1 Financial Statements and Management Report 2006
2 Premiere AG Management Report Situation of the Company and development of pay-tv Organisation and employees Assets, financial position and earnings situation Risk report Subsequent events Outlook Premiere AG Balance sheet Statement of operations Development of the fixed assets Premiere AG Notes to the financial statements I. General information II. Accounting policies III. Explanatory comments on the individual captions in the balance sheet and statement of operations IV. Other disclosures Auditor s Report Disclaimer This report contains forward-looking statements based on the currently held beliefs and assumptions of the management of Premiere AG, which are expressed in good faith and, in their opinion, reasonable. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, financial condition, performance, or achievements of Premiere AG, or media industry results, to differ materially from the results, financial condition, performance or achievements expressed or implied by such forward-looking statements. Given these risks, uncertainties and other factors, recipients of this document are cautioned not to place undue reliance on these forward-looking statements. Premiere AG disclaims any obligation to update these forward-looking statements to reflect future events or developments.
3 Premiere AG Financial Statements and Management Report 2006 Management Report 1 Premiere AG Management Report Premiere AG, in which all the business activities of the Premiere Group are bundled, acts as the control center in strategic and commercial functions and in the personnel, legal and communications service segments for all the Group s investments. The operative business is primarily assigned to Premiere Fernsehen GmbH & Co. KG (Premiere Fernsehen KG) and its downstream subsidiaries. The development of Premiere Fernsehen KG is therefore of great importance for the assessment of the company s situation. Premiere AG 100% Premiere Fernsehen GmbH & Co. KG 100% 100% 96.8% 97.5% Premiere Fernsehen GmbH (Austria) Premiere Service Center Schwerin GmbH Premus Logistik und Service GmbH Premiere Hotel Entertainment GmbH (Simplified view)
4 2 Situation of the Company and development of pay-tv The following is an account of the development only of Premiere Fernsehen KG. Business activities and strategy Core business: program subscriptions Program subscriptions are Premiere Fernsehen KG s core business, in which the Company generates over 80% of its revenues. Subscribers can pick and mix from a broad range of options to select exactly the programming they want to watch. Premiere Fernsehen KG offers special packages for business customers in the hotel and sports bar industry. Subscribers also have the option of ordering and viewing programs on demand. On the PREMIERE DIREKT channel, movies are available from six months after their cinema launch ready to watch, around the clock. PREMIERE DIREKT s on-demand offering also includes adult entertainment and exclusive events. Customers can also order movies from the PREMIERE DIREKT+ video-on-demand service at any time by telephone, text message or Internet. The service runs on cutting-edge hard-disk receivers which Premiere Fernsehen KG leases and sells as part of a wider assortment of innovative digital receivers, making the transition to the convenience of digital TV easier for its customers. Alongside the business with program subscriptions and payper-view services, Premiere Fernsehen KG also derives revenues from advertising. Premiere Fernsehen KG offers its advertising customers exclusivity and the opportunity to communicate with clearly-defined and attractive target groups. The combination of exclusive environments and creative, special advertising formats opens up a host of options which guarantee brands that special level of attentiveness. Premiere Fernsehen KG knows its viewers and develops individually-tailored intermedia communications concepts for each of its advertising customers ranging from traditional advertising spots to special advertising formats as well as varied placements in the editorial environment. Four pillar strategy for a changed competitive environment The media and communications markets are going through a period of change. Network operators are evolving out of their traditional role as simple programming transporters into content marketers. The buzzword triple-play -television, telephony and Internet from a single source stands for a trend towards bundled products that is bringing telecommunications firms and cable network operators into competition with each other. This phenomenon is set to influence the media business worldwide over the next few years. The media landscape in the future will not only feature new players and a greater volume of programming; media consumption and target markets will become further differentiated as well, and competition for limited consumer time and money for media will intensify. Changes are also in store for the transmission modes of television, with the Internet and mobile devices joining cable and satellite as sources of content. Digital delivery and customers return path to the broadcaster will bring an expanding range of television services as on-demand programming moves up alongside conventional TV viewing in popularity. Despite these innovative advances, television will remain the primary mass communication medium. Having focused on its core business over the last several years with successful results, Premiere Fernsehen KG is now in a position as a compact and agile media company to quickly adapt to changing conditions. To achieve the overarching goal of profitable growth, Premiere Fernsehen KG employs an essentially four pillar strategy for productively managing and shaping these change processes: 1. Enhancing programming exclusivity Premium pay-tv only works by offering a mix of exclusive, topflight programming. Premiere Fernsehen KG s core competency as programming and marketing provider for premium television entertainment thus will remain the most important strategic pillar going forward. The combined offering of popular movies and TV series, live professional sports and high-quality theme channels gives Premiere Fernsehen KG a unique position with viewers and constitutes its primary selling proposition. The main reason people opt for Premiere Fernsehen KG is its programming, which has always differentiated the company from the competition and will continue to do so throughout the future. Premiere Fernsehen KG s programming credo is therefore: exclusivity, quality and variety. In 2006, Premiere Fernsehen KG successfully expanded and qualitatively enhanced its program-
