CTC Media 10Q 2013 Q2 Quarterly report

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TABLE OF CONTENTS

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

FORM 10-Q


(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2013
or
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: 000-52003

CTC MEDIA, INC.
(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		58-1869211 (I.R.S. Employer Identification No.)

31A Leningradsky Prospekt
125284 Moscow, Russia
+7-495-785-6333
(Address Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)

2711 Centerville Road, Suite 400
Wilmington, DE 19808
302-636-5400
(Name, Address Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)

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 such 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 ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer ý		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

As of July 31, 2013, there were outstanding 156,224,327 shares of the registrant's common stock, $0.01 par value per share.

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CTC MEDIA, INC.
INDEX

		Page

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of December 31, 2012 and June 30, 2013	3
	Unaudited Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2013	4
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2013	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2013	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	48
PART II.	OTHER INFORMATION	49
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 6.	Exhibits	70
Signatures
Exhibit Index

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains forward-looking statements that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would," or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future results of operations or of financial position or state other "forward- looking" information. The factors described in the "Risk Factors" section of this quarterly report on Form 10-Q, as well as any cautionary language elsewhere in this quarterly report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in these forward-looking statements. Other unknown or unpredictable factors could have material adverse effects on our future results, performance or achievements. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed herein may not occur and actual performance and results may vary from those anticipated or otherwise suggested by such statements. You are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CTC MEDIA, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands of US dollars, except share and per share data)

	December 31, 2012			June 30, 2013

ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 4)	$	55,181		$	24,573
Short-term investments (Note 4)		131,449			138,961
Trade accounts receivable, net of allowance for doubtful accounts (December 31, 2012—$1,136; June 30, 2013—$1,130)		30,549			37,387
Taxes reclaimable		29,855			20,811
Prepayments		68,078			66,959
Programming rights, net (Note 5)		153,076			137,440
Deferred tax assets		31,355			31,399
Other current assets		1,860			4,218

TOTAL CURRENT ASSETS		501,403			461,748

PROPERTY AND EQUIPMENT, net		47,201			39,924
INTANGIBLE ASSETS, net:
Broadcasting licenses		82,276			69,442
Cable network connections		25,616			22,323
Trade names		5,708			5,328
Other intangible assets		5,739			4,173

Net intangible assets		119,339			101,266
GOODWILL		177,950			165,247
PROGRAMMING RIGHTS, net (Note 5)		102,216			106,825
INVESTMENTS IN AND ADVANCES TO INVESTEES		5,743			5,467
PREPAYMENTS		11,522			11,988
DEFERRED TAX ASSETS		20,200			20,099

TOTAL ASSETS	$	985,574		$	912,564

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft and loans (Note 4)		13,181			21,088
Accounts payable		80,871			77,214
Accrued liabilities		23,445			25,022
Taxes payable		37,524			22,361
Deferred revenue		9,048			9,174
Deferred tax liabilities		39,021			38,327

TOTAL CURRENT LIABILITIES		203,090			193,186

DEFERRED TAX LIABILITIES		19,558			15,651
COMMITMENTS AND CONTINGENCIES (Note 9)		—			—
STOCKHOLDERS' EQUITY (Note 6):
Common stock ($0.01 par value; shares authorized 175,772,173; shares issued December 31, 2012—158,160,719; June 30, 2013—158,210,719)		1,582			1,582
Additional paid-in capital		491,925			494,216
Retained earnings		333,003			344,254
Accumulated other comprehensive loss		(68,187	)		(124,544	)
Less: Common stock held in treasury, at cost (June 30, 2013—1,327,093 shares)		—			(16,027	)
Non-controlling interest		4,603			4,246

TOTAL STOCKHOLDERS' EQUITY		762,926			703,727

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	985,574		$	912,564

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

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CTC MEDIA, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands of US dollars, except share and per share data)

	Three months ended June 30,						Six months ended June 30,

	2012			2013			2012			2013
REVENUES:
Advertising	$	183,393		$	199,554		$	364,062		$	389,586
Sublicensing and own production revenue		3,049			5,107			12,290			9,010
Other revenue		1,142			1,354			2,352			2,706

Total operating revenues		187,584			206,015			378,704			401,302

EXPENSES:
Direct operating expenses (exclusive of programming expenses, shown below; exclusive of depreciation and amortization of $4,098 and $7,334 for the three months and $8,209 and $14,794 for the six months ended June 30, 2012 and 2013, respectively; and exclusive of stock-based compensation of $(121) and $761 for the three months and $812 and $1,443 for the six months ended June 30, 2012 and 2013, respectively)		(11,332	)		(11,457	)		(23,191	)		(22,900	)
Selling, general and administrative (exclusive of depreciation and amortization of $885 and $1,024 for the three months and $1,931 and $2,029 for the six months ended June 30, 2012 and 2013, respectively; and exclusive of stock-based compensation of $831and $539 for the three months and $2,809 and $1,195 for the six months ended June 30, 2012 and 2013, respectively)		(41,543	)		(43,967	)		(84,271	)		(84,732	)
Stock-based compensation expense		(710	)		(1,300	)		(3,621	)		(2,638	)
Programming expenses		(79,894	)		(91,538	)		(158,388	)		(182,630	)
Depreciation and amortization		(4,983	)		(8,358	)		(10,140	)		(16,823	)

Total operating expenses		(138,462	)		(156,620	)		(279,611	)		(309,723	)

OPERATING INCOME		49,122			49,395			99,093			91,579
FOREIGN CURRENCY GAINS		1,955			690			551			1,236
INTEREST INCOME		1,859			2,654			3,988			5,970
INTEREST EXPENSE		(164	)		(192	)		(365	)		(399	)
OTHER NON-OPERATING INCOME (LOSS), net		617			246			846			(103	)
EQUITY IN INCOME OF INVESTEE COMPANIES		275			252			434			455

Income before income tax		53,664			53,045			104,547			98,738

INCOME TAX EXPENSE		(18,225	)		(19,222	)		(35,496	)		(35,481	)

CONSOLIDATED NET INCOME	$	35,439		$	33,823		$	69,051		$	63,257

LESS: INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST	$	(1,393	)	$	(2,230	)	$	(2,383	)	$	(3,076	)

NET INCOME ATTRIBUTABLE TO CTC MEDIA, INC. STOCKHOLDERS	$	34,046		$	31,593		$	66,668		$	60,181

Net income per share attributable to CTC Media, Inc. stockholders—basic	$	0.22		$	0.20		$	0.42		$	0.38

Net income per share attributable to CTC Media, Inc. stockholders—diluted	$	0.22		$	0.20		$	0.42		$	0.38

Weighted average common shares outstanding—basic		158,160,719			157,763,709			157,648,016			157,957,669

Weighted average common shares outstanding—diluted		158,160,719			157,849,341			157,880,218			157,989,322

Dividends declared per share	$	0.13		$	0.16		$	0.26		$	0.31

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

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CTC MEDIA, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)

(in thousands of US dollars, except share and per share data)

	Three months ended June 30,						Six months ended June 30,

	2012			2013			2012			2013
Net Income	$	35,439		$	33,823		$	69,051		$	63,257
Other Comprehensive loss:
Foreign Currency Translation Adjustment		(86,347	)		(38,629	)		(16,787	)		(56,485	)

Other Comprehensive loss		(86,347	)		(38,629	)		(16,787	)		(56,485	)

Comprehensive income (loss)	$	(50,908	)	$	(4,806	)	$	52,264		$	6,772

Less: Comprehensive income attributable to non-controlling interest		(1,074	)		(2,106	)		(2,417	)		(2,948	)

Comprehensive income (loss) attributable to CTC Media, Inc. stockholders	$	(51,982	)	$	(6,912	)	$	49,847		$	3,824

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

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CTC MEDIA, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of US dollars)

	Six months ended June 30,

	2012			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Consolidated net income	$	69,051		$	63,257
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax expense (benefit)		2,750			(6,826	)
Depreciation and amortization		10,140			16,823
Programming expenses		158,388			182,630
Stock based compensation expense		3,621			2,638
Equity in income of unconsolidated investees		(434	)		(455	)
Foreign currency gains		(551	)		(1,236	)
Changes in operating assets and liabilities:
Trade accounts receivable		(4,696	)		(4,666	)
Prepayments		(1,425	)		(140	)
Other assets		(4,166	)		8,218
Accounts payable and accrued liabilities		4,064			(2,228	)
Deferred revenue		2,313			1,073
Other liabilities		(4,161	)		(14,544	)
Dividends received from equity investees		485			523
Acquisition of programming and sublicensing rights		(173,450	)		(196,180	)

Net cash provided by operating activities		61,929			48,887

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment and intangible assets		(5,782	)		(1,926	)
Acquisitions of businesses, net of cash acquired		(2,683	)		—
Receipts from/(investments in) deposits, net		17,560			(15,436	)

Net cash provided by/(used in) investing activities		9,095			(17,362	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock		—			(16,027	)
Proceeds from exercise of stock options		4,615			454
Proceeds from/(settlement of) overdraft and loans, net		(17,530	)		8,046
Dividends paid to stockholders		(41,122	)		(48,930	)
Dividends paid to noncontrolling interest		(3,064	)		(3,238	)

Net cash used in financing activities		(57,101	)		(59,695	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		(446	)		(2,438	)
Net increase/(decrease) in cash and cash equivalents		13,477			(30,608	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		12,331			55,181

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	25,808		$	24,573

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

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of US dollars, except share and per share data)

1. ORGANIZATION

The accompanying consolidated financial statements include the accounts of CTC Media, Inc. and all consolidated subsidiaries (the "Company"). CTC Media, Inc., a Delaware corporation, operates the CTC, Domashny and Peretz television channels in Russia and Channel 31 in Kazakhstan. Historically, there were eight reportable segments: CTC Network, Domashny Network, Peretz Network, CTC Television Station Group, Domashny Television Station Group, Peretz Television Station Group, CIS Group and Production Group. Effective January 1, 2013, the Company changed its reportable segments in the way it reorganized reporting financial information to make operating decisions. Following the reorganization of reporting financial information, the Company's management and board of directors ("BOD") evaluate and manage performance of the Group and make operating decisions based primarily on its three Russia-based television channels (CTC, Domashny, and Peretz) and Channel 31 in Kazakhstan. Each channel includes operating results of its network which is responsible for broadcasting operations, including sales of its networks' advertising, licensing and commissioning of programming, producing its programming schedule, managing its relationships with its independent affiliates, and the respective stations that distribute the network's signal. Each channel is also allocated the internal margin on programming acquired from the Company's in-house production unit. The Company's other less significant operating segments are included along with the Company's headquarters' operations in the "All Other" category for financial reporting purposes.

The Company generates substantially all of its revenues from the sale of television advertising on both a national and regional basis. The Company also generates revenues from the sublicensing of programming rights and licensing of internally-produced programming to third parties.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements for the three and six months ended June 30, 2013 should be read in conjunction with the consolidated financial statements contained in the Company's Annual Report on Form 10-K filed with the US Securities and Exchange Commission (the "SEC") on March 6, 2013. The Company's accounting policies are more fully described in the Annual Report. The preparation of the Company's unaudited condensed consolidated financial statements requires the Company to make judgments in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for 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. The following discussion addresses the Company's most critical accounting policies, which require management's most difficult, subjective and complex judgments.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been recorded. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

The condensed consolidated balance sheet at December 31, 2012 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for the complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2012.

Principles of Consolidation

Wholly owned subsidiaries and majority owned ventures where the Company has operating and financial control, as well as variable interest entities where the Company has been deemed the primary beneficiary with power and ability to control, are consolidated. Those ventures where the Company exercises significant influence, but does not exercise operating and financial control, are accounted for under the equity method. The Company uses the purchase method of accounting for all business combinations. Results of subsidiaries acquired and accounted for under the purchase method are included in operations from the date of acquisition. Noncontrolling interests represent a noncontrolling shareholder's proportionate share of the equity in certain of the Company's consolidated entities. Intercompany accounts and transactions are eliminated upon consolidation. Disposals are reflected at the time risks and rewards of ownership have been transferred.

The Company is the primary beneficiary of the Channel 31 Group, a variable interest entity consisting of a 20% participation interest in Teleradiokompaniya 31st Kanal LLP ("Channel 31"), and a 70% and 60% interest in Prim LLP and Advertising and Marketing LLP, respectively, which provide programming content and the advertising sales function to Channel 31 (together, the "Channel 31 Group"). These interests provide the Company with a right to 60% of the economic interest of the Channel 31 Group. The Company consolidates the Channel 31 Group. As of June 30, 2013, the Channel 31 Group had assets (excluding intercompany assets) totaling $22,224 and liabilities (excluding intercompany liabilities) totaling $9,721. These assets and liabilities primarily relate to broadcasting licenses, trade payables for programming rights, loans and related deferred tax assets and liabilities. The Company finances the Channel 31 Group's operations in the ordinary course of business. Channel 31 Group's net income attributable to CTC Media, Inc. stockholders excluding intercompany expenses totaled $933 and $633 for the three and six months ended June 30, 2013, respectively.

Seasonality

The Company experiences seasonal fluctuations in overall television viewership and advertising revenues. Overall television viewership is lower during the summer months and highest in the first and fourth quarters. Seasonal fluctuations in consumer patterns also affect television advertising

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

expenditures. In 2012, approximately 33% of the Company's total advertising revenues were generated in the fourth quarter.

Use of Estimates

The preparation of financial statements in conformity with the accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in the financial statements include, among others, the estimate of fair values in business combinations, estimates of the fair value of the Company's common stock in determining stock-based compensation, the amortization method and periods for programming rights, useful lives of tangible and intangible assets, impairment of goodwill, valuation of intangible assets and long-lived assets, estimates of contingencies, and the determination of valuation allowances for deferred tax assets. Consequently, actual results may differ from those estimates.

Revenue Recognition

Revenue is recognized when there is persuasive evidence of an arrangement, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. An allowance for doubtful accounts is maintained for estimated losses resulting from the customers' inability to make payments. The Company recognizes advertising revenues at the moment when the advertising is broadcast and net of Value Added Taxes ("VAT").

The Company's own sales house serves as the exclusive advertising sales agent for all of its channels in Russia, and the advertising is placed with advertisers and their agencies under direct sales arrangements with them. The sales house is primarily responsible for all national and regional advertising sales, with the exception of advertising sales to several local clients of regional stations, which are made through Video International. The Company recognizes its Russian advertising revenues, excluding regional advertising revenues from local clients, based on the gross amounts billed to the advertisers and their agencies under direct sales arrangements. Advertising sales to local clients of regional stations under the Company's agency agreements with Video International are recognized net of agency commissions. Compensation expenses payable to Video International for the use of advertising software, related maintenance and analytical support and consulting services are included in selling, general and administrative expenses in the Company's consolidated statement of income.

Sublicensing revenues primarily represent revenues the Company earns from sublicensing its rights to programming and from licensing of internally-produced programming. Sublicensing revenue is recognized at such time as there is persuasive evidence that a sale or arrangement with a customer exists, the underlying programming is complete and has been transferred to the customer, the licensing period has commenced and the customer can begin use, the arrangement fee is fixed or determinable, and collection of the arrangement fee is reasonably assured.

Payments received in advance for advertising and other revenue are recorded as deferred revenue until earned.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Programming rights

Programming rights are stated at the lower of their amortized cost or net realizable value. The Company reports an asset and liability for the rights acquired and obligations incurred at the commencement of the licensing period when the cost of the programming is known or reasonably determinable, the program material has been accepted and the programming is available for airing.

The Company's programming rights also include internally produced programming. The cost of such programming includes expenses related to the acquisition of format rights, direct costs associated with production and capitalized overhead. The Company capitalizes production costs, including costs of individuals or departments with exclusive or significant responsibility for the production of programming that can be allocated to such particular programming, as a component of programming costs. Internally-produced programming is reported at the lower of amortized cost or fair value.

Purchased program rights are classified as current or non-current assets based on anticipated usage. Internally produced and purchased programming with unlimited rights are classified as non-current.

The Company amortizes programming based on expected revenue generation patterns, based on the proportion that current estimated revenues bear to the estimated remaining total lifetime revenues. If the initial airing of content allowed by a license is expected to provide more value than subsequent airings, the Company applies an accelerated method of amortization. These accelerated methods of amortization depend on the estimated number of runs the content is expected to receive, and are determined based on a study of historical results for similar programming. For content that is expected to be aired only once, the entire cost is recognized as an expense on the first run. To the extent that the revenues the Company expects to earn from broadcasting a program are lower than the book value, the program rights are written down to their net realizable value by way of recording an additional amortization charge. Such write-downs establish a new cost basis for programming rights.

Amortizable Long-Lived Assets

Amortizable assets are stated at cost less accumulated amortization. Definite-lived intangible assets primarily represent broadcast licenses and cable network connections. Cable network connections are amortized on a straight-line basis over their estimated period of future economic benefit, until approximately 2018.

Until September 30, 2012, the Company's broadcasting licenses were determined to have indefinite lives and were subject to annual impairment reviews. As of September 30, 2012, as a result of developments in the transition to digital broadcasting, the Company changed its estimate of the useful lives of its broadcasting licenses from indefinite to definite. See the Annual Report on Form 10-K filed with the SEC on March 6, 2013—"Item 8. Financial Statements and Supplementary Data—Note 10, Impairment loss". Starting from October 1, 2012, the Company began to amortize the remaining balances of its broadcasting licenses on a straight-line basis over each broadcasting license's estimated remaining useful life, ranging from 2.75 to 5.75 years, depending on the region.

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by the standard contains three levels as follows:

Level 1—Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2—Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets in non-active markets; (3) inputs other than quoted prices that are observable for the asset or liability; and (4) inputs that are derived principally from or corroborated by other observable market data.

Level 3—Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions.

There were no transfers between categories during the periods presented.

The fair values of the Company's derivative assets of $1,946 and derivative liabilities of $60 have been classified as Level 2. The fair value of the Company's foreign exchange forward contracts is determined based on the present value of future cash flows using market-based observable inputs such as forward rates, discounts rates and foreign currency exchange rates. Counterparty credit risk did not have a material impact on derivative fair value estimates. The Company's derivative instruments are short-term in nature, primarily one month to one year in duration.

The carrying amounts of the Company's financial instruments, which include cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate their fair value as of December 31, 2012 and June 30, 2013, respectively.

Goodwill and Indefinite-Lived Intangible Assets Impairment Tests

The Company assesses the carrying value of its goodwill on an annual basis, or more frequently if events or changes in circumstances indicate that such carrying value may not be recoverable. Other than its annual review, factors the Company considers important which could trigger an impairment review include under-performance of reporting units or changes in projected results, changes in the manner of utilization of the asset, a severe and sustained decline in the price of the Company's shares and negative market conditions or economic trends. For a discussion of methodology and major assumptions regarding the Company's impairment test refer to 2012 Annual Report on Form 10-K.

The planned transition to digital broadcasting could impact the Company's assumptions used in economic models and its assessment of the fair value of its reporting units. In December 2012, CTC and Domashny channels were selected in a public tender for inclusion in the second digital multiplex; Peretz channel was not selected. See also "Item 1A. Risk Factors—We may face additional

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2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

expenditures in connection with the planned transition from analog to digital broadcasting in Russia and the necessary investments for digital migration may not be fully monetized".

As of June 30, 2013, the Company estimated that the fair values of CTC, Domashny and Peretz reporting units exceeded their carrying values by more than 10%. The fair value of the Peretz reporting unit is particularly sensitive to changes in revenues and costs that may result depending on the distribution model after the end of analog broadcasting. Currently, the terms for participation in a third digital multiplex in Russia have not been specified. Based on further information about the terms of the transition to digital broadcasting, as well as other future developments, the Company may need to further revise its projected cash flows, which could adversely impact the fair value of its reporting units and related goodwill. As of June 30, 2013, the carrying values of goodwill related to CTC, Domashny and Peretz were $51 million, $26 million and $58 million, respectively.

Also, uncertainty remains concerning global economic stability in the medium-term. Any significant continuation or worsening of the current economic instability could result in decreases in the fair values of goodwill and require the Company to record additional impairment losses that could have a material adverse impact on its net income.

In addition, the fair value of the goodwill attributable to the Company's production operating unit is highly sensitive to the volume of in-house programming that is expected to be produced and sold to the Company's channels for broadcast. If the in-house production unit is not successful in developing and producing appropriate levels of quality programming for the Company's channels, the Company may be required to lower its estimates of future production by this unit. A significant decline in original programming compared with planned volumes, or revision of its current business model may result in downward revisions of the production unit's long-term cash flow projections and may then require the Company to record an impairment of its goodwill. As of June 30, 2013, the carrying value of production unit goodwill was approximately $30 million. The Company believes that control and ownership of content is becoming increasingly important. As a result, the Company continues to support further development of its in-house production in order to secure a steady supply of high-quality original programming, particularly in the key timeslots, given the strong competition from other channels for quality content.

The Company considers all current information in determining the need for or calculating the amount of any impairment charges; however, future changes in events or circumstances could result in decreases in the fair values of its intangible assets and goodwill.

