The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under ‘‘Risk Factors’’ and elsewhere in this Annual Report on Form 10-K.
We operate the CTC Network, a Russian television network offering entertainment programming targeted principally at 6-54 year-old viewers, and the Domashny, or ‘‘Home’’ Network, a Russian television network targeted principally at 25-60 year-old women. CTC’s signal is broadcast by over 330 television stations and local cable operators, including 17 owned-and-operated stations and 19 unmanned repeater transmitters. Domashny’s signal is broadcast by over 210 television stations and local cable operators, including eight owned-and-operated stations and seven unmanned repeater stations. The signals of CTC and Domashny cover approximately 100 million people and 58 million people in Russia, respectively.
We organize our operations into four business segments: CTC Network, Domashny Network, CTC Television Station Group and Domashny Television Station Group.
Our results of operations are affected primarily by the overall demand for television advertising, the limited supply of television advertising time, our ability to deliver a large share of viewers with desirable demographics, and the availability and cost of quality programming.
Overall demand for television advertising in Russia has experienced significant growth in recent years due to improved general business and economic conditions, including the levels of gross domestic product (‘‘GDP’’), disposable income and consumer spending. Presently, the Russian advertising market is one of the largest and fastest growing in Europe. Despite this rapid growth, however, advertising spending in Russia, both on a per capita basis and as a percentage of GDP, remains low by international standards. We believe this indicates that the television advertising market is still relatively under-developed. We intend to capitalize on this growth by strengthening our position as a leading advertising platform for reaching consumers in Russia.
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 increases in the price of advertising.
The continued success of our advertising sales depends 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. To date, we have been able to
achieve significant audience share at the CTC Network by broadcasting attractive entertainment programming, including original Russian series, shows and films as well as popular foreign series, films and animation. Although we believe we have been successful in licensing programming content that appeals to our key target audiences, we continue to compete with other television broadcasters for programming content, and to seek to air programming that addresses evolving audience tastes and trends in television broadcasting. Our programming costs have risen substantially in recent years and we expect that they will continue to do so as competition for high-quality Russian and foreign entertainment programming intensifies among Russian television broadcasters, in conjunction with anticipated growth in the Russian television advertising market.
While the ongoing development and expansion of our television networks represents the core of our strategy, we also seek opportunities to expand our business through the acquisition or launch of additional networks. In addition, we review opportunities to expand in adjacent Russian speaking markets where we can effectively and efficiently leverage our management and programming resources. Moreover, we evaluate opportunities from time to time in selected media sub-sectors that offer strong growth potential. We will also continue to explore opportunities to further expand our presence in the local advertising market, principally through the careful expansion of our owned-and-operated television stations in major cities. Any such acquisitions or expansion plans, if completed, could subject us to a range of additional factors that could affect our subsequent results of operations.
Initial Public Offering and Use of Proceeds
On June 1, 2006, we announced the pricing of the initial public offering (‘‘IPO’’) of our common stock at $14.00 per share. Of the 24,709,389 shares sold in the offering, 7,190,680 shares were offered by us and 17,518,709 shares were offered by selling stockholders. Additionally, the underwriters fully exercised on June 6, 2006, an over-allotment option to purchase 719,068 additional shares of common stock from CTC Media and 1,751,871 additional shares of common stock from certain selling stockholders. Our management and executive officers, our directors, the selling stockholders and our other major shareholders agreed to a lock-up period that ended on November 27, 2006.
We received net proceeds of $105.0 million from the sale of shares in the offering and aggregate exercise proceeds of $5.8 million from stock options exercised in connection with the IPO. We recognized approximately $1.4 million in other IPO-related expenses of which approximately $0.4 million was recorded as a reduction of additional paid-in capital and $1.0 million was expensed.
After the closing of the IPO, we had a total of 151,505,672 shares outstanding. Shares of our common stock are traded on the NASDAQ Global Market under the symbol ‘‘CTCM’’.
As of December 31, 2006, we had approximately $86.5 million of net proceeds remaining after using $22.0 million to repay short-term loans due to Alfa Bank, $1.4 million for various IPO-related expenses, and $0.9 million for general corporate purposes.
Television Advertising Sales
In the Russian television market, national advertising is generally not placed directly with broadcasters. Instead, two ‘‘sales houses,’’ Video International and NTV Media, control the placement of virtually all national television advertising in Russia. Since 1999, Video International has placed, on an exclusive basis, our national advertising.
Prior to 2006, local advertising sales at our owned-and-operated stations were generally placed directly by our in-house sales teams. Because of Video International’s strength in placing local advertising, beginning on January 1, 2006, we engaged Video International to place, on an exclusive basis, local advertising at substantially all of our owned-and-operated stations. Therefore, revenue sold through Video International accounted for substantially all of our advertising revenues in 2006.
Legislation came into effect on July 1, 2006, that imposed stricter limitations on airtime available for advertising, reducing maximum advertising time to no more than 15% of total broadcasting time each day, while at the same time stipulating that no more than 20% of advertising time may be allotted for
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commercial advertising in any given hour. The legislation will further reduce the maximum permissible amount of advertising to no more than 15% per hour effective January 1, 2008. We responded to these regulatory changes by taking steps to increase the amount of advertising time allocated to the CTC Network by its affiliates and to implement rate increases in response to the decline in airtime available for advertising. We also partnered with Video International, our sales agent, to effectuate rate increases in response to the decline in airtime available for advertising that has resulted from the new law. Video International successfully negotiated an increase of over 20% in average advertising rates for the second half of 2006.
The price of television advertising is primarily driven by demand, reflecting the fact that the amount of available television advertising is relatively limited. In general, national television advertising in any particular time slot is sold on the basis of gross rating points (‘‘GRPs’’), which refers to a particular measure of the population that has been watching a given broadcaster during a given 30-second time slot. Local television advertising, on the other hand, is currently sold by time (in 30 second slots) in some Russian cities, rather than by GRPs. Video International is seeking to restructure local sales to be sold on a GRP basis in larger Russian cities where audience shares are individually reported. It currently sells a portion of local advertising on the basis of GRPs, primarily in Moscow and St. Petersburg.
At the network level, where advertisers and advertising agencies purchase advertising on the basis of GRPs, if we fail to achieve the projected audience share for a particular time period, we will have fewer GRPs to sell and, therefore, our advertising revenues will be less than anticipated. On the other hand, if we achieve higher than anticipated audience share for a particular time period, advertisers do not generally compensate us for the over-delivery of GRPs. We therefore seek to adjust the projected GRPs to be delivered for a particular time slot on a rolling monthly basis in an effort to minimize the advertising revenues lost to over-delivery of GRPs when our audience share in that time slot is generally increasing.
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 — for example, on the basis of ratings among 18-45 year olds. Video International generally places the CTC Network’s advertising on the basis of ratings in CTC’s target audience, the 6-54 demographic, and it generally places the Domashny Network’s advertising on the basis of our ratings in Domashny’s target audience, 25-60 year-old women.
We derive no direct revenues from our independent affiliates. These independent affiliates broadcast our network signal in their local areas in exchange for the right to broadcast local advertising during designated time windows, from which they derive their own revenues. By providing us with a means of expanding our broadcast coverage with limited investment on our part, these independent affiliates help to increase our audience share and ratings, thereby indirectly increasing our national advertising revenues.
Television advertising sales vary over the course of the year. As a result of seasonality trends in viewing, the broadcasting industry generally achieves a greater proportion of advertising revenues in the fourth quarter. In 2004 and 2005, approximately 37% of our total advertising revenues for each year were generated in the fourth quarter. In 2006, however, the percentage of total advertising revenues generated in the fourth quarter decreased to approximately 32% mainly due to the effect that the success of our primetime ‘‘hit’’ series Born Not Pretty had on our revenues during the first half of 2006. We broadcast the first episode of Born Not Pretty in primetime in September 2005 and we broadcast the last episode in July 2006. Additionally, our audience share for the CTC Network in the fourth quarter of 2006 was negatively impacted by the relative underperformance of a few of our primetime shows during the fall season.
We expect that our future growth in advertising revenue will depend primarily on increases in the price of our advertising and our ability to increase our advertising inventory. At the national level, our ability to increase our advertising inventory depends upon our success in increasing our audience share, which in turn increases the number of GRPs we have available to sell. At the local level, the acquisition of additional owned-and-operated stations would provide us with additional local advertising time to sell.
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Our Agreements with Video International
We have three agreements with Video International for the placement of our advertising: one with CTC, one with Domashny and one umbrella agreement for both of our Television Station Groups, with sub-agreements for each of our individual owned-and-operated stations that have retained Video International to place their advertising. The agreements with the CTC Network and the Domashny Network run through December 2007 and 2009, respectively. The umbrella agreement for our Television Station Groups runs through December 2010.
We believe that the strength of our business relationship with Video International has grown as our business has grown. As a result, we have recently been able to secure more favorable commercial terms from Video International. From January 1, 2006, we pay Video International a fixed commission of 13% of gross advertising sales placed on the CTC Network. Prior to that, we paid variable commission rates to Video International that averaged 17.9% and 15.5% in 2004 and 2005, respectively. From the launch of our Domashny Network, we have paid Video International a fixed commission of 12% of gross advertising sales placed on the Domashny Network. The commission rate payable by our Television Station Groups is 15% of gross advertising sales placed on the owned-and-operated stations that have retained Video International to place their advertising. Local advertising sales generally command a higher rate of commission given that local advertising placements do not benefit from the economies of scale available to national sales.
In December 2004 and February 2005, we entered into new agreements in respect of CTC and Domashny Networks, respectively, providing for the fixed commissions described above. In connection with signing those new agreements, we paid Video International a one-time $9.9 million signing fee that we are recording on a straight-line basis from 2005 through 2007 as a reduction in revenues. We account for that signing fee as commission, allocating it to the CTC and Domashny Networks proportionally to their revenues. This increases Video International’s effective average commission rate on CTC’s and Domashny’s gross advertising sales.
Prior to 2006, our principal source of revenue (contracts for the placement of advertising) was denominated primarily in US dollars, with only contracts for the placement of local advertising outside of our Moscow and St. Petersburg stations being denominated in rubles. Beginning in January 2006, Video International began placing substantially all our advertising sales in rubles, and we currently expect that almost all of our advertising revenues in future years will be denominated in rubles as contracts from previous years that were denominated in US dollars expire.
In order to mitigate our currency risk exposure, Video International has agreed that it will seek to further amend its agreements with existing advertisers. These amendments would provide that either Video International or the advertiser could terminate the agreement in the event that the average exchange rate between the ruble and the dollar during any 30-day period fluctuates by more than 15% from the exchange rate on January 1 in the same calendar year, provided that the parties have not otherwise agreed to new advertising rates to reflect such currency fluctuations. We have further agreed with Video International that, in the event that Video International does not enter into such amendments with advertisers and such currency fluctuations do occur, Video International will compensate us for depreciations in the value of the ruble as compared to the dollar in excess of such 15% variation.
Video International, in consultation with us, determines advertising prices, agrees the terms of sales contracts between it and advertisers and oversees the collection of advertising sales revenue. Video International consults with us on general budgeting matters, including average selling prices, the total number of GRPs expected over the year, the allocation of GRPs across the year and similar matters. We do not have any input into the evaluation of the creditworthiness of potential new advertisers. We do, however, bear the credit risk associated with any failure by an advertiser to make payment when due.
We receive copies of all contracts entered into between Video International and advertisers in respect of our network advertising, including agreed pricing terms, and we verify the revenues under these agreements based on the contract terms and the advertising spots that we air for the advertisers. We are in the process of implementing a similar monitoring process at the local level, where most advertising sales have been handled by Video International only since the beginning of 2006. Although our agreements
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with Video International do not contain specific provisions regarding audit procedures, this monitoring process enables us to verify revenues and related data reported by Video International.
The Video International agreements are terminable upon 180 days’ notice by either party. As compensation for early termination, the terminating party must generally pay the other party an amount equal to the commission that was paid for the six-month period preceding the termination date as compensation for termination. In addition, the Video International agreement with our Television Station Groups may be terminated by us without liquidated damages if Video International fails to meet certain mutually agreed, local advertising sales targets by more than 10%, so long as the audience shares of our owned-and-operated stations are not materially below those achieved in the preceding year. These targets have been established only for purposes of these termination provisions, and Video International is not required to meet these targets.
Recent Acquisitions and Disposals
In April 2006, we acquired a 51% interest in two stations in Barnaul for $3.5 million in cash for each station, as well as a 100% interest in a station in Samara for a purchase price of $11.5 million, consisting of $11.1 million in cash and $0.4 million in assumed debt.
In April 2006, we also sold our 85% interest in two radio stations located in Perm for total cash consideration of $1.0 million and recognized a gain on sale of $0.8 million.
In November 2006, we acquired 100% of a station in Kemerovo for cash consideration of $1.7 million.
In November 2006, we also sold our 100% interest in a radio station located in Samara for total cash consideration of $0.6 million and recognized a $0.1 million gain on the sale.
In February 2007, we acquired the remaining 50% interest in a station located in Samara, bringing our ownership in this station to 100%, for cash consideration of $4.6 million.
In February 2007, we also acquired a 100% interest in a station located in Rostov for a total purchase price of $2.7 million, consisting of $2.6 million in cash consideration and $0.1 million in assumed debt.
Office Space
We have entered into agreements in regard to the future 10-year lease of approximately 12,000 square meters of office space in a building currently under construction in Moscow. Pursuant to Russian law and market practice, these agreements are structured as preliminary agreements which allow us to fix certain key terms of a final lease agreement that will be signed in the future. Under these preliminary agreements, we are obligated to enter into final lease agreements if the building is completed according to certain specifications and the state registration of title to the building is granted within the required timeframe. We can however cancel the preliminary agreements prior to signing the final lease agreements, in which case we would forfeit the security deposit paid of $1.7 million (at exchange rates as of December 31, 2006) and be required to pay certain other expenses incurred by the landlord on our behalf.
The building is scheduled to be available for occupancy by July 2008. If we consummate the final lease agreement under the currently agreed terms, we will pay a base annual rent commencing as of the occupancy date of approximately $8.6 million ($716 per square meter at exchange rates as of December 31, 2006). The rent is payable in rubles, but the rate will fluctuate based on the exchange rate between the ruble and the dollar and the ruble and the Euro, with annual increases after the second year of between 3% and 6% based on inflation rates in the United States. For the first twelve months of the lease, the annual rent will be reduced to approximately $6.2 million ($519 per square meter at exchange rates as of December 31, 2006) to compensate us for a portion of its fit-out costs. The final lease agreements would require us to pay an annual fee for property management and utilities of approximately $1.3 million (at exchange rates as of December 31, 2006) with increases starting in the second year of occupancy indexed to the Russian rate of inflation. Once we enter into the final lease, we may terminate the lease for any reason during the first five years upon twenty months’ written notice, the payment of $3.5 million (at exchange rates as of December 31, 2006) and the forfeiture of the security deposit. We may terminate the lease during the remaining five years of the final lease agreement for any reason upon twelve months’ written notice.
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Recent Stock Option Grants
In May 2006, our board of directors approved the grant of options to members of management to purchase an aggregate of 4,918,556 shares of our common stock upon the closing of the IPO. The exercise price for these options is $16.95 per share, equal to the average closing sales price per share of our common stock for the first twenty trading days on the NASDAQ Global Market. These stock options vest on a quarterly basis over three to four-year periods and have a maximum term of ten years from the grant date.
In September 2006, our board of directors approved the grant of options to another member of management to purchase an aggregate of 50,000 shares of our common stock. The exercise price for these options is $21.53 per share, equal to the closing sales price per share on the date of grant. These stock options vest on a quarterly basis over four years and have a maximum term of ten years from the grant date.
We are expensing the fair value of these options over their vesting periods. The fair value assigned to these options depends on several assumptions such as volatility, expected option term, and the risk free rate as well as the exercise price and the fair market value of our stock on the date of grant. We will recognize approximately $42.0 million in total compensation costs related to these options over a four-year period.
For 2006 we have recognized approximately $7.2 million in total stock-based compensation costs. The compensation costs related to these options is included in our consolidated statement of income as a component of selling, general and administrative expenses, except for $0.1 million that was classified in direct operating expenses.
Critical Accounting Policies, Estimates and Assumptions
Our accounting policies affecting our financial condition and results of operations are more fully described in our consolidated financial statements for the year ended December 31, 2006. The preparation of these consolidated financial statements requires us to make judgments in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe our critical accounting policies that affect the more significant judgments and estimates used in the preparation of our consolidated financial statements are as follows:
Foreign currency translation
Prior to January 1, 2006, our functional currency was the US dollar. Beginning in January 2006, Video International began placing all our advertising sales in rubles. As a result, a substantial amount of our advertising revenues for 2006 was denominated in rubles. Going forward substantially all of our advertising revenues will be denominated in rubles, as longer-term advertising contracts denominated in US dollars expire and are replaced with contracts denominated in rubles. Accordingly, we re-evaluated the functional currency criteria under SFAS No. 52, Foreign Currency Translation, and determined that beginning in 2006, the functional currency of our subsidiaries domiciled in Russia is the ruble. Therefore, since January 1, 2006, the financial statements of our Russian subsidiaries are translated into US dollars using the current rate method. We translate assets and liabilities at the rate of exchange prevailing at the applicable balance sheet date and stockholders’ equity is translated at the applicable historical rate. We translate revenue and expenses at monthly average rates of exchange. Translation gains and losses are included as part of the accumulated other comprehensive income. We adopted this change in our functional currency prospectively beginning January 1, 2006, in accordance with SFAS No. 52.
Programming rights
Our largest operating expense consists of the amortization of the cost of obtaining programming rights, substantially all of which we license from studios and third-party production houses. Programming
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rights are stated at the lower of their amortized cost or net realizable value. We record the cost of acquired programming rights as an asset only after we have the rights that give us immediate access to the materials needed to broadcast the related program. Once recorded, we amortize these programming rights in accordance with the policy described below. Programming rights that we expect to amortize within one year are classified as current assets.
The amortization policy we apply to the costs of our programming rights varies in accordance with the type of programming being amortized and the expected revenues from each run of such programming.
For foreign programming, which includes movies, series and animation, we amortize the cost of the programming on a straight-line basis over the licensed number of runs. Russian-produced movies and animation are also amortized on a straight-line basis over the licensed number of runs. We expense Russian-produced shows that we commission as they are aired.
Prior to July 1, 2005, we amortized Russian-produced series and sitcoms on a straight-line basis over the licensed number of runs, but not more than three runs. Starting July 1, 2005, we changed to a more accelerated amortization policy for Russian series and sitcoms based on changing patterns of historic and estimated future revenues from this type of programming in light of changes to our programming schedule, our audience share performance and projected increases in the price of advertising. After the change, Russian series with twenty episodes or less and sitcoms irrespective of the number of episodes are amortized 45% after the first run, 35% after the second run and 20% after the third run, when a license provides for three or more runs. When a license provides for two runs, we amortize the cost of Russian series and sitcoms 60% after the first run and 40% after the second run. Russian series with more than twenty episodes are amortized 60% after the first run, 30% after the second run and 10% after the third run, when a license provides for three or more runs. When a license provides for two runs, these series are amortized 70% after the first run and 30% after the second run.
From time to time, we obtain extensions of licenses for additional runs of successful foreign and Russian series, sitcoms and movies. We treat these extensions as new licenses and amortize them in accordance with the above policy.
Based on our analysis of advertising revenues, we believe that our amortization policy appropriately allocates the cost of programming rights with revenues earned. We review our amortization policy each quarter to ensure its continued appropriateness in light of changes in the Russian television advertising market, viewing patterns, our programming mix and schedule and our Networks’ audience share. We carry program rights on our balance sheet at the lower of amortized cost or net realizable value. We review the carrying amounts of our programming rights on a quarterly basis or more frequently if determined necessary. If the carrying amount of any programming right exceeds its expected future revenues, we write down the carrying value to net realizable value. We recognized impairment charges on our programming rights of $4.7 million, $5.4 million and $3.7 million for 2004, 2005 and 2006, respectively.
Stock-based compensation expense
On January 1, 2006, we adopted SFAS No. 123-R, Share-Based Payment, under the modified prospective method. Under SFAS No. 123-R, companies must calculate and record the cost of equity instruments, such as stock options or restricted stock, awarded to employees for services received in the statement of income; pro forma disclosures are no longer permitted. The cost of the equity instruments should be measured based on fair value of the instruments on the date they are granted (with certain exceptions) and is required to be recognized over the period during which the employees are required to provide services in exchange for the equity instruments. Since we had previously accounted for our stock-based compensation plans sunder the fair value provisions of SFAS No. 123, our adoption did not significantly impact our financial position or results of operations.
We estimate the fair value of stock options 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 our employee stock options. 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 options, and the fair value of our common stock on the date of grant.
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Since our IPO in June 2006, we determine the fair value of our common stock by using closing prices as quoted on the NASDAQ Global Market. However, for stock options granted before our IPO on June 1, 2006, we determined the fair value of our common stock as of the date of grant using the income approach. Under the income approach, we forecast net cash flows from our business operations based on projected earnings for a discrete forecast period and then apply appropriate discount rates to these estimated future cash flows. When using the income approach method to value our common stock, we were required to make significant assumptions to estimate future cash flows and the appropriate discount rate to be applied to those cash flows, including, but not limited to, assumptions related to:
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| • | the future size and development of the Russian television advertising market; |
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| • | our projected audience share; |
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| • | our estimated advertising market share; |
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| • | the development of various categories of expenses relative to prior years and to inflation expectations going forward; |
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| • | the time value of money; |
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| • | future rates of inflation; and |
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| • | Russia-specific risks and other risks inherent in the ownership of our shares. |
When calculating the value of one share of our common stock under the income approach, we divided the fair value of the company by the total common stock equivalents outstanding. We had convertible preferred stock outstanding until the completion of our IPO in June 2006. Preferred stock was included in the total common stock equivalents outstanding on an as-converted-to-common-stock basis. We did not assume a greater per share value for our preferred stock given the relative value of the liquidation preference payable to certain holders of our preferred stock compared to our estimated value of our company.
Volatility is another key input in the Black-Scholes option pricing model. For stock options granted before our IPO on June 1, 2006, we used the minimum value method, which assumes expected volatility of zero. However, for stock option grants occurring after our IPO, we estimated the volatility of our common stock by considering the volatility of the stock of other public companies in the media industry and in Russia. The transition away from the minimum value method has contributed to the higher valuation of our stock options granted after IPO and to the increase in the related compensation expense.
Accounting for acquisitions; goodwill and other intangible assets
In accordance with SFAS No. 141, Business Combinations, we allocate the purchase price of our acquisitions to the tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values, with the excess purchase price over those fair values being recorded as goodwill. The fair value assigned to intangible assets acquired is supported by valuations using estimates and assumptions provided by management. If we had made different estimates, the amount of the purchase price attributable to intangible assets and goodwill would have changed, resulting in changes to the annual amortization charge recorded in the Consolidated Statements of Income and Comprehensive Income as well as reclassifications between goodwill and intangible assets.
We assess the carrying value of intangible assets with indefinite lives and 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 are: under-performance of operating segments or changes in projected results, changes in the manner of utilization of the asset, and negative market conditions or economic trends. Therefore, our judgment as to the future prospects of each business has a significant impact on our results and financial condition.
Our annual assessment of the carrying values of intangible assets with indefinite lives and goodwill is based on discounted projected future cash flows. When an impairment review is undertaken, whether it be our annual assessment or if events or changes in circumstances indicate such carrying value may not
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be recoverable, significant judgment is required in estimating projected future cash flows including the determination of certain variables: discount rates, terminal values, the number of years on which to base the cash flow projections as well as the assumptions and estimates used to determine the cash inflows and outflows. We believe that our assumptions are appropriate. If future cash flows do not materialize as expected or there is a future adverse change in market conditions, we may be unable to recover the carrying amount of an asset, resulting in future impairment losses.
Tax provisions and valuation allowance for deferred tax assets
In the course of preparing financial statements in accordance with US GAAP and for tax other than income tax, we record potential tax loss contingency provisions under the guidelines of SFAS No. 5, Accounting for Contingencies. In general, SFAS No. 5 requires loss contingencies to be recorded when they are both probable and reasonably determinable. In addition, we record income tax and deferred tax provisions under the guidelines of SFAS No. 109, Accounting for Income Taxes. Significant judgment is required to determine when such provisions should be recorded and, when facts and circumstances change, when such provisions should be released.