5 Premiere AG Financial Statements and Management Report 2006 Management Report Situation of the Company and development of pay-tv 3 ming range through contract extensions and the acquisition of new rights (see Programming ): In fiction, Premiere Fernsehen KG has deals with all major Hollywood film studios and the leading independent producers. Premiere Fernsehen KG s portfolio of over 60 agreements with sporting associations and rights owners ensures a high-value and diverse live sports offering. Premiere Fernsehen KG s purchasing and commercial usage of rights and content is oriented around a classic pay-tv model. Premiere Fernsehen KG is also investing more in rights and the production of programming to create synergies and expand its offerings. Premiere Fernsehen KG s exclusive live broadcasting rights to the UEFA Champions League through the 2008/2009 season are one example. In addition to showing the games on pay-tv, Premiere Fernsehen KG produces Champions TV, a high-quality free-tv show, and makes all games available individually on the Internet in live stream at on a pay-per-view basis. 2. More flexible offering to strengthen customer retention and acquisition Premiere Fernsehen KG is gearing up for future competition with a more flexible offering marketed via multiple distribution channels. On August 1, 2006, Premiere Fernsehen KG introduced new pricing and packages marked by attractive entry prices from only EUR 9.99 per month and combination options with clear price incentives. The new packages are more compact and more focused in terms of content. The clearer profile strengthens Premiere Fernsehen KG s selling proposition, as customers can select a package which matches their own specific interests more closely, inherently improving customer satisfaction. Premiere Fernsehen KG sees potential in attracting new customers in the EUR 10 to EUR 20 price range in particular, which was previously not adequately catered for. For existing Premiere Fernsehen KG customers the new packages offer appealing alternatives which are improving customer retention among pricesensitive groups (see Marketing and Sales ). In December 2006, Premiere Fernsehen KG launched its PREMIERE FLEX prepaid product, providing exclusive Premiere Fernsehen KG programming without a subscription or contract. This new Premiere Fernsehen KG offering targets additional pay-tv target groups who are averse to contracts, have smaller media budgets or little time to watch TV. The product could also heighten the appeal of Premiere Fernsehen KG s receiver platform in course of the ongoing digitalization and open the doors for distribution partners who in the past have marketed Premiere Fernsehen KG s products only selectively (see Marketing and Sales ). 3. Innovative development Innovative TV technologies provide viewers a more pleasant and convenient viewing experience. As a pioneer in the field of digital TV in Germany, Premiere Fernsehen KG actively pursues innovative development to open up new growth markets and heighten customer retention. Premiere Fernsehen KG is the only German broadcaster offering two special HDTV (high-definition television format) packages for movies, sports and documentaries. With the PREMIERE DIREKT+ video-on-demand service and the Internet live streaming offerings available at www. premiere.de, Premiere Fernsehen KG is already catering to the trend towards more individualized media consumption. The rollout of a new generation of interactive digital receivers will allow interactive services to be used via the remote control, opening up the potential for additional streams of revenue. 4. Improving competitiveness through partnerships Premiere Fernsehen KG is consolidating its competitive position through strategic collaborations. Today, Premiere Fernsehen KG is the principle cooperation partner of arena Sport Rechte & Marketing GmbH (arena), a company of the Unity Media Group. Since August 2006, Premiere Fernsehen KG has been offering the Bundesliga channel arena to 9.6 million households served by Kabel Deutschland GmbH (KDG). Another 2.3 million cable households in the state of Baden-Württemberg can sign up for arena on Premiere Fernsehen KG, in this region the channel is broadcasted by Kabel BW GmbH & Co. KG (Kabel BW). Starting in February 2007, Premiere Fernsehen KG is broadcasting and marketing arena via satellite throughout Germany. In addition, Premiere Fernsehen KG is offering arena in 14 federal states to a further 2.2 million customers of smaller cable network operators (level 4 network). Premiere Fernsehen KG s Bundesliga marketing potential via satellite and cable now totals 30 million TV households in Germany. These agreements serve to strengthen Premiere Fernsehen KG s business operations and strategic positioning long-term. In addition to agreements with arena, the partnership with Deutsche Telekom AG (Deutsche Telekom) has secured Premiere Fernsehen KG a foothold in the key future market of IPTV (Internet Protocol Television). Premiere Fernsehen KG is showing its entire programming portfolio in the triple-play offering
