Basic Principles of the Group

The ProSiebenSat.1 Group is leading in the German market for TV and online advertising and with ProSieben and SAT.1 has two of the furthest reaching TV stations in the German-speaking region. Alongside a successful digital and ventures portfolio, the Group also has an international production network. This means, ProSiebenSat.1 has a broad and stable revenue and profit basis. Our goal is to continue growing profitabely in the future and to increase earnings of all our businesses in a sustainable manner.

Corporate Structure and Business Areas

The ProSiebenSat.1 Group is one of the largest independent media corporations in Europe. Free TV financed by advertising is our core business. We reach around 42 million TV households with our TV stations in Germany, Austria, and Switzerland. We have tapped into a dynamically growing business area with the distribution of our HD free TV stations. We are also Germany’s leading online seller of video content on the internet. Our digital portfolio includes the biggest German video-on-demand portal, maxdome. We are active in the online games business and operate an attractive, rapidly growing e-commerce portfolio. We also own Starwatch Entertainment, an independent music label. With the Red Arrow Entertainment Group, we produce international TV programs and sell them to TV stations worldwide.

Organization and Legal Group Structure

In December 2013, the ProSiebenSat.1 Group sold its Eastern European TV and radio stations. The sale of the Hungarian activities is expected to be concluded on February 25. The closing of the sale of the Romanian activities and the corresponding deconsolidation are expected in the second quarter of 2014. The Group had already sold its Northern European TV and radio activities at the end of 2012. This sale was completed in April 2013. Since then, the ProSiebenSat.1 Group has focused on the strategic expansion of its high-growth digital & adjacent business.

The enterprise is managed centrally by the holding company ProSiebenSat.1 Media AG. The organizational structure of the ProSiebenSat.1 Group did not change materially in 2013. We report in detail about changes to the scope of consolidation in the corresponding chapter of the Group management report and the Notes.

Management and Control

ProSiebenSat.1 Media AG is the parent company of the ProSiebenSat.1 Group and headquartered in Unterföhring near Munich. It is listed in Germany at the stock exchange in Frankfurt am Main and since August also at the stock exchange in Luxembourg (Bourse de Luxembourg). A stock corporation under German law has three principal governing bodies: the Annual General Meeting, the Executive Board, and the Supervisory Board. The governing bodies’ decision-making powers are strictly demarcated from each other:

The shareholders of ProSiebenSat.1 Media AG exercise their rights of joint administration and oversight at the Annual General Meeting. In August 2013, all non-voting preference shares were converted into voting common shares in a ratio of 1 : 1. This did not affect the amount of the share capital. Since the merger of the share classes, each share grants the same legal rights and obligations and one vote in the Annual General Meeting.

The Executive Board is responsible for the ProSiebenSat.1 Group’s overall performance, and has both professional and disciplinary authority over the managers of the various business segments and holding company units. The Supervisory Board monitors and advises the Executive Board in its conduct of business, and is thus directly involved in all corporate decisions of major importance.

The basic rules for this dual management system are defined in ProSiebenSat.1 Media AG’s articles of incorporation and in the rules of procedure for the Executive Board and Supervisory Board. The articles of incorporation also define the corporate objective. According to Section 179 of the German Stock Corporation Act (AktG), they may only be amended by a majority resolution of the Annual General Meeting. We report on personnel changes in the boards in the ”Reports from the Executive and Supervisory Board” section of the Annual Report.

Group Structure and Investments

The present consolidated financial statements include ProSiebenSat.1 Media AG and all significant subsidiaries — meaning entities in which ProSiebenSat.1 Media AG directly or indirectly holds a majority of voting rights, or over whose activities it can otherwise exercise a controlling influence.

One of the most important direct subsidiaries of ProSiebenSat.1 Media AG is ProSiebenSat.1 TV Deutschland GmbH. Under its umbrella, all German TV stations of the ProSiebenSat.1 Group work together in a cross-function matrix organization. In terms of structure, ProSiebenSat.1 Media AG differs considerably from other German TV companies. Not only does the company indirectly own all shares in the TV stations SAT.1, ProSieben, kabel eins, sixx, SAT.1 Gold, and ProSieben MAXX, it also indirectly holds a 100 % stake in the sales companies SevenOne Media GmbH and SevenOne AdFactory GmbH. This results in advantages with regard to the stations’ programming and the sale of advertising time. The companies in the online, games, travel and ventures areas are also affiliated indirectly with ProSiebenSat.1 Media AG via subsidiaries consolidated under the ProSiebenSat.1 Digital & Adjacent GmbH. The subsidiaries for the Content Production & Global Sales segment operate as the Red Arrow Entertainment Group, also a 100 % holding of ProSiebenSat.1 Media AG.

