Beyond Television Sky Deutschland AG Annual Report 2010

Transcription

1 Beyond Television Sky Deutschland AG Annual Report 2010

2 Key Figures Change (absolute) Change (in %) Subscribers Direct subscribers at beginning ( 000) 2,470 2, % Gross additions % Churn % Net growth >100% Direct subscribers at end 1) ( 000) 2,653 2, % of which Flex % HD penetration 2) (%) Subscription ARPU 3) (in, monthly) % Churn rate 4) (in %, annualised) Churn rate 5) (in %, 12 months rolling) Financials (in million) Revenues % Operating expenses 1, , % EBITDA % Depreciation and amortisation % Amortisation of subscriber base/trademark % EBIT % Financial result % Income taxes <-100.0% Result for the period % Consolidated balance sheet as of 31/12/ (in million) Total assets 1, , % Shareholders equity % Net debt % Employees as of 31/12/ Full-time employees 1,420 1, % 1) Direct subscribers comprise monthly contract subscribers (residential customers, sportsbars and hotel rooms) to at least one of Sky s channel packages and subscribers who purchased pay-per-view, and other ad hoc-services on a prepaid basis via the Flex range of products. Subscribers in the process of migration to new Sky packages are given up to ten days grace at the end of their prior contract before termination. 2) HD penetration is defined as relation of direct subscribers which have subscribed for the HD channels in relation to the total number of direct subscribers at the end of that period. 3) Subscription ARPU is defined as monthly average subscription revenues (formerly direct program revenues) for a given period divided by the average number of direct subscribers in that period. 4) The churn rate for a given period is defined as the number of direct subscribers that terminated their subscriptions during the course of a given period, divided by the average number of direct subscribers in that period (calculated by dividing the sum of the number of direct subscribers on the first day of that period and on the last day that period by two) and multiplied by four when referring to a quarterly period, by two when referring to a half-year period and by one when referring to a full-year period. 5) Is defined as the number of direct subscribers that terminated their subscriptions during the course of a 12-month period, divided by the average number of direct subscribers in that period. Explanatory notes on the key figures. The financial statements of Sky Deutschland group are drawn up on the basis of International Financial Reporting Standards (IFRS), with due regard to the interpretations of the International Financial Reporting Interpretations Commitee (IFRIC). Due to the totalling of individual items, the table may contain rounding differences. 2 Sky Deutschland AG

3 Beyond Television With Innovation and Enthusiasm for our Customers With Consistency and Dedication to our Shareholders With Team Spirit and Vision for our Targets

4 Beyond Television Sky recorded a net subscriber growth of 131,000 subscribers only in the last quarter of the year 2010 alone and now has a total of 2.653m subscribers. This means 2.653m individual programme interests Sky serves every day. And millions of reasons to offer first-class top-quality customer service to satisfy the needs of our subscribers every day. That is why the wishes and expectations of our subscribers are always at the heart of our business decisions. With our selection of programmes and packages we offer individual solutions for every customer need. Our customer service is fast, practical, and aims to serve the needs of our subscribers. We continuously develop products and services that offer impressive and unique added value for everyone of them. Our customers feel the same and use our offering and technical innovations to realise a better entertainment experience while watching TV. And that is what our offering is made for. We have portrayed some of our subscribers for this business report. We met them in private and asked them about their personal experience with Sky. They showed us what they find special and unique about our product and how we provide them special TV moments each and every day. for Customers who want more than TV

5 The right programme for everyone: Markus is using Sky Multiroom in his shared appartment and suddenly has more guests than expected. Two adults, four children a lot of different programme interests. Thanks to the Sky+ PVR none of Saoudatous family members miss their favourite programmes. Rudi experiences major sports events live even when he is away on business: He has downloaded the Sky Sport App for his ipad. For Jutta and her family, watching TV is something special. With Sky 3D, watching TV is an memorable experience for the entire family. With the Sky Sport Mobile App on the iphone, Christian is independent when it comes to where and when he is following the UEFA Champions League live on Sky.

6 6 Sky Deutschland AG

7 Content Key figures Sky world of entertainment 12 To the shareholders 28 Letter to the shareholders 28 Members of the Management Board 30 Share information 31 Sky AG combined management report 38 Business and strategy 38 Corporate functions 48 Key metrics and quarterly trends 52 Earnings, financial and net asset position 54 Opportunities and risks 58 Subsequet events 64 Outlook 64 Consolidated financial statements 74 Consolidated balance sheet 74 Consolidated statement of total comprehensive loss 75 Consolidated statement of cash flows 76 Consolidated statement of changes in equity 78 Notes for financial year General information and basis of preparation 80 Notes to the consolidated balance sheet 98 Notes to the consolidated statement of operations 118 Other explanatory comments 125 Responsibility statement 135 Auditor s report 136 Further information 142 Review and monitoring report by the Supervisory Board 142 Corporate governance at Sky Deutschland AG 150 Corporate responsibility 156 Contact information and financial calendar 158 Geschäftsbericht

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9 Thanks to Multiroom everyone in Markus K s shared appartment can see the Sky programme he or she wants to see

10 More TV Fun

11 For Markus, football is everything and it has always been this way: after attending a private football college he had a stint in professional football. For three years Markus played side by side with future first league players under 19 s team of the Bundesliga. Since then, the 31-year old has changed sides, and works as a freelance sports manager for his former team mates. He regards himself as a second Marcel Reif. The football coverage on Sky is just amazing: live, professional and always right to the point exactly what I want to see and hear. My friends too, by the way. That s why they regularly raid my flat, occupy my sofa and loot the fridge of our shared flat when important matches are on. To avoid trouble with the girls who are less crazy about football than we are, we found a solution: We have Sky in two rooms. Since I ve already been Sky customer since 2005 and my receiver and TV set arrived here even before me I immediately took the chance when we got a Multiroom-offering. Now we boys can watch football in peace while the ladies can watch their favourite films or series in the other room at the same time. But when my club has the lead the truce ends: We have to celebrate! After our triumphal entry in the female party zone the ladies send us back to the football room quite fast but no-one can avoid our house parties in the end: we can still celebrate after the final whistle. Thinking about it we have a lot more house parties since we got our Sky subscription. And I like it!

12 The World of Sky 12 Sky Deutschland AG

13 Sky subscribers want premium quality TV with programmes that are different and better than regular TV. Sky meets these demands with the highest levels of programme quality, individual offers for every kind of interest and state-of-the-art TV innovations. For a unique TV experience whenever you want and wherever you are. Discover the world of Sky. Annual Report

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15 Entertainment for everyone Sky Welt is the basic package with 25 channels covering all genres, including fascinating documentaries, children s programming, Hollywood classics, action, crime, series, soaps, music and erotic content. All in one package around the clock and without commercial interruption. Four unique HD channels are included without any additional charge. Sky Welt NEW: incl. 4 HD channels TM Satellite customers who book Sky Welt in combination with at least one other premium package will receive an additional 17 channels with film highlights, comedy, live sports, action, documentaries, children s programming, lifestyle, anime and music Disney Channel Sky Welt Extra Big photo: Boardwalk Empire on TNT Serie Small photo series (left to right): NFL on ESPN America, Morgan Freeman: Mysterien des Weltalls on Discovery Channel, Disney Micky Maus Wunderhaus on Playhouse Disney Annual Report

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17 Your own personal cinema The Film package from Sky gives subscribers the choice of around 80 films every day across all genres: blockbusters, classics, action films, drama and entertainment for the entire family all without advertising breaks. Enjoy the best picture quality and superb sound along with the option of original language on Sky Film channels Film Package Big photo: Robin Hood - Director s Cut on Sky Cinema Small photo series (left to right): Alice im Wunderland on Sky Cinema, Inception on Sky Cinema, Wolfman - Extended Version on Sky Cinema Annual Report

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19 Live sports for fans Sky broadcasts world class football including all UEFA Champions League matches, the DFB Cup, the biggest UEFA Champions League games (all German games guaranteed) as well as the top matches from the English Premier League. In addition, Sky offers all Formula One races and other motor sports, as well as major international golf tournaments, the top games from the Deutsche Eishockey Liga, tennis and wrestling. Sport Package Big photo: DEL on Sky Sport Small photo series (left to right): Premier League on Sky Sport, Golf on Sky Sport, Formel 1 on Sky Sport Annual Report

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21 Closer to the game As an official partner of the Bundesliga, Sky is closer to the action than any other broadcaster, providing live broadcasting of all Bundesliga and second division Bundesliga games, via single feed or in conference mode. In addition, fans will have access to detailed coverage presented by top football experts with exclusive interviews, background reports, professional game analyses and all the most recent Bundesliga highlights. Sky s Bundesliga programming is complimented by the exclusive shows Mein Stadion ( My Stadium ), Samstag LIVE! ( Saturday LIVE! ) and Sky90. Fußball Bundesliga Package Fußball Bundesliga on Sky Fußball Bundesliga Annual Report

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23 Seeing is believing Sky offers a stunning HD quality: HD means extremely high resolution, vibrant colours, 16:9 format and fantastic Dolby Digital 5.1 Surround Sound. German premieres of the latest blockbusters, new top series, action hits and film highlights as well as documentaries and live football, including Bundesliga, UEFA Champions League, UEFA Europa League and the DFB Cup. HD channels sporthd 1 * actionhd sporthd 2 * cinemahits HD * * Television in a new dimension: Germany s first 3D broadcaster shows select highlights from Sky s exclusive programming: From live sporting events to outstanding films, documentaries and much more all in HD 3D quality. Sky 3D NEW: Disney/Pixar Big photo: Sex and the City 2 on Sky Cinema HD Small photo series (left to right): Formel 1 on Sky Sport HD, Speed of Life Momentaufnahmen des Lebens on Discovery HD, Toy Story 3 on Disney Cinemagic HD Annual Report * Available as part of the Sky Welt package without additional costs

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25 Life for Saoudatou A. is colourful and chaotic. Sky+ offers something for every member of the family.

26 More Timeouts

27 Saoudatou was born in Togo. In her flat things often go haywire not only because of her four children who are between two and 17 years of age but also because of the many German and African friends who visit the family frequently. Then everyone dresses up and all party together. Saoudatou and her husband, warehouse clerk Aliou have made Germany their new home. They have been living and working here for 17 years, speak German, French and their mother tongue Ewe and they love Sky. They have been Sky subscribers since 1997 and love to watch kids and film programmes as well as football.. TV is very important for us. It helped us with improving our German language skills. And the children love it too, of course they like Sky in particular because they can watch all their favourite programmes there. The only difficult thing for us is to agree on a programme or to watch a movie from the beginning till the end it s almost impossible. But now we have Sky+. With Sky+ we can programme the hard disc receiver so we can record the best programme for every member of the family. And then we can watch it when we have the time. And that s exactly how we do it when the children start to fidget or we have unannounced visitors. My husband pushes the pause button and we continue when everything is calm and quiet again usually when the children are in bed and we aren t too tired. But thanks to our hard disc recorder nothing slips through our fingers as they say here.

28 To the shareholders Dear shareholders, Dear readers Customers deserve better. This was the simple principle that was set out when we re-launched as Sky Deutschland in the summer of 2009 that our customers, and in fact all people throughout Germany and Austria, deserve better television entertainment, better technology and innovation, and better service. There has long been a believed fact in the German and Austrian markets that pay TV would never work. What we found instead were viewers who were frustrated with the limited quality, choice and value in the market, and who were hungry for a better experience. At Sky we believe in championing the customer, in challenging the status quo, and never accepting that things cannot change for the better. The seeds were sown back in 2009, and much more was done in 2010 to further this objective. The introduction of our exciting new brand and the promise of quality, innovation and value that comes with it set the stage. The simplifi cation of our premium program packages, the extension of our film offering with several new channels, and most importantly, the expansion of our HD offering all contributed to a new, more positive response for our products and services. In 2010, we delivered many enhancements that brought us much closer to our ultimate goal: creating the best and most dynamic TV offering for our customers. At the front of this effort was the launch of four additional exclusive premium HD channels Sky Sport HD2, Sky Cinema Hits HD, Sky Action HD and ESPN America HD extending our position as the leading HD broadcaster in Germany and Austria. But this was only the beginning of a large-scale innovation campaign, both on screen and through our products. Brian Sullivan CEO of Sky Deutschland AG 28 Sky Deutschland AG

29 Some of the highlights included: Sky+, our first fully integrated HD PVR, giving our customers full control of their viewing experience, and ensuring they never miss their favourite programmes again. Sky Multiroom, a new offering for families who want the convenience of watching two different programs, in two different rooms, at the same time. The Sky Sport App, the first live sports streaming service in the world for the ipad, bringing all the excitement of Sky Sport to our customers wherever they choose (including the 2010 World Cup!). Our own 24-hour channel dedicated exclusively to the FIFA Football World Cup in South Africa. We marked the return of Michael Schumacher to Formula 1 racing by launching a dedicated channel to follow his progress, the perfect way to provide added value to our loyal Sky F1 viewers. The continued enhancement of our new, innovative services, including HD and 3G support for our Sky Sport ipad App, the introduction of a Sky Sport App for the iphone and ipod Touch, the launch of our Sky/UEFA Champions League Match Tracker App and the Sky Bar Finder App (both for the iphone and the ipod Touch). The launch of Sky 3D, Germany and Austria s fi rst 3D events channel, showing sports (including the Bundesliga, UEFA Champions League and DFB Cup, amongst others), movies, the arts, and much more. The launch of three new, live, in-house productions focused on the top football and sports events of the week ( Samstag LIVE!, Sky90, Mein Stadion Die Sky Bundesliga Vorschau ). We have already come a long way, and the results can be measured in our performance, with the early signs of solid subscriber and revenue growth showing through. Besides the core improvements in net growth, churn rate and ARPU, we have seen a fundamental increase in viewer ratings across the Sky channels, rising value-for-money scores, record customer recommendations and the highest satisfaction levels in the company s 20 year history. The positive response both from long term subscribers and brand new customers - is very encouraging, especially in these challenging times, and strengthens our resolve to work even harder to deliver the experience they deserve. In 2011, we will continue this growth and innovation strategy, always focusing on our customers, and deliver on areas which will lead to major changes not only for Sky but for the entire media business. Our main task will be to accelerate the pace of change in the largest TV market in Western Europe. A strong pay-tv market is good for everyone. It is good for content makers and rights holders, as it opens new revenue opportunities for investment, growth and diversity. It s good for the media industry as a whole, as there is more than enough opportunity to enhance all businesses. And most importantly it is good for customers, who are the core of our business. The course for success is set: the key metrics for the last year are encouraging and are trending in the right direction. With these results in mind we look into the future optimistically and continue to work on the development of our company s success. I want to thank you also in the name of the Management Board and the entire Sky team for your trust, confidence, and support. While there is still much to do, we are excited for the opportunity, and look forward to the challenge ahead. Best regards Brian Sullivan Annual Report

30 Members of the Management Board Brian Sullivan born 1962 entered the company as Deputy CEO in January 2010 more than 20 years of pay TV experience in the US and Europe appointed CEO on 1 April 2010 Dr. Holger Enßlin born 1967 entered the company in October 2003 long-term experience as a lawyer and head of the company s legal department Chief Offi cer Legal, Regulatory & Distribution since 1 December 2008 Pietro Maranzana born 1972 entered the company in November 2008 experience with business consulting and business planning, particularly for Sky Italia Chief Financial Officer from 1 June 2009 till 31 January 2011, afterwards return to Sky Italia Steven Tomsic born 1969 entered the company in December 2010 as Deputy Chief Financial Officer comprehensive branch knowledge, particularly in fi nancing, and very good knowledge about the company as a former supervisory board member of Sky Deutschland AG appointed Chief Financial Officer as of 1 February 2011 Carsten Schmidt born 1963 entered the company in July 1999 comprehensive knowledge in the fields of sports media, sports programming and -production as well as the acquisition of sports rights Chief Offi cer Sports, Advertising Sales & Internet since March Sky Deutschland AG

31 Share information Development of share capital On 21 December 2009, Sky announced that the Management Board had agreed, with the consent of the Supervisory Board, to increase the share capital of Sky Deutschland AG by a direct placement of up to 49,014,714 new shares to News Adelaide Holdings B.V., an indirect 100% subsidiary of News Corporation, against cash. On 21 January 2010 the direct placement to News Adelaide Holdings B.V. was completed. This capital increase comprised 49,014,714 new shares at a subscription price of 2.25 per new share and generated gross proceeds of 110 million. Sky Deutschland AG s registered share capital increased from 490,147,144 or 490,147,144 issued shares to 539,161,858 or 539,161,858 issued shares. As a result, News Corporation s indirect stake in Sky Deutschland AG increased from percent to percent. On 12 September 2010, Sky announced that the Management Board had agreed, with the consent of the Supervisory Board, to increase the share capital of Sky Deutschland AG by a rights issue of up to 269,580,929 new shares. On 28 September 2010 the rights issue was completed. The capital increase comprised 168,937,926 new shares at a subscription price of 1.05 per new share and generated gross proceeds of million. As a result, Sky Deutschland AG s registered share capital increased from 539,161,858 or 539,161,858 issued shares to 708,099,784 or 708,099,784 issued shares. The capital increase was entered in the Commercial Register on 30 September News Corporation s indirect stake in Sky Deutschland AG increased from percent to percent. Key figures for the Sky share Sky share information 2009 Year-end closing price (in ) High (in ) Low (in ) Number of shares at 31 December 708,099, ,147,144 Market capitalisation at year-end (in million) 1,199 1,108 Earnings per share (in ) ISIN Stock category Stock segment Market segment DE000SKYD000 Ordinary registered shares Frankfurt, Official Market Prime Standard Annual Report

32 Share price development Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Sky Deutschland AG MDAX DAX Sky s share price 1 traded down from 2.26 at the end of December 2009 to 1.76 at 26 January After a short recovery at the beginning of February to 2.15 on 2 February 2010, the Sky stock declined in the following weeks and started rising again during March and finished the first quarter at 1.91 on 31 March In April and May Sky shares traded down continuously. In June, Sky shares went up to 1.62 on 15 June 2010 and finished at 1.34 on 30 June In July, Sky shares traded up to The decline of the Sky stock on 3 August 2010 was due to Sky s ad hoc announcement as of 2 August 2010 that it plans to initiate fi nancing measures to raise a minimum of 340 million from a rights offering, potentially combined with a convertible bond and / or a shareholder loan. During August and September Sky shares traded between 1.11 and 0.92 and closed the third quarter at 1.03 on 30 September In October, the Sky stock price traded down from 0.97 to the year low of 0.82 on 12 October In the second half of October, Sky shares traded up and closed at 1.17 on 29 October In November and December, the Sky stock increased continuously and ended the year at Sky Deutschland AG shares showed a performance of minus 25 percent over the course of 2010 versus an increase of 16 percent in the DAX and 35 percent in the MDAX during the year. In January 2011, the share price increased from 1.90 on 3 January 2011 to 2.41 after the announcement of the Q key metrics on 12 January Until the end of January 2011, the share price continuously rose and closed the month at Based on the closing price, Sky Deutschland AG s market capitalisation on 31 December 2010 was 1,199m with a free fl oat market capitalisation of 600m. The average daily trading volume for the full year 2010 was 2,698,971 shares. Inclusion in indices The Sky stock is part of the MDAX and was ranked 34th in terms of trading volume and 43rd in terms of market capitalisation on 31 December In addition to being represented in other indices of the DAX family such as DAXsector Media, Sky shares are also included in the MSCI Global Investable Market and the Dow Jones STOXX indices. 1 The stated share prices are based on the daily XETRA closing prices of the German Stock Exchange 32 Sky Deutschland AG

33 Shareholder structure Sky Deutschland AG s share capital currently amounts to 708,099,784 with 708,099,784 issued shares. Shareholder structure (in%) ( Simplified view as of 31/01/2010) 50.1% Free Float 49.9% News Corporation Free Float 50.1% News Corporation 49.9% All shares other than those held by News Corporation are included in the free float as defined by the standards of the German Stock Exchange. Shares held by News Corporation After the completion of direct placement to News Adelaide Holdings B.V. in January 2010, News Corporation s indirect stake in Sky Deutschland AG increased from percent to percent. After the completion of the capital raising in September 2010, News Corporation s indirect stake in Sky Deutschland AG increased from percent to percent. Shares held by institutional investors Institutional investors who exceed notifiable thresholds of voting rights in Sky Deutschland AG are Odey Asset Management LLP (press release by Odey on 5 November 2009, stake of percent) and Taube Hodson Stonex Partners LLP (notification of 6 October 2010, stake of 4.92 percent). Shares held by Management Dr. Holger Enßlin, Chief Offi cer Legal, Regulatory & Distribution, held 15,000 Sky shares on 31 December Pietro Maranzana, CFO of Sky Deutschland AG, held 5,000 shares in Sky Deutschland AG on 31 December Shares held by members of the Supervisory Board Dr. Stefan Jentzsch, member of the Supervisory Board of Sky Deutschland AG, exercised his subscription rights during the capital increase in September 2010 and therefore increased his holding in Sky Deutschland AG from 80,000 to 120,000 shares (Director s Dealings announcement as of 6 October 2010). Annual Report

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35 Rudi H. is using the Sky Sports App on his ipad.

36 More Spectators

37 When it comes to quality, Rudi is an expert. Of course the SAP quality management consultant also looks out for top quality products for his free-time activities. When it comes to TV, Sky is the perfect choice for him, his wife and his two daughters. Rudi does not want to miss a thing when he is away on business. That s why he uses the Sky Sports App on his ipad. I don t know why but every time I start the Sky Sports App on my ipad a colleague of mine is breathing down my neck to just have a quick look. Afterwards it goes like Wow, have you seen this? I want this, too! I can understand. Although I use the App regularly I am still fascinated by its functionality. If I imagine sitting in the hotel while a Bundesliga or Champions League match is on and I could not watch it this would be a catastrophe, really. The Sky Sports App offers me exactly what I expect: live broadcasts in outstanding Sky quality, up-to-date sports news, video clips, data centres, background information and much more. Thank you Sky! With the Sky App I am always up-to-date, even at the hotel. And my girls at home are free to enjoy the great Sky programmes as well. There is no lack of films and kids programmes with Sky anyway.

38 Combined Management Report Business and strategy Business operations Sky s core business is subscription pay-tv. The Company offers a wide range of programming in Germany and Austria and in addition can be received via the Teleclub in Switzerland. Sky s program offering includes current feature fi lms, new series, children s channels, documentaries and live sports, in particular the games of the German football league (Fußball Bundesliga), the DFB Cup, the UEFA Europa League and the UEFA Champions League. In order to further enhance its unique program profile, Sky expanded its own production in the area of sports, most recently with the introduction of Saturday LIVE! ( Samstag LIVE! ) every Saturday on prime time after the Game of the Week and in January 2011 with the introduction of My Stadium ( Mein Stadion ) the preview reporting on the Bundesliga. On 13 August 2010, Sky expanded its previous comprehensive offering of seven HD channels with three additional HD channels, and on 27 October 2010 with ESPN America further to a total of eleven channels. In addition, on 13 August 2010 Sky started the first 3D channel, which broadcasts concerts, documentaries, blockbusters and exclusive live sports in brilliant HD 3D quality. Sky believes it offers the most comprehensive true HD programming selection. The Company also offers its subscribers first-class movies, live sports programming and adult entertainment on a pay-per-view basis. Sky distributes its programs digitally, primarily via satellite and cable. It thereby reaches approximately 90 percent of all TV households in Germany and Austria. In addition to conventional broadcasting via satellite and cable, Sky has also offered some of its services via internet as well as various services on the ipad or the iphone since June The expansion of further offerings is planned for mobile devices for the distribution of programs. Products and Services At Sky, the interests and desires of customers are the focus of all business decisions. Day after day Sky offers its viewers special television moments. The Sky brand stands for entertainment, thrill and excitement with the largest selection of television entertainment in the German-speaking region, as well as for a high quality program that sets it apart from other TV broadcasters. Sky offers more live football than the competition Sky offers the most attractive live sports selection in Germany and Austria Sky offers the best range of films on German and Austrian television Sky offers a comprehensive selection of German and American series, many of which are aired for the fi rst time Sky offers the greatest program diversity in true HD Sky offers channels for every age group and every family member Sky, with Sky+, offers its customers an HD-PVR which makes it possible at any time to record, store, pause, and replay programs. With its comprehensive selection of sports, films, series and HD, Sky considers itself to be the leading pay-tv provider in Germany and Austria. Sky broadcasts its premium programming over 18 individual channels, 24 hours per day. In addition, Sky subscribers have access to 45 partner channels with a broadly-diversifi ed selection for every taste. This selection offers something for everyone in the family. In addition to sports and fi lms, Sky also offers programming that includes thrillers and adventure all the way to comedy, documentaries and science fiction, as well as German productions and the best children s programming. Sky delivers this outstanding television experience not only at home in the living room. Subscribers can also enjoy their favorite programs on an increasing number of mobile platforms all at great value. Sky customers can assemble the programming of their choice by selecting the following packages: Sky Welt the entertainment package with 25 national and international channels Sky Welt offers a diverse programming service for every taste and includes documentary channels, children s programs for all age groups as well as several high quality entertainment and four HD channels. In connection with a promotional campaign, all customers additionally have access free of charge to the impressive 3D content of Sky through the end of February Upon subscribing to Sky Welt, customers can select premium packages according to their interests. 38 Sky Deutschland AG

39 Sky Welt Extra available for satellite customers Sky Welt Extra is available as an additional bonus package to satellite customers who choose at least one additional premium package. It offers a wider selection, even greater quality and expands the entertainment offering of Sky Welt. Film package the package for movie fans The Film package offers ten channels, including eight channels produced by Sky, showing 80 movies a day and approximately 25 premieres per month, aired for the first time on German-language TV. A wide selection of current movies is broadcast in 16:9, Dolby Digital-format and is also available in the original language. Sport package the most comprehensive sports package on German-language television The Sport package offers an exciting range of sports including football, Formula One and additional motor sports, as well as golf, ice hockey, tennis, wrestling and extreme sports, broadcast on three dedicated full-time sports channels. The Sport package offers football fans some special highlights: all games of the UEFA Champions League, all games played by the German and Austrian teams in the UEFA Europa League, the top games of the English Premier League, all games of the DFB Cup as well as all games of the Austrian Bundesliga. Fußball Bundesliga package Fußball Bundesliga around the clock, seven days a week Fußball Bundesliga is the package for Bundesliga fans. It offers all 612 Bundesliga and second division Bundesliga games live and in conference mode, and reports around the clock on the top two professional leagues seven days a week, 365 days a year. The live reporting is supplemented by programs such as My Stadium the Sky Bundesliga preview, Saturday LIVE! and Sky 90 with comprehensive preview and follow-up reporting relating to the Bundesliga. Sky HD the comprehensive true HD service in Germany and Austria Sky offers customers the most impressive selection of true HD content in Germany and Austria, with a current selection of twelve channels. With a picture quality up to fi ve times higher in HD, coupled with Dolby Digital sound, television now brings a cinemalike experience into the home. Four HD channels are included for all customers in the basic package Sky Welt. The remaining HD channels can be booked in line with the themes of the respective program packages. Since September 2010, HD customers can additionally receive the new 3D offering from Sky in connection with a promotional campaign through the end of February 2011, without additional cost. In addition, Sky offers TV innovations like the live football conference and Formula One racing that allows fi ve freely-selectable camera angles. Sky also offers its subscribers attractive films, live sports and adult entertainment through Sky Select, Sky Select+, Blue Movie and the internet on a pay-per-view basis or through various mobile applications. Sky offers special subscriptions for hotels, restaurants and sports bars and will expand this offer to other commercial clients in the future. General conditions and economic environment Economic environment The surprisingly quick recovery of the German economy after the worldwide financial and economic crisis was one of the outstanding events in In Germany, the gross domestic product, as an overall indicator of the total economic performance, increased in real terms by 3.6 percent in This was the highest yearly growth rate since the German reunification (source: Federal Statistics Offi ce 2011). This positive economic development also affects the recovery of the labor market. Employment and the number of employees paying social insurance contributions once again increased signifi - cantly. The number of unemployed was slightly more than 3 million in December 2010 with an unemployment rate of 7.2 percent (source: The labor and vocational training market in Germany. December and the year 2010, German Federal Employment Agency). These provided good support for growth in domestic demand and by extension the willingness to buy in the electronic and entertainment segment. The interest here in entertainment electronics and in HD-compatible televisions was large, which is closely linked to the large interest in HD programs on German television. The current figures for the consumer electronics market index in Germany (CEMIX) of the German Association of Consumer and Communications Electronics (gfu) show this clearly: Sales of digital set-top boxes increased by 27.1 percent in the fi rst three quarters; approximately 6.4 million flat screens were sold in this period (source: CEMIX). At the end of million flatscreens were sold (source: gfu). According to the market research organisation ScreenDigest, there were approximately 20 million HD-compatible television sets in Germany and Austria at the end of 2010, with the trend rising. According to gfu 178,000 HD 3D-compatible television sets had been sold in Germany by the end of The increased interest in new television technology and an improved television experience on the part of the consumer also corresponds to an increased demand for high-resolution television programs also for this reason HD has become an important success factor for the industry. Sky makes use of the potential of digital television to give its customers an optimal TV experience: all films can be enjoyed with the best digital image and audio quality, in 16:9 format, with Dolby digital sound or the option of viewing most films in their original language. Annual Report

40 Number of HDTV-sets in Germany and Austria (in millions) Austria Germany 17.7 Pay TV Penetration in Europe 56.0% 57.4% 41.9% % 10.9% Source: Screen Digest (11/2010) (Prog) Advertising revenues, among other key figures, represent an important factor for the economic situation in the media market. In 2009, the media industry in Germany was confronted by an exceptionally weak advertising market. This situation improved in The Central Association of the German Advertising Industry (ZAW) is forecasting a net increase (net = excluding discounts and agent s fees) in the amount of 0.35 billion to a total of billion for the total year This would represent an increase of 1.9 percent compared to the prior year. Competition In the German television system, three business models are competing with each other: The public television, which is primarily fi nanced through public broadcasting license fees; private television, which is mainly fi nanced by advertising; and pay-tv. According to a recent study by Booz & Company, the classic TV advertising market will stagnate in the coming years. The value creation of the media industry is accordingly shifting from classic TV advertising towards content one has to pay for, together with associated services. Pay-TV has the opportunity to benefi t from this opportunity disproportionately. Compared to the European core markets, the pay-tv penetration rate in Germany, in particular, lies below the average of all other Western European countries Germany Austria UK Italy France Source: Screen Digest; Sky s own calculations on the basis of data available on the market; State: Q According to Goldmedia (source: ALM Yearbook 2010), at the end of 2009 there were approximately 4.4 million pay-tv subscribers, a number that remained stable in a year of economic crisis. The market penetration is estimated to be 12.0 percent in Germany. The European comparison shows that there is still substantial potential for development here. Among the classic pay-tv platforms in Germany, Sky is the largest by a substantial margin, followed by Kabel Deutschland (1.1 million pay-tv customers; source: KD Q3, 2010), Unity Media (0.5 million pay-tv customers; source: ALM Yearbook 2010) and other smaller providers (Kabel BW, Tele Columbus, PrimaCom, KabelKiosk, arenasat, ASTRA/HD+). In addition to this, there is a certain number of IPTV customers (e.g. Deutsche Telekom, Alice) who can be considered as pay-tv customers. The pay-tv offering of arenasat was discontinued as of 30 September For 2010 the Private Radio and Telecommunications Federation [Verband Privater Rundfunk und Telemedien e.v. VPRT] forecasted a growth of 6 percent in the pay-tv market. As a provider of TV entertainment, Sky competes additionally with free-to-air television channels. Competition exists here especially for the acquisition of attractive program rights and also for the marketing of advertising times. The public channels ARD, ZDF and ORF, as well as the two largest private channel groups RTL and ProSiebenSat.1 offer competitive content in Germany and Austria such as films, series or live sports broadcasts. In order to set itself apart from the other television offerings on the market, Sky places emphasis on premium quality, on the added value of outstanding innovationdriven product experience and increasingly on own production. Parallel to linear television, a dynamic market is developing with the on-demand use of TV and video content over the internet. 1,275 Web-TV platforms are usable, over which approximately 151 million online videos are accessed per day (source: BLM Web-TV-Monitor 2010, Goldmedia). A large portion of this content is created by 40 Sky Deutschland AG

41 users (user generated content). This points to a dynamic change in the consumption of moving image content. According to ARD/ ZDF online study, in 2010 almost two-thirds of online users at least occasionally accessed video files in the internet, with the tendency strongly increasing. 45 percent of German online users have already visited the complementary offerings of TV broadcasters once or several times (source; ARD/ZDF online study 2010). The separation of television and internet is beginning to disappear. Internet-based offerings of classic TV content are to be found in the meantime for cinema movies, series, catch-up services for content already shown on linear television and live TV either financed by advertising or in the form of pay services. Web-TV offers services that are now being used intensively by young target groups. Sky is also present in this market with its Mediathek and the feebased offering Select Internet TV and plans to further expand this offering. With its extraordinary live-sport offering, Sky is already the largest German provider of sports video content in the internet in Germany and Austria. Political and legal environment As of 1 April 2010, the Rundfunkstaatsvertrag (German Interstate Broadcasting Agreement) in the version of the 13th Rundfunkänderungsstaatsvertrag (State Contract for Broadcasting Changes) came into effect. With this change, new general conditions for advertising and product placement in particular were initiated. Content which includes product placement must be recognisable as such. The changes to the Youth Media Protection Treaty planned for 1 January 2011 are invalid, after the state of North Rhine-Westphalia failed to ratify the amendment as the 14th State Contract for Broadcasting Changes. The core element of the amendment was the change in the legal framework for the uniform protection of children and young people against offerings in electronic information and communications media. In particular changes were planned in the area of non-linear call-up and online offerings. This was to make it easier for parents through the cooperation of so-called minor protection programs and from offerings designated by the providers to determine the extent of programming that is appropriate for children and young people. agency and have complied with the newly-implemented three-stage test within the scope of the 12th State Contract for Broadcasting Changes. On this basis, three-stage test procedures for the telemedia offerings of the public broadcasting agencies were carried out. The decisions can still be challenged within the judicial supervision. On 15 December 2010, the government heads of the states in connection with the State Premier Conference agreed to a budget appropriation as a means for the fi nancing of public broadcasting starting with the next budgetary period and signed a respective amendment (15th State Contract for Broadcasting Changes). Accordingly, starting in 2013 there is to be a broadcasting fee per household and business premise. The amount of the fee for private households is not to be in excess of the current fee of per month. Furthermore, the broadcasting treaty provides for an advertising prohibition after 8:00 pm as well on Sundays and nationwide holidays for ARD and ZDF. Excepted from this is sponsoring for the broadcasting of major events. Sky particularly advocates a further reduction of sponsoring in the area of sport broadcasts in public broadcasting. It is expected that in March the prime ministers of the states will again consider the new version of the Interstate Gambling Treaty, after the Interstate Gambling Treaty currently in effect expires at the end of 2011 and according to a judgment of the European Court of Justice (EuGH) must be rewritten. The central issue for the EuGH was the arrangement of the state gambling monopoly in Germany. The private broadcasters are committed to a liberalisation of the provisions, especially relating to the application of (sport) betting. Unlike in other European countries, the legal framework for the protection of copyright owners against copyright infringement on the internet (internet piracy) has not yet been reconfigured in favor of right holders in Germany. It is currently being discussed at the political level how the legal framework against piracy and, in particular, internet piracy can be strengthened. Sky is actively campaigning for strengthening the protection against piracy and internet piracy. Already in the version of the 12th State Contract for Broadcasting Changes, the scope of public broadcasting services was restricted, particularly with regard to the internet. The resolved clarifi cation of online content resulted from the enquiries of the European Commission with regard to the reconcilability of the fi nancing of public broadcasting in Germany with European financial aid provisions. According to the new rule, public broadcasting agencies may not supply their programs and accompanying information online seven days after the broadcast of the respective show on TV. From the perspective of Sky it is especially relevant that the public broadcasting agencies may only offer attractive sports content, as well as highlights broadcasts of the Bundesliga and second division Bundesliga games, for a maximum of 24 hours on the internet. Other offerings may only be available then in longer form on the internet if they are incorporated in a so-called telemedia concept of the broadcasting Annual Report

42 Strategic planning and operational measures for the financial year 2010 With the launch of the Sky services in July 2009, Sky began to implement a new business strategy. The purpose of this was to build a solid foundation for Sky to deliver sustainable acquisition and retention of customers and to increase the average revenue per user (ARPU). In this connection, management has made substantial progress through a series of measures in the following areas: Package attractiveness was increased, especially through the purchase of further channel rights, the extension of the HD service and the start of regular 3D broadcasts Customer satisfaction levels were significantly increased by the expansion of call center capacity, additional self-care services on the website along with the introduction of a new installation service User friendliness and the handling and ease of operation were increased through the optimisation of the electronic program guide (EPG) and the introduction of the new HD receiver Sky+ Marketing and multi-channel sales were signifi cantly intensified by investments in marketing and increasing numbers of sales outlets, along with new sales partnerships The purchase, as well as the buyback, of parts of the company led to a clearer concentration on the core business of the company and more efficient processes. The strategy was described in detail in the annual report 2009 and modified by Brian Sullivan in the first half of As a result, many encouraging improvements can be seen in the business development. Key metrics have improved in the course of the 2010 fi nancial year: After a positive development in the third quarter, all key metrics continued to improve signifi cantly in the fourth quarter: Sky is showing accelerating growth in the acquisition of new customers, decreasing churn rates and ARPU at a record level. While clearly and consistently differentiating itself from its competitors and with measures in the areas of content, innovation and services, Sky has generated the necessary momentum to offer the best possible TV experience to customers, to accelerate growth and to reach sustainable profi tability. Based on the revised strategy Sky is now concentrating its focus on the areas that make Sky special for its customers: 1. Differentiation through sharper HD, improved quality and exclusivity 2. Acceleration of net growth through the distribution of the harddisk receiver Sky+ 3. Differentiation and expansion through key innovations and product expansions 4. Expansion of distribution 5. Continuing the development of market-leading customer service 1. Differentiation through sharper HD, improved quality and exclusivity Management is convinced that the success of Sky is based on a very simple but convincing business model: Sky delivers a better television experience no matter when and where the viewer tunes in. Therefore, the Company concentrates on continuously delivering its customers better quality, groundbreaking innovation, better service and more added value. The progress made in quality is most clearly demonstrated in programming. Especially in the fi eld of HD, Sky provides the broadest and most convincing offering on the German TV market. Twelve HD channels (including Sky 3D) are currently being broadcast. On 13 August 2010, Sky extended the HD line-up by launching three new HD channels Sky Sport HD 2, Sky Action HD and Sky Cinema Hits HD which will further expand the marketleading position in the fi eld of high-quality true HD programming. On 27 October, Sky expanded its HD service once again to include another channel: With ESPN America HD, Sky customers can experience over 500 outstanding US sporting events live in HD all in the original English version. The channel was launched just in time for the start of the MLB World Series, exclusively available in Germany and Austria through Sky. Sky has also expanded the content offered in its existing HD service. Since the beginning of the new Bundesliga season in August 2010, Sky broadcasts the Bundesliga in conference mode for the fi rst time in true HD. Sky broadcasts the largest diversity of programming in true HD, unlike other providers which partially broadcast content that has been merely converted from standard resolution on their channels designated as HD. The share of HD customers to the total number of Sky customers, with 22.4 percent at the end of the fourth quarter 2010, doubled in comparison to the prior year. In order to provide an outstanding TV experience in true HD to largest possible number of customers, Sky decided to integrate four HD programs in the starter package Sky Welt, without additional cost to customers. Since 6 October 2010, all Sky customers with an HD compatible set-top box and an HD Ready or Full HD TV set automatically receive the programs Discovery HD, National Geographic HD, History HD as well as Eurosport HD without additional cost. As the next logical development in its HD service, and after the major success of the first live HD 3D football broadcast in Germany in March 2010, Sky launched the fi rst 3D service in true HD in Germany and Austria in October The new HD 3D channel encompasses highlights from the exclusive sports, fi lm, documentary and entertainment programming from Sky. On 3 October 2010, with its exclusive coverage of the Ryder Cup live and in HD 3D, Sky presented the first live sporting event in this broadcast technology. On 13 October 2010, Sky 3D, Germany s first 3D channel, began regular broadcasting. Here, all Sky HD subscribers in Germany and Austria who receive the program offering with a Sky-certified HD receiver via satellite or Kabel BW and additional local cable networks can witness the Bundesliga and additional sports highlights in 42 Sky Deutschland AG

