10-K 1 cetv-1231201710k.htm CENTRAL EUROPEAN MEDIA ENTERPRISES LTD 10-K Wdesk | Document
 
 
 
 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-24796
cmelogowithouttexta06.jpg
CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
(Exact name of registrant as specified in its charter)
BERMUDA
 
98-0438382
State or other jurisdiction of incorporation or organization
 
(I.R.S. Employer Identification No.)
 
 
 
O'Hara House, 3 Bermudiana Road, Hamilton, Bermuda
 
HM 08
(Address of principal executive offices)
 
(Zip Code)
Registrant's telephone number, including area code: (441) 296-1431
Title of each class
 
Name of each exchange on which registered
Securities registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK, $0.08 PAR VALUE
 
NASDAQ Global Select Market, Prague Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
UNIT WARRANTS TO PURCHASE SHARES OF CLASS A COMMON STOCK
 
None.
Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for each shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐




 
 
 
 
 
 
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” or “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes £ No T
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2017 (based on the closing price of US$ 4.00 of the registrant's Class A Common Stock, as reported by the NASDAQ Global Select Market on June 30, 2017) was US$ 250.0 million.
Number of shares of Class A Common Stock outstanding as of February 5, 2018: 145,498,488
DOCUMENTS INCORPORATED BY REFERENCE
Document
 
Location in 10-K in Which Document is Incorporated
Registrant's Proxy Statement for the 2018 Annual General Meeting of Shareholders
 
Part III





CENTRAL EUROPEAN MEDIA ENTERPRISES LTD.
FORM 10-K
For the year ended December 31, 2017
TABLE OF CONTENTS
Page
 
 
PART I
 
 
 
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 
 
 
 
 
PART IV
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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I.    Forward-looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 22E of the Securities Exchange Act of 1934 (the "Exchange Act"), including those relating to our capital needs, business strategy, expectations and intentions. Statements that use the terms “believe”, “anticipate”, “trend”, “expect”, “plan”, “estimate”, “forecast”, “should”, “intend” and similar expressions of a future or forward-looking nature identify forward-looking statements for purposes of the U.S. federal securities laws or otherwise. In particular, information appearing under the sections entitled "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward looking-statements. For these statements and all other forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or are otherwise beyond our control and some of which might not even be anticipated. Forward-looking statements reflect our current views with respect to future events and because our business is subject to such risks and uncertainties, actual results, our strategic plan, our financial position, results of operations and cash flows could differ materially from those described in or contemplated by the forward-looking statements contained in this report.
Important factors that contribute to such risks include, but are not limited to, those factors set forth under "Risk Factors” as well as the following: the effect of changes in global and regional economic conditions and the extent, timing and duration of the recovery in our markets; levels of television advertising spending and the rate of development of the advertising markets in the countries in which we operate; the extent to which our debt service obligations and covenants may restrict our business; our exposure to additional tax liabilities as well as liabilities resulting from regulatory or legal proceedings initiated against us; our ability to refinance our existing indebtedness; our success in continuing our initiatives to diversify and enhance our revenue streams; our ability to make cost-effective investments in our television businesses, including investments in programming; our ability to develop and acquire necessary programming and attract audiences; our ability to consummate the Divestment Transaction; and changes in the political and regulatory environments where we operate and in the application of relevant laws and regulations. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this report. All forward-looking statements speak only as of the date of this report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law.

1


Defined Terms
Unless the context otherwise requires, references in this report to the “Company”, “CME”, “we”, “us” or “our” refer to Central European Media Enterprises Ltd. (“CME Ltd.”) or CME Ltd. and its consolidated subsidiaries listed in Exhibit 21.01 hereto. Unless otherwise noted, all statistical and financial information presented in this report has been converted into U.S. dollars using period-end exchange rates or average rates where applicable. All references in this report to “US$” or “dollars” are to U.S. dollars, all references to “BGN” are to Bulgarian leva, all references to “CZK” are to Czech koruna, all references to “RON” are to the New Romanian lei and all references to “Euro” or “EUR” are to the European Union Euro. The exchange rates as at December 31, 2017 used in this report are US$/BGN 1.63; US$/CZK 21.29; US$/RON 3.89; and US$/EUR 0.83.
The following defined terms are used in this Annual Report on Form 10-K:
"2015 Convertible Notes" refers to our 5.0% senior convertible notes due November 2015, redeemed in November 2015;
"2017 PIK Notes" refers to our 15.0% senior secured notes due 2017, redeemed in April 2016;
"2017 Term Loan" refers to our 15.0% term loan facility due 2017, repaid in April 2016;
"2018 Euro Term Loan" refers to our floating rate senior unsecured term credit facility guaranteed by Time Warner, dated as of November 14, 2014 and amended on March 9, 2015, February 19, 2016, June 22, 2017 and February 5, 2018 which matures on May 1, 2019 (see Part II, Item 8, Note 24, "Subsequent Events" for further information);
"2019 Euro Term Loan" refers to our floating rate senior unsecured term credit facility due 2019 guaranteed by Time Warner, dated as of September 30, 2015 and amended on February 19, 2016 and June 22, 2017;
"2021 Euro Term Loan" refers to our floating rate senior unsecured term credit facility due 2021 entered into by CME BV (as defined below), guaranteed by Time Warner and CME Ltd., dated as of February 19, 2016 and amended on June 22, 2017;
"Euro Term Loans" refers collectively to the 2018 Euro Term Loan, 2019 Euro Term Loan and 2021 Euro Term Loan;
"2021 Revolving Credit Facility" refers to our amended and restated revolving credit facility dated as of February 28, 2014, as amended and restated as of November 14, 2014, further amended and restated on February 19, 2016 and amended on June 22, 2017;
"Divestment Transaction" refers to the framework agreement dated July 9, 2017 with Slovenia Broadband S.à r.l. for the sale of our Croatia and Slovenia operations (see Part II, Item 8, Note 3, "Discontinued Operations and Assets Held for Sale" for further information)
"Guarantee Fees" refers to amounts accrued and payable to Time Warner as consideration for Time Warner's guarantees of the Euro Term Loans;
"Reimbursement Agreement" refers to an agreement with Time Warner which provides that we will reimburse Time Warner for any amounts paid by them under any guarantee or through any loan purchase right exercised by Time Warner, dated as of November 14, 2014, amended and restated on February 19, 2016 and amended on March 2, 2017 and June 22, 2017;
"CME BV" refers to CME Media Enterprises B.V., our 100% owned subsidiary;
"CME NV" refers to Central European Media Enterprises N.V., our 100% owned subsidiary;
"Time Warner" refers to Time Warner Inc.; and
"TW Investor" refers to Time Warner Media Holdings B.V.
PART I
ITEM 1.    BUSINESS
Central European Media Enterprises Ltd., a Bermuda company limited by shares, is a media and entertainment company operating in Central and Eastern Europe. Our assets are held through a series of Dutch and Curaçao holding companies. We manage our business on a geographical basis, with four operating segments, Bulgaria, the Czech Republic, Romania and the Slovak Republic, which are also our reportable segments and our main operating countries. We own 94% of our Bulgaria operations and 100% of our companies in our remaining countries.
On July 9, 2017, we entered into a framework agreement with Slovenia Broadband S.à r.l., a wholly owned subsidiary of United Group B.V., relating to the sale of our Croatia and Slovenia operations. Accordingly, these operations are classified as held for sale and they are presented as discontinued operations for all periods in this report; and the discussion below relates to our continuing operations in the four remaining operating segments. See Part II, Item 8, Note 3, "Discontinued Operations and Assets Held for Sale" for further information.
Our main operating countries are members of the European Union (the “EU”). However, as emerging economies, they have adopted Western-style democratic forms of government and have economic structures, political and legal systems, systems of corporate governance and business practices that continue to evolve. As the economies of our operating countries converge with more developed nations and their economic and commercial infrastructures continue to develop, we believe the business risks of operating in these countries will continue to decline.
We operate market leading television networks in each of these four countries, broadcasting a total of 26 television channels to more than 40 million people living in the region. Each segment also develops and produces content for their television channels. We generate advertising revenues in our country operations primarily through entering into agreements with advertisers, advertising agencies and sponsors to place advertising on the television channels that we operate. We generate additional revenues by collecting fees from cable, direct-to-home (“DTH”) and internet protocol television ("IPTV") operators for carriage of our channels.
Our strategy is to maintain or increase our audience leadership in each of our countries and to pursue sales strategies designed to maximize our revenues in order to provide additional financial resources to invest in local content. We have built our audience leadership in each of our markets by operating a multi-channel business model with a diversified portfolio of television channels which appeal to a broad audience.

2


Content that consistently generates high audience shares is crucial to maintaining the success of each of our country operations. While content acquired from the Hollywood studios remains popular, our audiences increasingly demand content that is produced in their local language and reflects their society, attitudes and culture. We believe developing and producing local content is key to being successful in prime time and supporting market-leading channels and that maintaining a regular stream of popular local content at the lowest possible cost is operationally important over the long term.
As the distribution platforms in our region develop and become more diversified, our television channels and content will increasingly reach viewers through new distribution offerings, such as internet TV and smart devices. We offer viewers the choice of watching premium television content through a series of portals, including through Voyo, our subscription video-on-demand service, and advertising supported catch-up services on our websites.
Sales
We generate advertising revenues primarily through entering into agreements with advertisers, advertising agencies and sponsors to place advertising on our television channels.
Our main unit of inventory is the commercial gross rating point (“GRP”), a measure of the number of people watching television when an advertisement is aired. We generally contract with a client to provide an agreed number of GRPs for an agreed price (“cost per point” or “CPP”). Much less frequently, and usually only for small niche channels, we may sell on a fixed spot basis where an advertisement is placed at an agreed time for a negotiated price that is independent of the number of viewers. The CPP varies depending on the season and time of day the advertisement is aired, the volume of GRPs purchased, requests for special positioning of the advertisement, the demographic group that the advertisement is targeting and other factors. Our larger advertising customers generally commit to specified amounts of advertising on an annual basis, which sets the pricing for a minimum volume of GRPs.
We operate our television networks based on a business model of audience leadership, brand strength and popular local content. Our sales strategy is to maximize the monetization of our advertising time by leveraging our high brand power and applying an optimal mix of pricing and sell-out rate. The effectiveness of our sales strategy is measured by our share of the television advertising market, which represents the proportion of our television advertising revenues compared to the total television advertising market. We also generate additional revenues by collecting carriage fees from cable, satellite and IPTV operators for broadcasting our channels.
Programming
Our programming strategy in each country is tailored to match the expectations of key audience demographics by scheduling and marketing an optimal mix of programs in a cost effective manner. The programming that we provide drives our audience shares and ratings (see "Audience Share and Ratings" below) and consists of locally-produced news, current affairs, fiction, and reality and entertainment shows as well as acquired foreign movies, series and sports programming.
We focus our programming investments on securing leading audience share positions during prime time, where the majority of advertising revenues are delivered, and improving our cost efficiency through optimizing the programming mix and limiting the cost of programming scheduled off-prime time while maintaining all day audience shares.
Audience Share and Ratings
Audience share represents the viewers watching a channel in proportion to the total audience watching television at the time. Ratings represent the number of people watching a channel in proportion to the total population. Audience share and ratings information are measured in each market by independent agencies using peoplemeters, which measure audiences for different demographics and subgeographies of the population throughout the day. Our channels schedule programming intended to attract audiences within specific target demographics that we believe will be attractive to advertisers. The tables below provide a comparison of all day and prime time audience shares for 2017 in the target demographic of each of our leading channels to the primary channels of our main competitors.
Bulgaria
We operate one general entertainment channel, BTV, and five other channels, BTV CINEMA, BTV COMEDY, BTV ACTION, BTV LADY and RING.
Target Demographic
 
Channel
 
Ownership
 
All day audience share
 
Prime time audience share
 
 
 
 
 
 
2017
 
2016
 
2017
 
2016
18-49
 
BTV
 
CME
 
31.8%
 
30.5%
 
34.8%
 
33.6%
 
 
NOVA TV
 
MTG
 
16.7%
 
19.2%
 
18.5%
 
21.1%
 
 
BNT 1
 
Public television
 
6.0%
 
7.0%
 
7.4%
 
8.9%
 
 
 
 
 
 
 
 
 
 
 
 
 
Source: GARB
The combined all day and prime time audience shares of our Bulgaria operations in 2017 were 41.9% and 45.3%, respectively.