Stock-based compensation expense

The Company estimates the fair value of equity awards at the date of grant using the Black-Scholes option pricing model. The Black-Scholes pricing model was originally developed for use in estimating the fair value of traded options, which have different characteristics than the Company's employee equity awards. The model is also sensitive to changes in the subjective assumptions, which can materially affect the fair value estimate. These subjective assumptions include expected volatility, the expected life of the awards, future employee turnover rates, future employee award exercise behavior and the fair value of the Company's common stock on the date of grant. The Company

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2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

determines the fair value of its common stock by using closing prices as quoted on the NASDAQ Global Select Market. Performance-based nonvested share awards require management to make assumptions regarding the likelihood of achieving the set goals.

Once the Company has estimated the fair value of the equity instruments, it recognizes this estimated cost as stock-based compensation expense over the service period. Equity-based incentive awards that meet liability accounting criteria are remeasured at each reporting date at their fair value until settlement. The fair value of such unsettled equity-based incentive awards is recognized in liabilities.

Tax provisions and valuation allowance for deferred tax assets

The Company records valuation allowances related to the tax effects of deductible temporary differences and loss carryforwards when, in the opinion of management, it is more likely than not that the respective tax assets will not be realized. Changes in the Company's assessment of the probability of realization of deferred tax assets may affect the Company's effective income tax rate.

The Company records temporary differences related to investments in its Russian subsidiaries. These temporary differences consisted primarily of undistributed earnings that the Company does not plan to permanently reinvest in operations outside the United States.

Significant judgment is required to determine when income tax provisions should be recorded and, when facts and circumstances change, when such provisions should be released. Although the Company believes that its judgments and estimates are reasonable, actual results could differ, and the Company may be exposed to impairment losses that could be material.

New Accounting Pronouncements

Effective January 1, 2013, the Company adopted Accounting Standards Update 2011-11, Disclosures about Offsetting Assets and Liabilities ("ASU 2011-11"), Accounting Standards Update 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities ("ASU 2013-01") and Accounting Standards Update 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). The adoption of these amendments did not have a material impact on the Company's condensed consolidated balance sheet or results of operations.

In March 2013, the FASB issued Accounting Standards Update 2013-05, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU 2013-05"). The amendments apply to (i) the release of the cumulative translation adjustment into net income when a parent loses a controlling financial interest in part or all of its investment in a foreign entity (by sale or other transfer event); (ii) the acquisition of a business in stages by increasing an investment in a foreign entity from one accounted for under the equity method to one accounted for as a consolidated investment; or (iii) situations where the foreign entity no longer holds a controlling financial interest in a subsidiary or group of assets that conduct nonprofit activity or business within a foreign entity. The adoption of this guidance, which is effective prospectively for reporting periods beginning after

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2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

December 15, 2013, is not expected to have a material effect on the Company's condensed consolidated balance sheet or results of operations.

In July 2013, the FASB issued Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). The amendments provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The adoption of this guidance, which is effective prospectively for reporting periods beginning after December 15, 2013, is not expected to have a material effect on the Company's condensed consolidated balance sheet or results of operations.

3. NET INCOME PER SHARE

Basic net income per share is computed on the basis of the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares are calculated using the "treasury stock" method and consist of shares underlying outstanding equity awards. The number of shares excluded from the diluted net income per common share computation because their effect was antidilutive was 3,859,419 and 2,619,246 for the three months ended June 30, 2012 and 2013, respectively, and 3,859,419 and 2,715,914 for the six months ended June 30, 2012 and 2013, respectively.

The components of basic and diluted net income per share were as follows:

	Three months ended June 30,				Six months ended June 30,

	2012		2013		2012		2013
Net income attributable to CTC Media, Inc. stockholders	$	34,046	$	31,593	$	66,668	$	60,181

Weighted average common shares outstanding—basic	��
Common stock		158,160,719		157,763,709		157,648,016		157,957,669
Dilutive effect of:
Stock-based awards		—		85,632		232,202		31,653

Weighted average common shares outstanding—diluted		158,160,719		157,849,341		157,880,218		157,989,322
Net income per share attributable to CTC Media, Inc. stockholders:
Basic	$	0.22	$	0.20	$	0.42	$	0.38
Diluted	$	0.22	$	0.20	$	0.42	$	0.38

The numerator used to calculate diluted net income per common share for the three and six months ended June 30, 2012 and 2013 was net income attributable to CTC Media, Inc. stockholders.

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(in thousands of US dollars, except share and per share data)

4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS; BANK OVERDRAFT

The Company's cash and cash equivalents and short-term investments comprise bank accounts and term deposits. Deposits with an original maturity ranging from 91 to 365 days are classified as short-term investments. Below are breakdowns of cash and cash equivalents and short-term investments:

	December 31, 2012		June 30, 2013

Cash and cash equivalents:
Russian ruble bank accounts	$	23,519	$	13,037
US dollar bank accounts		31,021		10,195
Other		641		1,341

Total cash and cash equivalents	$	55,181	$	24,573

	December 31, 2012			June 30, 2013

	Annual interest rate	Amount		Annual interest rate	Amount
Short-term investments:
Ruble-denominated deposits	7.65%–9.25%	$	131,449	6%–9%	$	128,961
US dollar-denominated deposits			—	3.35%–3.52%		10,000

Total short-term investments		$	131,449		$	138,961

Bank overdraft—In July 2012, the Company signed a Ruble-denominated overdraft agreement with Alfa Bank bearing annual interest at the variable Mosprime Overnight rate +2.21% with a credit limit of approximately $31,000. In May 2013, the Company renewed the overdraft agreement with Alfa Bank on the same terms. As of December 31, 2012 and June 30, 2013, the Company had an overdraft position of $13,181 and $17,291 respectively, which are presented as current liabilities on the Company's balance sheets.

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(in thousands of US dollars, except share and per share data)

5. PROGRAMMING RIGHTS, NET

Programming rights as of December 31, 2012 and June 30, 2013 comprise the following:

	December 31, 2012			June 30, 2013

Internally produced—TV broadcasting and theatrical:
Released:
Historical cost	$	150,734		$	161,228
Accumulated amortization		(144,830	)		(150,503	)

Released, net book value		5,904			10,725

Completed and not released		6,796			7,195
In production		1,399			3,241

Total		14,099			21,161

Acquired rights:
Historical cost		707,428			703,585
Accumulated amortization		(466,235	)		(480,481	)

Net book value		241,193			223,104

Total programming rights	$	255,292		$	244,265

Current portion	$	153,076		$	137,440

Non-current portion	$	102,216		$	106,825

The Company expects to amortize approximately $21,161 of internally produced TV programming for its completed and released programs and completed but not yet released programs during the twelve months ending June 30, 2014.

6. STOCKHOLDERS' EQUITY

Stock repurchase program

On March 4, 2013, the Board of Directors approved an open market stock repurchase program, pursuant to which the Company will repurchase up to 2.5 million shares of common stock in the market for use under the Company's 2013 Equity Incentive Plan (the "Plan"). During the six months ended June 30, 2013, the Company repurchased 1,327,093 shares of its common stock at an average price of $12 per share for a total of $16,027. Treasury stock is accounted for under the cost method.

As of December 31, 2012, and June 30, 2013 the Company's issued and outstanding share capital was as follows:

Type

Common stock issued	158,160,719	158,210,719
Less: Common stock held in treasury	—	(1,327,093	)

Common stock outstanding	158,160,719	156,883,626

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6. STOCKHOLDERS' EQUITY (Continued)

Dividends

In 2013, the following dividends were declared and paid:

Declaration date	Per Share Dividend		Aggregate Dividend		Record Date	Payment Date

March 5, 2013	$	0.15	$	23,724	March 20, 2013	March 26 and April 9, 2013
April 30, 2013	$	0.16	$	25,206	June 3, 2013	June 26, 2013

The following table summarizes the changes in stockholders' equity during the six months ended June 30, 2012 and 2013:

	Total			CTC Media, Inc. stockholders			Noncontrolling interest

Stockholders' equity, December 31, 2011	$	697,208		$	693,972		$	3,236
Net Income		69,051			66,668			2,383
Other comprehensive (loss)/income		(16,787	)		(16,821	)		34

Comprehensive income		52,264			49,847			2,417

Share capital		9			9			—
Additional paid-in capital		7,507			7,507			—

Dividends declared		(44,186	)		(41,122	)		(3,064	)

Stockholders' equity, June 30, 2012	$	712,802		$	710,213		$	2,589

	Total			CTC Media, Inc. stockholders			Noncontrolling interest

Stockholders' equity, December 31, 2012	$	762,926		$	758,323		$	4,603
Net Income		63,257			60,181			3,076
Other comprehensive loss		(56,485	)		(56,357	)		(128	)

Comprehensive income		6,772			3,824			2,948

Additional paid-in capital		2,291			2,291			—
Less: Common stock held in treasury		(16,027	)		(16,027	)		—
Dividends declared		(52,235	)		(48,930	)		(3,305	)

Stockholders' equity, June 30, 2013	$	703,727		$	699,481		$	4,246

7. STOCK-BASED COMPENSATION

On March 4, 2013, the Company's Board of Directors approved the Company's 2013 Equity Incentive Plan, which was approved by the Company's stockholders on April 30, 2013 at the 2013 Annual Meeting of Stockholders. The Plan provides for the grant of a variety of forms of awards to acquire up to an aggregate of 2.5 million shares of common stock. The Compensation Committee of the Board has approved an initial round of awards to the Company's employees in the form of restricted stock units ("RSUs") to acquire up to 2.0 million shares of common stock. Such awards will entitle the grantees to receive shares of common stock, at no cost, upon the satisfaction of 2013, 2014

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7. STOCK-BASED COMPENSATION (Continued)

and 2015 performance-based vesting conditions and will become exercisable on a staggered basis over a period of four years from grant. Performance criteria are to be set by the Board of Directors for each of 2013, 2014 and 2015. The grant date for each sub tranche of the awards will be the date when performance criteria for the relevant year are set and communicated to employees.

Exercise is subject to the condition that the closing price of the Company's common stock has exceeded $12.00 per share on at least ten trading days prior to exercise. As of June 30, 2013, this condition had been met. As a condition to the receipt of an award under the Plan, any employee that held an outstanding option award under the Company's 2009 Equity Incentive Plan was required to forfeit the unvested portion of such award; the vested portion of outstanding option awards remained unaffected by the new program.

The Company's Board of Directors approved performance criteria for the 2013 sub-tranche in respect of 676,690 RSUs with a weighted average per unit grant date fair value of $10.55. In the three-and six months ended June 30, 2013, the Company recognized $1.2 million of expense attributable to these RSUs. The Company estimates that the total compensation expense related to awards approved under the Plan not yet recognized as of June 30, 2013 approximates $20 million, which is expected to be expensed over a weighted average period of 3.8 years. The Company expects to settle employee RSU exercises out of treasury stock.

8. INCOME TAX

The Company is subject to US (domestic), Russian and Kazakh income taxes, based on US legislation, Russian tax legislation, Kazakh legislation and the Double Tax Treaty of 1992 between the United States and Russia (the "Treaty"). The Company's Russia- and Kazakhstan-based subsidiaries are subject to Russian and Kazakh income tax. The statutory income tax rate in Russia and Kazakhstan in 2012 and in the first half of 2013 was 20%. US taxable income or losses recorded are reported on CTC Media, Inc.'s US income tax return. CTC Media, Inc.'s taxable revenues consist predominantly of dividends paid by its Russian subsidiaries and interest on deposits. Dividends distributed to CTC Media, Inc. are subject to Russian withholding tax of 5% under the Treaty. Dividends distributed within Russia are subject to a withholding tax of 9% in case of ownership of less than 50%.

The Company's effective income tax rate was 34% and 36% for the three and six months ended June 30, 2012 and 2013, respectively. The increase in effective tax rate when comparing the three- and six-month periods ended June 30, 2012 and 2013 was primarily due to recognition of certain foreign tax credits in the first half of 2012 that were deducted from US income tax.

The tax years ended December 31, 2010, 2011 and 2012 remain subject to examination by the Russian and US tax authorities. The tax years ended December 31, 2008 through 2012 remain subject to examination by the Kazakh tax authorities.

9. COMMITMENTS AND CONTINGENCIES

Operating environment

Russia and Kazakhstan continue to implement economic reforms and to develop the legal, tax and regulatory frameworks to support a market economy. The future stability of the Russian and Kazakh

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9. COMMITMENTS AND CONTINGENCIES (Continued)

economies is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by their governments.

The Russian and Kazakh economies are vulnerable to market downturns and economic slowdowns elsewhere in the world. The recent economic downturn in both the European and global economies has resulted in reduced growth in the advertising market. A continuation of this economic downturn could adversely affect further economic growth, access to capital and cost of capital, which could negatively affect the Company's future financial position, results of operations and business prospects. In the first half of 2013, the Russian and Kazakh governments continued to take measures to support their economies in order to overcome the consequences of the economic downturn. Despite some indications of recovery there continues to be uncertainty regarding further economic growth, access to capital and cost of capital, which could negatively affect the Company's future financial position, results of operations and business prospects.

Although management believes it is taking appropriate measures to support the sustainability of the Company's business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Company's results and financial position in a manner not currently determinable.

Transition to digital broadcasting

The Company believes that the introduction of digitalization will not adversely affect its ability to broadcast in the medium term, as its channels will continue to broadcast in the analog format under existing analog licenses until the transition to the digital format is completed. However, there is currently great uncertainty regarding the effect of the implementation of digital broadcasting on the Company's business models, as it is difficult to predict accurately how the digitalization of broadcasting may affect the market. While digital broadcasting would increase CTC's and Domashny's overall technical penetration, the necessary investments for digital migration may not be fully monetized. In addition, under Roskomnadzor's terms of participation in the second multiplex, the Company expects to encounter certain risks and uncertainties in the execution of the CTC and Domashny channels' business models, which could significantly impact the operations and fair value of its reporting units and related goodwill. Also, uncertainty exists with respect to Peretz' technical penetration and the impact on advertising revenues once analog broadcasting is no longer available. Subject to the availability of further information from the government and market participants, and the Company's ability to make further assessments of the government's plans, additional impairments may be required in the foreseeable future.

Exchange rate

Although the Company's reporting currency is the US dollar, it generates almost all of its revenues through the sale of advertising, which in Russia is sold primarily in rubles. The ruble is also the functional currency of the Company's principal operating subsidiaries. As a result, the Company's reported revenues and results of operations are impacted by fluctuations in the exchange rate between the US dollar and the Russian ruble. Additionally, given that substantially all of its revenues are generated in rubles, the Company faces exchange rate risk relating to payments that it must make in currencies other than the ruble. In the three months ended June 30, 2013, the Russian ruble

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9. COMMITMENTS AND CONTINGENCIES (Continued)

depreciated against the US dollar by 5%, and was on average 2% lower than the average value of the Russian ruble compared to the US dollar during the three months ended June 30, 2012. In the six months ended June 30, 2013, the Russian ruble depreciated against the US dollar by 7%, and was on average 1% lower than the average value of the Russian ruble compared to the US dollar during the six months ended June 30, 2012. If the exchange rate between the ruble and the US dollar were to depreciate, the revenues and operating results of the Company, as reported in US dollars, would be adversely affected.

Derivative Financial instruments

As part of its risk management strategy, the Company uses derivative financial instruments, primarily foreign exchange forward contracts, to mitigate its exposure to currency exchange risk related to US-dollar denominated payments. The Company's objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets and liabilities. It is the Company's policy to enter into foreign currency derivative transactions only to the extent considered necessary to meet its objectives as stated above.

The Company entered into certain foreign exchange forward contracts designated as fair value hedges to protect the value of its existing foreign currency liabilities and firm commitments. For derivative instruments with the notional amount of $32 million that were designated and qualify as fair value hedges, the Company recognized foreign currency gains on the derivative instruments of $46, as well as offsetting foreign currency losses on the hedged item in its consolidated statement of income. In addition, during the six months ended June 30, 2013, the Company entered into short-term non-designated hedges with the notional amount of $96.6 million to mitigate its exposure related to US-dollar denominated payments and recognized foreign currency gains of $3,404 on derivative instruments in its consolidated statement of income.

Purchase commitments

The table below summarizes information with respect to the Company's commitments as of June 30, 2013:

	Total		Through 2013		2014		2015		2016		2017

	(in thousands)
Acquisition of programming rights	$	254,425	$	132,720	$	80,190	$	28,285	$	13,230	$	—
Transmission and satellite fees		82,618		11,286		21,654		19,219		17,790		12,669
Leasehold obligations		34,556		3,504		7,317		7,663		7,894		8,178
Network affiliation agreements		8,025		1,500		2,944		2,264		1,036		281
Acquisition of format rights		1,186		1,186		—		—		—		—
Cable connections		2,989		854		1,708		427		—		—
Payments for intellectual rights		13,197		1,382		2,924		3,085		3,245		2,561
Other contractual obligations		14,968		1,867		3,322		3,455		3,090		3,234

Total	$	411,964	$	154,299	$	120,059	$	64,398	$	46,285	$	26,923

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9. COMMITMENTS AND CONTINGENCIES (Continued)

In addition, in connection with the planned digitalization in Russia and Kazakhstan, the Company may incur additional costs. On March 14, 2013, the Company entered into 10 year transmission agreements with the Russian Television and Radio Network ("RTRS"). Under the terms of these agreements, RTRS will provide to CTC and Domashny all services required for the channels to broadcast their signals in digital format throughout Russia to approximately 141.6 million viewers. The specific services, coverage and equipment to be provided by RTRS will be agreed by the parties on an annual basis pursuant to a roll-out plan forming a part of the principal agreement between the parties. The agreements terminate on March 31, 2023. In 2013, the amount payable to RTRS under the agreements by each of the CTC and Domashny channels is approximately $3 million. Fees payable to RTRS for 2014 and beyond will be calculated on an annual basis according to rates that RTRS will set by October 1st of the prior year and will be impacted by the multiplex infrastructure roll-out. These rates will not change more than once yearly and any annual increases in such rates will be in line with the increases in rates set by the Russian Federal Tariff Service for similar types of services. Governmental authorities have indicated that each channel participating in the second multiplex will be expected to pay up to $26 million annually in transmission fees after the rollout. The Company expects to continue incurring analog transmission costs during the analog-to-digital transition period. In 2012, the Company incurred approximately $26 million of such expenses for all of its channels.

Compliance with Licenses terms

All broadcast television stations in Russia are required to have broadcasting and other operating licenses. Only a limited number of such licenses are available in each locality. These licenses historically generally required renewal every five years. In November 2011, the federal law "Improving Regulation of Mass Media, Television and Radio Broadcasting" came into force and introduced a standard license term of ten years, as well as the new concept of a so-called "universal license". A universal license permits the channel to broadcast through free-to-air, cable and satellite broadcasting, in either digital or analog format. The Company has obtained universal licenses for all its Russian channels.

A broadcaster must conform its programming to the programming concept outlined in the broadcasting license. In particular, the broadcaster is obliged to ensure the compliance of its programming with the declared genres of the channel and to sustain the volume-genre ratio of broadcasted materials prescribed in the license.

The broadcasting license of Channel 31 in Kazakhstan contains various restrictions and obligations. Kazakh law currently requires that broadcasters broadcast at least 50% of their programming in the Kazakh language during every six-hour slot.

The Company may not always be in full compliance with these requirements. Also, the Company's independent affiliates have not always been in full compliance with all the requirements of their licenses or obtained all the licenses necessary for broadcasting. If the terms of a license are not complied with, or if a television station otherwise violates applicable Russian legislation or regulations, the license, after a warning notice from the regulator, may be suspended or terminated (which decision may be appealed in court). If an independent affiliate were to broadcast without all the necessary licenses, broadcasting may be terminated and fines could be imposed. Management believes that the probability of initiation of action against any material owned-and operated station or independent affiliate is remote.

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(in thousands of US dollars, except share and per share data)

9. COMMITMENTS AND CONTINGENCIES (Continued)

Legal and Tax Proceedings

In the ordinary course of business, the Company may be party to various legal and tax proceedings, and subject to claims, certain of which relate to the developing markets and evolving fiscal and regulatory environments in which the Company operates. In the opinion of management, the Company's liability, if any, in all pending litigation, other legal proceedings or other matters, will not have a material effect upon the financial condition, results of operations or liquidity of the Company.

10. SEGMENT INFORMATION

Historically, there were eight reportable segments: CTC Network, Domashny Network, Peretz Network, CTC Television Station Group, Domashny Television Station Group, Peretz Television Station Group, CIS Group and Production Group.

Effective January 1, 2013, the Company changed its reportable segments in the way it reorganized reporting financial information to make operating decisions. Following the reorganization of reporting financial information, the Company's management and Board evaluate and manage performance of the Group and make operating decisions based primarily on the Company's three Russia-based television channels (CTC, Domashny and Peretz) and Channel 31 in Kazakhstan. Beginning January 2013, these channels represent the Company's new reportable segments. Each channel includes operating results of its network which is responsible for broadcasting operations, including sales of its network's advertising, licensing and commissioning of programming, producing its programming schedule and managing its relationships with its independent affiliates, and the respective stations that distribute the network's signal. In addition, each channel is also allocated the internal margin on programming acquired from the Company's in-house production unit.

The Company's other less significant operating segments are included along with headquarters' operations in the "All Other" category for financial reporting purposes. The Company evaluates performance based on the operating results of each segment, among other performance measures.

Segment information for the three and six months ended June 30, 2012 has been restated to conform to the current period presentation.