43 fascinating 3D. A 3D television set and 3D glasses are also required. Until the end of February 2011, SKY 3D is activated for all Sky customers without additional cost. Since the start of the second half of the season, Sky is carrying a Bundesliga game in 3D every Sunday. Sky had already broken new ground with the broadcast of the first worldwide talk show with guest star Kiefer Sutherland on 20 November New program rights and expansion of exclusivity From 11 June until 11 July 2010, Sky was the only TV broadcaster in Germany and Austria to broadcast all 64 games of the FIFA World Cup live and in HD. With 70 employees on location in South Africa and an experienced team of long-time employees, commentators, moderators and experts from the studio in Germany, Sky offered its viewers a unique World Cup experience which was quite positively received by customers as well as in the media. The Semifi nal between Germany and Spain was watched by approximately 800,000 viewers of Sky. On 1 April 2010, Sky once again secured the live pay-tv rights to all games of the Austrian Fußball Bundesliga (ÖFBL) for Austria, Germany, Switzerland, Italy, Liechtenstein and Luxembourg. With the newly-expanded three-year contract, Sky holds the exclusive rights to the ÖFBL through the 2012/2013 season. The new contract guarantees more live football coverage than ever before. For the fi rst time subscribers can watch all games of the tipp 3-Bundesliga live and in full length. The Sky conference and the top game from the ADEG Erste Liga are also in the program. On 6 October 2010, Sky obtained important golf rights once again by securing the rights for the US Masters in Augusta until The Company broadcasts the most important major tournaments of the golf year, live and exclusive in Germany and Austria. After acquiring the rights to the remaining three major tournaments until 2012 on 2 June 2010, Sky will be broadcasting all professional golf majors live for the next two years. This past December, Sky also extended its rights contract with the US PGA Tour until 2012, guaranteeing the exclusive broadcasting of all events from the American professional tour. In addition to the TV broadcast rights, Sky also secured the exclusive internet, TV and mobile rights. The live broadcasts can also be ordered online via internet TV. In this regard, Sky remains the largest provider of sports videos on the Internet. In addition, on 3 January 2011, Sky announced the continuation of the partnership with the European Tour until In the coming four years Sky will carry the European Tour live and exclusively. A respective agreement was entered into with the marketing agency IMG Media. This includes the live broadcasts of all tournaments of the European Professional Tour, the Ryder Cup, the four tournaments of the World Golf Championships, the Asian Tournament and the Sunshine tournament, as well as the highlights of the European Seniors Tournament and the Challenge Tournament. In addition, Sky obtained expansive and exclusive broadcast rights for the tennis grand slam tournament Wimbledon for Germany and Austria. This has allowed Sky to continue expanding its exclusive sports rights portfolio. As Sky announced on 30 July 2010, the broadcaster will be showing the matches of the most signifi cant tennis tournament in the world until 2013 on several channels live and in true HD. In addition to TV distribution over cable and satellite, Sky will also broadcast the matches on the internet and through mobile devices through the Sky Live Sport app on the ipad. Sky continued its long-standing and successful partnership with the Formula 1. With the extension of the contract, Sky remains the only German television provider that offers its viewers the entire racing weekend from first free practice until the finish of the race. Sky broadcasts every race without advertising interruptions and from several selectable camera perspectives. Shortly after the decision to extend the contract in December 2010, Sky announced in January 2011 that starting with the upcoming Formula 1 season, all 20 racing weekends will be broadcast live and in true HD. Formula 1 will then be produced in original HD for the first time. With this, Sky is offering its customers coverage of the top tier of motor sports with an even higher production quality. In January 2011, Sky and World Wrestling Entertainment, Inc. (WWE) extended their cooperation in Germany, Austria and Switzerland by another three years. With this, the partnership that has already existed since 2000 continues through the end of In connection with the contract extension, the partners expanded their cooperation beyond the area of TV to digital and mobile platforms. The new contract, which begins in January 2011, for the first time comprises the broadcast of the WWE flagship show RAW in full length as well as the thirteen yearly pay-per-views of the WWE. In the area of in-house productions Sky is lifting its profi le and is offering its viewers exclusive added value with a number of new formats: On 25 September 2010, Sky started a new sports show with Saturday LIVE, which on every Bundesliga Saturday in addition to the current events in football, Formula 1, boxing, ice hockey, golf and US sports, presents the people that make the top sports so fascinating. The most recent new entry in Sky s programming also comes in the sports area with the program My Stadium The Sky Bundesliga Preview. on every Thursday evening the show provides a comprehensive look at the upcoming match day. 2. Acceleration of net growth through the distribution of the hard-disk receiver Sky+ A key element in Sky s strategy is the distribution of Sky+ the first fully integrated digital HDTV hard-disc receiver, which was launched for satellite customers on 8 May Since 13 December 2010, cable customers can also use this innovative technology of Sky in several German cable networks. Sky+ fundamentally changes the television habits of viewers. The HDTV hard-disc receiver is customised for the typical Sky functionalities and stands out due to its simple operability. The viewer can easily record with the push of a button on the remote control or program directly from the electronic program guide (EPG). Also, entire series can be recorded automatically with the push of a button. Minor protection blocking Annual Report

44 and second audio program also work in the recording. In addition, viewers can select programs from their personal archive at any time. With timeshift, ongoing programs can be paused, continued at a preferred point even before the recording has ended or fastforwarded to a certain point in the recording. Sky+ offers fl exibility in every respect: Sky subscribers can record both HD and SD programs while they simultaneously watch another channel. The set-top box receives all Sky channels as well as free-to-receive channels. Also HD 3D broadcasts can be received with Sky+. The device has a high performance hard disc, which can record up to 50 hours in HD quality or up to 100 hours in standard programming quality. CI Plus module Sky wants to offer interested individuals various access options for the best television experience on Sky and, in this way, develop additional customer potential. Therefore, the Company already announced a CI Plus module for digital reception of Sky programming at the IFA Berlin consumer electronics trade show in September 2010, which was introduced to the market on 1 December CI Plus is a further development of CI technology, which is already available in many modern television sets and which is increasingly being implemented in the consumer electronics market. In combination with a smartcard, the CI Plus module can decrypt the programs which have been activated for customers. The new technology enables access to the extraordinary product experience from Sky without additional set-top boxes, cables or remote controls and thereby provides subscribers with additional flexibility and comfort upon entering the product world of Sky. At the start of its marketing on 1 December 2010, Sky carried out a limited promotion until 15 January 2011 in connection with Samsung Deutschland. Customers who during this period purchased a certain CI-Plus-capable flat screen television of the Samsung brand were able to obtain a Sky subscription together with a CI-Plus module at attractive preferential prices. For 29,90 monthly they received the Sky Welt basic package, two further premium packages from Sky, the respective HD channels, and additionally, without further cost, the new CI-Plus module from Sky including Smartcard, without any activation fee. Approximately 1,000 consumer electronic centers throughout Germany participated in the promotion. Similar promotions for the marketing of the Sky CI Plus module were carried out together with other device manufacturers such as Humax, TechniSat and Mitsubishi Electronics. In the introductory phase, the Sky CI Plus module is to be sold only through such partnerships. Since 17 November 2010, all new and existing Sky subscribers on Kabel Deutschland s digital network (KD) can also receive Sky s programs via the CI Plus module of Kabel Deutschland. A corresponding agreement has been reached by the two companies that will make it possible for all customers to receive the pay-tv packages of both Sky and Kabel Deutschland on a single module. 3. Differentiation and expansion through key innovations and product extensions Just in time for the beginning of the 2010 FIFA World Cup, Sky launched a live sports app for the ipad. The Sky Sport app covers Fußball Bundesliga and sports from Sky with the channels Sky Sport 1, Sky Sport 2, Sky Fußball Bundesliga and Sky Sport Austria, including the optional channels. With this, ipad users can also experience the UEFA Champions League, DFB Cup, Formula One, tennis and ice hockey, live and on the go. In addition to the extensive live sports offering, the app also provides the most current sports news, video clips and data centers with all results, tables, club profi les as well as the most important background data from national and international sports, all at a glance. As part of the further development of mobile services, since the end of October 2010, Sky has also offered live sports in HD on the ipad for the first time. This allows Sky subscribers to follow the channels Sky Sport HD 1 and Sky Sport HD 2 on the ipad in high definition quality. This service also includes the Sky Bundesliga conference and selected individual Saturday afternoon games in HD quality. This service is convincing both experts and customers: on 30 November 2010, the Sky Sport app won the Kress Award in the Product section, in the category digi:media Award Web/Mobile. Furthermore, the Sky Sport app was also among the finalists for the innovation award of the Deutschen Wirtschaft in the category large companies. The awards and nominations underscore the outstanding innovation strength of Sky. The customer response to this offering has also been excellent. With over 76,000 downloads since its start in June 2010, at the end of the year the Sky Sport app is counted among the most successful apps for the Apple ipad. In addition, the Sky Sport Mobile app is also available on the iphone and ipod Touch. The new version of the Sky Sport app comprises the exclusive Sky channels Sky Sport 1, Sky Sport 2 and Sky Sport Austria including the sport option channels and includes the UEFA Champions League, the DFB Cup, the UEFA Europa League, the Premier League, DEL ice hockey, tennis, golf and much more. With the Sky Sport Mobile app for the iphone and ipod Touch, Sky customers have access over Wi-Fi and 3G to the fascinating world of the Sky live sports offerings and are thereby even more fl exible in the use of the Sky Sport offerings. Only ten days after the launch, the Sky Sport Mobile app showed over 100,000 downloads. In order to build on this dynamic development, Sky is planning a number of further innovative services that provide customers with the opportunity to enjoy the top quality of Sky s program anywhere and anytime. On 30 November 2010, Sky accordingly announced a cooperation with Samsung, under which the fi rst live sport app on the Android operating system is to be developed. The Sky Sport app for the Samsung Galaxy Smartphones and Galaxy Tablets will be usable over Wi-Fi and 3G and will also include the exclusive Sky Sport 1, Sky Sport 2 and Sky Sport Austria channels. 44 Sky Deutschland AG

45 Furthermore, Sky has developed the Sky Bar Finder as an application for the iphone. It has been available for free download in the app store since 23 June With the help of the user location through the GPS signal, this app determines the closest bars with Sky licenses, including address, from a total of around 18,000 locations in Germany and Austria. Upon request, it displays directions through an integrated route planner. In addition to a series of other functions, the mobile search engine also displays an overview of the current sports programs in bars as well as tables of the most important sports leagues. On 9 September 2010, Sky started the Sky Match Tracker. With this service, fans can follow all the exciting scenes from the UEFA Champions League and the UEFA Europa League virtually live directly on the iphone or ipod Touch. The Sky Match Tracker can be downloaded for free and offers users a mix of innovative free and cost-based services. The Sky Match Tracker offers timely access to brand new game scenes as video clips during the game and a summary of highlights soon after the game. In addition, the minute-by-minute ticker tracks all the relevant moments in the game, including team line-ups and player substitutions. With the introduction of Sky Multiroom on 14 June 2010, Sky has marketed a new service for customers who want to view the Sky s premium programs in multiple rooms at the same time. At a price of 12 per month ( 24 including Bundesliga), subscribers will obtain a second smartcard including their already-booked packages and an additional rental receiver. Whereas on the national average more than two people live in only 61 percent of households, the percentage amounts to 86 percent in Sky households. With Sky Multiroom, the pay-tv provider caters for the fact that an above-average number of its subscribers are multi-person households. 4. Expansion of distribution Sales and marketing cooperation In the second and third quarter of 2010, Sky entered into several partnerships with cable network operators, each focused on delivering customers more choice and greater value. The aim of these cooperation arrangements is to work more closely with cable network operators and to start sales co-operations with joint co-marketing offers, and to further expand the program offering in the German cable network. Through the use of the sales potential of its cooperation partners, Sky will strengthen its own sales power. In return, the cable network companies are gaining a unique content provider as a partner who significantly improves the quality of the respective cable network offering and develops additional sales potential. Also going forward, the Company will develop additional opportunities through partnerships with existing operators as well as new, direct distribution channels. Sky agreed to the first cooperation of this type with the cable network operator NetCologne at the end of April The Company combines various own products with a Sky subscription to a tripleplay offer (high-speed internet flat rate, telephone flat rate and Sky subscription). In connection with the marketing cooperation, Sky was integrated into the marketing campaign and obtained an exclusive placement in various points of sale locations of NetCologne. As part of the cooperation, NetCologne has also been the fi rst cable network operator to supply the Sky HD channels, Sky Sport HD2, Sky Action HD and Sky Cinema Hits HD. On 1 June 2010, a collective co-marketing agreement was entered into between Sky and DTK (Deutsche Telekabel), formerly known as Versatel Telekabel. The mutual sales and marketing cooperation encompasses a combined offering of a faster internet flat rate, a telephone flat rate and a Sky subscription. Sky is also working more closely with Tele Columbus, the largest independent German cable network operator. On 2 June 2010, Sky and Tele Columbus announced their intention to align their TV platforms at the end of In the near future, customers of both providers will only require one digital receiver for the reception of the different digital programming packages in the integrated cable networks of Tele Columbus rather than two devices as had been previously required. Thanks to a simulcrypt process, the uniform reception of up to 17 HD programs from Sky, the public broadcasters and the private channels is possible through the digital receiver of Tele Columbus. Also, the digital basic package from Tele Columbus, consisting of several free-tv channels, can be received together with the Sky programs on Sky receivers. An expansion of the partnership with further co-marketing offerings is planned. Heidelberg-based cable network operator Kabel BW has expanded its already-existing cooperation with Sky. On 24 June 2010, the companies agreed to a cooperation which encompasses a combination of CleverKabel, internet and telephone services with Sky subscription packages, such as Sky Welt and Sky Fußball Bundesliga. With this, Kabel BW customers have been able to obtain telecommunication services and entertainment content from a single source since July. Since the start of Sky s 3D channel in October 2010, Kabel BW has been the first cable network operator to supply this service in its cable network. For Sky, the agreement with Kabel BW represents the first sales and marketing cooperation that extends beyond the mere feed-in relationship with one of the three big cable network operators. On 11 August 2010, Sky started a planned cooperation with Deutsche Netz Marketing GmbH (DNMG) for the supply of further HD channels in the cable networks of DNMG member companies. With 140 member companies, DNMG is the largest marketing organisation for operators of cable television in German-speaking countries. The agreement should encompass the supply of selected Sky HD channels (Sky Sport HD2, Sky Action HD and Sky Cinema Hits HD) as well as joint marketing measures together with DNMG members. As a result, the additional technical reach of the Sky HD programs Sky Sport HD2, Sky Action HD and Sky Cinema Hits HD could be increased by up to 600,000 cable households by the end of the year. Annual Report

46 As a result of the most recent sales cooperation, since 1 December 2010 customers of the cable network operator Martens (a brand of EWE TEL GmbH) in Hamburg can also buy an attractive package of fast internet, telephone and Sky packages. Also for the hotel business, Sky provides target-group oriented TV program offerings and supports hoteliers through Sky Hotel Entertainment GmbH, a 97.5 percent subsidiary of Sky, with convenient complete solutions for digital upgrade. Hotels with satellite reception, which have up until now only received an analogue television signal from Astra satellites, will have to be upgraded to digital reception by May 2012 at the latest, because analogue broadcasting through this reception method will end at this point in time. Since July 2010, head ends are offered for the supply of digital TV signals in the inhouse distribution network in combination with a Sky programming package. In addition to the supply of digital free-to-air TV programs in the in-house network, the assignment of such a head end also allows the encryption of the Sky signal without requiring the installation of additional pay-tv equipment. Sky Hotel Entertainment GmbH is marketing hotel subscriptions together with SMOOVIE-TV, a remote control with an integrated smartcard reader. This enables the operation of pay-tv programs in combination with an eligible hotel TV set. Sky Hotel Entertainment GmbH also provides services for clinics. At the start of October 2010, Sky and Alto Hospital Services agreed to a marketing cooperation for patient television in hospitals. The Dusseldorf-based provider of hospital services will market its headsets for patient television with a selection of Sky programming. The possible content offering ranges from live broadcasts of the Bundesliga, the UEFA Champions League or the Deutsche Eishockey Liga (DEL) to attractive films and series. Patients can obtain the headsets with Sky reception for a fee that is determined by the clinic. This means that this combination of products comes at no additional cost to the clinics. Marketing campaigns Since the implementation of the Sky brand in Germany and Austria in July 2009, the brand recognition has reached a strong level. In December 2010, the brand recognition was 81 percent compared to 73 percent at the end of the previous year (Source: Icon Added Value: Ad Trek). With extensive marketing campaigns in 2010 among others with the well liked and well known actor Moritz Bleibtreu as an endorsement Sky in the past year further supported the brand development and educated television viewers of the benefits of Sky. The emphasis of the campaign throughout was the theme of quality television. Impressive pictures and clear arguments sharply differentiated the special television experience of Sky in contrast to standard television. The goal was to clearly and precisely communicate the added value for the viewer: the best films, the most extensive football coverage, a first-class live sports offering, the largest programming diversity in true HD and an outstanding selection of channels for the entire family. The major advertising campaigns were supported by further special offers with attractive introduction terms for new customers. Sky will continue to remain true to its latest marketing strategy in It will stress with more emphasis the already well accepted HD and 3D offering as the center point of the Company s communication and at the same time explain the advantages of the Sky brand to potential new customers in a pleasing way. 5. Continuing the development of market-leading customer service In a market where most households receive their television through cable or satellite, Sky sees a clear opportunity to differentiate itself from other providers through outstanding customer service. Customers needs are at the center of all business decisions of Sky. Customer satisfaction through superior service is an integral element of Sky s strategy as it supports upselling and lowers churn. Since November 2009, all Sky customers taking a box from Sky receive full warranty coverage, backed by 24/7 customer support. Sky aims to set a benchmark for a great customer experience through further investments in technology, processes and people. For this reason, Sky is continuously working on improving customer service. This has already led to positive results: Over the course of this year, Sky increased the most important performance indicators in customer service. In addition to faster handling of customer questions, shorter waiting times and a minimised drop-out rate in the service center, Sky has also expanded the customer area on the website sky.de in order to provide more self-care functions. A new campaign tool in the subscriber management system supports this development. As a result, the positive development also continued in the fourth quarter of 2010 in the area of customer services. Several indicators were able to be improved or stabilised at a higher level; this applies for both the waiting times and for the dropout rate of calls. Almost three quarters of the callers in December were (very) satisfied with their last call (source: Consilium). With this, Sky customer service is a leader in this field in Germany. Sky customers are satisfied customers. At 67.3 percent Sky reached an all time high in the scope of our monthly customer satisfaction survey conducted by Psychonomics in December (2009: 62.6%) - in addition to excellent customer service, product and program quality, among others, is critical for this rating. Sky sees a clear confirmation of the successful optimisation in the area of service and products in the improved churn rate: The annualised quarterly churn rate at the end of 2010 was 11.8 percent compared to 21.0 percent in the prior year. Decisions regarding capital development On 21 December 2009, Sky expressed its intention to increase the capital stock of the Company through the issue of new registered shares with the exclusion of subscription rights. News Adelaide Holdings B.V., a 100 percent indirect subsidiary of News Corporation, subscribed for 49,014,714 new shares at a purchase price of 2.25 per new share. These new shares were recorded in the commercial register on 21 January 2010 thus increasing the total number of registered shares of Sky from 490,147,144 to 539,161, Sky Deutschland AG

47 Consequently, News Corporation s share in Sky increased from percent to percent. Gross proceeds in the amount of 110 million expanded the financial flexibility of Sky and funded additional initiatives to sustain subscriber growth. These included: Additional investment to strengthen the marketing and sales initiatives, such as direct marketing activities to increase the number of subscribers. Additional investment in continued expansion of the HD service of Sky (also encompassing Sky+ service). Additional investment in programming as well as the start of new channels to contribute to the continued increase of selection and quality of the high value Sky entertainment service. By resolution of the General Shareholders Meeting on 23 April 2010, shareholders resolved the cancellation of the 2009 authorised capital, the establishment of a new 2010 authorised capital as well as the exclusion of subscription rights. Additionally, the Company was authorised to undertake the acquisition and amortisation of its own shares with the exclusion of purchase rights. According to the resolution on the cancellation of contingent capital 2006, the Management Board was also authorised to issue convertible and/ or warrant bonds, to exclude subscription rights and to establish a contingent capital The respective amendments to the statutes were recorded in the Company s commercial register on 7 June On 2 August and 12 September 2010, Sky announced the implementation of new financing measures to stimulate the abovementioned strategic core initiatives, and thereby stimulate growth, and to secure Sky s financial position. With the financing measures, Sky intends to generate at least 340 million in gross proceeds. The announced financing measures encompass a rights offer for the issuance of new shares, the issuance of a convertible bond and/or the providing of a shareholder loan by News Adelaide Holdings B.V. Sky received proceeds of million on 25 January 2011 from the issuance of a convertible bond to News Adelaide Holdings B.V. The bond can be converted to 53,914,182 no-par shares from contingent capital. It has a term of four years, is unsecured and subordinated to existing credit lines. The annual interest is at a rate of 5.5 percent and is payable quarterly at the end of each quarter. The conversion price amounts to and thereby represents a premium of 25 percent over the volume-weighted average XETRA stock price of the Sky share in the last ten exchange days. Through the issuance of the convertible bond and proceeds from the capital increase, gross proceeds received by Sky amount to 342 million. The financing measures for generating gross proceeds of a minimum of 340 million by 31 January 2011 are accordingly concluded. Since the business development in the fourth quarter of 2010 confirmed the positive trends that were indicated in the course of the prior year, on 12 January 2011 Sky announced an agreement with News Corporation, whereby the gross proceeds of 340 million from the financing measures announced on 2 August 2010 were increased to 400 million. The financial flexibility of Sky is hereby increased, and additional funds are made available for further investment especially in the area of HD that supports the positive development. The additional financing, now in the amount of 58 million, for the generation of gross proceeds totaling 400 million will be provided at the latest by 21 December 2011 in the form of a shareholder loan by News Adelaide Holdings B.V. The subscription period for the announced rights offer ended on 27 September The capital increase was the first part of the financing measures planned by Sky. In total, 168,937,926 of the 269,580,929 new shares offered were placed at a price of 1.05 per share percent were placed with Sky s principal stockholder News Adelaide Holdings B.V percent of the new shares were placed with investors other than News Corporation. After entering the capital increase in the commercial register on 30 September 2010, News Corporation s share of capital stock of Sky increased from percent to percent. The share capital of Sky increased by 168,937,926, from 539,161,858 to 708,099,784. The new shares have a calculated share of capital stock of 1.00 per share and were included in the existing listing on the Frankfurt Stock Exchange on 1 October The technical implementation of the capital increase was carried out on the same day. Upon conclusion of the rights issue, gross proceeds of the new issue in the amount of around million accrued to Sky. The Royal Bank of Scotland N.V (London Branch) and UniCredit Bank AG oversaw the capital measures as joint global coordinators and joint lead managers. Annual Report

48 Corporate functions Group structure Sky Deutschland AG, which incorporates all the business activities of the Sky Group, acts on behalf of the Group companies. The most important parts of the operating business are undertaken through Sky Deutschland Fernsehen GmbH & Co. KG and its subsidiaries. Unterföhring is the main location of Sky and is the registered offi ce of Sky Deutschland AG and Sky Deutschland Fernsehen GmbH & Co. KG. A complete listing of subsidiaries and their registered locations is shown in the Group notes under Item 1.7 ( Consolidation ). In August 2010, Sky moved into new corporate headquarters in Unterföhring. The modern building, which Sky is renting, provides improved communication and more effi ciency and allows a faster decision making process. Investments Effective 1 March 2010, Sky acquired Loxxess Medienlogistik GmbH, a company of the logistic specialist Loxxess AG. Loxxess Medienlogistik GmbH was founded in August 2006 under the name Premus Logistik und Service GmbH. In 2007, the company was sold to Loxxess AG and, upon the decision of Sky management in March 2010, for strategic reasons, was completely bought back. On 30 April 2010, the merger of the company to Sky Deutschland Fernsehen GmbH & Co. KG was recorded in the commercial register. At the same time as the repurchase, Sky agreed to a long-term service contract for comprehensive logistical and customer-care services with Loxxess AG. Effective 1 August 2010, Sky obtained an additional 51.1 percent of shares in Premium Media Solutions GmbH from CUTV GmbH. This brings Sky s total share in the advertising sales company to 75.9 percent. Carsten Schmidt, Chief Offi cer, Sport, Advertising Sales & Internet at Sky, as well as media manager Dr Andrea Malgara, who has held a 24.1 percent share in the Sky marketing company since January 2010, were named as directors of Premium Media Solutions. In the future, Premium Media Solutions will concentrate on the marketing of customised communication solutions for the advertising-driven economy and in so doing, also focus on new technologies with an emphasis on 3D and end devices, such as the ipad. The marketing of theme channels on the Sky platform as well as SD and HDTV channels which fi t with the premium portfolio of Sky and Premium Media Solutions is expected to be expanded. Management Board and Supervisory Board As a German stock corporation, Sky Deutschland AG, with its Management Board and Supervisory Board, has a two-tier management and control structure that is common in Germany. The Management Board manages the Company under its own responsibility. As of 31 December 2010 the Management Board had fi ve members. In addition to the Management Board members, six additional individuals who hold the position of Senior Vice President are responsible for the management of Sky. Sky s management team has many years of experience in all the important business areas: program, sales and marketing, technology, fi nance and administration. An experienced Supervisory Board consisting of nine members advises and monitors the Management Board of Sky Deutschland AG. The Management Board and Supervisory Board of Sky Deutschland AG work closely together for the good of the Company. Changes in the Management Board On 2 December 2009, in connection with an ad-hoc release, Sky announced that Mark Williams would be resigning from his post as Chief Executive Officer for personal reasons as of 31 March The Supervisory Board appointed Brian Sullivan, until then Managing Director, Customer Group of British Sky Broadcasting Ltd. (BSkyB) in Great Britain, to the position of Vice Chairman of the Management Board, effective from 1 January Effective from 1 April 2010, after the resignation of Mark Williams, Brian Sullivan took over the position of Chairman of the Management Board of Sky as planned. On 25 November 2010, the Supervisory Board appointed Steven Tomsic as the new Chief Financial Offi cer. He replaced Pietro Maranzana, who returns to Sky Italia as Deputy Chief Financial Offi cer in February After officially joining Sky on 6 December 2010 and serving a transitional period of two months as Deputy Chief Financial Officer Steven Tomsic took over the position of Chief Financial Officer on 1 February Before his appointment to CFO of Sky, Steven Tomsic was Director Corporate Finance and Planning for Europe and Asia at News Corporation in London and a member of the Supervisory Board of Sky. He resigned from his chair on the Supervisory Board on 5 December Changes in senior management On 6 October 2010, Sky announced that Hans-Jürgen Croissant, Senior Vice President, Communications, would be leaving the Company at his own request on 30 November The new head of communication is Wolfram Winter. Wolfram Winter s former area of Distribution Development was transferred to Dr. Holger Enßlin, Management Board member for Legal, Regulatory & Distribution, beginning 1 January As a former managing partner of Premiere Star GmbH and a former director of the NBC Universal Network, Wolfram Winter has a deep knowledge of the German pay- and free-tv markets. 48 Sky Deutschland AG

49 Furthermore, since 1 November 2010, Euan Smith has strengthened the management team of Sky as a Senior Vice President Product & Operations. Euan Smith is responsible in the newly created position for all tasks relating to the current and future customer service processes. Included in his area are the divisions Supply Chain, Customer Service, Product Development, Information Technology and the business segment Bar & Hotel. His activities will especially focus on the planning and the expansion of Sky s product offerings and all customer oriented activities. Euan Smith has extensive international experience in supply chain management and customer service. Over the past eight years Euan Smith has very successfully managed all aspects of the supply chain division at BSkyB. Changes in the Supervisory Board At the Annual General Meeting on 23 April 2010, the shareholders consented to an enlargement of the Supervisory Board. The following members were chosen for additional seats on the Supervisory Board: Chase Carey, Deputy Chairman, President and Chief Operating Officer of News Corporation, Miriam Kraus, Senior Vice President, Global Governance, Risk & Compliance, SAP AG, and Katrin Wehr- Seiter, Independent Business and Investment Advisor. Since the registration in the commercial register on 7 June 2010, the Supervisory Board consists of nine members. Effective from 16 July 2010, the Supervisory Board of Sky Deutschland AG appointed Chase Carey as Chairman of the Supervisory Board. Chase Carey replaces Markus Tellenbach, who will take on the role of Vice Chairman of the Supervisory Board. After his appointment to Chief Financial Officer, Steven Tomsic resigned from his membership on the Supervisory Board on 5 December As his successor, Jan Koeppen, Chief Operating Officer Europe Asia News Corporation, London, Great Britain, was legally appointed on 24 January 2011 as a new member of the Supervisory Board. Employees As of 31 December 2010, the Sky group employed 1,420 full-time employees, thereof 203 (2009: 202) are employees of the parent company Sky Deutschland AG. Compared to the prior year, the number of employees rose by 14.1 percent (2009: 1,244). The increase in the number of employees is largely attributed to the acquisitions of Sky Creative Services GmbH, Loxxess Medienlogistik GmbH and Premium Media Solutions GmbH. The number of employees of the Sky Deutschland Service Center GmbH was expanded at the same time. Most of the employees of the Group are employed at the Unterföhring location. The parent company and the subsidiaries Sky Deutschland Fernsehen GmbH & Co. KG and Sky Creative Services GmbH are located in Unterföhring. The second largest location of the Sky Group is Schwerin, where the Group company Sky Deutschland Service Center Schwerin GmbH is located. Additional locations are Fürth (Sky Hotel Entertainment GmbH) and Vienna, Austria. Number of employees according to location on 31 December Unterföhring 413 Schwerin 45 Vienna 15 Fürth Controlling system Sky s value-oriented management comprises a scheme applicable to members of the Management Board and a scheme applicable to the remaining managers and employees with variable compensation components. Management Board members generally have an opportunity to earn more than half of their base salary via a variable component. During 2010 and at the beginning of 2011 all contracts of Management Board members have been adjusted. Going forward the variable component is split between a short term component (annual bonus) and a long term component (long term incentive over three years). The objectives for the variable component are established by the Supervisory Board at the beginning of the year. At the end of the year the Supervisory Board conducts a review of performance against objectives for each Management Board member and determines the short term variable compensation of each Management Board member. The Supervisory Board makes the determination for 2010 for all Management Board members in its meeting on 17 February Senior Vice Presidents have their variable compensation based 50 percent on company goals and 50 percent on individual goals. For Vice Presidents, the bonus is made up 40 percent from the attaining of company objectives and 60 percent from the attaining of personal goals, whereas all other staff with a variable bonus as part of the compensation generally have the bonus split 30 percent attributable to company performance and 70 percent oriented to personal goals. For all managers and employees with variable compensation, qualitative as well as specifi c quantitative metrics are identifi ed as individual targets, refl ecting their contributions to the business. Sky s value-oriented management also include a Risk Management system (see also Opportunity and risk report, Basic Structure of Sky s Internal Control and Risk Management System), in compliance with the German Corporate Governance Code. Annual Report

50 Remuneration report Remuneration of the Management Board The structure of the remuneration system for the Management Board is governed and regularly reviewed by the Supervisory Board. The Supervisory Board is responsible for the determination of the Management Board compensation, which establishes the appropriate remuneration individually. The criteria for the appropriateness of the remuneration include particularly the responsibilities of the individual Management Board member, his personal performance, the performance of the entire Management Board and the economic situation, the results and the future outlook of the Company within its competitive environment. The structure of the renumeration system for the Management Board includes both a fixed base salary paid monthly and a performance-based variable component. The specific terms of the variable component vary among the contracts of the individual Board members but have to a large extent been adjusted during the year 2010 to the effect that 40 percent of the variable component is paid out in the following year and 60 percent after completion of the third year at the beginning of the fourth year (long term incentive). The long term incentive can be substituted by a Long-Term- Incentive-Plan. The amount is decided by the Supervisory Board; it is measured according to attainment of predefined goals. In addition, the Management Board members receive further compensation. This further remuneration varies according to the contract of the individual Management Board member and relates primarily to reimbursement for housing costs, school fees, company cars, life and health insurance. The Chairman of the Management Board, Brian Sullivan, has been provided with a long-term phantom share plan. As of the start of the contract, a total of 3.87 million was divided by the price of the Sky share in the amount of 2.26 (opening price XETRA), and 1.71 million phantom shares were assigned. The entitlement to 50 percent of the phantom shares becomes vested in April 2012 and the remaining 50 percent becomes vested in April After the conversion of the phantom shares at the current share price of the Sky share as of the above mentioned dates, the payment is dependent upon the growth of the net new subscriber business over the relevant performance period of 2 respectively 3 years. Otherwise, there is no stock option plan for members of the Management Board. The Supervisory Board resolved in its meeting on 9 December 2010 to introduce a Long-Term Incentive Plan as of 1 January Due to this the above mentioned variable component shall be replaced by a participation in the Long-Term-Incentive-Plan in the share of 60 percent. The plan term is three years. The plan participants at the start will be assigned a certain number of performance share units, which after three years are to be multiplied by the then current share price of the Sky share. The payment is dependent upon reaching agreed-upon Company performance indicators (net customer growth and EBITDA plus capital expenditure) over the total period of three years. In the event of the termination of the activity, it is set forth in the employment contracts of the Management Board members that the Company is entitled to cause leave of absence upon the revocation of the appointment as Management Board member, taking into account vacation entitlements and continuation of the fixed remuneration. The termination of the activity is generally governed explicitly on an individual basis in connection with a termination agreement. The termination agreement usually contains comprehensive noncompete obligations and is consistent with the recommendations of Section 4 of the German Corporate Governance Code. The individualised remuneration of the members of the Management Board for the 2010 financial year, which is divided in each case into a fixed and performance-based component, forms a part of the notes to the consolidated financial statements (see Item 4.8 Remuneration of the Management Board and the Supervisory Board ) and of the notes to the separate financial statements (see Item IV. Other disclosures ). Relating to GAS 17 (German Accounting Standards) share-based payments shall be disclosed together with their fair value at the grant date. In this respect the phantom shares have to be recognised in the amount of 3.87 million in the remuneration report. Consequently the remuneration of the Management Board members in the financial year 2010 amounted in total to 9.3 million (2009: 5.0 million) relating to GAS 17. The total expense for the remuneration of the Management Board members in the financial year 2010 amounted to 6.6 million in the consolidated financial statements and to 6.9 million in the separate financial statements. Promises for one-time payments, such as termination payments in the case of non-renewal of employment contracts or a change of control do not exist. Pension benefi ts are granted based on individual contracts. In the contract already concluded, a minimum payment is guaranteed. The financing is carried out through payments to a special pension fund. The contract is secured through the pension insurance association. In the event of death, the fixed remuneration continues to be paid for the month in which death occurs and the following three months to the widow and/or the dependent children. The variable remuneration is paid proportionally through the end of the month of death. No further agreements exist regarding payments to survivors. 50 Sky Deutschland AG

51 Remuneration of the Supervisory Board The remuneration of the Supervisory Board is established in the statutes and was revised as of 24 April The compensation follows the recommendations of the German Corporate Governance Code, which, in particular, addresses the chairman and vice chairman and, in addition to a fixed compensation provides for a performance based compensation as well as supplementary compensation for activities in committees (presidential and audit committees). In accordance with this, the chairman receives a fixed annual fee of 90,000, his deputy (if applicable) a fixed annual fee of 75,000. The other members of the Supervisory Board receive a fixed annual fee of 60,000. Members of the Supervisory Board that have not held their position in the Supervisory Board for the entire financial year receive compensation in proportion to length of their Supervisory Board membership. Each chairman of a committee additionally receives 15,000, however, with the total compensation not to exceed 90,000. The Company also reimburses Supervisory Board members for expenses in the exercise of the Supervisory Board mandate as well as any value-added taxes to be paid on their compensation or expenses. The Supervisory Board members also potentially participate on the long-term success of the Company through a performance-based compensation. They receive a compensation in the amount of 1,000, up to a maximum amount of 20,000, for every 0.01 that earnings per share (defined as net profit according to Section 113 (3) of the German Stock Corporation Act divided by the number of shares at the date of the General Shareholders Meeting that decide on the appropriation of net profit) in the financial year for which the compensation is to be paid exceeds the amount of 0.10 per share. Such a compensation is payable on the day of the General Shareholders Meeting that decides on the appropriation of net profit. Members of the Supervisory Board that have not held their position in the Supervisory Board for the entire financial year receive compensation in proportion to length of their Supervisory Board membership. The individualised remuneration of the Supervisory Board for the 2010 financial year, which is divided in each case into a fixed and performance-based component, forms a part of the notes to the consolidated financial statements (see Item 4.8 Remuneration of the Management Board and the Supervisory Board ). In the 2010 financial year, remuneration of the Supervisory Board members amounted to a total of 648,760 (2009: 296,607). Annual Report

52 Key metrics and quarterly trends 000 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Direct subscribers 1 at beginning 2,431 2,470 2,471 2,476 2,521 Gross additions Churn Net growth Direct subscribers at end 2,470 2,471 2,476 2,521 2,653 HD penetration 2) (%) Subscription ARPU 3) (in, monthly) Churn rate 4) (in %, annualised) Churn rate 5) (in %, 12 month rolling) Wholesale subscribers at end ) Direct subscribers comprise monthly contract subscribers (residential customers, sportsbars and hotel rooms) to at least one of Sky s channel packages and subscribers who purchased pay-per-view, and other ad hoc-services on a prepaid basis via the Flex range of products. Subscribers in the process of migration to new Sky packages are given up to ten days grace at the end of their prior contract before termination. 2) HD penetration is defined as relation of direct subscribers which have subscribed for the HD channels in relation to the total number of direct subscribers in that period. 3) Subscription ARPU is defined as monthly average subscription revenues (formerly direct program revenues) for a given period divided by the average number of direct subscribers in that period. 4) The churn rate for a given period is defined as the number of direct subscribers that terminated their subscriptions during the course of a given period, divided by the average number of direct subscribers in that period (calculated by dividing the sum of the number of direct subscribers on the first day of that period and on the last day of that period by two) and multiplied by four when referring to a quarterly period, by two when referring to a half-year period and by one when referring to a full-year period. 5) Is defined as the number of direct subscribers that terminated their subscriptions during the course of a 12-month period, divided by the average number of direct subscribers in that period. Due to strong customer demand, the growth of Sky accelerated in the fourth quarter of All operating performance indicators developed positively. The net growth of 131,000 customers represents a significant increase compared to the prior year period, in which 39,000 subscribers were added. For the entire year 2010, Sky showed a growth of 183,000 customers. This is two and half times higher growth than in the prior year period. Both the annualised quarterly churn rate (11.8% in Q compared to 21.0% in Q4 2009) and the rolling 12-month churn rate (16.2% in Q compared to 21.6% in Q4 2009) have reduced to the lowest level in 21 quarters. The Q ARPU of represents the highest level ever achieved by the Company. Sky HD continues on its course of success: In the fourth quarter the Company added 133,000 HD customers. The share of HD customers compared to the total number of Sky customers, with 22.4 percent at the end of the fourth quarter, more than doubled compared to the prior year. In the total year 2010, Sky showed a growth of 325,000 HD customers. 52 Sky Deutschland AG

53 Direct subscribers at end (in 000) Net growth (in 000) 2,470 2,471 2,476 2,521 2, Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Gross additions (in 000) 208 Churn (in 000) Churn rate (rolling) % % % % % Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Subscription ARPU (in, monthly) HD penetration (in %) Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Annual Report

