Vygotsky and the social nature of learning

Operating result

1) Earnings before interest, taxes, depreciation and amortisation 2) Earnings before interest and taxes 3) Ratio of EBITDA/EBIT to revenues

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Financial result

The financial result was negative €65.4 million (2011: negative €53.1 million) including interest expense in the amount of €34.2 million (2011: €32.7 million) in relation to the debt financing with the banking syndicate. In connection with the shareholder financing by News Adelaide Holdings B.V an interest expense in the amount of €25.4 million (2011: €16.3 million) was incurred. The year-on-year increase in interest expense is mainly due to the drawdown of the shareholder loan in the amount of €58.0 million in December 2011.

Consolidated net earnings

For the period ending 31 December 2012, earnings before taxes were negative €190.1 million (2011: negative €273.0 million). Income taxes comprise deferred tax expenses in the amount of €5.8 million (2011: €4.5 million). The consolidated net income after taxes was negative €195.2 million (2011: negative €277.6 million). The total comprehensive income was negative €196.6 million (2011: negative €275.0 million).

Basic/diluted earnings per share were negative €0.25 (2011: negative €0.39).

Net asset position

The following figures refer to the reporting date 31 December 2012 and in relation to the past financial year to the reporting date 31 December 2011.

Trade receivables increased to €85.9 million (2011: €72.1 million) primarily due to a higher subscriber base. Other financial assets decreased to €2.8 million (2011: €6.4 million) mainly due to fair value changes in foreign currency derivatives. The increase in film assets and advance payments for sports and film rights to €84.8 million (2011: €76.5 million) related in the amount of €5.6 million to the increase of film assets due to the purchase of film licences and in the amount of €2.6 million to an increase in advance payments for sports and film rights. Inventories decreased to €19.4 million (2011: €33.1 million). The decrease in inventories due to the impairment losses and the reclassification of rented receivers to non-current assets was only partially offset by the purchase of new receivers. Intangible assets amounted to €706.8 million (2011: €699.7 million). The additions from investments in software and receiver licences were partially compensated by scheduled amortisations. Property, plant and equipment amounted to €30.9 million (2011: €33.3 million). The carrying amount of receivers, recognised

under non-current assets, increased to €165.3 million (2011: €119.1 million).

The additions mainly related to HD receivers and external hard disks. Other assets increased to €47.8 million (2011: €21.8 million). The increase was mainly due to deferred marketing expenses, advance payments on playout services as well as deferred transaction costs for the financing measures announced on 14 January 2013. In addition, other assets comprised restricted cash.

Shareholders’ equity decreased by €46.9 million to €42.1 million (2011:

€89.0 million) primarily due to the loss for the period, partially offset by the capital increase from authorised capital. At the end of 2012, the ratio of equity to total assets was 3.7 percent (2011: 8.0 percent).

Total liabilities increased to €1,106.0 million (2011: €1,027.8 million) and were affected by the following developments: Borrowings rose to €615.3 million (2011: €580.0 million). The increase resulted from an additional drawdown of the Revolving Credit Facility in the amount of €6.9 million and the build-up of interest and transaction cost liabilities in connection with the shareholder financing in the amount of €22.8 million. Net financial liabilities (financial liabilities less cash) amounted to €611.0 million (2011: €525.2 million). Trade payables increased to €277.1 million (2011: €235.8 million) primarily as a result of an increase in payables for licences due to the acquisition of film rights as well as an increase in other trade payables mainly due to higher liabilities for the purchase of new receivers and higher liabilities in connection with encryp-tion services and cable broadcasting fees. Other financial liabilities decreased to €71.6 million (2011: €89.3 million) primarily due to a reduction in purchase price commitments regarding the buyback of all shares in Premiere Star GmbH, the acquisition of Loxxess Medienlogistik GmbH as well as Creation Club GmbH, the acquisition of Sky Creative Services GmbH, the buyback of shares in Premium Media Solutions GmbH as well as payments in connection with the shareholder claims. Other provisions increased to €15.6 million (2011:

€12.8 million). The increase was due to a potential payment obligation to a network operator. Other liabilities increased to €60.3 million (2011: €53.2 million). The increase resulted primarily from higher value added tax liabilities as a result of increased subscription revenues.