3


Czech Republic
We operate one general entertainment channel, TV NOVA, and seven other channels, NOVA 2, NOVA CINEMA, NOVA SPORT 1, NOVA SPORT 2, NOVA ACTION, NOVA GOLD and NOVA INTERNATIONAL, a general entertainment channel broadcasting in the Slovak Republic.
Target Demographic
 
Channel
 
Ownership
 
All day audience share
 
Prime time audience share
 
 
 
 
 
 
2017
 
2016
 
2017
 
2016
15-54
 
TV NOVA
 
CME
 
23.7%
 
23.7%
 
27.9%
 
28.2%
 
 
Prima
 
MTG / GME
 
10.7%
 
10.8%
 
13.5%
 
13.2%
 
 
CT 1
 
Public television
 
12.2%
 
12.3%
 
14.1%
 
14.7%
 
 
 
 
 
 
 
 
 
 
 
 
 
Source: ATO - Nielsen Admosphere; Mediaresearch
The combined all day and prime time audience shares of our Czech Republic operations in 2017, excluding NOVA SPORT 1, NOVA SPORT 2 and NOVA INTERNATIONAL, were 36.9% and 39.3%, respectively.
Romania
We operate one general entertainment channel, PRO TV, and seven other channels, PRO 2 (formerly ACASA), PRO X (formerly SPORT.RO), PRO GOLD (formerly ACASA GOLD), PRO CINEMA, PRO TV INTERNATIONAL, MTV ROMANIA, as well as PRO TV CHISINAU, a general entertainment channel broadcasting in Moldova.
Target Demographic
 
Channel
 
Ownership
 
All day audience share
 
Prime time audience share
 
 
 
 
 
 
2017
 
2016
 
2017
 
2016
18-49 Urban
 
PRO TV
 
CME
 
23.3%
 
20.6%
 
27.0%
 
25.0%
 
 
Antena 1
 
Intact group
 
14.9%
 
15.7%
 
15.9%
 
15.9%
 
 
TVR 1
 
Public television
 
1.4%
 
1.3%
 
1.5%
 
1.5%
 
 
 
 
 
 
 
 
 
 
 
 
 
Source: Kantar Media
The combined all day and prime time audience shares of our Romania operations in 2017, excluding PRO TV INTERNATIONAL, PRO TV CHISINAU and ACASA IN MOLDOVA (which ceased broadcasting in October 2017) were 27.4% and 30.3%, respectively.
Slovak Republic
We operate one general entertainment channel, TV MARKIZA, and three other channels, DOMA, DAJTO and MARKIZA INTERNATIONAL, a general entertainment channel broadcasting in the Czech Republic.
Target Demographic
 
Channel
 
Ownership
 
All day audience share
 
Prime time audience share
 
 
 
 
 
 
2017
 
2016
 
2017
 
2016
12-54
 
TV MARKIZA
 
CME
 
19.5%
 
22.2%
 
20.3%
 
23.3%
 
 
TV JOJ
 
J&T Media Enterprises
 
16.5%
 
15.4%
 
20.2%
 
18.8%
 
 
Jednotka
 
Public Television
 
8.6%
 
8.0%
 
10.8%
 
9.7%
 
 
 
 
 
 
 
 
 
 
 
 
 
Source: PMT/ TNS SK
The combined all day and prime time audience shares of our Slovak Republic operations in 2017, excluding MARKIZA INTERNATIONAL, were 27.0% and 28.3%, respectively.
Seasonality
We experience seasonality, with advertising sales tending to be highest during the fourth quarter of each calendar year due to the holiday season, and lowest during the third quarter of each calendar year due to the summer vacation period (typically July and August). Our non-advertising sales are not affected by seasonality.

4


Regulation of Television Broadcasting
Television broadcasting in each of the countries in which we operate is regulated by a governmental authority or agency. In this report, we refer to such agencies individually as a “Media Council” and collectively as “Media Councils”. Media Councils generally supervise broadcasters and their compliance with national broadcasting legislation, as well as control access to the available frequencies through licensing regimes.
Programming and Advertising Regulation
Our main operating countries are member states of the EU, and as such, our broadcast operations in such countries are subject to relevant EU legislation relating to media.
The EU Audiovisual Media Services Directive (the “AVMS Directive”) came into force in March 2010 and provides the legal framework for audiovisual media services generally in the EU. The AVMS Directive covers both linear (i.e., broadcasting) and non-linear (e.g., video-on-demand and catch-up) transmissions of audiovisual media services, with the latter subject to significantly less stringent regulation. Among other things, the AVMS Directive requires broadcasters to comply with rules related to, but not limited to, program content, advertising content and quotas, product placement, sponsorship, teleshopping, accessibility by persons with a visual or hearing disability, and minimum quotas with respect to “European works” (defined as originating from an EU member state or a signatory to the Council of Europe's Convention on Transfrontier Television as well as being written and produced mainly by residents of the EU or Council of Europe member states or pursuant to co-production agreements between such states and other countries). In addition, the AVMS Directive requires that at least 10% of either broadcast time or programming budget is dedicated to programs made by European producers who are independent of broadcasters. News, sports, games, advertising, teletext services and teleshopping are excluded from the calculation of these quotas. In respect of advertising, the AVMS Directive provides that the proportion of television advertising spots and teleshopping spots within a given hour shall not exceed 20% (what is commonly referred to as the ‘12 minute per hour rule’). The AVMS Directive does not otherwise restrict when programming may be interrupted by advertising in linear broadcasting, except in the case of films and news programming (where programming may be interrupted once every thirty minutes or more) and children’s programming (where the same restriction applies providing that the program is greater than thirty minutes) and religious programming (where no advertising or teleshopping shall be inserted). Under the AVMS Directive, product placement is prohibited subject to certain exceptions (for example it is permitted in films and series, sports programs and light entertainment programs) and providing that the use of product placement is not ‘unduly’ prominent, is not promotional and is appropriately identified to viewers. Legislation implementing the AVMS Directive has been adopted across our operating countries.
On May 25, 2016, the European Commission adopted a proposal to amend the AVMS Directive. As proposed, the legislation liberalizes many of the AVMS Directive requirements, including, for example, in respect of hourly advertising limits, product placement, teleshopping and sponsorship. The proposal is subject to consultation, review by the European Commission committees and a vote by the European Parliament in order to be adopted. Following adoption, any amendments to the AVMS Directive would then need to be implemented by our operating countries.
Please see below for more detailed information on programming and advertising regulations that impact our channels.
Bulgaria: In Bulgaria, privately owned broadcasters are permitted to broadcast advertising for up to 12 minutes per hour. The public broadcaster, BNT, which is financed through a compulsory television license fee and by the government, is restricted to broadcasting advertising for four minutes per hour and no more than 15 minutes per day, of which only five minutes may be in prime time. There are also restrictions on the frequency of advertising breaks (for example, news and children's programs shorter than 30 minutes cannot be interrupted). These restrictions apply to both publicly and privately owned broadcasters. Further restrictions relate to advertising content, including a ban on tobacco advertising and restrictions on alcohol advertising, regulations on medical products advertising and regulations on advertising targeted at children or during children's programming. In addition, members of the news department of our channels are prohibited from appearing in advertisements. Our channels in Bulgaria are required to comply with several restrictions on programming, including regulations on the origin of programming. These channels must ensure that 50% of a channel's total annual broadcast time consists of EU- or locally-produced programming and 12% of such broadcast time consists of programming produced by independent producers in the EU. News, sports, games and teleshopping programs, as well as advertising and teletext services, are excluded from these restrictions.
Czech Republic: Privately owned broadcasters in the Czech Republic are permitted to broadcast advertising for up to 12 minutes per hour. In September 2011, legislation was implemented in the Czech Republic which restricts the amount of advertising that may be shown on channels of the public broadcaster, CT. Pursuant to the regulation, no advertising may be shown on the public channels CT 1 and CT 24, while the channels CT 2 and CT 4 may show a limited amount of advertising. Also included in the legislation is the requirement that national private broadcasters must contribute annually to a Czech cinematography fund in an amount equal to 2% of their net advertising revenues. We are entitled to apply for financing from the fund. In the Czech Republic, all broadcasters are restricted with respect to the frequency of advertising breaks during and between programs, as well as being subject to restrictions that relate to advertising content, including a ban on tobacco advertising and limitations on advertisements of alcoholic beverages, pharmaceuticals, firearms and munitions.
Romania: Privately owned broadcasters in Romania are permitted to broadcast advertising and direct sales advertising for up to 12 minutes per hour. There are also restrictions on the frequency of advertising breaks (for example, news and children's programs shorter than 30 minutes cannot be interrupted). Broadcasters are also required that from the total broadcasting time (except for the time allocated to news, sports events, games, advertising and teleshopping) (a) at least 50% must be European-origin audio-visual works and (b) at least 10% (or, alternatively, at least 10% of their programming budget) must be European audio-visual works produced by independent producers. The public broadcaster, TVR, is restricted to broadcasting advertising for eight minutes per hour and only between programs. Further restrictions relate to advertising content, including a ban on tobacco advertising and restrictions on alcohol advertising, and regulations on advertising targeted at children or during children's programming. In addition, news anchors of all channels are prohibited from appearing in advertisements and teleshopping programming. A new Audiovisual Code was enacted in March 2017 providing additional safeguards in connection with the protection of minors and privacy rights.
Slovak Republic: Privately owned broadcasters in the Slovak Republic are permitted to broadcast advertising for up to 12 minutes per hour but not for more than 20% of their total daily broadcast time. Since January 2013, the public broadcaster RTVS, which is financed through a compulsory license fee, can broadcast advertising for up to 0.5% of its total broadcast time (up to 2.5% of total broadcast time including teleshopping programming), but between 7:00 p.m. and 10:00 p.m. may broadcast only eight minutes of advertising per hour. There are restrictions on the frequency of advertising breaks during and between programs. RTVS is not permitted to broadcast advertising breaks during programs. There are also restrictions that relate to advertising content, including a ban on tobacco, pharmaceuticals, firearms and munitions advertising and a ban on advertisements of alcoholic beverages (excluding beer and wine) between 6:00 a.m. and 10:00 p.m. Our operations in the Slovak Republic are also required to comply with several restrictions on programming, including regulations on the origin of programming. These include the requirement that 50% of the station's monthly broadcast time must be European-origin audio-visual works and at least 10% of a station's monthly broadcast time must be European audio-visual works produced by independent producers, at least 10% of which must be broadcast within five years of production.

5


Licensing Regulation
The license granting and renewal process in our operating countries varies by jurisdiction and by type of broadcast permitted by the license (i.e., terrestrial, cable, satellite). Depending on the country, terrestrial licenses may be valid for an unlimited time period, may be renewed automatically upon application or may require a more lengthy renewal procedure, such as a tender process. Generally cable and satellite licenses are granted or renewed upon application. We expect all of our licenses will continue to be renewed or new licenses to be granted as required to continue to operate our business. All of the countries in which we operate have transitioned from analog to digital terrestrial broadcasting and we have obtained digital licenses where requested. In January 2017, we ceased terrestrial distribution of our channels in the Slovak Republic, and channels are now available exclusively on cable, satellite and IPTV platforms. We will apply for additional digital licenses where such applications are prudent and permissible. Please see below for more detailed information on licenses for our channels.
Bulgaria: BTV operates pursuant to a national digital terrestrial license issued by the Council for Electronic Media, the Bulgarian Media Council, that expires in July 2024. BTV ACTION broadcasts pursuant to a national cable and satellite registration that is valid for an indefinite time period and also has a digital terrestrial license that expires in January 2025 which is not currently in use. BTV CINEMA, BTV COMEDY, RING and BTV LADY, as well as BTV, each broadcast pursuant to a national cable and satellite registration that is valid for an indefinite time period.
Czech Republic: Our channels in the Czech Republic operate under a variety of licenses granted by the Czech Republic Media Council, The Council for Radio and Television Broadcasting. TV NOVA broadcasts under a national terrestrial license that expires in January 2025. TV NOVA may also broadcast pursuant to a satellite license that expires in December 2020. NOVA CINEMA broadcasts pursuant to a national terrestrial digital license that expires in 2023. NOVA CINEMA also broadcasts via satellite pursuant to a license that is valid until November 2019. NOVA SPORT 1 broadcasts pursuant to a license that allows for both satellite and cable transmission that expires in October 2020. NOVA SPORT 2 broadcasts pursuant to a satellite license that expires in August 2027. In addition, NOVA SPORT 1 and NOVA SPORT 2 each have a license that permits internet transmission which expires in August 2027. NOVA ACTION broadcasts pursuant to a satellite license that expires in July 2024 and a national terrestrial license that expires in September 2023. NOVA 2 broadcasts pursuant to a national terrestrial license that expires in December 2024 and a satellite license that expires in February 2025. NOVA GOLD broadcasts pursuant to a national terrestrial license and a satellite license that each expire in February 2025. NOVA INTERNATIONAL broadcasts pursuant to a license that permits internet transmission which expires in January 2028.
Romania: PRO TV broadcasts pursuant to a national satellite license granted by the Romanian Media Council, the National Audio-Visual Council, that expires in May 2023. PRO 2 broadcasts pursuant to a national satellite license that expires in January 2025. PRO GOLD broadcasts pursuant to a national satellite license that expires in April 2021. PRO CINEMA broadcasts pursuant to a national satellite license that expires in April 2022. PRO X broadcasts pursuant to a national satellite license that expires in July 2021. MTV ROMANIA broadcasts pursuant to a national satellite license that expires in April 2018 and PRO TV INTERNATIONAL broadcasts pursuant to a national satellite license that expires in May 2018. PRO TV also broadcasts through the electronic communications networks pursuant to a series of local licenses and PRO 2 broadcasts in high-definition pursuant to a written consent from the Media Council. PRO TV CHISINAU broadcasts pursuant to a cable license granted by the Audio-Visual Coordinating Council of the Republic of Moldova (the "AVCC") that expires in November 2023. In September 2017 we applied to the AVCC to discontinue the ACASA IN MOLDOVA channel from October 2017.
Slovak Republic: TV MARKIZA, DOMA and DAJTO each broadcast pursuant to a national license for digital broadcasting granted by the Council for Broadcasting and Retransmission, the Media Council of the Slovak Republic, which is valid for an indefinite period. MARKIZA INTERNATIONAL is broadcast pursuant to the license granted to TV MARKIZA.
OTHER INFORMATION
Employees
As of December 31, 2017, we had a total of approximately 2,200 employees (including contractors).
Corporate Information
CME Ltd. was incorporated in 1994 under the laws of Bermuda. Our registered offices are located at O'Hara House, 3 Bermudiana Road, Hamilton HM 08, Bermuda, and our telephone number is +1-441-296-1431. Communications can also be sent c/o CME Media Services Ltd. at Krizeneckeho nam. 1078/5, 152 00 Praha 5, Czech Republic, telephone number +420-242-465-605. CME's Class A common stock is listed on the NASDAQ Global Select Market and the Prague Stock Exchange under the ticker symbol “CETV”.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act are available on our website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. These reports together with press releases, public conference calls, webcasts and posts to the "Investors" section of our website are available at www.cme.net and we encourage investors to use our website. The information contained on our website is not included as a part of, or incorporated by reference into, this Report.
Financial Information by Operating Segment and by Geographical Area
For financial information by operating segment and geographic area, see Part II, Item 8, Note 20, "Segment Data".

