at December 31, 2004 Euro 6.5 million (approximately US$ 8.8
      million) (December 31, 2003: Euro 8.0 million, approximately US$ 10.1
      million) was drawn by our Slovenian operating company under these
      agreements. This secured loan bears a variable interest rate of the
      European Inter-Banking Official Rate (“EURIBOR”) 6 month rate plus 3.0%
      (EURIBOR - 6 month as at December 31, 2004 was 2.1%). As at December 31,
      2004 a rate of 5.1% applied to this loan. This loan facility is secured by
      the real property, fixed assets and receivables of Pro Plus, which as at
      December 31, 2004 have a carrying amount of approximately US$ 25.4
      million.Principal
      payments of Euro 1.5 million (approximately US$ 2.0 million)were made on these loans in 2004.
  *Page
20*
  (2)
    A
      loan of Sk187 million (approximately US$ 6.6 million)(December
      31, 2003: Sk187 million, approximately US$ 5.7 million)from
      our non-consolidated affiliate, STS.This
      loan bears a variable interest rate of the Bratislava Inter Bank Official
      Rate (“BRIBOR”) 3 month rate plus 2.2% (BRIBOR - 3 month as at December
      31, 2004 was 4.3%). The loan is due to be repaid in full on December 1,
      2005. No principal payments were made on this loan in
  2004.
 (3)
    A
      total of Euro 1.0 million(approximately
      US$ 1.3 million) was drawn down on three loan agreements our Croatian
      operations have with Hypo Alpe-Adria-Bank d.d.These
      loans bear a variable interest rate of the EURIBOR 3 month rate plus 2.5%.
      As at December 31, 2004 a rate of 4.65% applied to these
      loans.These loan facilities are secured by the real property and fixed assets of
      OK, which as at December 31, 2004 have a carrying amount of approximately
      US$ 1.8 million. Principal payments of Euro 0.1 million (approximately US$
      0.1 million)were made on these loans in 2004.
 (4)
    An
      amount of Euro 0.03 million (approximately US$ 0.03 million) was drawn
      down on a fourth loan agreement our Croatian operations have with Hypo
      Alpe-Adria-Bank d.d.This
      loan bears a fixed interest rate of 7.25%.
 (5)
    Euro
      0.2 million (approximately US$ 0.3 million) was drawn down by our Croatian
      operations under a loan agreement with BKS Bank fur Karnten and Steiermark
      AG.This loan bears a variable interest rate of the EURIBOR 3 month rate plus
      3.0%. As at December 31, 2004 a rate of 5.15% applied to this
      loan.Principal payments of Euro 0.1 million (approximately US$ 0.1
      million)were made on these loans in 2004.
 
 In
addition to the above, one of our non-consolidated entities had the following
loan:
 (1)
    On
      July 24, 2002 STS, a 49% owned affiliate, obtained from Vseobecna uverova
      banka, a.s. ("VUB") a mid-term facility of SKK 100 million (US$ 3.5
      million). This facility matures in December 2005, and bears a variable
      interest rate of the BRIBOR 3 month rate plus 1.7% (BRIBOR - 3 month as at
      December 31, 2004 was 4.3%) and is secured by a pledge of certain fixed
      and current assets. The nominal value of receivables under pledge
      according to the contract is US$ 2.5
million.
 
 As at
December 31, 2004, we had programming rights commitments (included within
"Unconditional Purchase Obligations" in the chart above) of US$ 18.1 million in
respect of future programming which includes contracts signed with license
periods starting after December 31, 2004 (2003: US$ 8.2 million).
 
 Included
in Other Long-Term Obligations are our commitments to the Dutch tax authorities
(see Part II, Item 8, Note 14, "Commitments and Contingencies").
 
 See also
Part II, Item 8, Note 26 "Subsequent Events" for information relating to our
obligations under the Framework Agreement for the TV Nova (Czech Republic)
Acquisition.
 