Our actual Russian taxes may be in excess of the estimated amount expensed to date and accrued at December 31, 2006 due to ambiguities in and evolution of Russian tax legislation, varying approaches by regional and local tax inspectors, and inconsistent rulings on technical matters at the judicial level. With respect to certain issues, the risk of ultimately losing in court is more than remote, although we believe that it is not probable. We have also identified possible tax contingencies of up to approximately $4.5 million as of December 31, 2006, for which we have not provided an accrual. Such possible tax contingencies could materialize and require us to pay additional amounts of tax. We cannot guarantee that the amount and timing of an unfavorable resolution of any tax contingency would not have a material adverse effect on our results of operations in a particular period.
In the fourth quarter of 2006, our wholly owned subsidiary, ZAO CTC Network, was engaged in litigation with the Russian tax inspectorate in regard to a claim received in August 2006 for approximately $0.4 million (at exchange rate as of December 31, 2006) relating to tax payments transferred in 1998 and 1999 from its bank accounts that were allegedly not received by the government. In October 2006, we filed a lawsuit disputing the claim, and the court ruled in our favor in December 2006. While we intend to defend our position vigorously, if the courts were to rule in favor of the tax inspectorate upon appeal, it is possible that the tax inspectorate could also claim significant late payment interest. We do not believe an unfavorable outcome of this matter to be probable at this time; therefore, no provision is currently recorded in our financial statements.
We record valuation allowances related to 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 our assessment of probability of realization of deferred tax assets may affect our effective income tax rate.
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Results of Operations
The following table presents our historical consolidated operating results as a percentage of total operating revenues for the periods indicated:
Consolidated statement of income data
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| Revenues: | | | | | | | | | | | | | | | | | | |
| Advertising | | | | | 98.8 | | | | | | 97.9 | | | | | | 96.4 | |
| Sublicensing and other | | | | | 1.2 | | | | | | 2.1 | | | | | | 3.6 | |
| Total operating revenues | | | | | 100.0 | | | | | | 100.0 | | | | | | 100.0 | |
| Expenses: | | | | | | | | | | | | | | | | | | |
| Direct operating expenses (exclusive of depreciation and amortization) | | | | | (6.0 | | | | | | (5.4 | | | | | | (4.3 | |
| Selling, general and administrative (exclusive of depreciation and amortization) | | | | | (19.6 | | | | | | (17.4 | | | | | | (15.2 | |
| Amortization of programming rights | | | | | (29.1 | | | | | | (32.6 | | | | | | (31.8 | |
| Amortization of sublicensing rights | | | | | — | | | | | | (0.9 | | | | | | (1.8 | |
| Depreciation and amortization (exclusive of amortization of programming rights) | | | | | (5.1 | | | | | | (5.9 | | | | | | (5.3 | |
| Total operating expenses | | | | | (59.8 | | | | | | (62.0 | | | | | | (58.4 | |
| Operating income | | | | | 40.2 | | | | | | 38.0 | | | | | | 41.6 | |
| Foreign currency gains (losses) | | | | | 0.4 | | | | | | (0.4 | | | | | | 0.4 | |
| Interest income | | | | | 3.5 | | | | | | 1.3 | | | | | | 0.9 | |
| Interest expense | | | | | (4.3 | | | | | | (3.6 | | | | | | (0.5 | |
| Gains on sale of businesses | | | | | 3.0 | | | | | | — | | | | | | 0.3 | |
| Other non-operating income (losses), net | | | | | (0.1 | | | | | | 0.1 | | | | | | (0.1 | |
| Equity in income of investee companies | | | | | 0.5 | | | | | | 0.2 | | | | | | 0.6 | |
| Income before income tax and minority interest | | | | | 43.2 | | | | | | 35.7 | | | | | | 43.2 | |
| Income tax expense | | | | | (11.5 | | | | | | (10.5 | | | | | | (13.2 | |
| Income attributable to minority interest | | | | | (1.2 | | | | | | (1.1 | | | | | | (1.3 | |
| Net income | | | | | 30.5 | | | | | | 24.1 | | | | | | 28.7 | |
|
Comparison of Consolidated Results of Operations for the Years ended December 31, 2004, 2005 and 2006
Total operating revenues
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| CTC Network | | | | $ | 115,288 | | | | | $ | 168,669 | | | | | $ | 264,733 | |
| Change period-to-period | | | | | — | | | | | | 46.3 | | | | | | 57.0 | |
| Domashny Network | | | | | — | | | | | | 9,346 | | | | | | 20,649 | |
| Change period-to-period | | | | | — | | | | | | — | | | | | | 120.9 | |
| CTC Television Station Group | | | | | 37,712 | | | | | | 51,741 | | | | | | 74,765 | |
| Change period-to-period | | | | | — | | | | | | 37.2 | | | | | | 44.5 | |
| Domashny Television Station Group | | | | | 2,955 | | | | | | 7,761 | | | | | | 11,566 | |
| Change period-to-period | | | | | — | | | | | | 162.6 | | | | | | 49.0 | |
| Eliminations and other | | | | | (388 | | | | | | (40 | | | | | | (879 | |
| Total | | | | $ | 155,567 | | | | | $ | 237,477 | | | | | $ | 370,834 | |
| Change period-to-period | | | | | — | | | | | | 52.7 | | | | | | 56.2 | |
|
45
Our total operating revenues grew by approximately 52.7% and 56.2%, respectively, when comparing 2004 to 2005 and 2005 to 2006. The increase in revenues reflects the continued growth of the Russian television advertising market and the strength of our television networks in delivering their target audiences. On an annual basis, our revenue growth has historically outpaced the growth of the Russian television market overall, and we have continued to grow our audience shares. In addition, the increase in our revenues when comparing 2005 to 2006 was partially due to the fact that a significant majority of our advertising revenues for 2006 was denominated in rubles. We estimate that the appreciation of the Russian ruble against the US dollar in 2006 resulted in approximately a 4.0% increase in our advertising revenues.
Advertising revenues
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| CTC Network | | | | $ | 113,737 | | | | | $ | 165,003 | | | | | $ | 253,321 | |
| Change period-to-period | | | | | — | | | | | | 45.1 | | | | | | 53.5 | |
| Domashny Network | | | | | — | | | | | | 9,344 | | | | | | 20,647 | |
| Change period-to-period | | | | | — | | | | | | — | | | | | | 121.0 | |
| CTC Television Station Group | | | | | 36,803 | | | | | | 50,412 | | | | | | 73,549 | |
| Change period-to-period | | | | | — | | | | | | 37.1 | | | | | | 45.9 | |
| Domashny Television Station Group | | | | | 2,920 | | | | | | 6,345 | | | | | | 9,436 | |
| Change period-to-period | | | | | — | | | | | | 117.3 | | | | | | 48.7 | |
| Eliminations and other | | | | | 315 | | | | | | 1,306 | | | | | | 382 | |
| Total | | | | $ | 153,775 | | | | | $ | 232,410 | | | | | $ | 357,335 | |
| Change period-to-period | | | | | — | | | | | | 51.1 | | | | | | 53.8 | |
|
We recognize advertising revenues in the period that the corresponding advertising spots are broadcast. Our advertising revenue is recorded net of VAT and sales commissions.
CTC Network. Advertising revenues for the CTC Network increased by 45.1% and 53.5%, respectively, when comparing 2004 to 2005 and 2005 to 2006. This increase was principally due to the continued growth of television advertising in Russia from $1.7 billion in 2004 to $2.3 billion in 2005, and then to $3.2 billion in 2006, which resulted in a general increase in our advertising rates. The increase in our advertising revenues over the period under review was, to a lesser extent, also due to an increase in our audience share on the CTC Network from 9.8% in 2004 to 10.3% in 2005 and to 10.4% in 2006.
The increase in our audience share was partially the result of broadcasting of our highly successful series Born Not Pretty. This series, which made its debut in September 2005, was the CTC Network’s most successful program to date in terms of audience share, and generated an average overall primetime audience share of 24.1% during the period from September 5, 2005 to December 31, 2005, and 28.8% while being broadcast during primetime from January 16, 2006 until July 7, 2006. This level of audience share is significantly higher than the average audience share of any other series or sitcom broadcast on the CTC Network. Although we continue to seek to acquire and commission high quality Russian and international programming, we do not expect that we will be able to replace Born Not Pretty with programming that is as successful as this series. For example, primarily as a result of the conclusion of this series, our audience share on the CTC Network for the fourth quarter of 2006 was approximately 9.0%, which was lower than its audience share for the first three quarters of 2006. We also anticipate that our audience share on the CTC Network for the first half of 2007 will be below 2006 levels for the same reason.
The impact of the factors noted above on our revenues was partially offset by the effect of the legislation which came into effect on July 1, 2006 and imposed stricter limitations on airtime available for advertising. See ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Television Advertising Sales’’ for more information about this new legislation. Additionally, our audience share on the CTC Network in the fourth quarter of 2006 was negatively impacted by the relative underperformance of a few of our primetime shows during the fall season.
46
Domashny Network. The Domashny Network contributed $9.3 million and $20.6 million, respectively, to our consolidated advertising revenues for 2005 and 2006. This is equal to 4.0% and 5.8%, respectively, of our consolidated advertising revenues. The Domashny Network was launched on March 6, 2005. As a result, 2006 was its first full year of operation.
Television Station Groups. Advertising revenues of the CTC Television Station Group increased by 37.1% and 45.9%, respectively, when comparing 2004 to 2005 and 2005 to 2006. The increase in revenues during the periods under review was primarily the result of increased advertising rates. Advertising rates generally increased during the periods under review due to an overall increase in the demand for television advertising in Russia. Beginning in the third quarter of 2006, however, the rate of revenue growth of the CTC Television Station Group slowed due to the reallocation of advertising time on the CTC Network which decreased the proportion available to affiliates and owned-and-operated stations from 30.0% to 25.0%. Additionally, the new advertising legislation introduced on July 1, 2006 reduced the airtime available for advertising. See ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Television Advertising Sales’’ for more information about this reallocation of advertising time and this new legislation.
The Domashny Television Station Group contributed $2.9 million, $6.3 million and $9.4 million, respectively, to our consolidated advertising revenues for 2004, 2005 and 2006, amounting to 1.9%, 2.7% and 2.6%, respectively, of our consolidated advertising revenues in those years.
Prior to January 2006, the internal sales teams at our Television Station Groups were responsible for advertising sales, with only limited assistance from local advertising agencies. From January 2006, our Television Station Groups engaged Video International to act as their exclusive sales house for advertising sales.
Sublicensing and other revenues
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| CTC Network | | | | $ | 1,551 | | | | | $ | 3,667 | | | | | $ | 11,412 | |
| Change period-to-period | | | | | — | | | | | | 136.4 | | | | | | 211.2 | |
| Domashny Network | | | | | — | | | | | | 2 | | | | | | 3 | |
| Change period-to-period | | | | | — | | | | | | — | | | | | | 50.0 | |
| CTC Television Station Group | | | | | 909 | | | | | | 1,330 | | | | | | 1,217 | |
| Change period-to-period | | | | | — | | | | | | 46.3 | | | | | | (8.5 | |
| Domashny Television Station Group | | | | | 34 | | | | | | 1,414 | | | | | | 2,130 | |
| Change period-to-period | | | | | — | | | | | | 4058.8 | | | | | | 50.6 | |
| Eliminations and other | | | | | (702 | | | | | | (1,346 | | | | | | (1,262 | |
| Total | | | | $ | 1,792 | | | | | $ | 5,067 | | | | | $ | 13,500 | |
| Change period-to-period | | | | | — | | | | | | 182.8 | | | | | | 166.4 | |
|
Networks. The substantial increase in sublicensing and other revenues at the CTC Network level primarily resulted from the sublicensing of programming that we had commissioned, such as Born Not Pretty, Cadets and Peter the Magnificent, to Studio 1+1 in Ukraine. Additionally, we recognized $2.6 million in December 2006 from the sale of certain Russian mini-series originally commissioned by us to First Channel in Russia. Generally, we anticipate that our sublicensing activity will increase in future periods as we explore opportunities to earn supplemental revenues from our Russian programming.
Television Station Groups. Other revenues for the CTC Television Station Group primarily represent fees received for transmission. The Domashny Television Station Group’s other revenues were primarily generated by leasing space and production equipment at its Moscow facility to other group companies and to third-party production companies. A significant portion of the Television Station Groups’ sublicensing and other revenues are eliminated in consolidation.
47
Total operating expenses
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| CTC Network | | | | $ | (58,247 | | | | | $ | (84,828 | | | | | $ | (125,021 | |
| Change period-to-period | | | | | — | | | | | | 45.6 | | | | | | 47.4 | |
| Domashny Network | | | | | — | | | | | | (16,594 | | | | | | (25,276 | |
| Change period-to-period | | | | | — | | | | | | — | | | | | | 52.3 | |
| CTC Television Station Group | | | | | (21,228 | | | | | | (23,779 | | | | | | (26,692 | |
| Change period-to-period | | | | | — | | | | | | 12.0 | | | | | | 12.2 | |
| Domashny Television Station Group | | | | | (4,754 | | | | | | (14,164 | | | | | | (21,031 | |
| Change period-to-period | | | | | — | | | | | | 197.9 | | | | | | 48.5 | |
| Eliminations and other | | | | | (8,779 | | | | | | (7,925 | | | | | | (18,501 | |
| Total | | | | $ | (93,008 | | | | | $ | (147,290 | | | | | $ | (216,521 | |
| Change period-to-period | | | | | — | | | | | | 58.4 | | | | | | 47.0 | |
| % of total operating revenues | | | | | 59.8 | | | | | | 62.0 | | | | | | 58.4 | |
|
Our total operating expenses as a percentage of operating revenues amounted to 59.8%, 62.0% and 58.4%, respectively, in 2004, 2005 and 2006. As we pursue our growth strategy, we continue to manage our costs by taking a disciplined approach to expanding our operations. The structure of our networks, which is based on the traditional US broadcasting model, has enabled us to minimize investments in our infrastructure, while seeking to maximize viewing audience.
Direct operating expenses
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| CTC Network | | | | $ | (4,645 | | | | | $ | (4,522 | | | | | $ | (5,158 | |
| Change period-to-period | | | | | — | | | | | | (2.6 | | | | | | 14.1 | |
| Domashny Network | | | | | — | | | | | | (2,186 | | | | | | (2,793 | |
| Change period-to-period | | | | | — | | | | | | — | | | | | | 27.8 | |
| CTC Television Station Group | | | | | (4,577 | | | | | | (3,945 | | | | | | (4,984 | |
| Change period-to-period | | | | | — | | | | | | (13.8 | | | | | | 26.3 | |
| Domashny Television Station Group | | | | | (713 | | | | | | (2,660 | | | | | | (3,333 | |
| Change period-to-period | | | | | — | | | | | | 273.1 | | | | | | 25.3 | |
| Eliminations and other | | | | | 554 | | | | | | 566 | | | | | | 494 | |
| Total | | | | $ | (9,381 | | | | | $ | (12,747 | | | | | $ | (15,774 | |
| Change period-to-period | | | | | — | | | | | | 35.9 | | | | | | 23.8 | |
| % of total operating revenues | | | | | 6.0 | | | | | | 5.4 | | | | | | 4.3 | |
|
Networks. At the Network level, direct operating expenses principally comprise the salaries of our Networks’ engineering, programming and production staff and satellite transmission fees. Direct operating expense at the CTC Network as a percentage of this segment’s total operating revenues were 4.0%, 2.7%, and 1.9%, respectively, in 2004, 2005 and 2006. At the Domashny Network, direct operating expense as a percentage of this segment’s total operating revenues were 23.4% to 13.5%, respectively, in 2005 and 2006.
Television Station Groups. At the Television Station Group level, direct operating expenses primarily consist of transmission and maintenance costs and payroll expenses for engineering, programming, production and distribution staff. Direct operating expenses at our Television Station Groups are materially higher as a percentage of those segments’ total operating revenues compared to the networks because we bear the transmission costs of our owned-and-operated stations. For the CTC Television Station Group, direct operating expenses as a percentage of that segment’s total operating revenues amounted to 12.1%, 7.6% and 6.7%, respectively, in 2004, 2005 and 2006.
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For the Domashny Television Station Group, direct operating expenses as a percentage of that segment’s total operating revenues were 24.1%, 34.3% and 28.8%, respectively, in 2004, 2005 and 2006. Direct operating expenses as a percentage of this segment’s total operating revenues is higher than that of the CTC Television Station Group reflecting the start-up of operations.
Eliminations and other. We eliminate inter-company expenses from direct operating expenses. These inter-company expenses consist primarily of service fees charged to our Networks by our Television Station Groups for the operation and maintenance of repeater transmitters. Other direct operating expenses also includes costs related to the operation of our radio stations, which are not significant and continue to decline due to the sale of our 85% interest in two radio stations in Perm in April 2006.
Selling, general and administrative expenses
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| CTC Network | | | | $ | (11,169 | | | | | $ | (12,384 | | | | | $ | (12,785 | |
| Change period-to-period | | | | | — | | | | | | 10.9 | | | | | | 3.2 | |
| Domashny Network | | | | | — | | | | | | (4,747 | | | | | | (5,981 | |
| Change period-to-period | | | | | — | | | | | | — | | | | | | 26.0 | |
| CTC Television Station Group | | | | | (11,455 | | | | | | (13,326 | | | | | | (13,831 | |
| Change period-to-period | | | | | — | | | | | | 16.3 | | | | | | 3.8 | |
| Domashny Television Station Group | | | | | (1,184 | | | | | | (4,609 | | | | | | (6,628 | |
| Change period-to-period | | | | | — | | | | | | 289.3 | | | | | | 43.8 | |
| Eliminations and other | | | | | (6,642 | | | | | | (6,163 | | | | | | (17,072 | |
| Total | | | | $ | (30,450 | | | | | $ | (41,229 | | | | | $ | (56,297 | |
| Change period-to-period | | | | | — | | | | | | 35.4 | | | | | | 36.5 | |
| % of total operating revenues | | | | | 19.6 | | | | | | 17.4 | | | | | | 15.2 | |
|
Our selling, general and administrative expenses principally consist of advertising and promotion expenses; salaries and benefits; stock-based compensation; rent and utilities; audit, legal and other consulting fees; travel expenses; insurance costs and non-income taxes.
CTC Network. Selling, general and administrative expenses of the CTC Network as a percentage of this segment’s total operating revenues amounted to 9.7%, 7.3% and 4.8%, respectively, in 2004, 2005 and 2006. The increase in selling general and administrative expenses in absolute terms over the three-year period under review is due in part to salary increases and the fact that we switched the denomination of the salaries of most of our employees from dollars to rubles effective July 2006. When comparing 2005 and 2006, the impact of salary increases was offset by the first quarter reduction in the headcount of our CTC Network sales and support personnel by approximately 30 people as a result of our engagement of Video International to make local advertising sales. This resulted in a severance charge of $0.2 million which was expensed in the fourth quarter of 2005. Increases in advertising and promotional expenses from $1.9 million in 2004 to $3.1 million in 2005 and to $3.3 million in 2006 also contributed to the increase in absolute terms of selling, general and administrative expenses for the three-year period under review.
Stock-based compensation expense was $1.1 million, $0.4 million and $0.1 million, respectively, in 2004, 2005 and 2006. Stock-based compensation expense at the CTC Network relates to a stock appreciation right granted to our Chief Executive Officer in 2003. This stock appreciation right became fully vested in the second quarter of 2006. The impact of the Chief Executive Officer’s stock options granted in conjunction with the IPO is accounted for at the parent company level.
Domashny Network. Selling, general and administrative expenses of the Domashny Network as a percentage of the segment’s operating revenue were 50.8% and 29.0% in 2005 and 2006, respectively. This decrease reflects growth in Domashny Network’s revenues over the periods under review. In absolute terms, selling, general and administrative expenses at the Domashny Network increased primarily due to increases in salaries and benefits, and promotional expenses. As we continue to build the Domashny
49
brand, we expect selling, general and administrative expenses to increase in absolute terms but decrease as a percentage of this segment’s operating revenues.
CTC and Domashny Television Station Groups. Selling, general and administrative expenses of the CTC Television Station Group as a percentage of this segment’s total operating revenues amounted to 30.4%, 25.8% and 18.5%, respectively, in 2004, 2005 and 2006. The decrease in this expense as a percentage of this segment’s total operating revenues is principally the result of strong revenue growth and the decrease in the headcount of this segment’s sales and support personnel, as discussed below. In absolute terms, selling, general and administrative expenses increased primarily due to increases in advertising and promotion expenses.
Selling, general and administrative expenses of the Domashny Television Station Group as a percentage of this segment’s total operating revenues were 40.1%, 59.4% and 57.3%, respectively, in 2004, 2005 and 2006. In absolute terms, selling, general and administrative expenses increased between the periods primarily due to increases in advertising and promotion, as well as increases in salaries and benefits. Advertising and promotion expenses increased between the periods due to additional promotion campaigns at our newly acquired stations. Salaries and benefits increased between the periods due to raises effectuated at the beginning of each year, as well as from the addition of three new Domashny stations during 2006.
In connection with engaging Video International to be the exclusive advertising sales house for substantially all of the owned-and-operated stations in our Television Station Groups, we decreased the headcount of the sales and support personnel in our Television Station Groups by 170 in the beginning of 2006, resulting in $0.4 million in severance costs that were expensed in the fourth quarter of 2005. Despite the decrease in sales headcount, our Television Station Group’s selling, general and administrative expense continued to increase in 2006 as a result of new station acquisitions, increased marketing and promotional expenses and headcount growth outside the sales function. We expect selling, general and administrative expenses in out Television Stations Groups to continue to grow in absolute terms, but to decrease as a percentage of total segment operating revenues.
Eliminations and other. Other selling, general and administrative expenses consist principally of the general and administrative expenses of our corporate headquarters. These expenses, excluding stock-based compensation, amounted to $6.4 million, $5.7 million and $10.2 million, respectively, for 2004, 2005 and 2006. The general rise in these expenses over the three-year period at the corporate level is mainly due to the expansion of our corporate function in order to address the requirements of becoming a publicly traded company. Due to additional headcount, annual compensation increases, and increased board member fees, salaries and benefits amounted to $1.9 million, $2.5 million and $4.5 million, respectively, for 2004, 2005 and 2006. Additionally, in 2006 we expensed approximately $1.0 million in IPO-related costs, and incurred approximately $1.1 million in management consulting fees for advice on strategic and organizational issues and $0.8 million in directors and officers insurance premiums.
Corporate stock-based compensation expense amounted to nil, $0.2 million and $7.1 million, respectively, for 2004, 2005 and 2006. This increase over the periods under review resulted from the grant of stock options to our executive officers and other management in June 2006 upon the closing of our IPO.
We expect our general and administrative expenditures at the corporate level to increase during 2007 and subsequent years due to expenses associated with being a publicly traded company, increases in salaries and benefits as we add to our corporate headcount and as competition for qualified personnel continues to intensify in Russia.
50
Amortization of programming rights
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| CTC Network | | | | $ | (41,647 | | | | | $ | (64,768 | | | | | $ | (99,249 | |
| Change period-to-period | | | | | — | | | | | | 55.5 | | | | | | 53.2 | |
| Domashny Network | | | | | — | | | | | | (9,291 | | | | | | (15,954 | |
| Change period-to-period | | | | | — | | | | | | — | | | | | | 71.7 | |
| CTC Television Station Group | | | | | (2,249 | | | | | | (2,643 | | | | | | (2,933 | |
| Change period-to-period | | | | | — | | | | | | 17.5 | | | | | | 10.9 | |
| Domashny Television Station Group | | | | | (798 | | | | | | (440 | | | | | | (39 | |
| Change period-to-period | | | | | — | | | | | | (44.9 | | | | | | (91.1 | |
| Eliminations and other | | | | | (521 | | | | | | (209 | | | | | | 149 | |
| Total | | | | $ | (45,215 | | | | | $ | (77,352 | | | | | $ | (118,026 | |
| Change period-to-period | | | | | — | | | | | | 71.1 | | | | | | 52.6 | |
| % of total operating revenues | | | | | 29.1 | | | | | | 32.6 | | | | | | 31.8 | |
|
CTC Network. The amortization of programming rights is our most significant expense at the Network level. Amortization of programming rights for the CTC Network segment as a percentage of CTC Network’s total operating revenues amounted to 36.1%, 38.4% and 37.5%, respectively, for 2004, 2005 and 2006. The increase in amortization of programming rights for the CTC Network over the periods in absolute terms was due primarily to increases in the cost of programming, particularly foreign movies and Russian-produced programming. Effective July 1, 2005, we began amortizing our Russian series and sitcoms on a more accelerated basis, which resulted in an increase in our amortization expense of approximately $2.9 million for 2005 compared to 2004 and $4.4 million for 2006 compared to 2005. Impairment charges amounted to $4.7 million, $5.4 million and $3.7 million, respectively, for 2004, 2005 and 2006. For 2007, we expect our programming costs to continue to increase in response to intense competition for quality programming.