Strategy, Business Operations and Segments

By integrating the TV and digital fields, we want to open up pioneering business areas, and in recent years have systematically gained access to new markets with strong long-term growth prospects. Our vision is to develop the ProSiebenSat.1 Group into a broadcasting, digital entertainment and commerce powerhouse and simultaneously consolidate the strong position in the TV business. Our objective is to open up additional sources of revenues outside the core business, free TV financed by advertising, and to further increase their share in total revenues.

The expansion of the Digital & Adjacent activities is the particular strategic focus of the ProSiebenSat.1 Group. The 2013 financial year was therefore characterized by launches and acquisitions. Here, the Group primarily benefits from the reach and the content of its strong free TV stations and the possibility of using free advertising space to market digital services. For example, the Group sees attractive opportunities for synergy and growth in in the e-commerce business as well as the market for digital entertainment. In the Ventures unit, ProSiebenSat.1 invests exclusively in holdings that target a dynamically growing mass market and that can be marketed synergistically via its TV stations. New revenue models for the Group also arise from the fast growing HDHighDefinition (HD) High-definition video content as opposed to standard definition (SD). HD content is predominantly distributed via television, Blu-ray and the internet. On televisions, the standards used are 720p, 1080i und 1080p. Online, HD content is streamed (e.g. on YouTube) or distributed in various file formats (e.g. avi, mp4, mkv, mov) and specifications. “Native HD” means that the content was produced with HD devices from the start, and that it does not need to be upscaled to be broadcast in HD. HD content is transferred between devices via HDMI und can be protected against copying (HDCP). The HD standard is in further development. distribution business. The ProSiebenSat.1 Group’s strategy is topped off with its program production and distribution activities. These operations are bundled under the Red Arrow Entertainment Group, which produces programs for its own TV stations and for independent third parties.

We measure the success of our strategy on the basis of 2010 by the achievement of our revenue targets for 2015. The ProSiebenSat.1 Group increased these targets in October 2013 due to the positive business performance. At Group level and on the basis of continuing operations, we had already achieved 69 % of our 2015 growth target by the end of 2013 thanks to targeted management.

Revenue growth targets 2015 and degree of achievement

The ProSiebenSat.1 Group also presented new financial targets for 2018 at its Capital Markets Day in October 2013: The Group wants to increase its revenues from continuing operations by EUR 1 billion compared with 2012. All three segments — Broadcasting German-speaking, Digital & Adjacent and Content Production & Global Sales — are to contribute to the positive revenue performance. The largest growth driver, Digital & Adjacent, is to contribute around 25 % to 30 % of consolidated revenue in 2018. At the same time, the Company is seeking to generate a significant earnings contribution from the additional revenues and thus to continue on its profitable growth course.

Revenue growth targets 2018 and degree of achievement

The operating units are responsible for the implementation of the strategy and are divided into three reporting segments. They are strategically, economically and technically interrelated and are managed by ProSiebenSat.1 Media AG. In its function as the Group holding company, ProSiebenSat.1 Media AG has no operational role. Its tasks include central financing, Group risk management and the ongoing development of the corporate strategy. The economic development of the ProSiebenSat.1 Group is determined primarily by the subsidiaries, held both directly and indirectly.

Segments of the ProSiebenSat.1 Group

• Broadcasting German-speaking segment: The TV activities in Germany, Austria and Switzerland are allocated to the Broadcasting German-speaking segment. With a population of over 80 million, Germany is Europe’s largest TV market. ProSiebenSat.1 is no. 1 in the advertising market here with its sales subsidiaries SevenOne Media and SevenOne AdFactory. Alongside innovative and customized sales concepts, the high reach of the ProSiebenSat.1 stations is key to the success of the Group. In Germany, Austria and Switzerland, the ProSiebenSat.1 Group operates 15 TV stations in total. The portfolios of the individual countries feature complementary, coordinated television stations, which cover a broad range of target groups in the audience and advertising market.
  
  In recent years, the ProSiebenSat.1 Group has also initiated new growth initiatives within its core business of TV. Since 2007, the Group has founded six new TV stations in the three German- speaking markets, with which the Group is further consolidating its strong position in the audience and advertising market. In 2013, ProSiebenSat.1 launched the women’s station SAT.1 Gold and the men’s station ProSieben MAXX. SAT.1 Gold is aimed mainly at women between 40 and 64; ProSieben MAXX is focused on male viewers between 30 and 59. The existing station portfolio of SAT.1, ProSieben, kabel eins and sixx is thus augmented by new key demographics. While SAT.1 offers TV programming for the whole family, ProSieben is primarily aimed at young viewers between 14 and 39. The core target group of kabel eins is viewers between 14 and 49; sixx focuses on young women aged between 14 and 39. By the channels launched in 2013, we were able to attract new advertisers for TV and expand our business with new customers.
  