 *Sources
and Uses of Ca* *sh*
 
 Our
ongoing source of cash in the operating stations is primarily the receipt of
payments from advertisers and advertising agencies. This may be supplemented
from time to time by local borrowing. Surplus cash generated in this manner,
after funding the ongoing station operations, may be remitted to us, or to other
shareholders 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 and equity accounted investments.
 
 The laws
under which our operating companies are organized provide 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. In the case of our Dutch and Netherlands
Antilles subsidiaries, our voting power is sufficient to compel the making of
distributions.
 
 *Page
21*
 
 In the
case of Nova TV (Croatia), distributions may be paid from net profits subject to
a reserve of 5% of annual profits until the aggregate reserves equal 5% of the
registered capital of Nova TV (Croatia). In the case of Pro TV, distributions
may be paid from the profits of Pro TV subject to a reserve of 5% of annual
profits until the aggregate reserves equal 20% of Pro TV's registered capital. A
majority vote is required in order for Pro TV to make distributions and we have
sufficient voting power to compel distributions of dividends. In the case of
STS, distributions may be paid from net profits subject to an initial reserve
requirement of 10% of net profits until the reserve fund equals 5% of registered
capital. Subsequently, the reserve requirement is equal to 5% of net profits
until the reserve fund equals 10% of registered capital. We cannot compel the
distributions of dividends by STS. In the case of Pro Plus, distributions may be
paid from the profits of Pro Plus, subject to a reserve equal to 10% of
registered capital being established from accumulated profits. We have a
sufficient majority to compel distributions of dividends from Pro Plus. In the
case of Innova and IMS, distributions may be paid from their profits and there
is no reserve requirement for either company. Our voting power in Innova and IMS
is sufficient to compel the distribution of dividends.
 
 STS has
made dividend distributions to us in 2003 and 2004; Pro Plus has made dividend
distributions to us in 2004.
 
 As at
December 31, 2004 and 2003 the operations had the following unsecured balances
owing to their respective holding companies:
 
 **Country**
    
    
    
    
    
    **As
      at December 31,(US $ 000’s)****2004**
    
    **2003**Croatia
    
    
    
    
    
    
    
    $
    11,087
    
    $
    -Romania
    
    
    (1)
    
    
    
    
    
    37,109
    
    
    37,756Slovak
      Republic
    
    
    
    
    
    
    
    
    -
    
    
    350Slovenia
    
    
    
    
    
    
    
    
    1,590
    
    
    77Ukraine
    
    
    
    
    
    
    
    
    13,459
    
    
    16,243Total
    
    
    
    
    
    
    
    $
    63,245
    
    $
    54,426
 
 (1) In
2003, our Romanian balances were restructured to facilitate repatriation of
certain amounts provided to our Romanian operations. This had the effect of
reducing the receivable by an amount of approximately US$ 6 million that will be
recovered through interest charges over the remaining term.
 
 Prior to
making investments in associated companies, borrowing or repayment of third
party overdraft or debt, or payments to us in excess of current year recharges,
our continuing consolidated operating stations generated cash of US$ 9.0 million
in 2004 compared to US$ 18.4 million in 2003. The decrease in net cash paid to
us is primarily due to negative cash flows arising out of our new Croatian
operations in 2004 and higher capital investment and income tax
payments. STS, our
equity accounted affiliate, generated cash of US$ 6.8 million in 2004 (2003: US$
7.0 million).
 
 
 *Cash
Outlook*
 
 Our
future cash needs will depend on our overall financial performance, the
completion of the TV Nova (Czech Republic) Acquisition as well as any future
investment and development decisions. We anticipate completing the TV Nova
(Czech Republic) Acquisition, which will include closing a transaction for
external financing that will be required to fund this acquisition, during the
first half of 2005. We believe that, taken together, our current cash balances,
the proposed external financing, internally generated cash flow and local
financing of broadcast operations should result in us hav ing
adequate cash resources to meet our debt service and other financial obligations
for the next 12 months.
 
