Explanatory Notes on Reporting Principles

Content and Form of the Combined Management Report

This report summarizes the Group Management Report of ProSiebenSat.1 Group, made up of ProSiebenSat.1 Media SE and its consolidated subsidiaries, and the Management Report of ProSiebenSat.1 Media SE. The Compensation Report, the takeover-related disclosures in accordance with Section 289 (4) and Section 315 (4) of the German Commercial Code (Handelsgesetzbuch — HGB) and the chapter entitled ”The ProSiebenSat.1 Share” can be found in the “To Our Shareholders” section of this Annual Report. These are also part of the audited Management Report.

Management Declaration in accordance with Section 289a HGB and Corporate Governance Report in accordance with Item 3.10 of the German Corporate Governance Code (Deutsche Corporate Governance Kodex — DCGK) (Fig. 19)

 

The Company’s Management Declaration in accordance with Section 289a HGB and the Corporate Governance Report in accordance with Item 3.10 DCGK are published on the Company’s homepage. In addition, the Management Declaration and the Corporate Governance Report are also 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 Declaration of Compliance in accordance with Section 161 of the German Stock Corporation Act (Aktiengesetz — AktG) were also part of the auditor’s review.

Predictive Statements on Future Earnings, Financial Position and Performance

Our forecasts are based on current assessments of future developments. In this context, we draw on our budget planning and comprehensive market and competitive analyses. The forecasted values are calculated in accordance with the reporting principles used in the financial statements and are consistent with the adjustments described in the Management Report. However, forecasts naturally entail some uncertainties that could lead to positive or negative deviations from planning. If imponderables occur or if the assumptions on which the forward-looking statements are made no longer apply, actual results may deviate materially from the statements made or the results implicitly expressed. Developments that could negatively impact this forecast include, for example, lower economic momentum than expected at the time this report was prepared. These and other factors are explained in detail in the Risk- and Opportunity Report. There we also report on additional growth potential; opportunities that we have not yet or not fully budgeted for could arise from corporate strategy decisions, for example. Potential risks are accounted for regularly and systematically as part of the Group-wide risk management process.

Significant events after the end of the reporting period are explained in the Notes, Note 35 “Events After the Closing Date.” The publication date of the Annual Report 2016 is March 16, 2017.

Reporting on the Basis of Continuing Operations

Unless otherwise indicated, the analysis of the earnings, financial position and performance of the Group is based on continuing operations. This reflects the performance indicators relevant to ProSiebenSat.1. In accordance with IFRS 5, the earnings contributions that arise in connection with disposals are not included in the individual items of the income statement; they are shown separately as the “Result from discontinued operations.” This also applies to the statement of cash flows, where the corresponding cash flows are presented as “Cash flow from discontinued operations.”

Key Figures Used

For ProSiebenSat.1 Group, revenues, EBITDA, recurring EBITDA, underlying net income and the leverage ratio are key financial indicators at Group level. Revenues and recurring EBITDA are key financial parameters at segment level. In addition, EBITDA is highly important for the Digital Entertainment and Digital Ventures & Commerce segments. The development of these figures is therefore used to analyze the Group’s earnings, financial position and performance in addition to the key figures from the income statement, statement of financial position and statement of cash flows. Audience shares are the key non-financial performance indicator.

ProSiebenSat.1 Group does not report on the order backlog in the advertising business. Instead, the development of our share on the advertising market and the analysis of the situation in the sector and with regard to competition provide key indicators for economic success; these are accounted for within the context of risk management. In the Content Production & Global Sales segment, the development and production of programming content as well as worldwide distribution through new or re-commissioning takes place, as is customary in the industry, in the short term and continuously. As a result, we do not report on order volumes here either.

Definition of selected key figures (Fig. 20)

 

Recurring EBITDA

Recurring earnings before interest, taxes, depreciation and amortization. It describes earnings before interest, taxes, depreciation and amortization, adjusted for certain influencing factors.

These factors include costs in connection with M&A transactions, reorganizations, legal claims, valuation effects of the Group Share Plan (GSP), results of deconsolidation and other significant influences.

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Costs in connection with M&A transactions include consulting expenses and other expenses for ongoing, closed or cancelled M&A transactions.

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Reorganization measures include functional and personnel expenses for significant reorganizations and restructurings. They comprise expenses such as severance payments, leave compensation, consulting costs and impairments on non-current assets.

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Legal claims include fines, penalties, repayment claims and consulting costs in connection with significant ongoing or expected legal claims.

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Valuation effects of the Group Share Plan (GSP) include the portion of the changes in the fair value of the share-based payment plans that affects profit or loss, which results from the difference between the share price on the issue date and the current price on the reporting date.