  In addition to the traditional free TV business, the ProSiebenSat.1 Group’s HD and basic pay TV stations are also reported in the Broadcasting German-speaking segment. The Group operates three pay TV channels: SAT.1 emotions, ProSieben FUN and kabel eins CLASSICS. The Group also participates in the technical fees that cable network, satellite, and IPTV operators generate from the distribution of ProSiebenSat.1 HD stations. The ProSiebenSat.1 Group has thus established a business area with recurring revenues in the long term and further strengthened its independence from the economically sensitive advertising market. In 2013, the number of ProSiebenSat.1 HD subscribers rose by 51 % to 4.2 million.
• Digital & Adjacent segment: The Digital & Adjacent segment is the strongest growth driver of the ProSiebenSat.1 Group. It bundles the business units Digital Entertainment, Digital Commerce and Adjacent. The Group leverages the advertising power and reach of its TV stations to develop products from these areas into successful brands.
  
  Digital Entertainment: The ProSiebenSat.1 Group markets over 50 proprietary online and mobile platforms as well as offerings from third parties. With a market share of 48 % and around two billion video views in 2013, the Group is also Germany’s leading seller of video content on the internet. In addition, the ProSiebenSat.1 Group operates Germany’s biggest video-on-demand portal, maxdome. maxdome offers nearly 60,000 on-demand titles and achieved a market share of 36 % in 2013. In the last financial year, the Group also founded a multi-channel network (MCN), Studio71, with which the media group produces, aggregates and distributes web content. In 2013, Studio71 launched more than 100 channels and signed exclusive contracts with more than 30 internet stars. Around six months after it started, the MCN already reached 100 million video views in January 2014. In addition, AMPYA was launched in 2013, ProSiebenSat.1´s own music streaming service.
  
  Digital Commerce: The ProSiebenSat.1 Group bundles its ventures activities in the Digital Commerce unit. The Group expands its e-commerce portfolio both through traditional investments in strategic majority interests and through its media-for-equity and media-for-revenue-share model. In doing so, the Group provides media services to promising start-up companies and receives a revenue and/or equity participation in return. In terms of traditional majority interests, the ProSiebenSat.1 Group mainly expanded its existing travel portfolio with several strategic acquisitions in 2013. The Group acquired majorities in the websites billiger-mietwagen.de, mydays.de and weg. de, among others. Therefore, ProSiebenSat.1 now covers the entire travel cycle, from booking a flight, accommodation and rental cars, events and local climate data. The Group plans to build up other thematic e-commerce portfolios in accordance with this model, for example, in fashion or home & living. ProSiebenSat.1 Group expanded its Digital Commerce portfolio to already over 40 holdings in the 2013 financial year.
  
  Adjacent: The Adjacent unit predominantly contains the ProSiebenSat.1 Group’s music and live entertainment activities. In 2013, the Group sold around 3.5 million records and marketed 60 % of the top 20 albums via its record label Starwatch Entertainment. The music activities were complemented by a proprietary ticketing platform and the event agency MMP, so that ProSiebenSat.1 now covers the entire value chain with its music business, from a record label to tickets, artist management and live events/concerts.
• Content Production & Global Sales segment: The Content Production & Global Sales segment covers the ProSiebenSat.1 Group’s international program production and distribution business. The two units are bundled under the Red Arrow Entertainment Group. In 2013, Red Arrow produced more than 170 TV formats and sold them to more than 180 countries. 80 % of the production volume was attributable to external customers (2012: 69 %); 20 % of the productions were produced for ProSiebenSat.1 stations. In the years to come, the proportion of external production orders is likely to increase. The Red Arrow Entertainment Group is represented in nine countries with 14 production companies and maintains its own sales offices in Los Angeles and Hong Kong.
  
  Red Arrow strengthened its network with new partnerships in the past financial year, including via a joint venture with the US producer and five-time Emmy-winner Mark Burnett. Red Arrow also significantly expanded its English-language fiction portfolio and launched promising productions: In 2014, Red Arrow will shoot films with international stars like Judi Dench and Dustin Hoffman. At the same time, the Red Arrow Entertainment Group expanded its production business for internet platform operators, gaining access to a growing order market: At the end of 2013, Red Arrow produced “Harry Bosch,” a crime pilot for the online retailer Amazon, and the third season of the hit series “Lilyhammer” for the US video-on-demand portal Netflix

Segment structure of the ProSiebenSat.1 Group

Intragroup Management System

The corporate management of the ProSiebenSat.1 Group is carried out centrally by the Group’s Executive Board. The overriding goal is to consistently implement the corporate strategy and to expand the Group from a traditional TV company to a broadcasting, digital entertainment, and commerce powerhouse.