Deferred tax liabilities increased to €55.2 million (2011: €49.8 million) and relate primarily to the different amortisation methods applied for tax purposes and in the IFRS balance sheet regarding intangible assets.

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Financial position

The following figures relate to the twelve-month period of the respective year, unless indicated otherwise.

Cash flow from operating activities amounted to negative €30.6 million (2011: negative €77.0 million). Cash outflows from the negative EBITDA in the amount of €51,1 million (2011: negative €155.5 million) adjusted by non-cash income and expenses in the amount of €13.5 million (2011: €7.8 million) were offset by changes in working capital in the amount of €7.6 million (2011: €68.5 million). Cash flow from operating activities also includes the cash flow in connection with the acquisition of film assets and advance payments for sport and film rights.

The cash flow from investing activities amounted to negative €136.4 million (2011: negative €110.2 million). Payments for investments in intangible assets and property, plant and equipment primarily related to the acquisition of receivers and associated licences as well as investments in software.

Payments for the acquisition of entities relate mainly to the buyback of all shares from Premiere Star GmbH as well as Creation Club GmbH, the acquisition from Loxxess Medienlogistik GmbH and the buyback of shares from Premium Media Solutions GmbH.

Cash flow from financing activities amounted to €116.5 million (2011:

€236.9 million). The inflow of funds from the capital increase exceeded the outflow of funds for repayment of credit facilities, interest payments as well as payments for transaction costs in connection with the capital measure that was carried out.

At the end of 2012, Sky had at its disposal liquid funds of €4.3 million (year end 2011: €54.8 million). The existing financing facilities (excluding guarantees and capitalised interests) were utilised in the amount of €594.6 million (year end 2011: €587.8 million). Thereof, €31.3 million were classified as equity according to IAS 32. The undrawn credit facilities amounted to €69.7 million as of the balance sheet date with a further €144.2 million of committed funding under the Financial Support Agreement reached on 2 February 2012.

The capital structure of Sky and the principles and aims of the risk manage-ment system are explained in detail in the notes to the consolidated financial statements under Item 2.8.1 (“Borrowings”), Item 4.1 (“Financial risk management”) and Item 4.2 (“Capital management”).

Overall presentation of the economic situation

The positive operational and financial trends delivered in 2011 continued in 2012 and delivered strong growth again. Focusing on exclusive high quality content, leading innovation and great customer service resulted in a significant improvement in all key metrics.

The subscriber base grew by 351,040 net subscribers (2011: 359,297 subscribers). The 12-month rolling churn rate amounted to 11.8 percent (2011: 11.0 percent). ARPU increased to €32.77 (2011: €31.29). EBITDA improved significantly over the previous year and amounted to negative

€51.1 million (2011: negative €155.5 million). The development of key metrics was in line with the statements forecast in the 2011 combined management report.

The award of the Bundesliga rights until 2017 as well as the acquisition and extension of other exclusive sports and film rights together with the invest-ments in the areas of HD, the enhanceinvest-ments to the Sky Go service, the exclusive Sky Anytime on demand service and the Sky Guide form the basis for further growth and to achieve sustainable profitability.

Sky Deutschland AG Revenues and earnings

Revenues amounted to €16.6 million (2011: €16.8 million) and primarily relate to management services of Sky Deutschland AG delivered to its subsidiaries during 2012. Other operating income increased to €356.8 million (2011: €7.9 million). The increase resulted primarily from the write-up of the interests in Sky Deutschland KG in the amount of €348.0 million. The write-up was due to the fact that the reasons for the impairment charge which had been taken on this equity interest in 2009 no longer existed as at the balance sheet.