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Other significant effects include transactions approved by the Group Chief Financial Officer but not connected to current operating performance. In this context, ProSiebenSat.1 considers transactions of at least EUR 0.5 million to be significant.

Underlying net income

Consolidated net profit after non-controlling interests from continuing activities before the effects of purchase price allocations, valuation effects for put options and purchase price liabilities, valuation effects in other financial result, hedge ineffectivness under hedge accounting and additional reconciling items.

Rounding Financial Figures

Due to rounding, it is possible that the individual figures do not exactly add up to the totals shown and that percentage figures given do not exactly reflect the absolute figures to which they relate.

Information on reporting and accounting policies (Fig. 21)

 

Reporting and use of non-IFRS figures: In addition to the financial information determined in accordance with IFRS, this Annual Report also includes non-IFRS figures. The reconciliation of these non-IFRS figures with the corresponding IFRS figures is shown in the Group’s earnings. Detailed definitions of these non-IFRS figures can be found in the (PDF:) glossary starting on page 282.

For its financial, strategic and operating decisions, ProSiebenSat.1 Media SE uses primarily non-IFRS figures as the basis of making decisions. These also provide investors with additional information which also allow a multi-year performance comparison, as they are adjusted for specific factors.

These figures are not determined on the basis of IFRS and may therefore differ from other entities’ non-IFRS figures. Therefore, they do not replace the IFRS figures and are not more important than the IFRS figures, but they do provide supplementary information. We are convinced that the non-IFRS figures are of particular interest to our investors for the following reasons:

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Reconciling items can influence or even overshadow operating performance; figures adjusted for such items therefore offer supplementary information for the assessment of the Company’s operating performance. Adjusted figures thus are more relevant for managing the Company.

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Moreover, underlying net income is an important factor at ProSiebenSat.1 Media SE for the calculation of the dividend payment, as we want to give the shareholders a share in the Company’s operating profitability.

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The Group has implemented a holistic management system. Non-IFRS figures are calculated consistently for the past and the future; they form an important foundation for internal controlling and the management’s decision-making processes.

Adjusting the management system. At the beginning of the financial year 2017, we are refining the internal management system. In comparison to the current methodology of adjusting selected earnings-based performance indicators, a complete income statement adjusted for certain influencing matters (non-IFRS income statement) will be prepared in the future and disclosed in the analysis of Group earnings of the Management Report. The conceptional refinement of the management system results in

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increased transparency in the presentation of specific factors where adjustment is required,

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integrated and consistent treatment of specific factors in the complete income statement where adjustment is required and

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standardization in the labeling of the asjusted earnings-related performance indicators.

In this context, the new labeling for the terms recurring EBITDA and underlying net income are adjusted EBITDA and adjusted net income. For adjusted EBITDA there is no deviation to what previously was recurring EBITDA. On the other hand, the consistent adjustment of special factors in the reconcilation to adjusted net income results in a difference in value. We anticipate that adjusted net income will tend to be higher in comparison to the present methodology.

Accounting of share-based payments from the Group Share Plans: ProSiebenSat.1 involves its employees in the company’s success with performance-based compensation. This also includes share-based payment plans (Group Share Plans) in which selected executives and the Executive Board participate. In this context, participants receive so called performance share units that entitle them to subscribe for shares. Due to the decision of the Executive Board and Supervisory Board of March 11, 2016, to settle the claims of the beneficiaries of the Group Share Plans in cash in the future and the associated conversion of the accounting for these share-based payments from equity-settled to cash-settled, cash-settled share-based payments in accordance with IFRS 2 are recognized in this Annual Report. In contrast to previous accounting (equity settlement), the ongoing recognition in profit or loss of changes in the fair value of the obligation with cash settlement planned in accordance with IFRS 2 results in significantly higher earnings volatility, which is attributable to the fluctuations in the price of the ProSiebenSat.1 share. For the first time, ProSiebenSat.1 Group is therefore adjusting recurring EBITDA and underlying net income for the portion of the changes in the fair value of the share-based payment plans that affects profit or loss, which results from the difference between the share price on the issue date and the current price on the reporting date. Figures for the previous year are not being adjusted, as there were no similar effects in the previous year due to the recognition as “equity-settled share based payments” at that time.

Valuation of earn-outs and put options: Due to the Company’s increasing M&A activities and the current investment strategy, the obligations from earn-outs and put options have steadily increased as ProSiebenSat.1 Group acquires further shares in connection with the acquisition of the ability to control these entities. In the second quarter of 2016, ProSiebenSat.1 Media SE therefore decided to adjust the changes in the fair value of these liabilities in the calculation of underlying net income. This adjustment results in greater transparency by revealing these effects and enables better comparison with operating performance. The adjustment is retrospective; the previous year’s figure was adjusted accordingly.