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ITEM 1A    RISK FACTORS
This report and the following discussion of risk factors contain forward-looking statements as discussed on page 1 of this report. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks and uncertainties described below and elsewhere in this report. These risks and uncertainties are not the only ones we may face. Additional risks and uncertainties of which we are not aware, or that we currently deem immaterial, may also become important factors that affect our financial condition, results of operations and cash flows.
Risks Relating to Our Financial Position
Changes in global or regional economic conditions may adversely affect our financial position and results of operations.
The results of our operations depend heavily on advertising revenue, and demand for advertising is affected by general economic conditions in the region and globally. Our markets have experienced overall growth in real GDP (as adjusted for inflation) and advertising spending since 2014; however, we cannot predict if the current growth trends will continue in the future. Recessions or periods of low or negative growth in the region or globally in the future may cause a deterioration of general economic conditions in one or more of our markets, which would have an adverse economic impact on our advertising revenues. Other factors that may affect general economic conditions in our markets include defaults by sovereigns or systemically important companies, austerity programs, natural disasters, acts of terrorism, civil or military conflicts or general political instability and responses to it, any of which may also reduce advertising spending. In addition, although we believe the advertising spend per capita of the countries in which we operate and advertising intensity (the ratio of total advertising spend per capita to nominal GDP per capita) will converge with developed markets in Europe, such convergence may not occur in the time frame we expect, or at all. Any of these developments would have a significant negative effect on our financial position, results of operations and cash flows.
Changes to the quantitative easing program implemented by European Central Bank ("ECB") and the impact on the region of the United Kingdom’s exit from the European Union (“EU”) may adversely affect our financial position and results of operations.
The ECB embarked upon quantitative easing in 2015 to address economic softness and a slowdown in growth of consumer prices in the Eurozone. The ECB also created funding and stability mechanisms to provide liquidity and financial assistance to Eurozone member states and financial institutions. Economic growth in recent years in the Eurozone, including strong growth in 2017, has been helped by the ECB’s quantitative easing program. Citing improved economic conditions, the ECB has announced that from January 2018 it will be reducing its quantitative easing program from a rate of EUR 60 billion a month to EUR 30 billion a month for an initial nine-month period. The ECB may decide to take further steps to reduce or exit quantitative easing in the future. The tapering of quantitative easing may adversely impact future growth in Eurozone countries, including the countries we operate in which would negatively impact our business.
On March 29, 2017, the United Kingdom formally initiated the process to leave the EU, commonly referred to as "Brexit", triggering a two-year period to finalize the terms for its leaving the EU. It is expected that economic conditions in the EU will be impacted by Brexit. While the overall economic impact of Brexit on the EU and the Euro is difficult to estimate at present, decisions to conserve cash and reduce spending by consumers and businesses in the United Kingdom would have a negative impact on economic growth rates in the United Kingdom and, to a lesser extent, in the EU, in particular those countries that are significant exporters to the United Kingdom. There is also significant uncertainty regarding the terms on which the United Kingdom will leave the EU, and it is expected that a more protracted process to set those terms would have a more prolonged economic impact. In addition, if other countries seek to leave the EU, that would increase uncertainty in the region, which may have a further negative impact on investment and economic growth rates. Furthermore, the departure of the United Kingdom from the EU may affect the budgetary contributions and allocations among the EU member states in the medium term, including the countries in which we operate, which are net recipients of EU funding. Economic uncertainty caused by Brexit or other instability in the EU resulting from Brexit could cause significant volatility in EU markets and reduce economic growth rates in the countries in which we operate, which would negatively impact our business.
Our operating results will be adversely affected if we cannot generate strong advertising sales.
We generate the majority of our revenues from the sale of advertising airtime on our television channels. While we have implemented pricing strategies to increase sales and television advertising spending, the success of these strategies has varied from market to market and continues to be challenged by pressure from advertisers and discounting by competitors. In addition to advertising pricing, other factors that may affect our advertising sales include general economic conditions (described above), competition from other broadcasters and operators of other distribution platforms, changes in programming strategy, changes in distribution strategy, our ability to secure distribution on cable, satellite or IPTV operators, our channels’ technical reach, technological developments relating to media and broadcasting, seasonal trends in the advertising market, changing audience preferences and in how and when people view content and the accompanying advertising, increased competition for the leisure time of audiences and shifts in population and other demographics. Our advertising revenues also depend on our ability to maintain audience ratings and to generate GRPs. This requires us to have a distribution strategy that reaches a significant audience as well as to maintain investments in programming at a sufficient level to continue to attract audiences. Changes in the distribution of our channels, such as our decision to cease broadcasting on DTT in the Slovak Republic may reduce the number of people who can view our channels, which may negatively impact our audience share and GRPs generated. Furthermore, significant or sustained reductions in investments in programming or other operating costs in response to reduced advertising revenues had and, if repeated, may have an adverse impact on our television viewing levels. Reductions in advertising spending in our markets and resistance to price increases as well as competition for ratings from broadcasters seeking to attract similar audiences may have an adverse impact on our ability to maintain our advertising sales. A failure to maintain and increase advertising sales could have a material adverse effect on our financial position, results of operations and cash flows.
Our debt service obligations and covenants may restrict our ability to conduct our operations.
We have significant debt service obligations under the Euro Term Loans as well as the 2021 Revolving Credit Facility (when drawn), including the Guarantee Fees to Time Warner as consideration for its guarantees of the Euro Term Loans (collectively, the "TW Guarantees"). Although a portion of the Guarantee Fees in respect of each of the Euro Term Loans can be non-cash pay at our option, accruing such fees will further increase the amounts to be repaid at the maturity of these facilities. In addition, if the Divestment Transaction does not close, the warrants are not exercised in full or cash flows from operations do not meet our forecasts, we would not be able to reduce our indebtedness as planned and would continue to bear higher average borrowing costs on our senior debt and pay more interest and Guarantee Fees. As a result of our debt service obligations and covenants contained in the related loan agreements, we are restricted under the Reimbursement Agreement and the 2021 Revolving Credit Facility (when drawn) in the manner in which our business is conducted, including but not limited to our ability to obtain additional debt financing to refinance existing indebtedness or to fund future working capital, capital expenditures, business opportunities or other corporate requirements. We may have a proportionally higher level of debt and debt service obligations than our competitors, which may put us at a competitive disadvantage by limiting our flexibility in planning for, or reacting to, changes in our business, economic conditions or our industry. For additional information regarding the Reimbursement Agreement, the 2021 Revolving Credit Facility and the TW Guarantees, see Part II, Item 8, Note 5, "Long-term Debt and Other Financing Arrangements".

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We may be unable to refinance our existing indebtedness and may not be able to obtain favorable refinancing terms.
We have a substantial amount of indebtedness. Under the Reimbursement Agreement and the 2021 Revolving Credit Facility (when drawn), we can incur only limited amounts of additional indebtedness, other than indebtedness incurred to refinance existing indebtedness. In addition, pursuant to the Reimbursement Agreement, the all-in rates on each of the Euro Term Loans increase to a maximum of 10.0% (or 3.5% above the then-current all-in rate, if lower), on the date that is 180 days following a change of control of CME Ltd. (as defined therein); and pursuant to the 2021 Revolving Credit Facility, all commitments terminate following a change of control (as defined therein) and the interest rate on amounts outstanding increases to 13% on the date that is 180 days following such change of control. We intend to repay the 2018 Euro Term Loan at or prior to maturity on May 1, 2019 with cash flows from operations and the expected proceeds from the Divestment Transaction or if the Divestment Transaction does not close, the expected proceeds from warrant exercises. In the event the Divestment Transaction does not close, the warrants are not exercised in full or cash flows from operations do not meet our forecasts, we would be required to refinance the 2018 Euro Term Loan in whole or in part. Pursuant to the Reimbursement Agreement, all commitments under the 2021 Revolving Credit Facility terminate on the refinancing of any Euro Term Loan. We face the risk that we will not be able to renew, repay or refinance our indebtedness when due, or that the terms of any renewal or refinancing will not be on better terms than those of such indebtedness being refinanced. In the event we are not able to refinance our indebtedness, we might be forced to dispose of assets on disadvantageous terms or reduce or suspend operations, any of which would materially and adversely affect our financial condition, results of operations and cash flows.
If the Divestment Transaction fails to complete or is terminated, we may need to find alternative sources of funds to repay certain of our indebtedness
On July 9, 2017, we entered into a framework agreement (the “Framework Agreement”) with Slovenia Broadband S.à r.l. (the "Purchaser"), a wholly owned subsidiary of United Group B.V., relating to the sale of our Croatia and Slovenia operations for cash consideration of EUR 230.0 million (approximately US$ 275.8 million), subject to customary working capital adjustments (the "Divestment Transaction"). The closing of the Divestment Transaction is subject to obtaining regulatory approvals and other customary closing conditions. On November 15, 2017 the Croatian Agency for Electronic Media ("CAEM") published a decision that the acquisition by the Purchaser is not permitted under the Croatian Act on Electronic Media due to certain cross ownership restrictions that CAEM believes to be applicable to the Divestment Transaction. Following the sale by the United Group of certain assets in Croatia to address this cross ownership restriction, the Purchaser has reapplied for approval from CAEM. Under the terms of the Framework Agreement, the Purchaser has the right to extend the closing date of the transaction until March 31, 2018 (the "Long Stop Date"). There is no guarantee that the CAEM regulatory approval or any other regulatory approvals will be obtained by the Long Stop Date. In the event the required regulatory approvals are not obtained by the Long Stop Date or the parties have not otherwise agreed to extend that date, both we and the Purchaser have the right to terminate the Framework Agreement on notice to the other party. If the Divestment Transaction does not close or is terminated, we would not be able to repay indebtedness we planned to repay with expected proceeds of the Divestment Transaction and would need to find alternative sources of funds to repay such indebtedness (see "We may be unable to refinance our existing indebtedness and may not be able to obtain favourable refinancing terms" above).
We may be subject to changes in tax rates and exposure to additional tax liabilities.
We are subject to taxes in a number of foreign jurisdictions, including in respect of our operations as well as capital transactions undertaken by us. We are subject to regular review and audit by tax authorities, and in the ordinary course of our business there are transactions and calculations where the ultimate tax determination is unknown. Significant judgment is required in determining our provision for taxes. The final determination of our tax liabilities resulting from tax audits, related proceedings or otherwise could be materially different from our tax provisions. Economic and political pressures to increase receipts in various jurisdictions may make taxation and tax rates subject to significant change and the satisfactory resolution of any tax disputes more difficult. The occurrence of any of these events could have a material adverse effect on our financial position, results of operations and cash flows.
A default by us in connection with our obligations under our outstanding indebtedness could result in our inability to continue to conduct our business.
Pursuant to the Reimbursement Agreement and the 2021 Revolving Credit Facility, we pledged all of the shares of CME NV and of CME BV, which together own all of our interests in our operating subsidiaries, in favor of Time Warner as security for this indebtedness. If we or these subsidiaries were to default under the terms of any of the relevant agreements, Time Warner would have the ability to sell all or a portion of the assets pledged to it in order to pay amounts outstanding under such debt instruments. This could result in our inability to conduct our business.
Fluctuations in exchange rates may continue to adversely affect our results of operations.
Our reporting currency is the dollar and CME Ltd.'s functional currency is the Euro. Our consolidated revenues and costs are divided across a range of European currencies. In 2017, the weakening of the dollar had a positive impact on reported revenues when translated from the functional currencies of our operations. Any future strengthening of the dollar will have a negative impact on our reported revenues. Furthermore, fluctuations in exchange rates may negatively impact programming costs. While local programming is generally purchased in local currencies, a significant portion of our content costs relates to foreign programming purchased pursuant to dollar-denominated agreements. If the dollar appreciates against the functional currencies of our operating segments, the cost of acquiring such content would be adversely affected, which could have a material adverse effect on our results of operations and cash flows.
Our strategies to enhance our carriage fees and diversify our revenues may not be successful.
We are focused on creating additional revenue streams from our broadcast operations as well as increasing revenues generated from television advertising, which is how we generate most of our revenues. Our main efforts with respect to this strategy are on increasing carriage fees from cable, satellite and IPTV operators for carriage of our channels as well as continuing to seek improvements in advertising pricing. Agreements with operators generally have a term of one or more years, at which time agreements must be renewed. There can be no assurance that we will be successful in renewing carriage fee agreements on similar or better terms. During negotiations to implement our carriage fees strategy in prior years, some cable and satellite operators suspended the broadcast of our channels, which negatively affected the reach and audience shares of those operations and, as a result, advertising revenues. There is a risk that operators may refuse to carry our channels while carriage fee negotiations are ongoing, which would temporarily reduce the reach of those channels and may result in clients withdrawing advertising from our channels. The occurrence of any of these events may have an adverse impact on our financial position, results of operations and cash flows. If we are ineffective in negotiations with carriers or in achieving further carriage fee increases, our profitability will continue to be dependent primarily on television advertising revenues, which increases the importance placed on our ability to improve advertising pricing and generate advertising revenues. In addition to carriage fees, we are also working to build-out our offerings of advertising video-on-demand products and other opportunities for advertising online. There can be no assurances that our revenue diversification initiatives will ultimately be successful, and if unsuccessful, this may have an adverse impact on our financial position, results of operations and cash flows.

