ProSiebenSat.1 Media AG Annual Report 2002

Sat.1 "Powered by Emotion"



Company:	Sat.1
Legal form:	GmbH
Founded:	1984
Interest held:	100%
Type of business:	Television broadcaster
Main activities:	Organizing and broadcasting a commercial full-service television schedule
Management:	Jürgen Doetz, Martin Hoffmann
Address:	Jägerstr. 32 10117 Berlin Tel.+49 30 20 90-0 Fax +49 30 20 90-20 90 www.Sat1.de

The Economic Situation


	Sat.1 consolidates position in advertising market With a 0.1 percentage-point increase in gross advertising market share to 19.8 percent, in fiscal 2002 Sat.1 was one of the three most successful stations in the German television advertising market. The other two were ProSieben, with a market share of 20.1 percent, and RTL, with 29.4 percent.


	Audience market dominated by sporting events in 2002 For television viewers, 2002 was a year of major sporting events like the Winter Olympics and the World Cup, both of which were carried by the public stations ARD and ZDF. Among the commercially decisive 14 to 49-year-old target group, Sat.1 achieved an average share of 11.1 percent, compared to the previous year's 11.6 percent. Among all viewers over the age of three, the station earned a 9.9 percent share, almost matching the previous year's 10.1 percent.


	Sat.1 - Television with emotion Sat.1 is positioned as television for today's family, focusing primarily on viewers between the ages of 25 and 49. Image studies conducted in November 2002 by the Monheimer Institute and SevenOne Media showed Sat.1 is considered a likable station for the whole family, with emotionally powerful broadcasts. The claim "powered by emotion" has become well known, and is considered a fitting description of the channel's programming. Strong program brands, especially in in-house fiction productions in German, give the station an unmistakable profile. Other pillars of the schedule are TV events, comedy and light entertainment programs, and sports coverage. Sat.1 won several German Television Prizes last year. Among the awards were best TV film ("Der Tanz mit dem Teufel"), best series ("Edel & Starck"), best comedy ("Ladykracher") and best daily show ("Richterin Barbara Salesch"). A survey commissioned by SevenOne Media from the forsa institute in fall 2002 gave Sat.1 the highest scores for late night shows, breakfast TV, court shows, soccer reporting, and doctor and hospital series.


	Successful, high-quality in-house productions Over the past few years, high-quality in-house and commissioned productions have become a Sat.1 trademark. "Der große Sat.1-Film," with first-run TV movies, earned an average 2002 share of 16.1 percent among viewers between 14 and 49. The station's event productions set standards again in 2002. The two-part "The Mists of Avalon" earned a share of 23.3 percent among viewers age 14 to 49. The Sat.1 productions "Wambo" and "Der Tanz mit dem Teufel - Die Entführung des Richard Oetker" additionally won the Grimme Prize and the German Television Prize - more evidence of the program's quality. Among series and other recurring productions, the new programs "Edel & Starck," "Broti & Pacek," and "Blond: Eva Blond!" did well, achieving prime time shares between 13.8 and 16.3 percent of the 14-to-49 audience. "Edel & Starck" won the German Television Prize for best series, and Christoph M. Ohrt was honored as best actor in a series. "Der Bulle von Tölz," "Kommissar Rex" with a new cast, and "Wolffs Revier" were also premiere broadcasts that earned shares of up to 21.6 percent of the audience group advertisers covet most. Innovative comedy was another of the station's trademarks again in 2002. New programs like Anke Engelke's "Ladykracher," "Mensch Markus" with Markus Maria Profitlich, and "Axel!" with Axel Stein achieved average shares of 11.7 to 18.2 percent of the 14-to-49 audience, and won the German Comedy Prize for 2002. "Ladykracher" also won the German Television Prize for best comedy. The "Harald Schmidt Show" won the Adolf Grimme Prize, and also attracted some 250,000 new regular viewers over the course of the year. With an average audience of 1.26 million, this late-night show achieved the broadest viewer reach since it first aired in December 1995.


	Sports coverage also enjoyed a good image. In a Forsa study, 45.2 percent of those surveyed between ages 14 and 49 put "ran - Sat.1-Bundesliga" soccer coverage in first place. In daytime TV, the talk shows "Franklin - Deine Chance um 11," "Vera am Mittag," and "Britt - Der Talk um Eins" remained stable in the market. Both Sat.1's court shows and its psychological advice show "Zwei bei Kalwass" are originals that have set afternoon trends on German TV. "Zwei bei Kallwass" and "Richter Alexander Hold" achieved convincing market shares - 16.8 and 20.9 percent - in the key target audience for advertising. "Richterin Barbara Salesch" gained further ground against 2001, earning an average share of 23.6 percent of the commercially decisive 14-to-49 age group in 2002.

Net Assets, Financial Position and Results of Operations


	World cup pulls down earnings The sharply contracting TV advertising market adversely affected Sat.1's business performance in 2002. The problem was exacerbated by exceptional effects like the soccer World Cup. Coverage of the World Cup on Sat.1 failed to measure up to expectations. Rights and production costs generated charges of EUR 54 million for this major sporting event, but it brought in revenues of only EUR 29 million because of the weak advertising market. A further adverse impact on Sat.1 profits has come from the hitherto high cost of the rights for Germany's Bundesliga soccer league. Fiscal 2002 revenues at Sat.1 were EUR 777 million, following EUR 831 million the year before. This is equivalent to a 6 percent reduction. Pre-tax income was EUR -98 million, following the previous year's EUR -77 million.