6 4 T-Home, additionally broadcasting all 1st and 2nd division Bundesliga matches in the traditional Premiere quality. A sublicense from Deutsche Telekom gives Premiere Fernsehen KG exclusive rights to live IPTV Bundesliga coverage through mid Television over broadband network is set to become Premiere Fernsehen KG s third major transmission mode to TV households alongside cable and satellite. Extensive presence in these three transmission modes constitutes a solid foundation for further growth. As the largest marketer of live Bundesliga soccer, Premiere Fernsehen KG is able to offer all major pay-tv rights nationwide. Programming New contracts concluded in 2006 in the fiction (films, series, theme channels) and sports segments have broadened Premiere Fernsehen KG's extensive and exclusive program offering. Film In 2006, Premiere Fernsehen KG cemented its position as the number one movie channel. Four of the most important Hollywood studios, Fox, Sony, Universal and Warner, have all extended their output deals with Premiere Fernsehen KG even before their contracts expired. Premiere Fernsehen KG has mediumterm contracts with all major studios and key independent studios. The rights to broadcast such 2006 box office hits as "Perfume: The Story of a Murderer", "The Devil wears Prada", "The Da Vinci Code" and the new James Bond "Casino Royale" for the first time on German TV were acquired. In 2006, Premiere Fernsehen KG once again brought its subscribers around 300 films as German TV premieres. The viewers favorite last year was "National Treasure", followed by "I, Robot" and "The Pacifier", all three pulling in between two and three million viewers across all showings. Series In 2005, Premiere Fernsehen KG began to establish itself as a provider of exclusive premium series. Premiere Fernsehen KG steadily expanded this position throughout High-quality series like "Lost", "Invasion", "Medium" and "Nip Tuck" were wellreceived by viewers. The elaborate historical production of "Rome", which was co-financed by Premiere Fernsehen KG, was the most successful series shown to date. The new season gets underway in 2007 and is one of 12 new series that Premiere Fernsehen KG will be showing in 2007 for the first time on German TV. Theme channels Premiere Fernsehen KG and Discovery Communications Deutschland extended their exclusive contract in 2006 up to the year The high-quality and popular channels DISCOVERY CHANNEL, DISCOVERY GESCHICHTE, ANIMAL PLANET and DISCOVERY HD will continue to be exclusively available in Germany on Premiere Fernsehen KG. The exclusivity contract also applies for distribution via IPTV. Sport As expected, Premiere Fernsehen KG managed to successfully conclude cooperation agreements with the new license holders of the rights to the soccer Bundesliga, thus allowing it to continue showing subscribers live matches. Since the 2006/2007 season, Premiere Fernsehen KG has been offering the soccer Bundesliga both under the Premiere brand and under the arena brand. Soccer Bundesliga In May 2006, Premiere Fernsehen KG announced a broad-based partnership with Deutsche Telekom. Premiere Fernsehen KG will broadcast the live matches of the soccer Bundesliga in the new IPTV broadcast standard over the broadband networks of Deutsche Telekom during the 2006/2007, 2007/2008 and 2008/2009 seasons. The "Bundesliga on Premiere powered by T-Com" offers all 612 matches of the Bundesliga first and second division with the quality viewers have come to expect from Premiere: individual matches, live and with conference viewing. On each week of the competition, three select matches will be shown in the high-resolution HDTV television standard. Premiere Fernsehen KG has the responsibility both for the editorial content and in media regulatory terms. All other Premiere Fernsehen KG packages are also available in the IPTV format over Deutsche Telekom's VDSL network as part of the "T-Home" offer.
7 Premiere AG Financial Statements and Management Report 2006 Management Report Situation of the Company and development of pay-tv 5 In Premiere Fernsehen KG's view, one of the best selling points for IPTV and "T-Home" is live Bundesliga matches with Premiere's traditional quality. Premiere Fernsehen KG firmly believes in the future of IPTV broadcasting standard because it brings together the advantages of traditional television with interactive, customized options for use. This could make Premiere Fernsehen KG's pay-tv program offerings interesting for new target groups. Premiere Fernsehen KG is still in the game with Bundesliga on traditional cable television as well. Premiere Fernsehen KG has concluded a distribution and marketing agreement with arena for the cable networks of KDG. Based on a marketing cooperation with Kabel BW, Premiere Fernsehen KG is also able to offer soccer Bundesliga from arena in Baden-Württemberg. Both contracts represent good market opportunities for Premiere Fernsehen KG. Premiere Fernsehen KG can offer the Bundesliga in 14 of the 16 German federal states and is able to continue showing many subscribers the soccer Bundesliga, the agreements also have potential for customer acquisition. In February 2007 Premiere Fernsehen KG expanded the cooperation with arena with a new agreement (see also Subsequent Events ). UEFA Champions League, international soccer When it comes to the cream of the crop of international soccer, Premiere Fernsehen KG is still the foremost address for soccer enthusiasts. Since September 2006, Premiere Fernsehen KG has had more exclusivity than ever before in broadcasting the UEFA Champions League. Premiere Fernsehen KG has secured all of the live TV rights and not only broadcasts all 125 matches live, but also brings viewers the top matches and an in-depth, up-todate match summary that can only be seen on Premiere Fernsehen KG. The management believes this extra exclusivity has had a positive effect on the perception of the Premiere Fernsehen KG brand and its programming offering. Since the beginning of the current soccer season, Premiere Fernsehen KG is, for the first time, also responsible for the selection and production of the free-tv coverage of the most important international soccer championship alongside its coverage on pay-tv. In February 2006, Premiere Fernsehen KG agreed with Deutschen SportFernsehen (DSF) on a strategic cooperation to run for three years. Under the new brand name "Champions TV", Premiere Fernsehen KG shows live UEFA Champions League matches on DSF as part of a three-hour program. The show is moderated by Sebastian Hellmann, who was awarded the German Television Prize in Hellman extended his contract with Premiere Fernsehen KG in The Grimme prize award winner, Marcel Reif, will continue to provide his professional support for the Champions League. He also extended his contract in From Premiere Fernsehen KG's point of view, a healthy balance has been created between an exclusive pay-tv offering and an attractive free-tv offering. 