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A downgrading of our corporate credit ratings may adversely affect our ability to raise additional financing.
Moody’s Investors Service rates our corporate credit as B2 with a positive outlook. Standard & Poor’s rates our corporate credit B+ currently on CreditWatch with developing implications due to the Divestment Transaction. Our ratings show each agency's opinion of our financial strength, operating performance and ability to meet our debt obligations as they become due. These ratings take into account the particular emphasis the ratings agencies place on metrics such as leverage ratio and cash flow, which they use as measurements of a company's liquidity and financial strength. They also reflect an emphasis placed by the ratings agencies on a track record of strong financial support from Time Warner. We may be subject to downgrades if our operating performance deteriorates or we fail to maintain adequate levels of liquidity. In addition, our ratings may be downgraded if the agencies form a view that material support from Time Warner is not as strong, or the strategic importance of CME to Time Warner is not as significant as it has been in the past. In the event our corporate credit ratings are lowered by the rating agencies, we may not be able to refinance our existing indebtedness or raise new indebtedness that may be permitted under the Reimbursement Agreement and the 2021 Revolving Credit Facility (when drawn), and we will have to pay higher interest rates, all of which would have an adverse effect on our financial position, results of operations and cash flows.
If our goodwill, other intangible assets and long-lived assets become impaired, we may be required to record significant charges to earnings.
We review our long-lived assets for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. Goodwill and indefinite-lived intangible assets are required to be assessed for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying amount of our goodwill, indefinite-lived intangible assets or long-lived assets may not be recoverable include slower growth rates in our markets, reduced expected future cash flows, increased country risk premium as a result of political uncertainty and a decline in stock price and market capitalization. We consider available current information when calculating our impairment charge. If there are indicators of impairment, our long-term cash flow forecasts for our operations deteriorate or discount rates increase, we may be required to recognize additional impairment charges in later periods. See Part II, Item 8, Note 4, "Goodwill and Intangible Assets" for the carrying amounts of goodwill in each of our reporting units.
Risks Relating to Our Operations
Content may become more expensive to produce or acquire or we may not be able to develop or acquire content that is attractive to our audiences.
Television programming is one of the most significant components of our operating costs. The ability of our programming to generate advertising revenues depends substantially on our ability to develop, produce or acquire programming that matches audience tastes and attracts high audience shares, which is difficult to predict. The commercial success of a program depends on several tangible and intangible factors, including the impact of competing programs, the availability of alternate forms of entertainment and leisure time activities, our ability to anticipate and adapt to changes in consumer tastes and behavior, and general economic conditions. While we have been successful in reducing content costs in prior periods, the cost of acquiring content attractive to our viewers, such as feature films and popular television series and formats, is likely to increase in the future. Our expenditures in respect of locally produced programming may also increase due to competition for talent and other resources, changes in audience tastes in our markets or from the implementation of any new laws and regulations mandating the broadcast of a greater number of locally produced programs. In addition, we typically acquire syndicated programming rights under multi-year commitments before knowing how such programming will perform in our markets. In the event any such programming does not attract adequate audience share, it may be necessary to increase our expenditures by investing in additional programming, subject to the availability of adequate financial resources, as well as to write down the value of any underperforming programming. Any material increase in content costs could have a material adverse effect on our financial condition, results of operations or cash flows.
Our operations are vulnerable to significant changes in viewing habits and technology that could adversely affect us.
The television broadcasting industry is affected by rapid innovations in technology. The implementation of these new technologies and the introduction of non-traditional content distribution systems have increased competition for audiences and advertisers. Platforms such as direct-to-home cable and satellite distribution systems, the internet, subscription and advertising video-on-demand, user-generated content sites and the availability of content on portable digital devices have changed consumer behavior by increasing the number of entertainment choices available to audiences and the methods for the distribution, storage and consumption of content. This development has fragmented television audiences in more developed markets and could adversely affect our ability to retain audience share and attract advertisers as such technologies penetrate our markets. As we adapt to changing viewing patterns, it may be necessary to expend substantial financial and managerial resources to ensure necessary access to new technologies or distribution systems. Such initiatives may not develop into profitable business models. Furthermore, technologies that enable viewers to choose when, how, where and what content to watch, as well as to fast-forward or skip advertisements, may cause changes in consumer behavior that could have a negative impact on our advertising revenues. In addition, compression techniques and other technological developments allow for an increase in the number of channels that may be broadcast in our markets and expanded programming offerings that may be offered to highly targeted audiences. Reductions in the cost of launching new channels could lower entry barriers and encourage the development of increasingly targeted niche programming on various distribution platforms. This could increase the competitive demand for popular programming, resulting in an increase in content costs as we compete for audiences and advertising revenues. A failure to successfully adapt to changes in our industry as a result of technological advances may have an adverse effect on our financial position, results of operations and cash flows.
Our operating results are dependent on the importance of television as an advertising medium.
We generate most of our revenues from the sale of our advertising airtime on television channels in our markets. Television competes with various other media, such as print, radio, the internet and outdoor advertising, for advertising spending. In all of the countries in which we operate, television constitutes the single largest component of all advertising spending. There can be no assurances that the television advertising market will maintain its current position among advertising media in our markets. Furthermore, there can be no assurances that changes in the regulatory environment or improvements in technology will not favor other advertising media or other television broadcasters. Increases in competition among advertising media arising from the development of new forms of advertising media and distribution could result in a decline in the appeal of television as an advertising medium generally or of our channels specifically. A decline in television advertising spending as a component of total advertising spending in any period or in specific markets would have an adverse effect on our financial position, results of operations and cash flows.

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We are subject to legal compliance risks and the risk of legal or regulatory proceedings being initiated against us.
We are required to comply with a wide variety of laws and other regulatory obligations in the jurisdictions in which we operate and compliance by our businesses is subject to scrutiny by regulators and other government authorities in these jurisdictions. Compliance with foreign as well as applicable U.S. laws and regulations related to our businesses, such as broadcasting content and advertising regulations, competition regulations, tax laws, employment laws, data protection requirements including the new EU General Data Protection Regulation, and anti-corruption laws, increases the costs and risks of doing business in these jurisdictions. We believe we have implemented appropriate risk management and compliance policies and procedures that are designed to ensure our employees, contractors and agents comply with these laws and regulations; however, a violation of such laws and regulations or the Company’s policies and procedures could occur. A failure or alleged failure to comply with applicable laws and regulations, whether inadvertent or otherwise, may result in legal or regulatory proceedings being initiated against us.
We have become aware of provisions in the tax regulations of one of our markets that shift the liability for taxes on gains resulting from certain capital transactions from the seller to the buyer. This provision may have been applicable to an acquisition made by us, although we do not believe we have any liability connected to this transaction. In addition, in 2016, the prosecuting authorities in Romania requested information in respect of an investigation into certain transactions entered into by Pro TV in 2014 primarily with certain related parties. We believe that the transactions under review are fully supported and have cooperated with the authorities in responding to the information request. If these or other contingencies result in legal or regulatory proceedings being initiated against us, or if developments occur in respect of our compliance with existing laws or regulations, or there are changes in the interpretation or application of such laws or regulations, we may incur substantial costs, be required to change our business practices (including on what terms and conditions we offer our channels under carriage agreements), our reputation may be damaged or we may be exposed to unanticipated civil or criminal liability, including fines and other penalties that may be substantial. This could have a material adverse effect on our business, financial position, results of operations and cash flows.
Our operations are in developing markets where there are additional risks related to political and economic uncertainty, biased treatment and compliance with evolving legal and regulatory systems.
Our revenue-generating operations are located in Central and Eastern Europe and we may be significantly affected by risks that may be different to those posed by investments in more developed markets. These risks include, but are not limited to, social and political instability, changes in local regulatory requirements including restrictions on foreign ownership, inconsistent regulatory or judicial practice, and increased taxes and other costs. The economic and political systems, legal and tax regimes, regulatory practices, standards of corporate governance and business practices of countries in this region continue to develop. Policies and practices may be subject to significant adjustments, including following changes in political leadership. This may result in social or political instability or disruptions and the potential for political influence on the media as well as inconsistent application of tax and legal regulations, arbitrary treatment before regulatory or judicial authorities and other general business risks. Other potential risks inherent in markets with evolving economic and political environments include exchange controls, higher taxes, tariffs and other levies as well as longer payment cycles. The relative level of development of our markets and the influence of local politics also present a potential for biased treatment of us before regulators or courts in the event of disputes. If such a dispute occurs, those regulators or courts might favor local interests over our interests. Ultimately, this could have a material adverse impact on our business, financial position, results of operations and cash flows.
Piracy of our content may decrease revenues we can earn from our content and adversely impact our business and profitability.
Piracy of our content poses significant challenges in our markets. Technological developments, including digital copying, file compressing, the use of international proxies and the growing penetration of high bandwidth internet connections, have made it easier to create, transmit and distribute high quality unauthorized copies of content in unprotected digital formats. Furthermore, there are a growing number of video streaming sites, increasing the risk of online transmission of our content without consent. The proliferation of such sites broadcasting content pirated from us could result in a reduction of revenues that we receive from the legitimate distribution of our content, including through video-on-demand and other services. Protection of our intellectual property is in large part dependent on the manner in which applicable intellectual property laws in the countries in which we operate are construed and enforced. We seek to limit the threat of content piracy. However, detecting and policing the unauthorized use of our intellectual property is often difficult and remedies may be limited under applicable law. Steps we take may not prevent the infringement by third parties. There can be no assurance that our efforts to enforce our rights and protect our intellectual property will be successful in preventing piracy, which limits our ability to generate revenues from our content.
We rely on network and information systems and other technology that may be subject to disruption, security breaches or misuse, which could harm our business or our reputation.
We make extensive use of network and information systems and other technologies, including those related to our internal network management as well as our broadcasting operations. These systems are central to many of our business activities. Network and information systems-related events, such as computer hackings, computer viruses, worms or other destructive or disruptive software, process breakdowns, malicious activities or other security breaches could result in a disruption or degradation of our services, the loss of information or the improper disclosure of personal data. The occurrence of any of these events could negatively impact our business if we are required to expend resources to remedy such a security breach or if they result in legal claims or proceedings or our reputation is harmed. In addition, improper disclosure of personal data could subject us to liability under laws, including the new EU General Data Protection Regulation, that protect personal data in the countries in which we operate. The development and maintenance of systems to prevent these events from occurring requires ongoing monitoring and updating as efforts to overcome security measures become more sophisticated. As technologies evolve, we will need to expend additional resources to protect our technology and information systems, which could have an adverse impact on our results of operations and cash flows.
Our broadcasting licenses may not be renewed and may be subject to revocation.
We require broadcasting and, in some cases, other operating licenses as well as other authorizations from national regulatory authorities in our markets in order to conduct our broadcasting business. While our broadcasting licenses for our operations in the Slovak Republic are valid for indefinite time periods, our other broadcasting licenses expire at various times through 2028. While we expect that our material licenses and authorizations will be renewed or extended as required to continue to operate our business, we cannot guarantee that this will occur or that they will not be subject to revocation, particularly in markets where there is relatively greater political risk as a result of less developed political and legal institutions. The failure to comply in all material respects with the terms of broadcasting licenses or other authorizations or with applications filed in respect thereto may result in such licenses or other authorizations not being renewed or otherwise being terminated. Furthermore, no assurances can be given that renewals or extensions of existing licenses will be issued on the same terms as existing licenses or that further restrictions or conditions will not be imposed in the future. Any non-renewal or termination of any other broadcasting or operating licenses or other authorizations or material modification of the terms of any renewed licenses may have a material adverse effect on our financial position, results of operations and cash flows.

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Our success depends on attracting and retaining key personnel.
Our success depends partly upon the efforts and abilities of our key personnel and our ability to attract and retain key personnel. Our management teams have significant experience in the media industry and have made important contributions to our growth and success. Although we have been successful in attracting and retaining such people in the past, competition for highly skilled individuals is intense. There can be no assurance that we will continue to be successful in attracting and retaining such individuals in the future. The loss of the services of any of these individuals could have an adverse effect on our businesses, results of operations and cash flows.
Risks Relating to Enforcement Rights
We are a Bermuda company and enforcement of civil liabilities and judgments may be difficult.
We are a Bermuda company. Substantially all of our assets and all of our operations are located, and all of our revenues are derived, outside the United States. In addition, several of our directors and officers are non-residents of the United States, and all or a substantial portion of the assets of such persons are or may be located outside the United States. As a result, investors may be unable to effect service of process within the United States upon such persons, or to enforce against them judgments obtained in the United States courts, including judgments predicated upon the civil liability provisions of the United States federal and state securities laws. There is uncertainty as to whether the courts of Bermuda and the countries in which we operate would enforce (a) judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the United States federal and state securities laws or (b) in original actions brought in such countries, liabilities against us or such persons predicated upon the United States federal and state securities laws.
Our Bye-laws restrict shareholders from bringing legal action against our officers and directors.
Our Bye-laws contain a broad waiver by our shareholders of any claim or right of action in Bermuda, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken or concurred in by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty.
Risks Relating to our Common Stock
Our share price may be adversely affected by sales of unregistered shares or future issuances of our shares.
Time Warner is the largest holder of shares of our Class A common stock, holding 61,407,775 unregistered shares of Class A common stock, one share of Series A preferred stock, 200,000 shares of Series B preferred stock and warrants to acquire 100,926,996 shares of our Class A common stock (the "TW Warrants"). The share of Series A preferred stock is convertible into 11,211,449 shares of Class A common stock and the shares of Series B preferred stock are convertible into shares of Class A common stock at the option of Time Warner (subject to certain exceptions). As of December 31, 2017, the 200,000 shares of Series B preferred stock were convertible into approximately 109.2 million shares of Class A common stock. The TW Warrants are exercisable for shares of Class A common stock until May 2, 2018 at an exercise price of US$ 1.00 per share. Time Warner has registration rights with respect to all its shares of Class A common stock now held or hereafter acquired. Furthermore, there are additional unregistered shares of our Class A common stock outstanding that we may be obligated to register and shares of Class A common stock underlying other warrants that may enter into trading. For additional information on the Series A preferred stock, Series B preferred stock and TW Warrants, see Part II, Item 8, Note 12, "Convertible Redeemable Preferred Shares" and Note 13, "Equity". In October 2016, Time Warner announced it has entered into a definitive merger agreement with AT&T Inc. under which AT&T Inc. will acquire Time Warner.  The merger is subject to approval by a number of regulatory authorities, including the U.S. Department of Justice. If completion of the merger is successful, AT&T Inc. will become the beneficial owner of equity securities currently beneficially owned by Time Warner and the successor to rights related to such securities granted to Time Warner.
We cannot predict what effect, if any, the entry into trading of previously issued unregistered shares of Class A common stock will have on the market price of our shares. We may also issue additional shares of Class A common stock or securities convertible into our equity in the future. If more shares of our Class A common stock (or securities convertible into or exchangeable for shares of our Class A common stock) are issued to Time Warner, the economic interests of current shareholders may be diluted and the price of our shares may be adversely affected.
The interests of Time Warner may conflict with the interests of other investors.
Time Warner is able to exercise voting power in us with respect to 46.3% of our outstanding shares of Class A common stock. As such, Time Warner is in a position to exercise significant influence over the outcome of corporate actions requiring shareholder approval, such as the election of directors or certain transactions. Following the issuance of the TW Warrants, the aggregate economic interest of Time Warner in us is approximately 76.1% (without giving effect to the accretion of the Series B preferred stock after December 31, 2017). Furthermore, Time Warner has the right to appoint one less than the number required to constitute a majority of our board of directors, provided that Time Warner continues to own not less than 40% of the voting power of the Company.
We are also party to an amended investor rights agreement with Time Warner and the other parties thereto under which, among other things, Time Warner was granted a contractual preemptive right (subject to certain exclusions) with respect to issuances of the Company’s equity securities, which permits it to maintain its pro rata economic interest as well as a right to top any offer that would result in a change of control of the Company. Under Bermuda law, there is no takeover code or similar legislation requiring an acquirer of a certain percentage of our Class A common stock to tender for the remaining publically held shares. In addition to being our largest shareholder, Time Warner is our largest secured creditor, as it guarantees 100% of our outstanding senior indebtedness and is the lender under the 2021 Revolving Credit Facility. The 2021 Revolving Credit Facility (when drawn) and the Reimbursement Agreement contain maintenance covenants in respect of interest cover, cash flow cover and total leverage ratios and includes covenants in respect of the incurrence of indebtedness (including refinancing indebtedness), the provision of guarantees, acquisitions and disposal and granting security. As such, Time Warner may be in a position to determine whether to permit transactions, waive defaults or accelerate such indebtedness or take other steps in its capacity as a secured creditor in a manner that might not be consistent with the interests of the holders of our Class A common stock. Furthermore, in certain circumstances, the interests of Time Warner as our largest shareholder could be in conflict with the interests of minority shareholders.