	Three months ended June 30, 2012

	Operating revenue from external customers		Intersegment revenue			Operating income/ (loss)			Identifiable assets			Depreciation and amortization			Programming expenses
CTC Channel	$	134,231	$	26		$	43,651		$	527,203		$	(1,824	)	$	(58,526	)
Domashny Channel		25,365		91			3,905			134,101			(721	)		(12,338	)
Peretz Channel		20,088		—			4,791			184,088			(1,919	)		(6,231	)
Channel 31		5,785		—			2,011			24,265			(87	)		(2,416	)
All Other		2,115		430			(5,236	)		76,165			(432	)		(383	)
Business segment results	$	187,584	$	547		$	49,122		$	945,822		$	(4,983	)	$	(79,894	)

Eliminations		—		(547	)		—			(40,827	)		—			—
Consolidated results	$	187,584	$	—		$	49,122		$	904,995		$	(4,983	)	$	(79,894	)

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

10. SEGMENT INFORMATION (Continued)

	Three months ended June 30, 2013

	Operating revenue from external customers		Intersegment revenue			Operating income/ (loss)			Identifiable assets			Depreciation and amortization			Programming expenses
CTC Channel	$	145,633	$	156		$	46,000		$	587,586		$	(2,287	)	$	(67,219	)
Domashny Channel		29,981		31			5,632			107,894			(1,933	)		(13,187	)
Peretz Channel		21,352		4			621			144,201			(2,962	)		(8,215	)
Channel 31		6,792		—			2,049			22,299			(740	)		(2,662	)
All Other		2,257		—			(4,907	)		112,340			(436	)		(255	)
Business segment results	$	206,015	$	191		$	49,395		$	974,320		$	(8,358	)	$	(91,538	)

Eliminations		—		(191	)		—			(61,756	)		—			—
Consolidated results	$	206,015	$	—		$	49,395		$	912,564		$	(8,358	)	$	(91,538	)

	Six months ended June 30, 2012

	Operating revenue from external customers		Intersegment revenue			Operating income/ (loss)			Identifiable assets			Depreciation and amortization			Programming expenses
CTC Channel	$	276,186	$	244		$	96,712		$	527,203		$	(3,732	)	$	(113,991	)
Domashny Channel		51,694		198			7,760			134,101			(1,468	)		(25,091	)
Peretz Channel		37,063		27			5,552			184,088			(3,901	)		(13,561	)
Channel 31		9,912		—			2,250			24,265			(180	)		(5,215	)
All Other		3,849		892			(13,181	)		76,165			(859	)		(530	)
Business segment results	$	378,704	$	1,361		$	99,093		$	945,822		$	(10,140	)	$	(158,388	)

Eliminations		—	$	(1,361	)		—		$	(40,827	)		—			—
Consolidated results	$	378,704	$	—		$	99,093		$	904,995		$	(10,140	)	$	(158,388	)

	Six months ended June 30, 2013

	Operating revenue from external customers		Intersegment revenue			Operating income/ (loss)			Identifiable assets			Depreciation and amortization			Programming expenses
CTC Channel	$	284,465	$	568		$	87,950		$	587,586		$	(4,621	)	$	(131,381	)
Domashny Channel		59,460		132			9,737			107,894			(3,914	)		(28,147	)
Peretz Channel		41,903		4			1,690			144,201			(6,035	)		(17,193	)
Channel 31		10,946		—			1,595			22,299			(1,477	)		(5,425	)
All Other		4,528		161			(9,393	)		112,340			(776	)		(484	)
Business segment results	$	401,302	$	865		$	91,579		$	974,320		$	(16,823	)	$	(182,630	)

Eliminations		—		(865	)		—			(61,756	)		—			—
Consolidated results	$	401,302	$	—		$	91,579		$	912,564		$	(16,823	)	$	(182,630	)

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CTC MEDIA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands of US dollars, except share and per share data)

11. SUBSEQUENT EVENTS

On August 2, 2013, the Company's Board declared a dividend of $0.16 per outstanding share of common stock, or approximately $25 million in total, which will be paid on or about September 27, 2013 to shareholders of record as of September 2, 2013. Although it is the Board's current intention to declare and pay further dividends in 2013, there can be no assurance that such additional dividends will in fact be declared and paid. Any such declaration is at the discretion of the Board and will depend upon factors such as the Company's earnings, financial position and cash requirements.

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

The following discussion and analysis relates to our financial condition and results of operations for the three and six months ended June 30, 2012 and 2013. This discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on March 6, 2013 (the "2012 Annual Report") and our Unaudited Condensed Consolidated Financial Statements and the notes thereto appearing elsewhere in this quarterly report.

Executive Summary

	Three months ended June 30,						% of total operating revenues						Change period-to-period

	2012			2013			2012			2013			2013 to 2012
	(in thousands)						% USD			% USD			% USD			% RUR
Total operating revenues	$	187,584		$	206,015			*100*	%		*100*	%		10	%		13	%

Including:
Advertising revenues		183,393			199,554			98	%		97	%		9	%		12	%

Total operating expenses	$	(138,462	)	$	(156,620	)		74	%		76	%		13	%		16	%

Including:
Direct operating expenses		(11,332	)		(11,457	)		6	%		6	%		1	%		2	%
Selling, general and administrative expenses		(41,543	)		(43,967	)		22	%		21	%		6	%		8	%
Programming expenses		(79,894	)		(91,538	)		43	%		44	%		15	%		18	%
Stock based compensation expense		(710	)		(1,300	)		0	%		1	%		83	%		85	%
Depreciation and amortization		(4,983	)		(8,358	)		3	%		4	%		68	%		71	%

Operating income	$	49,122		$	49,395			26	%		24	%		1	%		4	%

Foreign currency gains		1,955			690									(65	)%		(61	)%
Interest income, net		1,695			2,462									45	%		47	%
Other non-operating gains		892			498									(44	)%		(51	)%

Income before income tax	$	53,664		$	53,045			29	%		26	%		(1	)%		2	%

Income tax expense		(18,225	)		(19,222	)								5	%		6	%

Consolidated net income	$	35,439		$	33,823			19	%		16	%		(5	)%		(1	)%

Less: Income attributable to noncontrolling interest	$	(1,393	)	$	(2,230	)								60	%		63	%

Net income attributable to CTC Media, Inc. stockholders	$	34,046		$	31,593			18	%		15	%		(7	)%		(4	)%

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	Six months ended June 30,						% of total operating revenues						Change period-to-period

	2012			2013			2012			2013			2013 to 2012
	(in thousands)						% USD			% USD			% USD			% RUR
Total operating revenues	$	378,704		$	401,302			*100*	%		*100*	%		6	%		8	%

Including:
Advertising revenues		364,062			389,586			96	%		97	%		7	%		9	%

Total operating expenses	$	(279,611	)	$	(309,723	)		74	%		77	%		11	%		13	%

Including:
Direct operating expenses		(23,191	)		(22,900	)		6	%		6	%		(1	)%		0	%
Selling, general and administrative expenses		(84,271	)		(84,732	)		22	%		21	%		1	%		2	%
Programming expenses		(158,388	)		(182,630	)		42	%		46	%		15	%		17	%
Stock based compensation expense		(3,621	)		(2,638	)		1	%		1	%		(27	)%		(24	)%
Depreciation and amortization		(10,140	)		(16,823	)		3	%		4	%		66	%		68	%

Operating income	$	99,093		$	91,579			26	%		23	%		(8	)%		(5	)%

Foreign currency gains		551			1,236									124	%		127	%
Interest income, net		3,623			5,571									54	%		55	%
Other non-operating gains		1,280			352									(73	)%		(74	)%

Income before income tax	$	104,547		$	98,738			28	%		25	%		(6	)%		(3	)%

Income tax expense		(35,496	)		(35,481	)								0	%		2	%

Consolidated net income	$	69,051		$	63,257			18	%		16	%		(8	)%		(5	)%

Less: Income attributable to noncontrolling interest	$	(2,383	)	$	(3,076	)								29	%		31	%

Net income attributable to CTC Media, Inc. stockholders	$	66,668		$	60,181			18	%		15	%		*(10*	)%		(7	)%

Revenues

Our total operating revenues increased by 10% in US dollar terms and 13% in ruble terms when comparing the three months ended June 30, 2012 and 2013 and by 6% in US dollar terms and 8% in ruble terms when comparing the six months ended June 30, 2012 and 2013. Our advertising sales accounted for approximately 97% of total operating revenues during the three-and six-month periods under review. Our advertising sales increased by 9% in US dollar terms and 12% in ruble terms when comparing the three-month periods under review and increased by 7% in US dollar terms and 9% in ruble terms when comparing the six-month periods under review, primarily reflecting the impact of overall Russian television advertising market growth in the periods under review, partially offset by the effect of lower year-on-year target audience shares of Domashny and Peretz channels. In addition, when comparing the three-month periods under review, our advertising sales increased due to increased CTC audience share. Our sublicensing and other revenues increased by 54% in US dollar terms and 61% in ruble terms when comparing the three-month periods under review, primarily due to the timing of sublicensing sales to broadcasters in Ukraine and Russia, and decreased by 20% in US dollar terms and 17% in ruble terms when comparing the six-month periods under review, primarily due to the decrease in the amount of CTC prime time products sold in the first half of 2013. The amount of sublicensing revenues in the first half of 2013 is not indicative of the sublicensing revenues that may be expected for 2013 as a whole.

We estimate that the total Russian television advertising market (which includes both national and regional markets) increased by approximately 11-12% in ruble terms when comparing the two periods

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under review, reflecting higher advertiser demand. The increase in the Russian television advertising market in the first half of 2013 might not be indicative of the market growth that can be expected for 2013 as a whole. We are cautious about the potential negative impact that economic conditions, particularly the global economic slowdown, could have on television advertising spending. If overall spending by the largest multinational advertisers in the Russian television advertising market falls substantially, our advertising revenues may be significantly reduced, materially adversely affecting our results of operations. See "Item 1A. Risk Factors—We derive almost all of our revenues from the sale of advertising, which is sensitive to broader economic conditions. Our revenues may substantially decrease if the economic environment deteriorates in Russia or other CIS countries in which we operate."

The table below provides certain key statistics about the CTC, Domashny, Peretz and Channel 31 television channels:

Audience shares:

	Average target audience share				Average All 4+ audience share				Average target audience share				Average All 4+ audience share

	Three months ended June 30,								Six months ended June 30,
	2012		2013		2012		2013		2012		2013		2012		2013
CTC (Russia)		10.2		11.6		6.5		6.9		11.5		11.4		7.2		6.8
Domashny (Russia)		3.8		3.5		2.7		2.6		3.8		3.3		2.7		2.4
Peretz (Russia)		2.9		2.3		2.1		1.9		2.8		2.4		2.1		1.9
Channel 31 (Kazakhstan)		15.6		12.6		14.7		11.7		15.0		13.0		14.1		12.0

Our Russian channels' target audience shares were affected by overall audience fragmentation. All national free-to-air TV channels in Russia were negatively impacted by increased competition from smaller non-free-to-air and local TV channels viewership in the "All 4+" category, which increased from 12.6% in 2010 to 14.5% in 2011, 15.3% in 2012 and 17.0% in the first half of 2013.

CTC channel's average target audience share among 10 to 45 year-old viewers increased year-on-year in the second quarter of 2013 from 10.2% to 11.6% and slightly decreased from 11.5% to 11.4% when comparing the six-month periods under review, reflecting the timing effect of the launch of the channel's high-rating premieres in the second quarter of 2013 compared to the second quarter of 2012, and audience fragmentation (discussed above). Domashny channel's target audience share among 25-59 year-old female viewers decreased year-on-year in the second quarter of 2013 from 3.8% to 3.5% and from 3.8% to 3.3% when comparing the six-month periods under review. Peretz channel's target audience share among 25 to 49 year-old viewers decreased year-on-year in the second quarter of 2013 from 2.9% to 2.3% and from 2.8% to 2.4% when comparing the six-month periods under review. The decrease in audience share of Domashny and Peretz was primarily due to increased competition from other channels and audience fragmentation (discussed above), changes in the programming grid of Domashny channel as the channel continued to focus on younger audiences and relative underperformance of certain comedy programming of Peretz in the first half of 2013. Peretz channel is continuing to develop its positioning, brand and programming grid in 2013 to be more focused on edgy and action content.

Channel 31's target audience share among 6 to 54 year-old viewers decreased year-on-year in the second quarter of 2013 from 15.6% to 12.6% and from 15.0% to 13.0% when comparing the six-month periods under review, reflecting increased competition from other channels.

See "Item 1A. Risk Factors—A reduction in our audience shares and ratings would likely result in a reduction in our advertising revenues".

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Expenses

Our total operating expenses increased by 13% year-on-year in US dollar terms and 16% in ruble terms when comparing the three-month periods under review, and increased by 11% year-on-year in US dollar terms and 13% in ruble terms when comparing the six-month periods under review.

Direct operating expenses remained approximately flat when comparing the periods under review, largely reflecting the joint effect of decreased integrated sponsorship costs and increased transmission costs relating to our digital broadcasting infrastructure and increased technical penetration of Domashny and Peretz. In the three and six months ended June 30, 2013, transmission costs included digital transmission costs for CTC and Domashny pursuant to the roll-out plan for the second multiplex starting from March 2013 in the amounts of $0.3 million and $0.4 million, respectively. We estimate that we will incur approximately $6 million of such costs for 2013 as a whole (see below).

In connection with the planned digitalization in Russia, we entered into 10-year transmission agreements with the Russian Television and Radio Network (RTRS), a transmission provider, for digital transmission for our CTC and Domashny channels. In 2013, we are required to pay approximately $3 million in digital transmission fees for each channel. Governmental authorities have indicated that each channel participating in the second multiplex will be expected to pay up to $26 million annually for each channel based on planned rollout deadlines, but in the transition period, these annual transmission fees are expected to be lower and are to be paid by way of installment payments as the digital multiplex rollout progresses. We expect to continue incurring analog transmission costs during the analog-to-digital transition period. In 2012, we incurred approximately $26 million of such expenses in aggregate for all our channels. See also "—Key Factors Affecting Our Results of Operations", and "Item 1A. Risk Factors—We may face additional expenditures in connection with the planned transition from analog to digital broadcasting in Russia and Kazakhstan and the necessary investments for digital migration may not be fully monetized".

Selling, general and administrative expenses increased by 6% year-on-year in US dollar terms and 8% in ruble terms when comparing the three-month periods under review, which mostly related to increased advertising and promotion expenses as the result of the timing of advertising campaigns at our channels. When comparing the six-month periods under review, selling, general and administrative expenses were approximately flat.

Stock-based compensation expenses for the three-and six-month periods ended June 30, 2013 represent expenses recognized for the new 2013 Equity Incentive Plan approved by our stockholders at the 2013 Annual Meeting. As a condition to the receipt of an award under the new 2013 Equity Incentive Plan, any employee that held an outstanding option award under our 2009 Equity Incentive Plan was required to forfeit the unvested portion of such award; the vested portion of outstanding option awards remained unaffected by the new program. See also "—2013 Equity Incentive Plan; Options Exchange; Stock Repurchase Program" below.

We expect to recognize stock-based compensation expense related to our new 2013 Equity Incentive Plan of approximately $2.3 million for the remainder of 2013, $6.5 million for 2014, $7.8 million for 2015, $3.1 million for 2016 and $0.3 million for 2017.

Programming expenses increased by 15% year-on-year in US dollar terms and 18% in ruble terms when comparing the three-month periods under review and increased by 15% year-on-year in US dollar terms and 17% in ruble terms when comparing the six-month periods under review, primarily reflecting a more expensive programming mix at CTC channel due to airing more expensive foreign content to support the channel's audience share as well as the expiration of certain licenses. In addition, programming cost growth reflected investments in the Domashny and Peretz programming grids to support the target audience share for Domashny in response to increased competition from other channels and to focus on comedy programming for Peretz.

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Depreciation and amortization expenses increased by 68% year-on-year in US dollar terms and 71% in ruble terms when comparing the three-month periods under review and increased by 66% year-on-year in US dollar terms and 68% in ruble terms when comparing the six-month periods under review. Starting from October 1, 2012, our depreciation and amortization expense includes the amortization of our analog licenses due to a reassessment of their useful lives from indefinite to finite as a result of the planned transition to digital broadcasting in Russia and Kazakhstan.

Due to the reasons discussed aboveour operating income increased by 1% in US dollar terms and 4% in ruble terms to $49.4 million when comparing the three months ended June 30, 2012 and 2013 and decreased by 8% in US dollar terms and 5% in ruble terms to $91.6 million when comparing the six months ended June 30, 2012 and 2013 (2Q 2012: $49.1 million; H1 2012: $99.1 million).

Foreign currency gains of $0.7 and $1.2 million for the three and six months ended June 30, 2013, respectively, represent the impact of ruble depreciation on our dollar-denominated deposits and gains from our forward contracts, partially offset by the impact of ruble depreciation on our dollar-denominated liabilities.

Net interest income increased by 45% year-on-year in US dollar terms and 47% in ruble terms for the three-month periods under review and increased by 54% year-on-year in US dollar terms and 55% in ruble terms for the six-month periods under review, primarily reflecting the increased interest earned on our deposits.

Income tax expense. The effective tax rate was 34% and 36% for the three and six months ended June 30, 2012 and 2013, respectively. The increase in effective tax rate when comparing the three- and six-month periods under review was primarily due to recognition of certain foreign tax credits in the first half of 2012 that were deducted from US income tax.

2013 Equity Incentive Plan; Options Exchange; Stock Repurchase Program

On March 4, 2013, our Board of Directors adopted our 2013 Equity Incentive Plan (the "Plan"), which was approved by the stockholders on April 30, 2013, at the 2013 Annual Meeting. The Plan provides for the grant of awards to acquire up to an aggregate of 2.5 million shares of common stock. The Board has approved an initial round of awards to the Company's employees in the form of restricted share units to acquire up to approximately 2.0 million shares of common stock. Such awards will entitle the grantees to receive shares of common stock, at no cost, upon the satisfaction of performance-based vesting conditions over a period of three years from grant, and will become exercisable on a staggered basis over a period of four years from grant. Exercise is subject to the condition that the closing price of the Company's common stock has exceeded $12.00 per share on at least ten trading days prior to exercise. As of June 30, 2013, this condition had been met.

In addition, on March 4, 2013 the Board of Directors approved an open market stock repurchase program, pursuant to which the Company will repurchase up to 2.5 million shares of common stock in the market for use under the Plan. As of July 31, 2013, the Company had repurchased in the market approximately 1.98 million shares of common stock for use under the Plan.

Key Factors Affecting Our Results of Operations

Our results of operations are affected primarily by the overall demand for and consequent pricing of television advertising, the limited supply of television advertising time, our ability to deliver to advertisers a large share of viewers with desirable demographics, and the availability and cost of quality programming. Our results of operations are also affected by the value of the Russian ruble compared to the US dollar.

Russia, like many other countries, may continue to be affected by economic instability, including a decline in the value of shares traded on its stock exchanges, devaluation of its currency, capital flight

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and a decline in gross domestic product. Additionally, because Russia produces and exports large amounts of oil and gas, its economy is particularly vulnerable to fluctuations in the price of oil and gas in the world market. Decreases in international oil prices have adversely affected and may continue to adversely affect its economy. Total television advertising spending in Russia and Kazakhstan has been adversely affected by recent economic instability. Although conditions have generally improved in recent periods, considerable uncertainty remains concerning economic stability globally in the medium-term. If overall spending by the largest multinational advertisers in the Russian television advertising market falls substantially, our advertising revenues may be significantly reduced, materially adversely affecting our results of operations.

The supply of television advertising time is limited by Russian legislation (as discussed below). As a result of this limited supply of advertising time, we are only able to increase our revenues by delivering larger audience shares and by increasing the price of advertising.

The continued success of our advertising sales depends largely on our ability to attract a large share of the key target audiences, especially during primetime. Our ability to attract our key target audiences in turn depends in large part on our ability to broadcast quality programming. We face strong competition from other television broadcasters for programming content, and we must continue to strive to air programming that addresses evolving audience tastes and trends in television broadcasting.

Television Advertising Sales—We generate substantially all of our revenues from the sale of television advertising on both a national and regional basis. Our own advertising sales house, EvereST-S, serves as the exclusive advertising sales agent for substantially all advertising broadcast on all of our channels in Russia, and the advertising is placed with advertisers and their agencies under direct sales arrangements with them. The sales house is primarily responsible for all national and regional advertising sales, with the exception of advertising sales to several local clients of regional stations, which are made through Video International, an external sales house. Our cooperation model with Video International also provides for the licensing of specialized advertising software by Video International to our internal sales house, as well as the provision by Video International of related software maintenance, analytical support and consulting services.

Current Russian law limits the amount of time that a broadcaster may devote to advertising to no more than 15% of any broadcasting hour. In Kazakhstan, the maximum airtime available for advertising is limited to no more than 20% of total broadcasting time each day.

The level of advertising revenues that we receive is directly tied to our audience shares and ratings. Audience share represents the audience attracted by a channel as a proportion of the total audience watching television. Ratings represent the number of people watching a channel (expressed as a proportion of the total population measured). Because advertisers often seek to reach particular demographic groups, including particular ages and genders, they will often base their advertising placement decisions on ratings among such groups, rather than among the overall population. In prior years, CTC's advertising has generally been placed on the basis of our ratings in CTC's target audience, the 6-54 year-old demographic. Domashny has focused primarily on 25-59 year-old female viewers and Peretz has focused primarily on 25-59 year-old viewers. Starting from 2013, the target demographics for the CTC and Peretz channels were narrowed to "all 10-45" and "all 25-49", respectively, as part of our overall positioning strategy for these channels. These narrower demographic groups are highly commercially attractive for advertisers. While we undertake all necessary steps to maximize the audience numbers and desirable demographics that we deliver to advertisers, there is currently strong competition among the Russian channels for audience and ratings. See "Item 1A. Risk Factors—A reduction in our audience shares and ratings would likely result in a reduction in our advertising revenues".