Domashny Network. Amortization of programming rights for the Domashny Network segment as a percentage of its operating revenues amounted to 99.4% and 77.3% when comparing 2005 to 2006. As 2005 was the first year of operation of Domashny Network, we used programming to build audience share to attract viewers to the new product and to recruit new affiliates. We expect Domashny’s amortization of programming expense to decrease as a percentage of its operating revenues for 2007 as we build on this segment’s advertising revenues, but expect that this expense will continue to constitute a higher percentage of its operating revenues than is expected to be the case for the CTC Network as we continue to make substantial investments in programming in order to build Domashny’s audience share.
Television Station Groups. Our Television Station Groups amortize the programming that they commission for broadcast during the local windows. The investment our owned-and-operated stations make in programming has historically been limited. Governmental authorities recently added an additional term to the broadcast licenses of some of our CTC owned-and-operated stations requiring that 9% of daily broadcast time at these stations be devoted to ‘‘local content’’. We view this action primarily as a positive attempt to standardize the local content requirements in our CTC licenses, some of which previously contained higher or lower local content requirements. However, compliance with the provision could increase our local programming costs.
51
Amortization of sublicensing rights
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| CTC Network | | | | | — | | | | | $ | (2,043 | | | | | $ | (6,773 | |
| Total | | | | | — | | | | | $ | (2,043 | | | | | $ | (6,773 | |
| Change year-on-year | | | | | — | | | | | | — | | | | | | 231.6 | |
| % of total operating revenues | | | | | — | | | | | | 0.9 | | | | | | 1.8 | |
|
Amortization of sublicensing rights was nil, $2.0 million and $6.8 million, respectively, for 2004, 2005 and 2006. From the third quarter of 2005, we began to sublicense programs that we had commissioned for the CTC Network, such as Born Not Pretty, Kadets and Peter the Magnificent to Studio 1+1 in Ukraine. Additionally, we amortized $2.1 million in December 2006 related to the sale of certain Russian mini-series originally commissioned by us to First Channel in Russia. Generally, we anticipate that our sublicensing activity will increase in future periods as we explore opportunities to earn supplemental revenues from our Russian programming.
Depreciation and amortization (exclusive of amortization of programming rights and sublicensing rights)
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| CTC Network | | | | $ | (786 | | | | | $ | (1,111 | | | | | $ | (1,056 | |
| Change period-to-period | | | | | — | | | | | | 41.3 | | | | | | (5.0 | |
| Domashny Network | | | | | — | | | | | | (370 | | | | | | (548 | |
| Change period-to-period | | | | | — | | | | | | — | | | | | | 48.0 | |
| CTC Television Station Group | | | | | (2,948 | | | | | | (3,865 | | | | | | (4,945 | |
| Change period-to-period | | | | | — | | | | | | 31.1 | | | | | | 27.9 | |
| Domashny Television Station Group | | | | | (2,059 | | | | | | (6,455 | | | | | | (11,031 | |
| Change period-to-period | | | | | — | | | | | | 213.5 | | | | | | 70.9 | |
| Eliminations and other | | | | | (2,169 | | | | | | (2,119 | | | | | | (2,071 | |
| Total | | | | $ | (7,962 | | | | | $ | (13,920 | | | | | $ | (19,651 | |
| Change period-to-period | | | | | — | | | | | | 74.8 | | | | | | 41.2 | |
| % of total operating revenues | | | | | 5.1 | | | | | | 5.9 | | | | | | 5.3 | |
|
Our depreciation and amortization (exclusive of amortization of programming rights and sublicensing rights) relates to the depreciation of our property and equipment, mainly broadcasting equipment, transmitters, buildings, computer hardware and office furniture, and the amortization of our intangible assets other than programming rights and sublicensing rights, principally broadcast licenses, network affiliation agreements and cable network connections.
Networks. At the Network level, the depreciation of broadcasting equipment, computer hardware and office furniture represents the principal component of this expense. This expense remained relatively constant in absolute terms for the three-year period under review.
CTC Television Station Group. As a percentage of this segment’s operating revenues, depreciation and amortization expense amounted to 7.8%, 7.5% and 6.6%, respectively, for 2004, 2005 and 2006. In absolute terms depreciation and amortization increased from 2004 to 2005 due to our purchase in 2004 of the remaining minority interest in CTC-Moscow and ownership interests in two other owned-and-operated stations in this segment. In 2006, depreciation and amortization increased further as we acquired a station in Barnaul. For 2007, we expect total depreciation and amortization expense of the CTC Television Station Group to increase in absolute terms as we amortize intangible assets in connection with the acquisitions of new stations, but to decrease as a percentage of this segment’s operating revenues.
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Domashny Television Station Group. Depreciation and amortization expense amounted to 69.7%, 83.2% and 95.4%, respectively, for 2004, 2005 and 2006. The principal component of this segment’s depreciation and amortization expense relates to the acquisition in the third quarter of 2004 of majority interests in the four television stations that we acquired to launch the Domashny Network. In connection with this transaction, we allocated approximately $28.2 million to the acquired intangible assets based on their relative fair values. In 2006, we acquired an additional three television stations for this television station group. For 2007, we expect the depreciation and amortization expense of the Domashny Television Station Group to increase slightly in absolute terms due to recent acquisitions.
Other. Other depreciation and amortization expense consists primarily of the amortization expense of $2.0 million recorded in each of the years under review, recognized as a result of the assignment of $10 million in value to affiliation agreements of the CTC Network in connection with our acquisition in August 2003 of Alfa’s 25% plus one share interest in our CTC Network.
Foreign currency gains (losses)
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| Foreign currency gains (losses) | | | | $ | 695 | | | | | $ | (877 | | | | | $ | 1,579 | |
| Change period-to-period | | | | | — | | | | | | (226.3 | | | | | | (280.1 | |
|
Prior to January 1, 2006, the gains and losses from the measurement of monetary assets and liabilities that were not denominated in dollars were credited or charged to our consolidated statements of income. Therefore, the foreign currency gains and losses shown in 2004 and 2005, respectively, relate to the impact of exchange rate fluctuations of our ruble-denominated assets.
Effective January 1, 2006, the functional currency of our Russian subsidiaries changed to the ruble from the US dollar, but we retained the US dollar as our reporting currency. In 2006, our foreign currency gain primarily represents the impact of ruble appreciation on our dollar-denominated liabilities.
Interest income
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| Interest income | | | | $ | 5,380 | | | | | $ | 3,101 | | | | | $ | 3,479 | |
| Change period-to-period | | | | | — | | | | | | (42.4 | | | | | | 12.2 | |
|
Our interest income consists of interest earned on our bank accounts. During 2004 and first half of 2005, a substantial portion of our interest income was attributable to interest earned on a blocked account with a balance of $35.9 million of restricted cash that served as collateral for a loan of the same amount from Raiffeisen Zentralbank to the CTC Network. We entered into this loan arrangement so that we could deduct the interest payments for Russian tax purposes. The blocked account was released in July 2005 when we repaid the loan, and the loan agreement was terminated in February 2006. In 2006 our interest income primarily represents interest earned on our IPO proceeds received in early June.
Interest expense
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| Interest expense | | | | $ | (6,651 | | | | | $ | (8,525 | | | | | $ | (1,774 | |
| Change period-to-period | | | | | — | | | | | | 28.2 | | | | | | (79.2 | |
|
In the period under review, our principal interest expense was interest paid on loans extended by Alfa and Raiffeisen Zentralbank to the CTC Network. In 2003, we borrowed $35.9 million from Raiffeisen Zentralbank, with interest payable at a rate of 14% per year, plus a 1% annual commission that we accounted for as interest. The various loans outstanding from Alfa for the period under review accrued interest at annual rates that varied from 10.25% to 15%. See ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources’’. The decrease in interest expense in 2006 is due to the full repayment of our loan with Raiffeisen Zentralbank in the third quarter of 2005 and our loans with Alfa Bank in the second quarter of 2006.
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Gain on sale of businesses
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| Gain on sale of businesses | | | | $ | 4,613 | | | | | | — | | | | | $ | 919 | |
|
In July 2004, we sold our 50% interest in Radio Maximum, resulting in a gain of $4.6 million.
In April 2006, we sold our 85% interests in two radio stations located in Perm for total cash consideration of $1.0 million and recognized a $0.8 million gain on the sale.
In November 2006, we sold our 100% interest in a radio station located in Samara for total cash consideration of $0.6 million and recognized a $0.1 million gain on the sale.
Equity in income of investee companies
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| Equity in income of investee companies | | | | $ | 713 | | | | | $ | 578 | | | | | $ | 1,896 | |
| Change period-to-period | | | | | — | | | | | | (19.0 | | | | | | 228.3 | |
|
Under the equity method, we record our interest in the stations’ results of operations as an investment rather than consolidating its results with our results of operations, reflecting a portion of net income commensurate with our ownership stake in it. We accounted for the Perm station in our CTC Television Station Group using the equity method until November 2004 when we acquired a further 35% interest in this station and began consolidating its results. Our interest in Radio Maximum was also accounted for using the equity method until July 2004 when we sold it. The change in method of accounting for the Perm station and the sale of our interest in Radio Maximum are the principal reasons for the decrease in equity in income of investee companies from 2004 to 2005. Beginning in December 2005, we began accounting for our newly acquired Novosibirsk station under the equity method. In 2006 our equity in income of investee companies primarily consists of income attributable to our interests in the Kazan and Novosibirsk stations, over which we do not have effective control and which we account for under the equity method.
Income tax expense
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| Income tax expense | | | | $ | (17,872 | | | | | $ | (24,861 | | | | | $ | (48,969 | |
| Change period-to-period | | | | | — | | | | | | 39.1 | | | | | | 97.0 | |
|
Our effective tax rate was approximately 27%, 29% and 31%, respectively, for 2004, 2005 and 2006. The increase in our effective tax rate when comparing 2004 to 2005 reflects increases in both non-offsettable losses and non-deductible expenses as a percentage of income before tax. The increase in our effective tax rate when comparing 2005 to 2006 reflects an increase in non-deductible expenses as a percentage of income before tax offset by the decrease in non-offsettable losses. The increase in non-deductible expenses was primarily due to additional non-deductible stock-based compensation expense in our US entity due to the grant of stock options to members of management upon the closing of the IPO. We are unable to deduct stock-based compensation expense for option grants to employees who are not US residents.
Income attributable to minority interest
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands, except percentages) |
| Income attributable to minority interest | | | | $ | (1,904 | | | | | $ | (2,514 | | | | | $ | (4,918 | |
| Change period-to-period | | | | | — | | | | | | 32.1 | | | | | | 95.6 | |
|
Minority interest represents the share of net income of each of our consolidated owned-and-operated stations that is not wholly owned and that is therefore attributable to the minority stockholders of these
54
companies. Income attributable to minority interest increased over the periods under review in line with the increases in profitability of our consolidated owned-and-operated stations comprising our CTC Television Station Group.
Other comprehensive income
Effective January 1, 2006, our Russian domiciled subsidiaries changed their functional currency to the ruble. As a result, the financial statements of these Russian subsidiaries were translated into US dollars using the current rate method, resulting in translation adjustments of $18.0 million to our consolidated financial statements that were recorded as other comprehensive income in 2006.
Consolidated Financial Position — Significant Changes in our Consolidated Balance Sheets at December 31, 2006 Compared to December 31, 2005
Trade accounts receivable, net of allowance for doubtful accounts
Our accounts receivable increased from $6.0 million to $8.6 million at December 31, 2005 to December 31, 2006. This increase in accounts receivable is primarily due to an increase in revenue.
Prepayments
Current prepayments increased from December 31, 2005 to December 31, 2006 primarily due to payments related to programming not yet available for its first showing. Programming prepayments are reclassified as programming rights once the related programming material is available to be shown on our Networks.
Broadcasting licenses
Broadcasting licenses increased from December 31, 2005 to December 31, 2006 due to the acquisition of four owned-and-operated stations during 2006. See ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Acquisitions and Disposals.’’
Sublicensing rights
Sublicensing rights as shown on our balance sheet increased from December 31, 2005 to December 31, 2006 primarily due to a reclassification of programming costs in 2006 given our expectation that we will sublicense certain Russian mini-series originally commissioned by us.
Short-term and long-term loans
Short-term and long-term loans decreased significantly from December 31, 2005 to December 31, 2006 due to our full repayment of both our line of credit and the term loan that were outstanding with Alfa Bank on December 31, 2005.
Deferred tax asset
Deferred tax asset increased significantly from December 31, 2005 to December 31, 2006 mainly due to the increase in the difference between the US GAAP book basis and tax basis of programming rights. We amortize programming rights in our US GAAP accounts on a more accelerated basis than for tax purposes.
Other current assets
Other current assets increased from December 31, 2005 to December 31, 2006 mainly due to an increase in VAT receivable and advance payments made to Video International.
Liquidity and Capital Resources
We have financed our operations to date through cash from operations, loans from Alfa Bank, the private placement of equity and our recent IPO. At December 31, 2006, we had $176.5 million in cash and cash equivalents.
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Cash flows
Below is a summary of our cash flows during the periods indicated:
| | | | | | | | | | | | | | | | | | |
| | | | 2004 | | | 2005 | | | 2006 |
| | | | (in thousands) |
| Net cash provided by operating activities: | | | | $ | 33,216 | | | | | $ | 38,660 | | | | | $ | 116,784 | |
| Net cash used in investing activities: | | | | | (52,557 | | | | | | (13,181 | | | | | | (23,604 | |
| Net cash provided by (used in) financing activities: | | | | | 19,340 | | | | | | (38,922 | | | | | | 65,356 | |
|
Substantially all of our cash flow from operating activities throughout the periods under review derived from advertising revenues. Our cash flow from operating activities increased significantly over the periods under review principally because of the substantial increase in advertising revenues over these periods. Our advertising revenue was $153.8 million, $232.4 million and $357.3 million, respectively, for 2004, 2005 and 2006.
Our most significant use of cash in relation to operating assets and liabilities throughout the period under review was for the acquisition of sublicensing and programming rights. Our cash expenditure for the acquisition of sublicensing and programming rights was $73.8 million, $98.4 million $133.6 million during 2004, 2005 and 2006, exceeding our programming rights and sublicensing rights amortization expense in each of these years. Programming rights and sublicensing rights amortization was $45.2 million, $79.4 million and $124.8 million, respectively, during 2004, 2005 and 2006. We expect that in 2007, our cash expenditure for the acquisition of programming rights will continue to increase in absolute terms due primarily to increases in the cost of foreign movies and Russian-produced programming.
Cash used in investing activities includes cash used for the acquisition of property, equipment and intangible assets, and purchases and establishment of new owned-and-operated stations. In 2004, our continuing investment in owned-and-operated stations, in particular our acquisition in September and October 2004 of the four stations that we used as the foundation to launch our Domashny Network, resulted in a significant net use of cash in investing activities. In 2005, cash used in investing activities consisted of $7.6 million paid in December 2005 towards the acquisition of a 50% interest in a station in Novosibirsk and a 100% interest in a station in Voronezh. In 2006, we paid an additional $1.8 million in connection with the completion of the acquisition of a 50% interest in a station in Novosibirsk and a 100% interest in a station in Voronezh. In 2006, we also paid $7.0 million for the acquisition of a 51% interest in each of two television stations in Barnaul, $11.1 million for the acquisition of a 100% interest in one station located in Samara and $1.6 million for the acquisition of a 100% interest in a station in Kemerovo. Additionally, we paid approximately $1.0 million as deposits for station acquisition opportunities currently being evaluated. We also received $1.0 million from the sale of our 85% interests in two radio stations located in Perm in April 2006. In 2005 and 2006, we spent $6.1 million and $3.9 million, respectively, on capital expenditures, primarily the purchase of broadcasting, transmission and video editing equipment, and office and computer equipment.
Cash from financing activities fluctuated significantly between the periods primarily due to proceeds from and repayments of loans from Alfa Bank and Raiffeisen Zentralbank to the CTC Network and, in 2006, the receipt of net proceeds from our IPO. In 2004, CTC Network borrowed $24 million from Alfa to finance the purchase of the four stations acquired to launch Domashny. We repaid this loan in August 2005. In July 2005, we repurchased preferred and common shares equivalent to 13,283,200 shares of common stock (calculated on as as-if-converted to common stock basis) for approximately $54 million. To finance this repurchase and to fund working capital, we borrowed an aggregate of $68 million from Alfa in the second half of 2005, and had repaid $27 million of these borrowings by the end of 2005. Also in 2005, we repaid $35.9 million due to Raiffeisen Zentralbank. This repayment resulted in restricted cash decreasing by $35.9 million as Raiffeisen Zentralbank released the restriction on a deposit that served as a pledge for the loan. In 2006, we borrowed $19.0 million from Alfa Bank prior to our IPO to finance acquisitions and repaid $60.0 million to fully extinguish our Alfa Bank borrowings. As of December 31, 2006, we had only $0.2 million in borrowings outstanding, consisting primarily of a promissory note due in 2012 that was recorded as a contingent liability in the acquisition of one of our regional stations. Upon our IPO in 2006, we received $105.0 million in net proceeds and $5.9 million from the exercise of stock options.
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We believe that our current cash on hand, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months. We cannot assure you, however, that the assumed levels of revenues and expenses underlying this projection will prove to be accurate.
Off-balance sheet transactions
From time to time, we issue guarantees in favor of banks that make loans to production companies that produce Russian programming for us. Currently, there are no such guarantees in place.
Contractual obligations
The table below summarizes the principal categories of our contractual obligations for acquisitions of programming rights, transmission and satellite fees, leasehold obligations and equipment purchase obligations as of December 31, 2006:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
| | | | Total | | | Through
2007 | | | 2008
through
2009 | | | 2010
through
2011 | | | Thereafter |
| | | | (in thousands) |
| Acquisition of programming rights | | | | $ | 52,430 | | | | | $ | 44,812 | | | | | $ | 7,618 | | | | | $ | — | | | | | $ | — | |
| Acquisition of format rights | | | | | 3,325 | | | | | | 3,325 | | | | | | — | | | | | | — | | | | | | — | |
| Transmission and satellite fees | | | | | 37,175 | | | | | | 7,696 | | | | | | 15,266 | | | | | | 14,213 | | | | | | — | |
| Leasehold obligations(1) | | | | | 7,732 | | | | | | 1,808 | | | | | | 2,041 | | | | | | 878 | | | | | | 3,005 | |
| Equipment purchase obligations | | | | | 541 | | | | | | 541 | | | | | | — | | | | | | — | | | | | | — | |
| Total | | | | $ | 101,203 | | | | | $ | 58,182 | | | | | $ | 24,925 | | | | | $ | 15,091 | | | | | $ | 3,005 | |
|
| |
| (1) | The amounts shown exclude leasehold obligations that would arise upon entering into final lease agreements for the 10-year lease of approximately 12,000 square meters of office space in a building currently under construction in Moscow. See ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Office space’’ for more information about our preliminary lease agreements for this office space. |
Recently Issued Accounting Pronouncements
Accounting for Uncertainty in Income Taxes
In June 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued Interpretation No. 48 (‘‘FIN No. 48’’), Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109. FIN No. 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN No. 48 scopes out income taxes from SFAS No. 5, Accounting for Contingencies and is effective for fiscal years beginning after December 15, 2006. We have substantially completed our analysis for transition to FIN No. 48 as of January 1, 2007 and do not expect that its adoption will have a significant impact on our financial statements.
Fair Value Measurements
On September 15, 2006 the FASB issued FASB Statement No. 157 (SFAS No. 157), Fair Value Measurements. The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the provisions of SFAS No. 157 to determine the potential impact, if any, the adoption will have on our financial statements.
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Consideration of Effects of Prior Year Misstatements
In September 2006, the SEC released Staff Accounting Bulletin No. 108, ‘‘Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements’’ (‘‘SAB 108’’). SAB 108 provides interpretive guidance on the SEC’s views regarding the process of quantifying materiality of financial statement misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 is not expected to have a significant impact on our results of operations or financial position.
Income Statement Presentation of Taxes Collected from Customers and Remitted to Government Authorities
In June 2006, the Emerging Issues Task Force (‘‘EITF’’) reached a consensus on EITF Issue No. 06-03 (‘‘EITF 06-03’’), How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of EITF 06-03 become effective for fiscal years beginning after December 15, 2006. The adoption of ETIF 06-03 is not expected to have a material effect on our consolidated financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risk from changes in foreign currency exchange rates. We do not currently use derivative financial instruments, such as foreign exchange forward contracts or foreign currency options, to manage our foreign exchange risk because the market for these types of financial instruments in Russia is not well developed and the cost of these instruments is relatively high. We do not hold or issue derivatives or other financial instruments for trading purposes.
Prior to 2006, our principal source of revenue (contracts for the placement of advertising) was denominated primarily in US dollars. Because our expenses were also primarily denominated in US dollars, the impact on our results of ruble depreciation was insignificant. Beginning in January 2006, substantially all new advertising contracts between Video International and advertisers are ruble-denominated with the result that substantially all of our advertising revenues in 2007 are denominated in rubles as our longer-term advertising contracts denominated in US dollars expire and are replaced.
In response, we shifted a substantial majority of our expenditures from dollars to rubles. Nevertheless, we can give no assurance that we are adequately protected from the impact of currency fluctuations. Moreover, given that our reporting currency is the US dollar, rubles held in banks and other ruble-denominated assets and liabilities could fluctuate in line with any change in the value of the ruble. Prior to 2006, changes in the value of our ruble-denominated monetary assets and liabilities resulted in foreign currency gains or losses in our income statement. However, effective January 1, 2006 we determined that the functional currency of our subsidiaries domiciled in Russia is the ruble. Therefore, the financial statements of these subsidiaries are translated into US dollars using the current rate method and translation gains and losses are no longer included in net income, but are instead included as part of other comprehensive income.
We can, however, provide no assurance that these measures will adequately protect us from the impact of currency fluctuations. A substantial decline in the value of the Russian ruble against the US dollar could materially adversely affect our results of operations.
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The following table provides information about our financial instruments denominated in foreign currency and presents such information in US dollar equivalents (in thousands). All of our instruments that are sensitive to foreign currency exchange rates are denominated in rubles.
| | | | | | |
| | | | December 31, |
| | | | 2006 |
| Cash equivalents | | | | $ | 85,495 | |
| Taxes reclaimable | | | | | 4,232 | |
| Taxes payable | | | | | 11,485 | |
| Long-term loans | | | | | 210 | |
| Closing ruble/US dollar exchange rate | | | | | 26.3311 | |
|
Although we have trade accounts receivable and payable denominated in foreign currency, their carrying amount approximates fair value since such balances generally do not have extended payment terms.
Item 8. Financial Statements and Supplementary Data.
The information required by this item may be found beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2006. The term ‘‘disclosure controls and procedures,’’ as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. 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 December 31, 2006, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Internal Control over Financial Reporting
This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that was conducted during the fiscal quarter ended December 31, 2006 (our last fiscal quarter) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information relating to directors, certain executive officers and certain corporate governance matters is contained in our definitive Proxy Statement for the Annual Meeting of the Stockholders to be held on May 16, 2007, and is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions. A copy of our Code of Business Conduct and Ethics is filed as an exhibit hereto, and the text of our Code of Business Conduct and Ethics is posted in the ‘‘Corporate Governance’’ section of our website, www.ctcmedia.ru. We intend to disclose on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics that are required to be disclosed pursuant to the disclosure requirements of Item 5.05 of Form 8-K.
Item 11. Executive Compensation.
Information relating to executive compensation and the Company’s equity compensation plans is contained in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2007, and is incorporated herein by reference.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Information with respect to beneficial ownership of our common stock by each director and all directors and executive officers of the Company as a group is contained in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2007, and is incorporated herein by reference.
Information relating to any person who beneficially owns in excess of 5 percent of the total outstanding shares of our common stock is contained in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2007, and is incorporated herein by reference.
Information with respect to compensation plans under which equity securities are authorized for issuance is contained in the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 10, 2007, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information relating to certain relationships and related transactions and director independence is contained in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2007 and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this item is included under the caption ‘‘Independent Registered Public Accounting Firm’’ of our proxy statement.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
| | |
| (a) | Financial Statements and Schedules |
| | |
| (1) | Financial Statements — see ‘‘Index to Financial Statements’’ |
| | |
| (2) | Financial Statement Schedules |
Financial statement schedules not included have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements or notes.
Exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index immediately preceding such exhibits, which is incorporated herein by reference.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | |
| | | | Page |
| Report of Independent Registered Public Accounting Firm | | | | | F-2 | |
| Consolidated Balance Sheets as of December 31, 2005 and 2006 | | | | | F-3 | |
| Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2004, 2005 and 2006 | | | | | F-4 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006 | | | | | F-5 | |
| Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2005 and 2006 | | | | | F-6 | |
| Notes to Consolidated Financial Statements | | | | | F-8 | |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
CTC Media, Inc.
We have audited the accompanying consolidated balance sheets of CTC Media, Inc. and subsidiaries (‘‘the Company’’) as of December 31, 2005 and 2006, and the related consolidated statements of income and comprehensive income, cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CTC Media, Inc. and subsidiaries at December 31, 2005 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the accompanying consolidated financial statements, the Company changed its method of accounting for Share-Based Payments in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, on January 1, 2006.
/s/ Ernst & Young LLC
Moscow, Russia
February 28, 2007
F-2
CTC MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of US dollars, except share and per share data)
| | | | | | | | | | | | |
| | | | December 31, |
| | | | 2005 | | | 2006 |
| ASSETS | | | | | | |
| CURRENT ASSETS: | | | | | | | | | | | | |
| Cash and cash equivalents | | | | $ | 15,300 | | | | | $ | 176,542 | |
| Trade accounts receivable, net of allowance for doubtful accounts (2005 – $287; 2006 – $563) (including accounts receivable from related parties: 2005 − $135; 2006 − $1,468) | | | | | 6,016 | | | | | | 8,640 | |
| Taxes reclaimable | | | | | 3,109 | | | | | | 4,399 | |
| Prepayments (including prepayments from related parties: 2005 − nil; 2006 − $365) | | | | | 25,886 | | | | | | 38,302 | |
| Programming rights, net | | | | | 38,100 | | | | | | 41,634 | |
| Deferred tax asset | | | | | 1,310 | | | | | | 6,263 | |
| Other current assets | | | | | 790 | | | | | | 2,875 | |
| TOTAL CURRENT ASSETS | | | | | 90,511 | | | | | | 278,655 | |
| RESTRICTED CASH | | | | | 105 | | | | | | 120 | |
| PROPERTY AND EQUIPMENT, net | | | | | 19,405 | | | | | | 22,388 | |
| INTANGIBLE ASSETS, net: | | | | | | | | | | | | |
| Network affiliation agreements | | | | | 5,333 | | | | | | 3,333 | |
| Trade names | | | | | 5,834 | | | | | | 5,888 | |
| Broadcasting licenses | | | | | 28,896 | | | | | | 43,387 | |
| Cable network connections | | | | | 805 | | | | | | 409 | |
| Other intangible assets | | | | | 226 | | | | | | 354 | |
| Net intangible assets | | | | | 41,094 | | | | | | 53,371 | |
| GOODWILL | | | | | 68,273 | | | | | | 70,768 | |
| PROGRAMMING RIGHTS, net | | | | | 28,368 | | | | | | 24,267 | |
| SUBLICENSING RIGHTS, net | | | | | 1,836 | | | | | | 7,611 | |
| INVESTMENTS IN AND ADVANCES TO INVESTEES | | | | | 8,509 | | | | | | 9,319 | |
| PREPAYMENTS | | | | | 10,093 | | | | | | 8,713 | |
| DEFERRED TAX ASSET | | | | | 5,322 | | | | | | 9,077 | |
| OTHER NON-CURRENT ASSETS | | | | | 181 | | | | | | 508 | |
| TOTAL ASSETS | | | | $ | 273,697 | | | | | $ | 484,797 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | | | | | |
| Accounts payable (including accounts payable from related parties: 2005 − $402; 2006 − $676) | | | | $ | 16,349 | | | | | $ | 13,353 | |
| Accrued liabilities | | | | | 6,300 | | | | | | 5,508 | |
| Taxes payable | | | | | 8,765 | | | | | | 11,528 | |
| Short-term loans and interest accrued (including loans from related parties: 2005 – $4,064; 2006 – nil) | | | | | 4,068 | | | | | | — | |
| Deferred revenue (including deferred revenue from related parties: 2005 – $1,422; 2006-$54) | | | | | 8,171 | | | | | | 12,440 | |
| Deferred tax liability | | | | | 1,147 | | | | | | 2,937 | |
| Other current liabilities | | | | | 19 | | | | | | 600 | |
| TOTAL CURRENT LIABILITIES | | | | | 44,819 | | | | | | 46,366 | |
| LONG TERM LOANS (including loans from related parties: 2005 – $37,000; 2006 – nil) | | | | | 37,188 | | | | | | 210 | |
| DEFERRED TAX LIABILITY | | | | | 10,677 | | | | | | 14,080 | |
| MINORITY INTEREST | | | | | 1,915 | | | | | | 3,124 | |
| COMMITMENTS AND CONTINGENCIES (Note 16) | | | | | | | | | | | | |
| STOCKHOLDERS’ EQUITY: | | | | | | | | | | | | |
| Convertible preferred stock; $0.01 par value; shares authorized (2005 − 90,000; 2006 − nil) | | | | | | | | | | | | |
| shares issued and outstanding (2005 – 82,951; 2006 – nil) | | | | | 1 | | | | | | — | |
| Common stock; $0.01 par value; shares authorized (2005 − 160,000,000; 2006 − 175,772,173); | | | | | | | | | | | | |
| shares issued and outstanding (2005 – 72,824,800; 2006-151,505,672) | | | | | 728 | | | | | | 1,515 | |
| Additional paid-in capital | | | | | 210,740 | | | | | | 327,587 | |
| (Accumulated deficit)/Retained earnings | | | | | (32,371 | | | | | | 73,954 | |
| Accumulated other comprehensive income | | | | | — | | | | | | 17,961 | |
| TOTAL STOCKHOLDERS’ EQUITY | | | | | 179,098 | | | | | | 421,017 | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | $ | 273,697 | | | | | $ | 484,797 | |
|
The accompanying notes are an integral part of these financial statements.
F-3
CTC MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands of US dollars, except share and per share data)
| | | | | | | | | | | | | | | | | | |
| | | | 2004 | | | 2005 | | | 2006 |
| REVENUES: | | | | | | | | | |
| Advertising (including revenue from related parties of $99, $981 and $1,740 in 2004, 2005 and 2006, respectively) | | | | $ | 153,775 | | | | | $ | 232,410 | | | | | $ | 357,334 | |
| Sublicensing (including revenue from related parties of nil, $2,596 and $8,241 in 2004, 2005 and 2006, respectively) | | | | | — | | | | | | 3,088 | | | | | | 11,322 | |
| Other revenue (including revenue from related parties of nil, $12 and $10 in 2004, 2005 and 2006, respectively) | | | | | 1,792 | | | | | | 1,979 | | | | | | 2,178 | |
| Total operating revenues | | | | | 155,567 | | | | | | 237,477 | | | | | | 370,834 | |
| EXPENSES: | | | | | | | | | | | | | | | | | | |
| Direct operating expenses (exclusive of amortization of programming rights and sublicensing rights, shown below, exclusive of depreciation and amortization of $6,781, $12,377 and $15,108 in 2004, 2005 and 2006, respectively, and inclusive of stock-based compensation of nil, nil and $64 in 2004, 2005 and 2006, respectively) | | | | | (9,381 | | | | | | (12,747 | | | | | | (15,774 | |
| Selling, general and administrative (exclusive of depreciation and amortization of $1,181, $1,543 and $4,543 in 2004, 2005 and 2006, respectively, and inclusive of stock-based compensation of $1,082, $599 and $7,091 in 2004, 2005 and 2006, respectively) | | | | | (30,450 | | | | | | (41,229 | | | | | | (56,297 | |
| Amortization of programming rights | | | | | (45,215 | | | | | | (77,351 | | | | | | (118,026 | |
| Amortization of sublicensing rights | | | | | — | | | | | | (2,043 | | | | | | (6,773 | |
| Depreciation and amortization (exclusive of amortization of programming rights and sublicensing rights) | | | | | (7,962 | | | | | | (13,920 | | | | | | (19,651 | |
| Total operating expenses | | | | | (93,008 | | | | | | (147,290 | | | | | | (216,521 | |
| OPERATING INCOME | | | | | 62,559 | | | | | | 90,187 | | | | | | 154,313 | |
| FOREIGN CURRENCY GAINS (LOSSES) | | | | | 695 | | | | | | (877 | | | | | | 1,579 | |
| INTEREST INCOME (including interest income from related parties of $129, $217 and $237 in 2004, 2005 and 2006, respectively) | | | | | 5,380 | | | | | | 3,101 | | | | | | 3,479 | |
| INTEREST EXPENSE (including interest expense to related parties of $1,062, $5,157and $1,762 in 2004, 2005 and 2006, respectively) | | | | | (6,651 | | | | | | (8,525 | | | | | | (1,774 | |
| GAINS ON SALE OF BUSINESSES | | | | | 4,613 | | | | | | — | | | | | | 919 | |
| OTHER NON-OPERATING (LOSSES) INCOME, net | | | | | (83 | | | | | | 206 | | | | | | (200 | |
| EQUITY IN INCOME OF INVESTEE COMPANIES | | | | | 713 | | | | | | 578 | | | | | | 1,896 | |
| Income before income tax and minority interest | | | | | 67,226 | | | | | | 84,670 | | | | | | 160,212 | |
| INCOME TAX EXPENSE | | | | | (17,872 | | | | | | (24,861 | | | | | | (48,969 | |
| INCOME ATTRIBUTABLE TO MINORITY INTEREST | | | | | (1,904 | | | | | | (2,514 | | | | | | (4,918 | |
| NET INCOME | | | | $ | 47,450 | | | | | $ | 57,295 | | | | | $ | 106,325 | |
| Foreign currency translation adjustment | | | | | — | | | | | | — | | | | | | 17,961 | |
| COMPREHENSIVE INCOME | | | | $ | 47,450 | | | | | $ | 57,295 | | | | | $ | 124,286 | |
| Net income attributable to preferred stockholders | | | | | (21,300 | | | | | | (26,134 | | | | | | (20,621 | |
| Net income attributable to common stockholders | | | | | 26,150 | | | | | | 31,161 | | | | | | 85,704 | |
| Net income per share attributable to common stockholders – basic | | | | $ | 0.32 | | | | | $ | 0.39 | | | | | $ | 0.73 | |
| Net income per share attributable to common stockholders – diluted | | | | $ | 0.30 | | | | | $ | 0.37 | | | | | $ | 0.69 | |
| Weighted average common shares outstanding – basic | | | | | 80,580,000 | | | | | | 79,339,024 | | | | | | 117,880,814 | |
| Weighted average common shares outstanding – diluted | | | | | 156,570,711 | | | | | | 154,344,956 | | | | | | 154,077,957 | |
|
The accompanying notes are an integral part of these financial statements.
F-4
CTC MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of US dollars)
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
| Net income | | | | $ | 47,450 | | | | | $ | 57,295 | | | | | $ | 106,325 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | |
| Deferred tax benefit | | | | | (3,060 | | | | | | (3,860 | | | | | | (9,615 | |
| Depreciation and amortization | | | | | 7,962 | | | | | | 13,920 | | | | | | 19,651 | |
| Amortization of programming rights | | | | | 45,215 | | | | | | 77,351 | | | | | | 118,026 | |
| Amortization of sublicensing rights | | | | | — | | | | | | 2,043 | | | | | | 6,773 | |
| Stock based compensation expense | | | | | 1,082 | | | | | | 599 | | | | | | 7,155 | |
| Gain on disposal of property and equipment | | | | | — | | | | | | (159 | | | | | | (174 | |
| Gain on sale of businesses | | | | | (4,613 | | | | | | — | | | | | | (919 | |
| Equity in income of unconsolidated investees | | | | | (713 | | | | | | (578 | | | | | | (1,896 | |
| Income attributable to minority interest | | | | | 1,904 | | | | | | 2,514 | | | | | | 4,918 | |
| Foreign currency (gains) losses | | | | | (695 | | | | | | 877 | | | | | | (1,579 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | | |
| Trade accounts receivable | | | | | 66 | | | | | | (2,993 | | | | | | (1,068 | |
| Prepayments | | | | | (606 | | | | | | (5,804 | | | | | | 716 | |
| Other assets | | | | | 11 | | | | | | (20 | | | | | | (2,153 | |
| Accounts payable and accrued liabilities | | | | | 7,526 | | | | | | (6,187 | | | | | | (1,138 | |
| Deferred revenue | | | | | 3,887 | | | | | | 1,471 | | | | | | 2,732 | |
| Other liabilities | | | | | 920 | | | | | | (28 | | | | | | 1,942 | |
| Dividends received from equity investees | | | | | 640 | | | | | | 644 | | | | | | 713 | |
| Acquisition of programming and sublicensing rights (including acquisition from related parties of $1,273, $795 and $1,000 in 2004, 2005 and 2006, respectively) | | | | | (73,760 | | | | | | (98,425 | | | | | | (133,625 | |
| Net cash provided by operating activities | | | | | 33,216 | | | | | | 38,660 | | | | | | 116,784 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
| Acquisitions of property and equipment | | | | | (5,565 | | | | | | (5,829 | | | | | | (3,650 | |
| Acquisitions of intangibles | | | | | (154 | | | | | | (274 | | | | | | (224 | |
| Acquisitions of businesses, net of cash acquired | | | | | (51,517 | | | | | | (7,650 | | | | | | (21,897 | |
| Acquisitions of financial instruments | | | | | (508 | | | | | | — | | | | | | — | |
| Proceeds from sale of businesses, net of cash disposed | | | | | 5,100 | | | | | | — | | | | | | 1,482 | |
| Proceeds from sale of property and equipment | | | | | 22 | | | | | | 624 | | | | | | 673 | |
| Other | | | | | 65 | | | | | | (52 | | | | | | 12 | |
| Net cash used in investing activities | | | | | (52,557 | | | | | | (13,181 | | | | | | (23,604 | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
| Proceeds from issuances of common stock | | | | | — | | | | | | — | | | | | | 105,041 | |
| Common stock issuance costs | | | | | — | | | | | | — | | | | | | (394 | |
| Proceeds from exercise of stock options | | | | | 3,159 | | | | | | 157 | | | | | | 5,855 | |
| Repurchase of stock | | | | | — | | | | | | (53,954 | | | | | | — | |
| Proceeds from loans | | | | | 24,021 | | | | | | 68,000 | | | | | | 19,000 | |
| Repayments of loans | | | | | (6,505 | | | | | | (86,912 | | | | | | (60,384 | |
| (Increase) decrease in restricted cash | | | | | (62 | | | | | | 35,856 | | | | | | (12 | |
| Dividends paid to minority interest | | | | | (1,273 | | | | | | (2,069 | | | | | | (3,750 | |
| Net cash provided by (used in) financing activities | | | | | 19,340 | | | | | | (38,922 | | | | | | 65,356 | |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | | | | | 786 | | | | | | (934 | | | | | | 2,706 | |
| Net increase (decrease) in cash and cash equivalents | | | | | 785 | | | | | | (14,377 | | | | | | 161,242 | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | | | 28,892 | | | | | | 29,677 | | | | | | 15,300 | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | | | | $ | 29,677 | | | | | $ | 15,300 | | | | | $ | 176,542 | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | | | | | | | | | | | |
| Interest paid (including interest paid to related parties of $1,025, $5,130 and $1,846 in 2004, 2005 and 2006, respectively) | | | | $ | 6,466 | | | | | $ | 8,353 | | | | | $ | 1,948 | |
| Income tax paid | | | | $ | 19,535 | | | | | $ | 27,501 | | | | | $ | 57,896 | |
|
The accompanying notes are an integral part of these financial statements.
F-5
CTC MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(in thousands of US dollars, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding
Common
Shares | | | Outstanding
Convertible
Class A
Senior
Preferred
Shares | | | Outstanding
Convertible
Super
Senior
Preferred
Shares | | | Common
Stock | | | Preferred
Stock | | | Additional
Paid-in
Capital | | | Treasury
Stock | | | (Accumulated
Deficit)/
Retained
Earnings | | | Accumulated
Other
Comprehensive
Income | | | Subscription
and
Stockholders’
(Receivable)/
Payable | | | Stockholders’
Equity |
| DECEMBER 31, 2003 | | | | | 77,084,800 | | | | | | 35,664 | | | | | | 45,575 | | | | | $ | 771 | | | | | $ | 1 | | | | | $ | 201,171 | | | | | $ | (407 | | | | | $ | (82,884 | | | | | | — | | | | | $ | (247 | | | | | $ | 118,405 | |
Programming rights
received from programming distributor | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 187 | | | | | | 187 | |
| Fair value of stock options granted | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 1,082 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 1,082 | |
| Stock options exercised | | | | | 4,906,400 | | | | | | — | | | | | | 2,100 | | | | | | 49 | | | | | | — | | | | | | 3,121 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 3,170 | |
| Issuance of shares in connection with acquisition of minority interest | | | | | 1,979,200 | | | | | | — | | | | | | — | | | | | | 20 | | | | | | — | | | | | | 4,625 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 4,645 | |
| Cancellation of treasury stock | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 407 | | | | | | (407 | | | | | | — | | | | | | — | | | | | | — | |
| Net income | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 47,450 | | | | | | — | | | | | | — | | | | | | 47,450 | |
| DECEMBER 31, 2004 | | | | | 83,970,400 | | | | | | 35,664 | | | | | | 47,675 | | | | | $ | 840 | | | | | $ | 1 | | | | | $ | 209,999 | | | | | | — | | | | | $ | (35,841 | | | | | | — | | | | | $ | (60 | | | | | $ | 174,939 | |
Programming rights
received from programming distributor | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 60 | | | | | | 60 | |
| Fair value of stock options granted | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 599 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 599 | |
| Stock options exercised | | | | | 1,827,200 | | | | | | — | | | | | | — | | | | | | 18 | | | | | | — | | | | | | 142 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 160 | |
| Repurchase of shares | | | | | (12,972,800 | | | | | | (388 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (53,955 | | | | | | — | | | | | | — | | | | | | — | | | | | | (53,955 | |
| Cancellation of treasury stock | | | | | — | | | | | | — | | | | | | — | | | | | | (130 | | | | | | — | | | | | | — | | | | | | 53,955 | | | | | | (53,825 | | | | | | — | | | | | | — | | | | | | — | |
| Net income | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 57,295 | | | | | | — | | | | | | — | | | | | | 57,295 | |
| DECEMBER 31, 2005 | | | | | 72,824,800 | | | | | | 35,276 | | | | | | 47,675 | | | | | $ | 728 | | | | | $ | 1 | | | | | $ | 210,740 | | | | | | — | | | | | $ | (32,371 | | | | | | — | | | | | | — | | | | | $ | 179,098 | |
|
F-6
CTC MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(in thousands of US dollars, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Outstanding
Common
Shares | | | Outstanding
Convertible
Class A
Senior
Preferred
Shares | | | Outstanding
Convertible
Super
Senior
Preferred
Shares | | | Common
Stock | | | Preferred
Stock | | | Additional
Paid-in
Capital | | | Treasury
Stock | | | (Accumulated
Deficit)/
Retained
Earnings | | | Accumulated
Other
Comprehensive
Income | | | Subscription
and
Stockholders’
(Receivable)/
Payable | | | Stockholders’
Equity |
| Fair value of stock options granted | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 7,155 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 7,155 | |
| Stock options exercised | | | | | 4,410,324 | | | | | | — | | | | | | — | | | | | | 44 | | | | | | — | | | | | | 5,811 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 5,855 | |
| Conversion of preferred stock | | | | | 66,360,800 | | | | | | (35,276 | | | | | | (47,675 | | | | | | 664 | | | | | | (1 | | | | | | (663 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Common stock issued | | | | | 7,909,748 | | | | | | — | | | | | | — | | | | | | 79 | | | | | | — | | | | | | 104,544 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 104,623 | |
| Foreign currency translation adjustment | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 17,961 | | | | | | — | | | | | | 17,961 | |
| Net income | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 106,325 | | | | | | — | | | | | | — | | | | | | 106,325 | |
| DECEMBER 31, 2006 | | | | | 151,505,672 | | | | | | — | | | | | | — | | | | | $ | 1,515 | | | | | | — | | | | | $ | 327,587 | | | | | | — | | | | | $ | 73,954 | | | | | $ | 17,961 | | | | | | — | | | | | $ | 421,017 | |
|
The accompanying notes are an integral part of these financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
| 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 and Domashny television networks in Russia. The Company transmits its signal by satellite to its owned-and-operated affiliate stations and to independent affiliates. The Company’s network operations, including its relationships with its independent affiliates, are managed by CTC and Domashny Networks (the ‘‘Networks’’), its television entertainment network subsidiaries. CTC and Domashny Television Station Groups (the ‘‘Television Stations Group’’) manage the owned-and-operated affiliate stations and repeater transmitters. The Company generates substantially all of its revenues from the sale of television advertising, on both a national and regional basis. At the national level, this advertising is placed on the Networks through Video International (‘‘Video International’’), an advertising sales house (Note 16). Effective January 1, 2006, Video International began acting as the exclusive sales house for the placement of regional television advertising for substantially all of the stations in the Television Station Groups as well. The Company also generates sublicensing revenue primarily from sales of programming rights.
| |
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation
Wholly owned subsidiaries and majority owned ventures where the Company has operating and financial control are consolidated. Minority interest represents a minority owner’s proportionate share of the equity in certain of the Company’s consolidated entities. Those ventures where the Company exercises significant influence, but does not exercise operating and financial control, are accounted for under the equity method. Inter-company accounts and transactions are eliminated upon consolidation.
The Company recognizes profits and losses in accordance with its underlying ownership percentage or allocation percentage as specified in the agreements with its partners; however, losses are allocated to minority interests to the extent they do not exceed the minority interest in the equity capital of the subsidiary. Losses in excess of the minority interests are allocated to the Company. When such ventures and subsidiaries become profitable, the Company recognizes 100% of the profits until such time as the excess losses previously recognized have been recovered.
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. Disposals are reflected at the time risks and rewards of ownership have been transferred.
The principal subsidiaries included in the accompanying consolidated financial statements are ZAO CTC Network (‘‘CTC Network’’), ZAO New Channel (‘‘Domashny Network’’), OOO Marathon TV (‘‘CTC-Moscow’’), ZAO 6th Channel (‘‘CTC-St. Petersburg’’) and OAO Teleexpress (‘‘Domashny Moscow’’). CTC Media, Inc.’s ownership interests in these subsidiaries at December 31, 2004, 2005 and 2006 are as follows:
| | | | | | | | | | | | | | | | | | |
| | | | 2004 | | | 2005 | | | 2006 |
| TV Networks | | | | | | | | | | | | | | | | | | |
| CTC Network | | | | | 100.0 | | | | | | 100.0 | | | | | | 100.0 | |
| Domashny Network | | | | | 100.0 | | | | | | 100.0 | | | | | | 100.0 | |
| Television Station Groups | | | | | | | | | | | | | | | | | | |
| CTC-Moscow | | | | | 100.0 | | | | | | 100.0 | | | | | | 100.0 | |
| CTC-St. Petersburg | | | | | 80.0 | | | | | | 80.0 | | | | | | 80.0 | |
| Domashny Moscow | | | | | 99.9 | | | | | | 99.9 | | | | | | 99.9 | |
|
Business Segments
The Company operates in four business segments — CTC Network, Domashny Network, CTC Television Station Group and Domashny Television Station Group. The Company evaluates performance based on the operating income of each segment, among other performance measures (Note 17).
F-8
Foreign Currency Translation
Prior to January 1, 2006, the Company’s functional currency was the US dollar. However, as a result of a change in the contractual arrangement between Video International and advertisers that took place in January 2006, the Company’s 2006 revenue was primarily denominated in rubles. Accordingly, the Company reevaluated the functional currency criteria under Statement of Financial Accounting Standards (‘‘SFAS’’) No. 52, Foreign Currency Translation, and determined that, beginning in 2006, the functional currency of its subsidiaries domiciled in Russia is the ruble. Therefore, the financial statements of the Company’s subsidiaries domiciled in Russia for the year ended December 31, 2006, were translated into US dollars using the current rate method. Assets and liabilities were translated at the rate of exchange prevailing at the balance sheet date. Stockholders’ equity was translated at the applicable historical rate. Revenue and expenses were translated at monthly average rates of exchange. Translation gains and losses were included as part of accumulated other comprehensive income.