11


The price of our Class A common stock is likely to remain volatile.
The market price of shares of our Class A common stock may be influenced by many factors, some of which are beyond our control, including but not limited to those described above under “Risks Relating to Our Operations” as well as the following: general economic and business trends, variations in quarterly operating results, license renewals, regulatory developments in our operating countries and the European Union, the condition of the media industry in our operating countries, the volume of trading in shares of our Class A common stock, future issuances of shares of our Class A common stock and investors’ and securities analysts’ perception of us and other companies that investors or securities analysts deem comparable in the television broadcasting industry. In addition, stock markets in general have experienced extreme price and volume fluctuations that have often been unrelated to and disproportionate to the operating performance of broadcasting companies. These broad market and industry factors may materially reduce the market price of shares of our Class A common stock, regardless of our operating performance.
Our business could be negatively impacted as a result of shareholder activism.
On January 17, 2017, TCS Capital Management, LLC ("TCS Capital"), a beneficial owner of approximately 7.0% of our Class A common stock, filed an amendment to its Schedule 13D in which it disclosed its opinion that the Company should hire an investment bank to run a process to sell the Company as well as replace the Company's Board of Directors with new directors recommended by TCS Capital. In recent years, shareholder activists have become involved in numerous public companies. Shareholder activists frequently propose to involve themselves in the governance, strategic direction and operations of the Company. Such proposals may disrupt our business and divert the attention of our management and employees, and any perceived uncertainties as to our future direction resulting from such a situation could result in the loss of potential business opportunities, be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel and business partners, all of which could adversely affect our business. In addition, actions of activist shareholders may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.
ITEM 2.    PROPERTIES
We own and lease properties in the countries in which we operate. These facilities are fully utilized for current ongoing operations, are in good condition and are adequately equipped for purposes of conducting broadcasting, content production or such other operations as we require. We believe that suitable additional space is available on acceptable terms in the event of an expansion of our businesses. The table below provides a brief description of our significant properties.
Location
 
Property
 
Use
Hamilton, Bermuda
 
Leased office
 
Registered office, Corporate
Amsterdam, The Netherlands
 
Leased office
 
Corporate office, Corporate
Sofia, Bulgaria
 
Leased buildings
 
Office and studio space (Bulgaria segment)
Prague, Czech Republic
 
Owned and leased buildings
 
Administrative center, Corporate;
Office and studio space (Czech Republic segment)
Bucharest, Romania
 
Owned and leased buildings
 
Office and studio space (Romania segment)
Bratislava, Slovak Republic
 
Owned buildings
 
Office and studio space (Slovak Republic segment)
For further information on the cash resources that fund these facility-related costs, see Part II, Item 7, III, "Liquidity and Capital Resources".
ITEM 3.    LEGAL PROCEEDINGS
General
We are from time to time party to legal proceedings, arbitrations and regulatory proceedings arising in the normal course of our business operations, including the proceeding described below. We evaluate, on a quarterly basis, developments in such matters and provide accruals for such matters, as appropriate. In making such decisions, we consider the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of a loss. An unfavorable outcome in any such proceedings, if material, could have an adverse effect on our business or consolidated financial statements.
In the fourth quarter of 2016, our Slovak subsidiary MARKIZA-SLOVAKIA, spol. s.r.o. (“Markiza”) was notified of claims that were filed in June 2016 in a court of first instance in Bratislava, the Slovak Republic to collect amounts allegedly owing under four promissory notes. These four promissory notes were purportedly issued in June 2000 by Pavol Rusko in his personal capacity and were purportedly guaranteed by Markiza under the signature of Mr. Rusko, who was an executive director of Markiza at that time as well as one of its shareholders. The notes purport to be issued in favor of Marian Kocner, a controversial Slovak businessman, and to a former associate of Mr. Kocner, and were supposedly assigned several times, ultimately to Sprava a inkaso zmeniek, s.r.o., a company owned by Mr. Kocner that is the plaintiff in these proceedings. Two of the notes allegedly matured in 2015 and the other two in 2016. The four notes purport to be in the aggregate amount of approximately EUR 69.0 million.
Despite a random case assignment system in the Slovak Republic, claims in respect of three of the notes were initially assigned to the same judge. The judge who was assigned the claim in respect of the fourth promissory note (in the amount of approximately EUR 26.0 million) terminated proceedings in January 2017 because the plaintiff failed to pay court fees. The plaintiff refiled this claim in June 2017; the judge who was assigned the refiled claim terminated proceedings in September after the plaintiff again failed to pay court fees. In responses to the claims in respect of the other three promissory notes that were filed in August 2017, Mr. Rusko asserted that he signed the three notes in June 2000. We do not believe that the notes were signed in June 2000 or that any of the notes are authentic. We are vigorously defending the claims.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.

12


PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Shares of Class A common stock of Central European Media Enterprises Ltd. began trading on the NASDAQ National Market (since renamed the NASDAQ Global Select Market) on October 13, 1994 and began trading on the Prague Stock Exchange on June 27, 2005. On each market, the shares are traded under the ticker symbol "CETV".
On February 5, 2018, the last reported sales price for shares of our Class A common stock was US$ 4.60.
The following table sets forth the high and low prices for shares of our Class A common stock for each quarterly period during the last two fiscal years as reported by NASDAQ.
 
2017
 
2016
 
High
(US$ / Share)
 
Low
(US$ / Share)
 
High
(US$ / Share)
 
Low
(US$ / Share)
Fourth Quarter
$
5.20

 
$
4.00

 
$
2.88

 
$
2.15

Third Quarter
4.55

 
3.90

 
2.48

 
2.05

Second Quarter
4.45

 
2.90

 
2.96

 
2.03

First Quarter
3.15

 
2.40

 
2.71

 
2.17

At February 5, 2018, there were approximately 52 holders of record (including brokerage firms and other nominees) of shares of Class A common stock.
Under our 2015 Stock Incentive Plan (the "2015 Plan"), 6,000,000 shares of Class A are authorized for issuance in respect of equity awards. In addition, any shares available under our Amended and Restated Stock Incentive Plan (which expired on June 1, 2015), including in respect of any awards that expire, terminate or are forfeited, will be available for awards under the 2015 Plan (see Item 8, Note 17, "Stock-based Compensation"). See Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" for further information.
DIVIDEND POLICY
We have not declared or paid and have no present intention to declare or pay in the foreseeable future any cash dividends in respect to any class of our shares of common stock.
PURCHASE OF OWN STOCK
We did not purchase any of our own stock in 2017.

13


PERFORMANCE GRAPH
The following performance graph is a line graph comparing the change in the cumulative total shareholder return of the Class A common stock against the cumulative total return of the NASDAQ Composite Index and the Dow Jones Europe Stock Index between December 31, 2012 and December 31, 2017. The graph below assumes the investment of US$ 100 on December 31, 2012 in our Class A common stock, the NASDAQ Composite and the Dow Jones Europe Stock Index, assuming dividends, if any, are reinvested.
chart-834edaef2e41590ead4.jpg
Value of US$ 100 invested at December 31, 2012 as of December 31, 2017:
Central European Media Enterprises Ltd.
$
75.24

NASDAQ Composite Index
$
228.63

Dow Jones Europe Stock Index
$
129.34


14


ITEM 6.    SELECTED FINANCIAL DATA
Our selected consolidated financial data should be read together with our consolidated financial statements and related notes included in Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
The following tables set forth the selected consolidated financial data for each of the years in the five-year period ended December 31, 2017. The selected consolidated financial data is qualified in its entirety and should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data”. We have derived the consolidated statements of operations and comprehensive income / loss data for the years ended December 31, 2017, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017 and 2016 from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations and comprehensive income / loss data for the years ended December 31, 2014 and 2013 and the balance sheet data as of December 31, 2015, 2014 and 2013 were derived from consolidated financial statements that are not included in this Annual Report on Form 10-K. The selected financial data for all periods presented has been recast due to the impact of our Croatia and Slovenia segments which are presented as discontinued operations (see Item 8, Note 3, "Discontinued Operations and Assets Held for Sale").
 
For The Year Ended December 31,
 
(US$ 000's, except per share data)
 
2017

 
2016

 
2015

 
2014

 
2013

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME / LOSS DATA:
 
 
 
 
 
 
 
 
 
Net revenues
$
574,212

 
$
526,174

 
$
496,195

 
$
557,273

 
$
504,401

Operating income / (loss)
129,949

 
105,532

 
88,047

 
32,599

 
(179,045
)
Income / (loss) from continuing operations
54,053

 
(164,425
)
 
(86,176
)
 
(154,912
)
 
(277,421
)
Loss from discontinued operations, net of tax
(4,626
)
 
(16,172
)
 
(29,396
)
 
(76,990
)
 
(4,127
)
Net income / (loss) attributable to CME Ltd.
$
49,768

 
$
(180,291
)
 
$
(114,901
)
 
$
(227,428
)
 
$
(277,651
)
 
 
 
 
 
 
 
 
 
 
PER SHARE DATA:
 
 
 
 
 
 
 
 
 
Net income / (loss) per common share from:
 
 
 
 
 
 
 
 
 
Continuing operations — basic
$
0.17

 
$
(1.18
)
 
$
(0.70
)
 
$
(1.14
)
 
$
(2.24
)
Continuing operations — diluted
0.15

 
(1.18
)
 
(0.70
)
 
(1.14
)
 
(2.24
)
Discontinued operations — basic
(0.03
)
 
(0.10
)
 
(0.20
)
 
(0.52
)
 
(0.03
)
Discontinued operations — diluted
(0.03
)
 
(0.10
)
 
(0.20
)
 
(0.52
)
 
(0.03
)
Net income / (loss) attributable to CME Ltd. — basic
0.14

 
(1.28
)
 
(0.90
)
 
(1.66
)
 
(2.27
)
Net income / (loss) attributable to CME Ltd. — diluted
0.12

 
(1.28
)
 
(0.90
)
 
(1.66
)
 
(2.27
)
 
 
 
 
 
 
 
 
 
 
Weighted average common shares used in computing per share amounts (000’s):
 
 
 
 
 
 
 
 
 
Basic
155,846

 
151,017

 
146,866

 
146,509

 
125,723

Diluted
236,404

 
151,017

 
146,866

 
146,509

 
125,723

 
 
 
 
 
 
 
 
 
 
 
As at December 31,
 
(US$ 000's)
 
2017

 
2016

 
2015

 
2014

 
2013

CONSOLIDATED BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
54,903

 
$
40,606

 
$
59,120

 
$
28,844

 
$
90,921

Other current assets (1)
409,871

 
299,814

 
299,164

 
345,784

 
432,609

Non-current assets
1,163,281

 
1,050,297

 
1,082,133

 
1,230,200

 
1,425,321

Total assets
$
1,628,055

 
$
1,390,717

 
$
1,440,417

 
$
1,604,828

 
$
1,948,851

 
 
 
 
 
 
 
 
 
 
Current liabilities (1)
$
188,264

 
$
171,564

 
$
146,308

 
$
450,286

 
$
318,931

Non-current liabilities
1,180,968

 
1,070,786

 
974,270

 
653,434

 
981,029

Temporary equity
264,593

 
254,899

 
241,198

 
223,926

 
207,890

CME Ltd. shareholders' (deficit) / equity
(5,788
)
 
(107,804
)
 
77,260

 
279,794

 
440,108

Noncontrolling interests
18

 
1,272

 
1,381

 
(2,612
)
 
893

Total liabilities and equity
$
1,628,055

 
$
1,390,717

 
$
1,440,417

 
$
1,604,828

 
$
1,948,851

(1) 
Other current assets and current liabilities as at December 31, 2017 include total assets held for sale and total liabilities held for sale, respectively.