 In July
2004 we acquired Nova TV (Croatia) . We are
also planning on further investment in our Croatian operations. We anticipate
that we can increase our audience share by acquiring higher quality programming
and making additional strategic investments in local productions as well as by
limited capital investment in order to extend our technical reach. We expect
total investment to be in excess of US$ 15 million.
 
 *Page
22*
 
 On
December 13, 2004 we entered into a definitive agreement with PPF to acquire an
85% ownership interest in the TV Nova (Czech
Republic) Group in
the Czech Republic. We expect
the closing of the acquisition of the TV Nova (Czech Republic) Group to occur
during the second quarter of 2005. On February 24, 2005, we entered into the
Krsak Agreement, which provides for our acquiring the 16.67% interest of Mr.
Krsak in CET 21. We expect the transfer of the Krsak Interest to us to occur
during the third quarter of 2005.
 
 *The
aggregate purchase price for the TV Nova (Czech Republic) Acquisition and the
16.67% interest of Mr. Krsak in CET 21 is estimated to be approximately US$ 642
million, consisting of US$ 529 million in cash and the issuance of 3.5 million
shares of our Class A Common Stock to PPF. The purchase price is subject to
adjustments for changes in the debt and working capital levels of the TV Nova
(Czech Republic) Group between the signing date and the closing date of the TV
Nova (Czech Republic) Acquisition. See “Risk Factors” and “Operations by
Country, Expected Acquisitions” in Part I, Item 1. Following the completion of
the TV Nova (Czech Republic) Acquisition and the transfer of Mr. Krsak’s
interest in CET 21 to us, we will have an attributable interest of at least 85%
in the economics of the TV Nova (Czech Republic) Group.*
 
 We have a
call right on the remaining 15% interest in the TV Nova (Czech Republic) Group
held by PPF that is exercisable at any time after the closing date of the TV
Nova (Czech Republic) Acquisition. The call price is capped and will not exceed
25% of the adjusted purchase price for the TV Nova (Czech Republic) Acquisition,
subject to certain adjustments and other terms. It is estimated that the call
price will be approximately US$ 200 million. PPF has a right to put to us its
15% interest in the TV Nova (Czech Republic) Group, exercisable from the first
anniversary of the closing date of the TV Nova (Czech Republic) Acquisition for
an exercise price that is the lesser of (i) 15% of the independently appraised
value of the TV Nova (Czech Republic) business at the time of the exercise of
the put and (ii) 15% of the adjusted purchase price of the TV Nova (Czech
Republic) Acquisition, subject to certain adjustments and other
terms.
 
 The
closing of the TV Nova (Czech Republic) Acquisition is subject to the
satisfaction of a number of conditions, including receipt of an approval from
the Office for the Protection of Economic Competition of the Czech Republic. We
have received this approval with effect from February 3, 2005. In the event the
conditions to the completion of the TV Nova (Czech Republic) Acquisition are not
satisfied by October 1, 2005 or waived, the Framework Agreement will terminate.
Both we and PPF are subject to a payment of a fee of US$ 25.0 million if either
side fails to satisfy the conditions to closing as defined in the Framework
Agreement.
 
 The Krsak
Agreement is also subject to a number of conditions, including the consent of
the Council of the Czech Republic for Radio and Television Broadcasting, and the
consent of the general meeting of CET 21 to the transfer of Mr. Krsak’s interest
to us and the withdrawal of all outstanding legal proceedings by Mr. Krsak
relating to the TV Nova (Czech Republic) business. A failure by one of the
parties to fulfill conditions under the Krsak Agreement may result in penalty
payments being assessed against such party or may allow the other party to
terminate the Agreement. In addition, the failure to obtain third-party consents
within the prescribed time periods may result in the termination of the Krsak
Agreement.
 