Management System Based on Key Performance Indicators

The ProSiebenSat.1 Executive Board manages the Group with a number of financial and non-financial performance indicators. These key performance indicators (KPIs) are derived from the described strategic objectives of the ProSiebenSat.1 Group and broken down for its individual segments and operating units. The parameters we use enable us to measure the success of our business operations. The defined financial performance indicators are oriented toward the overriding goal of increasing profitability and growth and to the interests and requirements of the ProSiebenSat.1 Group’s equity providers and lenders:

• Revenue and earnings management: Revenues and recurring EBITDA are used for profitability management at Group and segment level and for the individual subsidiaries respectively. Recurring EBITDA (earnings before interest, taxes, depreciation and amortization), adjusted for non-recurring items, reflects the Group’s profitability. Since it eliminates the influence of taxes and depreciation, as well as the structure of the Company’s financing, recurring EBITDA also allows a meaningful assessment of operating profitability internationally. Another parameter is the underlying net income — i.e. the consolidated profit for the period after non-controlling interests from continuing operations, before the effects of purchase price allocations and other special items. Related to the underlying net income the basic earnings per common share is calculated.
• Financial planning: Financial leverage (leverage ratio) is an important parameter used in financial planning at Group level. It indicates the level of net debt in relation to LTM recurring EBITDA — i. e. the adjusted EBITDA that the ProSiebenSat.1 Group has generated in the last twelve months.

The company operates in an industry environment characterized by a very dynamic change process. It is therefore particularly important that the different operating units act flexibly and can quickly take advantage of market opportunities that arise. For this reason, while the individual subsidiaries operate on the basis of central objectives, they are also autonomous with full responsibility for revenues and earnings.

Our management system has a clear focus on achieving financial targets. Alongside the financial key performance indicators mentioned above, non-financial parameters. also serve the ongoing control of our customer, market and service-related achievement of targets. They contribute indirectly to achieving profitability and growth targets. An important parameter for TV that cannot be directly measured in financial terms is audience shares. They indicate the popularity of programs and are therefore an important means of documenting the operating performance of our free TV stations for the advertising industry. Deviations in current ratings from anticipated planning figures are assessed as part of early risk detection. Data on television consumption is collected exclusively by GfK FernsehforschungGfK Fernsehforschung GfK Fernsehforschung is a department within the GfK Group (Gesellschaft für Konsumforschung) that collects TV consumption data for Germany exclusively on behalf of the Arbeitsgemeinschaft Fernsehforschung (AGF). On a daily basis, GfK Fernsehforschung records the TV consumption of the households on the television panel, the people living in these households and their guests with electronic measuring instruments. This data is considered “the currency” in Germany’s TV market. in Germany on behalf of the Arbeitsgemeinschaft Fernsehforschung (AGF).

Overview of important key performance indicators

In addition to these internal performance indicators, the Group-wide management and planning process includes external indicators. Current economic data, such as the trend in private consumption, incoming orders, retail sales, and gross domestic product, serve, for example, as relevant indicators of advertising companies’ willingness to invest.

In addition to the formal process of corporate management, performance factors such as cost awareness and efficient process management are central requirements for the continued strengthening of the ProSiebenSat.1 Group’s leading position. The establishment of a “best practice organization” therefore remains an important strategic task for us. Central requirements for this are uniform process management and a successful internal controlling and risk management system. With the PRIME program, the ProSiebenSat.1 Group has systematically mapped all processes in the Group including risks, and thus has an efficient and transparent control instrument in process management. At the same time, the company provides the required conditions for a culture of top performance. High-performing and motivated employees,, guided by a common sense of mission, are the heart of our best practice organization. A key requirement for this is clear objectives for employees at all company levels (management by objectives).

Integrated Budgeting and Planning System

The strategy is debated at an annual meeting and, if necessary, individual targets are redefined or prioritized. SWOT analyses are an important strategy development tool. To this end, market conditions and current performance indicators for relevant competitors are compared, threats and opportunities presented by the market are evaluated and the strengths of the ProSiebenSat.1 Group put into focus.

Taking the strategic targets as a starting point, the operating plan for the year (budget) is compiled at the end of each financial year. This is done on the basis of “mixed planning”: The Executive Board decides the corporate strategy, and as a consequence the planning targets for the Group and its segments, centrally (“top-down”). The detailed planning, and in particular the determination of the measures for achieving the budgeted targets, is performed as a second step at the operational level (“bottom-up”). To this end, company-specific data from the income statements or statements of financial position and cash flow statements of individual subsidiaries are aggregated at segment and Group level. These data primarily relate to volumes and prices, human resources, program planning, costing, and capital budgeting. In turn, the budget forms the basis for the long-term multi-year planning. Key factors are quantified for the parameters described above, with the target values calculated on a quarterly basis for the next five years.

The anticipated short and long-term target attainment is analyzed throughout the year by means of monthly trend projections, so that any deviations from planning can be detected promptly and countermeasures can be implemented at short notice. The expected development of revenue, earnings and cash flows for the current year is calculated and compared to the budgeted figures on the basis of target attainment so far, i.e. actual figures. The individual steps of the planning process — budget preparation, multi-year planning, and monthly reporting — are shown in the planning calendar diagram below:

Planning calendar

Compensation Report

The Compensation Report describes the main features of the compensation system for the Executive Board and Supervisory Board of ProSiebenSat.1 Media AG and explains the structure and level of compensation of the individual members of the Executive Board and Supervisory Board. It is part of the audited Group Management Report and complies with the relevant legal regulations; it also takes into account the recommendations of the German Corporate Governance Code in the version of May 13, 2013.