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Generally, our ability to grow our revenues depends primarily on increases in the price of our advertising, demand for advertising and our ability to increase our advertising inventory by increasing our audience shares, as well as on overall television viewership. Due to the current economic instability, we believe that increases, if any, in the price of our advertising in the near term will be moderate. In addition, because of the current economic instability, sellout rates may decrease, which in turn would negatively impact our revenues. Our ability to increase our advertising inventory at the national level depends upon our success in increasing our audience share, which in turn increases the number of gross ratings points (GRPs) we have available to sell. See also "Item 1A. Risk Factors—A reduction in our audience shares and ratings would likely result in a reduction in our advertising revenues".

Television advertising sales vary over the course of the year. Overall television viewership is lower during the summer months and highest in the first and fourth quarters. Seasonal fluctuations in consumer patterns also affect television advertising expenditures. In 2012, approximately 33% of our total advertising revenues were generated in the fourth quarter.

Transition to digital broadcasting—In December 2012, our CTC and Domashny channels were selected for inclusion in the second digital multiplex. Governmental authorities have also announced that the existing analog broadcasting system will be switched off in stages during the rollout period, and indicated regional deadlines ranging from 2014 to 2017. See also our 2012 Annual Report on Form 10-K for the year ended December 31, 2012.

Governmental authorities have announced plans to introduce a third multiplex which will cover only cities with populations of more than 50,000 people and will be made available to 64% of the Russian population (compared to the second multiplex, which will be made available to 97% of the Russian population), and indicated that the tender for participation in the third multiplex will be held by the end of 2013. Currently, the terms for participation in the third multiplex have not been announced.

Our development strategy covered the eventuality that not all of our channels would be included in the second multiplex. We have already developed and approved an alternative transmission plan, which envisages the use of cable and satellite networks, as well as the internet, to provide a substantial level of technical penetration for Peretz.

On March 14, 2013, CTC and Domashny entered into agreements on identical terms with the Russian Television and Radio Network ("RTRS"). Under the terms of these agreements, RTRS will provide to CTC and Domashny all services required for the channels to broadcast their signals in digital format throughout Russia to approximately 141.6 million viewers. The specific services, coverage and equipment to be provided by RTRS will be agreed by the parties on an annual basis pursuant to a rollout plan forming a part of the principal agreement between the parties. The agreements terminate on March 31, 2023. In 2013, the amount payable to RTRS under the agreements by each of the CTC and Domashny channels is approximately $3 million. Fees payable to RTRS for 2014 and beyond will be calculated on an annual basis according to rates that RTRS will set by October 1st and will be impacted by the multiplex infrastructure rollout. These rates will not change more than once yearly and any annual increases in such rates will be in line with the increases in rates set by the Russian Federal Tariff Service for similar types of services. Governmental authorities have indicated that each channel participating in the second multiplex will be expected to pay up to $26 million annually in transmission fees after the rollout. We expect to continue incurring analog transmission costs during the analog-to-digital transition period. In 2012, we incurred approximately $26 million of such expenses in the aggregate for all of our channels.

Given the terms and fees associated with participation in the second multiplex, we expect to encounter certain risks and uncertainties in the execution of CTC and Domashny channels' business models. Also, current legislation does not provide 'must carry' obligations for cable operators, and accordingly we may be unable to secure or maintain carriage of our channels' signals over cable in

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certain regions, or at transmission rates that are consistent with our historical experience. As a result, there can be no assurance that we will be able to negotiate mutually acceptable transmission agreements in the future relating to the carriage of our signals with cable providers. In addition, uncertainty exists surrounding Peretz's technical penetration and its impact on advertising revenues once the analog broadcasting system has been switched off. It is difficult to predict accurately how the digitalization of broadcasting may affect the market. While digital broadcasting would increase our overall technical penetration, the necessary investments for digital migration may not be fully monetized. See also "Item 1A. Risk Factors—We may face additional expenditures in connection with the planned transition from analog to digital broadcasting in Russia and the necessary investments for digital migration may not be fully monetized".

Segment overview

Historically, we had eight reportable segments: CTC Network, Domashny Network, Peretz Network, CTC Television Station Group, Domashny Television Station Group, Peretz Television Station Group, CIS Group and Production Group. Effective January 1, 2013, we changed our reportable segments and reorganized the way we report financial information and make operational decisions. Following this reorganization, our management and Board of Directors evaluate and manage the performance of the Group and make operational decisions based primarily on our three Russia-based television channels (CTC, Domashny and Peretz) and Channel 31 in Kazakhstan. Each channel's performance takes into account the operating results of its network, which is responsible for broadcasting operations, including sales of the network's advertising, licensing and commissioning of programming, production of its programming schedule, management of its relationships with its independent affiliates, and management of the respective stations that distribute the network's signal. Each channel is also allocated the internal margin on programming acquired from our in-house production unit. Our other less significant operating segments are included along with headquarters' operations in the "All Other" category for financial reporting purposes.

•: CTC channel. CTC channel's principal target audience is 10-45 year-old viewers (in 2012: 6-54 year-old viewers). CTC's technical penetration is 95.1% with its signal covering approximately 100 million people in Russia. CTC channel manages 57 owned-and-operated stations and repeater transmitters that provide 63.1% technical penetration (or 66.4% of the channel's total penetration of 95.1%) and has arrangements with independent affiliate stations that provide 32% technical penetration (or 33.6% of the channel's total penetration of 95.1%).
•: Domashny channel. Domashny channel principally focuses on 25-59 year-old female viewers. Domashny's technical penetration is 88.5% with its signal covering approximately 63 million people in Russia. Domashny channel manages 49 owned-and-operated stations and repeater transmitters that provide 49.1% technical penetration for the Domashny channel (or 55.5% of its total penetration of 88.5%) and has arrangements with independent affiliate stations that provide 39.4% technical penetration (or 44.5% of its total penetration of 88.5%).
•: Peretz channel. Peretz channel principally focuses on 25-49 year-old viewers (in 2012: 25-59 year-old viewers). Peretz's technical penetration is 83.8% with its signal covering approximately 61 million people in Russia. Peretz channel manages 56 owned-and-operated stations and repeater transmitters that provide 54.1% technical penetration (or 64.55% of its total penetration of 83.8%) and has arrangements with independent affiliate stations that provide 29.7% technical penetration (or 35.45% of its total penetration of 83.8%).
•: Channel 31. Channel 31 is a Kazakh television broadcaster targeted principally at 6-54 year-old viewers. The Channel 31 broadcast its signal by 11 repeater transmitters and has arrangements with 12 independent affiliates and 68 local cable operators.

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Comparison of Consolidated Results of Operations for the three- and six-month periods ending June 30, 2012 and 2013

The following table presents the Company's revenues and operating income for three- and six-month periods ending June 30, 2012 and 2013 by segments:

	Three months ended June 30,						Change period-to-period

	2012			2013			2013 to 2012
	(in thousands)						% USD			% RUR
*Total operating revenues*
CTC Channel	$	134,257		$	145,789			9	%		12	%
Domashny Channel		25,456			30,012			18	%		21	%
Peretz Channel		20,088			21,356			6	%		9	%
Channel 31		5,785			6,792			17	%		20	%
All Other		2,545			2,257			(11	)%		(11	)%
Eliminations		(547	)		(191	)		—			—

Total	$	187,584		$	206,015			10	%		13	%

	Six months ended June 30,						Change period-to-period

	2012			2013			2013 to 2012
	(in thousands)						% USD			% RUR
*Total operating revenues*
CTC Channel	$	276,430		$	285,033			3	%		5	%
Domashny Channel		51,892			59,592			15	%		17	%
Peretz Channel		37,090			41,907			13	%		15	%
Channel 31		9,912			10,946			10	%		13	%
All Other		4,741			4,689			(1	)%		(2	)%
Eliminations		(1,361	)		(865	)		—			—

Total	$	378,704		$	401,302			6	%		8	%

	Three months ended June 30,						Change period-to-period

	2012			2013			2013 to 2012
	(in thousands)						% USD			% RUR
*Operating income/(loss)*
CTC Channel	$	43,651		$	46,000			5	%		9	%
Domashny Channel		3,905			5,632			44	%		48	%
Peretz Channel		4,791			621			(87	)%		(87	)%
Channel 31		2,011			2,049			2	%		2	%
All Other		(5,236	)		(4,907	)		(6	)%		(3	)%

Total	$	49,122		$	49,395			1	%		4	%

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	Six months ended June 30,						Change period-to-period

	2012			2013			2013 to 2012
	(in thousands)						% USD			% RUR
*Operating income/(loss)*
CTC Channel	$	96,712		$	87,950			(9	)%		(6	)%
Domashny Channel		7,760			9,737			25	%		28	%
Peretz Channel		5,552			1,690			(70	)%		(69	)%
Channel 31		2,250			1,595			(29	)%		(28	)%
All Other		(13,181	)		(9,393	)		(29	)%		(26	)%

Total	$	99,093		$	91,579			(8	)%		(5	)%

All Other. All other revenues primarily represent revenues from CTC-International and digital media segments; all other operating loss primarily represents expenses of our corporate headquarters and our in-house production unit's administrative costs, the operating results of CTC-International, and digital media segments.

CTC Channel

	Three months ended June 30,						% of total operating revenues						Change period-to-period

	2012			2013			2012			2013			2013 to 2012
	(in thousands)						% USD			% USD			% USD			% RUR
Total operating revenues	$	134,257		$	145,789			*100*	%		*100*	%		9	%		12	%

Including:
Advertising revenues		131,564			141,042			98	%		97	%		7	%		10	%

Total operating expenses	$	(90,606	)	$	(99,789	)		67	%		68	%		10	%		13	%

Including:
Direct operating expenses		(4,501	)		(4,444	)		3	%		3	%		(1	)%		0	%
Selling, general and administrative expenses		(25,755	)		(25,839	)		19	%		18	%		0	%		2	%
Programming expenses		(58,526	)		(67,219	)		44	%		46	%		15	%		18	%
Depreciation and amortization		(1,824	)		(2,287	)		1	%		2	%		25	%		28	%

Operating income	$	43,651		$	46,000			33	%		32	%		5	%		9	%

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	Six months ended June 30,						% of total operating revenues						Change period-to-period

	2012			2013			2012			2013			2013 to 2012
	(in thousands)						% USD			% USD			% USD			% RUR
Total operating revenues	$	276,430		$	285,033			*100*	%		*100*	%		3	%		5	%

Including:
Advertising revenues		264,862			276,652			96	%		97	%		4	%		7	%

Total operating expenses	$	(179,718	)	$	(197,083	)		65	%		69	%		10	%		11	%
	��
Including:
Direct operating expenses		(9,389	)		(8,926	)		3	%		3	%		(5	)%		(3	)%
Selling, general and administrative expenses		(52,606	)		(52,155	)		19	%		18	%		(1	)%		0	%
Programming expenses		(113,991	)		(131,381	)		41	%		46	%		15	%		17	%
Depreciation and amortization		(3,732	)		(4,621	)		1	%		2	%		24	%		25	%

Operating income	$	96,712		$	87,950			35	%		31	%		(9	)%		(6	)%

Revenues

Advertising revenues of CTC channel increased by 10% in ruble terms, when comparing the three-month periods under review, mainly due to an overall increase in advertiser demand, largely reflecting the estimated increase in the overall Russian television advertising market of approximately 11% in ruble terms. The increase in audience share of 14% was partially offset by a decrease in ratings due to a 5% decrease in overall television viewership among 10-45 year-old viewers. When comparing the six-month periods under review, advertising revenues of CTC channel increased by 7% in ruble terms mainly due to an overall increase in advertiser demand, largely reflecting the estimated increase in the overall Russian television advertising market of approximately 12% in ruble terms, partially offset by a decrease in ratings due to a 4% decrease in overall television viewership among 10-45 year-old viewers.

The increase in target audience share of 14% when comparing the three-month periods under review was primarily due to the timing of the launch of the channel's high rating premiers in the second quarter of 2013 compared to the second quarter of 2012. When comparing the six-month periods under review, CTC channel's audience share was approximately flat. See "Item 1A. Risk Factors—A reduction in our audience shares and ratings would likely result in a reduction in our advertising revenues".

Sublicensing and other revenues at CTC channel increased by 82% in ruble terms when comparing the three-month periods under review, primarily due to the timing of sublicensing sales to broadcasters in Ukraine and Russia, and decreased by 26% in ruble terms when comparing the six-month periods under review, primarily due to the decrease in the amount of CTC prime time products sold in the first half of 2013. The amount of sublicensing revenues in the first half of 2013 is not indicative of the revenues that may be expected for 2013 as a whole.

Expenses

Total operating expenses of CTC channel increased by 13% and 11% in ruble terms when comparing the three- and six-month periods under review, respectively, of which an increase of 11 percentage points ("pp") related to an increase in programming expenses (discussed below) when comparing the two periods under review.

Direct operating expenses of CTC channel as a percentage of this segment's total operating revenues were flat at 3% when comparing the three- and six-month periods under review. In ruble terms, when comparing the three-month periods under review, direct operating expenses were approximately flat,

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reflecting the joint effect of a 7pp increase in transmission and maintenance costs as a result of increased maintenance costs for our new digital broadcasting facility from July 2012 and digital transmission costs for CTC in connection with the roll-out plan of the second multiplex starting from March 2013 (see "—Transition to digital broadcasting" above) and a 6pp decrease in integrated sponsorship costs, mainly due to a decreased volume of integrated sponsorship. When comparing the six-month periods under review, direct operating expenses decreased by 3%, of which a decrease of 6pp related to decreased integrated sponsorship costs, partially offset by an increase of 4pp in transmission and maintenance costs (discussed above).

Selling, general and administrative expenses of the CTC channel as a percentage of this segment's total operating revenues decreased from 19% to 18% when comparing the three- and six-month periods under review, primarily due to increased channel revenues. In ruble terms, when comparing the three-month periods under review, selling general and administrative expenses increased by 2%, of which an increase of 5pp related to increased advertising and promotion expenses because of the timing of advertising campaigns as compared to the second quarter of 2012, and an increase of 3pp related to increased salaries and benefits costs due to annual raises and transfers of some employees from other segments to the CTC channel in the second half of 2012, partially offset by a decrease of 3pp in compensation payable to Video International due to the exclusion of certain services from compensation fees in 2013. When comparing the six-month periods under review, selling, general and administrative expenses were approximately flat, reflecting the joint effect of an increase of 4pp related to increases in salaries and benefits costs and a decrease of 4pp in compensation payable to Video International (discussed above).

Programming expenses of the CTC channel as a percentage of this segment's total operating revenues increased from 44% to 46% when comparing the three-month periods under review and from 41% to 46% when comparing the six-month periods under review, mainly due to a more expensive programming mix (discussed below), which was not fully offset by the increase in advertising revenues. In ruble terms, when comparing the three- and six-month periods under review, programming expenses increased by 18% and 17%, respectively, primarily due to airing more expensive foreign content to support channel's audience share as well as resulting from the expiration of certain licenses.

Depreciation and amortization expenses of CTC channel increased by 28% and 25% in ruble terms when comparing the three- and six-month periods under review, respectively, primarily due to the amortization of our analog broadcasting licenses. Starting from October 1, 2012, we commenced amortization of our analog licenses due to a reassessment of their useful lives from indefinite to finite as a result of the planned transition to digital broadcasting.

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Domashny Channel

	Three months ended June 30,						% of total operating revenues						Change period-to-period

	2012			2013			2012			2013			2013 to 2012
	(in thousands)						% USD			% USD			% USD			% RUR
Total operating revenues	$	25,456		$	30,012			*100*	%		*100*	%		18	%		21	%

Including:
Advertising revenues		25,221			29,837			99	%		99	%		18	%		21	%

Total operating expenses	$	(21,551	)	$	(24,380	)		85	%		81	%		13	%		16	%

Including:
Direct operating expenses		(2,746	)		(2,823	)		11	%		9	%		3	%		7	%
Selling, general and administrative expenses		(5,746	)		(6,437	)		23	%		21	%		12	%		12	%
Programming expenses		(12,338	)		(13,187	)		48	%		44	%		7	%		10	%
Depreciation and amortization		(721	)		(1,933	)		3	%		6	%		168	%		170	%

Operating income	$	3,905		$	5,632			15	%		19	%		44	%		48	%

	Six months ended June 30,						% of total operating revenues						Change period-to-period

	2012			2013			2012			2013			2013 to 2012
	(in thousands)						% USD			% USD			% USD			% RUR
Total operating revenues	$	51,892		$	59,592			*100*	%		*100*	%		15	%		17	%

Including:
Advertising revenues		51,040			58,571			98	%		98	%		15	%		17	%

Total operating expenses	$	(44,132	)	$	(49,855	)		85	%		84	%		13	%		15	%

Including:
Direct operating expenses		(5,408	)		(5,718	)		10	%		10	%		6	%		8	%
Selling, general and administrative expenses		(12,165	)		(12,076	)		23	%		20	%		(1	)%		0	%
Programming expenses		(25,091	)		(28,147	)		48	%		47	%		12	%		15	%
Depreciation and amortization		(1,468	)		(3,914	)		3	%		7	%		167	%		170	%

Operating income	$	7,760		$	9,737			15	%		16	%		25	%		28	%

Revenues

Advertising revenues of the Domashny channel increased by 21% and 17% in ruble terms when comparing the three- and six-month periods under review, respectively, principally due to an overall increase in advertiser demand, largely reflecting the estimated increase in the overall Russian television advertising market of approximately 11% in ruble terms when comparing the three-month periods under review and an increase of approximately 12% in ruble terms when comparing the six-month periods under review, which was reflected in increased sellout of the channel's inventory and increased sponsorship revenues, partially offset by 8% and 13% decreases in audience share when comparing the three- and six-month periods under review, respectively, due to changes in the programming grid as the channel continued to focus on younger audiences and enhance the commercial attractiveness of its demographic profile, increased competition from other channels and audience fragmentation.

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Expenses

Total operating expenses of Domashny channel increased by 16% and 15% in ruble terms when comparing the three- and six-month periods under review, respectively, of which increases of 6pp and 8pp related to increased programming expenses (discussed below), respectively, and an increase of 6pp related to increased depreciation and amortization expenses when comparing both periods under review.

Direct operating expenses of Domashny channel as a percentage of this segment's total operating revenues decreased from 11% to 9% when comparing the three-month periods under review and were approximately flat at 10% when comparing the six-month periods under review, mainly due to increased channel revenues. In ruble terms, when comparing the three- and six-month periods under review, direct operating expenses increased by 7% and 8%, respectively, of which increases of 10pp and 8pp, respectively, related to an increase in transmission and maintenance costs as a result of increased maintenance costs for our new digital broadcasting facility from July 2012 and digital transmission costs for Domashny channel in connection with the roll-out plan of the second multiplex starting from March 2013 (see "—Transition to digital broadcasting" above), and increases in technical penetration, partially offset by decreases of 7pp and 5pp, respectively, related to a decreased amount of integrated sponsorship costs, mainly due to a decreased volume of integrated sponsorship.

Selling, general and administrative expenses of Domashny channel as a percentage of this segment's total operating revenues decreased from 23% to 21% when comparing the three-month periods under review and decreased from 23% to 20% when comparing the six-month periods under review, mainly due to increased channel revenues. In ruble terms, when comparing the three-month periods under review, selling, general and administrative expenses increased by 12%, of which 15pp related to increases in advertising and promotion expenses in the second quarter of 2013 as compared to the second quarter of 2012 because of the timing of advertising campaigns. When comparing the six-month periods under review, selling, general and administrative expenses were approximately flat.

Programming expenses of the Domashny channel as a percentage of this segment's total operating revenues decreased from 48% to 44% when comparing the three-month periods under review and from 48% to 47% when comparing the six-month periods under review, mainly due to increased channel revenues.When comparing the three- and six-month periods under review, programming expenses increased by 10% and 15% in ruble terms, respectively, due to more expensive Russian series and movies to support Domashny's strategy of focusing on younger female audiences.

Depreciation and amortization expenses at Domashny channel increased by 170% in ruble terms when comparing the three- and six-month periods under review, primarily due to the amortization of our analog broadcasting licenses. Starting from October 1, 2012, we commenced the amortization of our analog licenses due to a reassessment of their useful lives from indefinite to finite as a result of the planned transition to digital broadcasting.