 External
financing of approximately US$ 450 million will be required to fund the TV Nova (Czech
Republic) Acquisition.
We have received a commitment from a consortium of banks to provide a bridge
loan of US$ 450 million. Financing of approximately US$ 200 million will be
required to fund the exercise price of the PPF Call. We intend to secure
permanent financing through a public or private offering of debt or equity. The
bridge facility will be secured and contain restrictive covenants. If we are
unable to obtain permanent financing and draw down on the bridge facility, the
interest rate will increase each quarter beginning six months from the initial
drawdown date and significant penalty conditions would be incurred in the event
the bridge loan is not repaid within one year.
 
 The
completion of the TV Nova (Czech Republic) Acquisition, the purchase of the
Krsak Interest and the exercise of the PPF Call and the related financings will
increase our leverage and we will have significant debt service obligations. In
addition, the terms of our indebtedness will 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.
 
 *Page
23*
 
 With the
drawdown of any bridge facility or the completion of a public or private
offering of equity or debt in connection with the completion of the TV Nova (Czech
Republic) Acquisition or, if exercised, the PPF Call, we would continue to expect
that cash
balances, internally generated cash flow and local financing of broadcast
operations should result in us hav ing
adequate cash resources to meet our debt service and other financial obligations
for the next 12 months.
 
 *Tax
Inspections*
 
 Pro Plus
has been the subject of an income tax inspection by the Republic of Slovenia tax
authorities for the years 1995 to 1998. As a result of these inspections the
Slovenian tax authorities had levied an assessment seeking unpaid income taxes,
customs duties and interest charges of SIT 1,073,000,000 (approximately US$ 6.1
million). The Slovenian authorities have asserted that capital contributions and
loans made by us in the years 1995 and 1996 to Pro Plus should be extraordinary
revenue to Pro Plus. On this basis, the Slovenian authorities claim that Pro
Plus made a profit in 1995 and 1996 for which it owes income taxes and interest.
Additionally, the Slovenian tax authorities claim that the fixed assets imported
as capital contributions were subject to customs duties which were not paid. On
February 9, 2001, the Slovenian tax authorities approved the cash capital
contributions for 1995 and 1996. This has reduced the assessment to SIT
636,800,000 (approximately US$ 3.6 million). The matter has been submitted to
the Administrative Court of Ljubljana for a hearing, although currently no date
is set for the hearing. The tax authorities have agreed not to take any action
until a decision is issued by the court.
 
 *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 Note 2 to our consolidated financial statements that
are included in Part II, Item 8 of this Form 10-K. 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 are believed to be reasonable under the
circumstances, the results of which form the basis of making 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 the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements:
 
 *Program
Rights Cost* -
Program Rights Costs consists of programming acquired from third parties and
programming produced locally and forms an important component of our station
broadcasting schedules. These Program Rights Costs are amortized on a systematic
basis over their expected useful lives. During 2004 we initiated a review of our
program rights cost policy. Effective from October 1, 2004 we changed our
amortization policy. The policy was changed after a comprehensive examination of
past periods ratings allocation to both first and second runs. In the first 3
quarters the film licenses were amortized 90% after the first run and 10% after
the second run. Series were amortized 100% after the first run in proportion to
the numbers of shows. In the last quarter, after the change, both films and
series are amortized 65% after the first run and 35% after the second run. The
impact of the change is a lower amortization charge of approximately US$
3.0 million for the year 2004.
 
 *Page
24*
 **
 *Valuation
of Goodwill and Other Intangible Assets* - We
have acquired significant intangible assets that are valued and recorded.
Intangible assets include goodwill, broadcast license costs license acquisition
costs and trademarks, all of which are not amortized under FAS No.142. We assess
the carrying value of these assets on an annual basis, or more frequently if
events or changes in circumstances indicate that such carrying value may not be
recoverable. Other than our annual review, factors we consider important, which
could trigger an impairment review are: under-performance of projected results,
changes in the manner of utilization of the asset, and negative market
conditions or economic trends.
 