Compensation Paid to the Executive Board

In addition to their functions as directors and officers of the Company, the members of the Executive Board of ProSiebenSat.1 Media AG also have contractual relationships with the Company. The ProSiebenSat.1 Media AG Supervisory Board is responsible for making the employment agreements with the members of the Executive Board. The Executive Board employment agreements have a maximum term of five years and also regulate the compensation. After a proposal by the Compensation Committee, the structure and amount of the Executive Board compensation are defined by the Supervisory Board and regularly reviewed. The criteria for appropriate compensation are, on the one hand, the individual Board members’ personal performance and areas of work and responsibility and, on the other hand, the amount and structure of executive board compensation in comparable companies, the Company’s business situation and the ProSiebenSat.1 Media AG compensation structure.

Compensation system for the Executive Board

The compensation system for the Executive Board of ProSiebenSat.1 Media AG aims to create an incentive for sustainable company performance. It is composed of fixed and results-based components. In the 2013 financial year, Executive Board compensation comprised the following components:

• All Executive Board members each received a fixed base salary, paid monthly, that was determined with reference to the individual Executive Board member’s areas of work and responsibility.
• In addition to this fixed base salary, the Executive Board members also received performance-based variable annual compensation in the form of an annual bonus. The terms of this annual bonus are essentially uniform among the contracts of the Executive Board members. The amount depends on the achievement of predefined performance targets, which arise on the basis of Group EBITDAEBITDA Abbreviation for Earnings before Interest, Taxes, Depreciation and Amortization. and net debtNet financial debt Total loans and borrowings minus cash and cash equivalents and current financial assets., as well as personal target agreements. The bonus cannot exceed 200 % of the contractually determined target amount. In the event that targets are missed, it is possible that there is no variable compensation at all.
  
  For Executive Board members, the Supervisory Board can convert portions of the annual performance-based variable compensation into multi-year performance-based variable compensation: The level of payment then no longer depends exclusively on the achievement of one year’s performance targets, but rather on the average achievement of targets over three years.
  
  In addition, Executive Board members receive a long-term share-based compensation component. The stock option plan (Long Term Incentive Plan) first introduced in 2005 was replaced in 2012 by a new share-based compensation plan (Group Share Plan). The Group Share Plan is organized as a share bonus program and is served by the Company’s own common shares following the conversion of all non-voting preference shares of ProSiebenSat.1 Media AG into common shares, which took effect on August 16, 2013. Participants are issued with performance share units (PSUs), entitling them from the beginning of the year of grant to receive common shares after the expiry of a four-year holding period. The conversion factor by which the PSUs are exchanged for ProSiebenSat.1 common shares after the end of the holding period depends on the achievement of predefined annual targets during the holding period. These relate to the development of Group EBITDA. The conversion factor can vary between 0 % and 150 %. In the event of exceptional developments, the Supervisory Board can also raise or lower the conversion factor by 25 % age points under consideration of the individual performance of the Executive Board members. If the share price when the conversion factor is defined exceeds the share price when the PSUs were issued by more than 200 %, the conversion factor is further reduced so that a price increase above the threshold of 200 % does not result in a further increased value of the PSUs (price-related cap). After the end of each year of the four-year holding period, a quarter of the PSUs awarded become vested; a requirement for this is that Group net income is generated in the year in question and the ProSiebenSat.1 Group’s EBITDA does not fall below a defined minimum.
  
  Stock options were last issued to Executive Board members under the expired stock option plan (Long Term Incentive Plan) in 2009. Thomas Ebeling and Axel Salzmann still own stock options from this plan that were granted to them as Executive Board members. Each option entitles the holder to acquire one ProSiebenSat.1 common share if certain exercise conditions are met. As well as an already expired two-year holding period, the exercise conditions include the achievement of a performance target linked to the price performance of the ProSiebenSat.1 common share and the advent of a vesting period staggered over five years. One fifth of the stock options issued becomes vested at the end of each financial year following the issue. As of the end of December 31, 2013, all stock options from 2009 are therefore vested. The Company repurchased the stock options of the Long Term Incentive Plan from the 2008 and 2009 cycles still outstanding in 2013 from the corresponding Executive Board members.
  