No restatement of comparative numbers was made for the change in functional currency. The change was adopted prospectively beginning January 1, 2006 in accordance with SFAS No. 52.
Revenue Recognition
The Company recognizes advertising revenues in the period that the corresponding advertising spots are aired. Advertising revenue is recorded net of sales commissions paid primarily to Video International. The advertising sales commissions amounted to $25,072, $35,875 and $59,660 in 2004, 2005 and 2006, respectively.
In 2004, Video International guaranteed a certain level of advertising sales depending on the Company’s audience share and size of the total Russian national advertising market. Effective the first quarter of 2005, the Company entered into new sales agreements with Video International for both the CTC and Domashny Networks. The new agreements do not contain a guarantee clause. Under these agreements with Video International, the Company paid signing fees in the amount of $9.9 million in May 2005. These signing fees are capitalized (included in prepayments) and expensed (included in advertising sales commissions) ratably over the underlying contractual term, which is three years. Signing fees expected to be expensed within one year are classified as current assets.
Sublicensing and other revenue primarily represent revenue the Company earns from sublicensing its rights to programming. Sublicensing revenue is recognized at such time as there is persuasive evidence that a sale or sublicensing arrangement with a customer exists, the underlying programming is complete and has been transferred to the customer, the sublicensing period has commenced and the customer can begin exploitation, 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.
Programming Rights
Programming rights are stated at historic acquisition cost less accumulated amortization. In accordance with SFAS No. 63, Financial Reporting by Broadcasters, the Company capitalizes expenditures for the acquisition of programming rights.
For foreign and Russian-produced movies, foreign series, foreign and Russian-produced animation, the Company amortizes the cost of the programming on a straight-line basis over the licensed number of runs consistent with the expected revenue generation pattern. Russian-produced shows which the Company commissions are expensed as aired.
For Russian-produced series and sitcoms, the Company’s previous policy was to amortize the costs of programming on a straight-line basis over the estimated number of runs, generally not more than three runs. Effective July 1, 2005, the Company changed its amortization policy. The policy was changed based on the performance of past runs and expected future revenue generation patterns. After the change, series with twenty episodes or less and sitcoms, irrespective of the number of episodes, are amortized 45% after
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the first run, 35% after the second run and 20% after the third run when a license provides for three or more runs. When a license provides for two runs, such series and sitcoms are amortized 60% after the first run and 40% after the second run. Series with more than twenty episodes are amortized 60% after the first run, 30% after the second run and 10% after the third run when a license provides for three or more runs. When a license provides for two runs, such series are amortized 70% after the first run and 30% after the second run.
The Company from time to time obtains extensions of licenses for additional runs of successful foreign and Russian series, sitcoms, and movies. Such extensions are treated as a new license and are amortized in accordance with the above policy.
Management reviews the carrying amounts of programming rights on a quarterly basis or more frequently, if necessary. If the carrying amount of any programming right exceeds its expected future revenues, the Company writes down the carrying value to net realizable value. Unamortized programming rights expected to be amortized within one year are classified as current assets.
Had the Company continued in 2005 with its prior policy to amortize Russian-produced series and sitcoms, net income and net income per common share would be as follows:
| | | | | | |
| | | | Year ended
December 31,
2005 |
| Net income as reported | | | | $ | 57,295 | |
| Add: Program amortization as reported | | | | | 79,394 | |
| Deduct: Program amortization based on policy prior to July 1, 2005 | | | | | (76,459 | |
| Income tax effect at 24% | | | | | (704 | |
| Pro forma net income | | | | $ | 59,527 | |
| Pro forma net income per common share: | | | | | | |
| Basic | | | | $ | 0.41 | |
| Diluted | | | | $ | 0.39 | |
|
Sublicensing Rights
Sublicensing rights include the unamortized cost of completed television episodes, television series in production and programming rights acquired for sublicensing rather than for exhibition on the Company’s own networks. Sublicensing rights principally consist of production costs, development and format costs, and are stated at the lower of cost, less accumulated amortization, or fair value. The Company accounts for sublicensing rights in accordance with American Institute of Certified Public Accountants Statement of Position 00-2, Accounting by Producers or Distributors of Films. The amount of capitalized sublicensing rights recognized as cost for a given episode as it is exhibited in various markets, throughout its life cycle, is determined using the film forecast method. Under this method, the amount of capitalized costs recognized as expense is based on the proportion of the television episode’s revenues recognized for such period to the television episode’s estimated remaining ultimate revenues. These estimates are revised periodically and projected losses, if any, are provided in full.
Property and Equipment
Property and equipment are stated at historic acquisition cost less accumulated depreciation. Depreciation is provided utilizing the straight-line method over the estimated useful lives of the assets, which range from 3 to 23 years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is recorded in the consolidated statement of income and comprehensive income.
Goodwill and Intangible Assets
The Company classifies intangible assets as definite-lived or indefinite-lived intangible assets. Definite-lived intangible assets primarily consist of broadcast licenses and network affiliation agreements,
F-10
both of which are amortized on a straight-basis over the estimated useful life of each asset, generally five years. These assets are stated at cost less accumulated amortization. Indefinite-lived intangible assets are comprised of trade names. Goodwill represents the excess of acquisition costs over the Company’s share of fair value of the net assets of acquired businesses. Indefinite-lived intangible assets and goodwill are not subject to amortization but are tested for impairment at least annually.
Impairment of Goodwill and Indefinite-Lived Intangible Assets
Goodwill is reviewed for impairment annually, as of the beginning of the fourth quarter, or if it is determined that impairment indicators exist using a two-step impairment test under SFAS No. 142, Goodwill and Other Intangible Assets. The Company determines whether an impairment has occurred by assigning goodwill to the reporting units identified in accordance with SFAS No. 142, and comparing the carrying amount of the entire reporting unit to the estimated fair value based on discounted cash flows of the reporting unit (Step 1). If the carrying value of the reporting unit is less than the estimated fair value of the reporting unit, the Company compares the implied fair value of goodwill based on a hypothetical purchase price allocation to the carrying value of the goodwill (Step 2). If the carrying value of goodwill exceeds the implied fair value of goodwill based on Step 2, goodwill impairment is deemed to have occurred, and the Company recognizes a loss for the difference between the carrying amount and the implied fair value of goodwill.
The Company is also required to test indefinite-lived intangible assets for impairment on an annual basis based upon a fair value approach. Indefinite-lived intangible assets must be tested between annual tests if events or changes in circumstances indicate that the asset might be impaired. These events or circumstances could include a significant change in the business climate, such as a significant sustained decline in an entity’s market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business, or other factors.
The Company completed its goodwill and indefinite-lived intangible assets impairment tests in the fourth quarter of 2006, and no impairment has been recognized through December 31, 2006.
Long-Lived Assets
Long-lived assets, including property and equipment and definite-lived intangibles, are reviewed periodically to determine whether an event or change in circumstances indicates that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, the Company determines whether an impairment has occurred through the use of an undiscounted cash flows analysis of assets at the lowest level for which identifiable cash flows exist. If the carrying value of the asset or group of assets exceeds the undiscounted cash flows, an impairment is deemed to have occurred, and the Company recognizes an impairment loss for the difference between the carrying amount and the estimated fair value of the asset. The fair value of the asset is estimated using a discounted cash flow analysis or other valuation techniques.
Prepayments
Prepayments primarily represent payments to producers of programming prior to the commencement of the license period for programming rights. At December 31, 2005 and December 31, 2006, prepayments for programming rights were $27,162 and $37,323, respectively.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are shown at their net realizable value which approximates their fair value.
The Company establishes an allowance for doubtful accounts receivable based on specific identification and management estimates of recoverability, in consultation with Video International, as appropriate. In
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cases where the Company is aware of circumstances which may impair a receivable, the Company records a specific allowance against amounts due, and thereby reduces the net recognized receivable to the amount the Company believes will be collected. If all collection efforts have been exhausted, the receivable is written off against the allowance.
Cash and Cash Equivalents
The Company classifies cash on hand and deposits in banks, including money market accounts, and any other investments with an original maturity of three months or less from the date of purchase, that the Company may hold from time to time, as cash and cash equivalents.
Restricted Cash
Restricted cash is primarily related to cash held at a financial institution for the collateralization of debt obligations of one of the Company’s consolidated subsidiaries.
Income Taxes
The Company uses the liability method of accounting for income taxes required by SFAS No. 109, Accounting for Income Taxes. Deferred income taxes result from temporary differences between the tax bases of assets and liabilities and the bases as reported in the consolidated financial statements, as well as the expected tax benefits of net operating loss carryforwards which are expected to be realized. Additionally, SFAS No. 109 requires that a valuation allowance must be established when it is more likely than not that all or a portion of deferred tax assets will not be realized (Note 13).
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2004, 2005 and 2006 were $5,884, $10,323 and $11,919, respectively.
Pensions
The Company contributes to the local state pension funds and social funds on behalf of all its employees in Russia. In Russia, all social contributions, including contributions to the pension fund, are made through a unified social tax (‘‘UST’’) calculated by the application of a regressive rate from 35.6% to 2% to the annual gross remuneration of each employee. In 2004 the Company allocated UST to three social funds, including the pension fund, where the rate of contributions to the pension fund varies from 28% to 2%, respectively, depending on the annual gross salary of each employee. Starting from January 1, 2005, the following new regressive rates of UST apply: from 26% to 2%.
Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and short-term debt approximate their fair value. At December 31, 2005 and 2006, the Company’s long-term debt and short-term debt at fixed rates approximated their fair value for similar arrangements.
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 value for 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, indefinite-lived intangible assets and long-lived assets, estimates of tax contingencies, and the determination of valuation allowances for deferred tax assets. Consequently, actual results may differ from those estimates.
F-12
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires the reporting of comprehensive income in addition to net income. Accumulated other comprehensive income includes foreign currency translation adjustments. For the years ended December 31, 2004 and 2005, comprehensive income for the Company is equal to net income. For the year ended December 31, 2006, as a result of the change in functional currency described previously in this Note, total comprehensive income included, in addition to net income, the effect of translating the ruble-denominated financial statements of subsidiaries domiciled in Russia into the Company’s reporting currency, in accordance with SFAS No. 52.
Stock-Based Compensation
On January 1, 2006, the Company adopted SFAS No. 123 (R), Share-Based Payment, under the modified prospective method. Under SFAS No. 123 (R), companies must calculate and record the cost of equity instruments, such as stock options or restricted stock, awarded to employees for services received in the statement of income and comprehensive income; pro forma disclosures are no longer permitted. The cost of the equity instruments is to be measured based on fair value of the instruments on the date they are granted (with certain exceptions) and is required to be recognized over the period during which the employees are required to provide services in exchange for the equity instruments. Since the Company had previously accounted for its stock-based compensation plans under the fair value provisions of SFAS No. 123, the Company’s adoption did not significantly impact its financial position or its results of operations.
The Company estimates the fair value of stock options at the date of grant using a 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 stock options. The model is also sensitive to changes in the subjective assumptions, which can materially affect the fair value estimate. Once the Company has estimated the fair value of the equity instruments, it recognizes this estimated cost as stock-based compensation expense on a straight-line basis over the service period.
Although the Company has an insignificant number of stock options outstanding that were accounted for under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, net income as reported in the periods presented equals pro forma net income as determined using the fair value method to determine total stock-based compensation expense since these stock options were fully vested.
Non-cash Investing and Financing Activities
During 2004, the Company concluded a certain transaction that did not result in cash receipts or cash payments. This significant transaction represented issuance of shares in connection with the acquisition of a minority interest in CTC-Moscow of $4,645 (Note 4).
Comparative Figures
Reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.
Recently Issued Accounting Pronouncements
Accounting for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48 (‘‘FIN No. 48’’), Accounting for Uncertainty in Income Taxes — an interpretation of SFAS No. 109. FIN No. 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and
F-13
penalties, accounting in interim periods, disclosure and transition. In addition, FIN No. 48 scopes out income taxes from SFAS No. 5, Accounting for Contingencies, and is effective for fiscal years beginning after December 15, 2006. The Company has substantially completed its analysis for transition to FIN No. 48 as of January 1, 2007 and does not expect that its adoption will have a significant impact on the Company’s financial statements.
Fair Value Measurements
On September 15, 2006 the FASB issued SFAS No. 157, Fair Value Measurements. The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the provisions of SFAS No. 157 to determine the potential impact, if any, the adoption will have on its financial statements.
Consideration of Effects of Prior Year Misstatements
In September 2006, the SEC released Staff Accounting Bulletin No. 108 (‘‘SAB No. 108’’), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on the SEC’s views regarding the process of quantifying materiality of financial statement misstatements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB No. 108 did not have any impact on the Company’s consolidated results of operations or financial position.
Income Statement Presentation of Taxes Collected from Customers and Remitted to Government Authorities
In June 2006, the Emerging Issues Task Force (‘‘EITF’’) reached a consensus on EITF Issue No. 06-03 (‘‘EITF No. 06-03’’), How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). EITF No. 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of EITF No. 06-03 become effective for fiscal years beginning after December 15, 2006. The adoption of ETIF No. 06-03 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.
| |
| 3. | NET INCOME PER SHARE |
Basic net income per share for the years ended December 31, 2004, 2005 and 2006 is computed on the basis of the weighted average number of common shares outstanding, using the ‘‘two-class’’ method (Note 14). Diluted net income per common share is computed using the ‘‘if converted method’’ with the weighted average number of common shares outstanding plus the effect of the outstanding stock options calculated using the ‘‘treasury stock’’ method. The number of stock options excluded from the diluted net income per common share computation, because their effect was antidilutive for the years ended December 31, 2004, 2005 and 2006 was nil, nil and 4,968,556 stock options, respectively. All potential shares of common stock from the assumed conversion of convertible preferred stock have been included in the diluted earnings calculation for the years ended December 31, 2004 and 2005. No convertible preferred stock was outstanding at December 31, 2006.
F-14
The components of basic and diluted net income per share were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Year ended December 31, |
| | | | 2004 | | | 2005 | | | 2006 |
| Net income | | | | $ | 47,450 | | | | | $ | 57,295 | | | | | $ | 106,325 | |
| Net income attributable to preferred stockholders | | | | | (21,300 | | | | | | (26,134 | | | | | | (20,621 | |
| Net income attributable to common stockholders | | | | $ | 26,150 | | | | | $ | 31,161 | | | | | $ | 85,704 | |
| Weighted average common shares outstanding – basic | | | | | | | | | | | | | | | | | | |
| Common stock | | | | | 80,580,000 | | | | | | 79,339,024 | | | | | | 117,880,814 | |
| Dilutive effect of: | | | | | | | | | | | | | | | | | | |
| Convertible preferred stock | | | | | 65,635,200 | | | | | | 66,538,400 | | | | | | 28,362,400 | |
| Common stock options and SARs | | | | | 9,494,711 | | | | | | 8,467,532 | | | | | | 7,834,743 | |
| Preferred stock options | | | | | 860,800 | | | | | | — | | | | | | — | |
| Weighted average common shares outstanding – diluted | | | | $ | 156,570,711 | | | | | $ | 154,344,956 | | | | | $ | 154,077,957 | |
| Net income per share attributable to common stockholders: | | | | | | | | | | | | | | | | | | |
| Basic | | | | $ | 0.32 | | | | | $ | 0.39 | | | | | $ | 0.73 | |
| Diluted | | | | $ | 0.30 | | | | | $ | 0.37 | | | | | $ | 0.69 | |
|
The numerator used to calculate diluted net income per common share for 2004, 2005 and 2006 was net income.
| |
| 4. | INVESTMENT TRANSACTIONS |
Acquisitions in 2004
In September 2004, the Company acquired 99.9% interest in OAO Teleexpress (Moscow), 100% interest in ZAO Nevsky Kanal (St. Petersburg) and 52% interest in ZAO Variant (Kazan). In October 2004, the Company acquired 100% interest in OOO T-8 (Perm). The four acquired television stations were entities under common control and were used to launch the Domashny Network.
The total purchase consideration for the four entities acquired in September and October 2004 of $49,397 consisted of cash consideration of $49,139 and $258 in direct transaction costs.
The following reflects the amounts assigned to the net assets acquired:
| | | | | | |
| ASSETS: | | | | | | |
| Current assets | | | | $ | 1,793 | |
| Property and equipment | | | | | 8,245 | |
| Programming rights | | | | | 408 | |
| Intangible assets, net | | | | | | |
| Broadcasting licenses | | | | | 26,613 | |
| Cable network connections | | | | | 1,546 | |
| Other intangible assets | | | | | 14 | |
| Goodwill | | | | | 30,360 | |
| Total assets | | | | $ | 68,979 | |
| LIABILITIES: | | | | | | |
| Current liabilities | | | | | 11,474 | |
| Non-current liabilities | | | | | 161 | |
| Deferred tax liability | | | | | 7,935 | |
| Minority interest | | | | | 12 | |
| Net assets | | | | $ | 49,397 | |
| Total purchase consideration and acquisition costs | | | | $ | 49,397 | |
|
F-15
The Company’s financial statements reflect the allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. As such, the Company assigned $26,613 to broadcasting licenses, which are being amortized over an estimated useful life of 5 years, $1,546 to the cable network connections, which are being amortized over a weighted average period of approximately 5 years, and $8,245 to property and equipment, which is being amortized over a weighted average period of 23 years. The excess purchase price over the net identifiable assets and liabilities acquired of approximately $30,360 has been assigned to goodwill, which is not deductible for tax purposes.
In 2004, in connection with this acquisition, the Company began implementation of a plan intended to eliminate duplication of resources within the consolidated company. The plan included the termination of the sales agreement with the Video International affiliate and cease of certain employment agreements.
As of December 31, 2004, the Company included $1,167 as part of the acquisition cost of the acquired entities related to this acquisition’s restructuring plans. The liabilities related to the termination of the Video International sales agreement and employment agreements of $881 and $286 were included in accounts payable and accrued liabilities, respectively. These amounts were fully paid in 2005.
The following unaudited pro forma combined results of operations for the Company give effect to the acquisition of the four stations as if it had occurred at the beginning of 2004. Information relating to 2003 results was not available to present pro forma information. In management’s opinion this information is not material to the Company’s current results of operations or financial position. These pro forma amounts are provided for informational purposes only and do not purport to present the results of operations of the Company had the transactions assumed therein occurred on or as of the date indicated, nor is it necessarily indicative of the results of operations which may be achieved in the future.
| | | | | | |
| | | | 2004 |
| | | | (Unaudited) |
| Operating revenues | | | | $ | 160,260 | |
| Pro forma net income | | | | $ | 44,258 | |
| Pro forma net income per common share: | | | | | | |
| Basic | | | | $ | 0.30 | |
| Diluted | | | | $ | 0.28 | |
|
In the year ended December 31, 2004, the Company also acquired (in separate transactions) interests in the following entities:
| | |
| • | In July and August 2002, the Company entered into stock exchange agreements with two minority stockholders in OOO Marathon TV. These agreements provided the minority stockholders the right to exchange their aggregate 5% ownership in OOO Marathon TV for stock of the Company based on the determination of their respective fair values in the first quarter of 2003. In December 2003, following the inability to agree on exchange ratios with the minority stockholders, this right was amended and immediately exercised, whereby in April 2004 the Company issued an aggregate of 1,979,200 shares of common stock for the minority interests. The estimated fair value of the acquired 5% interest was $4,645. Approximately $5,445 of the purchase price was allocated to broadcast licenses. |
| | |
| • | In March 2004, the Company acquired the 49% minority interest in OOO NTK (CTC-Nizhny Novgorod) for $800. As a result of this transaction CTC-Nizhny Novgorod became a wholly owned subsidiary of the Company. The acquisition resulted in goodwill in the amount of $325 that was allocated to the CTC Television Station Group. |
| | |
| • | In November 2004, the Company acquired 100% in ZAO Delta-Max (Perm) for cash consideration of $1,500. ZAO Delta-Max, in its turn, owned 35% of ZAO TV Maxima (Perm), 40% of ZAO Music Radio (Perm) and 40% of OOO Radio Maximum (Perm). Currently the Company has 85% interest in all of these companies. The acquisition resulted in goodwill in the amount of $369 that was allocated to the CTC Television Station Group. |
Goodwill recognized in those transactions is not deductible for tax purposes.
The acquisitions of the above minority interests were not significant to the Company’s unaudited pro forma statements of operations.
F-16
Disposals in 2004
In July 2004, the Company sold its 50% interest in OOO Maximum Radio (Moscow) for $5,000, resulting in a gain of $4,613. The Company’s investment in OOO Maximum Radio was accounted for under the equity method prior to the sale.
Acquisitions in 2005
In December 2005, the Company acquired a 100% interest in OOO PKF Radiosvyaz (Voronezh) for $1,150, consisting of $1,000 in cash consideration and direct transaction costs of $150 charged by Alfa Group (Note 15).
In December 2005, the Company acquired a 50% interest in OOO TV Station Mir (Novosibirsk) for $8,200, consisting of $8,000 in cash consideration and direct transaction costs of $200 charged by Alfa Group (Note 15). This acquisition was accounted for under the equity method.
Acquisitions in 2006
In April 2006, the Company acquired a 51% interest in each of two television stations located in Barnaul, OOO Vega-TV and OOO Tekhnicheskiy Zentr ‘‘Vecher’’, for cash consideration of $3,500 each. In April 2006, the Company acquired a 100% interest in ZAO Orion TV (Samara), for a total purchase price of $11,500, consisting of $11,124 in cash consideration and $376 in debt assumed. The Company’s consolidated financial statements reflect a preliminary allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. The Company assigned $21,311 to broadcasting licenses and $1,536 to property and equipment. The remainder of the purchase price was assigned to other assets acquired and to other liabilities assumed.
In November 2006, the Company acquired a 100% interest in OOO TC Kemerovo Tom for a total purchase price of $1,663. The Company’s consolidated financial statements reflect a preliminary allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. The Company assigned $2,117 to broadcasting licenses. The remainder of the purchase price was assigned to other assets acquired and to other liabilities assumed.
Disposals in 2006
In April 2006, the Company sold its 85% interests in two radio stations located in Perm, ZAO Music Radio and OOO Radio Maximum, for total cash consideration of $1,000 and recognized a gain of $782.
In December 2006, the Company sold its 100% interest in radio station located in Samara, OOO Sozvezdie Orion for total cash consideration of $600 and recognized a gain of $137.
| |
| 5. | PROGRAMMING RIGHTS, NET |
Programming rights as of December 31, 2005 and 2006 comprise the following:
| | | | | | | | | | | | |
| | | | 2005 | | | 2006 |
| Historical cost | | | | $ | 135,181 | | | | | $ | 177,012 | |
| Accumulated amortization | | | | | (68,713 | | | | | | (111,111 | |
| Net book value | | | | $ | 66,468 | | | | | $ | 65,901 | |
| Current portion | | | | | 38,100 | | | | | | 41,634 | |
| Non-current portion | | | | | 28,368 | | | | | | 24,267 | |
|
During 2004, 2005 and 2006, the Company recognized impairment charges on programming rights of $4,720, $5,356 and $3,741, respectively. The impairment charges are included in amortization of programming rights in the accompanying consolidated statements of income.
F-17
| |
| 6. | SUBLICENSING RIGHTS, NET |
Sublicensing rights as of December 31, 2005 and 2006 comprise the following:
| | | | | | | | | | | | |
| | | | December 31,
2005 | | | December 31,
2006 |
| Released, less amortization | | | | $ | — | | | | | $ | 5,183 | |
| Completed and not released | | | | | — | | | | | | 928 | |
| In production | | | | | 1,836 | | | | | | 717 | |
| In development or pre-production | | | | | — | | | | | | 783 | |
| Net book value | | | | $ | 1,836 | | | | | $ | 7,611 | |
|
As of December 31, 2006, the Company expects the entire $5,183 balance of unamortized sublicensing rights for released products to be fully amortized within three years. In addition, the Company expects approximately $4,248 of the sublicensing rights for released products and completed and not released products to be amortized during the twelve-month period ending December 31, 2007.