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Peretz Channel

	Three months ended June 30,						% of total operating revenues						Change period-to-period

	2012			2013			2012			2013			2013 to 2012
	(in thousands)						% USD			% USD			% USD			% RUR
Total operating revenues	$	20,088		$	21,356			*100*	%		*100*	%		6	%		9	%

Including:
Advertising revenues		20,028			20,781			100	%		97	%		4	%		6	%

Total operating expenses	$	(15,297	)	$	(20,735	)		76	%		97	%		36	%		38	%

Including:
Direct operating expenses		(2,574	)		(2,871	)		13	%		13	%		12	%		14	%
Selling, general and administrative expenses		(4,573	)		(6,687	)		23	%		31	%		46	%		48	%
Programming expenses		(6,231	)		(8,215	)		31	%		38	%		32	%		35	%
Depreciation and amortization		(1,919	)		(2,962	)		10	%		14	%		54	%		57	%

Operating income	$	4,791		$	621			24	%		3	%		*(87*	)%		*(87*	)%

	Six months ended June 30,						% of total operating revenues						Change period-to-period

	2012			2013			2012			2013			2013 to 2012
	(in thousands)						% USD			% USD			% USD			% RUR
Total operating revenues	$	37,090		$	41,907			*100*	%		*100*	%		13	%		15	%

Including:
Advertising revenues		36,890			41,232			99	%		98	%		12	%		14	%

Total operating expenses	$	(31,538	)	$	(40,217	)		85	%		96	%		28	%		29	%

Including:
Direct operating expenses		(5,343	)		(5,956	)		14	%		14	%		11	%		13	%
Selling, general and administrative expenses		(8,733	)		(11,033	)		24	%		26	%		26	%		28	%
Programming expenses		(13,561	)		(17,193	)		37	%		41	%		27	%		29	%
Depreciation and amortization		(3,901	)		(6,035	)		11	%		14	%		55	%		57	%

Operating income	$	5,552		$	1,690			15	%		4	%		*(70*	)%		*(69*	)%

Revenues

Advertising revenues of the Peretz channel increased by 6% and 14% in ruble terms when comparing the three- and six-month periods under review, respectively, principally due to overall increases in advertiser demand, largely reflecting the estimated increase in the overall Russian television advertising market of approximately 11% in ruble terms when comparing the three-month periods under review and an increase of approximately 12% in ruble terms when comparing the six-month periods under review, which was reflected in increased sellout of inventory and increased sponsorship revenues, partially offset by 21% and 14% decreases in audience share when comparing the three- and six-month periods under review, respectively, reflecting relative underperformance of certain comedy programming in the first half of 2013 and increased competition from other channels and audience fragmentation. Peretz channel is continuing to develop its positioning, brand and programming grid in 2013 to be more focused on edgy and action programming.

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Expenses

Total operating expenses of the Peretz channel increased by 38% and 29% in ruble terms when comparing the three- and six-month periods under review, respectively, of which increases of 14pp and 12pp, respectively, related to increased programming expenses (discussed below), increases of 14pp and 8pp, respectively, related to increased selling, general and administrative expenses primarily due to increased advertising and promotion and an increase of 7pp related to increased depreciation and amortization expenses (discussed below).

Direct operating expenses of Peretz channel as a percentage of this segment's total operating revenues were flat at 13% and 14% when comparing the three- and six-month periods under review, respectively. In ruble terms, when comparing the three-and six-month periods under review, direct operating expenses increased by 14% and 13%, respectively, of which an increase of 12pp related to increased transmission and maintenance costs due to annual raises, increased maintenance costs related to our new digital broadcasting complex from July 2012 and increases in technical penetration.

Selling, general and administrative expenses of Peretz channel as a percentage of this segment's total operating revenues increased from 23% to 31% when comparing the three-month periods under review and from 24% to 26% when comparing the six-month periods under review, primarily due to increased advertising and promotion expenses. In ruble terms, when comparing the three-month periods under review selling, general and administrative expenses increased by 48%, of which an increase of 52pp related to increased advertising and promotion expenses due to the launch of large-scale advertising campaigns in the second quarter of 2013 to support comedy programming at Peretz channel. When comparing the six-month periods under review, selling, general and administrative expenses increased by 28%, of which an increase of 28pp related to increased advertising and promotion expenses due to the timing of advertising campaigns.

Programming expenses of the Peretz channel as a percentage of this segment's total operating revenues increased from 31% to 38% when comparing the three-month periods under review and increased from 37% to 41% when comparing the six-month periods under review, mainly due to increased costs for locally produced content (discussed below). In ruble terms, when comparing the three- and six-month periods under review, programming expenses increased by 35% and 29%, respectively, primarily due to an increase in the volume of locally produced sketchcoms to support the Peretz channel's focus on comedy programming and, to a lesser extent, due to an increased cost of Russian and foreign movies in response to increased competitors from other channels.

Depreciation and amortization expenses of Peretz channel increased by 57% in ruble terms when comparing the three- and six-month periods under review, primarily due to the amortization of our analog broadcasting licenses. Starting from October 1, 2012, we commenced the amortization of our analog licenses due to a reassessment of their useful lives from indefinite to finite as a result of the planned transition to digital broadcasting.

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Channel 31

	Three months ended June 30,						% of total operating revenues						Change period-to-period

	2012			2013			2012			2013			2013 to 2012
	(in thousands)						% USD			% USD			% USD
Total operating revenues	$	5,785		$	6,792			*100*	%		*100*	%		17	%

Including:
Advertising revenues		5,696			6,743			98	%		99	%		18	%

Total operating expenses	$	(3,774	)	$	(4,743	)		65	%		70	%		26	%

Including:
Direct operating expenses		(339	)		(322	)		6	%		5	%		(5	)%
Selling, general and administrative expenses		(932	)		(1,019	)		16	%		15	%		9	%
Programming expenses		(2,416	)		(2,662	)		42	%		39	%		10	%
Depreciation and amortization		(87	)		(740	)		2	%		11	%		751	%

Operating income	$	2,011		$	2,049			35	%		30	%		2	%

	Six months ended June 30,						% of total operating revenues						Change period-to-period

	2012			2013			2012			2013			2013 to 2012
	(in thousands)						% USD			% USD			% USD
Total operating revenues	$	9,912		$	10,946			*100*	%		*100*	%		10	%

Including:
Advertising revenues		9,635			10,883			97	%		99	%		13	%

Total operating expenses	$	(7,662	)	$	(9,351	)		77	%		85	%		22	%

Including:
Direct operating expenses		(703	)		(591	)		7	%		5	%		(16	)%
Selling, general and administrative expenses		(1,564	)		(1,858	)		16	%		17	%		19	%
Programming expenses		(5,215	)		(5,425	)		53	%		50	%		4	%
Depreciation and amortization		(180	)		(1,477	)		2	%		13	%		721	%

Operating income	$	2,250		$	1,595			23	%		15	%		*(29*	)%

Revenues

Advertising revenues of Channel 31 increased by 18% and 13% in US dollar terms when comparing the three- and six-month periods ended June 30, 2012 and 2013, respectively, principally due to increased sellout and an increase in regional revenues, resulting from estimated overall television advertising market growth in Kazakhstan of 12% and 15%, respectively, partially offset by 19% and 13% decreases in target audience share when comparing the three- and six-month periods under review, respectively, reflecting increased competition from other channels.

Expenses

Total operating expenses of Channel 31 increased by 26% and 22% in US dollar terms when comparing the three- and six-month periods under review, respectively, of which an increase of 17pp related to increased depreciation and amortization expenses when comparing the two periods under review, an increase of 7pp related to an increase in programming expense (discussed below) when comparing the three-month periods under review and an increase of 4pp related to increased selling,

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general and administrative expenses (discussed below) when comparing the six-month periods under review.

Direct operating expenses of Channel 31 as a percentage of this segment's total operating revenues decreased from 6% to 5% when comparing the three-month periods under review and from 7% to 5% when comparing the six-month periods under review, primarily due to decreased transmission costs and decreases in salaries and benefits costs (discussed below). In US dollar terms, when comparing the three-and six- month periods under review direct operating expenses decreased by 5% and 16%, respectively, of which 7pp and 8pp, respectively, related to a timing decrease in salaries and benefits costs. In addition, when comparing the six-month periods under review, 9pp of decrease related to decreased transmission costs as a result of a Kazakh law which provides 'must carry' obligations for cable and satellite operators for selected channels in connection with the anticipated digitalization.

Selling, general and administrative expenses of Channel 31, as a percentage of this segment's total operating revenues, decreased from 16% to 15% when comparing the three-month periods under review, primarily due to increased channel revenues, and increased from 16% to 17% when comparing the six-month periods under review. In US dollar terms, when comparing the three-and six- month periods under review selling, general and administrative expenses increased by 9% and 19%, respectively, of which increases of 7pp and 8 pp, respectively, related to increased salaries and benefits costs as the result of annual raises. In addition, when comparing the six-month periods under review, an increase of 6pp related to increased advertising and promotion expenses due to the higher number of premiers broadcasted in the first half of 2013.

Programming expenses of Channel 31 as a percentage of this segment's total operating revenues decreased from 42% to 39% when comparing the three-month periods under review and from 53% to 50% when comparing the six-month periods under review, primarily due to increased channel revenues. In US dollar terms, when comparing the three- and six-month periods under review, programming expenses increased by 10% and 4%, respectively, primarily reflecting the increased cost of locally produced programming and increased cost and volume of foreign content in response to increased competition.

Depreciation and amortization expenses at Channel 31 increased by 751% and 721% in US dollar terms when comparing the three- and six-month periods under review, respectively, primarily due to the amortization of our analog broadcasting licenses. Starting from October 1, 2012, we commenced amortization of our analog licenses due to a reassessment of their useful lives from indefinite to finite as a result of the planned transition to digital broadcasting in Kazakhstan.

All Other

	Three months ended June 30,						Change period-to-period

	2012			2013			2013 to 2012
	(in thousands)						% USD
Total operating revenues	$	2,545		$	2,257			*(11*	)%

Total operating expenses	$	(7,781	)	$	(7,164	)		(8	)%

Selling, general and administrative expenses		(4,898	)		(4,131	)		(16	)%
Stock based compensation expenses		(710	)		(1,300	)		83	%
Other expenses		(2,173	)		(1,733	)		(20	)%

Operating loss	$	(5,236	)	$	(4,907	)		(6	)%

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	Six months ended June 30,						Change period-to-period

	2012			2013			2013 to 2012
	(in thousands)						% USD
Total operating revenues	$	4,741		$	4,689			(1	)%

Total operating expenses	$	(17,922	)	$	(14,082	)		*(21*	)%

Selling, general and administrative expenses		(10,142	)		(8,064	)		(20	)%
Stock based compensation expenses		(3,621	)		(2,638	)		(27	)%
Other expenses		(4,159	)		(3,380	)		(19	)%

Operating loss	$	(13,181	)	$	(9,393	)		*(29*	)%

When comparing the three-month periods ended June 30, 2012 and 2013, operating revenues from CTC-International amounted to $0.9 and $1 million, respectively, and operating revenues from our digital media business amounted to $0.7 and $0.9 million, respectively. When comparing the six-month periods ended June 30, 2012 and 2013, operating revenues from CTC-International amounted to $1.8 and $2.1 million, respectively, and operating revenues from our digital media business amounted to $1.4 and $2.0 million, respectively.

Selling, general and administrative expenses consist principally of the general and administrative expenses of our corporate headquarters and digital media segment. Decreases in selling, general and administrative expenses of $0.8 and $2.1 million, respectively, when comparing the three- and six-month periods under review were primarily due to decreases in selling, general and administrative expenses in our corporate headquarters of $0.7 and $1.4 million, reflecting decreased salaries and benefits costs due to the transfer of some employees from corporate headquarters to the CTC channel in the second half of 2012.

Our stock-based compensation expenses for the three-and six-month periods ended June 30, 2013 represent expenses recognized for the new 2013 Equity Incentive Plan approved by our stockholders at the 2013 Annual Meeting. As a condition to the receipt of an award under the Plan, any employee that held an outstanding option award under the Company's 2009 Equity Incentive Plan was required to forfeit the unvested portion of such award; the vested portion of outstanding option awards remains unaffected by the new program. See "—2013 Equity Incentive Plan; Options Exchange; Stock Repurchase Program" above.

We expect to recognize stock-based compensation expense related to our new 2013 Equity Incentive Plans of approximately $2.3 million for the remainder of 2013, $6.5 million for 2014, $7.8 million for 2015, $3.1 million for 2016 and $0.3 million for 2017.

Consolidated Financial Position—Significant Changes in our Consolidated Balance Sheets as of June 30, 2013 Compared to December 31, 2012

Trade accounts receivable, net of allowance for doubtful accounts

Our accounts receivable increased from $30.5 to $37.4 million from December 31, 2012 to June 30, 2013, mainly due to seasonally low balances of receivables from advertising at December 31.

Short-term and long-term programming rights

The decrease in programming rights from December 31, 2012 to June 30, 2013 of $11 million was primarily due to a decrease in foreign content, which was actively used at CTC channel in the first half of 2013 to support channel's audience share as well as a result of expiration of certain licenses.

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Intangible assets and Goodwill

Intangible assets and Goodwill decreased from December 31, 2012 to June 30, 2013 by $18.1 million and $12.7 million, respectively, primarily due to the effect of the depreciation of the Russian ruble against the US dollar, and commencement of amortization of our broadcasting licenses from October 2012. See also our 2012 Annual Report "Item 8. Financial Statements and Supplementary Data—Note 10, Impairment loss".

Taxes payable

Our taxes payable decreased from $37.5 million to $22.4 million from December 31, 2012 to June 30, 2013, primarily due to a decrease in income tax payable as the result of seasonally higher revenues in the fourth quarter of 2012 compared with the second quarter of 2013.

Liquidity and Capital Resources

Our sources of capital are mostly represented by cash flows from operations. We believe that our operating cash flow, cash on hand, and available short-term and long-term capital resources are sufficient to fund our working capital requirements, capital expenditures and programming commitments, income tax obligations, and anticipated dividends to our shareholders. We cannot assure you, however, that the assumed levels of revenues and expenses underlying this projection will prove to be accurate. We continually assess the counterparties and instruments we use to hold our cash and cash equivalents, with a focus on preservation of capital and liquidity. Based on information currently available, we do not believe that we are at risk of default by our counterparties.

As of June 30, 2013, we had $24.6 million in cash and cash equivalents, of which approximately 41% was held in US dollar-denominated accounts. In addition, as of June 30, 2013, we had $139.0 million in deposits with maturities ranging from three to eleven months, of which approximately 7% was held in US dollar-denominated accounts. In July 2012, we signed a Ruble-denominated overdraft agreement with Alfa Bank bearing annual interest at the variable Mosprime Overnight rate +2.21% with a credit limit of approximately $31 million. In May 2013, we renewed the overdraft agreement with Alfa Bank on the same terms. As of June 30, 2013, we had an overdraft position of $17.3 million that is presented in current liability on our balance sheet.

Cash flows

Below is a summary of our cash flows during the periods indicated:

	Six months ended June 30,

	2012			2013
	(in thousands)
Net cash provided by operating activities:	$	61,929		$	48,887
Net cash provided by/(used in) investing activities:		9,095			(17,362	)
Net cash used in financing activities:		(57,101	)		(59,695	)

Cash flows from operating activities decreased by $13.0 million as a result of the net effect of increased advertising sales offset by higher cash spend on acquisition of programming. Substantially all of our cash flows from operating activities are derived from advertising revenues. Our advertising revenues were $364.1 and $389.6 million, respectively, for the six-month periods ended June 30, 2012 and 2013. Our most significant use of cash in relation to operating activities throughout the periods under review was primarily attributable to the acquisition of programming and sublicensing rights. Our cash expenditures for the acquisition of programming and sublicensing rights were $173.5 million and $196.2 million for the six-month periods under review, respectively. The increase in cash paid for

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programming rights was primarily due to investments in Russian-produced and foreign content that will be used in 2013 and thereafter. Programming expenses amounted to $158.4 million and $182.6 million for the six-month periods ended June 30, 2012 and 2013, respectively.

Cash used in investing activities includes cash used for the acquisition of property, equipment and intangible assets, purchases of new broadcasting stations, and investments in or receipts from cash deposits. In the six-month period ended June 30, 2012, our cash provided by investing activities primarily represented cash received from deposits in the amount of $17.6 million. In addition, in the first half of 2012, we spent $5.8 million for capital expenditures, mainly on purchases of cable connections and leasehold improvements for new office facilities and $2.7 million related to the acquisitions of new broadcasting stations. In the six-month period ended June 30, 2013, our cash used in investing activities primarily represented investments in cash deposits of $15.4 million and cash paid for capital expenditures of $1.9 million.

Cash used in financing activities includes net proceeds from or settlement of overdraft, exercises of stock options, repurchases of the Company's common stock and payments of dividends. In the six-month period ended June 30, 2012, cash used in financing activities includes payment of dividends in the amount of $41.1 million to our stockholders, $3.1 million in dividends to minority shareholders of our owned-and-operated stations and net settlement of $17.5 million bank overdraft, partially offset by proceeds of $4.6 million received from the exercise of stock options by a former CEO. In the six-month period ended June 30, 2013, our cash used in financing activities includes payments of dividends in the amount of $48.9 million to our stockholders, $3.2 million in dividends paid to minority shareholders, repurchases of the Company's common stock of $16.0 million, partially offset by net proceeds from bank overdraft and loans of $8 million.

On August 2, 2013, our Board declared a dividend of $0.16 per outstanding share of common stock, or approximately $25 million in total. The record date is September 2, 2013 and the payment date is on or about September 27, 2013. Although it is the Board's current intention to declare and pay further dividends in 2013, there can be no assurance that such additional dividends will in fact be declared and paid. Any such declaration is at the discretion of the Board and will depend upon factors such as our earnings, financial position and cash requirements.

Contractual obligations

The table below summarizes information with respect to our contractual obligations as of June 30, 2013:

	Total		Through 2013		2014		2015		2016		2017

	(in thousands)
Acquisition of programming rights	$	254,425	$	132,720	$	80,190	$	28,285	$	13,230	$	—
Transmission and satellite fees		82,618		11,286		21,654		19,219		17,790		12,669
Leasehold obligations		34,556		3,504		7,317		7,663		7,894		8,178
Network affiliation agreements		8,025		1,500		2,944		2,264		1,036		281
Acquisition of format rights		1,186		1,186		—		—		—		—
Cable connections		2,989		854		1,708		427		—		—
Payments for intellectual rights		13,197		1,382		2,924		3,085		3,245		2,561
Other contractual obligations		14,968		1,867		3,322		3,455		3,090		3,234

Total(1)	$	411,964	$	154,299	$	120,059	$	64,398	$	46,285	$	26,923

(1): Accrued liabilities related to income taxes are excluded from this table because we cannot make a reasonably reliable estimate of the period of cash settlement with the taxing authorities.

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In addition, in connection with the planned digitalization in Russia and Kazakhstan, we may incur additional costs. In March 2013, we entered into 10-year transmission agreements with the Russian Television and Radio Network (RTRS), a transmission provider. In 2013, we expect to incur transmission fees pursuant to this agreement of approximately $3 million for each of our CTC and Domashny channels. Fees payable to RTRS for 2014 and beyond will be calculated on an annual basis according to rates that RTRS will set by October 1st of the prior year and will be impacted by the multiplex infrastructure roll-out. These rates will not change more than once yearly and any annual increases in such rates will be in line with the increases in rates set by the Russian Federal Tariff Service for similar types of services. Governmental authorities have indicated that each channel participating in the second multiplex will be expected to pay up to $26 million annually in transmission fees after the rollout, but in the transition period, these transmission fees are expected to be lower and are to be paid by way of installment payments as the rollout progresses. We expect to continue incurring analog transmission costs during the analog-to-digital transition period. In 2012, we incurred approximately $26 million of such expenses in the aggregate for all of our channels. In addition, governmental authorities have announced plans to introduce a third multiplex and indicated that the tender for participation in the third multiplex will be held by the end of 2013. Currently, the terms for participation in the third multiplex have not been indicated.

Also, current legislation does not provide 'must carry' obligations for cable operators, and accordingly we may be unable to secure or maintain carriage of our channels' signals over cable in certain regions, or at transmission rates that are consistent with our historical experience. As a result, there can be no assurance that we will be able to negotiate mutually acceptable transmission agreements in the future relating to the carriage of our signals with cable providers. See also "—Key Factors Affecting Our Results of Operations", and "Risk Factors—We may face additional expenditures in connection with the planned transition from analog to digital broadcasting in Russia and Kazakhstan, and may incur further impairment charges in connection with this transition".

Critical Accounting Policies, Estimates and Assumptions

The preparation of financial statements in conformity with the accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting estimates include, among others, the estimate of fair values in business combinations, estimates of the fair value of the Company's common stock in determining stock-based compensation, the amortization method and periods for programming rights and sublicensing rights, useful lives of tangible and intangible assets, impairment of goodwill, valuation of intangible assets and long-lived assets, fair value of derivative instruments, estimates of contingencies, and the determination of valuation allowances for deferred tax assets. We have discussed the estimates that we believe are critical and require the use of complex judgment in our 2012 Annual Report on Form 10-K. Since that date, there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.

Goodwill—We assess the carrying value of goodwill 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 include under-performance of reporting units or changes in projected results, changes in the manner of utilization of the asset, a severe and sustained decline in the price of our shares and negative market conditions or economic trends. For a discussion of our methodology and major assumptions regarding our impairment test refer to our 2012 Annual Report on Form 10-K.

The planned transition to digital broadcasting could impact our assumptions used in economic models and our assessment of the fair value of our reporting units. In December 2012, our CTC and

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Domashny channels were selected in a public tender for inclusion in the second digital multiplex; our Peretz channel was not selected. See also "Item 1A. Risk Factors—We may face additional expenditures in connection with the planned transition from analog to digital broadcasting in Russia and the necessary investments for digital migration may not be fully monetized".