54 Earnings, financial and net asset position Revenues and earnings Preliminary remark At the beginning of the 2010 fi nancial year Sky changed the classification of certain costs to the individual captions of the Group profi t and loss statement due to the implementation of a new reporting structure. The prior year s figures were accordingly reclassifi ed for the purpose of comparison. The changes related to the cost of sales, selling expenses and the general administrative expenses are presented in detail in the notes to the consolidated financial statements under Item 1.3. Development of revenues Revenues increased to million (2009: million). The growth is affected by an increase in subscription revenues by million to million (2009: million). Decisive for this was the higher number of subscribers with fixed-term contracts as well as a stronger increase in the ARPU. Offsetting this effect, the hardware revenues decreased to 25.1 million (2009: 47.4 million). On 4 July 2009 the new Sky TV entertainment service was introduced and replaced all previously existing offerings. The focus is on the rental of receivers. Upon request Sky provides the subscribers a loan receiver for payment of a one-time activation fee. In addition, revenues were recognised in the fi rst quarter of 2009 in the amount of 8.0 million from the sale of receivers to a cable network provider. The wholesale proceeds declined to 14.3 million (2009: 39.0 million) primarily due to the expiration of the rights agreement with arena as well as the cancellation of the wholesale agreement with Deutsche Telekom. Higher advertising proceeds, especially in connection with the broadcasting of the FIFA Football World Cup 2010, led to an increase in advertising revenues to 21.4 million (2009: 15.7 million). Other revenues decreased to 35.4 million (2009: 56.9 million), since Sky beginning with the 2009/2010 season no longer produces the Bundesliga in IPTV. Furthermore, the sublicensing of the UEFA Champions League ended with the 2008/2009 season. Development of expenses Cost of sales amounted to 1,018.8 million (2009: million). Programming costs increased primarily due to the higher costs for the broadcasting of the Fußball Bundesliga and the FIFA Football World Cup 2010 to million (2009: million). Technology costs increased to million (2009: million) as a result of higher cable feed, transponder and encryption payments, as well as higher bandwidth for the broadcast of the HD channels. Customer service and other costs of sales increased to 65.0 million (2009: 50.9 million) in particular due to higher costs in connection with the migration of existing customers to the new Sky packages, to higher costs following upselling activities and customer loyalty measures as well as from the sale of magazines. Until June 2009 the sales revenues from magazine subscriptions were considered on a net basis due to the earlier contract terms between Sky and the publisher. Currently Sky sells the magazine directly to the customer in combination with a Sky package, so that the costs of the supply are to be recognised as other costs of sale. In other cases Sky continues to operate as an agent for the publisher, so that the revenues are recognised in the amount of the commission. The hardware costs decreased to 52.9 million (2009: 58.5 million). Included in the hardware costs are valuation allowances on receivers in the amount of 7.4 million (2009: 0.3 million). On the other hand, the costs in the prior year included costs from the sale of receivers to a cable network operator. In addition, the focus of the new sales model, which was introduced on 4 July 2009, is on the loan of receivers. Accordingly, the costs of receiver sales fell compared to the prior year. Selling expenses increased to million (2009: million) due to the increased marketing investment to further establish the Sky brand and the sales activities associated with acquiring new subscribers. The general and administrative expenses increased to 88.2 million (2009: 74.7 million). The increase is due largely to increased IT expenses and building occupancy expenses. Other operating income increased to 16.3 million (2009: 11.4 million). On 19 July 2010 the German Institution for Arbitration made a judgment in favor of Sky, whereby the other party was required to make a payment of 4.5 million. Leading up to the settlement there were disputes between the Company and a cable network operator regarding services rendered in prior years. The effect on results resulting from the arbitration agreement amounts to 5.3 million, of which 3.5 million is shown under other operating income. The remaining effect results from the release of allowances on receivables in selling expenses ( 1.0 million) as well as the release of provisions in technology costs and interest expenses ( 0.8 million). In addition, Sky sold certain overdue trade receivables to a collection agency. The effect on results from this amounted to 3.5 million. Other operating expenses increased to 17.3 million (2009: 11.3 million) mainly due to the inclusion of payment obligations in connection with shareholder claims. Amortisation of the subscriber base amounted to 49.2 million (2009: 49.0 million). In addition the carrying amount of the Premiere trademark was fully written off in the amount of million in Sky Deutschland AG

55 Operating result Change (absolute) Revenues (in million ) Operating costs (in million ) 1, , EBITDA (in million ) 1) EBITDA margin (in %) 3) Depreciation and Amortisation Amortisation of subsciber base Amortisation of trademark EBIT (in million ) 2) EBIT margin (in %) 3) Change (in %) 1) Result before interest, tax and depreciation and Amortisation 2) Result before interest and taxes 3) Relationship EBITDA/EBIT to revenues Financial result The financial result amounted to negative 33.4 million (2009: negative 38.9 million). From the utilisation of the existing debt financing there was interest expense in the amount of 27.1 million (2009: 23.3 million). The total interest expense amounted to 37.0 million (2009: 35.3 million). The fi nancial result additionally included gains from the fair value remeasurement of foreign currency derivatives that do not qualify as cash fl ow hedges in the amount of 0.8 million (2009: losses in the amount of 0.7 million). In 2009, expenses in the amount of 4.0 million were shown in the financial result from the measurement of a virtual stock option that was granted to a previous shareholder of Premiere Star GmbH. The interest and similar income amounted to 3.3 million (2009: 3.0 million). Consolidated net earnings For the financial year 2010 there was a result before taxes of negative million (2009: negative million). The income taxes comprise deferred tax expense in the amount of 6.6 million (2009: deferred tax income in the amount of 50.4 million). After taxes there was a consolidated loss of million (2009: million). Basic/diluted earnings per share amounted to negative 0.70 (2009: negative 1.79). Assets and financial position The increase in trade receivables to 74.4 million (2009: 72.6 million) resulted primarily from the increase in monthly recurring subscriber revenues. The decrease in fi lm assets and advanced payments for sport and film rights to 88.8 million (2009: 97.7 million) resulted in particular from the decline in advances for sports rights, which in the prior year included the advances for the broadcasting of the FIFA Football World Cup Other financial assets decreased to 3.8 million (2009: 5.0 million) primarily due to decreased purchase price receivables. Inventories declined to 35.3 million (2009: 36.2 million). The decrease due to the write-downs recognised and the reclassifi cation of receivers that are to be rented out and delivered to subscribers to non-current assets was partially offset by the purchase of new receivers. Intangible assets decreased to million (2009: million). Amortisation, especially of the subscriber base, was in excess of the additions from the takeover of the subscriber lists for the telemedia service Blue Movie and the investment in the new subscriber management system and in other software. Property, plant and equipment increased to 22.4 million (2009: 16.4 million). The additions from investment, especially in connection with the move into the new headquarters, exceeded the current depreciation. The carrying amount of receivers, recognised under non-current assets, increased to 73.7 million (2009: 48.1 million). The additions mainly related to HD receivers. The cause for this was primarily the additions resulting from the reclassifi cation from inventories. Deferred tax assets declined to 0.0 million (2009: 1.4 million). Other assets decreased to 32.7 million (2009: 33.4 million). The decrease in deferred fi nancing expense in connection with the new capital structure was offset by deferred expenses for advertising services. Shareholders equity declined to million (2009: million) in spite of the capital increases from authorised capital due to the loss for the period. At year end the equity ratio amounted to 32.2 percent (2009: 44.3%). Total liabilities increased to million (2009: million) and were affected by the following developments. Financial liabilities increased to million (2009: million). The increase resulted from the utilisation of the existing debt financing. The net financial liability (financial liabilities less cash funds) amounted to million (2009: million). Opposite this, trade payables Annual Report

56 decreased to million (2009: million). The increase in license liabilities resulting from the acquisition of fi lm licenses was more than offset by the decrease in other trade payables, in particular as a result of lower payables from the purchase of receivers as well as the procurement of magazines. Other fi nancial liabilities increased to million (2009: 98.0 million). The increase is mainly due to the inclusion of obligations in connection with shareholder claims. In contrast the payment obligation for the buyback of shares in Premiere Star GmbH decreased. Other provisions declined to 3.3 million (2009: 11.6 million) in particular due to the usage and release of tax provisions in connection with the non-recognition of an input tax deduction from services received. The other liabilities also decreased to 36.9 million (2009: 38.9 million). The decrease resulted primarily from lower amounts payable to the tax authority. Deferred tax liabilities increased to 44.3 million (2009: 39.3 million) and relate primarily to the different Amortisation methods applied for tax purposes and in the IFRS balance sheet relating to intangible assets. Liquidity and cash fl ow Cash flows from operating activities amounted to negative million in the financial year (2009: negative million). The net cash outflow resulted from the negative operating result and the change in working capital, primarily due to sales of receivers. Cash flows from investment activities amounted to negative 88.9 million (2009: negative 53.3 million). The cash disbursements for investments in intangible assets and property, plant and equipment relate especially to the takeover of the subscriber lists for the telemedia service Blue Movie, acquired name rights, the purchase of receivers, the expansion of the new subscriber management system and investments in software. Cash outfl ows for the acquisition of companies resulted from the buy-back of shares in Premiere Star GmbH, the acquisition of Loxxess Medienlogistik GmbH, the acquisition of Sky Creative Services GmbH, as well as the buy-back of shares in Premium Media Solutions GmbH. In the prior year the cash outflows for investments in intangible assets and property, plant and equipment related in particular to acquired name rights, the implementation of the new subscriber management system and investments in new display stands in the branches of Sky s trading partners. Cash flows from financing activities increased to million (2009: million). The proceeds from the capital increases and the utilisation of the credit lines exceeded the repayments of loans, interest payments, and the payment of transaction costs in connection with the new capital structure and the revision of financial covenants. In total, Sky had liquid funds available at year end in the amount of 5.0 million (2009: 8.1 million). The credit lines (without consideration of guarantees) were utilised in the amount of million (2009: million). The capital structure of Sky and the principles and aims of the risk management system are explained in detail in the notes to the consolidated financial statements under Item ( Borrowings ), Item 4.1 ( Financial risk management ) and Item 4.2 ( Capital management ). Overall presentation of the economic situation EBITDA amounted to negative million and was in line with the forecast of 11 November 2010, in which a negative EBITDA between 260 million and 280 million was announced. EBITDA was substantially lower than originally forecasted in the 2009 combined management report due to the slower growth in subscribers and from investments in substantial growth measures that were made possible by the capital increases. After the positive development in the third quarter, Sky improved significantly in the fourth quarter with respect to all key performance indicators. Accelerated growth in the recruitment of new customers and shrinking churn rates together with an ARPU at a record level indicate that Sky s offering is gaining traction with consumers. The number of subscribers increased to million. The average program revenues per subscriber per month (ARPU) increased significantly to an historical record level of 30.22, and the 12-month churn rate declined further to 16.2 percent. The initiatives in the areas of content, innovation and services have generated the necessary momentum to offer Sky s customer the best possible TV experience, to accelerate growth and to reach sustainable profi tability. Sky Deutschland AG Revenue and earnings position Revenues decreased to 16.9 million (2009: million). A major cause for the decrease was the termination of the sublicensing of the licensing rights for the games of the Bundesliga and second division Bundesliga to Sky Deutschland Fernsehen GmbH & Co. KG at the end of the 2008/2009 season. Starting with the 2009/2010 season, the subsidiary directly holds the broadcasting rights. Other operating income increased to 4.1 million (2009: 1.1 million). The increase resulted primarily from the charge out of expenses to subsidiaries in connection with the use of the new headquarters. The decline in expenses is due to the fact that the license period for the games of the Bundesliga and second division Bundesliga also ended with the 2008/2009 season. License expenses amounted to 0.0 million (2009: million). Personnel expenses increased during the reporting period to 24.8 million (2009: 21.3 million) primarily due to higher fixed and variable salaries. Total depreciation and Amortisation decreased to 0.6 million (2009: 1.4 million) especially due to the lower Amortisation of intangible assets. In the prior year, the rights for the name Offi cial Partner of the Bundesliga were Amortised over the licensing term through the end of June Other operating expenses increased to 40.2 million (2009: 38.1 million). The increase resulted from the inclusion of obligations in connection with shareholder claims as well as higher occupancy costs; opposing these were a decrease in expenses in connection with capital increases carried out. 56 Sky Deutschland AG

57 The financial result improved to negative 33.0 million (2009: negative million). In the prior year, an impairment write-down in the amount of million to the lower fair value was recognised on the investment in Sky Deutschland Fernsehen GmbH & Co. KG. Income from loans included in financial assets, which resulted from the granting of loans to Sky Deutschland Fernsehen GmbH & Co. KG, increased slightly to 48.5 million (2009: 47.4 million). Interest expense from the utilisation of existing financing increased to 15.5 million (2009: 13.9 million). The difference in the valuation of the pension provisions of 0.3 million due to the conversion to the measurement provisions of German Accounting Law Modernisation Act ( BilMoG ) as of 1 January 2010 was recognised in the financial year through profi t and loss under extraordinary expenses. The income taxes comprise deferred tax expense in the amount of 26.9 million (2009: 0.0 million). The profi t and loss statement at the end of the financial year shows a loss in the amount of 38.8 million (2009: million). The accumulated loss of Sky Deutschland AG at year end amounted to million (2009: million). Asset position Property, plant and equipment increased to 7.6 million (2009: 0.5 million) due primarily to leasehold improvements carried out and investments made in office furniture and equipment in connection to the move to the new headquarters. The shares in affi liated companies comprise primarily the investment in Sky Deutschland Fernsehen GmbH & Co. KG. In 2010 Sky Deutschland AG made payments into the capital reserve of Sky Deutschland Fernsehen GmbH & Co. KG in the amount of million (2009: million). Accordingly, the shares in affi liated companies rose to 1,270.1 million (2009: million). Loans to affiliated companies relate to loans that were issued to Sky Deutschland Fernsehen GmbH & Co. KG. Due to the repayments in the past financial year, the loans to affi liated companies decreased to million (2009: million). Receivables from affiliated companies decreased to 5.5 million (2009: 12.4 million) primarily due to lower short-term receivables from the issuance of the loans to Sky Deutschland Fernsehen GmbH & Co. KG. Prepaid expenses increased to 6.8 million (2009: 6.2 million) due to higher prepaid financing costs in connection with the new financing structure. Shareholders equity increased to 1,736.1 million (2009: 1,538.5 million) following the capital increases. Provisions increased to 10.7 million (2009: 9.6 million) in particular due to higher personnelrelated provisions. Liabilities to banks increased to million (2009: million). The increase resulted from the utilisation of the existing debt financing. Trade payables also increased to 2.3 million (2009: 0.3 million) and consist mainly of obligations for the rental of the business premises. Other liabilities increased to 9.6 million (2009: 1.3 million) especially due to the inclusion of obligations in connection with shareholder claims. Deferred tax liabilities amounted to 78.4 million (2009: 0.0 million) and are primarily due to the difference between the trade and tax bases of the investment account for Sky Deutschland Fernsehen GmbH & Co. KG. Deferred tax assets on tax losses were deducted from the recognised deferred tax liabilities. Liquidity and cash fl ow Cash flows from operating activities for the entire year amounted to negative 25.4 million (2009: 6.0 million). Cash outfl ows in the amount of 44.3 million (2009: 37.8 million) due to the negative operating result were partly offset by cash infl ows of 18.9 million (2009: 43.7 million) due to the changes in working capital. Cash flows from investing activities amounted to negative million (2009: negative million). Cash outflows in the amount of 1.0 million (2009: million) from the issuance of a loan to Sky Deutschland Fernsehen GmbH & Co. KG as well as payments into the capital reserves of Sky Deutschland Fernsehen GmbH & Co. KG in the amount of million (2009: million) exceeded cash infl ows of 23.8 million (2009: 24.8 million) from interest received and the repayment of issued loans in the amount of 48.5 million (2009: 92.5 million) by Sky Deutschland Fernsehen GmbH & Co. KG. In addition, further investments led to cash outflows of 7.1 million (2009: 2.9 million). Cash flows from financing activities increased to million (2009: million). The proceeds from the capital increase and the utilisation of the credit lines exceeded the repayments of loans, interest payments, and the payment of transaction costs in connection with the new capital structure and the revision of financial covenants. The balance of liquid funds at the balance sheet date amounted to 0.1 million (2009: 1.7 million). Annual Report

58 Opportunity and risk report Summary of opportunities for the future development of the business The following points describe the significant opportunities for the future business development of the Company: Subscriber base with an attractive demographic structure Sky had million subscribers in Germany and Austria as of 31 December This makes Sky an attractive partner for fi lm studios and right holders as well as for organisers of sporting events. Sky also benefi ts from the composition of the subscriber base: the majority of subscribers are households with more than two individuals, who tend to be interested in a wide variety of programs. Unique program offering Sky customers can choose the programs they want to see from a broad range of options. Due to its outstanding variety, high-quality programming and well-known TV-brands, Sky Welt is the first choice for all lovers of television. Even more variety is offered by Sky Welt Extra. With the Film package Sky subscribers can watch about 80 movies from all categories each day and more than 25 fi rst releases on German TV every month. Sport fans get an extraordinary live sports program line-up with the sport package and Fußball Bundesliga package. In addition, Sky offers the most comprehensive HDTV selection in Germany and Austria. Market with significant growth potential Sky operates in Germany and Austria, which together form Europe s largest television market comprising a total of approximately 40 million TV households. The relatively low level of pay-tv penetration in these TV markets compared with other European markets indicates that both countries offer significant growth potential for pay-tv. Basic Structure of Sky s Internal Control and Risk Management System Sky believes that good corporate governance as a process of consistently identifying business opportunities and taking on their associated risks in a controlled manner results in a sustainably increased enterprise value. In applying this principle, the Management Board has installed a Risk Management System. The objective of this system is to identify risks at an early stage, evaluate them quickly and initiate the appropriate measures to mitigate or eliminate the relevant risks. The development of Sky s business is primarily affected by the legal environment, changes in the market prices for broadcasting rights, by the availability of fi nancing and by the competitive environment in which Sky operates. On the basis of a continuous and comprehensive inventory, all risks are documented systematically and are evaluated also with regard to the probability that they will occur. A database application developed by Sky s internal audit department supports the risk management process. The effectiveness of the existing risk Management System is continuously reviewed to reduce the possible exposure and, if necessary, to enable action to be taken. Nevertheless even a suitable and functioning Risk Management System cannot guarantee the identification and the management of all risks. Responsibilities and processes The Management Board is responsible for risk management, for defining the risk management policy and deciding on the extent that risks are borne by Sky and their subsequent management. The underlying principles of Sky s risk management policy are as follows: Early recognition risk identification Systematic assessment risk analysis Taking countermeasures risk controlling Check effectiveness risk monitoring The Management Board has set up a risk management task force comprised of the persons responsible for risks. The task force is headed by a risk manager. The risk manager compiles a quarterly report on the risks for the Management Board. Should new risks arise in the interim period that may impact the risk situation to a substantial degree, the risk manager is responsible for the preparation of an ad hoc report which is provided to the Management Board immediately. The Management Board regularly informs the Supervisory Board at ordinary and extraordinary meetings of the Supervisory Board as well as by telephone, without delay and comprehensively, of all issues relevant to the Company as to risk situations and risk management. The internal audit department is engaged to audit the propriety, reliability and efficiency of the business processes and organisational procedures within the group at regular intervals. Additionally, the key processes of the risk early warning system which is a component of the Risk Management System are audited by the external auditor in accordance with Section 317(4), German Commercial Code (HGB), as to whether these processes are able to identify risks that may threaten Sky s ability to continue as a going concern. 58 Sky Deutschland AG

59 Accounting-related Internal Control System In accordance with Section 289 (5), German Commercial Code (HGB), Sky is obliged to describe the accounting related Internal Control System and the accounting-related components of the Risk Management System in the management report. The accounting-related Internal Control System is designed to ensure that all events and transactions are correctly reflected in the accounts and are correctly recognised and measured in the financial reporting of Sky Deutschland AG and their subsidiaries in compliance with statutory and contractual requirements as well as internal guidelines. The accounting processes within the Sky Group are centralised to a very significant extent in the accounting department in Unterföhring as the main location of Sky. This enables the utilisation of standard and uniform processes and the application of standardised tools and systems in the accounting processes. The accounting department prepares the consolidated financial statements for the Sky Group as well as the individual fi nancial statements for all Group companies and reports the consolidated financial information on a monthly basis to the Management Board. Accounting impacts of complex issues are assessed with the support of external advisors. Furthermore, the principle of double-checking each other s work is applied throughout in all accounting processes as a general rule. The controlling department regularly verifies the completeness and accuracy of accounting data as well as possible deviations from the business plan and reports the results within a standardised reporting on a monthly basis to the Management Board. Furthermore, the controlling department reports possible deviations of the forecasted revenues and earnings from the business plan in a standardised form on a weekly basis to the Management Board. In addition, the internal audit department audits the propriety, reliability and efficiency of the accounting-related processes and organisational procedures and also reports the results to the Management Board. Sky has issued an appropriate system of internal guidelines that cover compliance issues, contract and purchase order authorisation, invoice authorisation and internal accounting guidelines. The internal accounting guidelines comprise guidelines such as a group-wide standardised table of accounts and a group-wide standardised internal reporting for consolidation purposes to ensure uniform financial reporting within the Sky Group. These guidelines are regularly updated. Due to the centralised accounting department, Sky has not issued an accounting manual. Sky uses SAP R/3 as the ERP system. In addition, data which are derived from other IT systems are monitored with respect to their correct transfer and processing in SAP R/3. The IT systems which are employed within the financial reporting process are secured against unauthorised access. Sky has an authorisation policy in place that is regularly updated and monitored. The Supervisory Board supervises matters including key aspects of financial reporting, risk management and the audit engagement, together with its main points of focus. Evaluation of individual risks Sky s business, results of operations and fi nancial condition could be materially adversely affected by risks that are currently unknown. In the following section major risk factors are described. Market and competition risks Sky is critically dependent on exclusive access to attractive content on commercially reasonable terms. The centerpiece of Sky s sports offering are the live broadcasts of the games of the Bundesliga and second division Bundesliga. In addition, Sky holds extensive rights, many of which are exclusive, to other types of premium sporting, as well as movies, TV series and programs that are broadcast in HDTV. Sky intends to finance the licence fees payable to its content providers primarily with the funds available to it under its credit facilities and, increasingly, with cash generated in the ordinary course of its business. If the business plan fails to result in suffi cient improvements in the amount of cash generated in the ordinary course of its business over time, Sky may be unable to pay these fees, in which case its content providers may terminate Sky s licences and claim damages. All of Sky s licences are for a limited period of time and require periodic renewals. There can be no assurance that Sky will be able to renew its licences on commercially reasonable terms. Even if Sky is given the opportunity to bid for a licence that comes up for renewal, there can be no assurance that it will have the necessary funds or be willing to match a competitor s bid. With regard to the broadcasts of the games of the Bundesliga and second division Bundesliga Sky holds the broadcasting rights until the end of the 2012/2013 season. According to the information of the Deutsche Fußball Liga (DFL) the bidding for the broadcasting rights from the season 2013/2014 onwards shall be fi nished latest in May Furthermore, several of the contracts with the Hollywood studios and UEFA, as well as several third party channel agreements contain change of control clauses that entitle the relevant counterparties to terminate the agreements in the event a major competitor acquires the majority of shares or otherwise gains control over Sky. Given that News Corporation controls the entity that owns the FOX studios and given that News Corporation currently indirectly holds 49.9 percent of the outstanding shares of Sky, termination rights under these change of control clauses may already have been triggered or may be triggered upon the acquisition of more than 50 percent of the outstanding shares by News Corporation. Annual Report

60 Customer and sales-specific risks TV companies in Germany and Austria face a signifi cant degree of competition, both from each other and from providers of other entertainment options. Sky s principal competitors are the German and Austrian free-tv stations. Sky also competes with the public broadcasters in Germany and Austria who offer some of their programming without commercial breaks. The public broadcasters are financed through broadcasting license fees, which limits the average household budget for other forms of entertainment. Sky s ability to increase the revenue it generates from its existing subscribers and to attract new subscribers depends in large part on consumers disposable incomes available for media spending. In case of a drop in household incomes, it is possible that the demand for media and entertainment products, including pay-tv, could substantially decline. To some extent, Sky also competes with cable network operators, such as Unitymedia, Kabel Deutschland, Kabel BW and Tele Columbus, as well as with operators of IPTV platforms such as Deutsche Telekom. It is possible that the cable network operators might extend their pay-tv offerings in the future, which could lead to more intense competition in the pay-tv market. As a result, the number of companies bidding for sporting events, movies and TV series and other high profile content may increase, which could restrict Sky s access to such content or raise the licence fees it must pay to gain access to the desired content. In addition, Sky competes with a variety of alternative distribution channels for movies and other audiovisual content, such as DVD sales and rentals, websites, internet service providers, pay-per-view services and other entertainment options available to consumers. Even though some of these other entertainment options may currently still suffer from a limited market acceptance, they may become more important in the future. In the event Sky fails to compete effectively and efficiently with other TV companies or if consumer demand moves from TV to alternative distribution channels or other entertainment options mentioned above, Sky s net assets, fi nancial position and results of operations could be materially adversely affected. The trademark licence agreement with BSkyB contains a change of control clause that entitles BSkyB to terminate the agreement under certain circumstances. Such termination however requires that (a) any legal person (other than already existing shareholders with more than 15 percent of the shares in Sky Deutschland AG) acquires direct or indirect control of Sky (which shall in particular be the case if such legal person acquires any further interest to a direct or indirect interest in Sky of more than 49 percent); and (b) the acquiring person is a substantial competitor of the BSkyB Group, or the association of the acquiring person with the trademark or with Sky would damage the Sky brand or BSkyB s reputation more than to an immaterial extent in any territory where the Sky brand is used. Such termination shall be effective either 48 months from the date on which it is given or the regular end of the term of the trademark licence agreement, whatever is earlier. In case the termination is based on a damage to the Sky brand or the reputation of the BSkyB group, the above 48 months period is reduced to twelve months. Technical risks Because Sky s business model is based on the provision of access to electronic content for payment, Sky is critically dependent on its ability to protect its content against unauthorised access from third parties. In addition many of Sky s licences contain clauses that require it to secure its licensed content and provide for termination rights and the payment of damages in the event of breaches. In 2008, Sky put a new encryption system in place that relies on two separate encryption technologies: a new version of the Nagravision system and Videoguard, a system developed by NDS. To reduce the likelihood of future security breaches, Sky is dependent on its ability to periodically update each of the two technologies it currently uses and, when a security breach occurs, to remedy such breach before a large number of people gain unauthorised access to Sky s programming. With regard to cable customers, cable network operators are responsible for the encryption of Sky s signals during transmission via their cable networks. If any of the operators encryption systems were to be circumvented, Sky could suffer substantial damage but would not have the ability to take direct action in order to remedy the security breaches. Sky also faces new piracy threats, such as the unauthorised streaming of content from offshore websites and unauthorised card sharing. In addition, Sky does not have a distribution network of its own to disseminate its programming to subscribers and thus depends on transmission agreements with cable and satellite network operators. If Sky fails to extend its transmission agreements with cable or satellite network operators when they expire or these operators terminate their agreements with Sky, it could lose access to a substantial number of its subscribers or be forced to accept commercially unreasonable terms. 60 Sky Deutschland AG

61 Performance and process-oriented risks Sky has entered into various contracts for the provision of services. It is not possible to guarantee that these partners will meet their contractual obligations, i.e. provide their services in a satisfactory manner. Since this could ultimately lead to interferences in Sky s business operations, Sky is attempting to reduce this risk by selecting service providers according to the most important criteria such as reliability, proven market experience and quality. In the second half of 2009 Sky implemented a new subscriber management system. The implementation of the new system focuses on enabling much better customer handling and giving Sky more flexibility for marketing initiatives. During 2011 Sky intends to expand the functionality of the new system to meet future business requirements. If Sky fails to implement the functionality required to meet new business requirements, the development of new business models and further improvements in customer handling is at risk. Legal risks Broadcasting licences Sky holds various broadcasting licences in Germany and one in Austria, which are set to expire in 2012 (Austria) and 2014, 2015, 2017, 2018 and There is a risk of broadcast licences not being extended or withdrawn should Sky breach media law or other laws or regulations, including the protection of minors. Sky has its own control facilities and a unique technological solution that goes beyond what is required by the German Interstate Treaty on the Protection of Minors. Minors are not only protected by providing later broadcasting times, but programs unsuitable for children or minors are also blocked in advance. The advance blocking system is currently regarded as the most effective protection measure for minors in TV. In order to protect minors, Sky stringently observes the adherence to additional measures for the full adult entertainment programming of Blue Movie. Only persons who can prove they are older than 18, either by showing a valid identity card onsite in the shop or using the PostIdent procedure in writing, can become customers of Blue Movie. Once accepted, they receive a personal Blue Movie PIN directly from the shop or by registered mail, which they must have on hand when placing an order. Federal Cartel Office The German Federal Cartel Office (Bundeskartellamt) is currently investigating a potential abuse of market dominant position by Sky. The Federal Cartel Office issued a non-legally binding statement of objections announcing that the Federal Cartel Office considers the decryption of Sky content only on receivers which do not support an open common interface solution as an abuse of a market dominant position. Such abuse according to the Federal Cartel Office can be remedied by decrypting Sky content for new not existing - subscribers only on receivers which support an open common interface. The reasoning of the Federal Cartel Office is, that third party operators should gain access to the customer via Sky s receivers without Sky being involved. Although Sky believes to have complied with all applicable laws, the Federal Cartel Office may impose sanctions, including substantial fines, and require Sky to mandatorily use receivers supporting a further specified common interface module as of a certain point in the future. All of this could lead to an increase in the cost of the receiver infrastructure. In any such case, Sky s business, results of operations and financial condition could be adversely affected. Meanwhile, the Federal Cartel Office informed Sky, that it has suspended the proceeding based on the latest market insights. The Federal Cartel Office intends to obtain further market data regarding the availability of TV sets with integrated digital tuners (idtvs) and CI+ slots in autumn 2011 and reserves the right to reopen the proceeding if the market developments are different then expected. A decision of the Federal Cartel Office is not expected before autumn 2011 and might be subject to court challenge in case the Federal Cartel Office does not discontinue the proceeding. The outcome of the proceeding and the respective financial impact is at this point in time not yet predictable and particularly depends on further market observations of the Federal Cartel Office. Shareholder claims Sky Deutschland AG is facing damage claims by shareholders with respect to public information on its subscriber numbers. The claims are mainly based on the allegation that the subscriber numbers published in the prospectus dated 21 February 2005 on the occasion of the initial public offering ( 2005 Prospectus ), in the prospectus dated 7 September 2007 on the occasion of an increase in share capital ( 2007 Prospectus ) and in other publications were too high. The basis of such allegation is an ad-hoc announcement of 2 October 2008, in which the Company, in addition to a predicted EBITDA loss for the financial year 2008 and the initialisation of discussions with the banks with regard to a restructuring of its credit lines, also announced a new method to classify its subscribers in the future, whereby certain subscribers which previously had been accounted for pursuant to the old classification were no longer counted. After this ad-hoc announcement the price of the shares in the Company decreased. The claimants attribute this price decrease to the communication of the new subscriber classification and claim damages based on their alleged financial detriment. Up until now twelve actions for damages against the Company have been filed against Sky, of which the Company has won eight in court. In one of these cases, the judgment in favor of the Company has already been established as final and absolute. In two cases the Court has decided in favor of the claimants (at least partially), for the remaining actions no first instance judgment have been given. So far, the claims total approximately 735,000. Annual Report

62 Further claims for damages have been asserted out of court, mostly by institutional investors ( the Funds ) which have initiated mediation proceedings (Güteverfahren). The extrajudicial asserted damages added up to approximately million. On 28 October 2010 an out-of-court settlement with the Funds was achieved, which was approved by the Company s Supervisory Board on 10 November Upon payment of 14.5 million which is due in installments and which is collateralised by a bank guarantee in an amount of 8.5 million, the Funds claims, especially in respect of the aforementioned million, is finally and absolutely settled. This holds for all claims regardless of whether known or yet unknown, current or prospective, and irrespective of their legal basis. The Company believes that the total amount of the settlements as well as any associated cost in particular legal costs will be covered by existing insurance policies (prospectus insurance for the 2007 Prospectus and D&O insurance). The same applies for the risks relating to the court proceedings. The Company will take all steps necessary to protect its legal interests including the assertion of own damage claims, if necessary. The settlement arrangement concluded so far with the funds by no means waives the Company s right of recourse against (former) Management Board and Supervisory Board members. The insurance policies in place have been concluded at arm s length and provide for an exemption from liability in case of Board members acting deliberately. Any case of willful intent will entitle the Company to assert claims against the respective Board members. So far the proceedings have not resulted in any case of willful intent and all claims based on willful intent have been rejected. Accordingly, in the consolidated financial statements as of 31 December 2010 the Company has accounted for the abovementioned obligations in the amount of 14.8 million less 6.0 million already paid. In accordance with the relevant insurance contracts, the Company provided the required documentation with respect to the claims till January The evaluation of the insurance companies is ongoing. The Company could be forced to enforce its claims against insurance companies and former board management through the court. Accounting risks Goodwill and subscriber base The goodwill and subscriber base recognised in Sky s consolidated financial statements might in future have to be written down if their value declines. The review of the intangible asset goodwill and subscriber base, recognised in the consolidated fi nancial statements, is based on the financial outlook in the business plan. Sensitivity analyses in the 2010 financial year have not revealed a signifi cant impact resulting from possible target shortfalls (overall growth, interest rates, subscriber growth and growth of ARPU). A write-down of the intangible assets in the future cannot be excluded. Investigation of the Federal Financial Supervisory Authority In connection with an audit according to Sections 37n ff. of the German Securities Trading Act (WpHG), the Federal Financial Supervisory Authority ( BaFin ) determined that the financial statements as of 31 December 2007 and the management report and Group management report for 2007 of the former Premiere AG (now: Sky Deutschland AG ) as well as the condensed interim consolidated financial statements as of 30 June 2008 and the interim report for the first six months of 2008 were allegedly incorrect. BaFin reached the following conclusions: The number of subscribers of the Company as shown in the management report for the 2007 financial year are overstated by approximately 623,000 and in the interim management report for the first six months of the 2008 financial year are overstated by approximately 611,000. In the Group management report for the 2007 fi nancial year, there was disclosure regarding the amount of consideration to be paid by Sky for the purchase of the Fußball Bundesliga sub-license from arena in 2007, consisting of payments in the amount of 335 million and 16.4 million shares. In addition, risks in connection with the planned acquisition of Fußball Bundesliga rights for the seasons from 2009/2010 to 2011/2012 were not adequately assessed and explained in It would have been necessary to present the potential effects of a failure to obtain the rights or a limitation regarding the exclusivity of the Fußball Bundesliga rights on the position of the Company in the management report and Group management report. In the consolidated financial statements as of 31 December 2007 and in the half-year financial report as of 30 June 2008, goodwill is overstated by million and million, respectively. The Company should not have recognised the acquisition of the sublicense for the Fußball Bundesliga rights from arena Sport Rechte und Marketing GmbH ( arena ), a subsidiary of Unitymedia GmbH, and the related acquisition of certain assets, as well as the takeover of contracts and certain employees as a business combination under the provisions of IFRS 3.4. In the half-year financial report as of 30 June 2008 the result was overstated by at least 10 million. In 2005 the Company had purchased a package of free and pay-tv broadcasting rights for the FIFA 2010 Football World Cup and in 2008 had sold a portion of the free-tv broadcasting rights. Sky allocated the acquisition costs incorrectly to the free and pay-tv broadcasting rights, whereby a too small portion of the acquisition cost was assigned as expense to the reported sales revenues. 62 Sky Deutschland AG

63 Furthermore, in the interim management report as of 30 June 2008 adequate references was not made to the existing risks to the financial position of the Group due to a short-term threatened violation of financial covenants contained in the financing contracts and a potential resulting cancellation by the lending banks as of 30 September The findings of BaFin have no direct effects on the fi nancial reporting at this time. Sky Deutschland AG has filed an objection against the decision of the BaFin. The objection proceedings are currently pending. Sky Deutschland AG will challenge the fi ndings of BaFin in court as the case might be. Should the findings of BaFin become legally binding, Sky Deutschland AG would potentially correct its annual financial statements for the 2007 financial year. In addition, fi nes could be imposed and claims for damages could be asserted by third parties. The principles and aims of the financial risk management with respect to existing currency, interest, price change, liquidity and credit risks as well as the status of forward currency and interest swap transactions is described in detail in the notes to the consolidated fi nancial statements under Item 4.1 ( Financial risk management ). With respect to the derivative fi nancial instruments utilised by the Company, reference is made to the Item ( Derivative financial instruments ) in the notes to the consolidated financial statements. Assessment of the overall risk Sky foresees no development in the risk area at the present time that would jeopardise the Company s continued existence. Tax risks Based on a restructuring expert opinion, the tax authorities confirmed in a binding declaration in November 2009 that Sky meets the requirements for restructuring exemption under Section 8c Corporate Income Tax Act (KStG). On 26 January 2011 the EU commission decided that the restructuring clause represents a government subsidy that is in conflict with European law. The reaction of the part of the German tax authority is not yet known. Accordingly, a different evaluation of existing tax losses and loss carry-forwards in the future cannot be excluded. Financial risks If one or several components of the business plan fail or cannot be implemented in a timely manner, Sky will be at risk of not achieving its EBITDA and cash fl ow targets, in which case the success of the business plan would be called into question. In this case, Sky s net assets, financial position and results of operations would be materially adversely affected and Sky could default under the new credit facilities. Instead of a specifi ed EBITDA threshold according to the new credit facilities a specifi ed threshold of free cash fl ow, as defined in the loan agreement, for the immediately preceding twelve month-period has to be maintained on a quarterly basis, starting on 31 December As of 31 December 2010 the free cashfl ow was above the defi ned threshold. As before Sky must on a quarterly basis, starting with 30 June 2012 and ending with the maturity of the facilities, maintain specified relationships between EBITDA and net finance result and between net debt and EBITDA. Finally, starting on 31 December 2012 Sky must for each quarter maintain a specifi ed relationship of cash flow to debt service. Annual Report

64 Subsequent events Outlook Sky received proceeds of million on 25 January 2011 from the issuance of a convertible bond to News Adelaide Holdings B.V. The bond can be converted to 53,914,182 no-par shares from contingent capital. It has a term of four years, is unsecured and subordinated to existing credit lines. The annual interest is at a rate of 5.5 percent and is payable quarterly at the end of each quarter. The conversion price amounts to and thereby represents a premium of 25 percent over the volume-weighted average XETRA stock price of the Sky share in the last ten exchange days. Through the issuance of the convertible bond and proceeds from the capital increase, gross proceeds received by Sky amount to 342 million. The financing measures for generation of gross proceeds of a minimum of 340 million by 31 January 2011 are accordingly concluded. Since the business development in the fourth quarter of 2010 confirmed the positive trends that were indicated in the course of the prior year, on 12 January 2011 Sky announced an agreement with News Corporation, whereby the gross proceeds of 340 million from the financing measures announced on 2 August 2010 are increased to 400 million. The financial flexibility of Sky is hereby increased, and additional funds are made available for further investment especially in the area of HD that supports the positive development. The additional financing in the amount now of 58 million for the generation of gross proceeds totaling 400 million will be provided at the latest by 21 December 2011 in the form of a shareholder loan by News Adelaide Holdings B.V. With the last three quarters of encouraging operating metrics, Sky is now seeing building momentum in the business, with performance following a more traditional pay-tv seasonal pattern. The constant focus on customers, top quality content, leading innovation and great service is beginning to deliver results, but Sky is still in the early days of its new proposition development, and there is much more to do. Accelerated growth in net subscriber additions and shrinking churn rates, combined with a record-level ARPU, confirm that increasing numbers of German and Austrian customers see the quality and value of Sky s product and service offering. Looking ahead, Sky will continue to enhance its market leading HD offering, deliver new and exciting services, and make its topquality programming accessible across more and more devices and platforms to enable its customers to watch Sky anywhere and at anytime. The strategic focus is to accelerate growth and to achieve sustainable profi tability. The Private Radio and Telecommunications Federation [Verband Privater Rundfunk und Telemedien e.v. VPRT] predicted a growth of 6 percent for the pay-tv market in Sky signifi cantly surpassed this estimate in both revenue and subscriber growth. The VPRT is predicting good conditions for a sustainably positive market development for 2011 as well. The management of Sky shares in this assessment and currently sees a positive framework for continued growth. Sky expects the trends seen in the last three quarters to continue in 2011 with rising subscriber numbers and lower churn. The management believes full-year 2011 EBITDA to be signifi cantly better than 2010, but will remain negative. The management expects the positive development to continue in Additional investments in the areas of HD, the Sky+ hard-disk receiver and other innovations should support the positive trend of the past quarters. The management expects a correspondingly high outflow of funds in 2011 and Sky intends to finance these investments with the funds available to it under its credit facilities and its shareholder loan and, increasingly, with cash generated in the ordinary course of its business. 64 Sky Deutschland AG