15


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Please refer to page 2 of this Annual Report on Form 10-K for a list of defined terms used herein.
The exchange rates used in this report are as at December 31, 2017, unless otherwise indicated.
I.    Overview
CME Strategy
Our operations comprise a unique collection of television networks across Central and Eastern Europe, each of which enjoys a strong competitive position due to audience share leadership, brand strength, strong local content, and the depth and experience of country management. The reach and affinity we provide advertisers supports our model of pricing inventory at a premium to our competition, and we pursue sales strategies designed to maximize our revenues in order to provide additional financial resources to invest in local content. We believe these competitive advantages position us to benefit if forecast economic growth leads to continued growth of the television advertising markets in the countries in which we operate.
We are focused on enhancing the performance of our television networks in each country, which we expect will continue improving operating margins and cash generation over the short- and medium-term. The main elements of our strategy are as follows:
leveraging content popular with our target demographics to maintain or increase our television audience share leadership and advertising market shares;
driving growth in television advertising revenues through our pricing strategies;
increasing carriage fees and subscription revenues to provide more diversified and predictable income;
expanding our online content offerings to further diversify revenues; and
maintaining a strict cost discipline and identifying cost synergies while safeguarding our brands and competitive strengths.
As market leaders with experienced management teams in each country, we believe we are well positioned to identify new challenges in a timely manner and adjust our strategy as new opportunities or threats arise.
We manage our business on a geographical basis with four operating segments: Bulgaria, the Czech Republic, Romania, and the Slovak Republic. These operating segments, which are also our reportable segments, reflect how our operating performance is evaluated by our chief operating decision makers, who we have identified as our co-Chief Executive Officers; how our operations are managed by segment managers; and the structure of our internal financial reporting.
On July 9, 2017, we entered into a framework agreement with Slovenia Broadband S.à r.l., a wholly owned subsidiary of United Group B.V., relating to the sale of our Croatia and Slovenia operations. Accordingly, these operations are classified as held for sale and they are presented as discontinued operations for all periods in this report; and the discussion below relates to our continuing operations in the four remaining operating segments.
Non-GAAP Financial Measures
In this report we refer to several non-GAAP financial measures, including OIBDA, OIBDA margin, free cash flow and unlevered free cash flow. We believe that each of these metrics is useful to investors for the reasons outlined below. Non-GAAP financial measures may not be comparable to similar measures reported by other companies. Non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, US GAAP financial measures.
We evaluate our consolidated results and the performance of our segments based on net revenues and OIBDA. We believe OIBDA is useful to investors because it provides a meaningful representation of our performance, as it excludes certain items that do not impact either our cash flows or the operating results of our operations. OIBDA and unlevered free cash flow are also used as components in determining management bonuses.
OIBDA includes amortization and impairment of program rights and is calculated as operating income / loss before depreciation, amortization of intangible assets and impairments of assets and certain unusual or infrequent items that are not considered by our co-Chief Executive Officers when evaluating our performance. Stock-based compensation and certain other items are not allocated to our segments for purposes of evaluating their performance and therefore are not included in their respective OIBDA. Our key performance measure of the efficiency of our consolidated operations and our segments is OIBDA margin. We define OIBDA margin as the ratio of OIBDA to net revenues.
Following a repricing of our Guarantee Fees in March 2017, the proportion of interest and related Guarantee Fees on our outstanding indebtedness that must be paid in cash has increased. In addition to this obligation to pay more Guarantee Fees in cash, we expect to use cash generated by the business to pay certain Guarantee Fees that are payable in kind. These cash payments are all reflected in free cash flow; accordingly, we believe unlevered free cash flow, defined as free cash flow before cash payments for interest and Guarantee Fees, best illustrates the cash generated by our operations when comparing periods. We define free cash flow as net cash generated from continuing operating activities less purchases of property, plant and equipment, net of disposals of property, plant and equipment and excluding the cash impact of certain unusual or infrequent items that are not included in costs charged in arriving at OIBDA because they are not considered by our co-Chief Executive Officers when evaluating performance.
For additional information regarding our business segments, including a reconciliation of OIBDA to US GAAP financial measures, see Item 8, Note 20, "Segment Data". For a reconciliation of free cash flow and unlevered free cash flow to a US GAAP financial measure, see "Free Cash Flow and Unlevered Free Cash Flow" below.
While our reporting currency is the dollar, our consolidated revenues and costs are divided across a range of European currencies and CME Ltd.’s functional currency is the Euro. Given the significant movement of the currencies in the markets in which we operate against the dollar, we believe that it is useful to provide percentage movements based on actual (“% Act”) percentage movements, which includes the effect of foreign exchange, as well as like-for-like percentage movements (“% Lfl”). The like-for-like percentage movement references reflect the impact of applying the current period average exchange rates to the prior period revenues and costs. Since the difference between like-for-like and actual percentage movements is solely the impact of movements in foreign exchange rates, our discussion in the following analysis is focused on constant currency percentage movements in order to highlight those factors influencing operational performance. The incremental impact of foreign exchange rates is presented in the tables preceding such analysis.

16


Executive Summary
The following tables provide a summary of our consolidated results for the years ended December 31, 2017, 2016 and 2015:
 
For The Year Ended December 31, (US$ 000's)
 
 
 
 
 
Movement
 
 
 
 
 
Movement
 
2017

 
2016

 
% Act

 
% Lfl

 
2016

 
2015

 
% Act

 
% Lfl

Net revenues
$
574,212

 
$
526,174

 
9.1
%
 
5.5
%
 
$
526,174

 
$
496,195

 
6.0
%
 
6.3
%
Operating income
129,949

 
105,532

 
23.1
%
 
18.8
%
 
105,532

 
88,047

 
19.9
%
 
19.4
%
Operating margin
22.6
%
 
20.1
%
 
2.5 p.p.
 
2.5 p.p.
 
20.1
%
 
17.7
%
 
2.4 p.p.
 
2.2 p.p.
OIBDA
$
165,532

 
$
136,908

 
20.9
%
 
16.5
%
 
$
136,908

 
$
109,442

 
25.1
%
 
24.4
%
OIBDA margin
28.8
%
 
26.0
%
 
2.8 p.p.
 
2.7 p.p.
 
26.0
%
 
22.1
%
 
3.9 p.p.
 
3.8 p.p.
Our consolidated net revenues increased 9% at actual exchange rates and 6% at constant rates in 2017 compared to 2016 due to an increase in both television advertising revenues and carriage fee and subscription revenues. Television advertising spending in the countries in which we operate grew an estimated 6% at constant rates in 2017 compared to 2016. Our consolidated television advertising revenues grew 8% at actual rates and 5% at constant rates due primarily to significant year-on-year growth in Romania, as well as higher levels of advertising spending in Bulgaria and the Czech Republic. Carriage fees and subscription revenues increased 17% at actual rates and 15% at constant rates primarily due to additional carriage fees from contracts with cable, satellite and internet protocol television ("IPTV") operators in the Slovak Republic since January 2017, when those operations ceased broadcasting on DTT.
Costs charged in arriving at OIBDA increased 5% at actual rates and 2% at constant rates in 2017 compared to 2016. We controlled costs overall, while spending more on popular local content, by offsetting this with savings in foreign acquired content and sports rights as well as reducing other operating costs. We made targeted investments in our programming line-up to satisfy additional demand for GRPs in Romania, to improve our competitive positioning in Bulgaria and the Czech Republic, and to support the change in the way our channels are distributed in the Slovak Republic. Other operating costs decreased due to savings from transmission costs, which offset higher marketing and staff costs.
Our focus on controlling costs while improving revenues led to another year of OIBDA margin expansion, which increased to 29% in 2017 from 26% in 2016. We expect the trend of revenues growing at a faster pace than costs will continue in 2018 and for the next several years, leading to further margin expansion year on year although trends may vary from quarter to quarter.
We remained audience share leaders during 2017 in all of the countries in which we operate and improved our competitive position in both prime time and all day audience share in three out of four countries. These audience shares give us a strong offering for advertisers, and we believe television continues to provide the most efficient medium to reach consumers in our markets. During 2017 we rebranded our niche channels in the Czech Republic and Romania to bring them under the umbrella of our flagship brands in each respective country.
Looking ahead to 2018 and beyond:
Following significant GDP growth in Romania during 2017, which saw the highest GDP growth rate in the European Union for a second year, expansion is expected to moderate in 2018. However, analysts estimate that GDP growth in the countries in which we operate will continue to outpace that of the developed markets (as defined below). We anticipate the television advertising market in each of our operating countries will grow in 2018.
Television continues to be the strongest medium for advertising in our operating countries, and demand for television advertising remains robust. This is particularly true in Romania and the Slovak Republic, as both our operations and the respective markets were largely sold-out in 2017. As a result, we have introduced higher list prices in our sales policies for all of our operating countries for 2018. Average realized prices for the year will ultimately depend on a number of factors, including the timing of commitments made for spending in 2018, the portion of those commitments that is prepaid, the volume of those commitments relative to the previous year, and the seasonality of advertisements actually placed.
We expect to continue growing non-advertising based carriage fees and subscription revenues. Following the successful transition from DTT broadcasting of our channels in the Slovak Republic, we expect growth in these consolidated revenues will be driven by contract renewals and increases in the number of subscribers to cable, satellite and IPTV platforms, which would benefit profitability in all countries.
The production of local content remains a key pillar of our strategy as it generally attracts larger audiences. We continually refine our program grids and intend to maintain targeted investments in local content in a cost effective manner. This is particularly true in the Slovak Republic, where we will maintain a strong line-up of local content as we seek to regain audience share and television advertising market share lost in 2017 during the change in the way our channels were distributed.
Local content also continues to be important for attracting audiences that consume content through alternatives to linear television. Increased investments in content will also be utilized to expand our offerings on subscription video on demand ("SVOD") platforms as well as advertising based video on demand ("AVOD") platforms to further diversify our revenues.
We believe increased investments in local content will be mostly offset by cost savings on foreign content, as well as savings in other operating costs, including cost synergies from optimizing certain elements of our operations.
Our cash paid for income taxes will continue to increase as the operating companies in each jurisdiction return to generating profits and previous net operating losses are fully utilized.
The dollar is currently weaker than it was, on average, in 2017, and if this persists for the duration of 2018 our local currency results compared to the prior year will be even higher when translated into dollars, further improving our overall results at actual exchange rates.
In 2018 we anticipate using increased cash generated by the business, expected proceeds from the sale of our operations in Croatia and Slovenia, any proceeds from warrant exercises, and savings from lower debt service obligations to repay a significant balance of principal on our outstanding long-term debt. If we are able to reach a net leverage ratio near 3x as a result of these transactions, we expect to review our capital allocation strategy to ensure we are appropriately balancing the benefits of further deleveraging with other uses for excess cash.

17


Lower Debt Service Obligations
In March 2017, the Guarantee Fees payable to Time Warner as credit guarantor of our currently outstanding Euro Term Loans have been reduced. As a result of the transaction:
Our weighted average borrowing cost immediately decreased 150 basis points to 7.25%, and decreased another 125 basis points to 6.00% in October 2017 when the net leverage ratio decreased below 6x.
The all-in rate now applicable to all currently outstanding senior term credit facilities automatically improves to 5.0% when our net leverage ratio is less than 5x.
Our cost of borrowing will decrease 50 basis points if the total of outstanding senior term credit facilities is reduced below €815 million, subject to certain adjustments for specified debt repayments, by September 30, 2018.
There is a minimum level of cash-pay interest and related Guarantee Fees totaling 5% applicable to all Euro Term Loans.
There were no changes to our existing debt prepayment rights and no changes to the 2021 Revolving Credit Facility.
On February 5, 2018 we entered into an amendment to the 2018 Euro Term Loan that extended the maturity date from November 1, 2018 to May 1, 2019.
Divestment Transaction to Accelerate Deleveraging
On July 9, 2017, we agreed to sell our operations in Croatia and Slovenia to Slovenia Broadband S.à r.l., a subsidiary of United Group B.V. (“United Group”), subject to obtaining regulatory approvals and other customary closing conditions. On November 14, 2017 the Croatian Agency for Electronic Media (“CAEM”) published a decision that the acquisition by the Purchaser is not permitted under the Croatian Act on Electronic Media due to certain cross ownership restrictions that CAEM believes to be applicable to the Divestment Transaction. Following a sale by the United Group of certain assets in Croatia to address this cross ownership restriction cited by CAEM, it has reapplied for approval from CAEM.
Total cash consideration for the transaction is EUR 230.0 million (approximately US$ 275.8 million), subject to customary working capital adjustments. Upon closing, the proceeds will be used to repay the remaining balance of the 2018 Euro Term Loan in full, and we expect to use the remaining proceeds to repay the Commitment Fee and a portion of the 2019 Euro Term Loan and related accrued Guarantee Fees. These repayments would significantly decrease our indebtedness and our net leverage ratio, and upon repayment of debt following the closing of this transaction, we expect our average borrowing cost on our senior debt would decrease to 4.5%. Had the transaction closed on December 31, 2017, CME’s net leverage ratio would have fallen from 5.4x to 4.6x as a result of the repayment of debt.
Free Cash Flow and Unlevered Free Cash Flow from Continuing Operations
 
For The Year Ended December 31, (US$ 000's)
 
2017

 
2016

 
Movement

 
2016

 
2015

 
Movement

Net cash generated from continuing operating activities
$
95,321

 
$
59,387

 
60.5
 %
 
$
59,387

 
$
79,580

 
(25.4
)%
Capital expenditures, net
(24,742
)
 
(22,201
)
 
(11.4
)%
 
(22,201
)
 
(23,563
)
 
5.8
 %
Free cash flow
70,579

 
37,186

 
89.8
 %
 
37,186

 
56,017

 
(33.6
)%
Cash paid for interest (including mandatory cash-pay Guarantee Fees)
40,619

 
50,611

 
(19.7
)%
 
50,611

 
14,976

 
NM (1)

Cash paid for Guarantee Fees that may be paid in kind
1,735

 
7,464

 
(76.8
)%
 
7,464

 

 
NM (1)

Unlevered free cash flow from continuing operations
$
112,933

 
$
95,261

 
18.6
 %
 
$
95,261

 
$
70,993

 
34.2
 %
(1) Number is not meaningful.
 