2006, the "Champions TV" free-tv format has attracted roughly 3.3 million viewers per match. "Champions TV" is a new revenue stream for Premiere Fernsehen KG's advertising sales and a showcase for the work of the sports team and the Premiere Fernsehen KG packages. In addition to the Champions League, Premiere Fernsehen KG also shows the Premiere Euroliga with the best matches from Europe's top leagues and the UEFA Cup. For the UEFA Cup, Premiere Fernsehen KG secured the pay-tv broadcast rights for all quarter-final and semi-final matches as well as the UEFA Cup final, up to and including Premiere Fernsehen KG broadcasts a total of 13 matches per season of which at least eight are exclusive. Premiere Fernsehen KG will show six of the eight matches exclusively during the quarter-finals and one match per day of the championship during the semi-finals. The package also includes three UEFA Super Cup matches. Other attractive sports rights acquired Professional sports mean far more than soccer at Premiere Fernsehen KG. In 2006, Premiere Fernsehen KG successfully acquired more first-class rights and enhanced the appeal of its sports programming. Since this year, the Munich-based pay-tv broadcaster has, for example, provided its viewers extensive live coverage of the Grand Slam Wimbledon tennis tournament and from 2008 onwards, Premiere Fernsehen KG will broadcast this prestigious event exclusively. Premiere Fernsehen KG shows its golf fans the British Open, the US PGA Championships and the US Open (all exclusive until 2009) as well as the PGA European Tour (exclusive until 2010). Premiere Fernsehen KG has also successfully beefed up its extensive motor sports programming. Starting this year Premiere Fernsehen KG broadcasts live the entire 24-hour Le Mans race in full length, from 2007 until 2009 exclusively. Premiere Fernsehen KG has signed a new contract to secure the broadcast rights to Formula 1 racing, which are among the most important premium pay-tv rights, until the end of 2007.
8 6 Advertising The 2006 Premiere Media Day, under the motto "Looking for explorers", was Premiere Fernsehen KG's second advertising sales tour of Germany. Innovative advertising formats and integrated marketing strategies for effective brand communication at Premiere Fernsehen KG were presented to industry representatives. Featured were the marketing opportunities posed by the UEFA Champions League at Premiere Fernsehen KG and for the free-tv format "Champions TV" in DSF. Premiere Fernsehen KG was able to successfully persuade advertising customers of the quality of the advertising environment far in advance of the soccer World Cup. The matches Germany played in were booked out weeks in advance. A majority of the advertising space was allocated to well-known brand name companies such as Adidas, Coca-Cola and Philips for the top matches. During the World Cup, a lot of different advertising formats were used at Premiere Fernsehen KG ranging from traditional advertising through to sponsoring all the way to innovative advertising formats. In August 2006, Premiere Fernsehen KG restructured its advertising sales and has since been able to serve its advertising customers more efficiently. The three central areas Sales, Sales Services and Air Time Planning of the pay-tv broadcaster's marketing activities are pooled under the single umbrella of "Premiere Media Solutions". The new Premiere Media Solutions division stands for integrated communications solutions from a single source. The principle of "One Face to the Customer" guarantees customers a single point of contact for all advertising spaces. Marketing and sales The changed competitive conditions drove marketing and sales in The focus was on realigning advertising and introducing a new and flexible pricing and package strategy. Marketing Working together with the new lead agency based in Düsseldorf, DDB, Premiere Fernsehen KG launched a new image campaign in March designed to stir up strong emotions. The message: Premiere is the better television experience and gives viewers the freedom to see their favorite programs whenever they want. The focus of the marketing campaigns during the second half of the year was the product. Here, Premiere Fernsehen KG worked with celebrities who brought a good dose of humor and charm to show that they too, at heart, are still just everyday soccer and movie fans. The first of the TV spots features Franz Beckenbauer and Marcel Reif while Marcel Reif and Boris Becker appear in the second set of spots. The original campaign, which was also designed to support introduction of the new packages, enjoyed a high resonance in the media. Sales In September 2006, Premiere Fernsehen KG merged all of its sales activities together under a single roof to achieve more efficient and more powerful new customer acquisition. All sales activities aimed at acquiring new subscribers were bundled in the newly created Sales division, from traditional retail sales through to direct marketing all the way to e-commerce & business customers. New pricing and packages successfully introduced On August 1, 2006, Premiere Fernsehen KG introduced a new pricing and package model marked by lower entry prices, more flexible combination options and clear price benefits for larger package combinations. Five premium packages are now available from EUR 9.99 per month each: PREMIERE BLOCKBUSTER, PREMIERE ENTERTAINMENT, PREMIERE THEMA, PREMIERE SPORT und PREMIERE FUSSBALL. All five packages together with a contract term of 24 months cost only EUR corresponding to a price advantage of 30% compared with the individual packages. In a second step, Premiere Fernsehen KG made it possible to subscribe to the HDTV channels PREMIERE HD and DISCOVERY HD as stand-alone products starting in the middle of November from EUR 9.99 per month. All seven premium packages plus the TV programming guide TV DIGITAL are available for EUR per month with a 24-term contract.