65 Disclosure pursuant to 289 (4) and 315 (4), German Commercial Code (HGB) As of 31 December 2010 the share capital of Sky Deutschland AG amounted to 708,099,784. It is divided into 708,099,784 registered no-par value shares. Each share in Sky Deutschland AG has one vote at the General Shareholders meeting and an equal share of the profi ts. The Management Board is not aware of any voting right restrictions or restrictions affecting the transferability of shares. According to a notification of voting rights, on 23 April 2009, News Adelaide Holdings B.V., Amsterdam, Netherlands, directly held an interest of more than 30.0 percent in the share capital of Sky Deutschland AG and 30.5 percent of the voting rights. This interest was indirectly held by News Corporation, New York, USA, News Publishing Australia Limited, New York, USA, News America Incorporated, New York, USA, News Corporation Europe, Inc., New York, USA and News Netherlands B.V., Naarden, Netherlands. After the entry of the capital increase in the commercial register on 30 September 2010, the interest of News Corporation in the share capital of Sky Deutschland AG increased to percent. According to a notification of voting rights, on 21 January 2009, Odey Asset Management LLP, London, United Kingdom, indirectly held an interest of more than 10.0 percent in the share capital of Sky Deutschland AG and percent of the voting rights. On 5 November 2009 Odey Asset Management LLP stated in a press release that its shareholding in Sky Deutschland AG was percent. No shares have been issued with special rights conferring controlling powers. There is no control over voting rights in the event that employees hold a share in the equity and do not directly exercise their control rights. The appointment and removal of Management Board members is conducted in accordance with Sections 84 and 85 of the AktG (German Stock Corporation Act) by the Supervisory Board. In addition, Article 6 (1) of the Company statutes provides that the number of Board members is also determined by the Supervisory Board. Sections 133 and 179 of the AktG apply to changes in the Company statutes. In accordance with these provisions, every amendment to the statutes requires a resolution of the general meeting for which a simple majority of the votes is necessary and at least three quarters of the capital represented when the resolution is passed must agree, unless the statutes stipulate a different capital majority. The Company statutes stipulate in Article 18 that resolutions of the general meeting shall be passed by a simple majority of the votes cast unless a larger majority is necessary under mandatory provisions of law. This is the case, for example, in relation to the creation of authorised capital (Section 202 (2) sentences 2 and 3 AktG) or contingent capital (Section 193 (1) sentences 1 and 2 AktG), for which a majority of three quarters of the capital represented at the passing of the resolution is necessary in each case. The Supervisory Board is empowered to decide upon changes to the statutes that affect only the wording. Based on the resolution of the Annual General Meeting on 23 April 2010 after the partial exercise of the authorisation in September 2010 the Management Board is currently still authorised, with approval of the Supervisory Board, to increase the share capital of Sky Deutschland AG until 22 April 2015 through a one-time or repeated issuance of up to 100,643,003 new registered no-par value shares against cash or in-kind contributions by up to 100,643,003 (Authorised capital 2010). The Management Board is authorised, with approval of the Supervisory Board, empowered to defi ne the further contents of the share rights and the terms of the stock issue. In the Annual General Meeting of 23 April 2010 the Management Board was authorised, with approval of the Supervisory Board, to issue up until 22 April 2015, once or several times, bearer or registered convertible bonds and/or bonds with warrants in the total amount of up to 500,000,000 with a limited or unlimited term and to offer subscriptions to the owners, or creditors, of bonds conversion or exercise rights for up to 53,916,185 new registered no-par value shares (no-par shares) of Sky Deutschland AG with a proportional amount of the share capital of up to 53,916,185 in total in accordance with the respective bond or warrant conditions. For servicing these convertible bonds and/or bonds with warrants by the Company, the General Shareholders Meeting on 23 April 2010 established a contingent capital in the amount of 53,916,185. With the issuance of a convertible bond to News Adelaide Holdings B.V. on 25 January 2011, conversion rights were granted for the purchase of up to 53,914,182 new registered no-par value shares. The Annual General Meeting on 23 April 2010 authorised Sky Deutschland AG s Management Board to buy back up to 10 percent of the subscribed capital that existed as of the date of the resolution. The repurchased shares together with the other treasury shares whose owners are to be treated in accordance with Sections 71d and 71e AktG are not permitted at any time to exceed 10 percent of the share capital. The authorisation 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. Annual Report

66 With regard to the credit facilities Sky is subject to various obligations and conditions. The credit facilities provide, among other things, for special repayments in the event of the acquisition of more than 50 percent of the shares or voting rights in Sky Deutschland AG by a third party. With respect to the new credit agreements, this requirement for an unscheduled repayment only applies in the event of a purchase by a third party that is not a member of the News Corporation Group. In the case of a violation of these provisions, the lenders may terminate the credit facilities and demand immediate repayment of the loan amounts. Sky Deutschland AG has not entered into other agreements that are subject to the alteration or termination upon a change of control. However, subsidiaries of Sky Deutschland AG have entered into agreements with the major Hollywood studios, with UEFA and several third party channels that entitle the relevant counterparties to terminate the agreements under certain conditions if a change of control occurs at Sky Deutschland AG. Furthermore a subsidiary of Sky Deutschland AG has entered into a trademark license agreement with BSkyB that entitles BSkyB to terminate the agreement under certain conditions if a change of control occurs at Sky Deutschland AG. Sky Deutschland AG has not entered into any compensation agreements with the members of the Management Board or employees relating to the eventuality of a takeover bid. 66 Sky Deutschland AG

67 Closing statement in accordance with 312 (3) German Stock Corporation Act (AktG) Pursuant to Section 312 of the German Stock Corporation Act (AktG) the Management Board of Sky Deutschland AG has prepared a dependent company report on relations with all affiliated companies for the period from 1 January 2010 to 31 December The report concludes with the following statement made by the Management Board: Sky Deutschland AG received adequate compensation for the legal transactions listed in the report on relations with affiliated companies under the circumstances known to the Management Board at the time such legal transactions were undertaken. No measures were taken or omitted at the instance of or in the interest of the controlling company or one of its affiliated companies. Declaration on Corporate Governance pursuant to 289a German Commercial Code (HGB) In this declaration, the Management Board reports on corporate governance pursuant to Section 289a (1) German Commercial Code (HGB). I. Declaration of conformity with the German Corporate Governance Code pursuant to 161 German Stock Corporation Act (AktG) The Management Board and Supervisory Board of Sky Deutschland AG adopted the following declaration of compliance with the German Corporate Governance Code on 11 January 2011: The Management Board and the Supervisory Board herewith declare that the recommendations of the Government Commission German Corporate Governance Code published by the Federal Ministry of Justice in the offi cial section of the Federal Gazette in the version of 18 June 2009 have been complied with since the last declaration of conformity dated 17 November 2009 with one exception. A nomination committee pursuant to lit German Corporate Governance Code has not been established. As no co-determination rules apply and the Supervisory Board is exclusively constituted with shareholder representatives and taking into account effi ciency considerations, the implementation of a nomination committee seems not to be appropriate. The Management Board and the Supervisory Board herewith further declare that the recommendations of the Government Commission German Corporate Governance Code published by the Federal Ministry of Justice in the offi cial section of the electronic Federal Gazette on 2 July 2010 in the version of 26 May 2010 are and will be complied with since 2 July 2010 for the financial years 2010 and 2011 with the exception of establishing a nomination committee pursuant to lit German Corporate Governance Code. Further information relating to corporate governance at Sky Deutschland AG are included in the Corporate Governance Report. II. Information on corporate governance practices Special codified corporate governance practices that are applied in addition to the statutory requirements or the recommendations and suggestions of the German Corporate Governance Code are not applied. III. Operation of the Management Board and the Supervisory Board As a German stock corporation, with its Management Board and Supervisory Board, Sky Deutschland AG has the two-tier management and control structure typical in Germany. The Management Board is responsible for independently managing the enterprise. The Supervisory Board appoints, advises and supervises the Management Board. The Management Board and the Supervisory Board of Sky Deutschland AG cooperate closely to the benefi t of the Company. 1. Management Board The number of Management Board members is determined by the Supervisory Board. In the financial year 2010, the Management Board consisted of four members for the larger part of the year, namely Brian Sullivan (CEO since 1 April 2010), Pietro Maranzana (CFO), Carsten Schmidt (Chief Officer Sports, Advertising Sales & Internet) and Dr. Holger Enßlin (Chief Officer Legal, Regulatory & Distribution). In the period from 1 January 2010 until 31 March 2010 Mark Williams acted as CEO for the Company. With effect as of 6 December 2010 Steven Tomsic was appointed as member of the Management Board and Deputy CFO and from 1 February 2011 on as CFO of the Company. Annual Report

68 As the managing body, the Management Board is obliged to act in the Company s best interests and undertakes to increase the sustainable value of the Company. Each member of the Management Board is responsible, within the scope of the Articles of Association, Rules of Procedure of the Management Board and Management Board resolutions, for independently managing his work area of the Company indicated in the respective applicable schedule of responsibilities. The schedule of responsibilities is prepared by the Management Board and requires the Supervisory Board s consent. The members of the Management Board are jointly responsible for the overall management. For this purpose, the members of the Management board must keep each other mutually informed about all essential procedures and transactions. The Chairman of the Management Board can, at any time, require information from the members of the Management Board about individual matters of their departments and stipulate that he shall be informed in advance about certain types of transactions. A resolution of the Management Board is required for all decisions and measures of a fundamental nature or of essential fi nancial importance for the Company. The Rules of Procedure of the Management Board list examples of individual transactions of fundamental significance or of essential financial importance. The resolutions of the Management Board shall be passed in meetings by a simple majority of votes cast. Management Board meetings shall take place at regular intervals, weekly if possible. Minutes shall be prepared on the meetings of the Management Board. By order of the Chairman of the Management Board, resolutions can also be passed outside of meetings, particularly in writing, by fax or by telephone. Externally, the Company is represented by two Management Board members jointly or by one Management Board member together with a procuration officer (Prokurist). 2. Supervisory Board According to the Articles of Association, the Supervisory Board of Sky Deutschland AG was comprised of six members until the annual general meeting on 23 April In the course of the extension of the Supervisory Board from six to nine members, three new members were elected by the annual general meeting. In accordance with the recommendations of the German Corporate Governance Code, the members of the Supervisory Board were individually elected. The current term of office of the newly elected members expires upon the end of the annual general meeting that resolves on the ratifi cation of the acts of the respective Supervisory Board members for the financial year The term of office of the other members expires upon the end of the annual general meeting that resolves on the ratification of the acts of the respective Supervisory Board members for the financial year On 16 July 2010 Chase Carey was elected Chairman of the Supervisory Board and Markus Tellenbach was elected Deputy Chairman. Until the aforementioned election Markus Tellenbach acted as Chairman and Thomas Mockridge as Deputy Chairman. The Supervisory Board advises and supervises the Management Board in the management of the Company. It is involved in strategy and planning as well as in all issues of fundamental signifi cance for the Company. In addition to the Articles of Association, the operation of the Supervisory Board is determined by the Rules of Procedure of the Supervisory Board that it established for itself. The Chairman of the Supervisory Board coordinates the work within the Supervisory Board, chairs its meetings and attends to the affairs of the Board externally. Invitations to the meetings are sent by the Chairman of the Supervisory Board. A meeting of the Supervisory Board must be called at least twice per calendar half-year. The invitation shall be in writing or in text form, complying with a two-week notice period, and shall indicate the individual items on the agenda. In urgent cases, the Chairman can also issue invitations by telephone, and the notice period for calling the meeting can be shortened. Documents pertaining to the meeting shall be sent to the Supervisory Board in due time before the meeting. The Supervisory Board shall have a quorum if at least fi ve members are involved in the taking of a decision. Unless mandatory statutory provisions specify otherwise, resolutions of the Supervisory Board are adopted by a simple majority of votes cast. In the event of a tie, the Chairman s vote shall be the deciding vote. Minutes shall be prepared on the meetings and resolutions of the Supervisory Board. By direction of the Chairman of the Supervisory Board, resolutions may also be passed outside of meetings in writing, by telefax or via or other comparable form. Declarations of intent of the Supervisory Board shall be issued by the Chairman on behalf of the Supervisory Board or, in the event that he is hindered from doing so, such declarations shall be issued by the Chairman s deputy. The Supervisory Board shall examine the efficiency of its activities once per year. Along with the qualitative criteria to be specifi ed by the Supervisory Board, the examination of effi ciency shall cover, in particular, the procedures within the Supervisory Board as well as the timely and sufficient supply of information to the Supervisory Board. 3. Cooperation between Management Board and Supervisory Board The joint aim of the Management and Supervisory Boards is to achieve a sustained increase in corporate value. To this end the Management Board regularly informs the Supervisory Board at ordinary and extraordinary meetings of the Supervisory Board as well as by telephone, without delay and comprehensively, of all issues relevant to the Company as to planning, business development, risk situation, risk management and compliance of both the group and the individual business divisions. The Management Board points out deviations of the actual business development from previously formulated plans and targets. The Management Board reports also 68 Sky Deutschland AG

69 cover the topic of compliance with statutory provisions and the Company s internal guidelines. The Management Board also coordinates Sky Deutschland AG s strategic approach with the Supervisory Board. The Management Board s reports to the Supervisory Board are verbal or in writing. For details please refer to the Review and Monitoring Report of the Supervisory Board of Sky Deutschland AG for the financial year The Management Board s tasks and duties vis-à-vis the Supervisory Board are governed by the Rules of Procedure of the Management Board. In particular, the Rules of Procedure lay down the Management Board s reporting and information duties and specifi es transactions of fundamental significance requiring the consent of the Supervisory Board. The Chairman of the Management Board is responsible for communicating with the Supervisory Board and its members. IV. Composition and operation of Supervisory Board committees Pursuant to its Rules of Procedure, the Supervisory Board has established from among its members an Audit Committee and a Presidential Committee. The key rules on the committees operation are set forth in the Rules of Procedure of the Supervisory Board. The committees themselves have not established their own rules of procedure. The provisions of the Articles of Association applicable to the Supervisory Board and the Rules of Procedure of the Supervisory Board apply mutatis mutandis to the committees within the scope of statutory provisions. The Supervisory Board generally elects committee members by a simple majority of votes cast. Committee members are elected for their duration of office as Supervisory Board members, unless a shorter term is specified at the time of election. Committees shall have a quorum if at least three members are involved in the taking of a decision. Committees shall report on their work at regular intervals. 1. Presidential Committee The Presidential Committee is comprised of the Chairman of the Supervisory Board, his deputy and a third committee member to be elected. During financial year 2010, the Presidential Committee at first consisted of Markus Tellenbach, Thomas Mockridge and Guillaume de Posch. Following the resignation of Markus Tellenbach as Chairman, Chase Carey became Chairman of the Presidential Committee with his election as Chairman of the Supervisory Board on 16 July Markus Tellenbach remained as a member of the Presidential Committee and is the Deputy Chairman. Thomas Mockridge resigned as a member of the Presidential Committee. It assesses and recommends to the Management Board potential candidates. The Presidential Committee of the Supervisory Board did not convene during fi nancial year The Supervisory Board decided to discuss all issues regarding the succession of Pietro Maranzana within the full Supervisory Board. 2. Audit Committee The Audit Committee is composed of three members. During financial year 2010 these members were Dr. Stefan Jentzsch (Chairman), Mark Kaner and Steven Tomsic. Due to the resignation of Steven Tomsic as a member of the Supervisory Board Jan Koeppen and Miriam Kraus for compliance issues had been appointed as a member of the Audit Committee on 25 January The Chairman of the Audit Committee, Dr. Stefan Jentzsch, is an independent financial expert; from work in his field he has acquired specialist knowledge and experience with regard to the application of accounting principles and internal control systems. The Audit Committee s task is to support the Supervisory Board in its supervisory role. This shall include the following: Preparatory review of the Company s annual financial statements and management report, the consolidated annual financial statements and group management report in cooperation with the auditor; Supervision of the accounting process as well as the handling of all basic issues with respect to accounting including the application of new accounting standards; Supervision and review of the efficiency of the internal risk management systems, the internal control systems and of the internal revision systems; Supervision of the audit, in particular the required independence of the auditor and additional services rendered by the auditors; The passing of resolutions on the audit mandate given to the auditor, the determination of the audit focal points and of the auditor s compensation; Supervision of implementation and compliance with an effi cient compliance-system. In the financial year 2010 the Audit Committee held two meetings: on 22 February and on 11 November Unterföhring, 1 February 2011 The Management Board The presidential Committee prepares the Supervisory Board meetings and executes Supervisory Board resolutions. It also prepares the appointment of Management Board members, including the terms and conditions of employment contracts and remuneration. Annual Report

70

71 The v. B. has high quality standards also for TV: That is why they are using Sky 3D.

72 More Encounters of the Third Kind

73 The television is not a normal part of Jutta and Max v. B s daily routine. They prefer to make watching TV as a special event for them and their daughters. Sky 3D is an obvious choice for this. The children are just as fascinated with the 3D images as their parents. Jutta, mother and wendy-house designer praises the unique quality of Sky s with programming and technology. My husband and I do not just want to be lulled by the TV programme. And our daughters should also become familiar with responsible handling of the media. Therefore we take our time to choose the right programme and enjoy TV as an event for special occasions. And Sky 3D is the right medium for this. It is just incredible what happens in our living room all of a sudden: The film and cartoon heroes of our children seem to be within grasp and I think we also had Kiefer Sutherland sitting on our sofa. I honestly think 3D technology is a fascinating thing for all of us. As soon as we put on the 3D glasses and switch on Sky we immerse ourselves in different world.

74 Consolidated financial statements Consolidated balance sheet K Notes 31/12/10 31/12/09 Assets Current assets Cash and cash equivalents (2.1) 4,999 8,124 Trade receivables (2.3) 72,499 68,774 Receivables from entities accounted for at equity Other financial assets (2.4) 3,141 4,570 Film assets and advanced payments for sport and film rights (2.8.1) 67,657 73,586 Inventories (2.2) 35,311 36,241 Assets held for sale Other assets (2.5) 28,412 19,526 Total current assets Non-current assets Trade receivables (2.3) 1,899 3,862 Other financial assets (2.4) Deferred taxes (3.9) 40 1,446 Film assets and advanced payments for sport and film rights (2.8.1) 21,184 24,136 Interests in entities accounted for at equity Receivers (2.7) 73,700 48,102 Property, plant and equipment (2.7) 22,413 16,382 Intangible assets (2.8.2) + (2.8.3) 699, ,954 Other assets (2.5) 4,251 13,920 Total non-current assets 823, ,394 Total assets 1,035,766 1,046,411 Liabilities and equity Current liabilities Borrowings (2.9.1) 43,772 29,610 Trade payables (2.9.2) 167, ,930 Liabilities to entities accounted for at equity - 3,142 Other financial liabilities (2.9.3) 47,124 35,865 Other provisions (2.9.5) 3,266 11,559 Liabilities classified as held-for sale Other liabilities (2.9.4) 33,975 35,628 Total current liabilities 295, ,222 Non-current liabilities Borrowings (2.9.1) 280, ,924 Trade payables (2.9.2) 16,015 18,154 Other financial liabilities (2.9.3) 55,977 62,143 Deferred taxes (3.9) 44,264 39,345 Provisions for pensions and similar obligations (2.9.6) 6,398 6,274 Other liabilities (2.9.4) 2,884 3,307 Total non-current liabilities 406, ,147 Total liabilities (2.9) 701, ,369 Equity Subscribed capital 708, ,147 Additional paid-in capital 1,487,009 1,425,720 Reconciling item for successive share purchases in subsidiaries without change in control 58,245 58,245 Accumulated other comprehensive income 1, Retained deficit 1,801,546 1,394,011 Equity attributable to stockholders 333, ,031 Minority interest Total equity (2.11) 333, ,041 Total liabilities and equity 1,035,766 1,046, Sky Deutschland AG

75 Consolidated statement of total comprehensive loss K Notes 1/1/ 31/12/10 1/1/ 31/12/09 adjusted Revenues (3.1) 977, ,069 Cost of sales (3.2) 1,018, ,675 Program 751, ,402 Technology 149, ,883 Hardware 52,887 58,533 Customer service and other cost of sales 64,960 50,857 Gross profit 41,038 61,606 Selling expenses (3.3) 188, ,085 General and administrative expenses (3.3) 88,151 74,746 Other operating income (3.4) 16,346 11,388 Other operating expenses (3.5) 17,332 11,319 Amortisation of trademark - 331,629 Amortisation of subscriber base (3.6) 49,182 48,993 Result from operations 367, ,989 Gain from entities accounted for at equity (3.7) 1, Interest and similar income (3.7) 3,306 3,035 Other financial expense (3.7) 721 6,264 Loss from entities accounted for at equity Interest and similar expenses (3.7) 37,012 35,308 Result before taxes 400, ,889 Income taxes (3.9) 6,590 50,361 Result for the period 407, ,528 Other comprehensive income Changes in fair value of available-for-sale financial assets (net of tax) Changes in fair value of derivatives in cash flow hedges (net of tax) Changes in translation reserve resulting from foreign currency 0 Total comprehensive loss 408, ,324 Earnings attributable to: Stockholders 407, ,222 Minority interest Total comprehensive loss attributable to: Stockholders 408, ,018 Minority interest Result per share total ( ) basic and diluted (3.10) Annual Report

76 Consolidated statement of cash flows K Notes 1/1/ 31/12/10 1/1/ 31/12/09 Result for the period before income tax 400, ,889 Net interest expense 33,706 32,273 Gain on sold foreign exchange forward contracts Depreciation, amortisation and impairment losses/reversal of impairment losses on property, plant and equipment, intangible assets and financial assets 49,829 44,682 Amortisation of subscriber base (3.6) 49,182 48,993 Amortisation of trademark - 331,629 Result from sale of interests in subsidiaries (3.4) Other non-cash income and expenses 6,690 4,699 Changes in other provisions (2.9.5) 7, Losses on disposal of intangible assets, property, plant and equipment and receivers Changes in inventories, trade receivables and other assets 29,311 78,934 Changes in trade payables and other liabilities 27,694 25,242 Interest received 1,448 2,369 Net cash used by operating activities 324, ,419 Proceeds from sale of intangible assets, property, plant and equipment and receivers Proceeds from sale of other non current financial assets - 2,083 Proceeds from sale of interests in entities 67 2,161 Payments for acquisition of entities, net of cash acquired 13,554 11,310 Payments for investments in intangible assets and property, plant and equipment (4.3) 75,411 46,779 Net cash used by investing activities 88,885 53,270 Net proceeds from increase in capital by stockholders / net proceeds from stock issues 279, ,049 Proceeds from the granting of borrowings (4.3) 286, ,317 Repayment of finance lease liabilities 5,716 5,847 Repayment of borrowings (4.3) 123, ,977 Proceeds from sale of foreign exchange forward contracts Payments for transaction costs in connection with new debt financing 7,026 15,948 Interest paid 19,515 24,815 Net cash provided by financing activities 410, ,657 Net decrease in cash and cash equivalents 3,125 59,032 Cash and cash equivalents at beginning of period 8,124 67,156 Cash and cash equivalents at end of period (2.1) 4,999 8, Sky Deutschland AG

77 Annual Report

78 Consolidated statement of changes in equity K Notes Subscribed capital Additional paid-in capital Retained deficit Reconciling item for shareholder transactions without change in control Balance as of 1/1/09 112,460 1,376, ,789 Increase in capital for contribution in cash carried out on 14 January 2009 (less capital procurement costs) 10,224 26,680 Increase in capital for contribution in cash carried out on 22 April 2009 (less capital procurement costs) 367,464 22,682 Repurchase of 40.2 % of shares in Premiere Star GmbH 58,245 Effect of adjustment in tax rate for deferred taxes 95 Total transactions with stockholders Total comprehensive loss 676,222 Balance as of 31/12/09 (2.11) 490,147 1,425,720 1,394,011 58,245 Balance as of 1/1/10 490,147 1,425,720 1,394,011 58,245 Increase in capital for contribution in cash carried out on 21 January 2010 (less capital procurement costs) 49,015 60,723 Increase in capital for contribution in cash carried out on 30 September 2010 (less capital procurement costs) 168, Total transactions with stockholders 217,953 61,289 Total comprehensive loss 407,535 Balance as of 31/12/10 (2.11) 708,100 1,487,009 1,801,546 58, Sky Deutschland AG

79 Accumulated changes in fair value of derivatives in cash flow hedges Accumulated changes in fair value of available-for-sale financial assets Change in translation reserve resulting from foreign currency Accumulated other comprehensive income Equity attributable to stockholders Non-controlling interests , ,656 36,903 36,903 Total 390, ,146 58,245 58, , , , , , , , , , , , , , , Annual Report

80 Notes for the financial year General information and basis of preparation 1.1 General information about the Group Sky Deutschland AG and its subsidiaries (referred to as Sky, Company, Group or Sky Group ) operate a pay-tv business in Germany and Austria under the Sky trademark. The Sky Group is also engaged in the purchase, sale and distribution of rights to fi lms, series and TV productions, the acquisition, sale and distribution of broadcasting rights for public events, the arrangement of program magazine subscriptions, and other activities associated with the operation of the pay-tv business. Sky Deutschland AG s registered offi ce is at Medienallee 26, Unterföhring, Germany, and it is entered in the Commercial Register at the Munich Municipal Court under the number HRB Sky Deutschland AG, as the Group holding company, manages all of the business activities of the Sky Group. 1.2 Basis of preparation of the consolidated financial statements In accordance with 315a (1) HGB (German Commercial Code) in conjunction with Article 4 of the Regulation No. 1606/2002 of the European Parliament and the Council dated 19 July 2002, Sky prepares its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union taking into account the additional disclosures required by 315a (1) HGB. The consolidated financial statements are prepared in accordance with the International Financial Reporting Standards and its interpretations effective as of 31 December 2010 as adopted by the European Union. The consolidated financial statements have been prepared in euros ( ), as the functional and the reporting currency of the Group. Amounts are generally reported in the notes to the consolidated fi nancial statements in thousands of euros (K ), unless otherwise stated. All Group companies prepare their financial statements for financial years ending 31 December with the fi nancial year representing the calendar year. The consolidated financial statements are generally prepared on the basis of the measurement of assets and liabilities at cost or amortised cost. Excepted from this are non-derivative available-for-sale fi nancial assets and derivative fi nancial instruments, which are respectively recognised at fair value as of the balance sheet date. The balance sheet presents assets and liabilities classifi ed by their maturities. Assets that are expected to be sold within twelve months or are consumed or settled in connection with normal operations are classifi ed as current. Liabilities are classifi ed as current if they are required to be settled within twelve months of the balance sheet date. The consolidated statement of operations as a component of the consolidated statement of comprehensive loss has been prepared in accordance with the cost of sales method. The Management Board prepared the consolidated financial statements and authorised them for issuance within the meaning of IAS 10 on 1 February Sky Deutschland AG

81 1.3 Change in reporting structure With the beginning of the fi scal year 2010, the Sky Group modifi ed the allocation of certain expenses to the individual expense items in its consolidated statement of total comprehensive loss due to the implementation of a new reporting structure. For comparative purposes, the previous year s figures have been adjusted. The reclassifi cation affected cost of sales, selling expenses and general and administrative expenses as shown in the following table: (in K ) 1/1 31/12/2009 adjusted 1/1 31/12/2009 Amounts reclassified Cost of sales 963, ,322 8,353 Program 720, ,036 3,365 Technology 133, ,883 0 Hardware 58,533 53,046 5,487 Customer service and other cost of sales 50,857 51, Selling expenses 171, ,676 4,592 General and administrative expenses 74,746 78,507 3,762 Impact on result 0 The new reporting structure was implemented to further improve the usability of the reporting and to align internal and external reporting. Platform promotion costs for Sky Creative Services GmbH ( Sky Creative Services ) were previously allocated to expenses for direct sales and other selling expenses as part of selling expenses. Under the new reporting structure, they are allocated to programming costs. Certain telephone costs previously reported under customer service costs are allocated to general and administrative expenses, whereas personnel costs relating to the management of the service center in Schwerin, Germany, which were previously allocated to general and administrative expenses, are now allocated to customer service costs under the new reporting structure. Repairs at the customer s location as well as certain magazine costs, both previously allocated to customer service costs, are now allocated to hardware costs and other selling expenses, respectively. In connection with the implementation of its new reporting structure, Sky has also changed the allocation of its revenues to the following classifications. The applicable revenue categories are briefl y described below: Subscription revenues refer to revenues from the sale of digital program subscriptions, for which the subscriber pays a fee, including revenues from both sports bars and hotel room subscriptions. Hardware revenues comprise revenues from selling and renting receivers, revenues generated by technical services and revenues from installation services. Wholesale revenues result from supplying cable providers with Sky content and other wholesale agreements. Advertising revenues include proceeds from the marketing of advertising times and space in TV, magazine and other media platforms (e.g. online). Other revenues mainly comprise revenues from transmission services, commissions for placement services and sublicensing revenues. In connection with the introduction of its new reporting structure, Sky also renamed transmission cost to technology cost. Annual Report

82 1.4 Significant claims Shareholder claims Sky Deutschland AG is facing damage claims by shareholders with respect to public information on its subscriber numbers. The claims are mainly based on the allegation that the subscriber numbers published in the prospectus dated 21 February 2005 on the occasion of the initial public offering ( 2005 Prospectus ), in the prospectus dated 7 September 2007 on the occasion of an increase in share capital ( 2007 Prospectus ) and in other publications were too high. The basis of such allegation is an ad-hoc announcement of 2 October 2008, in which the Company, in addition to a predicted EBITDA loss for the financial year 2008 and the initialisation of discussions with the banks with regard to a restructuring of its credit lines, also announced a new method to classify its subscribers in the future, whereby certain subscribers which previously had been accounted for pursuant to the old classifi cation were no longer counted. After this ad-hoc announcement the price of the shares in the Company decreased. The claimants attribute this price decrease to the communication of the new subscriber classifi cation and claim damages based on their alleged fi nancial detriment. Up until now twelve actions for damages against the Company have been fi led against Sky, of which the Company has won eight in court. In one of these cases, the judgment in favor of the Company has already been established as final and absolute. In two cases the Court has decided in favor of the claimants (at least partially), for the remaining actions no first instance judgments have been given. So far, the claims total approximately 735,000. Further claims for damages have been asserted out of court, mostly by institutional investors ( the Funds ) which have initiated mediation proceedings (Güteverfahren). The extrajudicial asserted damages added up to approximately million. On 28 October 2010 an outof-court settlement with the Funds was achieved, which was approved by the Company s Supervisory Board on 10 November Upon payment of 14.5 million which is due in installments and which is collateralised by a bank guarantee in an amount of 8.5 million, the Funds claims, especially in respect of the aforementioned million, is fi nally and absolutely settled. This holds for all claims regardless of whether known or yet unknown, current or prospective, and irrespective of their legal basis. The Company believes that the total amount of the settlements as well as any associated cost in particular legal costs will be covered by existing insurance policies (prospectus insurance for the 2007 Prospectus and D&O insurance). The same applies for the risks relating to the court proceedings. The Company will take all steps necessary to protect its legal interests including the assertion of own damage claims, if necessary. The settlement arrangement concluded so far with the funds by no means waives the Company s right of recourse against (former) Management Board and Supervisory Board members. The insurance policies in place have been concluded at arm s length and provide for an exemption from liability in case of Board members acting deliberately. Any case of willful intent will entitle the Company to assert claims against the respective Board members. However, so far the proceedings have not resulted in any case of willful intent and all claims based on willful intent have been rejected. Accordingly, in the consolidated financial statements as of 31 December 2010 the Company has accounted for the abovementioned obligations in the amount of 14.8 million less 6.0 million already paid. In accordance with the relevant insurance contracts, the company provided the required documentation with respect to the claims till January The evaluation of the insurance companies is ongoing. The Company could be forced to enforce its claims against insurance companies and former board management through the court. Investigation by the Federal Cartel Offi ce The German Federal Cartel Office (Bundeskartellamt) is currently investigating a potential abuse of market dominant position by Sky. The Federal Cartel Office issued a non-legally binding statement of objections announcing that the Federal Cartel Offi ce considers the decryption of Sky content only on receivers which do not support an open Common Interface solution as an abuse of a market dominant position. Such abuse according to the Federal Cartel Offi ce can be remedied by decrypting Sky content for new not existing subscribers only on receivers which do support open Common Interface. The reasoning of the Federal Cartel Office is, that third party operators shall gain access to the customer via Sky s receivers without Sky being involved. Although Sky believes to have complied with all applicable laws, the Federal Cartel Offi ce may impose sanctions, including substantial fines, and require Sky to mandatorily use receivers supporting a further specifi ed Common Interface module as of a certain point in the future. All of this could lead to an increase in the cost of the receiver infrastructure. 82 Sky Deutschland AG

83 In any such case, Sky s business, results of operations and fi nancial condition could be adversely affected. Meanwhile, the Federal Cartel Office informed Sky, that it suspends the proceeding based on the latest market insights. The Federal Cartel Offi ce intends to obtain further market data regarding the availability of TV sets with integrated digital tuners (idtvs) and CI+ slots in autumn 2011 and reserves the right to reopen the proceeding if the market developments are different than expected. A decision of the Federal Cartel Offi ce is not expected before autumn 2011 and might be subject to court challenge in case the Federal Cartel Offi ce does not discontinue the proceeding. The outcome of the proceeding and the respective financial impact is at this point in time not yet predictable and particularly depends on further market observations of the Federal Cartel Offi ce. Investigation of the Federal Financial Supervisory Authority In connection with an audit according to Sections 37n ff. of the German Securities Trading Act (WpHG), the Federal Financial Supervisory Authority ( BaFin ) determined that the fi nancial statements as of 31 December 2007 and the management report and Group management report for 2007 of the former Premiere AG (now: Sky Deutschland AG ) as well as the condensed interim consolidated fi nancial statements as of 30 June 2008 and the interim report for the first six months of 2008 were allegedly incorrect. BaFin reached the following conclusions: The number of subscribers of the Company as shown in the management report for the 2007 fi nancial year are overstated by approximately 623,000 and in the interim management report for the fi rst six months of the 2008 financial year are overstated by approximately 611,000. In the Group management report for the 2007 fi nancial year, there was no disclosure regarding the amount of consideration to be paid by Sky for the purchase of the sublicense for the German Fußball-Bundesliga from arena in 2007, consisting of payments in the amount of 335 million and 16.4 million shares. In addition, risks in connection with the planned acquisition of the German Fußball-Bundesliga Pay TV rights for the seasons from 2009/2010 to 2011/2012 were not adequately assessed and explained in It would have been necessary to present the potential effects of a failure to obtain the rights or a limitation regarding the exclusivity of the German Fußball-Bundesliga Pay TV rights on the position of the Company in the management report and Group management report. In the consolidated financial statements as of 31 December 2007 and in the half-year fi nancial report as of 30 June 2008, goodwill is overstated by million and million, respectively. The Company should not have recognised the acquisition of the sublicense for the German Fußball-Bundesliga from arena Sport Rechte und Marketing GmbH ( arena ), a subsidiary of Unitymedia GmbH, and the related acquisition of certain assets, as well as the takeover of contracts and certain employees as a business combination under the provisions of IFRS 3.4. In the half-year financial report as of 30 June 2008 the result was overstated by at least 10 million. In 2005 the Company had purchased a package of free and pay-tv broadcasting rights for the 2010 football world championship and in 2008 had sold a portion of the free-tv broadcasting rights. Sky allocated the acquisition costs incorrectly to the free and pay-tv broadcasting rights, whereby a too small portion of the acquisition cost was assigned as expense to the reported sales revenues. Furthermore, in the interim management report as of 30 June 2008 adequate references were not made to the existing risks to the financial position of the Group due to a short-term threatened violation of fi nancial covenants contained in the fi nancing contracts and a potential resulting cancellation by the lending banks as of 30 September The findings of BaFin have no direct effects on the fi nancial reporting at this time. Sky Deutschland AG has fi led an objection against the decision of the BaFin. The objection proceedings are currently pending. Sky Deutschland AG will challenge the findings of BaFin in court as the case might be. Should the findings of BaFin become legally binding, Sky Deutschland AG would potentially correct its annual financial statements for the 2007 financial year. In addition, fi nes could be imposed and claims for damages could be asserted by third parties. Annual Report

84 1.5 New accounting standards issued by the IASB The following standards and interpretations were required to be adopted for the fi rst time in 2010: In July 2008, the IASB published an amendment to IAS 39, Eligible Hedged Items Amendment to IAS 39 Financial Instruments: Recognition and Measurement, which provides a clarifi cation of the application of hedge accounting. The amendment is to be applied for financial years beginning on or after 1 July The amendment has been adopted by the EU. This amendment specifi es the application principles in the areas of the designation of inflation risks as the hedged item as well as designation of a one-sided risk in an underlying transaction (for example, with an option as the hedging instrument). The application of this amendment had no effect on the consolidated financial statements of Sky. In April 2009, the IASB published the second collective standard, Improvements to IFRS, in order to make minor changes to 12 existing standards and interpretations. The changes include revisions to IAS 18 Revenue that defi ne certain indicators for the determination of a principal vs. an agent in a transaction as well as the resulting effect on the amount of revenue to be recognised. Unless otherwise set forth in the respective changes, these improvements are effective for fi nancial years beginning on or after 1 January The application of these changes had no effect on the consolidated fi nancial statements of Sky. In November 2008, IFRIC 17, Distribution of Non-cash Assets to Owners was published. This interpretation contains, among other items, rules regarding the accounting for transactions in which an entity distributes non-cash assets as dividends to its owners. The interpretation has been adopted by the EU and is required to be applied for financial years beginning on or after 1 November The application of this interpretation had no effect on the consolidated fi nancial statements of Sky. IFRIC 18 Transfers of assets from customers. This interpretation serves as guideline on accounting for the receipt from customers of property, plant and equipment, or cash which was used for the acquisition or construction of certain assets. This interpretation is required to be applied for financial years beginning on or after 1 November The application of this interpretation had no effect on the consolidated fi nancial statements of Sky. Application of the following standards and interpretations, which have been published by the IASB or the IFRIC, is not yet mandatory, because they have not yet been adopted by the EU or because their effective date is in the future. Where they have already been adopted by the EU, Sky has not applied them early. In October 2009, the IASB published an amendment to IAS 32 Classifi cation of Rights Issue clarifying the presentation of rights, options and warrants to acquire a fixed number of equity instruments. The amendment is effective for fi nancial years beginning on or after 1 February In November 2009, the IASB issued an amendment to IAS 24 Related Party Disclosures. The amendment includes a simplifi cation of the definition of a related party and eliminates inconsistencies from the defi nition. In addition, it provides a partial exemption from the disclosure requirements for government-related entities. The amended standard is effective for fi nancial years beginning on or after 1 January IFRS 9 Financial Instruments was issued by the IASB in November It is the IASB s intention to replace IAS 39 by IFRS 9 in three phases. As a result of the first phase in this replacement project, the IASB issued the chapters of IFRS 9 relating to the classifi cation and measurement of financial assets and financial liabilities. Under the new provisions, fi nancial assets are classifi ed on the basis of the entity s business model for managing the financial assets and the contractual cash fl ows. Financial assets are initially measured at fair value and subsequently measured at amortised cost or fair value. As to the measurement of financial liabilities, the existing regulations of IAS 39 have largely been adopted by IFRS 9. The standard is effective for fi nancial years beginning on or after 1 January It has not yet been adopted by the EU. In November 2009, the IFRIC published IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. The interpretation provides the accounting treatment when the terms of a fi nancial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the fi nancial liability. This interpretation has been adopted by the EU and is effective for financial years beginning on or after 1 July In November 2009, the IFRIC published an amendment to IFRIC 14, Prepayments of a Minimum Funding Requirement. The changes to IFRIC 14 are relevant for entities that, in connection with defi ned benefi t plans for post-employment benefi ts, are subject to prepayments for minimum funding requirements. As a result of the changes, under certain conditions future prepayments for minimum funding requirements are to be considered separately as an asset. The amendments were adopted by the EU in July 2010 and are effective for financial years beginning on or after 1 January In May 2010, the IASB published amendments to existing IFRS in connection with its Annual Improvements Project. These comprise amendments to various IFRS with effects on the recognition, measurement and disclosures of transactions, as well as editorial changes and changes to terminology. Most of the amendments are effective for fi nancial years beginning on or after 1 January Early application is permitted. The amendments still require adoption into European law by the EU. Sky is currently assessing the potential effects of the implementation of the changes on the consolidated fi nancial statements. 84 Sky Deutschland AG