December 31, 2017

 
December 31, 2016

 
Movement

Cash and cash equivalents
$
54,903

 
$
40,606

 
35.2
%
Our unlevered free cash flow increased in 2017 reflecting higher cash collections from revenue growth, which was partially offset by higher cash spending on content as well as higher cash paid for income taxes and capital expenditures. Free cash flow increased significantly more than unlevered free cash flow due to a significant decrease in cash paid for interest and accrued Guarantee Fees.
Due to the significant increase in cash generated by the business, on August 1, 2017, we elected to repay EUR 50.0 million (approximately US$ 59.1 million at August 1, 2017 rates) of the outstanding principal balance of the 2018 Euro Term Loan, and on February 6, 2018 we repaid an additional EUR 50.0 million (approximately US$ 61.6 million at February 6, 2018 rates). We ended 2017 with cash of US$ 54.9 million and from the beginning of 2018 we have access to another US$ 50.0 million of liquidity provided by the 2021 Revolving Credit Facility, which remains undrawn.

18


Market Information
After adjusting for inflation, we estimate that during 2017, GDP grew in each of the countries in which we operate at a rate that exceeded the average growth rate of the developed markets. In this respect, "developed markets" refers to a combined group of 11 countries from within the European Union, predominantly from Western Europe, and the United States. Romania continued to be one of the fastest growing economies in the European Union as increases to average wages have provided support for higher disposable income, however higher inflation and uncertainty regarding fiscal policy there are expected to slightly reduce growth in 2018. Similar to the last few years, it has been reported that GDP growth in our markets has been less reliant on growth in exports, and domestic demand has played a larger role in economic expansion. Consumer confidence remains strong in the Czech and Slovak Republics, reflecting historically low rates of unemployment in those countries.
On March 29, 2017, the United Kingdom formally initiated the process to leave the European Union, commonly referred to as “Brexit”, triggering a two-year period to finalize the terms of that separation. While the negotiations over the exact terms of Brexit may negatively impact economic growth in the UK and Europe, the contribution of domestic demand as a component of GDP growth has reduced the sensitivity of our markets to external shocks affecting exports. Additionally, we have not seen an appreciable impact on the behavior of advertisers in the countries in which we operate since the UK electorate voted in favor of Brexit in June 2016.
On April 6, 2017, the Czech National Bank determined that the recent increase in inflation in the country was sustainable and its mandate for price stability had been met. As a result, it ended its commitment to intervene in currency markets and withdrew the floor related to the EUR/CZK exchange rate. Following the announcement, the Czech Koruna has since strengthened more than 15% against the dollar, also reflecting appreciation of the Euro versus the dollar. If the currency continues to appreciate, this will improve the results of our largest operation in dollar terms.
Moderate inflationary pressures are expected in 2018 due to tighter labor market conditions, and the ECB is expected to begin winding down quantitative easing measures. As a result, incremental interest rate rises are expected in the Czech Republic and Romania. Even with this, analysts estimate that GDP growth in the countries in which we operate will continue to outpace that of the developed markets in 2018. We believe the growth in real private consumption forecast for 2018 will support overall growth in the television advertising markets across the four countries where we continue to operate.
Over the long-term, we believe that the convergence of GDP per capita in our markets with that of the developed markets will continue as economic conditions improve and sustained periods of higher growth continue. The higher rates of economic growth compared to the developed markets should result in even higher rates of growth in advertising spending, which is driven by a number of factors:
Per capita nominal GDP at purchasing power parity in our markets remains approximately half that of the developed markets;
Total advertising spend per capita remains around 10% of levels in the developed markets;
The ratio of total advertising spend per capita to nominal GDP per capita, also known as advertising intensity, was approximately a third that of the developed markets in 2017; and
In the markets in which we operate, basic products such as food, beverages and household cleaning supplies comprise the main source of advertising revenues, whereas in the developed markets, the marketing of premium products, including finance, automotive, entertainment and travel products, makes up the majority of current television advertising spending.
Since television was commercialized in our markets at the same time as other forms of media, television advertising generally accounts for a higher proportion of total advertising spend than in the developed markets, where newspapers, magazines and radio were established as advertising media well before the advent of television. And contrary to trends in developed markets, television advertising spend as a percentage of total advertising spend has grown in our markets during recent years.
We believe that television advertising will continue to hold its share of total advertising spend in our markets because of its greater reach and effective measurement, which makes this medium more appealing to advertisers. Television is especially attractive to advertisers because it delivers high reach at low cost compared to other forms of media. More recently, internet advertising has grown at the expense of print and outdoor advertising, and we offer additional advertising opportunities when clients seek to complement their television campaigns with campaigns online. While spending for digital advertising is expected to overtake spending on television in the near-term in the developed markets, we believe the strength of television as an advertising medium in our markets will continue for the foreseeable future.
The following table sets out our estimates of television advertising spending net of discounts by country (in US$ millions) for the years set forth below:
Country
2017

 
2016

 
2015

Bulgaria
$
105

 
$
101

 
$
97

Czech Republic
313

 
303

 
292

Romania*
245

 
218

 
193

Slovak Republic
144

 
138

 
128

Total CME Markets
$
807

 
$
760

 
$
710

Growth rate
6
%
 
7
%
 
7
%
* Romania market excludes Moldova.
Source: CME estimates, using the 2017 average exchange rate for all periods presented above.
On a constant currency basis, we estimate television advertising spending in our markets increased by 6% in 2017 compared to the previous year. In Bulgaria, the market increased 4% as we estimate all broadcasters increased their average prices, while overall GRPs sold were flat. In the Czech Republic, market growth of 4% was driven by higher average prices. In Romania, the market grew 12% because the increase in demand for advertising that started in 2016 also led to significant increases in average prices in 2017. In the Slovak Republic, the market grew 4% due to higher average prices while inventory sold in 2017 was flat compared to last year following the end of spending on informational and political campaigns that took place during the first half of 2016. If this spending on informational and political campaigns is excluded, we estimate the market grew 9% in the Slovak Republic in 2017.

19


Segment Performance
 
NET REVENUES
 
For The Year Ended December 31, (US$ 000's)
 
 
 
 
 
Movement
 
 
 
 
 
Movement
 
2017

 
2016

 
% Act

 
% Lfl

 
2016

 
2015

 
% Act

 
% Lfl

Bulgaria
$
77,341

 
$
72,651

 
6.5
%
 
3.7
%
 
$
72,651

 
$
73,090

 
(0.6
)%
 
(0.3
)%
Czech Republic
209,041

 
190,372

 
9.8
%
 
3.5
%
 
190,372

 
182,636

 
4.2
 %
 
3.5
 %
Romania
191,244

 
172,951

 
10.6
%
 
9.5
%
 
172,951

 
157,578

 
9.8
 %
 
11.3
 %
Slovak Republic
97,721

 
90,549

 
7.9
%
 
4.7
%
 
90,549

 
84,434

 
7.2
 %
 
7.5
 %
Intersegment revenues
(1,135
)
 
(349
)
 
NM (1)

 
NM (1)

 
(349
)
 
(1,543
)
 
NM (1)

 
NM (1)

Total Net Revenues
$
574,212

 
$
526,174

 
9.1
%
 
5.5
%
 
$
526,174

 
$
496,195

 
6.0
 %
 
6.3
 %
(1) Number is not meaningful.
 
OIBDA
 
For The Year Ended December 31, (US$ 000's)
 
 
 
 
 
Movement
 
 
 
 
 
Movement
 
2017

 
2016

 
% Act

 
% Lfl

 
2016

 
2015

 
% Act

 
% Lfl

Bulgaria
$
16,841

 
$
12,242

 
37.6
 %
 
34.9
 %
 
$
12,242

 
$
15,479

 
(20.9
)%
 
(20.7
)%
Czech Republic
83,600

 
77,018

 
8.5
 %
 
1.3
 %
 
77,018

 
71,697

 
7.4
 %
 
6.2
 %
Romania
74,435

 
62,016

 
20.0
 %
 
19.7
 %
 
62,016

 
41,176

 
50.6
 %
 
51.7
 %
Slovak Republic
24,742

 
15,947

 
55.2
 %
 
47.4
 %
 
15,947

 
10,585

 
50.7
 %
 
47.8
 %
Eliminations
(8
)
 
5

 
NM (1)

 
NM (1)

 
5

 
26

 
NM (1)

 
NM (1)

Total operating segments
199,610

 
167,228


19.4
 %

14.9
 %

167,228


138,963


20.3
 %

19.8
 %
Corporate
(34,078
)
 
(30,320
)
 
(12.4
)%
 
(7.5
)%
 
(30,320
)
 
(29,521
)
 
(2.7
)%
 
(2.7
)%
Total OIBDA
$
165,532

 
$
136,908

 
20.9
 %
 
16.5
 %
 
$
136,908

 
$
109,442

 
25.1
 %
 
24.4
 %
(1) Number is not meaningful.
Bulgaria
 
For the Year Ended December 31, (US$ 000's)
 
 
 
 
 
Movement
 
 
 
 
 
Movement
 
2017

 
2016

 
% Act

 
% Lfl

 
2016

 
2015

 
% Act

 
% Lfl

Television advertising
$
53,446

 
$
49,111

 
8.8
 %
 
6.0
 %
 
$
49,111

 
$
50,717

 
(3.2
)%
 
(3.0
)%
Carriage fees and subscriptions
19,462

 
18,703

 
4.1
 %
 
1.5
 %
 
18,703

 
17,853

 
4.8
 %
 
5.3
 %
Other
4,433

 
4,837

 
(8.4
)%
 
(10.8
)%
 
4,837

 
4,520

 
7.0
 %
 
7.2
 %
Net revenues
77,341

 
72,651

 
6.5
 %
 
3.7
 %
 
72,651

 
73,090

 
(0.6
)%
 
(0.3
)%
Costs charged in arriving at OIBDA
60,500

 
60,409

 
0.2
 %
 
(2.6
)%
 
60,409

 
57,611

 
4.9
 %
 
5.1
 %
OIBDA
$
16,841

 
$
12,242

 
37.6
 %
 
34.9
 %
 
$
12,242

 
$
15,479

 
(20.9
)%
 
(20.7
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OIBDA margin
21.8
%
 
16.9
%
 
4.9 p.p.

 
5.1 p.p.

 
16.9
%
 
21.2
%
 
(4.3) p.p.

 
(4.3) p.p.

The television advertising market in Bulgaria increased an estimated 4% at constant rates in 2017 compared to 2016.
Our television advertising revenues increased at constant rates in 2017 compared to 2016 due to higher average prices for the year. Carriage fees and subscription revenues increased slightly at constant rates due to continued efforts to secure new contracts with cable, satellite and IPTV operators with improved pricing. The decrease in other revenues related to lower spending placed with the radio business.
Television advertising revenues declined slightly in 2016 compared to 2015 as an increase in the volume of GRPs sold was more than offset by lower average prices, which were negatively impacted due to significant discounting by the competition seeking market share. Carriage fees and subscription revenues increased because the number of cable, satellite and IPTV subscribers grew during the course of the year and a distribution agreement was renewed at higher prices during the third quarter of 2016.
Costs charged in arriving at OIBDA decreased at constant rates in 2017 compared to 2016 due primarily to a significant bad debt charge in the comparative period. Content costs were flat, as higher spending on popular programming was offset by savings in sports rights.
On a constant currency basis, costs increased at constant rates in 2016 compared to 2015 due primarily to a US$ 3.4 million bad debt charge related to our decision to cease cooperation with one agency during the fourth quarter of 2016 and instead started working directly with the clients that agency represented. Content costs decreased, which was driven by savings in foreign acquired programming that more than offset a slight increase in sports rights.

20


Czech Republic
 
For the Year Ended December 31, (US$ 000's)
 
 
 
 
 
Movement
 
 
 
 
 
Movement
 
2017

 
2016

 
% Act

 
% Lfl

 
2016

 
2015

 
% Act

 
% Lfl

Television advertising
$
188,373

 
$
172,392

 
9.3
%
 
3.0
%
 
$
172,392

 
$
166,158

 
3.8
 %
 
3.0
 %
Carriage fees and subscriptions
12,141

 
10,325

 
17.6
%
 
11.6
%
 
10,325

 
7,176

 
43.9
 %
 
43.0
 %
Other
8,527

 
7,655

 
11.4
%
 
3.1
%
 
7,655

 
9,302

 
(17.7
)%
 
(18.1
)%
Net revenues
209,041

 
190,372

 
9.8
%
 
3.5
%
 
190,372

 
182,636

 
4.2
 %
 
3.5
 %
Costs charged in arriving at OIBDA
125,441

 
113,354

 
10.7
%
 
5.0
%
 
113,354

 
110,939

 
2.2
 %
 
1.7
 %
OIBDA
$
83,600

 
$
77,018

 
8.5
%
 
1.3
%
 
$
77,018

 
$
71,697

 
7.4
 %
 
6.2
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OIBDA margin
40.0
%
 
40.5
%
 
(0.5) p.p.

 
(0.9) p.p.

 
40.5
%
 
39.3
%
 
1.2 p.p.

 
1.1 p.p.

The television advertising market in the Czech Republic increased an estimated 4% at constant rates in 2017 compared to 2016.
Our television advertising revenues increased at constant rates in 2017 compared to 2016 due to higher average prices, which more than offset a slight decrease in GRPs sold. Carriage fees and subscription revenues increased due primarily to additional contracts for Nova International that became effective late in 2016.
In 2016, advertisers bought more GRPs compared to 2015 resulting in higher television advertising revenues, however our average price for advertising was lower due to significant discounting by the competition to sell incremental inventory provided by channels they launched late in 2015. Carriage fees and subscription revenues increased due to high definition versions of our channels that were available exclusively on cable and satellite platforms for the entire year, as well as the contribution from launching NOVA SPORT 2 in late 2015 and NOVA INTERNATIONAL in early 2016.
Costs charged in arriving at OIBDA in 2017 increased on a constant currency basis compared to 2016 due primarily to an increase in content costs, as higher quality productions and additional local fiction in the schedule this year compared to 2016 was partially offset by less expensive acquired content as well as lower transmission and consultancy costs.
On a constant currency basis, costs increased slightly in 2016 on a constant currency basis compared to 2015 due to an increase in content costs. Additional spending to introduce several entertainment formats in the program grid during 2016 was mostly offset by savings in local fiction, foreign acquired programming, and other non-programming costs.