9 Premiere AG Financial Statements and Management Report 2006 Management Report Situation of the Company and development of pay-tv 7 So far, Premiere Fernsehen KG's experience with the new price model has been positive. Overall, the new packages are regarded as better value for money by both existing subscribers as well as new customers. Around two-thirds of customers who subscribe to one of the new packages opt for a 24-month contract. Management is of the opinion that these longer contracts increase the stability and intrinsic value of Premiere Fernsehen KG's subscriber base. Subscriber behavior in selecting the programming packages has not changed considerably since the new package structure was introduced. The percentage of top-end packages (combinations of 5 or more), at 36%, is only slightly lower than the previous year's figure of 40%. The first trends also show that Premiere Fernsehen KG can successfully attract new target groups in the price range between EUR 10 and EUR 20. By including the HDTV packages in the new pricing structure Premiere Fernsehen KG has considerably lowered the entry threshold for those interested in using this new technology and enjoying this highresolution television quality. Eight months after their launch to market, the number of HD packages ordered by the end of the third quarter 2006 was at 40,000 and had climbed further, topping 56,000 (individual or in combination with other packages), as at December 31, Enhancement of customer potential through pre-paid PREMIERE FLEX offering At the beginning of December 2006, Premiere Fernsehen KG added another key component to its new pricing and package strategy designed to give customers more flexibility and individual choice. The new pre-paid PREMIERE FLEX package lets customers take advantage of Premiere Fernsehen KG's exclusive programming without a subscription or contract. The package works just like the pre-paid system for cell phones: buy and activate credit, and then watch Premiere without any contractual obligations or a basic fee. PREMIERE FLEX credit can be bought in different amounts and recharged at any time. PREMIERE FLEX is positioned as a supplementary product to Premiere Fernsehen KG s core business of programming packages, designed to attract new target groups. The results of market research and experience gleaned from other industries shows that people are more willing to use a product if they do not have to enter a long-term contract. Premiere Fernsehen KG does not anticipate "preying on its own customers" as the packages offer very clear price benefits. Each of the seven PREMIERE FLEX premium packages costs EUR 20 per month, while a one-year subscription costs EUR per month and a two-year subscription, only EUR Combination discounts will continue to be given for one-year or two-year subscriptions only. The incentive to conclude a classic Premiere subscription still remains high in Premiere Fernsehen KG's opinion. Premiere Fernsehen KG believes PREMIERE FLEX also heightens the appeal of the Premiere Fernsehen KG receiver platform. It is to be expected that over the next few years as the television landscape pushes forward with digitalization, more and more television households will purchase a new digital TV receiver to be able to receive more programs with higher quality. Throughout Germany PREMIERE FLEX customers can watch Premiere Fernsehen KG s programming via cable or satellite. All digital receivers suitable for the reception of Premiere Fernsehen KG s programming can be used for PREMIERE FLEX. Premiere Fernsehen KG assumes that there are around 2 million compatible digital receivers in TV households that do not have a subscription. In the management's view, these potential customers have a particularly low entry barrier to becoming Premiere Fernsehen KG customers with PREMIERE FLEX. PREMIERE FLEX also opens the doors to new sales forms and sales partners for Premiere Fernsehen KG. What's needed are the ability to handle credit card payments and modern e-loading systems. For example, Penny offers PREMIERE FLEX credit at more than 2,000 points of sale via simple e-loading systems. In Premiere Fernsehen KG's view, the new pre-paid option will make the company attractive over the long term to sales partners who have only marketed Premiere Fernsehen KG products up to now for specific promotions over a several day period. Premiere Fernsehen KG expects other advantages of the pre-paid strategy to be an ongoing presence at new points of sale in Germany and a steady interest by partners in marketing PREMIERE FLEX credit. This could make it possible for Premiere Fernsehen KG to considerably lower its direct acquisition risk for new target groups. To win back former customers who cancelled their subscriptions primarily due to dissatisfaction with package structures is expected to be another positive effect. Customer management Premiere Fernsehen KG provides its customers a high service level. Around-the-clock, subscribers can call in to service centers, which are manned by up to 1,900 customer support staff during peak hours. Trained personnel handle questions on subscriptions,
10 8 technical issues and programming. In 2006, Premiere Fernsehen KG recorded over 20 million customer contacts via telephone, fax, mail and . Premiere Fernsehen KG conducts regular quality control measures at its in-house and outsourced service centers to ensure a steady improvement in support quality. More than 100 service quality and customer satisfaction surveys were conducted in 2006, the results of which are used on an ongoing basis to develop and implement optimization measures. Premiere Fernsehen KG takes service on the Internet seriously as well; in the service area of the Premiere portal on www. premiere.de customers can, for example, consult Frequently Asked Questions. The summer months of 2006 were a time of special challenges for Service. During this period, Premiere Fernsehen KG received an unusually high number of inquiries regarding the broadcast of Bundesliga soccer and the new prices and packages which came into effect on August 1, The new pricing structure was implemented successfully within a mere three-month time frame and has had a positive impact on customer retention. Premiere Fernsehen KG was able to convince many subscribers of one of the new packages. By the end of the third quarter, around 100,000 customers that had already churned had got back in touch because of the new packages