	In all, earnings were down EUR 21 million, compared to revenue losses of EUR 54 million. The substantial drop in revenues was partially compensated with rigorous cost management. In fact, setting aside the expensive World Cup, the station's cost structure has improved overall by a substantial EUR 73 million since 2000. Cost optimization was also evident in broadcasting expenses and purchased services. After adjustment for the exceptional effects of the World Cup, this item was down 5 percent from the previous year's figure. Sat.1's item for programming and materials costs rose 2 percent to EUR 803 million. The World Cup pushed depreciation of programming assets up from the previous year's EUR million to EUR 675 million. The amount of unscheduled depreciation included in this figure was up 14 percent, to EUR 49 million. Unscheduled depreciation is taken for feature films, series and commissioned productions if their costs can presumably not be covered by future revenues. Depreciation of programming assets is a major component of the item for programming and material costs that appears in the statement of income. This item also includes expenses for licenses, transmission fees and materials, as well as production costs. Earnings relating to other periods were EUR 21 million in 2002, up considerably from the previous year's EUR 5.7 million. The increase was mainly the result of write-ups on programming assets. This gain is reported as part of other operating income, which rose 32 percent over the year before, to EUR 58 million. Programming assets are written up if licensed programs or commissioned productions have been valued too low in regard to their future economic benefits. These write-ups are required under German law. The net loss for the year was made up by ProSiebenSat.1 Media AG under a profit and loss transfer agreement.


	Staff down 30 percent Sat.1 SatellitenFernsehen GmbH employed an average of 186 staff members in 2002. This is equivalent to a reduction of 30 percent. Personnel expenses were down 22 percent, to EUR 16 million. The change is essentially a result of the pooling of news programming at N24. "Information and magazine" operations had been transferred to N24 back in July 2001. N24 is the central news service provider for all ProSiebenSat.1 Group stations, and produces the news programming for Sat.1, ProSieben and Kabel 1. The transfer was not fully reflected in the average staff figures until 2002. The average age of all Sat.1 personnel in 2002 was 37. In its editorial operations, the station had five trainees over the course of the year. There were 84 individuals on internships.


	Receivables down considerably Sat.1's total assets were down 16 percent from the year before, to EUR 701 million. On the assets side, the lower total is the result of a decrease in current assets. Current assets represented 87 percent of total assets at the end of 2002.

Sat.1: Depreciation of programming assets and programming investments


	The decrease in current assets was largely a consequence of a lower figure for accounts receivable. Receivables and other current assets, at EUR 97 million, were down a total of 51 percent, or EUR 103 million, from the figure at the end of 2001. The principal factor here was the reduction of EUR 70 million in amounts due from Group companies, resulting in a total of EUR 47 million. This figure principally includes amounts due from and owed to other Group companies, and especially from or to ProSiebenSat.1 Media AG - an item reported in the present form for the first time. In contrast to the previous year, the total includes net amounts due from or owed to not only the Sat.1 Group, but the entire ProSiebenSat.1 Group. It also includes profits and losses transferred from Sat.1 to its parent company. Lower trade accounts receivable and a decline in other current assets were other factors that contributed to reducing total receivables.


	Programming the most important asset item Representing 73 percent of total assets, programming is Sat.1's most important asset item. It was valued at EUR 513 million as of the December 31, 2002, reporting date - a decline of 5 percent. Sat.1 programming investments amounted to EUR 658 million, and were thus down EUR 82 million from the previous year's figure of EUR 740 million. Sat.1's on-balance-sheet programming assets are mainly feature films and series, along with commissioned productions intended for one-time or multiple airings. Additionally, the station has programming inventory under contract that has not been capitalized as yet, comprising exclusive broadcasting rights worth a total of EUR 491 million. Thus total programming assets under contract for Sat.1 amounted to EUR 1.004 billion as of December 31, 2002. These rights cover 7,851 hours of programming in all - feature films, series, entertainment and magazine shows. A large portion of this programming is suitable for airing in the prime access or prime time periods - i.e., the evening hours between 5:00 and 11:00, the time of day with the greatest reaches and the highest advertising revenues. The total revenue potential of the programming stock is around EUR 1.3 billion. The programming rights the station had under contract up to December 31, 2002, will cover roughly 64 percent of its needs for licensed programming in the heaviest-revenue time periods until the year 2005. Thus Sat.1 has an extremely solid programming base.


	Equity capitalization improved The equities and liabilities side of the balance sheet reflects an improvement in Sat.1's equity capitalization. A shareholder resolution added EUR 360 million to capital reserves. This change boosted the equity ratio from 10 percent to 63 percent as of December 31, 2002. Total equity was EUR 444 million, thus giving Sat.1 an extremely solid equity base. The improvement in equity capitalization made it possible to reduce total debt by 67 percent, to EUR 237 million. Thus the level of debt relative to total liabilities and equity dropped from 86 percent at the end of 2001 to 34 percent. Amounts owed to other Group companies, and especially to ProSieben- Sat.1 Media AG, declined from EUR 603 million to EUR 133 million.