85 In October 2010, the IASB published an amendment to IFRS 7, Financial Instruments: Disclosures. The amendment is effective for financial years beginning after 1 July 2011 and has not yet been adopted by the EU. The amendments address disclosures required in connection with the transfer of financial assets. A transfer of financial assets exists, for example, in the case of a sale of trade receivables (factoring) or in connection with asset backed securities (ABS) transactions. In December 2010, the IASB published an amendment to IAS 12 Deferred tax: Recovery of underlying assets. IAS 12 requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects the reversal of temporary differences through use or sale. It can be diffi cult and subjective to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40 Investment Property. The amendment provides a practical solution to the problem by introducing a presumption that the reversal of temporary differences will be through sale. 1.6 Changes in stockholder structure On 18 January 2010, the Management Board of Sky Deutschland AG, Unterföhring, with the consent of the Supervisory Board, decided to increase the share capital of the Company by 49,014,714 against contributions in cash by issuing 49,014,714 new registered shares without subscription rights using the authorised capital of the Company. News Adelaide Holdings B.V., a wholly-owned indirect subsidiary of News Corporation, subscribed to the shares and thereby increased its interest from percent to percent. The capital increase was entered in the Commercial Register on 21 January In connection with a second capital increase, which was announced on 2 August 2010 and carried out on 30 September 2010, Sky placed 168,937,926 shares of the 269,580,929 new shares offered percent of the new shares were placed with investors other than News Adelaide Holdings B.V., Sky s principal shareholder percent were placed with News Adelaide Holdings B.V.. The capital increase was entered in the Commercial Register on 30 September In connection with the capital increase, News Corporation increased its indirect interest to percent. 1.7 Consolidation a) Subsidiaries Sky Deutschland AG, nine domestic and two foreign subsidiaries are consolidated in these fi nancial statements. All subsidiaries that are under the control of Sky Deutschland AG are included in the consolidated fi nancial statements. They are fully consolidated from the date on which control is transferred to the Group, and are deconsolidated from the date when the ability to control ceases. Control is presumed if the parent owns, either directly or indirectly through a subsidiary, more than one half of the voting power. Control also exists if the parent company has the power to govern the financial and operating policies of the entity under a statute or an agreement. Name Registered office Investment holding on 31/12/10 Investment holding on 31/12/09 Sky Deutschland Fernsehen GmbH & Co. KG (Sky Deutschland KG) Unterföhring % % Sky Deutschland Verwaltungs-GmbH (Sky Deutschland Verwaltung) Unterföhring % % Sky Österreich GmbH (Sky Österreich) Vienna, Austria % % Sky Deutschland Service Center GmbH (Sky Deutschland Service Center Schwerin) Schwerin % % SCAS Satellite CA Services GmbH (SCAS) Unterföhring % % Premiere WIN Fernsehen GmbH (Premiere WIN Fernsehen) Unterföhring % % GIGA Digital Television GmbH (GIGA) Cologne % % Sky Creative Services GmbH (Sky Creative Services) Munich % % Premiere Star Österreich GmbH (Premiere Star Österreich) Vienna, Austria % % Premium Media Solutions GmbH (formerly Sky Media Solutions GmbH) (PMS)* Unterföhring % 0.0% Premium Media Solutions GmbH* Unterföhring n/a 24.8 % Sky Hotel Entertainment GmbH (Sky Hotel Entertainment) Fürth 97.5 % 97.5 % * For further information please refer to 1.8 Acquisition of companies The assets and liabilities of the domestic and foreign entities included in the consolidated financial statements are accounted for in accordance with the uniform accounting policies applicable for the Group. Intra-group transactions are eliminated. Receivables and liabilities and expenses and income between consolidated entities are eliminated against one another. Intra-group gains and losses did not arise during the financial year. Annual Report

86 In accordance with IFRS 3, all business combinations shall be accounted for using the acquisition method. The purchase price of the acquired subsidiary is allocated to the acquired assets, liabilities and contingent liabilities. Incidental acquisition costs will be directly expensed to profi t and loss. This allocation is based on the fair values of the assets, liabilities and contingent liabilities prevailing at the time at which control over the subsidiary is obtained. Assets held for sale within the meaning of IFRS 5 are measured at fair value less costs to sell. Any remaining excess of the purchase price over the fair value of the net assets is recognised as goodwill. Subsequent measurement of the fair values is carried out according to the nature of the assets and liabilities. Sky exercises the option to account for non-controlling interests individually for each business combination. b) Interests in entities accounted for at equity These comprise entities that are not subsidiaries, but where Sky has the ability to exert signifi cant influence directly or indirectly over their financial and operating policies (associates). Entities accounted for at equity are initially recognised in the consolidated fi nancial statements at cost. A positive difference at the acquisition date between cost and the fair values of the proportionate share of the identifiable assets, liabilities and contingent liabilities is recognised as goodwill in the carrying amount of the investment. For companies accounted for at equity, the recognised investment is adjusted based on the development of the share of the reported equity of the associate company in subsequent years. As of 31 December 2010, no companies were accounted for at equity in the consolidated fi nancial statements of the Sky Group. Registered Investment holding Investment holding Consolidation Name Office on 31/12/10 on 31/12/09 method Premium Media Solutions GmbH Unterföhring % 24.8 % Full consolidation Loxxess Medienlogistik GmbH Unterföhring % 8.8 % Full consolidation As to the obtaining of control over both Loxxess Medienlogistik GmbH, Unterföhring, and Premium Media Solutions GmbH, Unterföhring, we refer to the disclosures under item 1.8 Acquisition of companies. 86 Sky Deutschland AG

87 1.8 Acquisition of companies Loxxess Medienlogistik GmbH On 1 March 2010, Sky acquired Loxxess Medienlogistik GmbH, a subsidiary of the logistics specialist Loxxess AG. Loxxess Medienlogistik GmbH was founded in August 2006 as a subsidiary of Sky Deutschland Fernsehen GmbH & Co. KG. In 2007, it was sold to Loxxess AG. The remaining investment of 8.8 percent of the shares was accounted for at equity due to Sky s ongoing significant influence over the fi nancial and operating policies. As of the signing date of the purchase agreement the fair value of the equity interest amounted to 0.5 million. Upon the signing of the contract on 1 March 2010, Sky completely bought back Loxxess Medienlogistik GmbH, which was then renamed as Sky Logistic Services GmbH. The consideration was 5.2 million and will be paid in annual installments until With an agreement dated 19 April 2010, the merger of Sky Logistic Services GmbH into Sky Deutschland Fernsehen GmbH & Co. KG was concluded. The merger was entered into the commercial register on 30 April Sky carried out a purchase price allocation in accordance with IFRS 3 and an assessment of the pre-existing contractual relationships from logistic services between Sky and Loxxess Medienlogistik GmbH. The assessment of the pre-existing contractual relationship resulted in a loss of 0.3 million, which was recorded in other operating expenses. As a result of the purchase price allocation, no differences between the carrying amounts and the fair values of the assets and liabilities were identified, resulting in goodwill of 4.2 million. Obtaining more control of essential logistic processes as well as cost savings were the principal reasons for the acquisition. The following assets and liabilities were taken over at the time of the acquisition: Loxxess Medienlogistik GmbH (in K ) Fair Values Carrying amounts Inventories 2 2 Receivables 3,072 3,072 Property, plant, equipment Other assets 1,404 1,404 Total assets 4,576 4,576 Payables 3,089 3,089 Other liabilities Total liabilities 3,596 3,596 Net assets acquired 980 Goodwill 4,157 Cost of acquisition 5,137 less present value of consideration deferred 2,519 less fair value of equity interest already owned 452 Net cash outflow from the acquisition 2,166 Annual Report

88 Premium Media Solutions GmbH Effective 1 August 2010 Sky bought back 51.1 percent of the shares in Premium Media Solutions GmbH, Unterföhring. Before obtaining the majority in the shares, Sky held a 24.8 percent interest in Premium Media Solutions GmbH which was accounted for at equity due to Sky s influence over their fi nancial and operating policies. As of the signing date of the purchase agreement the fair value of the equity interest amounted to 0.6 million. The potential acquisition of the remaining 24.1 percent of the interests is stipulated by a put-call agreement. In accordance with the relevant IFRS accounting regulations, these interests are regarded as having already been acquired in the consolidated financial statements. The total consideration including the consideration stipulated in the put-call agreement amounts to 1.8 million, which will be paid in several installments until With an agreement dated 27 August 2010, the merger of Premium Media Solutions GmbH to Sky Media Solutions GmbH was concluded. The merger was entered into the commercial register on 9 September Upon completion of the merger, Sky Media Solutions GmbH has been renamed Premium Media Solutions GmbH. The reasons for the buyback were the gain of control over the advertising sales generation process in order to secure planned revenue growth and the increase in effi ciency by directly managing the advertising sales team and customer access. The following assets and liabilities were taken over at the time of the acquisition: Premium Media Solutions GmbH (in K ) Fair Carrying Values amounts Cash and cash equivalents Receivables Property, plant and equipment Intangible assets 2 2 Other assets Total assets 1,084 1,084 Payables 1,157 1,157 Other liabilities Total liabilities 1,246 1,246 Net assets acquired 162 Goodwill 2,554 Cost of acquisition 2,392 less cash acquired 636 less present value of consideration deferred 1,186 less fair value of equity interest already owned 593 Net cash inflow from the acquisition 23 Both entities acquired in the financial year 2010 only circumstantially contributed to the Group s revenues and the annual earnings, so that the Group renounces the disclosures pursuant to IFRS 3 B Sky Deutschland AG

89 1.9 Disposal of business entities In the second quarter of 2009, the management of Sky took the decision to sell its interest in Roombase Networks Limited, Nikosia, Cyprus. Therefore, the assets and liabilities of this operation had been classifi ed as held for sale according to IFRS 5. The sale occurred on 1 March Sky has sold its interest in Roombase Networks Limited, Nikosia, Cyprus to Techlive Cyprus Limited. The total consideration received amounted to K 67. Roombase Networks Limited reported the following carrying amounts of assets and liabilities at the time of deconsolidation: Roombase Networks Limited (in K ) Carrying amounts Cash and cash equivalents 68 Receivables 452 Deferred taxes 10 Property, plant and equipment 690 Total assets 1,220 Current trade payables 441 Other current liabilities 303 Other non-current liabilities 80 Total liabilities Translation of foreign currencies Transactions denominated in foreign currencies are translated at the exchange rate prevailing on the transaction date. Monetary items in the balance sheet denominated in foreign currencies are translated at the selling and buying rate respectively applicable as of the balance sheet date. Unrealised translation gains or losses resulting from this translation are recognised in profi t or loss for the period Accounting policies Financial instruments Summary Purchases and sales of fi nancial instruments are recognised on the trade date, i.e. on the date on which the Group commits to buy or sell an asset or liability. The Company holds financial instruments in the form of cash and cash equivalents, receivables, available-for-sale fi nancial assets, financial liabilities and loans, and derivatives in the form of interest swaps and foreign exchange forward contracts. Financial assets are initially recognised at their fair values and, in the case of fi nancial assets not classifi ed at fair value through profi t or loss, including directly attributable transaction costs. They are measured subsequently at fair value or at amortised cost, applying the effective interest method. Fair value corresponds to the market or quoted prices, where available. A market or quoted price can be identifi ed in particular for availablefor-sale fi nancial assets. If a market or quoted price is not available, fair value is determined in accordance with recognised valuation procedures. In the case of current receivables and liabilities, amortised cost approximates the notional value or the settlement amount. The Company derecognises financial assets either if the contractual rights to the cash fl ows cease or these rights are transferred by the Company to a third party in such a way that the criteria for derecognition are fulfi lled. Financial liabilities are derecognised when they have been redeemed, i.e. when the contractual obligations have been settled or cancelled or have expired or the criteria for derecognition in accordance with IAS 39 have been fulfi lled. Financial liabilities are also derecognised if the amendment of significant conditions causes a significant change in the cash fl ows associated with the redemptions or interest. When the change becomes effective, a new fi nancial liability is recognised at fair value. If an exchange of debt instruments or modifi cation of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the earnings of the period on the extinguishment. Annual Report

90 If the exchange or modifi cation is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modifi ed liability. If, in the case of revolving credit lines, a reduction in the amount or an adjustment of the terms results in a reduction in the available credit capacity, the transaction costs related to the revolving credit line are released to profi t or loss in proportion to the reduction in the credit capacity Cash and cash equivalents Cash and cash equivalents comprise cash in hand, cash balances and term deposits with a total maturity of less than three months from the date of acquisition. They are recognised at notional value, whereby foreign currencies are translated at the closing rate Financial assets Financial assets are initially recognised at their fair value, which normally corresponds to their cost; subsequent measurement is at amortised cost, using the effective interest method. Impairments of trade receivables are largely refl ected by applying allowance accounts. The decision as to whether a credit risk shall be taken into account by means of an allowance account or a direct reduction of a receivable depends on how reliably the risk situation can be assessed. An allowance is recorded if there is objective evidence that the receivable is impaired. A signifi cant indication of impairment is that the receivable is included in dunning procedures. The allowance represents the difference between the carrying amount and the present value of the expected cash receipts. Reimbursement rights relating to liabilities incurred by the Sky Group are only recognised when it is virtually certain that the reimbursement will be received Available-for-sale financial assets The available-for-sale financial assets category includes fi nancial assets that cannot be allocated to any other measurement category. Mainly, securities and investments are reported here. Unquoted equity instruments are measured at cost, since no market for these assets exists and a fair value cannot be determined by other reliable measurement methods. Interests in companies over which Sky is unable to exert control, joint control or signifi cant influence are accounted for as equity instruments. Changes in fair value of other available-for-sale fi nancial assets are recognised directly in other comprehensive income. In the cases in which fair value is signifi cant and other than temporarily below cost, the impairment in the amount of the difference is recognised in profi t or loss. If fair value adjustments were previously recognised directly in equity and the written-down fair value is lower than the original cost of the asset, the portion of the impairment loss corresponding to the fair value gain previously recognised in equity is reversed through equity. Any further decrease in value is recognised in profi t or loss as an expense for the period. If the circumstances that resulted in impairment cease to exist in subsequent periods, the impairment loss on debt securities previously charged to profi t or loss is reversed through the profi t and loss. The reversal of the impairment of equity investments is recognised in equity. 90 Sky Deutschland AG

91 Financial liabilities Financial liabilities are initially recognised at fair value less directly attributable transaction costs. Subsequent measurement is at amortised cost using the effective interest method Derivative fi nancial instruments The derivatives used by the Company are either interest rate swaps or foreign exchange forward contracts. Interest rate swaps are used to hedge the risk of variable interest payments for loans. Foreign exchange forward contracts are used to economically hedge the risks of fluctuations in the exchange rates of the US dollar and the British pound, since the Company has respective payment obligations to be met in connection with operating activities. All financial derivatives used in the Group are measured at their fair values and are recognised as assets or liabilities. The fair values of derivatives are reported under other financial assets or other fi nancial liabilities. Their classifi cation as current and non-current is based on the maturities of the expected cash flows or the maturities of the corresponding derivatives. Beginning in the second quarter of 2009, the Company has applied hedge accounting with respect to its US dollar and British pound exposure. The overall objective of Sky s hedging strategy is to mitigate the risk of having to settle payment obligations denominated in US dollars and British pound for the purchase of sports programming and movie licenses as well as for other licenses by using forward exchange transactions. These derivatives are designated as hedging instruments in qualifying cash flow hedges in accordance with IAS 39. The effective portion of changes in the fair value of these derivatives is recognised directly in other comprehensive income, net of income tax. The ineffective portion is reported in profi t and loss. When the underlying transaction occurs, the accumulated changes in the fair value of the derivative recognised in accumulated other comprehensive income as part of equity is capitalised as part of the carrying amount of Advanced payments for sports and film rights. If the hedge no longer meets the criteria for hedge accounting, the cumulative gain or loss on the hedging instrument that has been recognised in equity from the period when the hedge was effective shall remain separately in equity until the forecasted transaction occurs. If the hedge relationships in which the derivatives are used do not fulfi ll the criteria of IAS 39 for hedge accounting, changes in fair value are recognised directly in profi t or loss Inventories Inventories are measured at the lower of cost or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs to sell. Rebates, bonuses and cash discounts are deducted from cost. Measurement is based on moving average prices Property, plant and equipment Property, plant and equipment are measured at cost, less depreciation and, to the extent necessary, impairment losses. Cost comprises the purchase price, including any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operation in a manner intended by management. Rebates, bonuses and cash discounts are deducted from the purchase price. Subsequent expenditure relating to an item of property, plant and equipment that has already been taken to use is added to the carrying amount of the asset or, where appropriate, recognised as a separate asset, if it is probable that future economic benefi ts will fl ow to the entity and the purchase costs of the asset can be reliably determined. All other subsequent expenditure is recognised as an expense in the period in which it is incurred. Subsequent expenditure that would otherwise be capitalised, which exceeds the recoverable amount of the respective asset, is recognised immediately in profi t or loss. Expenditure on repairs and maintenance which does not include any replacement or spare parts is recognised immediately in profi t or loss. Replacement or spare parts are capitalised, while the replaced parts are written off accordingly. Property, plant and equipment are depreciated over their expected useful lives using the straight-line pro rata temporis method. Annual Report

92 Depreciation is based on the following useful lives: Useful lives (years) Buildings 30 Receiver 5 7 Technical equipments and machines Leasehold improvements 5 10 Operational and office equipment Intangible assets Film assets and advance payments for sport and film rights These assets comprise broadcasting licenses acquired from fi lm studios, advance payments on sport and film rights and a film library that was acquired in Licenses are recognised at their cost at the time they become available or on commencement of the license. In the case of purchases from fi lm studios, cost includes minimum guarantees and expected additional payments that depend on the number of subscribers ( overages ), which are estimated at the time of initial recognition, plus other directly attributable costs. The program library was capitalised at its purchase price. Utilisation of the broadcasting licenses is based on the actual transmissions during the fi nancial year in relation to the expected total number of transmissions during the license period. If it is expected that unused transmissions will be outstanding at the end of the license period, an impairment loss is recognised immediately in full for such transmissions. The program library is amortised straight-line based on the terms of the licenses over a useful life of between two and fi fteen years. With respect to the live pay-tv rights for all Fußball-Bundesliga and 2nd Fußball-Bundesliga matches in Germany, Austria and Switzerland from the season 2009/2010 to 2012/2013, the utilisation is based on the allocation of match days per season taking into account the increasing license fees payable to the DFL Deutsche Fußball Liga GmbH over the four seasons. In contrast, in prior periods the pay-tv rights for the Fußball-Bundesliga and 2nd Fußball-Bundesliga matches in Germany, Austria and Switzerland for the season 2008/2009 were amortised based on the forecasted revenues generated from these rights. The calculation was adjusted if changes in the forecasted revenues occurred. The classification of film assets as non-current and current depends on whether they are expected to be used in the normal operating cycle. Non-current film assets primarily comprise long-term licenses and library products. Payments on account for rights already agreed by contract are recognised as advance payments on sport and film rights in accordance with the timetable set forth in the agreements Goodwill Goodwill is recognised at cost and is subjected at least once a year (as of 30 September) to an impairment test. Goodwill is not amortised. If indications of impairment are identifi ed during the year, an additional impairment test is carried out. (Please also refer to Impairment losses and reversals of impairment losses). 92 Sky Deutschland AG

93 Other intangible assets Other intangible assets comprise purchased software, licenses, rights to names, trademarks and subscriber bases. Software, purchased licenses and rights to names are measured at the time of their acquisition at cost plus other directly attributable costs and subsequently at cost less accumulated amortisation and impairment losses. The subscriber bases were initially measured at fair value or at cost at the time of their acquisition and are being amortised over the expected average subscription period. The following useful lives are applied for intangible assets that are subject to scheduled amortisation: Useful lives (years) Subscriber base 8 Software licenses 3 Music titles 3 Rights to names Impairment losses and reversals of impairment losses Impairment losses are recognised as of the balance sheet date on property, plant and equipment and intangible assets (including the subscriber bases) if the recoverable amount of the asset has fallen below its carrying amount. The recoverable amount is the higher of the fair value less costs to sell and the value in use. Goodwill is not amortised, but is tested for impairment on the basis of the recoverable amount of the cash generating unit to which the goodwill is allocated. Due to the nature of Sky s operations, goodwill is allocated to the cash-generating unit Pay-TV-Business which includes all of the Group s operating activities and corresponds to the level within the Group at which goodwill is monitored for internal management purposes. In performing the impairment testing, the Company generally uses the value in use which corresponds to the present value of the future net cash flows of the cash-generating unit. In addition, the Company assesses the fair value less expected cost to sell for the cash generating unit Pay-TV-Business, which is derived from the quoted price of the Sky share. If the recoverable amount is lower than the carrying amount of the cash-generating unit, the goodwill is written down fi rst. Any amount remaining after writing down the goodwill to zero is allocated proportionately to other non-current assets of the cash-generating unit based on the carrying amounts of each individual asset or group of assets. It is examined at every balance sheet date as to whether the reasons for impairment losses recognised in previous periods still exist. Reversal of impairment losses is mandatory if the recoverable amount of an asset or a group of assets has increased. The upper limit for reversal of an impairment loss is cost less the cumulative depreciation or amortisation that would have arisen if no impairment losses had been recognised in prior periods. Reversals of impairment losses are recorded in the consolidated statement of comprehensive loss in the respective functional areas or reported separately. Impairment losses on goodwill cannot be reversed in a subsequent period Other assets Other assets are measured at amortised cost. Identifi ed specific risks are reflected by corresponding valuation allowances (specifi c allowances). Annual Report

94 Leasing Company as lessee Provided substantially all of the risks and rewards incidental to ownership of a leased asset can be attributed to the Company as the lessee, the leased asset is capitalised as property, plant and equipment or intangible asset and a corresponding finance lease liability is recorded at the same amount (finance lease). The asset and the corresponding liability are recognised at inception of the lease at the fair value of the leased asset or the present value of the minimum lease payments, if lower. The lease liability is amortised and rolled forward in subsequent periods in accordance with the effective interest method. If, on the other hand, substantially all of the risks and rewards incidental to ownership of a leased asset cannot be attributed to the Company, the lease payments are recognised as expense on a straight-line basis over the period of the lease (operate lease). In 2009, a contract for hardware and software components regarding the new subscriber management system was concluded. The contract has been classifi ed as a finance lease because the present value of the minimum lease payments at inception of the lease corresponded to the fair value of the leased assets. Accordingly, the hardware is capitalised in property, plant and equipment and the software is capitalised in other intangible assets. Both components are depreciated straight-line over their economic useful life of 60 months. In 2010 the existing lease contract for receivers expired, which had been classified as a finance lease, because the present value of the minimum lease payments at inception of the lease largely corresponded with the fair value of the leased assets. Accordingly, the receivers were capitalised in property, plant and equipment and depreciated straight-line over their economic useful life of 60 months. In the case of sale-and-leaseback transactions, the gains from these transactions will be deferred as a liability and amortised straight-line over the term of the lease. The finance lease contract contained a replacement obligation for receivers provided, in the event of the loss or destruction of a receiver, for its replacement by another receiver of the same type and quality. The Company complied with this obligation in that receivers legally owned by the Company and reported in property, plant and equipment or in inventories were assigned to the respective lease contract. The replacement receiver replaced the lost receiver and resulted in a retirement from property, plant and equipment or the inventories. A liability to the lessor was reported for the replacement obligations that had not been fulfi lled as of the balance sheet date. The existing lease contracts for pay-tv equipment, TVs and accessories ( pay-tv equipment ) are classified as finance leases, because the present value of the minimum lease payments at inception of the lease largely corresponded in each case to the present value of the leased assets. Accordingly, the pay-tv equipment is recognised in property, plant and equipment under technical equipment and machines from finance leases. Pay-TV equipment subject to lease agreements concluded before 1 January 2006 (old agreements) is depreciated straightline over the term of the respective fi nance lease (18 to 60 months), while the pay-tv equipment in leases concluded from 2006 onwards (new agreements) is depreciated straight-line over the economic useful life (84 months). In the case of sale-and-leaseback transactions, the gains have been deferred as a liability and amortised straight-line over the term of the lease. The finance leases for pay-tv equipment generally provide in the event of the loss or destruction of the pay-tv equipment (or part thereof) for the lessor to be indemnified by the lessee. The Company complies with this obligation in that commensurate parts that are legally owned by the Company and recognised in property, plant and equipment or the inventories are incorporated in the pay-tv equipment and replace the parts that are lost or destroyed. This results in a retirement from property, plant and equipment or inventories. A liability to the lessor is reported for the replacement obligations that have not been fulfi lled as of the balance sheet date. Some of the fi nance leases grant the lessee the right to purchase the leased asset at the end of the lease term. The purchase price on exercise of this option is almost always the carrying amount applying straight-line depreciation in accordance with the depreciation tables used for tax purposes or the lower fair value at the time of sale. The Company leases office buildings, motor vehicles and other technical equipment under operating leases. 94 Sky Deutschland AG

95 Company as lessor The receivers recognised in property, plant and equipment are leased to subscribers under operating leases. Receivers are to be distinguished between the following categories: d-boxes, zapping receivers, HD-receivers, hard-disc receivers, HD hard-disc receivers, interactive receivers, external hard-discs (for the upgrading of HD receivers) and CI+ modules. The term of the leases is 6, 12, 24 or 36 months. Purchase options on the part of the subscribers (lessees) do exist at Sky Österreich. Apart from that, subscribers do not hold any purchase options or similar rights and Sky does not hold any put options or similar rights at the end of the lease. The receivers remain in the economic ownership of the Company for the term of the lease. With regard to the rental income from existing operating leases, please refer to the disclosures under item 2.7 Property, plant and equipment including receivers. The pay-tv equipment is almost entirely leased to hotels under finance leases. The term of the leases is up to 84 months. These are regarded as finance leases because the Company transfers most of the risks and rewards associated with ownership of the leased asset to the lessees. Leased assets under fi nance leases are recognised by the lessee. The lessor recognises a receivable that is measured at the net investment in the lease. Please refer with regard to the calculation of the net investment in the lease to Finance lease receivables. Unguaranteed residual values do not exist because of the full amortisation of the finance leases. Gains on disposal resulting from the leases are recognised immediately in profi t or loss. In connection with the strategic alignment of the hotel business, since the end of the preceding year, only referral services are undertaken between the leasing company and the hotel as lessee for new purchases of hotel pay-tv installations Provisions Provisions for pensions and similar obligations The actuarial measurement of the defined benefi t obligations for pensions and similar obligations is based on the projected unit credit method. The projected unit credit method measures the liability by assuming that each period of service gives rise to an additional unit of benefi t entitlement. Assumptions are made in measuring the liability about expected increases in salaries and pensions. The pension obligations have been determined on the basis of an actuarial valuation. The interest portion of the pension costs is reported in the financial result. Actuarial gains and losses are recognised in profi t or loss in general administrative expenses in the period in which they arise Other provisions Provisions are recognised if a present obligation to a third party arises from past events, the settlement of which is expected to result in a probable outfl ow of future economic benefi ts and whose amount can be reliably estimated. Provisions that will not result in an outfl ow of resources already in the following year are recognised at their settlement amount, discounted to the balance sheet date. The discount rate is based on market interest rates. The amount required to settle the obligation also includes future cost increases Income taxes Current taxes are recorded for the income taxes owed by Group entities at the time they arise. Deferred taxes are generally recorded for all temporary differences between the tax bases and the carrying amounts of the assets and liabilities in the consolidated balance sheet ( liability method ). An exception arises for differences relating to the fi rst-time recognition of non-taxable goodwill and that do not result in the recognition of deferred taxes. Deferred taxes are also recorded for tax losses and deductible temporary differences, provided suffi cient taxable income will be generated in the future against which these tax losses can be utilised or will exist at the time that these differences reverse, and sufficiently reliable information is available with regard to the future course of the business. Deferred tax assets and deferred tax liabilities are calculated using the tax rate that is applicable to the period when the temporary differences reverse. Future changes in tax rates are only taken into account to the extent that these have been enacted or substantially enacted as of the balance sheet date. Deferred tax assets and deferred tax liabilities are offset if the tax debtor and the tax creditor are identical and current taxes would be offset. Annual Report

96 Revenue recognition Subscription revenues are recorded in the period in which performance takes place. Advance cash receipts from subscribers are deferred as liabilities and recognised as revenue primarily on a straight-line basis over the term of the subscription. Pay-per-view revenues, resulting from the subscriber selecting a specifi c program title, are recorded in the consolidated statement of comprehensive loss at the time of transmission. Revenues from the sale of receivers are recorded when the risk is transferred. Receipts from leased receivers classifi ed as operating leases are recognised straight-line over the lease term. If a subscription is offered as part of a multiple element arrangement, the revenues from this transaction are allocated to the individual components based on their relative fair values. Activation fees and installation fees are not considered separate elements since these elements do not have a stand-alone value to the subscribers. In those cases, the fees received for such services are allocated to the components that form a unit of accounting with respect to revenue recognition, i.e. the subscription or the receiver (relative fair value method). Agreements for the rental of pay-tv equipment to hotels that are classifi ed as finance leases are treated in the same way as the sale of hardware, i.e. revenues are recognised in the amount of the leased receivables that are to be capitalised and cost of sales is recognised in the amount of the retirement of the pay-tv equipment at inception of the lease. Revenues from agency business are generally recognised when performance has taken place. Until December 2010, when renegotiations took place, revenues from the arrangement of subscriptions in conjunction with the cooperation with tmc Content Group AG, Baar, Switzerland were determined on the basis of the revenues generated by the arranged subscription. The revenue is realised at the time the subscribers are billed. Platform and distribution services rendered in conjunction with the cooperation are billed and recognised as revenue in the same way. Advertising revenues are recognised when the advertising has been carried out. Revenues from the transmission of programs are realised when performance occurs Interest expense and income Interest expense and income are recognised when incurred using the effective interest method Non-current assets classifi ed as held for sale Assets held for sale and associated liabilities are classifi ed as current assets and current liabilities, respectively, if it is highly probable that these assets will be sold within a period of 12 months. Such a sale is highly probable if management has taken the decision to sell these assets and the assets are actively marketed for sale. Assets held for sale are initially measured at their carrying amount. If the fair value less cost to sell is below the carrying amount, an impairment loss is recognised. Depreciable and amortisable assets are no longer depreciated or amortised once they have been classifi ed as assets held for sale Expenses and income from changes in estimates and the derecognition of liabilities Expenses and income from changes in estimates and derecognition of liabilities are reported in the profi t or loss in the function area in which the original entry was made Share-based payments In 2010, Sky has granted phantom shares to the chief executive offi cer of the group, which will entitle him to obtain payments upon expiry of the vesting period in April 2012 and April 2013, if certain subscriber growth targets are reached. The amount payable will be determined by the then existing fair value of the Sky share. The fair value of the phantom shares is recognised in profi t and loss over the vesting period. The fair value of the shares is determined using the Black-Scholes-model. 96 Sky Deutschland AG

97 Estimates and judgments The preparation of consolidated financial statements under IFRS requires that assumptions are made that affect the amounts recognised in the Group s balance sheet and consolidated statement of comprehensive loss and the disclosures of contingent assets and liabilities. Actual results in later periods could differ from these estimates. Changes in payments based on the number of subscribers in conjunction with the recognition of fi lm licenses are recorded as changes in accounting estimates. Accordingly, the residual carrying amount is increased or reduced at the time of the change in accounting estimates. The resulting amount is amortised as profi t or loss over the period of the remaining transmissions (prospective method). Free cash flow, general growth, risk-free interest rates, the increase in the number of subscribers and ARPU (average revenue per user) growth are considered in conjunction with the impairment test on goodwill (see also Goodwill) of the cash-generating unit. The following four scenarios were investigated: growth of 0.0 percent p.a. after the planning period; an increase of 2 percent p.a. in the risk-free interest rate; a 25 percent reduction in subscriber growth over the planning period resulting in a reduction of revenues; and a 25 percent reduction in ARPU growth over the planning period resulting in a reduction of revenues. All four scenarios did not result in the recognition of any impairment losses. In accordance with historical experience, an average membership period of eight years for subscribers was assumed for the amortisation of the subscriber bases (see also Other intangible assets). The amount recognised for pension provisions (see also item Pension provisions) is based on actuarial reports. Adjustments to the provisions for actuarial gains and losses according to actuarial reports are recognised immediately in profi t or loss. Employee turnover rates used in determining the pension provisions are based on historical experience. The fair value of the phantom shares is dependent on certain parameters such as the volatility and the current interest level. Besides, estimates regarding the expected subscriber growth will also affect the amount to be expensed. Under IFRS, revenue shall be measured in accordance with the fair value of the consideration received or receivable. The recognition criteria are generally applied separately to each transaction. However, in certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction, in order to reflect the substance of the transaction correctly. The Group generally applies the relative fair value method to allocate the total contractual amount. Under this method, the total contractual amount has to be allocated in proportion to the fair value of the individual elements. Deferred tax assets and tax losses are recognised up to the amount for which it appears more likely than not that future taxable income will be available Segment reporting The business activities of the Group concentrate on the operation of a pay-tv business in Germany and Austria under the Sky brand name and related activities. Accordingly, the internal reporting to the Management Board of the Company provides information on the combined operation of the pay-tv business in both countries. In addition, the allocation of resources follows this internal reporting structure. Insofar, Sky does not have different operating segments in accordance with IFRS 8. Annual Report

98 2 Notes to the consolidated balance sheet 2.1 Cash and cash equivalents Cash and cash equivalents are made up as follows: (in K ) 31/12/10 31/12/09 Bank and cash balances 3,524 8,046 Term deposits 1, Total 4,999 8,124 Term deposits mainly consist of rental guarantees lodged with banks. The rental guarantees were credited with an average interest at 0.48 percent p.a. (2009: 1.85 percent p.a.). 2.2 Inventories Inventories are made up as follows: (in K ) 31/12/10 31/12/09 Receivers 33,447 34,712 Other inventories 1,864 1,529 Total 35,311 36,241 Receivers are intended to be provided to subscribers. The sale of receivers in connection with a subscription is made in the name of and on behalf of Sky by the distributor. Accordingly, the warehousing takes place both in the central warehouse in Bor (Czech Republic) and on a decentralised basis at sales partners in Germany and Austria. The carrying amount of the inventories recognised at net realisable value amounts to K 3,682 (2009: K 3,834). Impairment losses of K 3,441 were recognised as expense in the financial year (2009: K 253) and are included in cost of sales (hardware). 2.3 Trade receivables Overview Trade receivables developed as follows: (in K ) 31/12/10 31/12/09 Trade receivables (before allowances) 101, ,152 Allowances 34,149 54,056 Trade receivables (after allowances) 67,630 70,096 Damage claims 6,768 2,540 Total (after allowances) 74,398 72,636 Both the decrease in trade receivables (before allowances) and allowances is primarily due to a sale of receivables in The sale comprised certain overaged receivables that were being sold to a debt-collecting agency. The proceeds from the sale amount to K 3,504 and are shown under other income. The temporary abandonment of the enforcement of damage claims in the previous year has resulted in an increase in damage claims in Sky Deutschland AG

99 Trade receivables are made up as follows: (in K ) 31/12/10 of which of which 31/12/09 non-current non-current Receivables from subscribers 44, ,306 0 Receivables from dealers 4, ,192 0 Receivables from finance leases 3,527 1,835 5,497 3,560 Other 21, , Total (after allowances) 74,398 1,899 72,636 3,862 The following table shows an aging analysis of trade receivables that are past due but not impaired as of the reporting date. (in K ) Carrying amount (after allowances) of which: neither past due nor impaired at balance sheet date less than 30 days between 30 and 60 days of which: not impaired at balance sheet date but past due in the following time ranges between 61 and 90 days between 91 and 180 days between 181 and 360 days more than 360 days 31/12/10 Trade receivables 74,398 28,810 7, ,617 1,233 2,007 31/12/09 Trade receivables 72,636 19,875 3,413 1,258 3, ,018 3,418 There are no indications as of the balance sheet date with regard to the balances of trade receivables which are past due but not impaired that the debtors will not meet their payment obligations. The carrying amount of the receivables whose terms have been renegotiated and which would otherwise have been past due or impaired amounted as of the balance sheet date to K 1,056 (2009: K 1,195). The allowances recorded against trade receivables developed as follows: (in K ) Balance as of 1/1 54,056 65,070 Derecognition of receivables 31,583 20,422 Amount recognised as expense or income in the reporting period 11,663 9,283 Additions for the year from business acquisitions Balance as of 31/12 34,149 54,056 The derecognition of receivables relates entirely to receivables from prior years that have been provided in full and are irrecoverable Receivables from subscribers, dealers and other trade receivables Receivables from subscribers, dealers and other trade receivables are reported net of allowances. Expenses for allowances recorded against receivables in the financial year amounted to K 11,724 (2009: K 9,322). Of this total amount, an expense in the amount of K (2009: K 8,387) is recorded against receivables from subscribers and an income of K (2009: K 415) is recorded against receivables from dealers. Another K 762 of expense (2009: K 1,350) are recorded against other receivables. In the event of the early termination of the contract, Sky bills subscribers with damages in the amount of the subscription fees for the remaining term of the contract discounted to the termination date, in addition to receivables that have already been accumulated for subscription fees. Receivables are recognised at their fair value based on expected cash inflows. Receivables are only derecognised when it is fi nally established that they are not recoverable. Annual Report

100 The Group uses several collection agencies to recover the receivables. The receivables are generally not sold to the collection agencies. Therefore, the risk of default on the receivables remains with the Company. Allowances on receivables that have been passed on to the collection agencies for recovery are recorded on the basis of historical experience. Other trade receivables include a large number of individual items Finance lease receivables Finance lease receivables result from lease contracts concluded with hotels for pay-tv equipment, TVs and accessories. Finance lease receivables of K 3,527 are reported in the balance sheet as of 31 December 2010 (2009: K 5,497), of which K 1,692 (2009: K 1,937) are current and K 1,835 (2009: K 3,560) are non-current. The following table reconciles the gross investment in the leases to the net investment in the leases: (in K ) 31/12/10 31/12/09 Gross investment in the leases (minimum lease payments receivable) 3,975 6,386 Less: unearned finance income Less: accumulated allowance for uncollectible minimum lease payments receivable Net investment in the leases (present value of minimum lease payments receivable) 3,527 5,497 The gross and net investments in the leases are due as follows: (in K ) 31/12/10 31/12/09 Gross investment in the leases 3,975 6,386 < 1 year 1,953 2, years 2,006 3,924 > 5 years Net investment in the leases 3,527 5,497 < 1 year 1,692 1, years 1,835 3,470 > 5 years Sky Deutschland AG