and proactively reversed their subscription cancellation on their own initiative. In order to more efficiently handle subscriber inquiries, Premiere Fernsehen KG continued to reorganize its call centre structure in 2006, progressively converting over to voice-over-ip operation. The new system unites in-house and external service centers within a single virtual call center affording a more flexible, rapid and cost-effective processing. Premiere Fernsehen KG s successful deployment of modern information and communications technology has improved service in terms of both availability and productivity. Premiere Fernsehen KG s exclusive and varied programming itself is of cource the most important factor for keeping customers satisfied. To augment direct, product-based customer retention the Premiere Stars bonus program was introduced in In light of the increasing popularity of established, larger programs such as Payback and Happy Digits among customers however, Premiere Fernsehen KG decided to discontinue its own loyalty bonus program as of year end Research and innovation Innovative TV technologies enable Premiere Fernsehen KG to create new products and further enhance the television experience, making it even more impressive. These technologies thus play an essential role for Premiere Fernsehen KG in being able to benefit from market trends early on in the game and develop additional growth potential. Premiere Fernsehen KG's primary focus is mass-market innovations that bring added value to viewers. The company is streamlined in its approach to development and works closely together with technology partners. Premiere Fernsehen KG concentrates on formulating the projects, selecting and guiding its partners as well as quality assurance. Innovations in 2006 HDTV launched Exclusive programming with exclusive quality: Since January 2006, subscribers can enjoy the new high-resolution HDTV format. The Premiere Fernsehen KG HD package offers around 100 movie highlights, sporting events such as the UEFA Champions League as well as outstanding documentaries every month. In November 2006, Premiere Fernsehen KG bundled the HD package into two channels: PREMIERE HD and DISCOVERY HD. The programs were consolidated into two channels because only two HDTV channels are fed in via TV cable in many parts of Germany. So as not to shut these customers and other prospective HD customers out of an entire channel, the movie and sport channels were merged together to become PREMIERE HD. PREMIERE HD and DISCOVERY HD can be received via satellite, cable and VDSL (IPTV). UEFA Champions League at Premiere Fernsehen KG has been a pioneer in broadcasting attractive content via new distribution channels and is emphasizing this position since September 2006 with live broadcasts of soccer matches on the Internet. Since the beginning of the new season, Premiere Fernsehen KG has been showing all individual matches as well as the conference viewing of the UEFA Champions League live at The live streams can be accessed by both Premiere Fernsehen KG customers and nonsubscribers. Each match is billed individually and subscribers get a discount rate. The new free TV format "Champions TV" has proven to be an effective vehicle for promoting pay-per-view
11 Premiere AG Financial Statements and Management Report 2006 Management Report Situation of the Company and development of pay-tv 9 streaming offers and led to a surge in name recognition of the product and awareness of the Premiere website: During the group phase, up to 8,000 customers ordered a live stream every day of the championship and up to 200,000 users visited during a "Champions TV" broadcast to learn more about Premiere Fernsehen KG offerings. Within just a few weeks, Premiere Fernsehen KG was able to put the new payper-view offering onto the map for the soccer fan target group, thereby opening up opportunities for new revenue potential. New generation of modern digital receivers In 2005, Premiere Fernsehen KG had already made the fundamental decision to introduce a new generation of modern digital receivers starting in the second half of Marketing of the interactive receiver began in mid November With this move, the company was responding to the changing competitive environment on the German television market as well as to new customer needs. In the business year of 2006, Premiere Fernsehen KG invested more than EUR 50 million in rolling out this new receiver infrastructure. By the end of 2007, these investments will total almost EUR 100 million. Future focus Premiere Fernsehen KG constantly keeps an eye on technical developments and market tendencies to be able to identify promising trends at an early stage. Premiere Fernsehen KG is reacting to the trend towards more individual forms of media usage with hard disk receivers that have integrated video-on-demand and live streaming options. Premiere Fernsehen KG plans to further establish both services on the market along with HDTV. In hardware, the focus will be on expanding the new receiver platform. Thanks to numerous functions, the new devices not only give viewers a comfortable television experience with a modern "look and feel", they are also easy to operate and future-proof. An integrated network connection port (ethernet) make the new receivers return path-compatible and hence, primed for interactive applications. The return path will, in future, make it possible to use interactive services merely by pressing a button on the remote control. The telephone will no longer be part of the process, all that's needed is the press of a button and the connection is established via a DSL connection. The interactive receiver can receive the conventional digital DVB signals as well as IP signals for services transmitted over Internet Protocol (IP). Mobile TV The distribution of content to mobile devices is an interesting new market for Premiere Fernsehen KG to tap into additional sources of revenue. During the soccer World Cup, Premiere Fernsehen KG gained its first experience with mobile television. Fans were able to receive reports en route produced specially for the mobile format on their cell phones from the portals of the country's two largest mobile network operators, T-Mobile and Vodafone. During the 2006/2007 season, T-Mobile customers can also view selected top matches and the conference of the first and second Bundesliga live on their cell phones, the signal is supplied by Premiere Fernsehen KG.