  Further information on the Group Share Plan 2013 and the remaining stock options under the Long Term Incentive Plan can be found in the notes to the consolidated financial statements.
• Pension agreements were signed for all members of the Executive Board. For the period of the employment relationship, the Company pays a monthly contribution into the personal pension account managed by the Company. The contribution made by the Company is equivalent to 20 % of the respective fixed monthly gross salary. Each member of the Executive Board has the right to pay any additional amount into the pension account in the context of deferred compensation. There are no further payments after the end of the employment relationship. The Company guarantees the paid-in capital and annual interest of 2 %. The amounts paid in are invested on the money and capital markets. A retirement pension is paid if the Executive Board member attains the age of 60, or 62 in the case of Heidi Stopper, who was appointed to the Executive Board on October 1, 2012, and was a member for at least a full three years. This entitlement also arises in the case of permanent disability. The monthly retirement pension is derived from the actuarially calculated life-long pension as of the time of the entitlement to benefits. Instead of a life-long pension, Executive Board members can demand the payment of the guaranteed capital when the entitlement occurs.
• In addition, the Executive Board members receive other non-performance-based fringe benefits in the form of non-cash benefits through being granted company cars and taking part in group accident insurance.
• In the case of the premature termination of the employment relationship by the Company without good cause, the Executive Board agreements include a severance payment commitment amounting to two years’ total compensation according to Section 4.2.3 of the German Corporate Governance Code up to a maximum of the compensation that would have been paid up to the end of the agreement period.
• A post-contractual non-competition clause was agreed for all Executive Board members covering one year following the termination of the employment contract. If this is applied, the Executive Board members receive a monthly waiting allowance for the duration of the post-contractual non-competition clause amounting to half of the contractual benefits most recently received, for Dr. Wegner amounting to the contractual annual compensation most recently received (fixed compensation and annual bonus). Sections 74 ff. of the German Commercial Code also apply.

Compensation of Executive Board members for the 2013 financial year

The following total compensation was determined for the Executive Board members appointed by the Company as of the close of the 2013 financial year:

Compensation of Executive Board Members

Additional disclosures on share-based compensation instruments
(stock option plan)

The stock options held by active members of the Executive Board developed as follows in the 2013 financial year:

Development of stock options held by active members of the Executive Board in the 2013 financial year

Since the 2010 financial year, no stock options have been granted to members of the Executive Board.

The Company reacquired the 225,000 stock options of the Long Term Incentive Plan from the 2008 and 2009 cycles still outstanding in 2013 from the corresponding Executive Board members on the basis of a Supervisory Board resolution. The weighted average strike price was EUR 5.43 per option; the weighted average share price amounted to EUR 26.19 per option.

Other compensation components

The Company has granted neither loans nor provided guaranties or warranties to the members of the Executive Board.

Total compensation of former Executive Board members

In the 2013 financial year, total compensation (pensions) was paid to former Executive Board members amounting to EUR 0.3 million (previous year: EUR 0.3 million). As of December 31, 2013, pension provisions for former members of the Executive Board according to IFRS amounted to EUR 10.0 million (previous year: EUR 8.7 million).

In the 2013 financial year, 167,000 stock options were bought back or exercised by former members of the Executive Board. The weighted average strike price was EUR 11.25 per option; the weighted average exercise price amounted to EUR 26.08 per option.

Andreas Bartl, who left the Executive Board in 2012, received the following compensation in the 2012 financial year:

Compensation of Andreas Bartl, who left the Executive Board in 2012, for the 2012 financial year

Pension provisions

In the 2013 financial year, there were additions to pension provisions for active and former Executive Board members in line with IFRS totaling EUR 3.1 million (previous year: EUR 2.9 million). EUR 1.7 million of this related to service cost (previous year: EUR 1.4 million), EUR 0.5 million to interest expenses (previous year: EUR 0.5 million) and EUR 0.9 million to actuarial losses ( previous year: EUR 1.0 million). As of December 31, 2013, pension provisions for active and former Executive Board members totaled EUR 15.5 million (previous year: EUR 12.8 million).

D&O insurance

The Executive Board members are involved in group liability insurance (D&O insurance). This D&O insurance covers the personal liability risk should Executive Board members be made liable for financial losses when exercising their professional functions for the Company. The insurance includes a deductible according to which an Executive Board member against whom a claim is made pays a total of 10 % of the claim in each insured event, but not more than 150 % of the respective fixed annual compensation for all insurance events in one insurance year. The relevant figure for calculating the deductible is the fixed remuneration in the calendar year in which the infringement of duty occurred.

Compensation Paid to the Supervisory Board

Compensation system for the Supervisory Board

The compensation of the Supervisory Board is set in the articles of incorporation of ProSiebenSat.1 Media AG. Members of the Supervisory Board receive fixed annual compensation. It amounts to EUR 50,000 for the ordinary Supervisory Board members and EUR 100,000 each for the Chairman and the Vice Chairman. In addition, meeting honoraria are paid for contributing to the committees. This amounts to EUR 3,000 per meeting attended for ordinary members of the Audit and Finance Committee, and EUR 1,500 per meeting attended for ordinary members of any other Committee. Committee Chairmen receive twice the standard meeting honorarium. No performance-based variable compensation is granted.