21


Romania
 
For the Year Ended December 31, (US$ 000's)
 
 
 
 
 
Movement
 
 
 
 
 
Movement
 
2017

 
2016

 
% Act

 
% Lfl

 
2016

 
2015

 
% Act

 
% Lfl

Television advertising
$
143,693

 
$
128,814

 
11.6
 %
 
10.3
 %
 
$
128,814

 
$
113,460

 
13.5
 %
 
14.9
 %
Carriage fees and subscriptions
44,032

 
40,202

 
9.5
 %
 
8.8
 %
 
40,202

 
40,292

 
(0.2
)%
 
1.5
 %
Other
3,519

 
3,935

 
(10.6
)%
 
(12.0
)%
 
3,935

 
3,826

 
2.8
 %
 
4.2
 %
Net revenues
191,244

 
172,951

 
10.6
 %
 
9.5
 %
 
172,951

 
157,578

 
9.8
 %
 
11.3
 %
Costs charged in arriving at OIBDA
116,809

 
110,935

 
5.3
 %
 
3.8
 %
 
110,935

 
116,402

 
(4.7
)%
 
(3.2
)%
OIBDA
$
74,435

 
$
62,016

 
20.0
 %
 
19.7
 %
 
$
62,016

 
$
41,176

 
50.6
 %
 
51.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OIBDA margin
38.9
%
 
35.9
%
 
3.0 p.p.

 
3.3 p.p.

 
35.9
%
 
26.1
%
 
9.8 p.p.

 
9.6 p.p.

The television advertising market in Romania increased an estimated 12% at constant rates in 2017 compared to 2016.
Our television advertising revenues increased at constant rates in 2017 compared to 2016 due to higher prices. The market continued to be largely sold out in 2017, reflecting sustained strong demand for advertising as clients invested more in campaigns to improve their competitive positions. Carriage fees and subscription revenues grew on a constant currency basis during 2017 due to an increase in the number of reported subscribers.
In 2016, fiscal stimulus was believed to have improved consumer confidence and spending, which helped increase demand for advertising on television during the course of the year. We fully monetized additional inventory generated by our main channel compared to 2015, which led to a higher sell-out rate in 2016. Contributing to this was the broadcasting of UEFA European Championship matches in the second and third quarters. Since we sold more GRPs at significantly higher prices, our television advertising revenues increased. Carriage fees and subscription revenues grew slightly on a constant currency basis due to an increase in the number of cable and satellite subscribers.
Costs charged in arriving at OIBDA in 2017 increased at constant rates compared to 2016. Content costs increased, as we invested more in local productions of entertainment formats as well as local fiction, which more than offset savings from sports rights. Non-programming costs also increased, primarily as a result of higher staff costs and professional fees, which more than offset lower transmission costs.
On a constant currency basis, costs decreased in 2016 compared to 2015 as non-programming costs declined due to lower bad debts and professional fees, savings from restructuring efforts, and lower transmission costs. This more than offset an increase in content costs as we invested more in the schedule to generate additional inventory, which included the costs associated with broadcasting UEFA European Championship matches.

22


Slovak Republic
 
For the Year Ended December 31, (US$ 000's)
 
 
 
 
 
Movement
 
 
 
 
 
Movement
 
2017

 
2016

 
% Act

 
% Lfl

 
2016

 
2015

 
% Act

 
% Lfl

Television advertising
$
85,715

 
$
84,779

 
1.1
 %
 
(1.9
)%
 
$
84,779

 
$
79,135

 
7.1
 %
 
7.4
 %
Carriage fees and subscriptions
7,597

 
2,101

 
NM (1)

 
NM (1)

 
2,101

 
1,324

 
58.7
 %
 
59.0
 %
Other
4,409

 
3,669

 
20.2
 %
 
15.2
 %
 
3,669

 
3,975

 
(7.7
)%
 
(7.5
)%
Net revenues
97,721

 
90,549

 
7.9
 %
 
4.7
 %
 
90,549

 
84,434

 
7.2
 %
 
7.5
 %
Costs charged in arriving at OIBDA
72,979

 
74,602

 
(2.2
)%
 
(4.7
)%
 
74,602

 
73,849

 
1.0
 %
 
1.6
 %
OIBDA
$
24,742

 
$
15,947

 
55.2
 %
 
47.4
 %
 
$
15,947

 
$
10,585

 
50.7
 %
 
47.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OIBDA margin
25.3
%
 
17.6
%
 
7.7 p.p.

 
7.3 p.p.

 
17.6
%
 
12.5
%
 
5.1 p.p.

 
4.8 p.p.

(1) Number is not meaningful.
The television advertising market in the Slovak Republic increased an estimated 4% at constant rates in 2017 compared to 2016.
Our television advertising revenues decreased on a constant currency basis during 2017 compared to 2016 from selling fewer GRPs as our audience share was affected by the lower reach for our channels, which have been distributed exclusively on cable, satellite and IPTV platforms since the start of 2017. Demand for GRPs was also lower in 2017 compared to 2016 due to spending on informational and political campaigns in the first half of 2016 that was not repeated in 2017. If this spending is excluded, our television advertising revenues were flat at constant rates in 2017 as higher prices offset fewer GRPs sold. The change in the way our channels are distributed resulted in a significant increase in carriage fees and subscriptions revenue, as well as a cost reduction from significantly lower transmission costs.
In 2016, television advertising revenues grew compared to 2015 due primarily to higher prices, reflecting strong demand for advertising on television while the market remained largely sold-out. Fewer GRPs were sold in 2016 compared to 2015, which reduced the benefit of the increase in prices. Carriage fees and subscription revenues increased in 2016 as we entered into new agreements with a number of carriers and launched MARKIZA INTERNATIONAL during the first quarter of 2016.
Costs charged in arriving at OIBDA in 2017 decreased compared to 2016 due to lower transmission costs, which were partially offset by an increase in content costs as we made targeted adjustments in the programming line-up since we changed the way our channels are distributed.
On a constant currency basis, costs increased slightly in 2016 compared to 2015 due to increases in various non-programming costs. Content costs were flat year-on-year as investments in local content were offset by savings from foreign acquired programming.

23


II.    Analysis of the Results of Operations and Financial Position
 
For The Year Ended December 31, (US$ 000's)
 
 
 
 
 
Movement
 
 
 
 
 
Movement
 
2017

 
2016

 
% Act

 
% Lfl

 
2016

 
2015

 
% Act

 
% Lfl

Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Television advertising
$
471,227

 
$
435,096

 
8.3
 %
 
4.5
 %
 
$
435,096

 
$
409,469

 
6.3
 %
 
6.4
 %
Carriage fees and subscriptions
83,232

 
71,331

 
16.7
 %
 
14.5
 %
 
71,331

 
66,644

 
7.0
 %
 
8.2
 %
Other revenue
19,753

 
19,747

 
0.0
 %
 
(4.6
)%
 
19,747

 
20,082

 
(1.7
)%
 
(1.5
)%
Net Revenues
574,212

 
526,174

 
9.1
 %
 
5.5
 %
 
526,174

 
496,195

 
6.0
 %
 
6.3
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Content costs
254,061

 
238,063

 
6.7
 %
 
3.8
 %
 
238,063

 
227,510

 
4.6
 %
 
5.2
 %
Other operating costs
49,864

 
54,949

 
(9.3
)%
 
(12.2
)%
 
54,949

 
55,731

 
(1.4
)%
 
(1.1
)%
Depreciation of property, plant and equipment
26,991

 
23,106

 
16.8
 %
 
12.5
 %
 
23,106

 
21,327

 
8.3
 %
 
8.5
 %
Amortization of intangibles
8,592

 
8,270

 
3.9
 %
 
(1.0
)%
 
8,270

 
12,050

 
(31.4
)%
 
(31.4
)%
Cost of revenues
339,508

 
324,388

 
4.7
 %
 
1.6
 %
 
324,388

 
316,618

 
2.5
 %
 
2.9
 %
Selling, general and administrative expenses
104,755

 
96,254

 
8.8
 %
 
4.1
 %
 
96,254

 
89,816

 
7.2
 %
 
7.3
 %
Restructuring costs

 

 
 %
 
 %
 

 
1,714

 
(100.0
)%
 
(100.0
)%
Operating income
$
129,949

 
$
105,532

 
23.1
 %
 
18.8
 %
 
$
105,532

 
$
88,047

 
19.9
 %
 
19.4
 %
Revenue:
Television advertising revenues: On a constant currency basis, television advertising revenues increased by 5% in 2017 compared to 2016, while television advertising spending in our markets is estimated to have increased by 6%. On a constant currency basis, television advertising revenues increased by 6% in 2016 compared to 2015, while television advertising spending in our markets is estimated to have increased by 7%.
Carriage fees and subscriptions: Carriage fees and subscription revenues increased during 2017 compared to 2016, primarily in the Slovak Republic where our channels have been exclusively available on cable, satellite and IPTV platforms since January 2017 and in Romania due to higher subscriber counts. Carriage fees and subscription revenues increased in 2016 compared to 2015, primarily due to the inclusion of high definition versions of certain of our channels in our offering and the launch of additional channels in the Czech Republic. Carriage fees revenues also increased across a number of other segments due to higher cable, satellite and IPTV subscriber counts.
Other revenues: Other revenues include primarily internet advertising revenues and revenues generated through the licensing of our own productions. Other revenues decreased during 2017 compared to 2016 due to lower internet and radio advertising and in 2016 compared to 2015 primarily due to lower license and sublicense revenues.
See "Segment Performance" above for additional information on trends in revenues.
Operating Expenses:
Content costs: Content costs (including production costs and amortization of programming rights) increased during 2017 compared to 2016 primarily due to inclusion of both more hours of local productions in our broadcast schedules and higher quality acquired programming. Content costs increased in 2016 compared to 2015 due to including an increased volume of local programming in our broadcast schedules as well as our broadcasting of UEFA European Championship matches in Romania.
Other operating costs: Other operating costs decreased during 2017 compared to 2016 primarily due to cost savings in the Slovak Republic following our decision not to renew our contract for the terrestrial distribution of our channels there. Other operating costs for 2016 were broadly in line with 2015 as cost savings from lower transmission costs were offset by higher authors’ rights association charges.
Depreciation of property, plant and equipment: Depreciation of property, plant and equipment increased during 2017 compared to 2016 and in 2016 compared to 2015 due to higher capital expenditures.
Amortization of intangibles: On a constant currency basis, total amortization of broadcast licenses and other intangibles decreased slightly during 2017 compared to 2016 primarily due to certain intangibles in Romania becoming fully amortized, partly offset by an increase in amortization of certain of our trademarks in the Czech Republic. Amortization of intangibles decreased in 2016 compared to 2015, primarily due to higher amortization expense in 2015 for certain of our trademarks in Romania that we determined were no longer indefinite-lived and began amortizing from January 1, 2015 which were subsequently divested with the sale of our Romanian studios in the fourth quarter of 2015. The lower amortization expense also reflects certain intangible assets in Bulgaria which were fully amortized in the fourth quarter of 2015.
Selling, general and administrative expenses: Selling, general and administrative expenses increased during 2017 compared to 2016 primarily due to increased levels of staff and professional fees, particularly in Romania, offset by decreased bad debt expense in Bulgaria. Selling, general and administrative expenses increased in 2016 compared to 2015, primarily due to the reversal of a charge related to certain tax audits in Romania in the third quarter of 2015 and increased bad debt in Bulgaria as we ceased cooperation with one agency during the fourth quarter of 2016 and instead started working directly with the clients that agency represented. These increases were partly offset by lower professional fees, particularly in Romania and in Corporate.
Selling, general and administrative expenses in 2017 include a charge of US$ 4.3 million in respect of non-cash stock-based compensation, an increase of US$ 0.9 million compared to 2016 (see Item 8, Note 17, "Stock-based Compensation"). Non-cash stock-based compensation charges were US$ 2.3 million in 2015.

24


Restructuring costs: There were no restructuring charges during 2017 or 2016. The restructuring charges in 2015 relate to the elimination of positions according to our 2015 plan.
Operating income: Operating income increased from 2015 through 2017 largely due to increased television advertising and carriage fee revenues while maintaining effective cost control efforts. Our operating margin, which is determined as operating income divided by net revenues, was 22.6% in 2017, compared to 20.1% in 2016 and 17.7% in 2015.
Other income / expense items for the years ended December 31, 2017, 2016 and 2015:
 
For The Year Ended December 31, (US$ 000's)
 
2017

 
2016

 
% Act

 
2016

 
2015

 
% Act

Interest expense
$
(70,633
)
 
$
(111,389
)
 
36.6
 %
 
$
(111,389
)
 
$
(151,767
)
 
26.6
 %
Loss on extinguishment of debt
(101
)
 
(150,158
)
 
99.9
 %
 
(150,158
)
 

 
NM (1)

Other non-operating income / (expense), net:
 
 
 
 
 
 
 
 
 
 
 
Interest income
523

 
573

 
(8.7
)%
 
573

 
426

 
34.5
 %
Foreign currency exchange gain / (loss), net
17,185

 
7,149

 
140.4
 %
 
7,149

 
(11,550
)
 
NM (1)

Change in fair value of derivatives
(1,783
)
 
(10,213
)
 
82.5
 %
 
(10,213
)
 
4,848

 
NM (1)

Other income / (expense), net
396

 
417

 
(5.0
)%
 
417

 
(17,333
)
 
NM (1)

(Provision) / credit for income taxes
(21,483
)
 
(6,336
)
 
NM (1)

 
(6,336
)
 
1,153

 
NM (1)

Loss from discontinued operations, net of tax