 Our
annual assessment of the carrying value of an intangible asset not subject to
amortization is based on discounted future cash flows. When an impairment review
is undertaken, whether it be our annual assessment or if events or changes in
circumstances indicate such carrying value may not be recoverable, certain
variables are utilized in determining cash flows: discount rates, terminal
values, the number of years on which to base the cash flow projections as well
as the assumptions and estimates used to determine the cash inflows and
outflows. We believe that our assumptions are appropriate.
 
 We have,
in addition, acquired intangible assets that are subject to amortization during
2004. These consist of customer relationships and were valued as part of the
increase in our ownership of our Romanian operations. We determined these
customer relationships to have a finite life and will be amortizing them over 8
years. An impairment of an intangible asset, subject to amortization, may occur
if events or changes in circumstances indicate that such carrying value may not
be recoverable in accordance with FAS No. 144.
 
 *Bad
Debt Provision* - We
maintain a bad debt provision for estimated losses resulting from the inability
of our customers to make required payments. If the financial condition of our
customers were to deteriorate additional allowances may be required in future
periods. We periodically review the accounts receivable balances and our
historical bad debt, customer concentrations and customer creditworthiness when
evaluating the adequacy of our provision.
 
 *Deferred
Tax* - We
recognize deferred tax assets if it is probable that sufficient taxable income
will be available in future periods against which the temporary differences and
unused tax losses can be utilized. We have considered future taxable income and
tax planning strategies in assessing whether deferred tax assets should be
recognized.
 
 ******
 ***VII.
Related party matters***
 
 ***Overview***
 
 There is
a limited local market for many specialist television services in the countries
in which we operate, many of which are provided by parties known to be connected
to our local shareholders.  As stated in FAS 57 “Related Party
Disclosures” 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 will continue to
review all of these arrangements.
 
 We
consider related parties to be those shareholders who have direct control and/or
influence and other parties that can significantly influence management; a
"connected" party is one in which we are aware of a family or business
connection to a shareholder.
 
 **Related
Party Loans**
 
 A table
of outstanding loans and advances to related parties in all countries in which
we operate is shown below
 
 *Page
25*
  **As
      at December 31, (US$ 000’s)****2004**
    
    **2003**Consolidated
      Balance Sheet Items - Current Assets*Loans
      to related parties*Boris
      Fuchsmann
    
    $
    300
    
    $
    1,200Inter
      Media
    
    
    -
    
    
    1,302Media
      Pro Pictures
    
    
    -
    
    
    1,347**$**
    **300**
    
    **$**
    **3,849**Consolidated
      Balance Sheet Items - Non-Current Assets*Loans
      to related parties*Boris
      Fuchsmann
    
    **$**
    **2,525**
    
    **$**
    **1,883**
 
 We
received payments against our related party loans during 2004, such that the
current portion of the loans reduced to US$ 0.3 million at December 31, 2004
from US$ 3.8 million at December 31, 2003. Non-current loans to related parties
increased in the year to US$ 2.5 million at December 31, 2004 from US$ 1.9
million at December 31, 2003. This reflects a movement of balances from current
loans to non-current loans.
 
 ***Croatia***
 
 We have
no related party transactions in Croatia.
 
 ***Romania***
 
 We and
Mr. Sarbu are shareholders in MPI , Pro TV and Radio Pro. Our Cooperation
Agreement with Mr. Sarbu requires that related party transactions be approved by
a majority vote of the shareholders. The approval process for related party
transactions was exercised verbally for the period from 1997 to late 2001.
Beginning in 2002 formal, written records have been required and reviews of
related party transactions have been performed. Approval of these has been made
at local board and shareholder meetings.
 
 Mr.
Sarbu, the General Director and minority shareholder in our Romanian operations,
has extensive business interests in Romania, particularly in the media sector.
Due to the limited local market for many specialist television services in
Romania, companies related or connected to Mr. Sarbu were often the sole or
primary supplier of the services that MPI required, and much of the Romanian
business was developed based on services supplied by Mr. Sarbu’s companies.
 