The Company recognized impairment charges on sublicensing rights of nil, nil and $233 in 2004, 2005 and 2006, respectively. The impairment charges are included in amortization of sublicensing rights in the accompanying consolidated statements of income and comprehensive income.
| |
| 7. | PROPERTY AND EQUIPMENT, NET |
Property and equipment as of December 31, 2005 and 2006 comprise the following:
| | | | | | | | | | | | | | | | | | |
| | | | Useful life,
years | | | 2005 | | | 2006 |
| Cost: | | | | | | | | | |
| Buildings | | | | | 10-23 | | | | | $ | 9,157 | | | | | $ | 11,040 | |
| Broadcasting equipment | | | | | 7 | | | | | | 18,923 | | | | | | 24,534 | |
| Vehicles | | | | | 5 | | | | | | 812 | | | | | | 824 | |
| Office equipment | | | | | 3 | | | | | | 5,550 | | | | | | 7,131 | |
| Total cost | | | | | | | $ | 34,442 | | | | | $ | 43,529 | |
| Accumulated depreciation | | | | | | | | (15,037 | | | | | | (21,141 | |
| Net book value | | | | | | | $ | 19,405 | | | | | $ | 22,388 | |
|
Depreciation expense was $2,143, $3,183 and $4,618 in 2004, 2005 and 2006, respectively.
| |
| 8. | INTANGIBLE ASSETS, NET |
Intangible assets as of December 31, 2005 and 2006 comprise the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2005 | | | 2006 |
| | | | Useful life, years | | | Cost | | | Accumulated
amortization | | | Cost | | | Accumulated
amortization |
| Network affiliation agreements | | | | | 5 | | | | | $ | 10,000 | | | | | $ | (4,667 | | | | | $ | 10,000 | | | | | $ | (6,667 | |
| Trade names | | | indefinite | | | | | 5,834 | | | | | | — | | | | | | 5,888 | | | | | | — | |
| Broadcasting licenses | | | | | 5 | | | | | | 41,991 | | | | | | (13,095 | | | | | | 69,848 | | | | | | (26,461 | |
| Other intangible assets | | | | | 5 | | | | | | 2,206 | | | | | | (1,175 | | | | | | 2,938 | | | | | | (2,175 | |
| Total | | | | | | | | | | $ | 60,031 | | | | | $ | (18,937 | | | | | $ | 88,674 | | | | | $ | (35,303 | |
|
Amortization expense was $5,819, $10,737 and $15,033 in 2004, 2005 and 2006, respectively.
F-18
Estimated amortization expenses for the next five years related to intangible assets included in the accompanying consolidated balance sheet as of December 31, 2006 are as follows:
| | | | | | |
| For the year ended December 31, 2007 | | | | $ | 16,371 | |
| For the year ended December 31, 2008 | | | | | 14,401 | |
| For the year ended December 31, 2009 | | | | | 9,909 | |
| For the year ended December 31, 2010 | | | | | 5,358 | |
| For the year ended December 31, 2011 | | | | | 1,444 | |
| | | | | $ | 47,483 | |
|
| |
| 9. | GOODWILL |
Goodwill as of December 31, 2004, 2005 and 2006 comprises the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | CTC
Network | | | Domashny
Network | | | CTC
Station
Group | | | Domashny
Station
Group | | | Total |
| Balance as of December 31, 2004 | | | | $ | 36,538 | | | | | $ | 17,858 | | | | | $ | 2,143 | | | | | $ | 12,502 | | | | | $ | 69,041 | |
| Reversal of contingent income tax liability (Note 16) | | | | | — | | | | | | — | | | | | | — | | | | | | (768 | | | | | | (768 | |
| Balance as of December 31, 2005 | | | | | 36,538 | | | | | | 17,858 | | | | | | 2,143 | | | | | | 11,734 | | | | | | 68,273 | |
| Reversal of contingent income tax liability (Note 16) | | | | | — | | | | | | — | | | | | | — | | | | | | (1,023 | | | | | | (1,023 | |
| Foreign currency translation adjustment | | | | | — | | | | | | 1,821 | | | | | | 275 | | | | | | 1,422 | | | | | | 3,518 | |
| Balance as of December 31, 2006 | | | | $ | 36,538 | | | | | $ | 19,679 | | | | | $ | 2,418 | | | | | $ | 12,133 | | | | | $ | 70,768 | |
|
| |
| 10. | INVESTMENTS IN EQUITY INVESTEES |
As of December 31, 2005 and 2006, the Company’s principal equity investees comprise the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Ownership
interest, % | | | 2005 | | | Ownership
interest, % | | | 2006 |
| Television Stations: | | | | | | | | | | | | | | | | | | | | | | | | |
| CTC-Kazan | | | | | 50 | | | | | $ | 268 | | | | | | 50 | | | | | $ | 564 | |
| CTC-Novosibirsk | | | | | 50 | | | | | | 8,200 | | | | | | 50 | | | | | | 8,721 | |
| Other Television Stations | | | | | 21-50 | | | | | | 41 | | | | | | 21-50 | | | | | | 34 | |
| Total investments and advances to investees | | | | | | | | | | $ | 8,509 | | | | | | | | | | | $ | 9,319 | |
|
| |
| 11. | ACCRUED LIABILITIES |
As of December 31, 2005 and 2006, the Company’s accrued liabilities comprise the following:
| | | | | | | | | | | | |
| | | | 2005 | | | 2006 |
| Accrued liabilities consist of: | | | | | | | | | | | | |
| Agency commissions | | | | $ | 1,184 | | | | | $ | 30 | |
| Tax contingencies | | | | | 2,019 | | | | | | 876 | |
| Bonuses and accrued vacation | | | | | 2,156 | | | | | | 2,394 | |
| Auditing and consulting services | | | | | 231 | | | | | | 1,376 | |
| Other accrued liabilities | | | | | 710 | | | | | | 832 | |
| Total accrued liabilities | | | | $ | 6,300 | | | | | $ | 5,508 | |
|
F-19
| |
| 12. | BORROWINGS |
Short term loans and interest accrued as of December 31, 2005 and 2006 comprise the following:
| | | | | | | | | | | | |
| | | | 2005 | | | 2006 |
| Alfa Bank principal | | | | $ | 4,000 | | | | | | — | |
| Alfa Bank interest accrued | | | | | 64 | | | | | | — | |
| Other loans and interest accrued | | | | | 4 | | | | | | — | |
| Short term loans and interest accrued | | | | $ | 4,068 | | | | | | — | |
|
Long term loans as of December 31, 2005 and 2006 comprise the following:
| | | | | | | | | | | | |
| | | | 2005 | | | 2006 |
| Alfa Bank principal | | | | $ | 37,000 | | | | | | — | |
| Other loans | | | | | 188 | | | | | | 210 | |
| Long term loans | | | | $ | 37,188 | | | | | $ | 210 | |
|
In August 2003, the Company entered into a back-to-back loan arrangement. CTC Network received from Raiffeisen Bank a US dollar denominated loan in the amount of $35,900. The loan proceeds were used to repay an inter-company loan to CTC Media, Inc. The loan bore interest at 14.00% per annum. In addition, Raiffeisen Bank charged a commission of 1.00% per annum. Interest and commission expense related to this loan amounted to $5,385, $3,192 and nil in 2004, 2005 and 2006, respectively.
As collateral for the loan and interest accruing thereon, CTC Media, Inc. deposited $35,900 with Raiffeisen Bank in a pledged account. The interest on the account was 14.00% per annum. The deposited funds were blocked and could be used only with the permission of Raiffeisen Bank and are shown as restricted cash. Interest income on funds in the pledged account amounted to $5,026, $2,837 and nil in 2004, 2005 and 2006, respectively.
In July 2005, the Company reduced the Raiffeisen Bank back-to-back facility balance to nil. CTC Network repaid to Raiffeisen Bank the loan principal of $35,900 and $978 of interest accrued through the date of repayment. Raiffeisen Bank released the restriction on use of funds of $36,878 held in the deposit account open by CTC Media, Inc. with the bank. The facility was closed in February 2006.
In September 2004, CTC Network entered into a $40,000 US dollar denominated term loan with Alfa Bank. In September 2004, CTC Network received $20,000 under this term loan with a maturity in March 2006 and an interest rate of 14.00%, and $4,000 with a maturity in September 2005 and interest of 13.75%. In 2005, CTC Network repaid the whole principal and interest outstanding. The arrangement was terminated in August 2005. Interest expense related to this borrowing amounted to $1,062 and $1,841 in 2004 and 2005, respectively.
In July 2005, CTC Network entered into a $55,000 US dollar denominated term loan with Alfa Bank. The term loan was secured by 30.00% of CTC Network’s stock held by CTC Media, Inc. In July 2005, CTC Network received $51,000 under this term loan with a maturity in July 2007 and an interest rate of 14.00%. In 2005, CTC Network repaid $14,000 and, in 2006, CTC Network repaid the remaining balance in full and closed the facility. Interest expense related to this borrowing amounted to $2,930 and $1,302 in 2005 and 2006, respectively.
In July 2005, CTC Network entered into a $30,000 US dollar denominated credit line with Alfa Bank. The credit line is secured by 19.00% of CTC Network’s stock held by CTC Media, Inc. As of December 31, 2005, CTC Network had drawn down $14,000 with a maturity in August 2006 and interest of 11.50%, had repaid $13,000 under this tranche and had drawn down $3,000 with a maturity in June 2006 and interest of 10.25%. In 2006, CTC Network drew down $19,000 with a maturity in October 2006 and weighted-average interest rate of 10.20%. In 2006, CTC Network repaid the loan in full. The weighted average interest on short-term borrowings as of December 31, 2005, was approximately 10.60%. The interest expense related to this borrowing amounted to $386 and $470 in 2005 and 2006, respectively.
F-20
| |
| 13. | INCOME TAXES |
The Company accounts for income taxes using the liability method required by SFAS No. 109. The components of income (loss) before income taxes were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | 2004 | | | 2005 | | | 2006 |
| Pretax income (loss): | | | | | | | | | | | | | | | | | | |
| Domestic | | | | $ | 2,439 | | | | | $ | (6,327 | | | | | $ | (17,764 | |
| Foreign | | | | | 64,787 | | | | | | 90,997 | | | | | | 177,976 | |
| | | | | $ | 67,226 | | | | | $ | 84,670 | | | | | $ | 160,212 | |
|
The following is the Company’s significant components of the (provision) benefit for income taxes:
| | | | | | | | | | | | | | | | | | |
| | | | 2004 | | | 2005 | | | 2006 |
| Domestic – current | | | | $ | (363 | | | | | $ | (389 | | | | | $ | (388 | |
| Foreign – current | | | | | (20,569 | | | | | | (28,332 | | | | | | (58,196 | |
| Domestic – deferred | | | | | 544 | | | | | | 300 | | | | | | (148 | |
| Foreign – deferred | | | | | 2,516 | | | | | | 3,560 | | | | | | 9,763 | |
| | | | | $ | (17,872 | | | | | $ | (24,861 | | | | | $ | (48,969 | |
|
The Company is subject to US and Russian income taxes, based on US, Russian tax legislation and the Double Tax Treaty of 1992 between the US and Russia (‘‘Treaty’’). The Russian-based investee companies are subject to Russian income tax. US taxable income or losses recorded are reported on CTC Media, Inc.’s US income tax return. The statutory income tax rate in Russia was 24% in 2004, 2005 and 2006.
CTC Media, Inc.’s taxable revenues consist predominantly of dividends and interest paid by the owned-and-operated affiliate stations. Dividends distributed to CTC Media, Inc. are subject to a Russian withholding tax of 5% under the Treaty. Dividends distributed within Russia are subject to a withholding tax of 6% in 2004, and 9% in 2005 and 2006.
The reconciliation of the US statutory federal tax rate of 35% to the Company’s effective tax rate is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | 2004 | | | 2005 | | | 2006 |
| Income tax expense at US statutory rates (35%) | | | | $ | (23,529 | | | | | $ | (29,635 | | | | | $ | (56,074 | |
| Non-off-settable gains (losses) | | | | | 750 | | | | | | (4,836 | | | | | | (5,845 | |
| Non-deductible expenses | | | | | (799 | | | | | | (1,368 | | | | | | (5,643 | |
| Equity in income of investee companies | | | | | 250 | | | | | | 202 | | | | | | 664 | |
| Foreign exchange differences (gains) losses | | | | | (1,189 | | | | | | 540 | | | | | | — | |
| Different foreign tax rates | | | | | 7,129 | | | | | | 10,534 | | | | | | 20,470 | |
| Valuation allowance utilized | | | | | — | | | | | | — | | | | | | 143 | |
| Foreign withholding tax | | | | | (936 | | | | | | (1,436 | | | | | | (2,688 | |
| Other permanent differences | | | | | 452 | | | | | | 1,138 | | | | | | 4 | |
| Income tax expense | | | | $ | (17,872 | | | | | $ | (24,861 | | | | | $ | (48,969 | |
|
F-21
Deferred tax assets and liabilities are recorded based on temporary differences between book bases of assets and liabilities and their bases for income tax purposes. The following table summarizes the major components of the Company’s deferred tax assets and liabilities as of December 31, 2005 and 2006:
| | | | | | | | | | | | |
| Deferred tax assets and liabilities | | | 2005 | | | 2006 |
| Net operating losses and tax loss carry forwards | | | | $ | 6,479 | | | | | $ | 8,136 | |
| Previously taxed deemed dividend income | | | | | 3,975 | | | | | | 6,447 | |
| Programming rights | | | | | 2,844 | | | | | | 13,064 | |
| Cable network connections cost | | | | | 1,043 | | | | | | 954 | |
| Accrued agency commissions | | | | | 284 | | | | | | 30 | |
| Stock-based compensation | | | | | — | | | | | | 423 | |
| Other deferred tax assets | | | | | 432 | | | | | | 305 | |
| Valuation allowance | | | | | (8,242 | | | | | | (14,019 | |
| Total deferred tax asset | | | | $ | 6,815 | | | | | $ | 15,340 | |
| Intangible assets | | | | | (9,369 | | | | | | (12,435 | |
| Property and equipment | | | | | (1,491 | | | | | | (1,827 | |
| Other deferred tax liabilities | | | | | (1,147 | | | | | | (2,755 | |
| Total deferred tax liability | | | | $ | (12,007 | | | | | $ | (17,017 | |
|
The following table presents the Company’s deferred tax assets and liabilities as of December 31, 2005 and 2006 attributable to different tax paying components in different tax jurisdictions:
| | | | | | | | | | | | |
| | | | 2005 | | | 2006 |
| Deferred tax assets: | | | | | | | | | | | | |
| Domestic tax component | | | | $ | 9,471 | | | | | $ | 14,163 | |
| Foreign tax component | | | | | 5,586 | | | | | | 15,196 | |
| Valuation allowance | | | | | (8,242 | | | | | | (14,019 | |
| Total deferred tax asset | | | | $ | 6,815 | | | | | $ | 15,340 | |
| Deferred tax liabilities: | | | | | | | | | | | | |
| Domestic tax component | | | | $ | — | | | | | $ | — | |
| Foreign tax component | | | | | (12,007 | | | | | | (17,017 | |
| Total deferred tax liability | | | | $ | (12,007 | | | | | | (17,017 | |
|
As of December 31, 2005 and 2006, CTC Media, Inc. had net operating loss carryforwards (‘‘NOLs’’) for US income tax purposes of $15,704 and $20,836, respectively, resulting in potential deferred tax benefits of $5,496 and $7,293, respectively. The NOLs expire in the period from 2012 to 2022.
In 2005 CTC Media, Inc. received loans from CTC Network, which resulted in a reduction in NOLs, as these loans are treated as deemed dividends for US tax purposes and are subject to US income tax. Future dividend distribution from CTC Network to CTC Media, Inc. in the amount of the previously taxed deemed dividend income (‘‘PTI’’) will not be taxed. As of December 31, 2005 and 2006, the PTI potential deferred tax benefit amounted to $3,975 and $6,447, respectively. As of December 31, 2006, the loans had been fully repaid.
During 2006, the Company elected not to claim foreign tax credits in favor of claiming NOLs. For comparative purposes, the Company has revised its 2005 description of the tax attributes underlying its deferred tax asset and the related valuation allowance on such deferred tax asset to reflect this change in tax planning strategy.
As of December 31, 2005 and 2006, certain of the Company’s consolidated Russian subsidiaries had tax loss carryforwards of $4,096 and $3,516, respectively, resulting in potential deferred tax benefits of $983 and $844, respectively. Tax loss carryforwards expire primarily in 2015. For Russian income tax purposes, the Company can use tax loss carry forwards for up to 10 years after the year when the loss was
F-22
incurred. Until December 31, 2006, the relief could not exceed 50% of taxable income in a given year. Effective January 1, 2007, full utilization of the relief within a year is allowed.
As of December 31, 2005 and 2006, the Company has recorded a valuation allowance due to the uncertainty of the realization of US NOLs of $3,341 and $5,139, respectively, Russian tax loss carryforwards of $926 and $805, respectively, PTI of $3,975 and $6,447, respectively, and other deferred tax assets of nil and $1,628, respectively.
| |
| 14. | STOCKHOLDERS’ EQUITY |
As of December 31, 2004, 2005 and 2006, the Company’s outstanding share capital was as follows:
| | | | | | | | | | | | | | | | | | |
| Type | | | 2004 | | | 2005 | | | 2006 |
| Common stock outstanding | | | | | 83,970,400 | | | | | | 72,824,800 | | | | | | 151,505,672 | |
| Convertible preferred stock | | | | | | | | | | | | | | | | | | |
| Class A Senior preferred stock | | | | | 35,664 | | | | | | 35,276 | | | | | | — | |
| Super Senior preferred stock | | | | | 47,675 | | | | | | 47,675 | | | | | | — | |
| Total preferred stock outstanding | | | | | 83,339 | | | | | | 82,951 | | | | | | — | |
|
Common Stock
The Company’s certificate of incorporation authorizes the Company to issue 175,772,173 shares of common stock and, as of December 31, 2006, 151,505,672 shares were issued and outstanding. Each holder of common stock is entitled to one vote for each share of common stock held of record on all matters which stockholders generally are entitled to vote.
As of December 31, 2006, the Company had reserved shares of common stock for issuance of 11,657,840 common stock options.
During 2004, both former and current employees and directors and/or their affiliated entities exercised options to purchase an aggregate of 4,906,400 shares of common stock for an aggregate consideration of $2,275.
During 2005, both former employees and current and former directors and/or their affiliated entities exercised options to purchase an aggregate of 1,827,200 shares of common stock for an aggregate consideration of $1,827.
During 2006, both former and current employees and directors and/or their affiliated entities exercised options to purchase an aggregate of 4,410,324 shares of common stock for an aggregate consideration of $5,855.
On July 29, 2005, the Company repurchased from its stockholders an aggregate of 12,972,800 shares of its common stock for an aggregate consideration of $52,655 (net of $1,688 of aggregate exercise prices paid upon the exercise of options by former directors and employees to buy shares that were immediately thereafter repurchased by the Company).
Stock Splits
On August 20, 2004, a 200-for-one stock split was effected with respect to the Company’s common stock. Concurrently, the conversion terms of the Class A Senior preferred stock and Super Senior preferred stock were increased from 1:1 to 1:200. On March 2, 2006 a further four-for-one stock split was effected with respect to the Company’s common stock. Concurrently with this later stock split, the conversion terms of the Class A Senior preferred stock and Super Senior preferred stock were increased from 1:200 to 1:800. All references in the accompanying consolidated financial statements and notes to share and per share amounts have been retroactively adjusted to reflect these changes.
F-23
Convertible Preferred Stock
As of December 31, 2004, the authorized and outstanding convertible preferred stock of the Company was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Type | | | Shares
Authorized | | | Shares
Issued | | | Conversion
Rate into
Common
Stock | | | Liquidation
priority | | | Liquidation
preference |
| Class A Senior preferred stock | | | | | 40,000 | | | | | | 35,664 | | | | 1:800 | | | | | — | | | | | $ | — | |
| Super Senior preferred stock | | | | | 50,000 | | | | | | 47,675 | | | | 1:800 | | | | | 1 | | | | | | 68,175 | |
| Total | | | | | 90,000 | | | | | | 83,339 | | | | | | | | | | | | | | $ | 68,175 | |
|
On August 13, 2004, an affiliate of a director exercised an option to purchase 2,100 shares of Super Senior preferred stock for a total consideration of $895.
As of December 31, 2005, the authorized and outstanding convertible preferred stock of the Company was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Type | | | Shares
Authorized | | | Shares
Issued | | | Conversion
Rate into
Common
Stock | | | Liquidation
priority | | | Liquidation
preference |
| Class A Senior preferred stock | | | | | 40,000 | | | | | | 35,276 | | | | 1:800 | | | | | — | | | | | $ | — | |
| Super Senior preferred stock | | | | | 50,000 | | | | | | 47,675 | | | | 1:800 | | | | | 1 | | | | | | 68,175 | |
| Total | | | | | 90,000 | | | | | | 82,951 | | | | | | | | | | | | | | $ | 68,175 | |
|
On July 29, 2005, the Company repurchased from its stockholders an aggregate of 388 shares of Class A Senior preferred stock of an aggregate consideration of $1,300.
On June 6, 2006, all convertible preferred stock was converted into common stock in conjunction with the Company’s initial public offering (‘‘IPO’’) as discussed below.
Initial Public Offering
The Company filed a registration statement with the SEC to register shares of the Company’s common stock in connection with the IPO. Upon closing of the IPO on June 6, 2006, the Company issued 7,909,748 additional shares of common stock and all the convertible preferred stock outstanding automatically converted into 66,360,800 shares of common stock. On December 31, 2006, the Company had a total of 151,505,672 shares outstanding.
Stock-Based Compensation
The Company has granted options and stock appreciation rights (‘‘SAR’’) to its employees, consultants and member of its Board of Directors pursuant to its 1997 Stock Option/Stock Issuance Plan and its 1992 Stock Option Plan, as well as pursuant to individual option agreements that are described in more detail below.
| |
| The | 1997 Stock Option/Stock Issuance Plan |
The 1997 Stock Option/Stock Issuance Plan (‘‘1997 Plan’’) provides for the issuance of a maximum of 3,460,000 shares of common stock to employees, consultants and members of the Board of Directors. The 1997 Plan consists of two separate equity programs: the option grant program, under which eligible participants may be granted options to purchase shares of common stock; and the stock issuance program, under which eligible participants may be issued shares of common stock directly, either through the immediate purchase of such shares or as a bonus for services rendered to the Company. For both programs, the exercise or purchase price was historically fixed by the Company’s Board of Directors and, in the future, will be fixed by the Compensation Committee of the Board of Directors.
F-24
Under the option grant program, the option exercise price per share may not be less than 85% of the fair market value per share of common stock on the option grant date for nonqualified options or 100% of fair market value for incentive stock options. If the person to whom the option is granted is a holder of 10% or more of common stock, then the exercise price per share shall not be less than 110% of fair market value per share of common stock on the option grant date.
Under the stock issuance program, the purchase price per share may not be less than 85% of the fair market value per share of common stock on the issue date. If the person purchasing the common stock is a holder of 10% or more of common stock, then the purchase price per share shall not be less than 110% of fair market value per share of common stock on the issue date.
The maximum term of an option granted under the 1997 Plan may not exceed ten years. The 1997 Plan expires at midnight on May 14, 2007. After its expiration, no further grants can be made under the 1997 Plan but the vesting and effectiveness of options previously granted will remain unaffected.
In November 2004, the Company granted an option to an officer of the Company to purchase 376,604 shares of common stock at an exercise price of $3.98. In April 2005, the Company granted an option to an officer of the Company to purchase 376,604 shares of common stock at an exercise price of $3.98.
The following assumptions were used in the option-pricing model:
| | | | | | |
| | | | 2004
options | | | 2005
options |
| Risk free interest rate | | | 3.13% | | | 3.76% |
| Expected option life (years) | | | 4 | | | 4 |
| Expected dividend yield | | | — | | | — |
| Volatility factor | | | 0% | | | 0% |
| Weighted-average grant date fair value of options (per share) | | | $0 | | | $0.84 |
|
As of December 31, 2006 there were outstanding options to purchase 918,084 shares of common stock at a weighted average exercise price of $10.60 granted under the 1997 Plan’s option grant program and issuances of an aggregate of 56,000 shares under the 1997 Plan’s stock issuance program. As of December 31, 2006 options to purchase 1,625,524 shares had been exercised under the 1997 Plan at a weighted average exercise price of $1.40. To date, the exercise price of all options granted has been at or above the estimated fair market value of the shares at the grant date, as determined by the Company’s Board of Directors.
The 1992 Stock Option Plan
The 1992 Stock Option Plan (‘‘1992 Plan’’) provided for the grant of options to purchase a maximum of 5,189,600 shares of common stock to employees, consultants and members of the Board of Directors. The 1992 Plan expired in October 2002. As a result, no further grants can be made under this plan but the vesting and effectiveness of options previously granted are unaffected by the expiration of the 1992 Plan.
In 1992 the Company granted to a former officer of the Company an option to purchase 186,400 shares of common stock at an exercise price of $0.56. The option expired at September 14, 2004 without being exercised.