As of June 30, 2013, we estimated that the fair values of CTC, Domashny and Peretz reporting units exceeded their carrying values by more than 10%. The fair value of the Peretz reporting unit is particularly sensitive to changes in revenues and costs that may result depending on the distribution model after the end of analog broadcasting. Currently, the terms for participation in the third digital multiplex have not been specified. Depending on further information about the terms of the transition to digital broadcasting, as well as other future developments, we may need to further revise our projected cash flows, which could adversely impact the fair value of our reporting units and related goodwill. As of June 30, 2013, the carrying values of goodwill related to CTC, Domashny and Peretz were $51 million, $26 million and $58 million, respectively.

Also, uncertainty remains concerning global economic stability in the medium-term. Any significant continuation or worsening of the current economic instability could result in decreases in the fair values of goodwill and require us to record additional impairment losses that could have a material adverse impact on our net income.

In addition, the fair value of the goodwill attributable to our production operating unit is highly sensitive to the volume of in-house programming that is expected to be produced and sold to our channels for broadcast. If the in-house production unit is not successful in developing and producing appropriate levels of quality programming for our channels, we may be required to lower our estimates of future production by this unit. A significant decline in original programming compared with planned volumes, or revision of our current business model may result in downward revisions of the production unit's long-term cash flow projections and may then require us to record an impairment of our goodwill. As of June 30, 2013, the carrying value of production unit goodwill was approximately $30 million. We believe that control and ownership of content is becoming increasingly important. As a result, we continue to support further development of in-house production in order to secure a steady supply of high-quality original programming, particularly in the key timeslots, given the strong competition from other channels for quality of content.

We consider all current information in determining the need for or calculating the amount of any impairment charges; however, future changes in events or circumstances could result in decreases in the fair values of our intangible assets and goodwill.

Recently Issued Accounting Pronouncements

We have considered all recently issued accounting pronouncements and disclosed the ones that could be material to our financial statements in the notes to our consolidated financial statements. See "Item 1. Financial Statements—Note 2, Basis of Presentation and Summary of Significant Accounting Policies."

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign currency exchange risk

Because our reporting currency is the US dollar and the functional currency of our principal operating subsidiaries is the Russian ruble, our reported results of operations are impacted by fluctuations in the exchange rate between the US dollar and the Russian ruble. Additionally, given that substantially all of our revenues are generated in rubles, we face exchange rate risk relating to operating expenses that we incur in currencies other than the ruble, primarily US dollar payments for non-Russian produced programming. For the six months ended June 30, 2013, if the value of the ruble

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compared to the US dollar had been, on average, 10% lower than it actually was, we would have reported decreases in total operating revenues and total operating expenses of approximately $34.6 million and $19.3 million, respectively. The total operating expenses we reported would have decreased in this hypothetical scenario because most of our operating expenses are ruble-denominated even though our reporting currency is the US dollar.

The prevailing exchange rate as of July 31, 2013 was RUR 32.89 to $1.00.

From time to time we enter into foreign exchange hedging arrangements in relation to a portion of our payments denominated in US dollars. In the first half of 2013, we entered into foreign exchange forward contracts for approximately $97 million to reduce a portion of our foreign exchange risk related to US-dollar denominated payments.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of June 30, 2013. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2013, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

During the three months ended June 30, 2013, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently party to any legal proceedings, the outcome of which would reasonably be expected to have a material adverse effect on our financial results or operations.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this Quarterly Report on Form 10-Q before purchasing our common stock. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties of which we are unaware, or that we currently deem immaterial, may also become important factors that affect us. There may be risks that a particular investor views differently from us, and our analysis of the risks we face might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock could decline, and you could lose some or all of your investment. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Risks relating to our business and industry

We derive almost all of our revenues from the sale of advertising, which is sensitive to broader economic conditions. Our revenues may substantially decrease if the economic environment deteriorates in Russia or other CIS countries in which we operate.

We generate substantially all of our revenues from advertising. In general, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and buying patterns. Since the introduction of commercial television advertising in Russia following the fall of the Soviet Union, advertising spending has fluctuated substantially, generally increasing during periods of economic growth and decreasing during downturns.

Beginning in the second half of 2008, Russia, like many other countries, experienced economic instability, characterized by a steep decline in the value of shares traded on its stock exchanges, devaluation of its currency, capital flight and a decline in gross domestic product. Additionally, because Russia produces and exports large amounts of oil and gas, its economy is particularly vulnerable to fluctuations in the price of oil and gas in the world market. Recent decreases in international oil prices have adversely affected and may continue to adversely affect the Russian economy. Like Russia, Kazakhstan has also experienced economic instability.

Although overall Russian television advertising spending increased in each of the past three years, if overall spending by advertisers in the Russian television advertising market falls substantially in future periods, our advertising revenues may be significantly reduced, materially adversely affecting our results of operations.

A reduction in our audience shares and ratings would likely result in a reduction in our advertising revenues.

The level of advertising revenues that we receive is directly tied to our audience shares and ratings. If our audience shares or ratings were to fall as a result, for example, of competitive pressures, underperformance of key programs, failure to renew licenses, or a change in the method of measuring television audiences, this would likely result in a decrease in our advertising revenues, which could be material. Our ability to attract and retain viewers depends primarily on our success in offering programming that appeals to our target audiences. Russian viewer preferences have been changing in

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recent years, with increasing demand for programming produced in Russia. There is currently a relatively limited supply of Russian-produced programming and strong competition among Russian networks and channels for such programming and Russian production talent, as well as for popular foreign programming.

From time to time we air one or two series during primetime that contribute disproportionately to our overall audience share, resulting in an overall audience share that we may not be able to sustain once that series is discontinued or loses popularity. Moreover, because we continue to rely on third-party production companies for a large portion of our programming and our programming library is not as extensive as those of some of our competitors, we may be unable to quickly substitute new programming for underperforming programming. In 2012 and the first half of 2013, the target audience share of the CTC channel was below the anticipated audience share and below the audience share for 2011 and 2010, due to increased competition from other television channels and the relative underperformance of series launched during primetime.

If we are unable to produce or secure a steady supply of high-quality programming, particularly in the key timeslots, or if we fail to anticipate, identify or react appropriately to changes in Russian viewer tastes or legislation, or to increased competition, by providing appropriate programming, our overall audience shares could be negatively affected, which would adversely affect our advertising revenues. Moreover, if any of the programming we produce, commission or license does not achieve the audience share levels we anticipate, we may be required to write-off all or a portion of the carrying cost of such programming, and we could be forced to broadcast more expensive programming to maintain audience share, either of which could have a material adverse impact on our results of operations.

We may face additional expenditures in connection with the planned transition from analog to digital broadcasting in Russia and Kazakhstan, and the necessary investments for digital migration may not be fully monetized.

In late 2009, the Russian government announced a federal program to introduce digital broadcasting throughout Russia by 2015. The government's plan called for digital broadcasting to be introduced in stages, with several packages of digital signals, or "multiplexes", to be launched over time. The government initially announced the channels that would be included in the first multiplex (Channel One, Rossiya 1, Rossiya 2, Rossiya 24, Rossiya K, Channel 5, NTV, Karousel, one regional channel that will be selected by regional government authorities and a new Russian public channel), determined milestones for the transition to this multiplex, and indicated that the infrastructure for this first multiplex will be funded by the government.

In October 2012, the Russian Federal Service for Supervision in the Sphere of Telecommunications, Information Technologies and Mass Communications(Roskomnadzor)announced the terms of a tender for a second multiplex, the results of which were announced on December 14, 2012. In total, 18 networks took part, including all three of our networks: CTC, Domashny and Peretz. A total of 10 channels, including our CTC and Domashny channels, were selected for inclusion in the second multiplex. On March 14, 2013, CTC and Domashny entered into agreements on identical terms with the Russian Television and Radio Network ("RTRS"). Under the terms of these agreements, RTRS will provide to CTC and Domashny all services required for the channels to broadcast their signals in digital format throughout Russia to approximately 141.6 million viewers. The specific services, coverage and equipment to be provided by RTRS will be agreed by the parties on an annual basis pursuant to a rollout plan forming a part of the principal agreement between the parties. The agreements terminate on March 31, 2023. In 2013, the amount payable to RTRS under the agreements by each of the CTC and Domashny channels is approximately $3 million. Fees payable to RTRS for 2014 and beyond will be calculated on an annual basis according to rates set by RTRS.

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Governmental authorities have also announced that the existing analog broadcasting system will be switched off in stages during the rollout period, and indicated regional deadlines ranging from 2014 to 2017. The second multiplex will be made available to 97.6% of the Russian population. In addition, governmental authorities announced plans to introduce a third multiplex which will cover only cities with populations of more than 50,000 people and will be made available to 64% of the Russian population, and indicated that the tender for participation in the third multiplex will be held by the end of 2013. Currently, the terms for participation in the third multiplex have not been indicated.

With respect to our technical penetration in 2012, TNS Russia reported that 95.1% of households located in cities with more than 100,000 residents had the technical ability to receive CTC's broadcast signal, 88.5% had the ability to receive Domashny's signal, and 83.8% had the ability to receive Peretz's signal. Russian cities with more than 100,000 residents together account for approximately 50% of the total population of Russia.

Following the introduction of digital broadcasting, we expect to encounter certain risks and uncertainties in the execution of each of our channels' business models. Currently, we believe the most significant of these are the following:

•: The anticipated transition to digital broadcasting may affect the relative position of broadcasters within the television marketplace, which may negatively impact the audience shares of our channels.
•: Viewers may not acquire televisions or converters that will allow them to receive the digital signal prior to the time analog broadcasting ends. Further, viewers may switch to cable television. In the absence of "must-carry" obligations for cable operators, this could lead to a decline in the overall number of households viewing free-to-air television and, as a result, our viewer ratings.
•: Our Peretz channel may not be able to compete effectively if it is not included in the third multiplex, as its technical penetration could decrease when free-to-air analog broadcasting is terminated and could be limited, at a maximum, to the level of overall cable penetration. Currently, cable penetration in Russia among cities with more than 100,000 residents is approximately 60%, which is lower than Peretz channel's current overall technical penetration of approximately 84%. With respect to the third multiplex, it is unclear what requirements the channels will be required to meet in order to be included in that multiplex.
•: Current Russian legislation does not provide 'must carry' obligations for cable and satellite operators, and accordingly we may be unable to secure or maintain carriage of our signal over cable in certain regions, or at transmission rates that are consistent with our historical experience. As a result, there can be no assurance that we will be able to negotiate mutually acceptable transmission agreements with cable providers in the future relating to the carriage of our signal.
•: We expect to continue to incur analog transmission costs during the analog-to-digital transition period. In 2012, we incurred approximately $26 million of such expenses; we may also incur further costs, in addition to those we currently have, during the transition period and thereafter. Governmental authorities have also indicated that each channel participating in the second multiplex will be expected to pay up to $26 million annually in digital transmission fees once the second multiplex is fully introduced. In the transition period, these transmission fees are expected to be lower and are to be paid by way of stage payments as the rollout progresses. As a result, increased revenues from higher anticipated geographical penetration from digital broadcasting may not sufficiently compensate for increased costs associated with transmission and broadcast equipment upgrades.

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•: There may be other unanticipated risks and expenses that we encounter during the transition and subsequently that could be material to our future financial position and results of operations.

We believe that the introduction of digitalization will not adversely affect our ability to broadcast in the medium term, as our channels will continue to broadcast in the analog format under existing analog licenses until the transition to the digital format is completed. However, as discussed above, there is currently uncertainty regarding the effect of the implementation of digital broadcasting on our business models, as it is difficult to predict how the digitalization of broadcasting may affect the market in the long term.

See also "—A significant portion of our total assets relates to goodwill. We have been required to record significant impairment charges for goodwill in the past, and if events or changes in circumstances further reduce the fair value of those assets, we may be required to record additional impairment losses that could materially adversely impact our net income."

Several recently adopted Russian laws may impact the programming and advertisements we are permitted to broadcast, which could result in a reduction in our audience share and advertising revenues.

The recently adopted federal law "On regulation of production and distribution of ethanol, alcohol and drinks containing alcohol" classifies beer and all drinks containing alcohol as alcoholic drinks, and in turn prohibits the advertising of such drinks on television. As a result, effective July 2012, we are no longer able to broadcast ads for beer and drinks containing beer on our channels. We were able to adjust our advertising sales so as to avoid a negative impact on our revenues in 2012.

Another new law, "On protection of children from harmful information", which came into effect on September 1, 2012, could impact our approach to programming on our Russian channels. This law prohibits the distribution of any information that may be harmful to children , such as scenes of violence, abusive language, pornography and scenes encouraging children to consume alcohol, drugs and tobacco. All information must be labeled into five categories: (1) information appropriate for children under 6 years, (2) information appropriate for children 6 years and older, (3) information appropriate for children 12 years and older, (4) information appropriate for children 16 years and older, and (5) information prohibited for children. In order to comply with this new law, we have established an editorial control department responsible for labeling our programs in accordance with these five categories. Since September 1, 2012 all our programs have been labeled in accordance with this new law. Implementation of this law has not adversely affected our channels to date, but we can provide no assurance that governmental authorities will not in the future interpret the law in such a way that will require us to revise our programming, which could adversely impact the audience share of our channels.

On April 19, 2013 a new law came into force amending the federal law "Improving Regulation of Mass Media, Television and Radio Broadcasting" as well as the administrative code, prohibiting the use of abusive language in mass media. We believe that these amendments will not affect our channels as long as we constantly monitor our content, but since the term "abusive language" is not defined and is subject to interpretation, we can not guarantee that we will not be faced with claims that we have violated this new law or that we will be able to defend these claims successfully.

In July 2013, the Russian parliament adopted a new law amending the law on advertising as well as the Administrative Code in respect of advertising biologically active additives (BAA) and imposing sanctions for inappropriate advertising thereof. According to these amendments, advertisements must include a disclaimer that BAAs are not a medicine. Advertisers as well as television channels broadcasting such BAA advertisements will be liable if such a disclaimer is not included or does not satisfy these new requirements. These amendments have not been signed by the President of Russia yet, but we anticipate that they will be signed in the near future and will come into force within 90 days

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after they are signed by the President and officially published. We do not expect that these amendments will affect our business significantly, since we have editorial control over commercials we broadcast, but we can not be sure that we will not receive any claims in the future, since there is no legal practice in implementing these amendments and there are no court interpretations of them.

Changes in the method of measuring television audiences and ratings have at times in the past resulted, and may again in the future result, in decreases in our audience share and ratings.

Our advertising revenues are largely driven by our audience share (the percentage of all people watching television at a given time who are watching CTC, Domashny or Peretz) and ratings (the percentage of the total population that is watching CTC, Domashny or Peretz at a given time). The system of audience measurement in Russia, currently run by TNS Russia, has evolved as the advertising market has matured and in response to changing Russian demographics.

TNS Russia currently weights the panel of measured cities based on broadcasters' technical penetration in a group of 121 cities (the so-called "establishment survey"). The panel cities are chosen from among those Russian cities with more than 100,000 residents, which together account for approximately 50% of the total population of Russia. Our audience share could be negatively affected if we were to lose an affiliate in one of the cities in that group, or if our technical penetration in that group of cities were to be lower than our average technical penetration.

At the end of 2012, the government published the results of the Russian population census taken at the end of 2010. These results led to changes to the relative weighting of the cities in the panel, the size of which increased to 76 cities starting January 1, 2013. Furthermore, in 2013 TNS expanded the "establishment survey" from 121 cities to all cities with more than 100,000 residents (164 cities in total). According to preliminary estimates such change did not lead to any significant changes in the weighting system and have any impact on our estimated ratings.

The anticipated transition to digital broadcasting discussed above may also result in changes in the TNS measurement system, including a re-weighting of the panel cities, to reflect increased penetration of Russian channels after the rollout period. We cannot predict the impact of any such changes at this time.

When changes to the system of audience measurement occur, we attempt to take steps when possible in respect of our programming, distribution and sales to counteract the effects of such changes. We cannot assure you that these steps will be adequate or effective, or that any further changes in the measurement system will not result in further decreases in our audience shares and, as a result, a material decrease in our advertising revenues.

A significant portion of our total assets relates to goodwill. We have been required to record significant impairment charges for goodwill in the past, and if events or changes in circumstances further reduce the fair value of our reporting units, we may be required to record additional impairment losses that could materially adversely impact our net income.

We have a significant amount of goodwill recorded on our consolidated balance sheet. If we determine that our estimate of the current value of a reporting unit is below the recorded value of that unit on our balance sheet, we may record an impairment loss for goodwill.

In addition, uncertainty remains concerning global economic stability in the medium-term. Many of the largest advertisers in the Russian market, including many of the largest advertisers on CTC, Domashny and Peretz, are multinational companies that sell consumer products on a worldwide basis. If Russia experiences significant economic instability or uncertainty, these companies may choose to reduce their advertising spending in Russia. The Company's management, in consultation with the BOD, continuously assesses market conditions and may revise its estimates for the Russian television

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advertising market growth in the medium term to reflect potential negative trends in the macroeconomic environment. The Company's management also considers the developments in digital broadcasting and their potential impacts on revenues and costs (see also "—We may face additional expenditures in connection with the planned transition from analog to digital broadcasting in Russia and Kazakhstan, and the necessary investments for digital migration may not be fully monetized"). Any decrease in cash flow projections could adversely impact the fair value of its reporting units and related goodwill or intangible assets, and the Company would then record impairment charges.

Also, the fair value of the goodwill attributable to our production operating unit is highly sensitive to the volume of in-house programming that is expected to be produced and sold to our channels for broadcast. If the in-house production unit is not successful in developing and producing appropriate levels of quality programming for our channels, we may be required to lower our estimates of future production by this unit. A significant decline in original programming compared with planned volumes, or revision of its current business model may result in downward revisions of the Company's long-term projections and may then require the Company to record an impairment of its goodwill. As of June 30, 2013, the carrying value of production unit goodwill was approximately $30 million.

We consider all current information in respect of determining the need for, or calculating, any impairment loss; however, future changes in events or circumstances, such as a continuation or worsening of the current economic instability, decreases in our audience shares or ratings, increased competition from cable providers or others, or changes in the audience measurement system, could result in decreases in the fair value of our long-lived assets and require us to record additional impairment losses that could have a material adverse impact on our net income.

Declines in the value of the Russian ruble against the US dollar have in the past negatively affected our reported revenues and our operating results, both of which are reported in US dollars.

Although our reporting currency is the US dollar, we generate almost all of our revenues through the sale of advertising, which in Russia is sold primarily in rubles. The ruble is also the functional currency of our principal operating subsidiaries. As a result, our reported revenues and results of operations are impacted by fluctuations in the exchange rate between the US dollar and the Russian ruble. Additionally, we face exchange rate risk relating to payments that we must make in currencies other than the ruble. We generally pay for non-Russian produced programming in US dollars.

The ruble has experienced significant fluctuations against the dollar in recent years. Although the Russian ruble appreciated against the US dollar by 6% during 2012, the average exchange rate of the ruble against the US dollar was 6% lower in 2012 than in 2011. In the three months ended June 30, 2013, the Russian ruble depreciated against the US dollar by 5%, and was on average 2% lower than the average value of the Russian ruble compared to the US dollar during the three months ended June 30, 2012. In the six months ended June 30, 2013, the Russian ruble depreciated against the US dollar by 7%, and was on average 1% lower than the average value of the Russian ruble compared to the US dollar during the six months ended June 30, 2012. Should the Russian ruble significantly depreciate against the US dollar in future periods, our revenues and operating results for future periods, as reported in US dollars, will be adversely affected.

Restrictions on direct or indirect foreign ownership of Russian television companies could limit our ability to grow our business through acquisitions.

In May 2008, the law "On foreign investments in economic entities that have strategic importance for defense and security of the state (the "Strategic Enterprises Law") came into effect in Russia. The Strategic Enterprises Law imposes restrictions on direct or indirect non-Russian ownership in "strategically important" industries, including television broadcasters that broadcast to more than 50% of the population of a relevant constituent entity of the Russian Federation. Among other things, the

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Strategic Enterprises Law requires prior approval from the Commission for Control Over Foreign Investments, and potentially from the Federal Security Bureau, for the acquisition by a non-Russian entity of an interest above a certain ownership threshold in a company operating in a strategically significant sector. We understand that such approval generally requires at least six months.

The Strategic Enterprises Law contains a "grandfather" provision with respect to pre-existing holdings in affected companies that requires notification of such pre-existing holdings but does not have an approval requirement. We therefore believe that neither CTC Media's pre-existing ownership of its Russian operating subsidiaries, nor the pre-existing ownership of shares of CTC Media by non-Russian stockholders, violates the Strategic Enterprises Law or requires any approval. We do believe, however, that we will be required to obtain approval under the Strategic Enterprises Law for any acquisition of an affiliate television station that broadcasts to more than 50% of the population of a relevant constituent entity of the Russian Federation, or any acquisition of another Russian network. Such approval process is likely to be time-consuming and may, in any event, ultimately result in a rejection of a proposed transaction. As a result, we may lose out on acquisition opportunities to competitors, and our ability to grow our business through acquisitions in Russia may be limited. Even if the authorities approve such a transaction, they may do so subject to conditions regarding the operation of the company—including, for example, the composition of its management—that may limit our effective control and operational flexibility.

Restrictions on foreign involvement in the television business in Russia could potentially be amended or interpreted in such a way as to result in our loss of necessary licenses or to require us to divest majority control of our Russian operating subsidiaries.