 Following
a review of related party transactions in 2002, the shareholders of MPI decided
to institute reviews of related party transactions, bring services in-house
where possible and place additional controls over the remaining related party
transactions.
 
 *Description
of related party transactions in Romania*
 
 In 1995
we loaned Inter Media SRL US$ 1.3 million to purchase an interest in the
building in which MPI operates. In addition to this, there was a loan due that
has been guaranteed by Mr. Sarbu and one of his companies, Media Pro Pictures
for US$ 1.0 million. On March 29, 2004, we acquired an additional 14% share in
each of our consolidated subsidiaries MPI and Pro TV from Rootland Trading
Limited, which is controlled by Mr. Sarbu, for purchase consideration of US$
20.3 million (see Part II, Item 8, Note 9 “Acquisitions and Disposals”). The
consideration for the acquisition consisted of US$ 16.9 million cash and the
settlement of both the above loans plus all outstanding interest.
 
 *Page
26*
 
 The total
purchases from companies related or connected with Mr. Sarbu in 2004 were
approximately US$ 6.9 million (2003 : US$ 6.6 million, 2002 : US$ 4.4
million).  These were mainly for various production and administrative
related services.  The total sales to companies related or connected with
Mr. Sarbu in 2004 were approximately US$ 0.1 million (2003 : US$ 0.9 million,
2002 : US$ 1.0 million).  At December 31, 2004, companies connected to Mr.
Sarbu had an outstanding balance due to us of US$ 0.6 million (2003 : US$ 0.9
million). At December 31, 2004, companies related to Mr. Sarbu had an
outstanding balance due to us of US$ 0.4 million (2003 : US$ 0.9 million). 
At December 31, 2004, companies related to Mr. Sarbu had an outstanding balance
due to them of US$ 0.6 million (2003 : US$ 0.4 million).
 
 We signed
a Put Option Agreement with Mr. Sarbu in July 2004 that grants him the right to
sell us 5% of his shareholding in MPI and Pro TV between March 1, 2006 and
February 28, 2009 and his remaining shareholding for a twenty-year period
thereafter. The put price will be determined in each instance by an independent
valuation and is subject to a floor price. Following our purchase of a 2%
interest in MPI and Pro TV from Mr. Sarbu, he will be allowed under the Put
Option Agreement to put to us 3% of his shareholding between March 1, 2006 and
February 28, 2009 and his remaining shareholding for a twenty-year period
thereafter. Following an amendment to the Put Option Agreement entered into on
March 3, 2005, Mr. Sarbu may put to us 3% of his shareholding in MPI and Pro TV
between March 1, 2006 and February 28, 2009.
 
 ***Slovenia***
 
 In
connection with the restructuring of our Slovenian operations, we have entered
into a put/call arrangement with the general director of Pro Plus, Marijan
Jurenec, who owns the remaining 3.15% voting and profits interests of Pro Plus
(the operating company). Under the terms of the agreement, Mr. Jurenec generally
has the right to put his interest to us from December 31, 2004 until January 30,
2006 at a price that consists of a fixed component and a variable component
based on station Segment EBITDA. We have the right to call the interest held by
Mr. Jurenec at any time until December 31, 2006 at a price that is the same as
the put price until January 30, 2006 and of approximately Euro 5.4 million
(approximately US$ 7.3 million) thereafter until December 31, 2006, when the
call expires.
 
 ***Slovak
Republic***
 
 Our
operating company in the Slovak Republic, STS, has loaned us Sk187
million (approximately US$ 6.6 million) . The
loan is repayable by us on December 1, 2005 and bears interest at a rate of 3
month BRIBOR+2.2% (BRIBOR - 3 month as at December 31, 2004 was 4.3%), which
rate we believe is comparable to independently negotiated third party rates.
Outstanding interest due to STS at December 31, 2003 was US$ 1.1 million.
 