Compensation of Supervisory Board members for the 2013 financial year

Supervisory Board members received the following compensation for the 2013 financial year:

Compensation of Supervisory Board members for the 2013 financial year

In addition to this fixed annual compensation or meeting honoraria, the members of the Supervisory Board were reimbursed for all out-of-pocket expenses and received compensation for the sales tax levied on their compensation and out-of-pocket expenses.

D&O insurance covers the personal liability risk should Board members be made liable for financial losses when exercising their functions. No deductible has been agreed for members of the Supervisory Board.

Members of the Supervisory Board received no remuneration or other consideration for personal services, especially consulting and mediation services, during the 2013 financial year. Members of the Supervisory Board do not receive loans from the Company.

Basic Legal Principles

ProSiebenSat.1 Media AG has to comply with a large number of stock exchange and legal regulations. As a stock corporation listed in Germany, it is in particular subject to German laws that govern corporations, co-determination, and the capital markets, and it must observe the recommendations of the German Corporate Governance Code. Important reporting obligations that result from the legal requirements for this management report are shown below.

• Takeover-related disclosures in accordance with Section 315 (4) of the German Commercial Code (HGB) and their explanations under Sections 124 a Sentence 1 No. 3 and 176 (1) Sentence 1 of the German Stock Corporation Act (AktG): The registered common shares (with no par value) of ProSiebenSat.1 Media AG are traded at the stock exchange in Frankfurt am Main with simultaneous admission to the sub-segment with post-admission obligations (Prime Standard) of the Frankfurt Stock Exchange and in the regulated market at the stock exchange in Luxembourg (Bourse de Luxembourg). As a publicly traded company whose voting shares are listed in an organized market within the meaning of Section 2 (7) of the German Securities Acquisitions and Takeover Act (WpÜG), ProSiebenSat.1 Media AG is obliged to record the information stipulated in Sections 289 (4) and 315 (4) HGB in the management report and Group management report.
• Report on relations with affiliated companies and closing statement by the Executive Board under Section 312 (3) AktG: In compliance with Section 312 AktG, the Executive Board of ProSiebenSat.1 Media AG has prepared a report on relations with affiliated companies, which contains the following closing statement: “For every legal transaction carried out in the reporting period between ProSiebenSat.1 Media AG and Lavena 1 S.à r.l. and its affiliated companies, ProSiebenSat.1 Media AG agreed appropriate compensation in accordance with Section 312 AktG and received performance in return for such compensation in so far as performance was due during the year under review.”
• Management Declaration according to Section 289a HGB and the Corporate Governance Report according to Item 3.10 of the German Corporate Governance Code: The company’s Management Declaration according to Section 289a HGB and the Corporate Governance Report according to Item 3.10 of the German Corporate Governance Code are published on the Company’s homepage. In addition, the Management Declaration and the Corporate Governance Report are included in the Annual Report. The Group auditor has critically reviewed the Corporate Governance Report in accordance with the IDW auditing standard. The Management Declaration and the annual Declaration of Compliance under Section 161 AktG were also part of the auditor’s review.
• Description of the key features of the internal control and risk management system in regard to the reporting process pursuant to Section 315 (2) No. 5 HGB: The Risk Report includes information about the internal controlling and risk management system – according to Section 315 (2) No. 5 HGB — in regard to the consolidated reporting process.

Basic Principles of Media Policy

Broadcasting System and Regulatory Conditions

The German TV market is distinguished by a dual broadcasting system. Alongside well-funded public broadcasting, which operates 21 TV stations and around 70 radio stations with a budget of EUR 8.6 billion, there are also private broadcasters. The latter finance more than 280 TV stations and nearly 260 radio stations with EUR 7.1 billion (2012). The private television market is dominated by two families of stations: The ProSiebenSat.1 Group, the market leader in the German TV advertising market, and the RTL Group. While the private providers operate as independent commercial enterprises, funding of public broadcasting is guaranteed by law and its mandate for basic broadcasting is ensured by the license fee. In addition to this income, the public broadcasters also generate revenues via advertising.

Income from license fees has further increased in recent years. In 2012, the monthly fee was EUR 17.98 per TV. In 2000, it was DM 28.25 or EUR 14.44. In view of this, the funding of the dual system has become unbalanced, even though the revenues of the private commercial broadcasters have returned to the level of 2000 after years of recession in the industry.

Change in total revenues in broadcasting in comparison

After the changeover to a new license fee model in January 2013, revenues from fees are likely to rise slightly again in the years to come. Faced with the increasing convergence of devices capable of receiving broadcasts, the former device-based fee was replaced by a new model. The fee is now raised per household – regardless of ownership, type, or number of devices. Due to the expected greater number of fee-paying households, the study “German Entertainment and Media Outlook: 2013-2017” by PricewaterhouseCoopers (PwC) forecasts that fee income will increase by around 0.3 % in 2013.