101 2.4 Other financial assets The other financial assets comprise the following: (in K ) Total 31/12/10 of which non-current Total 31/12/09 of which non-current Purchase price receivables 0 0 1,733 0 Derivatives Creditor accounts with debit balances 1, ,286 0 Available-for-sale financial assets Miscellaneous 1, Total 3, , Securities included under Available-for-sale fi nancial assets were recognised at fair value as of 31 December 2010 in the amount of K 300 (2009: K 240). As of the balance sheet date, the derivatives include the positive fair values from foreign exchange forward transactions. For further information, please refer to Derivative fi nancial instruments and Disclosures on derivatives. 2.5 Other assets Other assets are made up as follows: (in K ) Total 31/12/10 of which non-current Total 31/12/09 of which non-current Advance payments on advertising services 10, Tax receivables 6, ,565 0 Financing costs 4,164 2,331 13,846 9,700 Fees for encryption systems 2, ,552 2,529 Transmission fees 2, Advance payments on service operations 1, Advance payments to creditors ,187 0 Salary advances Signing Bonus Miscellaneous 4,919 1,279 4,737 1,407 Total 32,663 4,251 33,604 13,920 The advertising services, for which advance payments in the amount K 10,119 have been made in the fi nancial year, will be rendered in In connection with the amended financing, Sky paid fees to the banks in the amount of K 7,050 in 2010, market standard for this type of waiver and amendment agreement. As far as the Company has already drawn amounts under the new facilities, a portion of the transaction costs is deducted from the carrying amount of the financial liability and amortised over the term of the liability using the effective interest method. For undrawn facilities, the allocated transaction costs are reported under other assets and amortised to profi t and loss over the term of the facility using the effective interest method. The miscellaneous other assets primarily comprise guarantee commissions paid, fees, insurance premiums, software maintenance agreements and film promotion contributions. Annual Report

102 2.6 Assets classified as held for sale In the second quarter of 2009, the assets and liabilities assigned to Roombase Networks Limited were classifi ed as held for sale as defi ned in IFRS 5, based on the intention of the management to sell the interest held by the Company. The sale took place as of 1 March Assets classified as held for sale 31/12/10 31/12/09 Cash and cash equivalents 0 77 Trade receivables Property, plant and equipment Impairment Total Liabilities classified as held for sale 31/12/10 31/12/09 Trade payables Other current liabilities Other non-current liabilities Total Property, plant and equipment including receivers (in K ) Land and buildings Own technical equipment Technical equipment and receivers under finance leases Own receivers Other operational and office equipment Advance payments Cost Balance as of 1/1/10 1,469 6,186 15,049 89,119 25, ,661 Additions from business acquisition Additions for the year 3, ,069 4,153 2,933 71,647 Disposals for the year , ,484 Reclassifications 349 1,687 8,391 10, Balance as of 31/12/10 5,408 5,389 5, ,900 29,494 2, ,024 Total Depreciation Balance as of 1/1/10 1,273 4,785 6,630 44,091 16, ,176 Depreciation for the year ,279 20,217 3, ,106 Disposals for the year , ,368 Impairment losses , ,998 Reclassifications 0 1,687 6,492 8, Balance as of 31/12/10 1,550 3,790 1,660 62,200 19, ,911 Carrying amount as of 31/12/10 3,858 1,599 4,241 73,700 9,783 2,933 96, Sky Deutschland AG

103 (in K ) Land and buildings Own technical equipment Technical equipment and receivers under finance leases Own receivers Other operational and office equipment Advance payments Cost Balance as of 1/1/09 1,574 5,355 10,238 70,918 21, ,285 Additions from business acquisition 23 1, ,182 Additions for the year ,448 23,747 7, ,522 Disposals for the year ,547 3, ,083 Reclassifications Non-current assets held for sale 0 1, ,246 Reclassifications Balance as of 31/12/09 1,469 6,186 15,049 89,119 25, ,661 Total Depreciation Balance as of 1/1/09 1,312 3,912 4,775 33,472 16, ,594 Depreciation for the year ,501 13,507 3, ,087 Disposals for the year ,975 2, ,267 Impairment losses Reclassifications Non-current assets held for sale Reclassifications Balance as of 31/12/09 1,273 4,785 6,630 44,091 16, ,176 Carrying amount of 31/12/ ,401 8,419 45,028 9, ,485 The carrying amount of non-leased receivers amounts to K 5,599 (2009: K 8,482). The carrying amount of receivers leased to subscribers amounts to K 68,101 (2009: K 39,620). The additions of K 60,069 (2009: K 23,747) to own receivers mainly related to HD receivers. All purchases of receivers are recognised initially in inventories. Receiver from inventories which get leased by customers under operating lease arrangements are reclassifi ed to property, plant and equipment and amortised straight-line over their expected useful lives. The impairment loss of K 3,998 (2009: K 87) relates to both hard disc receivers lacking HD features and defective interactive receivers and is included in cost of sales (hardware). A future economic benefi t is no longer expected from the use of these receivers. Expected minimum lease payments from operating leases for receivers existing at the balance sheet date amount to K 4,405 (2009: K 9,439). The remaining weighted average contractual term of these leases is approximately 5 months (2009: approximately 8 months). Property, plant and equipment includes technical equipment (pay-tv equipment), which is integrated in the hotel operations. As of 31 December 2010, the carrying amount of this equipment amounted to K 1,269 (2009: K 1,045), of which K 461 (2009: K 485) relates to pay-tv equipment recognised under finance leases and K 808 (2009: K 560) to own pay-tv equipment. Only those receivers, which are used for this purpose, are amortised over a period of seven years. The carrying amount of technical equipment and receivers under finance leases comprises the following: (in K ) Pay-TV equipment Receivers 0 3,074 Hardware for new subscriber management system 3,780 4,860 Total 4,241 8,419 Annual Report

104 2.8 Intangible assets Film assets and advance payments for sport and film rights The carrying amounts of the fi lm assets and advance payments for sport rights developed as follows: (in K ) Carrying amount as of 31/12/10 of which non-current Carrying amount as of 31/12/09 of which non-current Film assets 64,103 20,607 66,781 23,139 Advance payments for sport rights 24, , Total 88,841 21,184 97,722 24,136 The film assets reported in this caption mainly comprise broadcasting rights purchased from fi lm studios and a program library acquired in The film assets developed as follows: (in K ) Film licenses Advance payments for film rights Program library Cost Balance as of 1/1/10 142,239 7,997 7, ,136 Additions for the year 108,978 2, ,058 Disposals 112, ,343 Reclassifications 5,856 5, Balance as of 31/12/10 144,730 4,220 7, ,851 Utilisation/amortisation Balance as of 1/1/10 86, ,413 91,355 Utilisation/amortisation for the year 112, ,632 Disposals 112, ,343 Impairment losses Balance as of 31/12/10 87, ,369 92,747 Carrying amount as of 31/12/10 57,352 4,220 2,531 64,103 of which non-current 16,856 1,220 2,531 20,607 Total The cost of the purchased fi lm rights was adjusted by K 364 (2009: K 147) in conjunction with the contractually agreed determination of the actual number of subscribers. 104 Sky Deutschland AG

105 The film assets developed as follows in the previous year: (in K ) Film licenses Advance payments for film rights Program library Cost Balance as of 1/1/09 160,215 13,588 7, ,703 Additions for the year 104,480 4, ,578 Disposals 132, ,145 Reclassifications 9,689 9, Balance as of 31/12/09 142,239 7,997 7, ,136 Total Utilisation/amortisation Balance as of 1/1/09 74, ,421 77,863 Utilisation/amortisation for the year 144, ,021 Disposals 132, ,145 Impairment losses Balance as of 31/12/09 86, ,413 91,355 Carrying amount as of 31/12/09 55,297 7,997 3,487 66,781 of which non-current 15,994 3,657 3,487 23,139 The impairment losses resulted from the derecognition of unused transmission slots. Utilisation and amortisation are recorded in cost of sales Goodwill (in K ) Cost Balance as of 1/1/ 633, ,143 Additions from business combinations 6,711 11,056 Balance as of 31/12/ 639, ,199 Impairment Balance as of 1/1/ 1,296 0 Impairment for the year 0 1,296 Balance as of 31/12/ 1,296 1,296 Carrying amount as of 31/12/ 638, ,903 The additions in the financial year result from the business combinations with Loxxess Medienlogistik GmbH and Premium Media Solutions GmbH. The impairment test for the cash-generating unit pay-tv Business revealed no need for any write-downs. The recoverable amount was determined by referring to the value in use calculated on the basis of the free cash flow projections in the business plan (planning period from 2010 to 2014 for the impairment test as of 30 September 2010). The key assumptions with respect to the projected free cash flows relate to development of the number of subscribers and the ARPU. A discount rate of 8.1 percent p.a. as of 30 September 2010 (30 September 2009: 9.6 percent p.a., 31 December 2009: 8.75 percent p.a.) and a growth factor after the planning period of 0.5 percent p.a. as of 30 September 2010 (2009: 0.5 percent p.a.) were applied in the calculations for the cash-generating unit (see also Estimates and judgments). Annual Report

106 2.8.3 Other intangible assets (in K ) Trademarks Subscriber base Other intangible assets Other intangible assets under finance lease Internally generated intangible assets Advance payments Cost Balance as of 1/1/10 333, ,226 95,312 5,692 2, ,388 Additions from business acquisition Additions for the year 0 6,217 25, ,777 33,837 Disposals for the year 0 0 4, ,222 Reclassifications Balance as of 31/12/10 333, , ,043 5,692 2,645 1, ,031 Total Amortisation Balance as of 1/1/10 333, ,327 65, , ,337 Amortisation for the year 0 49,182 16,602 1, ,930 Disposals for the year 0 0 4, ,191 Balance as of 31/12/10 333, ,508 77,786 1,708 2, ,076 Carrying amount as of 31/12/ ,934 39,257 3, ,778 60,955 (in K ) Trademarks Subscriber base Other intangible assets Other intangible assets under finance lease Internally generated intangible assets Advance payments Cost Balance as of 1/1/09 333, , , , ,251 Additions from business acquisition Additions for the year ,929 5, ,916 Disposals for the year , ,945 Reclassifications Balance as of 31/12/09 333, ,226 95,312 5,692 2, ,388 Total Amortisation Balance as of 1/1/ ,334 63, , ,355 Amortisation for the year 0 48,993 18, ,558 Disposals for the year , ,373 Impairment losses 333, ,798 Balance as of 31/12/09 333, ,327 65, , ,337 Carrying amount as of 31/12/ ,899 29,937 5, ,051 The subscriber base mainly relates to an acquisition that was carried out in The subscriber base is amortised on a straight-line basis over the useful life based on historical experience. It was not necessary to recognise any impairment losses. The additions for the past financial year regarding subscriber base primarily relate to an agreement reached with tmc Content Group AG, Baar, Switzerland on the transfer of the subscriber lists for the teleservice Blue Movie. The overall consideration amounts to K 6,100, of which K 5,100 were payable in cash upon closing the contract and another K 1,000 will be settled with an outstanding receivable. Other intangible assets comprise purchased software, licenses and the costs for the rights to use names. In May 2009, the Management Board with the approval of the Supervisory Board decided to discontinue the use of the Premiere brand at the end of the second quarter Therefore, the carrying amount of the Premiere trademark was written off resulting in an expense of K 331, Sky Deutschland AG

107 2.9 Liabilities The liabilities are made up as follows: 31/12/10 Total 31/12/09 Total (in K ) < 1 year 1 5 years > 5 years 31/12/10 < 1 year 1 5 years > 5 years 31/12/10 Borrowings 43, , ,313 29, , ,534 Trade payables 167,714 15, , ,930 18, ,084 Other financial liabilities 47,124 55, ,101 35,865 62, ,008 Liabilities to entities accounted for at equity , ,142 Liabilities classified as held-for sale Other liabilities 33,975 2, ,859 35,628 3, ,935 Deferred taxes 0 44, , , ,345 Provisions for pensions and similar obligations 0 0 6,398 6, ,274 6,274 Other provisions 3, ,266 11, ,559 Total 295, ,336 6, , , ,873 6, , Borrowings The Company is reporting the following borrowings, broken down by maturities: 31/12/10 Total 31/12/09 Total (in K ) < 1 year 1 5 years 31/12/10 < 1 year 1 5 years 31/12/09 Bank debt 39, , ,620 21, , ,424 Finance lease liabilities 4,362 4,264 8,626 6,350 7,992 14,343 Loan from Nagravision , ,767 Other borrowings Total 43, , ,313 29, , ,534 The carrying amount of the borrowings broadly corresponds to their fair value. The bank debt reported under borrowings primarily comprises the fi nancing package agreed upon in December 2008 amended in December 2009 and in August 2010 with a banking syndicate. Annual Report

108 Bank debt The increase in bank debt from K 154,424 as of 31 December 2009 to K 315,620 as of 31 December 2010 primarily results from the utilisation of the new credit lines in the amount K 166,197 and an increase in transaction costs, that are being deducted from the carrying amount of the financial liability in the amount of K -7,700. An exit fee, equivalent of 4.0 percent of the last 12 months consolidated EBITDA will be payable on 31 December Due to ongoing evaluations regarding certain calculation parameters, the obligation has not yet been recorded on the balance sheet. In the course of the direct placement of 49 million shares to News Corporation in January 2010, Sky s bank syndicate consented to a waiver and amendment request with regard to a waiver of mandatory prepayment from equity proceeds, an adjustment of the existing fi nancial covenants to refl ect the additional investments and an amendment to allow for temporary repayment of a term loan. Sky paid to the banks fees in the amount of K 3,907, market standard for this type of waiver and amendment agreement. On 2 August 2010, Sky announced financing measures with expected gross proceeds of at least 340 million. The amount should be raised through a combination of a rights offering, the issuance of a convertible bond to and a shareholder loan from News Adelaide Holdings B.V.. At the end of September 2010 Sky completed the rights offering by placing 168,937,926 of the 269,580,929 new shares offered at a price of 1.05 per share. The Company received gross proceeds in the amount of million. Due to the required amendments to the existing financing conditions Sky paid fees in the amount of K 3,144 to the banks. As Q strongly confi rms the positive trend and shows that Sky Deutschland is taking the right steps in focusing on content, HD, innovation and customer satisfaction, the company increased the volume of the announced fi nancing measures from 340 million to 400 million. In order to (i) avoid a mandatory repayment of its loans with proceeds from the capital increase, (ii) align fi nancial covenants and other conditions in such a way that they refl ect the intended use of the offering proceeds and other payments in connection with the fi nancing and (iii) avoid a breach of the fi nancial covenants that would occur at subsequent date, which would entitle the lenders to immediately cancel the loans and require repayment of the outstanding amounts, Sky agreed with the banking syndicate to an amendment of the credit conditions on 2 August At the time of preparation of these consolidated financial statements, the required consent of the bank syndicate to the increased funding has been achieved. Subject to certain conditions, News Adelaide Holdings B.V. has agreed to provide the additional 60 million as a shareholder loan, which can be drawn down until 21 December The outstanding amount of million (gross) will be raised through the issuance of a convertible bond with up to 53,916,185 underlying shares from contingent capital to News Adelaide Holdings B.V. (to be issued no later than 31 January 2011) followed by shareholder loans provided by News Adelaide Holdings B.V. by no later than 31 January 2011 (with regard to such amount to ensure gross proceeds of 340 million) or 21 December 2011, respectively (with regard to the additional 60 million (gross)). In connection with a private placement the convertible bonds were issued to News Adelaide Holdings B.V. on 25 January The bond can be converted into 53,914,182 ordinary registered shares stemming from contingent capital. The convertible bond has a four year maturity, is unsecured and subordinated to the existing credit facilities. It has a cash coupon of 5.5 percent per annum, payable quarterly in arrears. The conversion price has been set at 3.053, representing a premium of 25 percent on the volume weighted average XETRA price per Sky Deutschland AG share over the last 10 trading days (including the day of issuance). With the placement of the convertible bond together with the gross proceeds from the rights offering, Sky Deutschland has raised gross proceeds in the amount of 342 million. The fi nancing measures to ensure gross proceeds of at least 340 million by 31 January 2011 are now fully completed. The incremental funding in the amount of remaining 58 million to reach overall gross proceeds of 400 million as announced on 12 January 2011 will be provided as a shareholder loan by News Adelaide Holdings B.V. by no later than 21 December The shareholder loan will be subordinated to the existing credit lines and will have a term extending to 31 March Interest will amount to twelve percent p.a., whereby the interest will not be due until the end of the loan term. At a subsequent date the shareholder loan could also be converted into equity. The conversion of the shareholder loan into equity will require the approval of Sky and its shareholders. 108 Sky Deutschland AG

109 Loan from Nagravision A credit line of K 7,250 was agreed upon in 2003 with Kudelski S.A., Switzerland, (Nagravision). This credit line was taken up in full in February The credit line was restructured in The last installment including accrued interest in the amount of K 1,767 was paid on 30 September Finance lease liabilities The following minimum lease payments are due under the finance leases: (in K ) < 1 year 1 5 years 2010 Total Minimum lease payments 4,539 4,993 9,531 Discount amounts Present values 4,362 4,264 8,626 (in K ) < 1 year 1 5 years 2009 Total Minimum lease payments 6,663 9,532 16,195 Discount amounts 313 1,540 1,852 Present values 6,350 7,992 14,343 The weighted average interest rate for finance lease liabilities with fixed lease payments was 9.4 percent p.a. (2009: 9.8 percent p.a.) Trade payables Trade payables are made up as follows: 31/12/10 Total 31/12/09 Total (in K ) < 1 year 1 5 years > 5 years 31/12/10 < 1 year 1 5 years > 5 years 31/12/09 Liabilities to film studios for the purchase of film licenses 65,077 1, ,259 56,594 1, ,148 Liabilities to subscribers for security deposits 3,729 11, ,947 4,226 12, ,928 Other trade payables 98,908 3, , ,111 3, ,009 Total 167,714 15, , ,930 18, ,084 The carrying amounts correspond to the fair values. Annual Report

110 2.9.3 Other financial liabilities 31/12/10 Total 31/12/09 Total (in K ) < 1 year 1 5 years 31/12/10 < 1 year 1 5 years 31/12/09 Purchase price payables 13,585 49,777 63,363 11,906 55,767 67,673 Liabilities to employees (including management bonuses) 7,867 1,425 9,293 7, ,982 Debtor accounts with credit balances 9, ,316 10, ,973 Obligations from shareholder claims 8, , Derivatives 2,664 2,920 5,584 1,370 4,782 6,152 Severance payments 1, , ,097 Miscellaneous 3,809 1,655 5,465 2,709 1,422 4,131 Total 47,124 55, ,101 35,865 62,143 98,008 With exception of the purchase price payables the fair values agree to the reported carrying amounts (please refer to 2.10 Additional disclosures on financial instruments). Regarding the negative fair value of derivative financial instruments we refer to Derivative fi nancial instruments and Disclosures on derivatives. For further information on the obligations from shareholder claims we refer to 1.4 Significant claims. On 1 January 2010, Sky has granted 1,712,389 virtual shares to the chief executive officer of Sky Deutschland AG, which will entitle him to obtain payments in the amount of the then existing fair value of the sky share upon expiry of the vesting period in April 2012 and April 2013, if certain subscriber growth targets are achieved. The fair value of the shares as of 31 December 2010 was determined by means of the Black-Scholes-model and amounts to K 2,899. The calculation was based on the following parameters: Risk free interest rate: 0.64 percent p.a. (tranche due on 1. April 2012) 0.97 percent p.a. (tranche due on 1. April 2013) Dividend yield: 0.00 percent Volatility: percent Price of the Sky share: 1.69 In respect of the performance-related criteria, which are dependent on the subscriber development until 1 April 2012 and 1 April 2013 respectively, full achievement has been assumed. In the financial year 2010, an expense in the amount of K 1,090 has been incurred Other liabilities Other liabilities are made up as follows: 31/12/10 Total 31/12/09 Total (in K ) < 1 year 1 5 years 31/12/10 < 1 year 1 5 years 31/12/09 Subscriber payments from prepaid offers 21, ,544 20, ,901 Advance payments on orders 4, ,091 4, ,050 Fees for encryption systems 335 1,095 1, ,448 1,890 Social security liabilities Liabilities to tax authorities 951 1,148 2,099 4,502 1,148 5,650 Miscellaneous 6, ,081 5, ,386 Total 33,975 2,884 36,859 35,628 3,307 38,935 The subscriber payments from prepaid offers relate to the deferral of revenue from prepaid packages sold with terms going beyond the balance sheet date. 110 Sky Deutschland AG

111 2.9.5 Other provisions (in K ) Receivers Other Litigation Onerous taxes costs contracts Warranties Total Balance as of 1/1/10 1,323 7,636 1,151 1, ,559 Additions , ,592 Utilisation 126 5, , ,168 Reversals 880 1, ,717 Balance as of 31/12/ ,061 1, ,266 of which current 773 1,061 1, ,266 of which non-current (in K ) Receivers Other Litigation Onerous taxes costs contracts Warranties Total Balance as of 1/1/ , , ,024 Additions 1, ,137 Utilisation Reversals Reclassification assets held for sale Balance as of 31/12/09 1,323 7,636 1,151 1, ,559 of which current 1,323 7,636 1,151 1, ,559 of which non-current The provisions have been recognised on the basis of the expected outfl ows. The provisions for receivers mainly relate to costs for the testing, repair and scrapping of receivers. Provisions for litigation have been set up for expected risks from lawsuits and costs for lawyers and other court fees on pending legal disputes Provisions for pensions Defined benefi t plans The Group operates unfunded final salary defined benefit pension plans. In addition to retirement pensions, the pension liability also covers widows, orphans and disability pensions. The following amounts are recognised as expense for the period: (in K ) Current service cost Transfer of resources 48 0 Interest cost Realised actuarial losses (-)/gains(+) Pension expense The current service cost and the actuarial gains or losses are reported under general and administrative expenses and the interest expense on the pension obligations is reported in the fi nancial result. Since there are no plan assets as defined by IAS 19 and all actuarial gains and losses are recognised in profit and loss when incurred, the present value of the defined benefit obligation (DBO) of the pension obligations and the obligations similar to pensions equals the provision recognised in the balance sheet. Annual Report

112 The defined benefit obligation (DBO) has developed as follows: (in K ) Defined benefit obligation as of 1/1/ 6,274 5,494 Addition from business acquisition Pension expense Pension payments Defined benefit obligation as of 31/12/ 6,398 6,274 The defined benefi t obligation and the adjustments to the plan liabilities based on historical experience developed as follows: (in K ) Defined benefit obligation as of 31/12/ 6,398 6,274 5,494 5,086 6,114 6,192 Experience adjustments on plan liabilities 1/1/ 31/12/ The calculation of the pension liability was based on the following assumptions: 31/12/10 31/12/09 Discount rate 5.70% 5.53% Pension growth rate 2.00% 2.00% Salary growth rate for 2011: 2.50% 2.00% for subsequent years: 2.00% Employee turnover rate 8.30% 8.30% Expected pension payments in 2011 amount to K 107 (in 2010: K 94) Defined contribution plans The measurement of the contributions payable resulting from termination indemnity obligations to employees of the Austrian subsidiary resulted in expense of K 26 (2009: K 14). Due to a commitment made to Brian Sullivan K 74 have been paid into a pension fund in the fi nancial year. Contributions to the statutory pension insurance scheme in the past financial year amounted to K 10,517 (2009: K 8,854). 112 Sky Deutschland AG

113 2.10 Additional disclosures on financial instruments The following table shows the carrying amounts by measurement categories in accordance with IAS 39 and the fair values by classes of financial assets and financial liabilities (in K ) Assets (Class of financial instruments according to IFRS 7.6) financial instrument measured at Fair value as of 31/12/10 Carrying amount as of 31/12/10 Carrying amount of categories as defined in IAS 39 Fair Value FVTPL recognised (HfT) in equity AfS LaR FLAC Carrying amount according to IAS 17 Cash and cash equivalents 4, Trade receivables Amortised cost 74,372 74, , ,527 Other non-derivative financial assets Amortised cost 3,029 3, , Derivative financial assets Fair value Derivatives in connection with Cash-Flow Hedges - Derivatives without hedge relation Available-for-sale financial assets Available-for-sale financial assets Liabilities Fair value Fair value At cost Fair value ,198 83, , ,527 Borrowings Amortised cost 324, , ,687 8,626 Trade payables Amortised cost 183, , ,729 0 Other non-derivative financial liabilities Amortised cost 97,805 97, ,517 0 Derivative financial liabilities Fair value 5,584 5,584 3,266 2, Derivatives in connection with Cash-Flow Hedges - Derivatives without hedge relation Fair value 2,319 2, , Fair value 3,266 3,266 3, , ,143 3,266 2, ,933 8,626 Annual Report

114 2009 (in K ) Assets (Class of financial instruments according to IFRS 7.6) financial instrument measured at Fair value as of 31/12/09 Carrying amount as of 31/12/09 Carrying amount of categories as defined in IAS 39 Fair Value FVTPL recognised (HfT) in equity AfS LaR FLAC Carrying amount according to IAS 17 Cash and cash equivalents 8, Trade receivables Amortised cost 72,759 72, , ,497 Receivables from entities accounted for at equity Other non-derivative financial assets Amortised cost Amortised cost 3,413 3, , Derivative financial assets Fair value Derivatives in connection with Cash-Flow Hedges - Derivatives without hedge relation Available-for-sale financial assets Available-for-sale financial assets Liabilities Fair value Fair value At cost Fair value 1,240 1, , ,950 85, ,246 70, ,497 Borrowings Amortised cost 170, , ,191 14,343 Trade payables Amortised cost 215, , ,084 0 Liabilities to entities accounted for at equity Other non-derivative financial liabilities Amortised cost 3,142 3, ,142 0 Amortised cost 93,244 91, ,856 0 Derivative financial liabilities Fair value 6,152 6,152 4,762 1, Derivatives in connection with Cash-Flow Hedges - Derivatives without hedge relation Fair value 1,390 1, , Fair value 4,762 4,762 4, , ,767 4,762 1, ,273 14,343 Explanation of abbreviations FVTPL (HfT) Financial assets/liabilities at fair value through profit or loss classified as held for trading AfS Available-for-sale financial assets LaR Loans and receivables FLAC Financial liabilities measured at Amortised cost A separate class has to be established for cash and cash equivalents. An allocation to financial instruments measured at amortised cost or to financial assets measured at fair value is not appropriate, since they are reported at nominal value, whereby foreign currency balances are translated at the rate for the day. The measurement of cash and cash equivalents is therefore not connected with a category in IAS 39, so that no disclosure is required of the carrying amount by measurement category. Trade receivables and other financial assets primarily have short maturities, so that their carrying amounts as of the balance sheet date approximate the fair values. The fair values of the finance lease receivables are determined with reference to the discounted expected future cash fl ows on the basis of the contractual terms. 114 Sky Deutschland AG

115 In the case of available-for-sale financial assets, the market value in an active market, where this exists, is applied as the fair value. The market values of interest swaps are determined by discounting the expected future cash fl ows over the residual term of the contracts on the basis of current market interest rates and the interest structure trend. The market values of the foreign exchange forward contracts are determined based on the forward rates. The fair values of the debt reported under the financial liabilities, finance lease liabilities and other borrowings, and the non-current borrowings are determined as the present values of the payments associated with the liabilities, applying the respective applicable interest structure trend. Trade payables and other borrowings mainly have short maturities, so that their carrying amounts approximate the fair values. The table below analyses financial instruments carried at fair value by valuation method. The different levels have been defi ned as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs) 2010 (in K ) Level 1 Level 2 Level 3 Total Assets Derivative financial assets Derivatives in connection with Cash-Flow Hedges Derivatives without hedge relation Available-for-sale financial assets Liabilities Derivative financial assets 0 5, ,584 - Derivatives in connection with Cash-Flow Hedges 0 2, ,319 - Derivatives without hedge relation 0 3, , (in K ) Level 1 Level 2 Level 3 Total Assets Derivative financial assets Derivatives in connection with Cash-Flow Hedges Derivatives without hedge relation Available-for-sale financial assets 240 1, ,240 Liabilities Derivative financial assets 0 6, ,152 - Derivatives in connection with Cash-Flow Hedges 0 1, ,390 - Derivatives without hedge relation 0 4, ,762 Annual Report

116 2.11 Equity General Sky Deutschland AG s subscribed capital amounts to 708,099,784. It is divided into 708,099,784 registered shares with no par value; each share with no par value has a notional interest of 1.00 in the capital stock. The capital has been contributed in full. Additional paid-in capital amounted as of the balance sheet date to K 1,487,009 (2009: K 1,425,815) of which K 926,289 (2009: K 856,574) is not available for distribution. The agreement entered into with the banking syndicate and News Corporation and its amendment in August 2010 for the new long-term financing structure led to two capital increases. On 18 January 2010, the Management Board of Sky Deutschland AG, Unterföhring, with the consent of the Supervisory Board, decided to increase the share capital of the Company by 49,014,714 against contributions in cash by issuing 49,014,714 new registered shares without subscription rights using the authorised capital of the Company. The subscription price was established at 2.25 per share. The total share of Sky Deutschland registered shares increased from 490,147,144 to 539,161,858. The company thereby received proceeds in the amount of million. Less the transaction costs in the amount of K 547, the additional paid-in capital increased by K 60,722, from K 1,425,720 to K 1,486,442. The capital increase was entered in the Commercial Register on 21 January In connection with a second capital increase, which was announced on 2 August 2010 and carried out on 30 September 2010, Sky placed 168,937,926 shares of the 269,580,929 new shares offered at a price of 1.05 per share percent of the new shares were placed with investors other than the News Corporation percent were placed with News Adelaide Holdings B.V., a 100 percent subsidiary of News Corporation. The new shares have a calculated share of the capital stock of 1.00 per share. The subscribed capital increased as result by 168,937,926 from 539,161,858 to 708,099,784. The company thereby received proceeds in the amount of million. Less the transaction costs in the amount of K 7,880, the additional paid-in capital increased by K 567, from K 1,486,443 to K 1,487,009. The capital increase was entered in the Commercial Register on 30 September The General Shareholders Meeting on 23 April 2010 authorised Sky Deutschland AG s management board to buy back up to 10 percent of the subscribed capital that existed as of the date of the resolution. The authorisation 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 has been granted until 22 April The management board is empowered to utilise stock in the Company that is acquired on account of this power for all legally authorised purposes. The above-mentioned resolution became effective on 7 June 2010 upon entry of the amendment of the Company s statutes into the commercial register. The Company has no treasury stock as of 31 December Authorised capital The authorised capital 2009 granted to the management board by the General Shareholders Meeting of 9 July 2009 was cancelled in the General Shareholders Meeting on 23 April At the same time, the management board was authorised to increase the share capital of the Company until 22 April 2015, with approval of the supervisory board, through the issuance of new no par registered shares against cash and/or in-kind contributions, once or several times, by up to a total amount of 269,580,929 (authorised capital 2010). The above-mentioned resolution became effective on 7 June 2010 upon entry of the amendment of the Company s statutes into the commercial register. Subsequent to the capital increase carried out on 30 September 2010, the remaining authorised capital amounts to 100,643, Sky Deutschland AG

117 Contingent capital In the Annual General Meeting on 23 April 2010, Sky s Management Board, with the consent of the Supervisory Board, has been authorised, in the period until 22 April 2015, once or in partial amounts, to issue registered and/or bearer convertible bonds and/or notes with warrants ( bonds ) in an aggregate nominal amount of up to 500,000,000 of limited or unlimited term and to grant conversion or option rights to subscribe up to 53,916,185 new registered non-par value ordinary shares (non par shares) in Sky Deutschland AG with a pro rata amount of the registered share capital of up to 53,916,185 to the holders and/or creditors of bonds as more closely defined in the terms and conditions for the convertible bonds or notes with warrants (Contingent Capital 2010). The bonds can either be issued by Sky Deutschland AG or by other companies in which Sky Deutschland AG directly or indirectly holds a majority interest. The contingent capital issued in the General Shareholders Meeting on 17 May 2006 was cancelled at the same time. The contingent capital increase is only to be carried out if the holders of the conversion or option rights exercise their conversion or option rights or fulfill conversion obligations on such bonds. The resolution became effective with the entry of the related change in the articles of incorporation in the commercial register of the Company on 7 June For further details regarding the convertible bond issued in January 2011, we refer to the comments on bank debt under Borrowings Accumulated other comprehensive income Available for sale financial securities are measured at fair value. Changes in fair value are recognised directly in other comprehensive income. In the cases in which fair value is significant and other-than-temporarily below cost, the impairment in the amount of the difference is recognised in profit or loss. If fair value adjustments were previously recognised directly in equity and the written-down fair value is lower than the original cost of the asset, the portion of the impairment loss corresponding to the fair value gain previously recognised in equity is reversed through equity. Any further decrease in value is recognised in profi t or loss as an expense for the period. In accordance with IAS 39, the foreign currency forwards are measured at each balance sheet date at their fair value by using the forward rate for the remaining term. The effective portion of the gain or loss resulting from the changes in the fair value of these derivatives is recognised directly in other comprehensive income, net of any tax effect. Annual Report

118 3 Notes on the consolidated statement of comprehensive loss 3.1 Revenues (in K ) Subscriptions 881, ,011 Hardware 25,076 47,397 Wholesale 14,280 39,049 Advertising revenues 21,441 15,704 Other revenues 35,441 56,907 Total 977, ,069 Subscription revenues increased due to the rise in the number of monthly contract customers, as well as from a strong increase in the ARPU. Hardware revenues decreased to K 25,076 (2009: 47,397). In the prior year one-time revenues were included from the sale of receivers to a cable network operator. Wholesale revenues reduced to K 14,280 (2009: K 39,049) following expiry of the legal agreement with arena and the termination of the agreement with Deutsche Telekom. Compared to the prior year, other revenues decreased, to K 35,441 (2009: K 56,907). Starting at the beginning of the 2009/2010 season, Sky no longer produced the Fußball-Bundesliga in IPTV. Furthermore, the sublicensing of the UEFA Champions League ended with the 2008/2009 season. In total, sales revenues from the Austrian business in the amount of K 92,260 (2009: K 81,537) are included. 3.2 Cost of sales (in K ) Program 751, ,402 Technology 149, ,883 Customer service and other cost of sales 64,960 50,857 Hardware 52,887 58,533 Total 1,018, ,675 The programming costs primarily include license and production costs. The technology costs reflect in particular the transponder and play-out costs as well as broadcasting fees. The costs for hardware include primarily depreciation for receivers held in non-current assets and cost of sales for receivers sold. The costs for customer services, such as service hotlines, service support and customer retention, are included in the subscription management and service management costs. 118 Sky Deutschland AG

119 3.3 Selling and general and administrative expenses The selling and general and administrative expenses are made up as follows: (in K ) Marketing 76,119 71,435 Sales 43,675 40,368 Dealer commissions 37,741 31,700 Bad debts 12,068 9,449 Other selling expenses 18,620 18,134 Selling expenses 188, ,085 IT 38,450 32,566 Personnel, incl. termination benefits 27,400 25,213 Legal, consulting and administrative expenses 12,012 10,305 Facilities 9,727 6,390 Other General and administrative expenses 88,151 74, Other operating income (in K ) Income from compensation 7,132 2,395 Income from arbitration 3,514 0 Income from factoring 3,504 0 Gain from sale of investments 0 2,083 Miscellaneous 2,195 6,910 Total 16,346 11,388 In the reporting period Sky sold its 97.5 percent share in Roombase Networks Limited to Techlive Cyprus Limited. The proceeds from this transaction amounted to K 67 and were recognised in other operating income. The increase in income from compensation relates to a customer retention activity, according to which the enforcement of compensation claims had been abandoned for a certain period in On 19 July 2010, the German Institute of Arbitration issued a ruling in favor of Sky, whereby the counterparty was required to pay 4.5 million. The ruling was preceded by disputes between the Company and a cable network operator regarding services rendered in prior years. The effect on earnings resulting from the arbitration agreement amounts to 5.3 million, whereof 3.5 million is shown under other operating income. The remaining effect results from the reversal of an allowance on receivables in selling expenses ( 1.0 million) and the release of provisions in technology costs and interest expenses ( 0.8 million). In 2010, Sky sold certain overaged trade receivables to a debt-collecting agency. The sale resulted in proceeds of 3.5 million. Annual Report

120 3.5 Other operating expenses Other operating expenses are made up as follows: (in K ) Obligations from shareholder claims 14,799 0 Loss from derecognition of purchase receivable Loss from preexisting contractual relations in connection with business combinations 300-1,169 Allocation to allowances for doubtful receivables Loss on sale of property and equipment Costs relating to settlement agreement with shareholders 0 4,321 Allowances of loans 0 28 Impairment of goodwill and trademark 0 3,096 Miscellaneous 1,304 1,585 Total 17,332 11,319 For further information regarding the obligations from shareholder claims refer to 1.4 Signifi cant claims. In 2010, a purchase receivable from the sale of Premus Logistik und Service GmbH, Unterföhring in 2007 was derecognised as it was considered irrecoverable. Following the extraordinary General Shareholders Meeting on 26 February 2009, several shareholders filed an appeal against the resolution of the General Meeting to increase the Company s capital. In order to bring this litigation to a close, Sky entered into settlement agreements with the shareholders according to which Sky agreed to reimburse the shareholders costs resulting from these agreements. These additional costs of K 4,321 were recognised in other operating expenses in the previous financial year. The impairment of goodwill and trademark in 2009 resulted from the decision to discontinue the operations of GIGA. 3.6 Personnel expenses, depreciation and amortisation Personnel expenses and depreciation and amortisation of fixed assets were charged to operating profi t. (in K ) Wages and salaries 77,035 62,434 Social security 13,996 10,957 Other personnel expenses 3,131 2,558 Termination benefits 1,905 2,889 Pension expense and similar expense Personnel expenses 96,076 79,387 Amortisation of subscriber base 49,182 48,993 Depreciation of property, plant and equipment, including impairment 31,104 20,409 Amortisation of other intangible assets 17,748 21,230 Amortisation of program library Impairment of trademark Premiere and GIGA 0 333,429 Depreciation and amortisation 98, , Sky Deutschland AG

121 3.7 Financial result (in K ) Interest income from interest rate swaps 1,803 2 Other interest income 1,503 3,033 Income from entities accounted for at equity 1, Financial income 4,329 3,176 Interest expenses from interest rate swaps 0 3,534 Other interest expense 37,012 31,773 Loss from entities accounted for at equity Financial expenses 37,012 35,813 Other financial expense 721 6,264 Total 33,403 38,900 Interest income and interest expenses from interest derivatives comprise gains and losses on the retirement and measurement of interest swap transactions and current interest on these financial instruments. Other interest income mainly comprises current account interest and interest on the collection of receivables. Other interest expenses comprise primarily interest for the corporate financing. In 2010 interest in the amount of K 27,080 (2009: K 23,326) was incurred in connection with the fi nancing and was recognised in profi t and loss. Of this interest expense, an amount of K 22,074 was paid (2009: K 18,314). As of the balance sheet date K 1,828 (2009: K 2,772) was recognised as accrued interest payable and K 9,713 (2009: K 2,420) was added to the loan volume. The interest expenses for the past financial year include interest expenses of K 11,299 (2009: K 9,038) calculated in accordance with the effective interest method. 3.8 Net gains/losses by measurement categories Net gains/losses (in K ) Loans and receivables 23,615 11,004 Financial assets or liabilities held for trading 2,622 2,992 Available-for-sale financial assets Gains or losses on changes in fair value recognised in equity Gains or losses on disposal and measurement recognised in profit or loss 0 1,912 Financial liabilities measured at amortised cost 1,575 4,910 Total 24,534 5,054 Net gains or losses by measurement categories of financial instruments are influenced by changes in fair value, impairments, fl uctuations in exchange rates and derecognitions. The net gains or losses on financial assets and liabilities held for trading relate to the gains or losses on the disposal and the subsequent measurement of these financial instruments (2010: gain of K 2,622; 2009: loss of K 2,992). Interest effects are reported in the interest result (see also 3.7 Financial result), while the valuation of certain foreign exchange forward contracts that have not been designated for hedge accounting is shown in other financial result (see also Derivative fi nancial instruments). Annual Report