As of December 31, 2006 there were options to purchase 13,600 shares outstanding under the 1992 Plan at a weighted average exercise price of $0.70. In addition, as of such date, options to purchase 3,908,800 shares of common stock at a weighted average exercise price of $0.35 had been exercised. All options granted under the 1992 Plan were granted at the estimated fair market value of the shares at date of grant as determined by the Company’s Board of Directors.
CEO Stock Appreciation Rights
In September 2003, the Company granted to Alexander Rodnyansky, its Chief Executive Officer and the General Director of the CTC Network, SAR to purchase a total of 9,326,400 shares of common stock.
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The exercise price applicable to the purchase of 50% of those shares is $1.19 per share and the exercise price for the remaining shares is $1.79 per share. The SAR vests quarterly over a three-year period that commenced on June 30, 2003, and is fully vested. Upon exercise of the SAR, the Company has the option to settle its obligation by issuing common shares, paying cash, or any combination. As of December 31, 2006, the Company intends to settle the SAR by issuing common shares. In connection with the Company’s IPO, Mr. Rodnyansky partially exercised the SAR with respect to 3,108,800 shares at an exercise price of $1.19 per share and sold such shares in the IPO. The SAR expires on September 15, 2013.
As of the grant date the Company expected that all the rights under the SAR will vest. The Company’s compensation expense was measured at the grant date and is being recognized over the graded vesting period of the rights under the SAR. The Company determined the fair value of the SAR using the minimum value method. The Company expensed $1,082, $416 and $57 as a component of stock-based compensation in the accompanying consolidated statements of income in 2004, 2005 and 2006, respectively.
The following assumptions were used in the SAR-pricing model:
| | | | | | |
| | | | 2003
options |
| Risk free interest rate | | | | | 2.16 | |
| Expected option life (years) | | | | | 3 | |
| Expected dividend yield | | | | | — | |
| Volatility factor | | | | | 0 | |
| Weighted-average grant date fair value of SAR (per share) | | | | $ | 0.40 | |
|
Director Stock Options
During 2003, the Company granted options to purchase an aggregate of 3,200,000 shares of common stock to one of its directors and affiliates of two other directors. Two of these grants were made in connection with consulting agreements. The weighted average exercise price of these option grants was $0.91 per share. In connection with these grants, one director and an affiliate of another director agreed to cancel existing options to purchase 2,420,800 shares of common stock at a weighted average exercise price of $3.26 per share. The Company attributed the grant of the options to past services and expensed the $2,704 estimated value of these options in 2003. During 2004, as described above, these options were exercised to purchase 1,876,000 shares of common stock at a weighted average exercise price of $0.63. In July 2005, these options were exercised to purchase a further 1,060,000 shares of common stock at a weighted average purchase price of $1.33 per share. In June 2006, the remaining 264,000 options were exercised in conjunction with the Company’s IPO at a weighted average exercise price of $1.20 per share.
The following assumptions were used in the option-pricing model:
| | | |
| | | | 2003 options |
| Risk free interest rate | | | 2.15% – 3.98% |
| Expected option life (years) | | | 3-10 |
| Expected dividend yield | | | — |
| Volatility factor | | | 0%, 100% |
| Weighted-average grant date fair value of options (per share) | | | $1.46 |
|
The Company’s capital stock was not publicly traded on the date of grant. Volatility of the stock price for non-employees was made based on management’s consideration of other companies having similar characteristics, primarily emphasizing those companies operating in Russia. The fair values of employee stock options have been determined using the minimum value method.
In January 1999, the Company granted an option to purchase 2,100 shares of Super Senior preferred stock at an exercise price of $426 per share to one if its directors. The option became fully vested on June 30, 2000. In August 2004, this option was fully exercised.
F-26
Executive Officer and Management Options
In May 2006, the Company’s Board of Directors approved the grant of options to purchase an aggregate of 4,918,556 shares of Company’s common stock to executive officers and other members of management upon the closing of the IPO; 410,000 of which were granted under the 1997 plan. The exercise price for these options is $16.95 per share, equal to the average closing sales price per share of the Company’s common stock for the first twenty trading days on the NASDAQ Global Market. These stock options vest on a quarterly basis over three- to four-year periods and have a maximum term of ten years from the grant date.
In September 2006, the Company’s Board of Directors approved the grant of options to purchase an aggregate of 50,000 shares of Company’s common stock to another member of management under the 1997 plan. The exercise price for these options is $21.53 per share, equal to the closing sales price per share on the date of grant. These stock options vest on a quarterly basis over four years and have a maximum term of ten years from the grant date.
The following assumptions were used in the option-pricing model:
| | | | | | | | | | | | |
| | | | May 2006
options | | | September 2006
options |
| Risk free interest rate | | | | | 5.24 | | | | | | 4.75 | |
| Expected option life (years) | | | | | 5.9 | | | | | | 6.0 | |
| Expected dividend yield | | | | | — | | | | | | — | |
| Volatility factor | | | | | 46 | | | | | | 46 | |
| Weighted-average grant date fair value of options (per share) | | | | $ | 8.42 | | | | | $ | 10.95 | |
|
The following table summarizes options and SAR activity for the Company:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Stock Options | | | Super Senior
Preferred
Stock Options | | | SAR |
| | | | Quantity | | | Weighted
Average
Exercise
Price | | | Quantity | | | Weighted
Average
Exercise
Price | | | Quantity | | | Weighted
Average
Exercise
Price |
Outstanding as of
December 31, 2003 | | | | | 11,444,000 | | | | | $ | 0.93 | | | | | | 2,100 | | | | | $ | 426 | | | | | | 9,326,400 | | | | | $ | 1.49 | |
| Granted | | | | | 376,604 | | | | | | 3.98 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Exercised | | | | | (4,906,400 | | | | | | 0.47 | | | | | | (2,100 | | | | | | 426 | | | | | | — | | | | | | — | |
| Cancelled | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Expired | | | | | (3,587,200 | | | | | | 1.52 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
Outstanding as of
December 31, 2004 | | | | | 3,327,004 | | | | | | 1.30 | | | | | | — | | | | | | — | | | | | | 9,326,400 | | | | | | 1.49 | |
| Granted | | | | | 376,604 | | | | | | 3.98 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Exercised | | | | | (1,827,200 | | | | | | 1.00 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Cancelled | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Expired | | | | | (103,200 | | | | | | 0.79 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
Outstanding as of
December 31, 2005 | | | | | 1,773,208 | | | | | | 2.19 | | | | | | — | | | | | | — | | | | | | 9,326,400 | | | | | | 1.49 | |
| Granted | | | | | 4,968,556 | | | | | | 17.00 | | | | | | — | | | | | | — | | | | | | | | | | | | | |
| Exercised | | | | | (1,301,524 | | | | | | 1.66 | | | | | | — | | | | | | — | | | | | | (3,108,800 | | | | | | 1.19 | |
| Cancelled | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
| Expired | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
Outstanding as of
December 31, 2006 | | | | | 5,440,240 | | | | | $ | 15.84 | | | | | | — | | | | | | — | | | | | | 6,217,600 | | | | | $ | 1.64 | |
|
F-27
The following table summarizes information about nonvested common stock options and SAR:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Stock Options | | | SAR |
| | | | Quantity | | | Weighted
Average
Grant-date
Fair Value | | | Quantity | | | Weighted
Average
Grant-date
Fair Value |
Nonvested as of
December 31, 2005 | | | | | 509,988 | | | | | $ | 0.43 | | | | | | 1,137,600 | | | | | $ | 0.31 | |
| Granted | | | | | 4,968,556 | | | | | | 8.45 | | | | | | — | | | | | | — | |
| Vested | | | | | (1,043,426 | | | | | | 6.74 | | | | | | (1,137,600 | | | | | | 0.31 | |
| Forfeited | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
Nonvested as of
December 31, 2006 | | | | | 4,435,118 | | | | | $ | 7.93 | | | | | | — | | | | | | — | |
|
The following table summarizes information about exercisable common stock options and SAR:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Stock Options | | | SAR |
| | | | Quantity | | | Weighted
Average
Exercise
Price | | | Weighted
Average
Remaining
Contractual
Term | | | Quantity | | | Weighted
Average
Exercise
Price | | | Weighted
Average
Remaining
Contractual
Term |
| December 31, 2006 | | | | | 1,005,122 | | | | | $ | 14.47 | | | | 8.8 years | | | | | 6,217,600 | | | | | $ | 1.64 | | | | 6.7 years |
|
The following table summarizes information about the intrinsic value of Company’s common stock options and SAR as of December 31, 2006 and for the year then ended:
| | | | | | | | | | | | |
| | | | Common Stock
Options | | | SAR |
| Total intrinsic value of options/SAR exercised | | | | $ | 16,065 | | | | | $ | 39,824 | |
| Total intrinsic value of options/SAR vested | | | | | 10,197 | | | | | | 25,619 | |
| Total intrinsic value of options/SAR outstanding | | | | | 44,459 | | | | | | 139,088 | |
| Total intrinsic value of options/SAR exercisable | | | | | 9,592 | | | | | | 139,088 | |
|
The Company recognized stock-based compensation expense of $1,082, $599 and $7,155 for the years ended December 31, 2004, 2005 and 2006, respectively. As of December 31, 2006, the total compensation cost related to unvested awards not yet recognized is $35,020 to be recognized over a weighted average period of 2.93 years.
| |
| 15. | RELATED-PARTY TRANSACTIONS |
Transactions with Principal Stockholders
In 2004 and 2005, the Company entered into term loan and credit line arrangements with Alfa Bank, as described in Note 12.
The Company has entered into a series of letter agreements with Alfa Group for consulting services provided when the Company engages in tenders for new broadcasting licenses or negotiates to acquire a new owned-and-operated affiliate television station. Under these agreements, the Company incurred and capitalized as part of the purchase price of the related television stations success fees in the total amount of nil, $350 and nil in 2004, 2005 and 2006, respectively.
In 2004, 2005 and 2006 the Company licensed $1,273, nil and nil, respectively, in Russian-produced television programming from OOO Gamma Film, an affiliate of Alfa Group. In 2006 the Company recognized sublicensing revenue of $547 in relation to programming sold to Gamma.
The Company received advertising revenue from Alfa Group and its group companies of nil, $247 and $896 in 2004, 2005 and 2006, respectively.
F-28
Alfa Bank has opened three unsecured letters of credit in favor of a programming distributor to guarantee the Company’s obligations under licensing agreements. Alfa Bank’s commissions and fees in respect of these letters of credit amounted to $198, $244 and $163 in 2004, 2005 and 2006, respectively.
The Company maintains certain of its cash balances with Alfa Bank. Alfa Bank charged commissions for banking services of $62, $163 and $194 in 2004, 2005 and 2006, respectively. Interest income paid to the Company by Alfa Bank amounted to $129, $128 and $199 in 2004, 2005 and 2006, respectively.
The Company previously engaged Shared Value Limited to provide investor relations and corporate public relations services. The engagement of Shared Value Limited was terminated in 2005. The beneficial owners of a company that owns a significant stake in Shared Value Limited also holds interests in companies that own significant stakes in Modern Times Group MTG AB, an affiliate of one of the Company’s principal stockholders. The fees paid to Shared Value Limited amounted to $118 and $52 in 2004 and 2005, respectively.
Directors
In each of 2004, 2005 and 2006 two members of the Board of Directors were paid for consulting services provided to the Company and recharged the Company for certain expenses they incurred in connection with the provision of these consulting services. The aggregated consulting fees incurred amounted to $522, $471 and $100, respectively.
In 2006, the Company acquired from one of the directors programming rights for documentary films amounted to $270.
Chief Executive Officer
The Company’s CEO has an interest in an entity to which the Company sells programming and from which the Company acquires programming. In 2004, 2005 and 2006, the Company sold programming to this entity in the amounts of $141, $2,599 and $7,694, respectively. Deferred revenue relating to cash received for this programming amounted to $922 and nil as of December 31, 2005 and 2006, respectively. Accounts receivable for such programming amounted to nil and $1,372, respectively, in 2005 and 2006. In 2004, 2005 and 2006, the Company acquired programming in the amounts of $756, $667 and $815, respectively, from this entity. Accounts payable for the programming amounted to nil and $514, respectively, in 2005 and 2006.
In 2004 and 2005, the Company obtained design services from a subsidiary of an entity in which the CEO has an interest. The aggregate fees amounted to $131.
The Company’s CEO has an interest in another entity which places advertising on the Company’s networks and from which the Company acquires programming. In 2005 and 2006 the Company acquired programming in the amounts of $178 and $144, respectively. The Company received advertising revenue from the entity of nil, $734 and $843 in 2004, 2005 and 2006, respectively. Accounts receivable for advertising were nil and $96 as of December 31, 2005 and 2006, respectively.
The CEO has served as one of the producers of a number of cinema releases, for which the Company has acquired rights to broadcast. The CEO has not received compensation for his services as producer of such films.
Other
An employee of the Company has an interest in an entity from which the Company acquires programming. In 2004, 2005 and 2006 programming acquired amounted to nil, nil and $4,046, respectively. Prepayments to the entity amounted to nil and $365 as of December 31, 2005 and 2006, respectively.
| |
| 16. | COMMITMENTS AND CONTINGENCIES |
Purchase commitments
The Company has commitments to purchase programming rights, for which the license period has not started or the underlying program is not yet available. As of December 31, 2006, such commitments
F-29
amounted to $52,430. The Company is to pay $44,812, $6,722 and $896 in 2007, 2008 and 2009, respectively, under these commitments.
The Company has commitments to purchase property and equipment. As of December 31, 2006, such commitments amounted to $541 and are required to be paid in 2007.
Office space
The Company has entered into agreements in regard to the future 10-year lease of approximately 12,000 square meters of office space in a building currently under construction in Moscow. Pursuant to Russian law and market practice, these agreements are structured as preliminary agreements which allow the Company to fix certain key terms of a final lease agreement that will be signed in the future. Under these preliminary agreements, the Company is obligated to enter into final lease agreements if the building is completed according to certain specifications and the state registration of title to the building is granted within the required timeframe. The Company can however cancel the preliminary agreements prior to signing the final lease agreements, in which case the Company would forfeit the security deposit paid of $1.7 million (at exchange rates as of December 31, 2006) and be required to pay certain other expenses incurred by the landlord on the Company’s behalf.
The building is scheduled to be available for occupancy by July 2008. If the Company consummates the final lease agreement under the currently agreed terms, the Company will pay a base annual rent commencing as of the occupancy date of approximately $8.6 million ($716 per square meter at exchange rates as of December 31, 2006). The rent is payable in rubles, but the rate will fluctuate based on the exchange rate between the ruble and the dollar and the ruble and the Euro, with annual increases after the second year of between 3% and 6% based on inflation rates in the United States. For the first twelve months of the lease, the annual rent will be reduced to approximately $6.2 million ($519 per square meter at exchange rates as of December 31, 2006) to compensate the Company for a portion of its fit-out costs. The final lease agreements would require us to pay an annual fee for property management and utilities of approximately $1.3 million (at exchange rates as of December 31, 2006) with increases starting in the second year of occupancy indexed to the Russian rate of inflation. Once the Company enters into the final lease, it may terminate the lease for any reason during the first five years upon twenty months’ written notice, the payment of $3.5 million (at exchange rates as of December 31, 2006) and the forfeiture of the security deposit. The Company may terminate the lease during the remaining five years of the final lease agreement for any reason upon twelve months’ written notice.
If the final lease is entered into, the Company estimates at December 31, 2006, that future minimum lease payments under the final lease agreement are as follows:
| | | | | | |
| For the year ended December 31, | | | | | | |
| 2007 | | | | $ | — | |
| 2008 | | | | | 3,411 | |
| 2009 | | | | | 8,015 | |
| 2010 | | | | | 9,338 | |
| 2011 and thereafter | | | | | 78,981 | |
| | | | | $ | 99,745 | |
|
Operating leases
The Company has several cancelable operating leases for satellite transponders and office space with terms ranging from one to eleven years.
F-30
Future minimum lease payments due under these leases at December 31, 2006 are as follows:
| | | | | | |
| For the year ended December 31, | | | | | | |
| 2007 | | | | $ | 1,808 | |
| 2008 | | | | | 1,602 | |
| 2009 | | | | | 439 | |
| 2010 | | | | | 470 | |
| 2011 and thereafter | | | | | 3,413 | |
| | | | | $ | 7,732 | |
|
Total operating lease expense was $3,105, $3,946 and $4,727 in 2004, 2005 and 2006, respectively.
Concentrations
Revenues
National television advertising in Russia is generally not placed directly with channels or networks. Instead, two ‘‘sales houses,’’ Video International and a sales house affiliated with a competitor control the placement of virtually all national television advertising in Russia. The Company has agreements with Video International under which Video International serves as the Company’s exclusive sales house for the placement of national advertising on the Networks. Effective January 1, 2006, Video International also began acting as the exclusive sales house for the placement of regional television advertising for substantially all of the stations in the Television Station Groups.
The Company’s agreements with Video International extend through December 2007 and December 2009 for CTC Network and Domashny Network, respectively and 2010 for the Television Station Group. These agreements are generally terminable upon 180 days’ notice by either party. A disruption in the relationship with Video International or early termination of the agreements could have a material adverse effect on the Company’s business, financial condition and results of operations. Management believes the likelihood of the agreements being terminated is remote.
The Company’s revenues sold through Video International account for 72% of total operating revenues of $155,567 in 2004, 71% of total operating revenues of $237,477 in 2005 and 95% of total operating revenues of $370,834 in 2006.
Acquisitions of programming rights
The Company’s acquisitions of programming rights and sublicensing rights from its single largest supplier account for 22%, 23% and 22%, respectively, of total programming rights acquired in 2004, 2005 and 2006.
Tax Matters
The Company’s policy is to accrue for contingencies in the accounting period in which a liability is deemed probable and the amount is reasonably determinable. In this regard, because of the uncertainties associated with the Russian tax system, the Company’s final Russian taxes may be in excess of the estimated amount expensed to date and accrued at December 31, 2005 and 2006. This is due to a combination of the evolving tax legislation, varying approaches by regional and local tax inspectors, and inconsistent rulings on technical matters at the judicial level. The tax authorities have also aggressively assessed material tax assessments on Russian businesses, at times without a clear legislative basis. As of December 31, 2005 and 2006, the Company included accruals for tax contingencies totaling $2,019 and $876 as a component of accrued liabilities. The main part of the amounts reversed during 2005 and 2006 relates to the reversal of $768 and $1,023, respectively, of tax contingency accrual recorded in the initial purchase price allocation for the acquisition of OAO Teleexpress (Moscow) which was accounted for as a reduction of goodwill.
The following table summarizes the changes in the accrual for tax contingencies for the years ended December 31, 2004, 2005 and 2006:
F-31
| | | | | | | | | | | | | | | | | | |
| | | | 2004 | | | 2005 | | | 2006 |
| Balance, beginning of period | | | | $ | 338 | | | | | $ | 3,206 | | | | | $ | 2,019 | |
| Additions | | | | | 2,868 | | | | | | 234 | | | | | | 35 | |
| Amounts used | | | | | — | | | | | | (345 | | | | | | (123 | |
| Amounts reversed | | | | | — | | | | | | (1,076 | | | | | | (1,213 | |
| Foreign currency translation adjustment | | | | | — | | | | | | — | | | | | | 158 | |
| Balance, end of period | | | | $ | 3,206 | | | | | $ | 2,019 | | | | | $ | 876 | |
|
The amounts included in the accompanying consolidated statements of income for the years ended December 31, 2004, 2005 and 2006 were $155 expense, $8 expense and $152 income, respectively. The remaining amounts included in additions and amounts reversed relate to acquisitions and accordingly were included as part of the purchase price allocations. Additionally, the Company has identified possible tax contingences, which are not accrued. Such possible tax contingencies could materialize and require the Company to pay additional amounts of tax. As of December 31, 2006 management estimates such tax contingencies to be up to approximately $4.5 million.
It is the opinion of management that ultimate resolution of the Company’s tax liabilities, to the extent not previously provided for, will not have a material effect on the financial condition of the Company. However, depending on the amount and timing of an unfavorable resolution of any contingencies associated with taxes, it is possible that the Company’s future operations or cash flows could be materially affected in a particular period.
Broadcast Licenses
All of the Company’s affiliate television stations, including those that are owned-and-operated, are required to have broadcast and other operating licenses. Only a limited number of such licenses are available in each locality. These licenses generally require renewal every five years.
The broadcast licenses of affiliate stations contain various restrictions and obligations, including requirements that at least 50% of the programming shown constitute ‘‘Russian content’’ and governmental authorities recently added an additional term to the broadcast licenses of some of CTC owned-and-operated stations requiring that 9% of daily broadcast time at these stations be devoted to ‘‘local content’’. Certain affiliates may not have always been in compliance with this requirement. If the terms of a license are not fulfilled, or if a television station violates Russian legislation or regulations, the license may be suspended or terminated. Management believes that the probability of initiation of action against any material affiliate is remote.
Termination Benefits
In connection with engaging Video International to be the exclusive advertising sales house for substantially all of the owned-and-operated stations in the Television Station Groups, the Company decreased the headcount of the sales and support personnel in the first quarter of 2006, resulting in $638 in severance costs that were accrued and expensed in the fourth quarter of 2005, in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. As of December 31, 2006, all of these accrued severance costs have been paid.
Net Assets Position in Accordance with Statutory Requirements
In accordance with Russian legislation, joint stock companies must maintain a level of equity (net assets) that is greater than the charter capital. In the event that a company’s net assets, as determined under Russian accounting legislation, fall below certain minimum levels, specifically below zero, the company can be forced to liquidate.
ZAO New Channel, OAO Teleexpress and some other regional entities have had, and continue to have, negative equity as reported in each of their Russian statutory financial statements. Management believes that the risk of the initiation of statutory liquidation procedures or other material adverse actions is remote. However, if such actions were taken, it could have a material adverse effect on the Company’s results of operations, financial position and operating plans.
F-32
Russian Environment and Current Economic Situation
While there have been improvements in the Russian economic situation, such as an increase in gross domestic product and a reduced rate of inflation, Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent on these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government.
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 proceeding or other matters, will not have a material effect upon the financial condition, results of operations or liquidity of the Company.