Research and Development


	"Back-door pilots" - an established programming innovation There is virtually no other industry where success and failure can be measured as quickly as in the television market. Detailed data on audience reach and market share for programs and commercial breaks are available from the GfK television research service the morning after a program is aired. These figures are the most important management tool for programming directors, and at the same time serve to document performance for advertising clients. Research on audiences, programming and advertising is a high priority at Sat.1. Primary and secondary research for the entire ProSiebenSat.1 Group are handled centrally at SevenOne Media GmbH. On commission from the stations, this company prepares programming and show analyses ranging from focus groups to studio tests to creative workshops, Sinus milieu studies, and rounds of psychologically based discussions that take account of group dynamics. The results provide a base for important conclusions about the stations' programming, marketing and communications strategies, and about marketing practices.

Sat.1: Share of in-house and commissioned productions


	High-quality in-house productions are a key feature of the station's programming profile and belong to its core competence. Developing new and innovative programs is a very important activity at Sat.1. Sat.1 has the largest share of in-house and commissioned broadcasts of any German commercial station - 76 percent in 2002, or 6,672 hours of programming aired. The channel invests extensively in new shows, and sets the standard for production quality on German television. Last year it commissioned 178 scripts, and produced six pilot films. In all, Sat.1 spent more than EUR 10 million on new programming development. Development costs for the previous year had been around EUR 5 million. The rise was due to the introduction of "backdoor pilots." With this innovative programming idea, audiences decide what programs should go into series production. In 2002, the majority of viewers voted for three series to go into production: "Körner and Köter," "Der Elefant Mord verjährt nie" and "Mit Herz und Handschellen."

Events Subsequent to the Reporting Date


	Successful new launches of comedy shows Sat.1 expanded its market position at the beginning of the new year. Among all viewers over the age of three, the station reached a market share of 9.8 percent in the first two and a half months (until March 15, 2003). Among 14 to 49-year-olds, Sat.1 earned 11.0 percent. The station launched successful new shows in the first few months of 2003: The sketch comedy "Die Dreisten Drei - Die Comedy WG" reached an average market share of 19.4 percent in the commercially decisive target group in the 10:15 time slot on Friday evenings. Hugo Egon Balder's star-studded comedy show "Genial daneben - Die Comedy Arena" has already grabbed a share of up to 16.6 percent on Saturday evenings. The second seasons of "Ladykracher" and "Mensch Markus" picked up seamlessly on the series' earlier successes, respectively earning shares of 23.1 and 16.5 percent in the 14-to-49 age group. Especially successful was the March 10, 2003, launch of the access prime format "Lenßen & Partner." The show airs Monday to Friday at 06:00 in the evening and already reaches market shares of over 16 percent with the 14-49 target audience.


	Still interested in Bundesliga soccer At the end of January 2003, Sat.1 let lapse an option to acquire Free TV rights to the next season of Germany's soccer Bundesliga. Picking up the option would not have made economic sense. But the station is still interested in showing Bundesliga soccer, which it regards as a strategic product. The owner of the rights, the Swiss marketing company Infront, was notified that Sat.1 would prefer a longer-term arrangement in the future, and would like to negotiate a three-year agreement on Bundesliga rights. Sat.1 is currently preparing alternative programming against the possibility that the rights might be picked up by another station.

Outlook


	Sat.1 has set itself the goal of getting into the black at the operating level in 2003. But that will be possible only if the market environment remains stable. Yet so far there are no signs of a turnaround for the advertising market in Germany. Amid this setting, Sat.1 will continue its rigorous cost management, especially in programming expenses. One positive factor in this regard will be the absence of the expense of the World Cup, which added a total of EUR 54 million to broadcasting costs in 2002. Programming investments will be reinforced further for the times of day that are of particular importance for the advertising market.


	Broadcasting performance to rise The top priority is to improve broadcasting performance. Sat.1 is showing new sequences of proven programs like "Edel & Starck," "Der Bulle von Tölz" and "Blond: Eva Blond!" The station will be presenting the "Star Trek" prequel series "Enterprise" as a German prime time TV premiere. Other German Free TV premieres for the whole family will be "Sleepy Hollow," "Stuart Little," "Insider," "28 Days," "Girl, Interrupted" and "I Dreamed of Africa." Sat.1 has also scheduled high-grade German TV films again in 2003, including the event productions "Für immer verloren" with Veronica Ferres and Walter Sittler, "Das Wunder von Lengede" with a cast including Heino Ferch, Jan Josef Liefers and Heike Makatsch, and a great number of other TV movies. The comedy slots are filled with new sequences of "Axel!" and "Hausmeister Krause - Ordnung muss sein," along with "Sechserpack," "Bewegte Männer" and the already launched sketch comedies. In sports reporting, Sat.1 sets the pace with "ran" in Bundesliga soccer, along with the best from the world of basketball and football.