122 3.9 Income taxes Income tax expense comprises the following: (in K ) Current tax expense Deferred tax income/expense 6,677 50,497 Total 6,590 50,361 Deferred taxes for German entities are measured based on a tax rate of percent (previous year percent), taking into account, in addition to corporate income tax of 15 percent, the solidarity surcharge at 5.5 percent on the corporate income tax and trade tax on income of percent (2009: percent). Deferred tax assets on temporary differences and tax losses are recognised up to the amount for which it appears probable that future taxable income will be available. As of the balance sheet date the Company had accumulated corporate tax losses of K 2,064,078 (2009: K 1,850,088), of which K 228,679 (2009: K 216,328) related to Sky Austria. In addition, there is an interest carry forward of K 105,026 (2009: K 73,073) ( 8a Corporate Income Tax Act). No deferred tax assets have been set up for recoverability reasons either on the tax losses or on the interest carry forward (2009: K 0). On the basis of the existing law in 2008 the Company lost corporate tax loss carry forwards in the amount of K 225,917 due to the acquisition of percent of the share capital of the Sky Deutschland AG by the News Corporation. In 2009 the Citizens Relief Act had been passed by the German Parliament by which inter alia Sec. 8c of the Corporate Income Tax Act ( 8c KStG ) was amended by introducing a turnaround clause (Sanierungsklausel) regarding tax loss and interest carry forwards with retrospective effect for the tax assessment period The Citizens Relief Act stipulated that tax losses and tax loss carry forwards could be preserved under certain conditions. Based on the Company s financial restructuring report which had been drafted for the purpose of securing the Group s long-term financing, the tax authorities issued an advance ruling in November 2009 by which the authorities confi rmed that the conditions of the turnaround clause in Sec. 8c para. 1a had been met. This referred to both the Financial Restructuring Exception (Sec. 8c para. 1a line 1 and line 2 of the Corporate Income Tax Act) and the Company s works council agreement on the preservation of jobs which complies with Sec. 8c para. 1a line 3 of the Corporate Income Tax Act. Based on an examination, the EU Commission decided on 26 January 2011 that the turnaround clause is considered to entail state aid. Any aid granted by a Member State or through state resources in any form whatsoever, which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods and affects trade among Member States is incompatible with the Internal Market. As Germany is not allowed to grant such state aid, the Sanierungsklausel is not applicable at all and with effect from 1 January 2008 onwards. Taking this into account, the company assumes the losses as of 31 December 2010 to be decreased by the proportionate lapse of tax loss carry forwards of Sky Deutschland AG in 2008 in connection with News Corporation s acquisition of a shareholding in Sky Deutschland AG of up to percent. Deferred tax assets recognised directly in other comprehensive income amount to K 597 (2009: K 234). This effect results from the valuation of foreign exchange forward contracts designated for hedge accounting. 122 Sky Deutschland AG

123 Differences in recognition and measurement and tax losses result in the following recognised deferred tax assets and liabilities: 31/12/10 31/12/09 (in K ) Deferred tax Deferred tax Deferred tax Deferred tax assets liabilities assets liabilities Trade receivables Finance lease receivables Investments and long-term financial assets Finance leases Property, plant and equipment Intangible assets ,566 2,072 41,677 Other assets and other financial assets ,292 Borrowings Trade payables ,120 Provisions for pensions Other provisions ,426 0 Other liabilities and other financial liabilities 1, ,163 0 Total 3,911 48,134 8,755 46,655 of which current 1, ,557 2,396 of which non-current 2,577 47,162 5,199 44,259 Offset 3,870 3,870 7,310 7,310 Per balance sheet 40 44,264 1,446 39,345 Deferred tax assets and liabilities are offset provided they are with the same tax authority and current taxes are offset. The reported tax expense differs from the expected tax expense that would have arisen if the nominal tax rate of percent (2009: percent) had been applied to the IFRS pre-tax earnings. The reconciliation showing the differences is shown below. (in K ) Loss before taxes 400, ,889 Expected tax benefit 109, ,986 Reconciliation: Change in non-recognition of deferred taxes 112, ,448 Non-deductible expenses 3,223 6,641 Tax-free gains Change in German tax rate 0 2,313 Other 511 2,391 Tax income (+)/expense ( ) 6,590 50,361 Annual Report

124 3.10 Earnings per share Basic earnings per share are calculated as the ratio of the Group earnings and the weighted average number of ordinary shares outstanding during the year. 01/01 12/31 Fourth Quarter Earnings attributable to stockholders of Sky Deutschland AG (K ) 407, , , ,008 Weighted average number of outstanding shares (thousand) 579, , , ,147 Basic earnings per share total (in ) No circumstances existed either at the current balance sheet date or in the previous year that would have resulted in the dilution of earnings per share. In connection with a private placement a convertible bond was issued to News Adelaide Holdings B.V. on 25 January The bond can be converted into 53,914,182 ordinary registered shares stemming from contingent capital. 124 Sky Deutschland AG

125 4 Other explanatory comments 4.1 Financial risk management Financial risk factors The Group is exposed in particular to interest and foreign currency risks in connection with its operating activities. It is the Group s policy to avert or restrict these risks through hedging transactions. All hedging measures are coordinated or carried out on a centralised basis by the Group s Treasury & Corporate Finance department Foreign currency risk Fluctuations in exchange rates could result in unforeseeable volatility in earnings and cash fl ows. Sky uses foreign exchange forward contracts to hedge the foreign currency risk. These transactions are related to the hedging of cash fl ows in foreign currencies in connection with the purchase of fi lm and other licenses. Fair value gains or losses from re-measurement of foreign exchange forward contracts as of the balance sheet date were recognised in profi t or loss only in the case that they had not been designated for hedge accounting pursuant to IAS 39. Of the total payments in US dollars and British pound, K 84,722 were hedged during the past fi nancial year (2009: K 58,500). The total trade payables of K 183,729 (2009: K 215,084) include K 36,623 (2009: K 17,040) in foreign currency. Foreign currency sensitivity is determined fi rstly by aggregating the net positions of the operating business denominated in foreign currency (mainly liabilities from the purchase of fi lm licenses in US dollars). The foreign currency risk is arrived at by multiplying the nonhedged foreign currency position by a 10 percent mark-up or devaluation of the US dollar compared with the euro. In addition, all foreign exchange forward contracts which are not designated for hedge accounting are subjected to a currency sensitivity analysis as changes in the exchange rate of the US dollar on which the transactions are based would affect profi t and loss (gain or loss on the adjustment of the fair value). For the purpose of the sensitivity analysis, Sky only looks at the negative scenario. A 10 percent devaluation of the US dollar compared with the euro would result in a negative effect from the foreign exchange forward contracts at the same time as a positive effect from the US dollar denominated programming liabilities, so that a net negative effect of altogether K 1,213 on the earnings for the past financial year would result from this (2009: K 928) Interest rate risk The Company is exposed to interest rate risks as a result of its variable interest rate liabilities. Sky reduces this risk by using interest swaps, through which the variable interest payments are hedged by exchanging them for fixed interest payments. The total borrowings of K 324,313 (2009: K 170,534) include K 312,685 (2009: K 155,419) with variable interest rates. Interest swap transactions have been entered into at a total nominal value of K 100,000 (2009: K 100,056), to hedge the interest rate risk. The fixed interest rates during the financial year were between 3.91 percent and 4.08 percent p.a. (2009: between 3.22 percent and 4.08 percent). In accordance with IFRS 7, interest rate risks are presented by means of sensitivity analyses. These present the effects of changes in market rates of interest on profi t or loss or on equity. Sky only looks at the negative scenario of interest rate risk for the purpose of the sensitivity analysis. Interest swaps have an effect on the fi nancial result (gains and losses on re-measuring fi nancial instruments at fair value), because they are not integrated in a hedge relationship in accordance with IAS 39 and are therefore taken into account in the interest sensitivity analysis. Changes in market rates of interest have an effect in the case of non-derivative variable interest rate fi nancial instruments on the future interest payments, but not on the earnings for the fi nancial year and do not therefore have to be included in the interest sensitivity analysis in accordance with IFRS 7. Annual Report

126 On an assumed reduction of 100 basis points in the market interest rate as of the balance sheet date, the fi nancial result for the period would have been reduced by K 772 (2009: K 3,009) Price risk Some of the long-term contracts concluded with major American fi lm studios include price-change clauses. These price-change clauses cover the average price increases relating to the general cost of living. Significant portions of Sky s film licensing and encryption fees are linked to the actual number of subscribers. Some of the contracts with owners of program rights also include guaranteed minimum subscriber numbers. If the minimum subscriber numbers are not achieved, a higher portion of Sky revenues is necessary to cover this cost basis Liquidity risk The liquidity risk is the risk that the Company could encounter diffi culties in meeting its financial obligations, such as interest payments and the redemption of borrowings, the payment of trade payables or fi nance lease obligations. Financial planning instruments are utilised in order to identify liquidity shortages on a timely basis. In this connection, the liquidity requirement is updated on a regular basis. The Company s planning horizon for the operational cash planning is one year. The Company hedges future cash fl ows by means of derivatives based on a planning horizon of 12 to 18 months for foreign exchange forward contracts and up to fi ve years for interest swap transactions. The following tables show all contractually defined interest and principal payments as of 31 December 2010 and 31 December 2009 on recognised financial liabilities, including derivatives with a negative market value. The market values are disclosed for the foreign exchange forward contracts and the net interest payments for the interest swap transactions, while the undiscounted cash fl ows for the following financial years are shown for the remaining liabilities. All financial instruments held as of the balance sheet date and for which payments have already been contractually agreed have been included. Plan fi gures for future new liabilities are not incorporated. Variable interest payments are calculated on the basis of the interest rates fixed in each case as of the balance sheet date. Financial liabilities that are repayable at any time on the request of the lender are always allocated to the earliest period. as of 31 December 2010 (in K ) to and later Non-derivative financial liabilities Bank debt 40,202 3, ,713 0 Finance lease liabilities 4,539 2,951 2,042 0 Other borrowings Trade payables 167,818 6,711 4,995 4,808 Other financial liabilities 46,020 28,186 30,264 1,353 Derivative financial liabilities Currency derivatives in connection with cash flow hedges 2, Currency derivatives without a hedging relationship Sky Deutschland AG

127 Following is the corresponding presentation for 2009: as of 31 December 2009 (in K ) to and later Non-derivative financial liabilities Bank debt 19,626 3, ,420 0 Finance lease liabilities 6,663 4,539 4,993 0 Other borrowings 1, Trade payables 200,962 5,225 8,256 5,444 Liabilities to entities accounted for at equity 2, Other financial liabilities 35,127 12,043 56, Derivative financial liabilities Currency derivatives in connection with cash flow hedges 1, Currency derivatives without a hedging relationship Credit risk The default risk on the financial assets represents the danger of the default of a contractual partner and is therefore limited to the carrying amounts of the respective assets. In order to avoid payment defaults, credit reports are obtained on the contractual partners or historical data is used from earlier business relationships, particularly on payment behavior. Adequate allowances are set up against the receivables for identifi ed risks. In addition, the Company utilises the direct debit procedure to ensure the receipt of payments from the subscribers. Financial transactions are only entered into with contracting parties with solid credit standing, so that the actual default risks are low. There is currently no indication that the Sky Group is threatened by such a risk Disclosures on derivatives Other financial assets and other fi nancial liabilities include the following derivatives: (in K ) Positive fair values Interest swaps 0 0 Foreign exchange forward contracts Total Negative fair values Interest swaps 2,920 4,723 Foreign exchange forward contracts 2,664 1,428 Total 5,584 6,152 The notional amounts of the derivatives outstanding as of the balance sheet date are as follows: Maturities Total Maturities Total (in K ) < 1 year 1 5 years 31/12/10 < 1 year 1 5 years 31/12/09 Foreign exchange forward contracts 71, ,804 84,716 2,305 87,021 - Currency derivatives in connection with cash flow hedges 49, ,376 77,789 2,305 80,094 - Currency derivatives without hedging relationship 22, ,428 6, ,927 Interest swaps 0 100, , , ,056 Total 71, , ,804 84, , ,077 Annual Report

128 In the financial year, gains in the amount of K 5,815 (2009: losses in the amount of K 685) were reclassifi ed from other comprehensive income to advance payments for sport and film rights as additional acquisition costs, of which a positive K 3,947 (2009: a negative K 118) is shown as utilisation in cost of sales and another positive K 55 in other expenses. In 2011 gains in the amount of K 1,247 will be recognised in cost of sales. 4.2 Capital management The following table shows equity, total assets, the equity ratio and net borrowings. (in K ) 31/12/10 31/12/09 Total assets 1,035,766 1,046,411 Shareholders equity 333, ,041 Equity ratio (in %) Net debt 319, ,410 In order to increase the financial flexibility and to be in a position to invest in the areas of marketing, sales, programming and technology, Sky carried out respective capital increases on 21 January 2010 and 30 September These resulted in gross placement proceeds in the amount of million. Sky is required to adhere to a number of operating financial covenants contained in its credit facilities. Sky requested the banking syndicate to forego a mandatory unscheduled payment from the proceeds of the share capital. The formal approval of all lenders took place on 14 January 2010 and on 2 August 2010 respectively. For further details regarding the two capital increases we refer to item General comments. Consequently, on a quarterly basis, starting on 31 March 2010 and ending on 30 June 2012, Sky had to ensure that its EBITDA for the immediately preceding twelve month period reach specified thresholds. As stipulated by the Amendment and Waiver Agreement concluded with the banks on 2 August 2010, this requirement is replaced by a requirement to ensure that Sky s free cash fl ow during the immediately preceding twelve month period meets certain thresholds. This requirement will become effective starting in Q In addition, from 30 June 2012 until the maturity date of the credit facilities, Sky must, on a quarterly basis, maintain specified relationships between its EBITDA and its net finance result and between its net debt and EBITDA. Finally, starting on 31 December 2012 Sky must, on a quarterly basis, maintain a specifi ed relationship between its cash fl ow and its debt service. If Sky were to default under any of the operational or fi nancial covenants and such default was not cured or waived, the fi nancing banks would be entitled to declare all amounts outstanding under the facilities to become immediately due and payable. In any such case, Sky would have to fi le for insolvency. Sky s statutes do not subject it to any capital requirements. In particular, the Company has no obligations to sell or otherwise issue shares in connection with existing share-based compensation plans or convertible bonds. With regard to the authorised capital and the contingent capital we refer to item 2.11 Equity. 4.3 Cash flow statement Cash flow from operating activities also includes the cash fl ows in connection with the film assets and the advance payments for sport and film rights. The following non-cash transactions were carried out during the past fi nancial year: (in K ) Conclusion of finance lease contracts 6,904 11,092 Acquisition of entities and interests in entities with deferred considerations 3,934 77,480 Total 10,838 88,572 There were no infl ows and outfl ows of income taxes either in the past fi nancial year or in the previous year. 128 Sky Deutschland AG

129 4.4 Related party transactions Related parties are persons or companies on which the Group can exercise signifi cant influence or which can exercise signifi cant influence on the Group. In addition to the members of the Company s Management Board and Supervisory Board, these also include family members and the domestic partners of the persons affected. In the course of the normal business activities, all delivery and service transactions with non-consolidated entities are carried out under terms and conditions which are also customary with non-related third parties. The Company generated revenues with the following groups of related parties during the past fi nancial year: (in K ) Revenues from sales and services Income from recharging personnel expenses Personnel expenses Other income Expenses from services received Net Payables Receivables Total of affiliates ,765 2, Total of companies with significant influence above the company 2, ,159 55,385 26,906 3,837 Total of other related parties Total 3, ,923 58,092 26,906 3,837 The services received from associated companies relate to logistic services provided to Sky. The expenses incurred for services received from companies with significant influence over Sky relate in particular to license payments for film rights and encryption services. In this connection, companies with signifi cant influence are those that are controlled by News Corporation, those that are under joint management of News Corporation and its partner companies and those over which News Corporation can exercise significant influence. In connection with the corporate fi nancing amended in 2010, transaction costs in the amount of K 2,619 were incurred with News Adelaide Holdings B.V. in the financial year. In 2011, additional transaction costs for both the convertible bond and the shareholder loan will incur with News Adelaide B.V.. BSkyB and Sky Deutschland KG entered into a trademark license agreement in 2009, which allows Sky to use the Sky brand name. The contract has a license period from 1 July 2009 to 30 June 2016 (initial term) and is automatically extended for a further period of 7 years (extended term). Thereafter Sky has the option of a single subsequent extension of 3 years. The agreement comprises license fees at arm slength, which are based on the stipulated revenues and are capped in the fi rst 7 years. In the fiscal year 2010 a total of K 2,023 (2009: K 869) were recognised in selling expenses. Besides, production costs in the amount of K 117 were incurred in connection with the Ryder Cup in Sky Italia S.r.l. and Sky Deutschland KG entered into a service agreement. Sky Italia is committed to supply certain IT facilities, including management, maintenance and consultancy services with regard to the start-up of the IT infrastructure operations of the new subscriber management system. The contract will run until June 2012 with total payments of K 17,129. Regarding the compensation of the Management Board and the Supervisory Board, please refer to 4.8 Compensation of the Management Board and the Supervisory Board. 4.5 Contingent liabilities and assets pledged as security The debt financing is secured by all signifi cant assets of Sky Deutschland AG and Sky Deutschland KG, especially by all the limited partners interests in Sky Deutschland KG, the interests in Sky Austria, bank accounts of Sky Deutschland AG and Sky Deutschland KG, the entire trade receivables, especially the subscriber receivables and the sales proceeds for the subscriber base and the marketing rights for the entire current and future film assets. In order to secure open receivables under fi nance leases for receivers, the claims against the subscribers relating to the receivers, especially the rights of recovery of the receivers from the subscribers and the rentals for provision of the receivers have been assigned to the lessors. Annual Report

130 In order to secure open receivables under finance leases for pay-tv equipment, the future revenues from the provision of the pay-tv equipment have generally been assigned to the lessors. 4.6 Litigation Please refer to 1.4 Significant claims of these notes for further information. 4.7 Other financial commitments The Group s other financial commitments to purchase goods or services in the future as of 31 December 2010 were as follows: (in K ) due in 2011 due in due from 2016 Total 31/12/10 Film licenses 97,282 62, ,857 Sport licenses 335, , ,236 Partner channels 114, , ,806 Purchase commitments for receivers 60, ,935 Miscellaneous 121, ,697 5, ,870 Total 729, ,361 5,245 1,565,704 The Group s other financial commitments to purchase goods or services in the future as of 31 December 2009 were as follows: (in K ) due in 2010 due in due from 2015 Total 31/12/09 Film licenses 99, , ,650 Sport licenses 361, , ,143,523 Partner channels 122, , ,593 Purchase commitments for receivers 5,460 6, ,681 Miscellaneous 142, ,331 15, ,288 Total 732,398 1,447,597 15,741 2,195,736 The financial commitments for the purchases of sport and fi lm licenses and for the partner channels result from medium and long-term contracts. The miscellaneous other financial commitments comprise agreed future selling and administration costs and obligations for sport fees and sport productions. Future commitments under non-cancellable operating leases are as follows: (in K ) due in 2011 due in due from 2016 Total 31/12/10 Network operators and transponder rents 165, , , ,194 Office buildings 6,392 21,978 65,568 93,938 Motor vehicles 1,197 1, ,274 Technical office equipment Total 172, , , ,456 Future commitments under non-cancellable operating leases as of 31 December 2009 were as follows: (in K ) due in 2010 due in due from 2015 Total 31/12/09 Network operators and transponder rents 137, , , ,058 Office buildings 7,240 21,942 71, ,458 Motor vehicles 1,808 2, ,944 Technical office equipment Total 147, , , , Sky Deutschland AG

131 The commitments for network operators and transponder rentals refl ect the future payments for transmission costs. Transmission costs comprise fees paid to cable operators for broadcasting Sky s programming, transponder costs, encrypted access and satellite uplink costs, as well as all other transmission costs. Satellite transponder costs are generally fixed, and payable in monthly installments. Transmission fees paid to cable operators are generally fixed and in some cases also have variable elements that vary with the revenues generated from subscribers. Encrypted access costs are based on the number of subscribers. The expenses recognised in the consolidated statement of comprehensive loss for operating leases amount to K 144,989 (2009: K 121,954). 4.8 Compensation of the Management Board and the Supervisory Board For the members of the Management Board and the Supervisory Board, the following compensation was incurred for the past fi nancial year: (in K ) Fixed compensation Performance-related compensation Other compensation Long-term incentives Management Board Brian Sullivan ,164 3,043 Dr. Holger Enßlin Pietro Maranzana Carsten Schmidt Steven Tomsic Mark Williams ,346 Total Management Board 2,579 1,250 1,446 1,287 6,562 Total 2010 Supervisory Board Chase Carey Guillaume de Posch Markus Tellenbach Thomas Mockridge Dr. Stefan Jentzsch Mark Kaner Steven Tomsic Katrin Wehr-Seiter Miriam Kraus Total Supervisory Board Total 3,091 1,250 1,583 1,287 7,211 Annual Report

132 The compensation in the previous year was as follows: (in K ) Fixed compensation Performance-related compensation Other compensation Long-term incentives Management Board Mark Williams 1,310 1, ,425 Dr. Holger Enßlin Carsten Schmidt Hans Seger Pietro Maranzana Total Management Board 2,400 1, ,972 Total 2009 Supervisory Board Rainer Großkopf Richard Roy Dr. Stefan Jentzsch Thomas Mockridge Hans Seiler Guillaume de Posch Mark Kaner Steven Tomsic Markus Tellenbach Total Supervisory Board Total 2,611 1, ,269 The fixed compensation of the Supervisory Board comprises fixed elements and a compensation component for the work in the executive and audit committees. The other Supervisory Board compensation comprises attendance fees for the meetings of the Supervisory Board. Mark Williams stepped down as Chief Executive Offi cer on 31 March On 2 December 2009 the Supervisory Board has appointed Brian Sullivan, as Deputy Chief Executive Offi cer with effect from 1 January Mr. Sullivan served initially in this function for three months before he became Chief Executive Offi cer with effect from 1 April Due to an agreed-upon share-based compensation program with Brian Sullivan, an expense was recognised in the reporting period in the amount of K 1,090. The stock option program comprises the issuance of virtual shares, which entitle Brian Sullivan to obtain payments in 2012 and/or 2013, if certain performance goals are reached, especially with respect to the growth of subscribers. The fair value of these shares was determined by means of an option pricing model. The following table shows the compensation of the management board in accordance with German Accounting Standard 17 (GAS 17) for the remuneration report. Under GAS 17, share-based payments are included in the remuneration report with the fair value at the grant date. Therefore, it includes 1,712,389 virtual shares with a grant date fair value of K 3,870 granted to Brian Sullivan in long-term incentives instead of the expense recognised in 2010 in the amount of K 1,090. Taken this into consideration, the total remuneration of the management board in the accordance with GAS 17 amounts to K 9,342. (in K ) Fixed compensation Performance-related compensation Other compensation Long-term incentives Management Board Brian Sullivan ,944 5,822 Dr. Holger Enßlin Pietro Maranzana Carsten Schmidt Steven Tomsic Mark Williams ,346 Total Management Board 2,579 1,250 1,446 4,067 9,342 Total Sky Deutschland AG

133 The remuneration for the supervisory board in 2009 and 2010 and the remuneration for the management board in 2009 in accordance with GAS17 corresponds to the compensation expense recognised, which is provided in the table at the beginning of this section. On 25 November 2010, effective 6 December 2010, the Supervisory Board of Sky Deutschland AG appointed Steven Tomsic, formerly a member of the Supervisory Board, to Debuty Chief Financial Offi cer and, from 1 February 2011 as the new Chief Financial Offi cer. He follows Pietro Maranzana, who previously held this position and, as of the same date, will leave the Company. In connection with the General Shareholders Meeting on 23 April 2010, the number of Supervisory Board members was increased from six to nine in order to profi t from the expertise of the additional board members. Chase Carey, Miriam Kraus and Katrin Wehr-Seiter were elected to the Supervisory Board. Each of these members will have a term which expires at the General Shareholder s Meeting of The resolutions for the increase in number of Supervisory Board members became effective with the entry of the related changes to the statutes in the commercial register on 7 June On 16 July 2010 Chase Carey was elected by the Supervisory Board to Chairman of Supervisory Board of Sky Deutschland AG. He replaced Markus Tellenbach, who is taking over the position of Vice Chairman of the Supervisory Board. As a result of his appointment as Deputy Chief Financial Offi cer, Steven Tomsic resigned from his position as member of the Supervisory Board on 5 December On 24 January 2011, Jan Koeppen was appointed to the Supervisory Board of Sky Deutschland AG by way of judicial decree. Jan Koeppen will be proposed for election at the Annual General Meeting on 15 April 2011 by the Supervisory Board. Supervisory board Chase Carey Guillaume de Posch Markus Tellenbach Function Chairman of the Supervisory Board Chairman of the Presidential Committee Member of the Presidential Committee Debuty Chairman of the Supervisory Board Member of the Presidential Committee Thomas Mockridge Dr. Stefan Jentzsch Mark Kaner Chairman of the Audit Committee Member of the Audit Committee Katrin Wehr-Seiter Miriam Kraus Jan Koeppen Member of the Audit Committee Member of the Audit Committee Annual Report

134 4.9 Number of employees The average number of employees broken down by functional areas is as follows: Sales/Marketing/Communications Service Center Management/Administration Program/Sport production IT Technology Other 2 2 Total 1,361 1,160 In March 2010, Sky Deutschland KG obtained control over Loxxess Medienlogistik GmbH with a total of 137 employees. The number of employees has been converted to full-time equivalents. With the takeover of Premium Media Solutions GmbH, the number of employees increased by another 22 employees Fees of the external auditors Fees of K 715, which were made up as follows, were incurred and recorded as expense in the fi nancial year: (in K ) Audit of financial statements Other assurance or valuation services Tax consultancy services Other services Total Declaration of compliance with the German Corporate Governance Code in accordance with 161 AktG (German Stock Corporation Act) The declaration of compliance dated 11 January 2011 was made available permanently to all stockholders on Sky Deutschland AG s website ( Events after the balance sheet date Apart from the transactions disclosed under the individual captions of these notes, other significant transactions have not occurred since the balance sheet date. The Management Board Unterföhring, 1 February 2011 Brian Sullivan Carsten Schmidt Steven Tomsic Dr. Holger Enßlin 134 Sky Deutschland AG

135 Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated fi nancial statements give a true and fair view of the assets, liabilities, fi nancial position and profi t or loss of the group, and the group management report includes a fair review of the development and performance of the business and the position of the group, together with a description of the principal opportunities and risks associated with the expected development of the group. Unterföhring, 1 February 2011 The Management Board Annual Report

136 Auditor s report We have audited the consolidated fi nancial statements prepared by Sky Deutschland AG, Unterföhring, --comprising the consolidated statement of comprehensive loss, consolidated balance sheet, consolidated statement of changes in equity, consolidated statement of cash flows and the notes to the consolidated financial statements-- together with the report on the position of the Company and the Group for the business year from January 1 to December 31, The preparation of the consolidated fi nancial statements and the group management report in accordance with IFRSs, as adopted by the EU, and the additional requirements of German commercial law pursuant to Article 315a (1) HGB [Handelsgesetzbuch German Commercial Code ] are the responsibility of the Management Board of the Company. Our responsibility is to express an opinion on the consolidated financial statements and on the group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, fi nancial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated fi nancial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual fi nancial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by the Management Board, as well as evaluating the overall presentation of the consolidated fi nancial statements and the group management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to 315a (1) HGB and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group s position and suitably presents the opportunities and risks of future development. Munich, February 2, 2011 KPMG AG Wirtschaftsprüfungsgesellschaft Schmidt Wirtschaftsprüfer [Chartered Accountant] Kremer Wirtschaftsprüfer [Chartered Accountant] 136 Sky Deutschland AG

137 Annual Report

138

139 Christian S. loves to experience football live with the Sky Sport Mobile App while he is on the road.

140 More in Touch

141 Christian S. is a freelance TV journalist working for several large German TV stations. A nine-to-five working day is like a foreign world for him. At home, someone else is controlling his time distribution as well: The die-hard football fan and long-time Sky subscriber has become the father of a little son just a few weeks ago. In my job I am on tour all over the world. I love my job but I have to admit I sometimes find it hard to reconcile my job, my family and my hobby. That s why I use every opportunity to get things done with my iphone: I call friends, maintain my calendar, plan my next business trip and the best thing is that I don t have to be at home at the kick off of the UEFA Champions League matches. For this I have installed the Sky Sport Mobile App on my iphone and I am excited! I don t miss a single match of the European top clubs and can also watch other sports broadcasts live. If there is not enough time for an entire match I get the info about highlights and scores via the Matchtracker. And when I come home after a stressful business trip my family has top priority. My wife would not be amused if the first thing I did after coming home would be to sit on the couch and watch football. If we watch TV at all we rather enjoy a Sky Select Film on the sofa if our little sunshine let s us.

142 Review and monitoring report by the Supervisory Board of Sky Deutschland AG for financial year 2010 Dear shareholders, Below we will briefl y describe the composition of the Supervisory Board of Sky Deutschland AG (subsequently also called the Company ) (point I). We will then report on the Supervisory Board s committees (point II), the review of the management (point III) and, following a note on the subject of Corporate Governance (point IV), on the review of the Company s annual accounts and the 2010 annual report (point V). Finally, the Supervisory Board will provide its views on Sky Deutschland AG in regards to fi nancial year 2010 and the prospects for financial year 2011 (point VI). I. Supervisory Board 1. Composition Until the annual general meeting on 23 April 2010 the Supervisory Board consisted of the following members: Mr. Markus Tellenbach (Chairman); Mr. Thomas Mockridge (Deputy Chairman); Mr. Dr. Stefan Jentzsch; Mr. Guillaume de Posch; Mr. Mark Kaner; Mr. Steven Tomsic. At the annual general meeting on 23 April 2010, the number of members of the Supervisory Board was increased from six to nine and the articles of association of the Company were amended correspondingly. Following the increase and the election of the three new members, the Supervisory Board from 7 june (date of registration of amendment of articles of association at commercial register) consisted of the following members: Mr. Chase Carey (Chairman since 16/07/ 2010); Mr. Markus Tellenbach (Deputy Chairman since 16/07/ 2010); Mr. Thomas Mockridge; Mr. Dr. Stefan Jentzsch; Mr. Guillaume de Posch; Mr. Mark Kaner; Mr. Steven Tomsic (member until 05/12/2010); Ms. Miriam Kraus; Ms. Katrin Wehr-Seiter. The term of office for the newly elected members concludes at the end of the annual general meeting for the year 2014 while the term of office for the remaining elected members concludes at the end of the annual general meeting for the year At the Supervisory Board meeting on 16 July 2010, Mr. Carey was elected as Chairman of the Supervisory Board and Mr. Tellenbach was elected as Deputy Chairman. With effect as of 5 December 2010 Mr. Tomsic stepped down from his position as member of the Supervisory Board. He was appointed member of the Management Board of the Company with effect as of 6 December 2010 (see III.4 below for details). On 14 December 2010 the Management Board of the Company filed with approval of the Supervisory Board an application for the judicial appointment of Mr. Jan Koeppen, Chief Operating Officer Europe Asia News Corporation, as Supervisory Board member with the competent local court of Munich. On 24 January 2011 the local court approved the application. Drawing upon their unique experience, the individual members of the Supervisory Board support the Supervisory Board as a whole in its activities for the Company. Mr. Carey has held leading positions at News Corporation for many years. He is currently President and Chief Operating Offi cer, responsible for all operative matters within the News Corporation group. He has an international background and great expertise within the areas of general entertainment and PayTV, which he had gained also in his position as CEO of the American direct broadcast satellite operator Direct TV. Mr. Tellenbach, currently Chief Executive Officer of TVN Group, the leading media company in Poland, made a name in the national and international PayTV market, and is therefore qualifi ed to assist the Supervisory Board in its activities. As the former director of several banks and currently as partner at Perella Weinberg Partners LP, Dr. Jentzsch is distinguished by his particular experience in the financial field and has special expertise in the fields of accounting and auditing, and thus meets all the requirements that 100 para. 5 AktG places on the fi nancial expert. He can be considered independent as he has no business or private relationship to the company or the Management Board that could cause a conflict of interest. As Chief Officer of Sky Italia S.r.l., which is part of the group of companies that belong to News Corporation, Mr. Mockridge has deep experience in the pay-tv market. As the former CEO and COO of various European media companies and most recently as the former CEO of ProSiebenSat.1 Media AG, 142 Sky Deutschland AG

143 Mr. de Posch has extensive experience of the TV business and therefore supports the Supervisory Board with his expertise and market knowledge. Mr. Kaner as President of 20th Century Fox Television Distribution, Los Angeles, has a long experience in the international (pay-) TV markets. As Head of Corporate Finance and Planning for Europe and Asia at News Corporation in London, Mr. Steven Tomsic had in his role as a member of the Supervisory Board the necessary experience to support the board on all matters involving fi nance and business development. Ms. Kraus is Senior Vice President for Global Governance, Risk and Compliance at SAP AG. Taking into account the recent legal developments and the rising relevance of Compliance, Internal Control and Riskmanagement, she brings a crucial expertise to the Supervisory Board. Ms. Wehr-Seiter is a self-employed business and investment consultant following many years as a Principal at an investment advisory company. She served on boards within - inter alia - the media industry and will support the Supervisory Board with her in-depth knowledge of the industry and in the area of financing. 2. Number of meetings During financial year 2010, the Supervisory Board came together for fi ve meetings, namely on 22 February 2010, 22 April 2010, 16 July 2010, 10 November 2010, and on 9 December Beside the meetings during financial year 2010, the Supervisory Board held seven conference calls on occasions in which this was necessary because of Company matters, namely on 18 January 2010, 24 February 2010, 16 June 2010, 27 July 2010, 12 September 2010, 28 September 2010, and on 25 November a) Meeting on 22 February 2010 During its meeting on 22 February 2010, the Supervisory Board dealt with the annual accounts for financial year 2009 and reviewed its effectiveness (for more details, see the Corporate Governance Report). b) Meeting on 22 April 2010 At the Supervisory Board meeting on 22 April 2010, the Supervisory Board reviewed trading in Q Considering the legal framework regarding the deductible, the Supervisory Board further approved the renewal of the D&O insurance. c) Meeting on 16 July 2010 On 16 July 2010 Mr. Carey was elected Chairman of the Supervisory Board after Mr. Tellenbach resigned from his offi ce as Chairman following his appointment as CEO of TVN Group in Poland. This new position is time consuming and it is his assessment therefore that he will no longer have the time to conduct the offi ce with the necessary diligence. He was elected Deputy Chairman when Mr. Mockridge resigned from this position due to time constraints. The Supervisory Board was further briefed on trading in Q d) Meeting on 10 November 2010 At the Supervisory Board meeting on 10 November 2010, the Supervisory Board reviewed the report of the Management Board regarding the damage claims raised in connection with former public announcements of the Company s subscriber fi gures. The claims are mainly based on the allegation that the subscriber numbers published in the prospectus dated 21 February 2005 on the occasion of the initial public offering, in the prospectus dated 7 September 2007 on the occasion of an increase in share capital and in other publications in the years 2005 to 2008 such as press releases were too high. The basis of such allegation is an ad-hoc announcement of 2 October 2008, in which the Company, in addition to a predicted EBITDA loss for the fi nancial year 2008 and the initialisation of discussions with the banks with regard to a restructuring of its credit lines, also announced a new method to classify its subscribers in the future, whereby certain subscribers which previously had been accounted for pursuant to the old classifi cation were no longer counted. After this ad-hoc announcement the price of the shares in the Company decreased. The claimants attribute this price decrease to the communication of the new subscriber classifi cation and claim damages based on their alleged fi nancial detriment. Beside the actions for damages of a current claimed volume of around 735, further claims for damages have been asserted out of court, mostly by institutional investors which have initiated mediation proceedings (Güteverfahren). The also extrajudicial asserted damages add up to approximately million. The Management Board reported to the Supervisory Board that after long negotiations on 28 October 2010 an out-of-court settlement with the institutional investors was achieved. Upon payment of 14.5 million which are due in instalments and which are collateralised by a bank guarantee in an amount of 8.5 million until March 2012, the Funds claims, especially in respect of the aforementioned million, will be finally and absolutely settled. This holds for all claims regardless of whether known or yet unknown, current or prospective, and irrespective of their legal basis. The main reason for the settlement was the defence against risks that could potentially threaten the existence of the Company. The settlement was entered into subject to Supervisory Board approval. After discussions and following explicit external legal advice, in its meeting on 10 November 2010, the Supervisory Board approved the Annual Report

144 settlement. The Supervisory Board acts on the assumption that due to insurance coverage obtained and/or, where applicable, existing claims for compensation against (former) members of executive bodies, the settlement amount can be reclaimed entirely from third parties. This assumption is backed by a legal memo available. e) Meeting on 9 December 2010 At the 9 December 2010 meeting, the Management Board informed the Supervisory Board about the latest development of the Company. Furthermore, the budget for 2011 was approved following a thorough review. Furthermore, the Supervisory Board discussed and approved a so called Long Term Incentive Plan, establishing a stock option program for the Management Board, the Senior Vice Presidents and Vice Presidents of the Company based on phantom stocks. Therewith, the Supervisory Board intends to especially meet the requirements of the German Corporate Governance Codex stipulating that the compensation structure of the Management Board shall comprise variable components based on a multi-year assessment. f) Personal participation at the meetings The Supervisory Board members personally took part at the meetings; it was only at the meeting on 10 November 2010 that Mr. Carey and Mr. de Posch participated via telephone. At the meeting on 9 December 2010 Mr. Dr. Jentzsch participated via telephone. II. Committees In accordance with the regulations contained in the internal rules of procedure, the Supervisory Board of Sky Deutschland AG established two committees. 1. Audit Committee The Audit Committee addresses the steadily rising standards for auditing and accounting, the controlling of risk management by the Management Board and the relationship with the auditor and complies with the regulations of the German Accounting Law Modernisation Act (BilMoG). In this respect, the Audit Committee has the following tasks: Preparatory review of the Company s annual financial statements and management report, the consolidated annual financial statements and group management report in cooperation with the auditor; Supervision of the audit and the accounting process as well as the handling of all basic issues with respect to accounting including the application of new accounting standards; Supervision and review of the effectiveness of the internal risk management systems, the internal control systems and of the internal revision systems; Supervision of the audit, in particular the required independence of the auditor and additional services rendered by the auditors; The passing of resolutions on the audit mandate given to the auditor, the determination of the audit focal points and of the auditor s compensation; Supervision of implementation and compliance with an effi cient compliance-system. The Audit Committee is composed of at least three members. During financial year 2010 these members were Mr. Dr. Jentzsch (Chairman), Mr. Kaner and Mr. Tomsic. Due to the resignation of Mr. Tomsic as a member of the Supervisory Board, Mr. Koeppen and Ms. Kraus have been appointed member of the Audit Committee on 25 January Presidential Committee The Presidential Committee is entrusted with the following tasks: preparing the Supervisory Board meetings; monitoring the implementation of the decisions made by the Supervisory Board or by its committees; suggesting the terms and conditions of service contracts with members of the Management Board; assessing candidates for the Management Board and making recommendations to the Supervisory Board for potential candidates. Under the rules of procedure of the Supervisory Board, the Presidential Committee is composed of the Chairman of the Supervisory Board and the Deputy Chairman as well as a third elected member. During financial year 2010, the Presidential Committee at first consisted of Mr. Tellenbach, Mr. Mockridge and Mr. de Posch. Following the changes in the position of the chairman of the Supervisory Board, later in fi nancial year 2010 the Presidential Committee consisted of Mr. Carey, Mr. Tellenbach and Mr. de Posch. 3. Meetings of the Audit Committee The Audit Committee of the Supervisory Board met one time during financial year 2010, namely on 10 November Furthermore, during financial year 2010 the Audit Committee held two conference calls, namely on 15 February 2010, and on 11 May During the conference call on 15 February 2010, the Audit Committee in particular reviewed the annual accounts for Sky Deutschland AG as well as the group annual accounts and the combined management report for financial year 2009, and discussed these with the auditor. In a further call on 11 May 2010 the Audit Committee was informed about the latest developments with regard to the annual general meeting on 23 April Some shareholders of the Company raised actions for rescission against the resolutions regarding the ratification of the actions of the members of the Management Board and the Supervisory Board, arguing that the Company unlawfully entered into settlement agreements with shareholders following the extraordinary general meeting on 26 February 2009 and that the 144 Sky Deutschland AG