In the fourth quarter of 2006, the Company’s wholly-owned subsidiary, ZAO CTC Network, was engaged in litigation with the Russian tax inspectorate in regard to a claim received in August 2006 for approximately $0.4 million at the US dollar/ruble exchange rate as of December 31, 2006 relating to tax payments transferred in 1998 and 1999 from its bank accounts that were allegedly not received by the government. In October 2006, the Company filed a lawsuit disputing the claim, and the court ruled in its favor in December 2006. While the Company intends to defend its position vigorously, if the courts were to rule in favor of the tax inspectorate upon appeal, it is possible that the tax inspectorate could also claim significant late payment interest. The Company does not believe an unfavorable outcome of this matter to be probable at this time; therefore, no provision is currently recorded in the financial statements.
| |
| 17. | SEGMENT INFORMATION |
The Company operates in four business segments — CTC Network, Domashny Network, CTC Television Station Group, Domashny Television Station Group. The Company has presented its business segments consistent with the information used by the chief operating decision maker to manage the operations for purposes of making operating decisions and allocating resources. The Company evaluates performance based on the operating income of each segment, among other performance measures.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2004 |
| | | | CTC Network | | | Domashny
Network | | | CTC Station
Group | | | Domashny
Station
Group | | | Business
segment
results | | | Eliminations
and other | | | Consolidated
results |
| Operating revenue | | | | $ | 115,288 | | | | | | — | | | | | $ | 37,712 | | | | | $ | 2,955 | | | | | $ | 155,955 | | | | | $ | (388 | | | | | $ | 155,567 | |
| Operating income/ (loss) | | | | | 57,041 | | | | | | — | | | | | | 16,484 | | | | | | (1,799 | | | | | | 71,726 | | | | | | (9,167 | | | | | | 62,559 | |
| Identifiable assets | | | | | 136,721 | | | | | | 17,858 | | | | | | 34,454 | | | | | | 49,522 | | | | | | 238,555 | | | | | | 54,666 | | | | | | 293,221 | |
| Capital expenditures | | | | | (2,170 | | | | | | — | | | | | | (4,048 | | | | | | (485 | | | | | | (6,703 | | | | | | 984 | | | | | | (5,719 | |
| Depreciation and amortization | | | | | (786 | | | | | | — | | | | | | (2,948 | | | | | | (2,059 | | | | | | (5,793 | | | | | | (2,169 | | | | | | (7,962 | |
| Amortization of programming rights | | | | | (41,647 | | | | | | — | | | | | | (2,249 | | | | | | (798 | | | | | | (44,694 | | | | | | (521 | | | | | | (45,215 | |
| Amortization of sublicensing rights | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | |
|
F-33
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2005 |
| | | | CTC Network | | | Domashny
Network | | | CTC Station
Group | | | Domashny
Station
Group | | | Business
segment
results | | | Eliminations
and other | | | Consolidated
results |
| Operating revenue | | | | $ | 168,669 | | | | | $ | 9,346 | | | | | $ | 51,741 | | | | | $ | 7,761 | | | | | $ | 237,517 | | | | | $ | (40 | | | | | $ | 237,477 | |
| Operating income/ (loss) | | | | | 83,841 | | | | | | (7,248 | | | | | | 27,962 | | | | | | (6,403 | | | | | | 98,152 | | | | | | (7,965 | | | | | | 90,187 | |
| Identifiable assets | | | | | 184,841 | | | | | | 23,471 | | | | | | 40,998 | | | | | | 46,029 | | | | | | 295,339 | | | | | | (21,642 | | | | | | 273,697 | |
| Capital expenditures | | | | | (1,857 | | | | | | (569 | | | | | | (2,042 | | | | | | (1,544 | | | | | | (6,012 | | | | | | (91 | | | | | | (6,103 | |
| Depreciation and amortization | | | | | (1,111 | | | | | | (370 | | | | | | (3,865 | | | | | | (6,455 | | | | | | (11,801 | | | | | | (2,119 | | | | | | (13,920 | |
| Amortization of programming rights | | | | | (64,768 | | | | | | (9,291 | | | | | | (2,643 | | | | | | (440 | | | | | | (77,142 | | | | | | (209 | | | | | | (77,351 | |
| Amortization of sublicensing rights | | | | | (2,043 | | | | | | — | | | | | | — | | | | | | — | | | | | | (2,043 | | | | | | — | | | | | | (2,043 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, 2006 |
| | | | CTC Network | | | Domashny
Network | | | CTC Station
Group | | | Domashny
Station
Group | | | Business
segment
results | | | Eliminations
and other | | | Consolidated
results |
| Operating revenue | | | | $ | 264,733 | | | | | $ | 20,649 | | | | | $ | 74,765 | | | | | $ | 11,566 | | | | | $ | 371,713 | | | | | $ | (879 | | | | | $ | 370,834 | |
| Operating income/ (loss) | | | | | 139,712 | | | | | | (4,627 | | | | | | 48,073 | | | | | | (9,465 | | | | | | 173,693 | | | | | | (19,380 | | | | | | 154,313 | |
| Identifiable assets | | | | | 252,878 | | | | | | 28,069 | | | | | | 80,147 | | | | | | 57,415 | | | | | | 418,509 | | | | | | 66,288 | | | | | | 484,797 | |
| Capital expenditures | | | | | (747 | | | | | | (212 | | | | | | (1,338 | | | | | | (1,428 | | | | | | (3,725 | | | | | | (149 | | | | | | (3,874 | |
| Depreciation and amortization | | | | | (1,056 | | | | | | (548 | | | | | | (4,945 | | | | | | (11,031 | | | | | | (17,580 | | | | | | (2,071 | | | | | | (19,651 | |
| Amortization of programming rights | | | | | (99,249 | | | | | | (15,954 | | | | | | (2,932 | | | | | | (39 | | | | | | (118,174 | | | | | | 148 | | | | | | (118,026 | |
| Amortization of sublicensing rights | | | | | (6,773 | | | | | | — | | | | | | — | | | | | | — | | | | | | (6,773 | | | | | | — | | | | | | (6,773 | |
|
‘‘Eliminations and other’’ column principally includes the activities of the corporate headquarters and eliminations of inter-company transactions.
The Company operates within one geographic region — Russia and has substantially all revenues from television advertising.
| |
| 18. | QUARTERLY FINANCIAL DATA (UNAUDITED) |
Summarized quarterly financial data is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the Three Months Ended |
| | | | March 31,
2005 | | | June 30,
2005 | | | September 30,
2005 | | | December 31,
2005 |
| Operating revenue | | | | $ | 43,070 | | | | | $ | 56,094 | | | | | $ | 47,984 | | | | | $ | 90,329 | |
| Operating income | | | | | 13,669 | | | | | | 22,756 | | | | | | 5,997 | | | | | | 47,765 | |
| Net income | | | | | 7,902 | | | | | | 14,606 | | | | | | 1,885 | | | | | | 32,902 | |
| Net income per share – basic | | | | $ | 0.05 | | | | | $ | 0.10 | | | | | $ | 0.01 | | | | | $ | 0.24 | |
| Net income per share – diluted | | | | $ | 0.05 | | | | | $ | 0.09 | | | | | $ | 0.01 | | | | | $ | 0.22 | |
|
F-34
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | For the Three Months Ended |
| | | | March 31,
2006 | | | June 30,
2006 | | | September 30,
2006 | | | December 31,
2006 |
| Operating revenue | | | | $ | 79,224 | | | | | $ | 102,758 | | | | | $ | 70,919 | | | | | $ | 117,933 | |
| Operating income | | | | | 33,068 | | | | | | 49,209 | | | | | | 13,696 | | | | | | 58,340 | |
| Net income | | | | | 22,654 | | | | | | 34,110 | | | | | | 8,443 | | | | | | 41,118 | |
| Net income per share – basic | | | | $ | 0.16 | | | | | $ | 0.24 | | | | | $ | 0.06 | | | | | $ | 0.27 | |
| Net income per share – diluted | | | | $ | 0.15 | | | | | $ | 0.23 | | | | | $ | 0.05 | | | | | $ | 0.26 | |
|
The sum of the earnings per share for the four quarters will generally not equal earnings per share for the total year due to the changes in the average number of common shares outstanding.
| |
| 19. | SUBSEQUENT EVENTS |
In January 2007, options to purchase 34,400 shares of common stock were exercised at an exercise price of $0.56 per share.
In February 2007, the Company acquired the remaining 49% interest in ZAO Radio-Volga TV (Samara), bringing its ownership in this station to 100%, for cash consideration of $4.6 million.
In February 2007, the Company also acquired a 100% interest in OOO Programma, Servis, Montazh (Rostov) for a total purchase price of $2.7 million, consisting of $2.6 million in cash consideration and $0.1 million in debt assumed.
F-35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | |
| | | | CTC MEDIA, INC. |
| | | | |
| | | | By: /s/ Alexander Rodnyansky |
| | | | Alexander Rodnyansky
Chief Executive Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated.
| | | | |
| Signature | | Title | | Date |
|
| /s/ Alexander Rodnyansky | | Chief Executive Officer
(Principal Executive Officer) | | February 28, 2007 |
|
| |
|
| /s/ Nilesh Lakhani | | Chief Financial Officer
(Principal Financial Officer) | | February 28, 2007 |
|
| |
|
| /s/ John Dowdy | | Chief Accounting Officer
(Principal Accounting Officer) | | February 28, 2007 |
|
| |
|
| /s/ Hans-Holger Albrecht | | Co-Chairman of the Board of
Directors | | February 28, 2007 |
|
| |
|
| /s/ Peter Aven | | Co-Chairman of the Board of
Directors | | February 28, 2007 |
|
| |
|
| /s/ Vagan Abgaryan | | Director | | February 28, 2007 |
|
| |
|
| /s/ Tamjid Basunia | | Director | | February 28, 2007 |
|
| |
|
| /s/ Maria Brunell | | Director | | February 28, 2007 |
|
| |
|
| /s/ Charles Burdick | | Director | | February 28, 2007 |
|
| |
|
| /s/ Kaj Gradevik | | Director | | February 28, 2007 |
|
| |
|
| /s/ Werner Klatten | | Director | | February 28, 2007 |
|
| |
|
| /s/ Oleg Sysuev | | Director | | February 28, 2007 |
|
| |
|
S-1
EXHIBIT INDEX
| | | | | | | | | | | | | | | | | | |
Exhibit
No. | | | Description | | | Form on
which
Originally
Filed | | | Original
Exhibit
Number | | | Original
Filing Date
with SEC | | | SEC File
Number |
| 3 | .4 | | | | Restated Certificate of Incorporation of CTC Media | | | S-1 | | | 3.4 | | | April 11, 2006 | | | 333-132228 |
| 3 | .6 | | | | Restated Bylaws of CTC Media | | | S-1 | | | 3.6 | | | April 11, 2006 | | | 333-132228 |
| 4 | .1 | | | | Specimen Certificate evidencing shares of common stock | | | S-1 | | | 4.1 | | | May 12, 2006 | | | 333-132228 |
| 10 | .1++ | | | | 1992 Stock Option Plan | | | S-1 | | | 10.1 | | | March 6, 2006 | | | 333-132228 |
| 10 | .2++ | | | | 1997 Stock Option/Stock Issuance Plan | | | S-1 | | | 10.2 | | | March 6, 2006 | | | 333-132228 |
| 10 | .3++ | | | | Stock Option Agreement, dated January 1, 2003, by and between CTC Media (f/k/a StoryFirst Communications, Inc.) and John T. Healy (the ‘‘Healy Option’’) | | | S-1 | | | 10.3 | | | March 6, 2006 | | | 333-132228 |
| 10 | .4++ | | | | Letter Agreement dated August 10, 2004 amending the Healy Option | | | S-1 | | | 10.4 | | | March 6, 2006 | | | 333-132228 |
| 10 | .5++ | | | | Stock Option Agreement, dated April 17, 2003, by and between CTC Media (f/k/a StoryFirst Communications, Inc.) and International Media Ventures Incorporated | | | S-1 | | | 10.5 | | | March 6, 2006 | | | 333-132228 |
| 10 | .6++ | | | | Stock Option Agreement, dated April 17, 2003, by and between CTC Media (f/k/a StoryFirst Communications, Inc.) and Myron A. Wick III | | | S-1 | | | 10.6 | | | March 6, 2006 | | | 333-132228 |
| 10 | .7++ | | | | Amended and Restated Stock Option Agreement, dated April 17, 2003, by and between CTC Media (f/k/a StoryFirst Communications, Inc.) and Myron A. Wick III | | | S-1 | | | 10.7 | | | March 6, 2006 | | | 333-132228 |
| 10 | .8++ | | | | Share Appreciation Rights Agreement, dated September 16, 2003, by and between CTC Media (f/k/a StoryFirst Communications, Inc.) and Alexander Rodnyansky | | | S-1 | | | 10.8 | | | March 6, 2006 | | | 333-132228 |
| 10 | .9++ | | | | Amended and Restated Notice of Grant of Stock Option dated January 30, 2006 to Nilesh Lakhani (Non-Statutory Stock Option) and related Stock Option Agreement | | | S-1 | | | 10.9 | | | March 6, 2006 | | | 333-132228 |
|
| | | | | | | | | | | | | | | | | | |
Exhibit
No. | | | Description | | | Form on
which
Originally
Filed | | | Original
Exhibit
Number | | | Original
Filing Date
with SEC | | | SEC File
Number |
| 10 | .10++ | | | | Amended and Restated Notice of Stock Option Grant dated January 30, 2006 to Nilesh Lakhani (Incentive Stock Option) and related Stock Option Agreement | | | S-1 | | | 10.10 | | | March 6, 2006 | | | 333-132228 |
| 10 | .11++ | | | | Notice of Grant of Stock Option dated April 28, 2005 to Vladimir Khanumyan and related Stock Option Agreement | | | S-1 | | | 10.11 | | | March 6, 2006 | | | 333-132228 |
| 10 | .12++ | | | | Amended and Restated Employment Agreement, dated as of January 31, 2006, by and between CTC Media and Nilesh Lakhani | | | S-1 | | | 10.12 | | | March 6, 2006 | | | 333-132228 |
| 10 | .13++ | | | | Employment Agreement, dated April 13, 2006, by and between CTC Media and Vladimir Sergeevich Khanumyan | | | S-1 | | | 10.13 | | | May 1, 2006 | | | 333-132228 |
| 10 | .14++ | | | | Employment Agreement, dated May 11, 2006, by and between CTC Media and Alexander Rodnyansky | | | S-1 | | | 10.14 | | | May 12, 2006 | | | 333-132228 |
| 10 | .15++ | | | | Amended and Restated Employment Agreement, dated November 28, 2005 between CTC Media and Leigh Sprague | | | S-1 | | | 10.1 | | | March 6, 2006 | | | 333-132228 |
| 10 | .16.1++ | | | | Employment Contract, dated May 10, 2006 by and between OOO Marathon-TV (CTC Moscow) and Sergey Petrov | | | S-1 | | | 10.16.1 | | | May 12, 2006 | | | 333-132228 |
| 10 | .16.2++ | | | | Employment Contact, dated May 10, 2006 by and between ZAO CTC Region and Sergey Petrov | | | S-1 | | | 10.16.2 | | | May 12, 2006 | | | 333-132228 |
| 10 | .17++ | | | | Amended and Restated Consulting Agreement dated July 1, 1999, by and between CTC Media, (f/k/a StoryFirst Communications, Inc.) and International Media Ventures Incorporated | | | S-1 | | | 10.17 | | | March 6, 2006 | | | 333-132228 |
| 10 | .18++ | | | | Amended and Restated Consulting Agreement dated July 1, 2000, by and between CTC Media (f/k/a StoryFirst Communications, Inc.) and The H.A.M. Media Group LLC | | | S-1 | | | 10.18 | | | March 6, 2006 | | | 333-132228 |
|
| | | | | | | | | | | | | | | | | | |
Exhibit
No. | | | Description | | | Form on
which
Originally
Filed | | | Original
Exhibit
Number | | | Original
Filing Date
with SEC | | | SEC File
Number |
| 10 | .19 | | | | Advertising Sales Agreement (Agreement #TC-3/0100) dated as of December 31, 2000, as amended December 21, 2004 by and between CTC and CJSC TSV (Video International) (English translation) | | | S-1 | | | 10.19 | | | March 6, 2006 | | | 333-132228 |
| 10 | .19.1 | | | | Supplementary Agreement dated as of April 26, 2006 to Advertising Sales Agreement (Agreement #TC-3/0100) dated as of December 31, 2000, as amended December 21, 2004 by and between CTC and CJSC TSV (Video International) (English translation) | | | S-1 | | | 10.19.1 | | | May 12, 2006 | | | 333-132228 |
| 10 | .20 | | | | Advertising Sales Agreement (Agreement # EM-22/0205 dated as of February 24, 2005 by and between Domashny and CJSC Ad Media (Video International) (English translation) | | | S-1 | | | 10.20 | | | March 6, 2006 | | | 333-132228 |
| 10 | .20.1 | | | | Supplementary Agreement dated as of April 26, 2006 to Advertising Sales Agreement (Agreement # EM-22/0205 dated as of February 24, 2005 by and between Domashny and CJSC Ad Media (Video International) (English translation) | | | S-1 | | | 10.20.1 | | | May 12, 2006 | | | 333-132228 |
| 10 | .21 | | | | Advertising Sales Agreement dated as of January 30, 2006, by and between CTC Media Video International and Video International Trend (English translation) | | | S-1 | | | 10.21 | | | April 11, 2006 | | | 333-132228 |
| 10 | .21.1 | | | | Supplementary Agreement dated as of May 16, 2006 to the Advertising Sales Agreement dated as of January 30, 2006, by and between CTC Media, VI and VI Trend (English translation) | | | 10-Q | | | 10.21.1 | | | July 31, 2006 | | | 000-52003 |
| 10 | .22 | | | | Form of Advertising Sales Agreement by and between Video International Trend and local owned-and-operated station (English translation) | | | S-1 | | | 10.22 | | | April 11, 2006 | | | 333-132228 |
| 10 | .23 | | | | Stock Purchase Agreement dated July 29, 2003 by and between CTC Media and Alfa Capital Holdings (Cyprus) Limited | | | S-1 | | | 10.23 | | | March 6, 2006 | | | 333-132228 |
|
| | | | | | | | | | | | | | | | | | |
Exhibit
No. | | | Description | | | Form on
which
Originally
Filed | | | Original
Exhibit
Number | | | Original
Filing Date
with SEC | | | SEC File
Number |
| 10 | .24 | | | | Agreement dated July 29, 2003 by and among CTC Media, OJSC Alfa Bank and Merrow Ventures Limited | | | S-1 | | | 10.24 | | | March 6, 2006 | | | 333-132228 |
| 10 | .25 | | | | Assignment of Indebtedness dated August 19, 2003 between CTC Media and Alfa Capital Holdings (Cyprus) Limited | | | S-1 | | | 10.25 | | | March 6, 2006 | | | 333-132228 |
| 10 | .26 | | | | Letter Agreement dated January 1, 2003 by and between CTC Media (f/k/a StoryFirst Communications, Inc.) and Alfa Bank | | | S-1 | | | 10.26 | | | March 6, 2006 | | | 333-132228 |
| 10 | .27 | | | | Letter agreement, dated February 4, 2004, by and between CTC Media (f/k/a StoryFirst Communications, Inc.) and Alfa Bank | | | S-1 | | | 10.27 | | | March 6, 2006 | | | 333-132228 |
| 10 | .28 | | | | Loan Agreement dated July 22, 2005 by and between OJSC Alfa Bank and CTC (English translation) | | | S-1 | | | 10.28 | | | March 6, 2006 | | | 333-132228 |
| 10 | .29 | | | | Loan Agreement dated July 29, 2005 by and between OJSC Alfa Bank and CTC (English translation) | | | S-1 | | | 10.29 | | | March 6, 2006 | | | 333-132228 |
| 10 | .30 | | | | Pledge Agreement No. 96073/z dated July 22, 2005 by and between CTC Media and Alfa Bank (English translation) | | | S-1 | | | 10.30 | | | April 11, 2006 | | | 333-132228 |
| 10 | .31 | | | | Pledge Agreement No. 96144/z dated July 29, 2005 by and between CTC Media and Alfa Bank (English translation) | | | S-1 | | | 10.31 | | | April 11, 2006 | | | 333-132228 |
| 10 | .32 | | | | Loan Agreement dated September 3, 2004 by and between OJSC Alfa Bank and CTC (English translation) | | | S-1 | | | 10.32 | | | April 11, 2006 | | | 333-132228 |
| 10 | .33 | | | | Pledge Agreement No. 93227/z dated September 3, 2004 by and between CTC Media (f/k/a Story First Communications, Inc.) and Alfa Bank (English translation) | | | S-1 | | | 10.33 | | | April 11, 2006 | | | 333-132228 |
| 10 | .34 | | | | Stock Purchase Agreement relating to shares of CTC Media dated as of July 28, 2005 among CTC Media and certain of its stockholders | | | S-1 | | | 10.34 | | | March 6, 2006 | | | 333-132228 |
|
| | | | | | | | | | | | | | | | | | |
Exhibit
No. | | | Description | | | Form on
which
Originally
Filed | | | Original
Exhibit
Number | | | Original
Filing Date
with SEC | | | SEC File
Number |
| 10 | .35 | | | | Share Purchase Agreement dated September 7, 2004 by and between Haywood Capital Limited and CTC (English translation) | | | S-1 | | | 10.35 | | | March 6, 2006 | | | 333-132228 |
| 10 | .36 | | | | Share Purchase Agreement dated September 15, 2004 by and between Haywood Capital Limited and CTC (English translation) | | | S-1 | | | 10.36 | | | March 6, 2006 | | | 333-132228 |
| 10 | .37 | | | | Share Purchase Agreement dated September 9, 2004 by and between Haywood Capital Limited and CTC Media (English translation) | | | S-1 | | | 10.37 | | | March 6, 2006 | | | 333-132228 |
| 10 | .38 | | | | Share Purchase Agreement dated September 2, 2004 by and between AZO RocT.s. and ZAO CTC Region (English translation) | | | S-1 | | | 10.38 | | | April 11, 2006 | | | 333-132228 |
| 10 | .39 | | | | Form of Stockholders Agreement dated May 12, 2006 by and among CTC Media, MTG Broadcasting AB, Alfa Capital Holdings (Cyprus) Ltd, Cavendish Nominees and Sector Investment Holding Company Limited | | | S-1 | | | 10.39 | | | May 12, 2006 | | | 333-132228 |
| 10 | .40 | | | | Form of Registration Rights Agreement, dated May 1, 2006 by and among CTC Media and certain of its stockholders | | | S-1 | | | 10.40 | | | May 1, 2006 | | | 333-132228 |
| 10 | .41++ | | | | Form of indemnification agreement between CTC Media and each of its directors and executive officers | | | S-1 | | | 10.41++ | | | March 6, 2006 | | | 333-132228 |
| 10 | .42 | | | | Non-Residential Premises Lease Agreement between All-Russian Scientific and Researching Institute of TV and Broadcasting and CTC (English translation) | | | S-1 | | | 10.42 | | | March 6, 2006 | | | 333-132228 |
| 10 | .43 | | | | Form of Registration Rights Agreement between CTC and certain of its stockholders | | | S-1 | | | 10.43 | | | April 11, 2006 | | | 333-132228 |
| 10 | .44++ | | | | Stock Option Agreement dated as of July 14, 2006 between CTC Media and Alexander Rodnyansky | | | 10-Q | | | 10.44++ | | | July 31, 2006 | | | 000-52003 |
| 10 | .45++ | | | | Stock Option Agreement dated as of July 14, 2006 between CTC Media and Vladimir Khanumyan | | | 10-Q | | | 10.45++ | | | July 31, 2006 | | | 000-52003 |
|
| | | | | | | | | | | | | | | | | | |
Exhibit
No. | | | Description | | | Form on
which
Originally
Filed | | | Original
Exhibit
Number | | | Original
Filing Date
with SEC | | | SEC File
Number |
| 10 | .46++ | | | | Stock Option Agreement dated as of July 12, 2006 between CTC Media and Nilesh Lakhani | | | 10-Q | | | 10.46++ | | | July 31, 2006 | | | 000-52003 |
| 10 | .47++ | | | | Notice of Grant of Stock Option dated July 19, 2006 to Leigh Sprague (Incentive Stock Option) and related Stock Option Agreement | | | 10-Q | | | 10.47++ | | | July 31, 2006 | | | 000-52003 |
| 10 | .48++ | | | | Notice of Grant of Stock Option dated July 19, 2006 to Leigh Sprague (Non-Statutory Option) and related Stock Option Agreement | | | 10-Q | | | 10.48++ | | | July 31, 2006 | | | 000-52003 |
| 10 | .49++ | | | | Notice of Grant of Stock Option dated July 19, 2006 to Sergey Petrov (Non-Statutory Stock Option) and related Stock Option Agreement | | | 10-Q | | | 10.49++ | | | July 31, 2006 | | | 000-52003 |
| 10 | .50 | | | | Preliminary Lease Agreement dated November 10, 2006, between ZAO CTC and OOO Promyshlenno-Finansovaya Kompania (English translation) | | | Filed herewith | | | | | | | | | |
| 10 | .51 | | | | Preliminary Lease Agreement dated November 10, 2006, between CTC Media, Inc. and OOO Promyshlenno-Finansovaya Kompania (English translation) | | | Filed herewith | | | | | | | | | |
| 10 | .52++ | | | | Notice of Grant of Stock Option dated July 19, 2006 to John Dowdy (Incentive Stock Option) and related Stock Option Agreement | | | Filed herewith | | | | | | | | | |
| 10 | .53++ | | | | Notice of Grant of Stock Option dated July 19, 2006 to John Dowdy (Non-Statutory Stock Option) and related Stock Option Agreement | | | Filed herewith | | | | | | | | | |
| 10 | .54++ | | | | Employment Agreement between CTC Media and John Dowdy | | | Filed herewith | | | | | | | | | |
| 14 | .1 | | | | Code of Business Conduct and Ethics | | | Filed herewith | | | | | | | | | |
| 21 | .1 | | | | Subsidiaries of CTC Media | | | S-1 | | | | | | March 6, 2006 | | | 333-132228 |
| 23 | .1 | | | | Consent of Independent Registered Public Accounting Firm | | | Filed herewith | | | | | | | | | |
| 31 | .1 | | | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | | | Filed herewith | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
Exhibit
No. | | | Description | | | Form on
which
Originally
Filed | | | Original
Exhibit
Number | | | Original
Filing Date
with SEC | | | SEC File
Number |
| 31 | .2 | | | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | | | Filed herewith | | | | | | | | | |
| 32 | .1 | | | | Section 1350 Certification of Chief Executive Officer | | | Filed herewith | | | | | | | | | |
| 32 | .2 | | | | Section 1350 Certification of Chief Financial Officer | | | Filed herewith | | | | | | | | | |
|
| |
| ++ | Indicates a management contract or any compensatory plan, contract or arrangement. |