12 10 Organisation and employees Management board Effective March 1, 2006, Carsten Schmidt was appointed as management board member responsible for Sports & New Business by the Premiere AG supervisory board. In this function, he succeeds Hans Mahr who left the company by mutual agreement. As of June 30, 2006, Premiere AG reduced its management board from five to four members and reassigned the board's management responsibilities. Markus Schmid, Head of Marketing and Sales, left the company on friendly terms. Management board remuneration The overall remuneration of the four members of the Premiere AG management board is comprised of fixed and variable components. The sum of the fixed component of the management board s remuneration is determined by the supervisory board on the basis of a performance assessment and includes all other payments received from Group companies. Criteria for determining the appropriate compensation are, in particular, the area of responsibility of the respective member of the board as well as the economic situation, the performance and outlook of the Company taking into account its peer companies. The variable component of the management board s remuneration takes the form of an annual bonus which is linked to the financial performance of the Company, requiring a specific EBITDA to be achieved. Although the variable component of the remuneration does not include incentives for long-term growth with the corresponding risk, the members of the management board hold equity stakes in the Company, which means that the long-term risk component is accommodated. The employment contracts of the management board members specify that the Company has the right to terminate in the event of discharge from the management board, subject to continued regular salary payment plus accrued holiday benefits. Termination terms are governed explicitly in all cases by individual mutual release agreement, which usually includes comprehensive noncompetition clauses. There are no covenants for one-time payouts for non-renewal of contract or change of control, nor pension benefits. In the event of employee death, regular salary is paid for the month of decease and the three months following to the surviving spouse and/or eligible dependents. The variable compensation component is paid pro-rata as of the end of the month of decease. No other covenants are in place regarding survivors benefits. The remuneration of the management board for the business year 2006 will be reported in the Notes, subdivided and individualized according to fixed and performance-related components (see Note IV. 2, Management board ). Disclosure pursuant to Section 289 (4), German Commercial Code (HGB) Premiere AG share capital totals EUR 82,000,000.00, consisting of 82,000,000 no-par-value registered shares. Shareholdings are tracked in a shareholders register; the issuance of share certificates is excluded as permissible by law unless necessary for exchange listing. The company may issue stock certificates for individual shares or multiple numbers of shares. The management board determines the form and content of share certificates including dividend rights and any renewal coupons, subject to supervisory board approval. The company had issued no stock certificates as of December 31, There are no restrictions the management board is aware of affecting the transferability of shares. All lock-up periods known to the management board had fully expired as of the reporting date. Each share confers one vote. There are no voting restrictions known to the management board. No shares conferring special rights have been issued. Voting rights can only be exercised by duly authorized individuals, including proxies appointed by the
13 Premiere AG Financial Statements and Management Report 2006 Management Report Organisation and employees 11 Company. Proxy authorization granted to a party other than a bank or shareholder association must be granted in writing by mail, fax or other form specified by the Company. Further specifics pertaining to proxy appointment are provided in the invitations to the Annual General Meeting. Shareholder resolutions are passed by a simple majority attendee vote barring compulsory provisions to the contrary pursuant to the Stock Corporation Act. A simple majority of capital represented suffices as permitted by law in the event resolution voting on the basis of share capital represented should be compulsory pursuant to the Stock Corporation Act. Shareholder entitlement to dividends is a function of the number of shares held. Other dividend provisions may be prescribed in relation to newly issued shares in accordance with the statutes. Dividend rights at variance to Section 60 (2), Stock Corporation Act (AktG) may likewise be approved pursuant to a capital increase. The sole shareholder as of the reporting date holding over 10% of Premiere AG share capital was Fernseh Holding S. à. r. I. with a 14.72% equity stake. Dr. Georg Kofler holds a 13.87% stake in Premiere AG via Fernseh Holding S. à. r. l. Dr. Kofler administers approximately 1% of these shares as trustee for other current and future executives of the Premiere Group and an additional 0.04% for the benefit of Carsten Schmidt. Voting rights for these shares are exercised by Fernseh Holding S. à. r. l. The shareholdings of Michael Börnicke and Hans Seger, amounting respectively to 0.425% of Premiere AG shares, are held under the trusteeship of Fernseh Holding S.à.r.l, which also exercises voting rights for the shares. The appointment and discharge of management board members is conducted in accordance with Sections 84 and 85 of the Stock Corporation Act (AktG). Sections 179 ff. of the Stock Corporation Act (AktG) apply to changes in the Company statutes. The supervisory board is authorized to vote on changes to the statutes pertaining solely to their formulation. There are no other provisions concerning the statutes in addition or at variance to the above. The management board is empowered, with the approval of the supervisory board, to increase Premiere AG s capital stock by up to EUR 41,000, through May 16, 2011 by issuing, on one or several occasions, up to 41,000,000 new registered shares in return for contributions in cash or in kind (authorized capital for 2006). The power can be exercised in partial amounts. The management board is empowered, with the approval of the supervisory board, to define the further contents of the share rights and the terms of the stock