 STS has a
number of contracts with companies connected to Jan Kovacik, a shareholder in
Markiza, and indirectly STS, for the provision of television programs. Many of
these contracts are for the production of programs that require specialist
studios and specific broadcast rights. STS also sold advertising time through an
advertising agency controlled by Jan Kovacik under an agreement which terminated
on November 30, 2004. The total 2004 advertising sales of STS placed through Mr.
Kovacik’s advertising agency were US$ 1.9 million (2003: US$ 2.5 million, 2002:
US$ 2.1 million), and the total amount due to STS from this agency at December
31, 2004 was US$ 0.4 million (2003 : US$ 2.4 million).
 
 We have
received contractual management fees from STS since 1998. The value of these
fees was US$ 0.4 million, US$ 0.4 million and US$ 0.7 million 2004, 2003 and
2002, respectively. In 2003, the other local shareholders suggested that they
were also entitled to fees for their services to STS. Consequently, we made a
provision of US$ 0.7 million in our consolidated statement of operations
(representing our 70% share of a potential US$ 1.1 million charge against STS).
During 2004, this issue was resolved and our 2004 results include a write-back
of the provision taken in 2003.
 
 *Page
27*
 
 ***Ukraine***
 
 We
contract with Contact Film Studios for the production of certain television
programs. This is a company connected to Boris Fuchsmann, the 40% shareholder
and joint Managing Director of Innova, which is one of the Ukraine operating
companies. Our total purchases from Contact Film Studios in 2004 were US$ 0.1
million (2003: US$ 0.1 million, 2002: US$ nil million). This amount is included
in prepaid programming as at December 31, 2004.
 
 In 1998
we made a loan to Mr. Fuchsmann with a total balance outstanding at December 31,
2004 of US$ 2.8 million (2003: US$ 3.1 million). The interest rate on this loan
is US$ 3 month LIBOR+3%, subject to a minimum of 5% and has a final due date of
November 2006.
 
 Alexander
Rodnyansky, the former general director and current Honorary President of Studio
1+1, continues as the 70% shareholder in the license company. Mr. Rodnyansky is
also the general director of the Russian broadcaster CTC based in Moscow. Studio
1+1 conducts regular co-production business with CTC and plans to continue such
commercial co-operation for future projects. Our total purchases from CTC in
2004 were US$ 0.1 million (2003: US$ 0.4 million, 2002: US$ 0.1
million).
 
 We
acquire legal and consulting services from LLC Legal Company Varlamov and
Partners, headed by the deputy general director of Studio 1+1. Total amount of
services rendered by the company in 2004 was US$ 0.2 million.
 
 We
contract with Vabank for provision of the banking services. This bank is
connected to the minority shareholder and joint Managing Director of Innova
Boris Fuchsmann through his presence on the bank’s Supervisory Board. Our
balance on the current account with Va bank was US$ 1.2 million as at December
31, 2004.
 
 Innova
Marketing is a company wholly owned and headed by Boris Fuchsmann, the 40%
shareholder and joint Managing Director of Innova. Innova Marketing renders
consulting services to Innova The amount of such services provided in 2004 was
US$ 0.2 million.
 
 ***Corporate***
 
 On May
27, 2003 we paid US$ 4.7 million to Ronald S. Lauder, our non-executive Chairman
and controlling shareholder, reimbursing costs previously incurred by him in
pursuing his Czech Republic arbitration. The payment was approved unanimously by
our independent directors following a review of the ways in which the Lauder
arbitration contributed to our success in the UNCITRAL Arbitration against the
Czech Republic.
 
 
 **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.
 
 Central
      European Media Enterprises Ltd.By:
      /s/ Wallace Macmillan
      Wallace
      Macmillan
      Vice
      President - Finance
      (Principal
      Financial Officer and Accounting Officer)April
      1, 2005
 
 *Page
28*