In addition to the Strategic Enterprises Law discussed above, the law "On Mass Media" (the "Mass Media Law") also restricts direct (but not indirect) foreign involvement in Russian television businesses. Following adoption of these provisions in 2002, we implemented a restructuring plan pursuant to which we created a holding company structure and reduced CTC Media's direct ownership in the CTC Network and each of our owned-and-operated stations below 50%. CTC Media's direct ownership of Domashny and the Peretz Group, which were acquired subsequent to the adoption of these restrictions, is also below 50%. This restructuring was completed prior to the August 2002 deadline with respect to all entities in our group, other than our CTC-Moscow station; the restructuring of the ownership of that station was completed in December 2002. To date, no Russian governmental authorities have taken any action against our CTC-Moscow station for its failure to comply with the restrictions on foreign legal ownership by the deadline. Because CTC Media itself does not broadcast or distribute television programming in the Russian Federation, we believe that CTC Media itself does not fall under the definition of a "founder of a television or video program" for purposes of the Mass Media Law, and that CTC Media does not violate the foreign involvement restrictions of that law.

The Mass Media Law could in the future be interpreted by Russian governmental authorities or a court to extend to, and to prohibit, indirect foreign ownership of or control over Russian broadcasters of television or video programs. In addition, the Strategic Enterprises Law described above could be implemented or interpreted to apply in some respects to foreign holdings existing at the time of adoption of the law. In either case, it is possible that Russian governmental authorities could suspend or revoke broadcasting licenses or permits held by our networks and our owned-and-operated stations, or fail to renew any such licenses. If any law were to be adopted or interpreted to restrict indirect foreign ownership and control of Russian television broadcasters, and did not contain a "grandfather" provision with respect to existing holdings, CTC Media could be obliged to restructure its group in order to comply with such requirements, including by divesting a controlling stake in our networks and our owned-and-operated stations. If we failed to comply in a timely manner, the authorities could suspend, revoke or fail to renew broadcasting licenses or permits held by our networks or our

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owned-and-operated stations, or could take other actions against us that could limit our ability to operate.

Restrictions on foreign involvement in the television business in Kazakhstan could be amended or interpreted in such a way as to result in our loss of necessary licenses or to require us to divest control of our Kazakh operating subsidiaries.

The Mass Media Law in Kazakhstan restricts direct and indirect foreign ownership of any Kazakh television broadcaster to no more than 20%. In 2008, we acquired a 20% interest in the Kazakh television broadcast company Channel 31, and established two subsidiaries that provide the programming content and advertising sales functions to Channel 31 on an exclusive basis (together, the "Channel 31 Group"). Together, these interests provide us with a 60% economic interest in the Channel 31 Group as a whole. If the existing 20% limit were to be interpreted to restrict effective or economic control, rather than just direct ownership, or if the law were to be changed or interpreted to impose further restrictions or limitations on foreign ownership of Kazakh television broadcasters, we could be obliged to restructure this group in order to comply with such requirements or could be required to divest all or a portion of our interest in the Channel 31 Group. If we failed to comply in a timely manner, the authorities could suspend or revoke Channel 31's broadcasting licenses or could take other actions that could limit our ability to operate the Channel 31 Group. The book value of Channel 31's broadcasting license as of June 30, 2013, was approximately $8 million.

We may encounter difficulties integrating acquired businesses, and if we fail to identify additional suitable targets our growth may be impeded.

As part of our growth strategy, we intend to continue to evaluate potential acquisitions that we believe are commercially attractive. While acquisitions represent an important component of our growth strategy, the integration of new businesses poses significant risks to our existing operations, including:

•: additional and significant demands placed on our senior management, who are also responsible for managing our existing operations;
•: increased overall operating complexity of our business, requiring greater personnel and other resources;
•: difficulties of expanding beyond our core expertise;
•: significant initial cash expenditures to acquire and integrate new businesses;
•: contingent liabilities associated with acquired businesses; and
•: incurrence of debt to finance acquisitions and high debt service costs related thereto.

Additionally, the integration of new businesses may be difficult for a variety of reasons, including differing cultures or management styles, legal restrictions in the target's jurisdiction, poor target records or internal controls and an inability to establish control over cash flows. Furthermore, even if we are successful in integrating new businesses, expected synergies and cost savings may not materialize, resulting in lower than expected profit margins.

As a US public company, we are subject to securities laws and regulations requiring that we file with the SEC audited historical financial statements for businesses we acquire that exceed certain materiality thresholds. Given the financial reporting practices in Russia and other CIS countries, such financial statements are often not readily available or are not capable of being audited to the standards required by US securities regulations. As a result, we may be prevented from pursuing acquisition opportunities that our competitors and other financial and strategic investors are able to pursue.

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A change in Russian law further limiting the amount of advertising time permitted on television could materially adversely affect our results of operations.

Current Russian law limits the amount of time that a broadcaster may devote to advertising to no more than 15% of any broadcasting hour. From time to time, there are discussions in the Russian government regarding imposing additional restrictions on television advertising, such as limiting the types of products that may be advertised, limiting product placements in programming, limiting the number of advertising breaks allowed in certain programs or requiring channels to devote more broadcast time to public service announcements. If legislation were introduced to further limit our ability to broadcast paid advertising or product placements, we cannot guarantee that increases in advertising prices, if any, or any other steps we would be able to take to mitigate the impact of such further limitation would be sufficient to compensate for the loss of advertising time.

If free-to-air television does not continue to constitute a significant advertising forum in Russia, our revenues could be materially reduced.

We generate substantially all our revenues from the sale of television advertising in Russia, which constituted approximately half of all advertising expenditures in Russia in 2012, having increased from 25% in 1999. In the broader advertising market, television competes with various other advertising media, such as print, radio, internet and outdoor advertising. In addition, the television broadcasting industry is affected by rapid innovations in technology. The implementation of new technologies and the introduction of broadcasting distribution systems other than free-to-air broadcasting, such as direct-to-home cable and satellite distribution systems, the internet, video-on-demand, user-generated content sites and the availability of television programming on portable digital devices, are changing consumer behavior by increasing the number of entertainment choices available to the audience. While television continues to constitute the single largest component of all advertising spending in Russia, there can be no assurance that television will maintain its current position among advertising media. Increases in competition arising from the development of new forms of advertising media could have an adverse effect on our ability to maintain and develop our advertising revenues and, as a result, on our results of operations.

The loss of licenses, or the failure to comply with the terms of licenses, could have an adverse effect on our business.

All broadcast television stations in Russia are required to have broadcasting and other operating licenses. Only a limited number of such licenses are available in each locality. These licenses historically generally required renewal every five years. In November 2011, the federal law "Improving Regulation of Mass Media, Television and Radio Broadcasting" came into force and introduced a standard license term of ten years, as well as the new concept of a so-called "universal license", which permits the channel to broadcast through free-to-air, cable and satellite broadcasting, in either digital or analog format across the whole territory of Russia. We obtained universal licenses for all our channels, however, we anticipate that analog licenses will be relevant until the full transition to digital broadcasting is complete.

In addition, Russian law could be interpreted as requiring cable television operators to have broadcast and other operating licenses for each of the channels or networks they transmit on their cable systems. Most of the independent cable television operators that currently carry our networks do not possess such licenses. The issuance of a license, as well as the terms and conditions of any license, are often subject to the exercise of broad discretion by governmental authorities.

A broadcaster must conform its programming to the programming concept outlined in the broadcasting license. In particular, the broadcaster is obliged to ensure compliance of its programming with the declared genres of the channel and to maintain a required balance in the volume-genre ratio

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of broadcasted materials, both of which are prescribed in the license. Until recently, the broadcasting licenses of our affiliate stations also contained various restrictions, including requirements with respect to the minimum amount of locally produced programming that must be broadcast.

The broadcasting license of Channel 31 in Kazakhstan also contains various restrictions and obligations. Kazakh law currently requires that broadcasters air at least 50% of their programming in the Kazakh language during every six-hour slot.

We may not always be in full compliance with license requirements. Also, our affiliates have not always been in full compliance with all the requirements of their licenses or obtained all the licenses necessary for broadcasting. If the terms of a license are not complied with, or if we violate applicable legislation or regulations, the license may be suspended or terminated (which decision may be appealed in court). If an affiliate were to broadcast without all the necessary licenses, broadcasting may be terminated and fines could be imposed.

The loss of an existing broadcasting license, or the failure to obtain a broadcasting license in a new market, particularly in a significant market, could reduce or limit the coverage of our networks and result in a loss of audience share and a fall in ratings, which could materially adversely affect our advertising revenues and business.

The failure of our independent affiliates to comply with requirements in our network agreements that they broadcast our advertising creates potential for complaints from our advertising clients.

We seek to enter into formal agreements with our independent affiliate stations governing various aspects of the broadcast of our network programming. These agreements generally require our affiliates to air most of our programming, including advertising during federal advertising slots. The majority of our independent affiliate stations have their own broadcasting licenses which entitle them to form their own broadcasting grid structured in accordance with their licenses as well as our network agreements.

Some of these affiliates operate in small cities which are not included in the TNS Russia panel. As a result, there is no regular TNS monitoring of the advertising they broadcast, and we cannot ensure that our affiliates are consistent in their compliance with the federal advertising provisions of our agreements. If an independent affiliate breaches its obligations under our network agreement, we may face complaints from our advertising clients.

The loss of independent affiliates could result in a loss of audience shares.

We seek to enter into formal agreements with our independent affiliate stations that govern various aspects of the broadcast of our network programming. These agreements generally provide each party with the right to terminate the agreement on 60 or 90 days' notice without penalty. In certain instances, particularly in smaller cities and towns and with local cable networks, our arrangements are governed by letters of understanding that provide us with only limited recourse in the event of a disagreement. If an independent affiliate in a larger market, particularly in a city where audiences are measured and in which we do not own and operate a station, were to terminate its agreement with us, sell itself to a competing network or lose the ability to broadcast our signal, it could result in a decrease in our audience share.

We rely on third parties to provide us with re-transmission capabilities in certain locations, and our business would be adversely affected if such parties terminated or adversely changed the terms of those relationships.

In certain locations, we depend on cable operators or other third parties to carry our signal. In Moscow, for example, television signals are transmitted from a central tower to roof antennas located on buildings throughout the city, and are then amplified for retransmission within the buildings. Mostelecom is the major local provider of cable transmission in Moscow. We have contracts with

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Mostelecom to secure the rights of our CTC, Domashny and Peretz Moscow stations to be connected by cable to households in Moscow. These contracts do not, however, grant us the right to be connected to all households in Moscow for all of our networks. From time to time we evaluate, from a cost benefit analysis, whether to connect by cable to additional households. A second cable operator carries our networks' signals to approximately 15% of the Moscow households covered by our networks' signals. We pay this cable operator an annual fee for transmission to these households. A cable system similar to that provided by Mostelecom is in place in St. Petersburg and is operated by the local provider; we pay this cable operator an annual fee for transmission.

If we were to be denied continued access to the cable systems that carry our networks' signals in Moscow or St. Petersburg, our technical penetration would be materially adversely affected which would, in turn, have a material adverse effect on our audience shares. Depending on the exact terms of the transition to digital broadcasting, our dependence on cable operators may increase. Current Russian legislation does not provide 'must carry' obligations for cable operators, and accordingly we may be unable to secure or maintain carriage of our channels' signals over cable in certain regions, or at transmission rates that are consistent with our historical experience. As a result, there can be no assurance that we will be able to negotiate mutually acceptable transmission agreements in the future relating to the carriage of our signals with cable providers.

We rely on third parties for the production of some of our original Russian programming, and our business could be adversely affected if we are unable to continue such relationships on acceptable terms.

While we encourage our channels to obtain content from our in-house production unit, we do not place restrictions on their ability to obtain content from third parties that meets the channel's programming criteria. As a result, our in-house production unit must compete against other sources of programming, including on price and quality. Although we produce part of our original programming in-house, we continue to rely on third-party production houses to produce a portion of our original programs. If we are unable to continue our close working relationships with the production houses we use or to develop new relationships, our ability to air premium new Russian content may be impeded, which would likely result in a loss of audience share and therefore a reduction in our share of the television advertising market.

We may not be able to compete successfully against other television free-to-air channels and networks that may have broader coverage, greater name recognition, larger market share, wider programming content or access to more funding than we do, or with niche channels or non-free-to-air channels offering competitive programming formats.

The Russian television broadcasting business is highly competitive. Approximately 20 free-to air television channels account for approximately 98% of the television advertising market. The market also includes multiple non-free-to-air television channels. The free-to-air channels include five larger national channels, namely Channel One, Rossiya 1, NTV, TNT and CTC, and a number of smaller niche channels, including Domashny and Peretz. Our networks compete for audience share with other national television networks and channels and with local stations, as well as with niche broadcasters. We compete on the basis of both the actual and anticipated size of our audiences for specific time slots, as well as the demographic characteristics of our viewers.

On a national level, CTC competes directly with other larger broadcast networks and channels, including Channel One, as well as with the smaller network TNT. Domashny competes for advertising revenues primarily with Rossiya 1 and TVC, and Peretz competes primarily with TNT and REN-TV, although they both also compete with the larger broadcast networks and channels for viewers within their target demographic groups. On a local level, our owned-and-operated stations compete with other stations for local advertising.

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Channel One and Rossiya 1 were established as state television channels during the Soviet period and they remain under Russian state control. As a result, we understand that these channels receive state benefits not generally available to private companies, including free signal transmission (in the case of Channel One), direct state budget subsidies (in the case of Rossiya 1) and preferences in licensing. Moreover, nearly every viewing household in Russia can receive the broadcast signals of Channel One and Rossiya 1, while only a more limited viewing audience can currently receive our network signals. The much broader coverage and name recognition of Channel One and Rossiya 1, coupled with programming geared toward a broader demographic group, help them to attract large audience shares. NTV, which is indirectly controlled by the state through Gazprom, the state-controlled energy company, also has a broader coverage than our networks, and we believe also benefits from free signal transmission. In 2012, Channel One had an average audience share of 13.9%, while Rossiya 1's was 13.4% and NTV's was 14.3%. CTC's average audience share in 2012 was 6.9%. We believe that the strong audience shares of Channel One, Rossiya 1 and NTV may give these broadcasters added leverage in negotiations with advertisers, advertising agencies and sales houses. Moreover, as we focus on entertainment programming, we are unable to compete with other broadcasters for audiences for news and sporting programs, some of which have among the highest audience shares and ratings in their time slots. In addition, Channel One, Rossiya 1 and NTV enjoy certain preferences that commercial channels do not. For example, they are included in the list of free-access federal channels that benefit from a must-carry option throughout Russia, as opposed to commercial channels including ours, which have to pay for transmission services.

In 2011 the Walt Disney Company acquired a 49% stake in the Russian channel 7TV, a part of UTH Russia holding. Disney Channel replaced the prior branding and programming of 7TV and launched its free-to-air broadcasting in Russia in December 2011. The Disney channel focuses on family entertainment by combining Disney programming with original Russian TV shows. The launch of the Disney Channel in Russia resulted in increased competition and impacted CTC's younger audience share.

On June 1, 2011, Telcrest acquired 25.15% of our common stock from a former stockholder. We understand that the beneficial owners of Telcrest, including Bank Rossiya (which is not affiliated with Rossiya television channel), have investments in Russian media businesses, including through ownership interests in Channel One, REN-TV and Channel 5. Telcrest and Bank Rossiya may have interests different from, or in addition to, the interests of other stockholders of CTC Media. See also "—Our principal stockholders may have interests that are different from, or in addition to, the interests of other stockholders of CTC Media."

In May 2013 a new Russian public channel started broadcasting. This channel will be freely available alongside Channel One, Rossiya, NTV and others when digital broadcasting commences. Since this channel broadcasts mainly news, documentary films and talk shows on significant public topics and is not focused on entertainment, we do not expect it to have any significant impact on our audience shares and ratings, although we cannot guarantee that it will not result in a decline in our audience shares and ratings in the future if it focuses more on entertainment programming.

In addition to competing with larger free-to-air broadcasters, we compete with multiple niche free-to-air and non-free-to-air channels. All larger national free-to-air TV channels in Russia were negatively impacted by increased competition from smaller non-free-to-air and local TV channels viewership in the "All 4+" category, which increased from 12.6% in 2010 to 14.5% in 2011, 15.3% in 2012 and 17.0% in the first half of 2013.

Non-free-to-air channels typically provide services to subscribers for a regular subscription fee, and typically do not generate a significant portion of their revenues from advertising. As a percentage of the overall television market, the non-free-to-air market in Russia is currently smaller than in the United States and Western European countries. Audience share for these channels, however, is

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increasing. In other countries, such as the United States, growth in non-free-to-air television services has often resulted in a fragmentation of the market and a corresponding decrease in the audience share of large national networks and channels. If niche and non-free-to-air channels continue to grow their customer base in Russia, our audience shares and ratings, especially the audience share of CTC channel, could be negatively affected, which would adversely affect our advertising revenues. See also "—If free-to-air television does not continue to constitute a significant advertising forum in Russia, our revenues could be materially reduced".

Also, the introduction of digital broadcasting may affect competition within the television marketplace, which may negatively impact the audience shares of our channels. See also "—We may face additional expenditures in connection with the planned transition from analog to digital broadcasting in Russia and Kazakhstan and the necessary investments for digital migration may not be fully monetized".

We have substantial future programming commitments that we may not be able to vary in response to a decline in advertising revenues, and as a result could experience material reductions in operating margins.

Programming represents our most significant expense, and at any given time we generally have substantial fixed commitments for the succeeding two to three years. For example, as of June 30, 2013 we had contractual commitments for the acquisition of approximately $132.7 million in programming rights through 2013 and $80.2 million in 2014. Given the size of these commitments, at any time a reduction in our advertising revenues could adversely affect our operating margins and results of operations. We would have only limited ability to reduce our costs in the short-run in response to such developments.

Our relationships with the co-owners of our television stations may limit our ability to implement our business plans and strategy.

More than half of our owned-and-operated stations are 100% owned by CTC Media. Other shareholders own between less than 1% and 50% of each of the remaining owned-and-operated stations. In some cases, we depend to a significant extent on our local partners for their familiarity with the local business environment and public authorities. Moreover, we may in the future similarly rely on joint-owners as we acquire additional stations. Any significant disruption in our relationship with these parties could make it more difficult for us to operate these stations.

Russian law and some of the agreements governing these stations grant protective rights to our co-owners that enable them to block certain significant corporate actions. Under Russian company law, significant corporate decisions, such as declaring and paying dividends and entering into substantial transactions, require the consent of the holders of two-thirds or three-quarters of the voting interests of the company, depending on the subject matter and the legal structure of the company. In addition, unanimous shareholder approval is required in limited instances, which could further affect our control over certain actions. For example, approval of a joint stock company's initial charter and reorganization of a joint stock company into a non-commercial partnership require 100% approval of shareholders. In the case of a limited liability company, increases in charter capital, amendments to a limited liability company's charter, and liquidation, among other actions, require 100% approval of the holders of participation interests.

As a result, we are often required to obtain the consent of our co-owners when making significant corporate decisions. Although we are not aware of any specific transaction in which we failed to obtain the requisite approval of the co-owners of our stations, due to the formalistic nature of Russian law and the large number of corporate actions that are taken annually by our co-owned stations, we believe it is likely that, from time to time, not all necessary minority shareholder consents have been obtained. As a result, we cannot guarantee that co-owners of our stations will not bring claims against us for

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failure to obtain these necessary consents, which, if successful, could result in the transaction in question being voided. Moreover, even if not technically required by law or contract, we generally prefer to obtain the consent and support of our co-owners before undertaking significant corporate actions. If this consent cannot be obtained, we may decide to forego a transaction that is commercially favorable to us in an effort to preserve goodwill with our co-owners.

Loss of key personnel could affect our growth and future success.

We believe that our growth and our future success will depend in large part upon our ability to attract and retain highly skilled senior management, production talent and finance personnel. We believe that certain competitors continue to aggressively court some of our personnel. The competition is intense in Russia for qualified personnel who are familiar with the Russian television industry and/or who are knowledgeable about US accounting and legal practices. We cannot assure you that we will be able to retain qualified personnel, or hire appropriate replacements on reasonable terms or at all.

A broadcasting systems failure could prevent us from transmitting our network signal and lead to a loss of viewers, damage to our reputation and a reduction in our advertising revenues.

Our networks' signals originate in Moscow and are uplinked to multiple separate satellite systems that transmit our signals to our affiliate stations and unmanned repeater transmitters. From time to time we experience insignificant signal failures. Although we are able to backup our signal, prolonged or repeated disruptions in our signals could lead to a loss of viewers, damage to our reputation and a reduction in our advertising revenues. We do not carry business interruption insurance to protect us in the event of a catastrophe or termination of our ability to transmit our signals, even though such an event could have a significant negative impact on our business.

We do not carry all of the insurance coverage customary in many countries for a business of our size and nature, and as a result could experience substantial loss or disruption.

The insurance industry is less developed in Russia than in other developed countries, and many forms of insurance protection common in other countries are not yet available in Russia on comparable terms. At present, we have no coverage for business interruption or loss of key management personnel. We do not maintain separate funds or otherwise set aside reserves for these types of losses. Any such loss may cause substantial disruption and may have a material adverse effect on our business, results of operations and financial condition.