issue. In the case of increases in capital, the stockholders shall, as a general rule, be granted the right to subscribe for the new shares. The management board is however empowered under certain circumstances, with the approval of the supervisory board, to exclude the subscription right of the stockholders in the case of increases in capital for a contribution in cash or in kind. The management board is empowered, with the approval of the supervisory board, to issue bearer or registered convertible or option bonds with a total nominal value of up to EUR 500,000, through May 16, 2011, on one or several occasions, with or without any limitations as to their term, and to grant the holders of convertible or option bonds conversion and option rights to subscribe for up to 8,200,000 new registered ordinary (individual) shares with no par value in the Company with a proportionate share of the subscribed capital of up to EUR 8,200, in accordance with the convertible bond or option terms. The power can also be exercised in partial amounts. The stockholders shall, as a general rule, be granted the right to subscribe for new convertible or option bonds. The management board is however empowered under certain circumstances, with the approval of the supervisory board, to exclude the subscription right of the stockholders when issuing the convertible or option bonds. The Company s capital stock is increased conditionally by up to EUR 8,200, by issuing up to 8,200,000 new registered ordinary (individual) shares (contingent capital for 2006). The sole purpose of the conditional capital is to grant new shares to the holders of conversion and option rights, which are issued, in accordance with the above-mentioned empowering resolution, by Premiere AG or by companies in which Premiere AG directly or indirectly holds majority investments. The conditional increase in capital will only be carried out to the extent that holders of conversion and option rights exercise their conversion or option rights or fulfill conversion obligations under such bonds. Premiere AG is empowered to purchase treasury stock in the amount of up to 10 percent of the capital stock existing at the time of passing the resolution. The power can be exercised in full or in partial amounts, on one or several occasions, in the pursuit of one or several purposes, by the Company, by its group companies or by a third party acting on its behalf. The power is
14 12 granted until November 16, The board of management is empowered to utilize stock in the Company that is acquired on account of this power for all legally authorized purposes. As a result of its existing loan financing, Premiere AG has to comply with various obligations and conditions from external lenders. The credit agreements amongst others foresee an obligation to make special redemptions in the event of the acquisition of more than 50% of the shares or the voting rights by a third party. If this condition is violated, the lenders can terminate the credit agreement and demand immediate repayment of the loan. In case of change of control, there are no covenants for onetime payouts to supervisory board members. Employees As of December 31, 2006, Premiere AG had a total of 180 employees on full-time contracts. Compared to the previous year (12/31/2005: 176) the figure slightly increased.
15 Premiere AG Financial Statements and Management Report 2006 Management Report Assets, financial position and earnings situation 13 Assets, financial position and earnings situation Assets ables due from Premiere WIN Fernsehen and wrote down the remainder of these receivables almost entirely. Stockholders equity decreased due to the loss for the year to EUR million (EUR million). Provisions declined to EUR 4.8 million (EUR 6.4 million), primarily due to the Premiere AG management board members decision not to accept performance-based remuneration for the business year Liabilities at EUR 1.5 million were slightly below previous year s figure of EUR 1.7 million. Financial position The outflow of funds from operating activities fell to EUR 11.6 million (01/01 12/31/2005: EUR 18.0 million). The Company s IPO in the business year 2005 had resulted in higher payments. The outflow of funds from investment activities dropped sharply to EUR 3.5 million (EUR million). The outflow of funds related to the increase of the loan granted to Premiere WIN Fernsehen during the year. Previous year s outflow comprised principally the granting of the loan to Premiere Fernsehen KG. The inflow of funds from financing activities was lower than the pre- Investments in affiliated companies mainly relate to the investment in Premiere Fernsehen KG. The investment in Premiere Win Fernsehen GmbH (Premiere Win Fernsehen) were written down in the business year 2006 on the basis of the company s current business plan which forecasts a substantial reduction in operating activities for Loans to affiliated companies comprise a loan granted to Premiere Fernsehen KG. Receivables from affiliated companies dropped to EUR 3.9 million (12/31/2005: EUR 9.0 million). The decrease in receivables resulted primarily from the decrease of receivables from Premiere Win Fernsehen. Premiere AG abandoned its claim on a large part of the receivvious year at EUR 15.0 million (EUR million). The inflow of funds resulted from the interest earned in connection with the loans granted to the subsidiaries. The higher inflow of funds in the previous year was due to the proceeds from the capital increase and the premium on the issuance of new shares in conjunction with the IPO. Cash and cash equivalents amounted as of the balance sheet date to EUR 0.3 million (12/31/2005: EUR 0.4 million). Earnings situation The revenues of EUR 17.0 million (01/01 12/31/2005: EUR 17.1 million) resulted mainly from management services by Premiere AG for its subsidiaries, as in the previous year. Personnel expenses rose slightly to EUR 20.4 million (EUR 19.4 million). Depreciation increased to EUR 1.6 million (EUR 0.2 million) due to the write-down of the loan granted to Premiere WIN Fernsehen. Other operating expenses dropped substantially to EUR 8.8 million (EUR 25.6 million). The previous year s figure included the legal and professional fees, advertising expenses and bank charges incurred in connection with the IPO. The financial result amounted to EUR 7.9 million (EUR 10.6 million). The decrease in the financial result was caused mainly by the write-down of the investment in Premiere WIN Fernsehen.