Fees for public stations

Another legal change came into force in 2013 with a sponsorship ban in public television after 8 p.m. and on Sundays and public holidays. The change in the law is in line with private broadcasting companies’ demand that public broadcasters stop being funded by advertising. In no European country do the public broadcasters have similarly high budgets to those in Germany. However, market analyses show that the broadcasting agencies are reaching ever fewer young people with their main channels, ARD and ZDF. In order to counteract this trend, the public broadcasters are expanding with specialist digital channels and online offerings. Their plans include a new youth station that will be complemented by online offerings. The expansion plans are being critically discussed by politics and society, as they exceed the originally public mandate to provide basic services. Fees are now used to finance – in addition to the main stations – three public news channels, four culture channels and an entertainment and service channel. Politicians are therefore calling for a restriction to the public broadcasters’ digital and online offerings. In 2014, a working group of the federal states will submit a report on potential savings at the public broadcasters. This report will form a basis for a discussion about the public broadcasters’ functional mandate.

The increasing market penetration of convergent devices such as tablets and smartphones means that television is increasingly consumed via the internet and competes with new media services. Besindes, more and more international rivals are entering the German media market. However, US internet companies like Google and Facebook are not subject to the same regulations, for example, in relation to copyright law that applies to German companies or legal requirements for the protection of young people. At the same time, television is more strictly regulated in Germany compared to other types of media and is subject to numerous quantitative and qualitative restrictions. For example, time for German TV advertising is restricted to a maximum of twelve minutes per hour, while opportunities to place advertising in certain programs are limited. Moreover, private broadcasting is regulated by media concentration legislation and programming restrictions. To ensure plurality of opinion, SAT.1 is legally required to finance regional programs for a total of five broadcast areas and to broadcast these parallel to prime time. In accordance with the requirements of the Interstate Broadcasting Treaty, SAT.1 also funds formats produced independently by third-party companies and for the content of which the latter are responsible.

Against this backdrop, ProSiebenSat.1 believes that new media structures are required that create equal regulation criteria on the German market, ensure fair competition for all providers of audiovisual content and take account of the digitalization. The ProSiebenSat.1 Group therefore participates actively in various political discussions such as the “Media Policy Round Table” in Bavaria and the “Media Dialog” in Hamburg. The objective of these initiatives by representatives of internet and media policy in state and federal governments, leading German media and internet companies, and the public broadcasters is to analyze the problem together and formulate recommendations for a redesign of media structures. The communication will continue in 2014 in the working group of the federal government and states, which was arranged in the coalition agreement.

Distribution of TV Programs and Technological Conditions

The number of TV households continues to grow, while increasing numbers of consumers in Germany are receiving their television signals via satellite and IPTV. In 2012, the number of households receiving TV programs via satellite rose to 17.6 million and was thus higher than the number of cable-TV households for the first time. An important growth driver of this shift is the increasing popularity of high-definition (HD) television. This is the finding of the study “German Entertainment and Media Outlook: 2013-2017” by PricewaterhouseCoopers (PwC). At the same time, growing numbers of people are willing to pay for attractive content. For example, the number of paying HD customers move to above a million for the first time in 2013, growth of 134 % year on year. In the second quarter of 2013, it was nearly 1.2 million.

TV households by delivery technology 2012

Development of Media Usage

Media consumption has grown steadily in recent years. People in Germany use media and media transmission channels for 594 minutes, i.e. nearly 10 hours, every day. Although a large number of media offerings are available to them, for years they have consistently spent around three quarters of their media-consumption time with three media types: TV, radio, and the internet. While radio use has declined considerably in recent years, television is maintaining its high level. Germans devote more than a third of their daily media time (205 minutes) to television. Private stations reach the most viewers with a market share of nearly 70 %. The internet — main driver of the increasing overall consumption time — is used for 115 minutes a day. Newspapers and magazines have been declining continuously for years and have now fallen to 28 minutes. In 2002, it was 41 minutes.

Media and media transmission channels

For most users today, digital media are a fixed part of their daily life. In nearly every household, one or more second-screen devices can already be found alongside the television, with a growing pervasion of tablets and smartphones in particular. The increase of internet consumption — according to the ARD/ZDF Online Study 2013 — has not yet resulted in major shifts in media usage time. However, the growing significance of the internet as a separate mass medium is making lasting changes to consumption behavior: Different media are frequently used in parallel. Among the young in particular, the simultaneous use of TV and the internet is already very widespread. At the same time, demand for multimedia offerings from a single source is increasing. TV sets that can connect to the internet, known as smart TVs, now make up the majority of new TV sets sold.

TV remains Germany’s most popular medium. For advertisers, television is not only very attractive for its reach and use time, but also for its high advertising impact. Investments in TV advertising are essential for the success of a brand and pay off equally in the short and long term. SevenOne Media demonstrated this in a joint study with GfK Fernsehforschung and the GfK Verein. The study evaluated the effects of TV advertising on all purchases in 30,000 German households over a whole year.