We may from time to time be involved in lawsuits and investigations that could entail significant costs and, if determined against us, could require us to pay substantial damages, fines and/or penalties.

In the normal course of our business we are involved in various legal proceedings. These lawsuits and other proceedings include commercial disputes, claims regarding intellectual property, tax disputes and labor disputes. Litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. If a lawsuit is decided in a way that is unfavorable to us, this could have a material adverse effect on our business, reputation, operating results, or financial condition.

As a publicly listed company, we may be exposed to lawsuits in which plaintiffs allege that CTC Media or our directors or officers failed to comply with applicable securities laws, stock market regulations or other laws, regulations or requirements. Whether or not there is merit to such claims, the time and costs incurred in defending our company and its directors or officers, and any potential settlement or compensation we might be obligated to pay the plaintiffs, could have a significant impact on our reported results, as well as our reputation.

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Our principal stockholders may have interests that are different from, or in addition to, the interests of other stockholders of CTC Media.

Each of our two largest stockholders, which together hold approximately 63% of our common stock, is involved in the television business in Russia.

MTG Russia AB, an affiliate of the publicly listed Modern Times Group MTG AB ("MTG"), holds a 50% interest in Raduga Holdings. Raduga is the sole owner of LCC DalGeoCom, which operates Raduga TV, a nationwide Russian digital satellite pay-TV platform. Lorenzo Grabau, a member of the Board of MTG, is a Co-Chairman of our board of directors; Jørgen Madsen Lindemann, President and CEO of MTG, and Irina Gofman, Chief Executive Officer of MTG Russia AB, are members of our board of directors. Although we do not currently operate in the pay-TV market, and do not currently compete with or have any commercial relationship with Raduga TV, MTG may have interests that are different from or in addition to interests of other stockholders of CTC Media, including as a result of its interest in another Russian television business.

We understand that the beneficial owners of our second largest shareholder Telcrest, including Bank Rossiya, have investments in Russian media businesses, including through indirect equity interests in Channel One, REN-TV and TRK 5 (Channel 5). We understand that Bank Rossiya also has indirect significant minority interests in Video International, with which we have software license and service agreements in respect of advertising sales. Pursuant to a stockholders agreement, Telcrest has designated three of our directors, none of whom we understand is currently primarily engaged in the operations of Channel One, REN-TV, TRK 5 or Video International. We compete with broadcasters in which the beneficial owners of Telcrest have equity and financial interests, and we believe the services of Video International are important to our operations. Although we are not aware of any conflicts of interest with Telcrest in this regard, Telcrest and its beneficial owners may have interests that are different from or in addition to interests of other stockholders of CTC Media.

Risks relating to doing business and investing in Russia

The Russian banking system remains underdeveloped, and another banking crisis could place severe liquidity constraints on our business.

Russia's banking and other financial systems are less developed and regulated than those of many other developed countries, and Russian legislation relating to banks and bank accounts is subject to varying interpretations and inconsistent application. Many Russian banks do not meet international banking standards, and the transparency of the Russian banking sector still lags far behind internationally accepted norms. Furthermore, Russian bank deposits made by corporate entities generally are not insured.

The disruption in the world credit markets in 2008 and 2009 also negatively impacted the banking sector in Russia. There are currently a limited number of creditworthy Russian banks, most of which are located in Moscow and the largest of which are state-owned. We generally hold a large majority of our cash balance in Russian banks, including the Russian subsidiaries of foreign banks. Of that balance, a significant portion is held in ruble-denominated accounts. There are few, if any, safe ruble-denominated instruments in which we may invest our excess ruble cash. A banking crisis or the bankruptcy or insolvency of the banks from which we receive or with which we hold our funds could result in the loss of our deposits or affect our ability to complete banking transactions in Russia, which could have a material adverse effect on our business, financial conditions and results of operations.

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Businesses in Russia, especially media companies, can be subject to politically motivated actions, which could materially adversely affect our operations.

The Russian government has taken various actions in past years against business people and companies operating in Russia that have been perceived as having been politically motivated, including actions for technical violations of law or violations of laws that have been applied retroactively, including violations of tax laws. These actions have on occasion resulted in significant fluctuations in the market prices of the securities of businesses operating in Russia, a weakening of investor confidence in Russia and doubts about the progress of market and political reforms in Russia.

Media businesses can be particularly vulnerable to politically motivated actions. We believe that our focus on entertainment, and the fact that we broadcast entertainment and celebrity news, but do not offer "hard" news, commentary or analysis on our national networks, could lessen the risk of provoking politically motivated actions. However, we do not restrict the ability of our independent affiliates to broadcast local news in local broadcasting windows, and some of our independent affiliates, as well as one of our owned-and-operated CTC stations, broadcast local political news, generally with the approval of our local partners and the local authorities. Any politically motivated action against us, our networks, our independent affiliates, or any of our principal stockholders, including the beneficial owners of MTG or Telcrest, could materially adversely affect our operations.

The Russian legal system can create an uncertain environment for investment and business activity, which could have a material adverse effect on our business and the value of our common stock.

The legal framework to support a market economy remains new and in flux in Russia and, as a result, the Russian legal system can be characterized by:

•: inconsistencies between and among laws and governmental, ministerial and local regulations, orders, decisions, resolutions and other acts;
•: substantial gaps in the regulatory structure resulting from the delay in adoption or absence of implementing regulations;
•: limited judicial and administrative guidance on interpreting Russian legislation;
•: the relative inexperience of judges and courts in interpreting relatively new commercial legislation;
•: a lack of judicial independence from political, social and commercial forces;
•: under-funding and under-staffing of the court system;
•: a high degree of discretion on the part of the judiciary and governmental authorities; and
•: poorly developed bankruptcy procedures that are subject to abuse.

As is true of civil law systems, judicial precedents generally have no binding effect on subsequent decisions. Not all Russian legislation and court decisions are readily available to the public or organized in a manner that facilitates understanding. The Russian judicial system can be slow, and enforcement of court orders can in practice be very difficult. All of these factors make judicial decisions in Russia difficult to predict and effective redress uncertain. Additionally, court claims and governmental prosecutions are sometimes used in furtherance of political aims.

The untested nature of much of recent Russian legislation and the rapid evolution of the Russian legal system in ways that may not always coincide with market developments may result in ambiguities, inconsistencies and anomalies in the Russian legal system.

For example, the new law "On protection of children from harmful information" does not contain any detailed regulation as to how this law will be implemented. Although we believe that we are in

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compliance with this law, there is very limited practice of implementation of this law in Russia, which may lead to a high degree of discretion of governmental authorities in its implementation, as well as abuse of this law. We cannot guarantee that authorities will not interpret this law or implement it in a way that may adversely affect us.

On April 19, 2013 a new law came into force amending the federal law "Improving Regulation of Mass Media, Television and Radio Broadcasting" as well as the administrative code, prohibiting the use of abusive language in mass media as well as increasing the penalties for doing so. We believe that these amendments will not affect our channels as long as we constantly monitor our content, but since the term "abusive language" is not defined and is subject to interpretation, we cannot guarantee that we will not be faced with claims that we have violated this new law or that we will be able to defend these claims successfully.

Such uncertainties in the Russian legal system could affect our ability to enforce our rights under our licenses and under our contracts, or to defend ourselves against claims by others, including government authorities. Furthermore, we cannot assure you that regulators, judicial authorities or third parties will not challenge our compliance with applicable laws, decrees and regulations.

Selective or arbitrary government action may have an adverse effect on our business and the value of our common stock.

Government authorities have a high degree of discretion in Russia and have at times exercised their discretion selectively or arbitrarily, without hearing or prior notice, and sometimes in a manner that is influenced by political or commercial considerations. The government also has the power, in certain circumstances, to interfere with the performance of, nullify or terminate contracts. Selective or arbitrary actions have included withdrawal of licenses, sudden and unexpected tax audits, criminal prosecutions and civil actions. Federal and local government entities have also used common defects in documentation as pretexts for court claims and other demands to invalidate and/or to void transactions, apparently for political purposes. We cannot assure you that regulators, judicial authorities or third parties will not challenge our compliance (including that of our subsidiaries) with applicable laws, decrees and regulations in Russia. Selective or arbitrary government action could have a material adverse effect on our business and on the value of our common stock.

If the Russian Federal Anti-monopoly Service were to conclude that we acquired or created a new company in contravention of anti-monopoly legislation, it could impose fines or administrative sanctions and could require the divestiture of such company or other assets.

Our business has grown in part through the acquisition and establishment of companies, many of which transactions required the prior approval of, or subsequent notification to, the Russian Federal Anti-monopoly Service or its predecessor agencies (the "FAS"). The relevant legislation restricts the acquisition or establishment of companies by groups of companies or individuals acting in concert without the required approval or notification. This legislation is vague in parts and subject to varying interpretations. If the FAS were to conclude that an acquisition or establishment of a new company had been effected in contravention of applicable legislation and competition has been reduced as a result, it could impose administrative sanctions and require the divestiture of such company or other assets, adversely affecting our business strategy and our results of operations.

If one of our principal subsidiaries is forced into liquidation due to negative net assets, our results of operations could suffer.

If at the end of any fiscal year a Russian company's net assets as determined in accordance with Russian accounting regulations are below the minimum amount of charter capital required by Russian law, the company is required to convene a shareholders meeting to adopt a decision to liquidate. If it

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fails to do so within a "reasonable period," the company's creditors may request early termination or acceleration of the company's obligations to them, as well as damages, and governmental authorities may seek to cause the involuntary liquidation of the company. Under an earlier version of this law, the company's shareholders could also bring an action to force the liquidation of the company. It is unclear under Russian law whether a historical violation of this requirement may be retroactively cured, even if a company later comes into compliance with the requirement. On occasion, Russian courts have ordered the involuntary liquidation of a company for having negative net assets even if the company has continued to fulfill its obligations and had net assets in excess of the minimum amount at the time of liquidation.

Certain of our regional subsidiaries have had, and continue to have, negative equity as reported in their respective Russian statutory financial statements. None of these companies has applied for voluntary liquidation. We are currently taking steps to remedy the negative net asset value of these subsidiaries, but we have not included it as a contingency in our financial statements because we believe that, so long as these subsidiaries continue to fulfill their obligations, the risk of their forced liquidation is remote.

There has been no judicial or other official interpretation of what constitutes a "reasonable period" within which a company must act to liquidate. If any of our subsidiaries were to be liquidated involuntarily, we would be forced to reorganize the operations we currently conduct through that subsidiary. The liquidation of any of the subsidiaries in our Television Station Groups would result in the termination of their existing broadcast and other licenses, and we cannot assure you that we would be able to secure new licenses needed for these stations to continue to operate. Accordingly, any liquidation could have a material adverse effect on our business.

Russian law requires the approval of certain transactions by the minority shareholders of our subsidiaries, including several of our owned-and-operated television stations, and failure to receive this approval could adversely affect our business and results of operations.

We own less than 100% of many of our owned-and-operated stations. Under Russian law, certain transactions defined as "interested party transactions" require approval by disinterested members of the board of directors or disinterested shareholders of the companies involved. Our owned-and-operated stations that have other shareholders engage in numerous transactions with us that require interested party transaction approvals in accordance with Russian law. Due to the formulistic nature of much of Russian law, these transactions have not always been properly approved, and therefore may be contested by minority shareholders. In the event that these other shareholders were successfully to contest past interested party transactions, or prevent the approval of such transactions in the future, our flexibility in operating these television stations could be limited and our results of operations could be adversely affected.

Certain transactions between members of our consolidated corporate group may constitute interested party transactions under Russian law even when the companies involved are wholly owned by us. Although we generally endeavor to obtain all corporate approvals required under Russian law to consummate these transactions, we have not always applied special approval procedures in connection with our consummation of transactions with or between our subsidiaries. In the event that a claim is filed in relation to certain transactions with or between our subsidiaries, such transactions are found to have been interested party transactions, and we are found to have failed to obtain the appropriate approvals, such transactions may be declared invalid. The unwinding of any transactions concluded with or between our subsidiaries may have a negative impact on our business and results of operations.

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Shareholder liability under Russian legislation could cause us to become liable for the obligations of our subsidiaries.

The Russian Civil Code, the Law on Joint Stock Companies and the Law on Limited Liability Companies generally provide that shareholders in a Russian joint stock company or limited liability company are not liable for the obligations of the company and bear only the risk of loss of their investment. This may not be the case, however, when one person (a "parent") is capable of determining decisions made by another (an "effected subsidiary"). The effected parent bears joint and several responsibility for transactions concluded by the effected subsidiary in carrying out these decisions in certain circumstances.

In addition, a parent is secondarily liable for an effected subsidiary's debts if an effected subsidiary becomes insolvent or bankrupt as a result of the action or inaction of a parent. This is the case no matter how the parent's capability to determine decisions of the effected subsidiary arises. For example, this liability could arise through ownership of voting securities or by contract. In these instances, other shareholders of the effected subsidiary may claim compensation for the effected subsidiary's losses from the parent that caused the effected subsidiary to act or fail to act, knowing that such action or inaction would result in losses. Accordingly, in CTC Media's position as a parent, it could be liable in some cases for the debts of its effected subsidiaries. Although the total indebtedness of CTC Media's effected subsidiaries is currently immaterial, it is possible that CTC Media could face material liability in this regard in the future, which could materially adversely affect our business and our results of operations.

Changes in the Russian tax system or arbitrary or unforeseen application of existing rules could materially adversely affect our financial condition.

Our tax burden may become greater than the estimated amount that we have expensed to date and paid or accrued on our balance sheets. Russian tax authorities have often been arbitrary and aggressive in their interpretation of tax laws and their many ambiguities, as well as in their enforcement and collection activities. Many companies are often forced to negotiate their tax bills with tax inspectors who may demand higher taxes than applicable law appears to provide. Any additional tax liability, as well as any unforeseen changes in Russian tax laws, could have a material adverse effect on our future results of operations or cash flows in a particular period. We have at times accrued substantial amounts for contingent tax liabilities, a substantial portion of which accruals we have reversed as contingencies have been resolved favorably or changes in circumstances have occurred. The amounts currently accrued for tax contingencies may not be sufficient to meet any liability we may ultimately face. From time to time, we also identify tax contingencies for which we have not provided an accrual. Such unaccrued tax contingencies could materialize and require us to pay additional amounts of tax.

Under Russian accounting and tax principles, financial statements of our Russian companies are not consolidated for tax purposes. As a result, each Russian- registered entity in our group pays its own Russian taxes and we cannot offset the profits or losses in any single entity against the profits and losses of any other entity. Consequently, our overall effective tax rate may increase as we expand our operations, unless we are able to maintain an effective corporate structure that minimizes the effect of these Russian accounting and tax norms.

The Russian tax system imposes additional burdens and costs on our operations in Russia, and complicates our tax planning and related business decisions. The uncertainty involved potentially exposes us to significant fines, penalties and enforcement measures despite our best efforts at compliance, which could result in a greater than expected tax burden on our subsidiaries. These factors raise the risk of a sudden imposition of arbitrary or onerous taxes on our operations in Russia. This could adversely affect our business and the value of our common stock.

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Any US or other foreign judgments that may be obtained against us may be difficult to enforce against us in Russia.

Although CTC Media is a Delaware corporation, subject to suit in US federal and other courts, most of our assets are located in Russia, and all of our directors and their assets are located outside the United States. Although arbitration awards are generally enforceable in Russia, judgments obtained in the United States or in other foreign courts, including those with respect to US federal securities law claims, may not be enforceable in Russia. There is no mutual recognition treaty between the United States and the Russian Federation, and no Russian federal law provides for the recognition and enforcement of foreign court judgments. Therefore, it may be difficult to enforce any US or other foreign court judgment obtained against our company, any of our operating subsidiaries or any of our directors in Russia.

Risks relating to doing business elsewhere in the CIS

We face similar risks in other countries of the CIS.

In addition to Russia, we currently have operations in other countries in the CIS, including Kazakhstan and Moldova. We may acquire additional operations in other countries of the CIS. In many respects, the risks inherent in transacting business in these countries are similar to those in Russia, especially those risks set out above in "—Risks relating to doing business and investing in Russia".

Emerging markets such as Russia and other CIS countries are subject to greater risks than more developed markets, including legal, economic and political risks.

Investors in emerging markets such as Russia and other CIS countries should be aware that these markets are subject to greater risk than more developed markets, including in some cases legal, economic and political risks. Investors should also note that emerging economies, such as the economies of Russia and Kazakhstan, are subject to rapid change and that the information set out herein may become outdated relatively quickly. Furthermore, in doing business in various countries of the CIS, we face risks similar to (and sometimes greater than) those that we face in Russia. Accordingly, investors should exercise care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved and investors are urged to consult with their own legal and financial advisors before making an investment in our shares.

Risks relating to our stock

The price of our common stock has experienced significant volatility in the past and may be volatile in the future.

Our stock price has experienced significant volatility in the past and is likely to be volatile in the future. The stock market in general and, in particular, the market in emerging markets, like Russia, have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. This volatility has been more pronounced in recent periods due to the turmoil in world financial markets. As a result of this volatility, investors may not be able to sell their shares of our common stock at or above the price at which they purchase it. The market price for our common stock may be influenced by many factors, including:

•: fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
•: changes in estimates of our financial results or recommendations by securities analysts;

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•: changes in market valuations of similar companies;
•: extraordinary expenses or charges in particular periods, including material impairment losses;
•: changes in general economic, political and market conditions in Russia and globally;
•: changes in the audience shares of our networks;
•: changes in the structure of advertising sales in Russia;
•: public announcements by industry experts regarding trends in advertising spending in Russia and globally; and
•: announcements regarding our acquisition activities, if any.

Moreover, only a relatively small number of shares of our common stock are currently actively traded in the public market. As of June 30, 2013, approximately 37% of our outstanding common stock was held by parties other than our directors, executive officers and principal stockholders and their respective affiliates. The limited liquidity of our common stock may have a material adverse effect on the price of our common stock.

In the past, following periods of volatility in the market price of a company's securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our stock could decline if one or more equity research analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Insiders have substantial control over us and could delay or prevent a change in corporate control.

As of June 30, 2013, our directors, executive officers and principal stockholders, and their respective affiliates, beneficially owned, in the aggregate, approximately 63% of our outstanding common stock. As a result, these stockholders, if acting together, may have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these persons, acting together, may have the ability to control the management and affairs of our company. In particular, our principal stockholders have entered into a voting arrangement that determines the composition of our board of directors.

Anti-takeover provisions in our charter documents and under Delaware law could prevent or delay change-of-control transactions.

Anti-takeover provisions of Delaware law and our charter documents may make a change in control of our company more difficult. For example:

•: Stockholders' meetings may only be called by one of the Co-Chairmen of our board of directors, our Chief Executive Officer or the majority of the board of directors.
•: Our stockholders may not take action by written consent.
•: We have a classified board of directors, which means that our directors serve for staggered three-year terms and currently no more than three of our nine directors are elected each year.

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This structure may make it more difficult for an acquirer to take control of our company, which may make our company a less desirable acquisition target.

Delaware law also prohibits a corporation from engaging in a business combination with any holder of 15% or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction or approves the transaction pursuant to which the holder became a 15% holder. Our board of directors may use this provision to prevent changes in our management. Our board of directors approved the transaction pursuant to which Telcrest became a holder of more than 15% of our capital stock, and accordingly this prohibition would not apply in the case of a business combination transaction with Telcrest.

Under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future.

In addition, we are party to a stockholders' agreement with our two largest stockholders, MTG and Telcrest, pursuant to which each of these stockholders has agreed, with limited exceptions, not to acquire additional shares of our capital stock to the extent that such acquisition would cause its beneficial ownership to exceed 50% of the voting power of our outstanding shares without making a tender offer for all of our outstanding shares in compliance with the tender offer rules under the Securities Exchange Act of 1934, unless it reaches this ownership level through the exercise of rights of first offer set forth in the stockholders' agreement.

If there are substantial sales of our common stock in the market by our existing stockholders, our stock price could decline.

If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. The holders of approximately 63% of our common stock have the right under specified circumstances to require us to register their shares for resale to the public or participate in a registration of shares by us.

Item 6. Exhibits

The Exhibit index is hereby incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements 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.


		CTC MEDIA, INC.
		By:		/s/ NIKOLAY SURIKOV Nikolay Surikov Chief Financial Officer Date: August 6, 2013

		CTC MEDIA, INC.
		By:		/s/ YULIA SHTYROVA Yulia Shtyrova Acting Chief Accounting Officer Date: August 6, 2013

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EXHIBIT INDEX

		Description	Form on which Originally Filed

10.1		Employment Agreement dated as of July 31, 2013 between CTC Media, Inc. and Yuliana Slashcheva	Filed herewith
10.2		Separation Agreement and Release dated as of July 29, 2013 between CTC Media, Inc. and Boris Podolsky	Filed herewith
31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)	Filed herewith
31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)	Filed herewith
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 USC. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
101.INS	*	XBRL Instance Document.
101.SCH	*	XBRL Taxonomy Extension Schema Document.
101.CAL	*	XBRL Taxonomy Calculation Linkbase Document.
101.LAB	*	XBRL Taxonomy Label Linkbase Document.
101.PRE	*	XBRL Taxonomy Presentation Linkbase Document.
101.DEF	*	XBRL Taxonomy Extension Definition Linkbase Document.

*: submitted electronically herewith.

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CTC Media (CTCM) Inactive 10-Q2013 Q2 Quarterly report

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