145 members of the Management Board and the Supervisory Board did not answer questions in this regard at the annual general meeting on 23 April 2010 correctly and comprehensively. The court actions ended with a ruling on 16 December 2010 expressly stating that the settlement agreements were legitimate while at the same time declaring the resolutions regarding the ratifi cations of the actions of the members of the Management Board and the Supervisory Board to be null and void as two questions were not answered comprehensively enough at the annual general meeting on 23 April The Company decided not to file an appeal against the ruling which therefore becomes legally binding. During the meeting held on 10 November 2010 the Audit Committee was also informed as to what extent the recommendations made in the Management Letter of 2009 were implemented. Further, the Audit Committee was informed about the timetable for the preparation, testing, validation and audit priorities of the annual accounts and annual reports of the Company and the Sky Deutschland group as of 31 December Meetings of the Presidential Committee The Presidential Committee of the Supervisory Board did not convene outside of the meetings of the Supervisory Board during financial year The Supervisory Board decided to discuss all issues concerning the duties of the Presidential Committee in particular the retirement of Mr. Maranzana, the appointment of Mr. Tomsic as member of the Management Board and the implementation of the Long Term Incentive Plan within the full Supervisory Board (for management changes see also point III.4). III. Monitoring the Management Board during financial year 2010 During financial year 2010, the Supervisory Board executed the tasks to be accomplished according to the law, statutes, internal rules of procedure and Corporate Governance Code, and monitored and reviewed the management of the Management Board diligently and regularly. In addition, the Supervisory Board provided advice throughout the continued strategic development of the Company and all substantial individual measures. In order to monitor the Management, the Supervisory Board: familiarised itself with the annual budget passed for fi nancial year 2010; regularly requested reports from the Management Board, especially on business policies, business planning and profi tability, how the business was developing as well as substantial individual measures made by the Company; in accordance with the internal rules of the Management Board, assessed and discussed business affairs that were subject to approval by the Supervisory Board before they were implemented. 1. Monitoring by means of reporting by the Management Board During financial year 2010, in order to secure suffi cient monitoring and review of the Management, the Supervisory Board - during and outside of meetings - regularly had the Management Board report on the course of business, on sales, revenue and costs, the fi nancing, risks and risk management as well as the general situation of the Company and the group which was complied with by the Management Board. The report on the development of the Company in general and on the programming area was always delivered by the Chairman of the Management Board, therefore during financial year 2010 fi rst by Mr. Williams and later by Mr. Sullivan respectively. Mr. Maranzana informed the Supervisory Board in regards to the current fi nancial situation (current figures as compared to the fi gures from the previous year, budgeted fi gures, presentation of the differences between the current and previous year and explanations of the reasons for the differences), including the respective current structure of the Sky Deutschland group and the key-terms and details of the capital increase. Mr. Schmidt explained the respective current situation in the area of sports programming, advertising sales and internet while Mr. Dr. Enßlin reported on all major legal issues. The abovementioned periodic reporting, moreover, was supported by presenting the quarterly reports (required due to the listing of the Company on the Frankfurt Stock Exchange). In this way, the Supervisory Board could regularly obtain an informative impression of the Company in regards to profi ts, assets and finances. During the balance-sheet meeting on 22 February 2010, the Supervisory Board listened to explanations of the annual accounts and the management report as well as the group annual accounts and group management report of Sky Deutschland AG as of 31 December 2009, and to reports on profi tability. During this meeting the Supervisory Board as was recommended by the Audit Committee approved the annual report and the annual accounts for Sky Deutschland AG. Furthermore, the Supervisory Board closely monitored the investigation initiated by the German Financial Reporting Enforcement Panel ( DPR ) in Q and concluded by the Federal Agency for Financial Market Supervision ( BaFin ) in 2010, regarding the Company s consolidated and separate financial statements for the financial year 2007, its interim consolidated fi nancial statement for the six month period ended June 2008 and the related management reports. On 22 November 2010 the Company published the material results by way of an adhoc-release. The Company further published the mandatory publication pursuant to Sec. 37q para 2 sentence 1 WpHG on 11/16 December 2010 in the Electronic Federal Gazette and the Börsenzeitung. Further information about the frequency, the objectives and the methods of the monitoring and reviewing activities is given below. Annual Report

146 As the Company faced difficult tasks in fi nancial year 2010, namely the ongoing restructuring including further capital increases, the Supervisory Board intensified its monitoring and review tasks. Therefore, to especially discuss the mentioned tasks with the management in greater detail and to discuss such Company s matters which requires the approval of the Supervisory Board pursuant to the rules of procedure for the Management Board, the members of the Supervisory Board came together for the mentioned conference calls. 2. Audit of business requiring approval The Supervisory Board established rules of procedure for the Management Board according to which certain types of business activities may only be undertaken with the consent of the Supervisory Board. The rules stipulate more precisely the informational and reporting requirements for the Management Board. The rules of procedure are to ensure that the Management Board always reports such matters and business activities that occur in the Company and its subsidiaries to the Supervisory Board, matters and activities which influence or can considerably infl uence the status, profi tability or liquidity of the Company, and that the Supervisory Board can fulfi l its obligations as the Company s controlling body. Beside the approvals which are mentioned in this report elsewhere, during financial year 2010 the Supervisory Board issued its approval to the following issues: Thus, in order to strengthen the financial structure of the Company, the Supervisory Board, during a conference call on 18 January 2010, approved a capital increase against cash contributions by utilising the authorised capital 2009 by an amount of 49,014,714 to an amount of 539,161,858 by issuing 49,014,714 new, registered no par value shares for an issue price of 2.25 for each new share and approved the subscription of all new shares by News Adelaide Holdings B.V. During its meeting on 22 February 2010, the Supervisory Board issued its approval to repurchase all the shares held by third parties in Loxxess Medienlogistik GmbH as well as the sale of all shares in Roombase Networks Ltd.. By its decision in its conference call on 24 February 2010, with regard to the damage claims raised in connection with former public announcements of the Company s subscriber fi gures, the Supervisory Board approved to fi le a third party notice (Streitverkündung) in all current shareholder actions against all members of the Management Board of Sky Deutschland AG which had been in office in the period of 1 January 2005 to 2 October 2008, except for Mr. Mark Williams and Mr. Oliver Kaltner. With resolution dated 16 July 2010 the Supervisory Board approved the repurchase of all shares held by third parties in Premium Media Solutions GmbH. During a conference call on 27 July 2010, the Supervisory Board issued its approval to a Financial Support Agreement between News Adelaide Holdings B.V., News Corporation and Sky Deutschland AG and Sky Deutschland Fernsehen GmbH & Co. KG. By that agreement News backstopped gross proceeds from a minimum of 340 million resulting from measures including a capital increase, a convertible bond by utilising contingent capital and a shareholders loan. During the conference call on 12 September 2010 the Supervisory Board subsequently approved a capital increase against cash contributions by utilising the authorised capital 2009 up to an amount of 269,580,929 to an amount of 808,742,787 by issuing 269,580,929 new, registered no par value shares for an issue price of 1.00 and an subscription price of 1.05 for each new share. Based on that Financial Support Agreement, in January 2011 the Company issued to News Adelaide Holdings B.V. a convertible bond amounting to 164,6 million. The issuance of the convertible bond in January 2011 together with the rights offering completed in September 2010 raised gross proceeds in the amount of 342 million. Finally, News Adelaide Holdings B.V. assures to the Company a loan in the amount of 58 million, which will be provided no later than 31 December With resolution dated 10 November 2010, the Supervisory Board approved the repurchase of all Blue Movie customers and all related assets from tmc content group AG. For the abovementioned and all other presented matters to be decided upon, the Supervisory Board obtained detailed information by having the Management Board report orally and in writing on the motives, risks, goals and consequences as well as the effects of the scheduled business on the company s assets, profi ts and finances. The Management Board in each and every case provided information (for example regarding the capital increases in particular the external opinions upon the determination of issue price/subscription price) regarding the matters to be decided upon in due time. The Supervisory Board was, in every case, suffi ciently informed to be able to make carefully considered decisions. Every member of the Supervisory Board brought his personal expertise and experience to bear on the review and evaluation of the matters to be decided upon. 3. Conflicts of interest Because of his activities in the governing body of News Adelaide Holdings B.V., Mr. Mockridge refrained from voting to avoid confl icts of interest when decisions were made in regards to the resolutions on the capital increase in January Because of his position as a legal representative of News Corporation, Mr. Carey refrained from voting to avoid confl icts of interest when decisions were made in regards to the fi nancial support agreements with News Corporation on 27 July 2010 and the resolutions on the capital increase on 12 September Sky Deutschland AG

147 Both Mr. Carey and Mr. Tellenbach refrained from voting when they were elected Chairman and Deputy Chairman respectively of the Supervisory Board on 16 July Mr. Tomsic abstained from voting to avoid confl ict of interests when he was appointed member of the Management Board. Moreover, no confl icts of interest were recorded. 4. Change in the composition of the Management Board The following changes in the composition of the Management Board took place during financial year Mr. Sullivan was appointed member of the Management Board with effect on 1st January 2010 and took over as CEO on 1 April 2010 after Mr. William s had resigned as member of the Management Board of the Company as of 31 March On 25 November 2010 the Supervisory Board appointed Mr. Tomsic as member of the Management Board and Deputy CFO with effect as of 6 December 2010 and from 1 February 2010 on as CFO of the Company, since Mr. Maranzana resigned from his office with effect as of 31 January IV. Corporate Governance The management and Supervisory Board have prepared a separate report on the subject of Corporate Governance, which has also been printed in the business report and which is referred to here. V. Audit of the annual accounts and management report for 2009 and the subordinate status report On 23 April 2010 during the shareholders meeting, KPMG AG Wirtschaftsprüfungsgesellschaft, Munich ( KPMG or auditor ), was selected to audit the Company. KPMG audited the annual accounts and the group annual accounts of Sky Deutschland AG including the combined management report. The audit did not result in any objections. For the annual accounts and the combined management report, the auditor granted a certificate without restrictions. A draft copy of the annual accounts for Sky Deutschland AG as of 31 December 2010, in accordance with IFRS, the group annual accounts for Sky Deutschland AG as of 31 December 2010, and the combined management report for financial year 2010 were sent to the Audit Committee on 4 February 2011 and explained by the Management Board during a conference call on 15 February 2011 which was also attended by the Company s auditors KPMG. The fi nal documents to be audited (annual accounts, group annual accounts, combined management report, including the audit reports) were sent to the members of the Supervisory Board on 7 February Board. Finally, the Supervisory Board received an annual report on the subjects of revision and risk management. The Supervisory Board approved the reports of the auditor. There is no doubt as to the independence of the auditor. The Supervisory Board completely agreed with the results provided by the auditor. After extensive examination, the Supervisory Board declared that there are no objections to be raised against the management of the Company by the Management Board or the annual accounts and group annual accounts prepared by the Management Board. Therefore, at the recommendation of the Audit Committee, the Supervisory Board approved the annual accounts and the group annual accounts of Sky Deutschland AG during its meeting on 17 February In this way, the annual accounts for Sky Deutschland AG are established. In addition and in accordance with 312 of the AktG, the Management Board prepared a report on relations with affi liated companies for financial year The auditor reviewed this report and reported in writing to the Supervisory Board as to the outcome of the audit, as well as orally during a meeting of the Supervisory Board on 17 February 2011, and issued the following unrestricted opinion: After our statutory audit and assessment, we confi rm that: 1. the information in this report is correct, 2. in the legal transactions listed in the report, the payment by the Company was not unreasonably high or disadvantages have been compensated, 3. the implemented measures listed in the report do not warrant an assessment that differs significantly from that made by the Management Board. The Supervisory Board has examined the report as to completeness and accuracy and discussed the results of the auditor. That examination showed that there were no indications for any objections. The Supervisory Board therefore declared that after the concluding review there are no objections to be raised against the final declaration of the Management Board in its report in accordance with 312 of the AktG and has - at the recommendation of the Audit Committee - concurred with the fi ndings of the auditor. During the balance-sheet meeting on 17 February 2011, which dealt with auditing the annual accounts and group annual accounts, the Supervisory Board extensively examined the documents to be audited. The auditor participated in the meeting and reported on the principal results of the audit. Furthermore, during the balancesheet meeting, the auditor explained the audit reports in detail and responded to questions posed by the members of the Supervisory Annual Report

148 VI. Appraisal of financial year 2010 and the prospects for financial year 2011 The Supervisory Board is of the opinion that Sky Deutschland has reached a good result in the financial year After the successful relaunch in the previous year Sky continues to make progress in all operating areas. With this, Sky has cleared the path for positive business development in the next few years. The main focus here is on the customer, the further expansion of the content portfolio particularly in the fi eld of HD as well as the introduction of innovations which raise the TV experience for customers to the next level. With the promising operative key metrics in the last three quarters a significant acceleration of our business activities became apparent. The acceleration of net customer growth, decreasing churn rates and a record ARPU show that the introduced measures were successful. Overall, the measures that were initiated in 2010 and partly implemented until now are a good basis for the successful development of the company. Although the Supervisory Board expects losses for the financial year 2011, it is confi dent that significant key metrics will develop in a positive way and expects the general trend will continue in Unterföhring, 17 February 2011 The Supervisory Board of Sky Deutschland AG Chase Carey (Chairman of the Supervisory Board) 148 Sky Deutschland AG

149 Annual Report

150 Corporate Governance at Sky Deutschland AG The Management Board and Supervisory Board of Sky Deutschland AG (hereinafter also referred to as the Company ) are committed to ensure the existence of their enterprise and sustainable profi tability by means of responsible, transparent and long-term oriented corporate management. In so doing, Sky Deutschland AG has adhered to nationally and internationally recognised standards for proper and responsible corporate management. Sky Deutschland AG would like to acknowledge the trust that its national and international investors, customers, business partners, staff and the public have shown and intends to continue to develop Corporate Governance within this enterprise. At Sky Deutschland AG, Corporate Governance extends to every division of the company. The Management Board and Supervisory Board of Sky Deutschland AG have conferred on the recommendations of the German Corporate Governance Code, and in particular with the new amendments of 26 May Based on these consultations, on 11 January 2011 the following declaration of compliance was issued, stating with one exception that Sky Deutschland AG has complied with all recommendations of the German Corporate Governance Code: The Management Board and the Supervisory Board herewith declare that the recommendations of the Government Commission German Corporate Governance Code published by the Federal Ministry of Justice in the offi cial section of the Federal Gazette in the version of 18 June 2009 and since the last published declaration of compliance of 17 November 2009 have been complied with one exception. A nomination committee pursuant to lit German Corporate Governance Code has not been established. As no codetermination rules apply and the Supervisory Board is exclusively constituted with shareholder representatives and taking into account efficiency considerations, the implementation of a nomination committee seems not to be appropriate. The Management Board and the Supervisory Board herewith further declare that the recommendations of the Government Commission German Corporate Governance Code published by the Federal Ministry of Justice in the official section of the electronic Federal Gazette in the version of 26 May 2010 on 2 July 2010 will be complied since 2 July 2010 with the exception of establishing a nomination committee pursuant to lit German Corporate Governance Code. Information about compliance with each of the individual recommendations and/or suggestions is provided on Sky Deutschland AG s website at: The current declaration of compliance as well as those of previous years are also available there. Shareholders and the Annual General Meeting Sky Deutschland AG s shareholders can exercise their rights and in particular cast their votes at the Annual General Meeting ( AGM ). Each share in Sky Deutschland AG grants one vote. There are no shares with multiple voting rights, no preferred stock ( golden shares ) and no maximum voting rights. Around 300 shareholders participated in the AGM in Munich on 23 April 2010; percent of the share capital was represented. As provided for in the statutes, the Chair at the AGM is taken by the Chairman of the Supervisory Board. The statutes had been changed during the AGM to the point that the Supervisory Board may appoint any other Supervisory Board member to take the Chair Additionally, the statutes had been changed with resolution of the AGM on 23 April 2010 to fulfi l all legal requirements of a new legal standard, the so called Aktionärsrechterichtlinie (ARUG). The AGM of Sky Deutschland AG has been organised and conducted with the stipulation that all shareholders be provided with up-todate, extensive and effective information before and during the meeting to facilitate registering for the AGM as well as exercising their rights. In due time prior to the AGM shareholders are provided with extensive information on the last financial year via the annual financial report. The invitation to the upcoming AGM specifi es the individual points on the agenda as well as the conditions for participation. Shareholders have the opportunity to exercise their voting rights themselves at the AGM or have them exercised by a proxy of their choice or by a proxy holder designated by the Company who has to vote in accordance with the respective shareholder s instructions. To make it easier for shareholders to exercise their rights and to enable them to prepare for the AGM, the reports, documents and annual report as well as the agenda displayed for inspection by the shareholders at the Company s business premises when the AGM has been called are readily available on Sky Deutschland AG s website. On request the documents will also be sent electronically or by post to shareholders, financial service providers and shareholder associations. Admission tickets for the meeting can also be ordered, proxies issued, inter alia, to the proxy holders designated by the Company, and instructions issued for exercising voting rights at the AGM via Sky Deutschland AG s website ( A list of those present as well as the voting results will be published on the Internet directly after the AGM. 150 Sky Deutschland AG

151 This will facilitate and foster the exchange of information between Sky Deutschland AG and its shareholders. In addition, the Company s statutes permit the Management Board to allow the AGM to be followed via electronic audio and video media. The AGM held on 23 April 2010 was broadcast live on the Internet up to the beginning of the general debate. The statements of the shareholders have so far not been broadcast in order to protect the personal privacy of the speakers. Cooperation between the Management Board and the Supervisory Board Sky Deutschland AG s Management Board and Supervisory Board work closely together for the benefi t of the Company. Their common objective is to ensure the existence of the Company and sustainable profi tability. In accordance with legal regulations, there is a dual management system at Sky Deutschland AG, which is characterised by separate personnel for the management and oversight organs. The Management Board conducts the business of the Company on its own responsibility and in the interest of the Company, develops the strategic direction of the Company and coordinates it with the Supervisory Board while ensuring that it is properly implemented. The Supervisory Board reviews and advises the Management Board and is directly involved in decisions that are of fundamental importance for the Company. To this end, the Management Board informs the Supervisory Board or the Chairman of the Supervisory Board at the ordinary and extraordinary meetings of the Supervisory Board and by telephone regularly, comprehensively and on a timely basis and about all questions of business planning, business development of both the Group and the individual units the Company s risk situation and risk management. Deviations in the course of business from prepared planning and targets are explained and justified there. Reporting by the Management Board also comprises the issue of the Company s compliance, i.e. all measures to comply with legal regulations as well as with internal guidelines. The Management Board and the Supervisory Board also confer on Sky Deutschland AG s strategic focus. Documents for the meeting are sent to the Supervisory Board in due time prior to every meeting. Reports by the Management Board to the Supervisory Board are rendered verbally or in print. For further details please refer to the Review and Oversight Report of Sky Deutschland AG s Supervisory Board for The specific tasks and obligations of the Management Board in relation to the Supervisory Board are regulated in rules of procedure for the Management Board. These rules of procedure determine Management Board information and reporting obligations and define transactions of fundamental importance, such as major decisions made by the Management Board, including larger acquisitions, disinvestments and financial measures, which are subject to approval by the Supervisory Board. The Company did not grant any loans to members of the Supervisory Board or the Management Board during the past financial year. Members of the Management Board and the Supervisory Board would be liable to pay damages to the Company in the event of culpable violation of their incumbent duty to take due care of the Company. In order to protect its management and for the benefi t of the Company who gains a solvent debtor in the event of culpable violation of duties by the Management Board, Sky Deutschland AG has taken out Directors and Offi cers (D&O) Liability Insurance for the Management Board with a deductible in alignment with 93 para. 2 sentence 3 AktG. The Company complies with the new recommendation of the German Corporate Governance Code, Directors and Officers (D&O) Liability Insurance which provides for a commensurate deductible with regard to the members of the Supervisory Board. The Management Board The Management Board of Sky Deutschland AG conducts the business activities of the Company on its own responsibility with the objective of achieving sustainable profi tability and of acting in the best interests of the Company. It takes into consideration the interests of the Company s shareholders, its employees and of any other groups associated with the Company (Stakeholders). Every member of the Management Board is fully responsible for their division at the Company as laid out in the respective organisational chart, within the framework of the rules of procedure for the Management Board of Sky Deutschland AG and the resolutions of the Management Board. The members of the Management Board bear joint responsibility for the overall management of the Company. The Management Board of Sky Deutschland AG had fi ve members as of 31 December 2010, namely: Mr. Brian Sullivan, Mr. Dr. Holger Enßlin, Mr. Carsten Schmidt, Mr. Pietro Maranzana and Mr. Steven Tomsic. The following changes occurred in the composition of the Management Board during financial year 2010: Mr. Sullivan was appointed member of the Management Board with effect to 1st January 2010 and took over as CEO on 1 April 2010 after Mr. William s had resigned as member of the Management Board of the Company to 31 March On 25 November 2010 the Supervisory Board appointed Mr. Tomsic as member of the Management Board and Deputy CFO with effect as of 6 December 2010 and from 1 February 2011 on as CFO of the Company, since Mr. Maranzana resigned from his office with effect as of 31 January The functions of the CEO, Mr. Brian Sullivan, as well as the responsibilities of the remaining members of the Management Board have been defi ned in the internal rules of procedure for the Management Board of Sky Deutschland AG and in the organisational chart. The internal rules of procedure also define those decisions and measures Annual Report

152 of a fundamental nature or of signifi cant financial importance for Sky Deutschland AG and the Group companies that require a decision by the entire Management Board and stipulate when a majority is required for decisions made by the Management Board. The Supervisory Board has set an age limit of 65 years for the members of the Management Board. On 6 June 2008, the Government Commission on the German Corporate Governance Code amended what were formerly proposals relating to a so-called compensation cap to become a recommendation. Sky Deutschland had already complied with all recommendations on the compensation cap in previous years. The compensation cap has already been taken into account since the beginning of this financial year when contracts are concluded with members of the Management Board. Granting benefits on the occasion of early termination of activity in the Management Board as a consequence of a change of control ( change of control regulation) is not included in Sky Deutschland s contracts with members of the Management Board. Members of the Management Board must disclose conflicts of interest to the Supervisory Board without delay and must inform the other members of the Management Board as well. Consequently, contracts concluded with the Company, for instance by a related party (spouse, registered life-partner, relation in the fi rst degree) of a member of the Management Board or by a business entity, on which the member of the Management Board or a related party can exercise significant control, must be approved by the Supervisory Board. Contracts of this type did not exist during the reporting period. Members of the Management Board may only accept secondary positions, particularly on the Supervisory Boards of non-group companies, with the approval of the Supervisory Board. No confl icts of interest arose involving members of the Management Board of Sky Deutschland AG during the past financial year. The Supervisory Board The Supervisory Board advises and reviews the Management Board in conducting the Company s business activities. In so doing, the Supervisory Board also orients itself to the annual budget as approved for the respective financial year. At regular intervals, the Supervisory Board examines business developments and planning as well as the Company s strategy and its implementation. In this context, the Supervisory Board regularly receives reports from the Management Board, in particular on significant individual measures implemented by the Company. Moreover the Supervisory Board discusses the half-year financial reports as well as the quarterly reports with the Management Board and approves the annual fi nancial statements of Sky Deutschland AG and the consolidated financial statements, taking into consideration the reports of the external auditors and the findings of the Audit Committee. The Supervisory Board also decides on appointing and discharging members of the Management Board and determining their areas of responsibility. The Supervisory Board takes diversity into account when determining the composition of the Management Board. At the AGM held on 23 April 2010, the articles of association were amended and the Supervisory Board expanded to nine members. After the election of the three new members, the new Supervisory Board until 05 December 2010 consisted of the following members: Chase Carey, Markus Tellenbach, Guillaume De Posch, Dr. Stefan Jentzsch, Thomas Mockridge, Mark Kaner, Steven Tomsic, Miriam Kraus and Katrin Wehr-Seiter. The term of office for the newly elected members concludes at the end of the annual general meeting which resolves on the ratifi cation for the year 2014 while the term of office for the remaining elected members concludes at the end of the annual general meeting which resolves on the ratifi cation for the year On 16 July 2010, Mr. Chase Carey was elected as Chairman of the Supervisory Board. On the same date, Mr. Markus Tellenbach was elected as Deputy Chairman. Regarding the vacant seat in the Supervisory Board, due to the resignation of Steven Tomsic as member of the Supervisory Board, on 14 December 2010 the Management Board of the Company filed an application for the judicial appointment of Mr. Jan Koeppen, Chief Operating Officer Europe Asia News Corp, as Supervisory Board member with the competent local court of Munich in alignment with 104 Stock Corporation Act (AktG). On 24 January 2011 the local court accepted the application. With the proposals for the election of the members of the Supervisory Board, care is taken that the Supervisory Board is always composed in such a way that is members as a group possess the ability and expert experience required to properly complete its tasks. Furthermore, in so doing, attention is also focussed on the international activities of the Company, on potential conflicts of interest as well as on diversity. By taking into account the specifics of the enterprise, in particular the next election of the Supervisory Board members, the Supervisory Board intends to stipulate an appropriate degree, namely 30 percent of female representation in the Supervisory Board in Since the Codetermination Act is not applicable to Sky Deutschland AG, only persons elected by the shareholders with a simple majority can serve on the Supervisory Board. The Supervisory Board has issued its own rules of procedure, which define the tasks, obligations and internal organisation of the Supervisory Board and its committees. These include detailed provisions on confidentiality, on conflicts of interest and on the reporting obligations of the Management Board. The Supervisory Board has established two committees: The Presidential Committee prepares the meetings of the Supervisory Board and fixes the conditions and proxy authorisations for concluding, amending and terminating contracts with Management Board members. Moreover, the Presidential Committee monitors implementation of resolutions made by the Supervisory Board or its committees. 152 Sky Deutschland AG

153 As recommended by the German Corporate Governance Code, the Audit Committee oversees the effectiveness and effi ciency of the Company s internal and external accounting according to 107 para. 3 Sentence 2 AktG and is engaged with the Supervision and review of the efficiency of the internal risk management systems, the internal control systems and of the internal revision systems. Sky Deutschland AG has implemented the Corporate Governance Implications according to the German Accounting Law Modernisation Act (BilMoG), effective since 29 May This comprises new regulations regarding the independence and qualifi cation when filling new positions in the Supervisory Board and the Audit Committee as well as further concretion of monitoring tasks. The main focus lays on the duty to monitor the efficiency of internal control systems as well as the annual audit. Together with the external auditors, the Audit Committee reviews the Company s annual financial statements as prepared by the Management Board. Based on the external auditors report on the annual financial statements, the Audit Committee makes proposals to the Supervisory Board on adopting the annual financial statements. The committee also addresses the necessary independence of the auditors, commissions the external auditors to audit the annual financial statements and the consolidated fi nancial statements, determines the focuses of the audits as well as the fee agreement and the remuneration for the external auditors. It also reviews the internal controlling system of the Company and the procedure for identifying risks, risk controlling and risk management as well as the compliance of the Company. An essential prerequisite is a thorough Compliance reporting by the Management Board to the Supervisory Board or the Audit Committee. The latter therefore deals following Good Practice with the internal control systems, risk identifying processes, risk control and risk management. The internal auditors regularly report to the committee, which then determines the audit plan and the focuses of the auditing. In this context the risk-management and revision systems remain continually in development and can be adapted to changing conditions. For essential features of Sky Deutschland AG s controlling and risk-management systems reference is made to the annual report. As the former director of several banks and currently as partner at Perella Weinberg Partners LP, the Chairman of the Audit Committee, Mr. Dr. Jentzsch is distinguished by his particular experience in the financial field and has special expertise in the fields of accounting and auditing, and thus meets all the requirements that 100 para. 5 AktG places on the financial expert. He can be considered independent as he has in particular no business or private relationship to the company or the Management Board that could cause a conflict of interests. In light of the fact that the Supervisory Board of the Company is exclusively made up of representatives of the shareholders due to a lack of pertinent codetermination regulations, establishing a nominating committee does not appear to be expedient from the standpoint of efficiency. No former member of the Company s Management Board or one of its legal predecessor companies is a member of either the Supervisory Board or one of its committees. The Supervisory Board has set an age limit of 65 years for its own members. No proposals shall be made at the AGM to elect future candidates for the Supervisory Board if the respective candidate for the Supervisory Board would reach the age of 69 during his term of offi ce. No member of the Supervisory Board concluded a consultancy or service agreement or a contract for work and services with the Company. Independent members of the Supervisory Board are Markus Tellenbach, Guillaume de Posch, Dr. Stefan Jentzsch, Miriam Kraus and Katrin Wehr-Seiter. They have no business or personal relations with the Company or its Management Board which cause a conflict of interests. At its meeting on 22 February 2010, the Supervisory Board reviewed its efficiency with regard to the past fi nancial year. This meeting took place without the members of the Management Board. The review was carried out with the help of a control sheet, which was answered by the members of the Supervisory Board. The Chairman of the Supervisory Board documented the evaluation in the control sheet. Transparency To ensure the greatest possible degree of transparency, Sky Deutschland AG s Management Board operates with an open and timely information policy concerning the general situation and signifi cant business-related changes in the Company with regard to shareholders, financial analysts, investors, the media and the interested general public. Sky Deutschland AG s investor relations activities include publication of all regular information required, such as the interim and annual reports as well as telephone conferences and a large number of events with journalists, fi nancial analysts and investors both at home and abroad. In order to provide comprehensive information that ensures timely availability to all of its shareholders, Sky Deutschland AG uses the Internet as well as other available communication channels. All of Sky Deutschland AG s press releases and ad-hoc reports are published on the Company s website. The statutes of the Company and detailed information on the implementation of the recommendations and suggestions of the German Corporate Governance Code are also available on the Company s website. A financial calendar informs shareholders about all significant recurring dates, e.g. the AGM or publication of annual reports and interim reports. The financial calendar is included in the annual report and in the interim reports and is also available on the Internet at nanzkalender. Sky Deutschland AG immediately publishes any insider information that directly affect the Company, even if they occur outside the regular reporting cycle. This occurs in accordance with relevant legal provisions (ad hoc publicity). Annual Report

154 In addition, Sky Deutschland AG will also immediately provide information in accordance with legal provisions following notifi cation that someone has attained, exceeded or fallen below 3, 5, 10, 15, 20, 25, 30, 50 or 75 percent of the voting rights in Sky Deutschland AG by acquisition or disposal or in any other way. Pursuant to Section 15a of the German Securities Trading Act (WpHG), members of the Management Board and the Supervisory Board are legally obliged to disclose their own dealings with shares in Sky Deutschland AG or financial instruments of the Company and to notify the Federal Agency for Financial Services Supervision except in the case that the total sum of the transactions made by a person with management duties as well as a person closely related to him/her does not reach the sum of 5,000 within a calendar year. This is also applicable to certain staff members who have executive functions and to persons closely related to them. Sky Deutschland AG discloses relevant notifi cations (directors dealings) immediately after they are received. Such information can also be called up in accordance with legal provisions on the Internet at directorsdealings. Since financial year 2008, the legal provisions in Section 15a of the German Securities Trading Act (WpHG) have been supplemented by an internal guideline governing transactions with the Company s stocks for members of the Board and ensure the required transparency. The names of any persons absolutely requiring access to insider information in order to be able to fulfi l their assignments at Sky Deutschland are included in an insider register. On 25. January 2011, the Company has established an Insider Trading Policy for all employees defining clear trading windows in which Sky Deutschland shares can be traded to prevent insider trading. Information on notifiable securities transactions by members of the Management Board and the Supervisory Board for financial year 2010 are included in the Annual Document prepared in accordance with Article 10 of the German Securities Prospectus Act (WpPG) that can be accessed on Sky Deutschland AG s website at This document also includes other disclosures prescribed by German capital market legislation made by Sky Deutschland AG during the financial year. All signifi cant disclosures are always made in German and English. Shares in the Company owned by members of the Management and Supervisory Boards are regularly updated on the Company s website and are stated on the reporting dates in the annual and interim reports. The information is presented in individualised form. On 31 December 2010, members of the Management Board held 20,000 shares. A total of 15,000 shares thereof were owned by Dr. Holger Enßlin, Chief Offi cer Legal, Regulatory & Distribution, and CFO Pietro Maranzana held 5,000 shares in Sky Deutschland AG, respectively. As regards the members of the Supervisory Board, on 31 December 2010 only Dr. Stefan Jentzsch held 120,000 shares. Accounting and Auditing The consolidated financial statements and the Group financial review of the Sky Deutschland Group are prepared in accordance with International Financial Reporting Standards (IFRS), as applied in the European Union. The statutory, and for dividend payments relevant, individual financial statements of Sky Deutschland AG are prepared in accordance with the German Commercial Code (HGB) and the supplementary provisions in the statutes. At the AGM on 23 April 2010, the shareholders elected Munichbased KPMG AG Wirtschaftsprüfungsgesellschaft as statutory auditor of the annual financial statements, statutory auditor of the consolidated financial statements, auditor for the review of the half-year financial statement and the quarterly financial statements for financial year 2010 and auditor for the review of the half-year financial statement and the quarterly financial statements for financial year 2011 which are drawn up prior to the AGM in financial year The Audit Committee took note of the declaration of independence that was submitted. The external auditors participated in the consultations of the Audit Committee and the Supervisory Board on the annual and consolidated financial statements for 2010 on 17 February 2011 and reported to the Supervisory Board on the results of the audit of the annual fi nancial statements of Sky Deutschland AG as of 31 December 2010 and the management report (German Commercial Code HGB) and the consolidated fi nancial statements for the Sky Deutschland Group as of 31 December 2010 and the management report (IFRS). It has been agreed with the external auditors of Sky Deutschland AG that the Chairman of the Supervisory Board or of the Audit Committee will be informed immediately about possible reasons for exclusion and partiality, so far as these cannot be remedied immediately. It has furthermore been agreed that the external auditors will immediately report all findings and occurrences of signifi cance for the work of the Supervisory Board that come to light during the audit. 154 Sky Deutschland AG

155 The external auditors must notify the Supervisory Board or comment in the audit report if they discover any facts in the performance of the audit of the financial statements that indicate that the declaration of compliance with the German Corporate Governance Code according to Article 161 of the German Stock Corporation Act (AktG) made by the Management Board and the Supervisory Board is not correct. Remuneration report The report on remuneration is part of the combined management report (see page 50 and 51). The individual remuneration of the Management Board and Supervisory Board members for 2009, broken up into fixes and performance-based components, is published in the notes to the consolidated financial statements (see section 4.8 Compensation of the Management Board and the Supervisory Board ). Unterföhring, 17 February 2011 The Management Board The Supervisory Board Brian Sullivan (Chief Executive Officer) Chase Carey (Chairman of the Supervisory Board) Annual Report

156 Corporate Responsibility Trustworthiness, transparency and sustainable operational behaviour are the core values of the corporate culture at Sky. Social responsibility is therefore an essential component of the self-understanding of Sky. The Sky Foundation Like no other German TV channel Sky stands for fi rst-class sports coverage and high-level sports competence. Our comprehensive know-how and our passion for sports also translate into Sky s social engagement With the Sky Foundation founded in 2008 the company aims to improve the chances of young people, especially from socially underprivileged environments. The Sky Foundation, supported by prominent sportspersons and namely scientists promotes projects which aim to inspire the younger generation to do more sports and live a healthy life. The foundation particularly invests in initiatives that convey values like fairness and team spirit to children and teenagers and not only make them physically fi t but also improve their social competence. The Sky Foundation has been supporting Clean Winners e.v. since The foundation has already fi nanced the facility in Unterföhring in July Both facilities will be completely financed with funds obtained from the Sky Foundation by the year The staff members of the Sky Service Center in Schwerin are actively engaged in the new facility. The association founded by Carl-Uwe Steeb, Stefan Schaffelhuber and Hans-Dieter Cleven in 1997 supports more than 300 socially disadvantaged children at 18 facilities all over Germany. The Sky Foundation has promised substantial support via funds amounting to 75,000 over a total of three years. In addition, the Sky Foundation supports the project Heidelberger Kids auf Schwimmkurs initiated by Franziska von Almsick which is to be expanded to other cities as well. The goal of the project is to teach children how to behave in the water to prevent them from drowning because they have never learned how to swim. The engagement of the Sky Foundation plays a major role with the fact that currently 660 school children per week receive cost-free swimming lessons. Charity Activities Sky conducted several charity auctions in the course of the year 2010 whose benefi ts were handed over to the Sky Foundation. The event series started with an auction for sought-after week tickets for the US Masters 2010 in Augusta via Ebay including a meet and greet with currently most successful German golf player Martin Kaymer. With this, around 12,000 could be gathered for the Sky Foundation. A large number of celebrities from sports, business and society met at the Sky Business Golf Trophy in Kitzbühel in September Sky also organised a charity auction in the course of this event and collected contributions for the Sky Foundation amounting to a total of 32,000. With the large Sky charity auction on Ebay at the end of the year Sky managed to collect around 34,000 for a good cause. Together with the largest online market place worldwide Sky offered unique events and collectibles like for example a dinner with the Swiss national coach and Sky expert Ottmar Hitzfeld, exclusive studio visits to Sky shows Sky90 and Saturday LIVE!, a football training with Sky expert Stefan Effenberg, a look behind the scenes of a Sky Bundesliga live report with Franz Beckenbauer as well as hand-signed collectibles of Sebastian Vettel and Michael Schumacher. Sky donated the proceeds of the charity auction to the Sky Foundation. Promotion for Media Newcomers Sky also promotes newcomers in the media sector. As a partner of the afk institute for further education in the fi eld of electronic media Sky supports the education of up-and-coming journalists, directors and producers. The Munich-based facility teaches the basics of the TV industry. With its promotion of talented media newcomers Sky aims to ensure the programme quality of tomorrow already today. In 2010 Sky has also supported the Deutsche Sportjugend (German Association for children and teenagers in Sports) with a fi nancial contribution. 156 Sky Deutschland AG

157 Protection of young People Sky as a modern TV service provider relies on a combination of technical youth protection and a broadcasting time regulation in order to support parents with controlling the media-related behaviour of their children. Broadcasts which are not suited for children and teenagers are pre-locked. With this, it is not possible to receive the audio and video signals of the respective channels. The broadcast can immediately be unlocked by entering a four-digit individual PIN handed over to the customer as soon as he or she has fi nalised subscription. Due to the pre-lock Sky is legally allowed to air FSK 18 fi lms already at 8pm and FSK 16 films around the clock. Environmental Protection Sky attaches great value to making a contribution to environmental protection. All employees are encouraged to economise valuable resources like paper and conduct the majority of business correspondence electronically. In accordance with this goal commonly used office devices have been centralised in the course of Sky s move into a new, modern headquarters. The new multi-device printers have economic settings and short warming-up times. The motion detectors for offi ce lighting help with saving energy: If employees are present in the office, the light is switched on automatically, and in case of a prolonged absence of employees the light is switched out. The new heating system is based on the utilisation of geothermal energy and does not pollute the environment with cardio dioxide. The company has also determined a new upper limit for the emission of the selectable care models. The Sky building is cleaned using biodegradable products. Annual Report

158 Contact information and financial calendar Published by Sky Deutschland AG Medienallee Unterföhring Contact and further information: Communications Phone: Investor Relations Phone: Financial calendar 2011: 15 April 2011 Annual General Meeting 12 May 2011 Q1 results 12 August 2011 Half year report 10 November 2011 Q3 results Conception and design Corporate Communications deuerling werbung und design nice advertising Photos shutterstock; Jörg Fokuhl; Boardwalk Empire, Home Box Office Inc. All Rights Reserved; NASA Marshall Space Flight Center Collection; Getty Images; Micky Mouse Wunderhaus, 2006 Disney Channel; Robin Hood, 2010 Universal Studios, All Rights Reserved; Alice im Wunderland, Disney Enterprises, Inc. All rights reserved; Inception, 2010 Warner Bros Entertainment; Inc. All Rights Reserved; Wolfman, 2010 Universal Studios, All Rights Reserved; Sport, dpa picture alliance; imago; Bundesliga, dpa - picture alliance; imago; Sex and the City 2, TM & 2009 Warner Bros, All Rights Reserved; Formel1, hochzwei; Speed of Life, Discovery HD; Toy Story 3, Disney/ Pixar. Disclaimer This report contains forward-looking statements based on the currently held beliefs and assumptions of the management of Sky Deutschland AG, which are expressed in good faith and, in their opinion, reasonable. Forward-looking statements known and unknown risks, uncertainties and other factors, which may cause the actual results, fi nancial condition, performance or achievements of Sky Deutschland AG, or media industry results, to differ materially from the results, fi nancial 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. Sky Deutschland AG disclaims any obligation to update these forward-looking statements to refl ect future events or developments. 158 Sky Deutschland AG