Personnel expenses increased to €35.1 million (2011: €27.0 million). The increase is mainly driven by higher share based compensations as a result of the higher Sky Deutschland AG stock price. Total depreciation and amortisa-tion increased to €1.9 million (2011: €1.4 million) primarily due to leasehold improvements carried out. Other operating expenses increased to €28.9 million (2011: €26.1 million) mainly due to higher consulting charges in connection with the capital measures carried out in 2012 and planned for 2013 as well as higher legal fees.

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The financial result decreased to €7.8 million (2011: €19.7 million). Income from loans, included in financial assets, which resulted from the granting of loans to Sky Deutschland KG, increased to €56.2 million (2011: €55.3 million). This increase was more than compensated by an increase in interest expenses to €48.5 million (2011: €35.8 million), primarily resulting from the utilisation of existing financing.

The income taxes comprised deferred tax expense in the amount of €43.2 million (2011: €9.9 million), whereof €22.0 million were due to the write-up of the interests in Sky Deutschland KG.

The profit and loss statement at the end of the financial year showed a net income in the amount of €272.2 million which was mainly affected by the write-up of the interests in Sky Deutschland KG (2011: net loss in the amount of €19.8 million). The accumulated loss of Sky Deutschland AG at year end amounted to €230.7 million (2011: €502.9 million).

Net asset position

Property, plant and equipment decreased to €11.7 million (2011: €12.6 million) primarily due to scheduled amortisations. The interests in affiliated companies comprised primarily the investment in Sky Deutschland KG. In 2012, Sky Deutschland AG made payments into the capital reserve of Sky Deutschland KG in the amount of €155.0 million (2011: €168.1 million).

Taking the write-up of the interests in Sky Deutschland KG into account, interests in affiliated companies rose to €1,941.2 million (2011: €1,438.2 million). Loans to affiliated companies related to a loan that was issued to Sky Deutschland KG. During 2012, loans to affiliated companies increased to

€870.9 million (2011: €844.3 million). Receivables from affiliated companies increased to €20.4 million (2011: €7.7 million) primarily due higher receiva-bles for management services rendered to Sky Deutschland KG and other cost allocations. Other assets primarily increased due to a refund claim of withholding tax arising from the retrospective tax exemption of interest payments on the convertible bond. Prepaid expenses, mainly relating to the upfront fee recognised in connection with the issuance of the convertible bond, decreased to €26.3 million (2011: €31.7 million).

Due to the net income for the year and the equity measure undertaken in 2012, shareholders’ equity increased to €2,175.5 million (2011: €1,747.5 million). Provisions increased to €22.6 million (2011: €14.6 million) in particular due to higher provisions for variable salaries. Liabilities relating to

the convertible bond issued in 2011 remained at €166.2 million (2011:

€166.2 million). Liabilities to banks amounted to €295.3 million (2011:

€294.2 million) and mainly comprised the existing debt financing. Trade payables increased slightly to €4.9 million (2011: €4.8 million) and consisted mainly of obligations for the rental of the business premises. Liabilities to associated entities amounted to €73.7 million (2011: €59.6 million) and comprised the Shareholder Loan I of News Adelaide Holdings B.V. including interest, a commitment fee for loan commitments from News Adelaide Holdings B.V. in the year 2012 and the arrangement fee for a future Share-holder Loan II. Other liabilities increased to €5.7 million (2011: €5.2 million) especially due to obligations to News Adelaide Holdings B.V. in connection with the withholding tax refund claim of Sky Deutschland AG arising from the retrospective tax exemption of interest payments on the convertible bond.

Deferred tax liabilities amounted to €131.5 million (2011: €88.2 million) and are primarily due to the difference between the trade and tax bases of the investment account for Sky Deutschland KG. Deferred tax assets on tax losses were deducted from the recognised deferred tax liabilities.

Financial position

Cash flow from operating activities amounted to negative €51.5 million (2011: negative €25.2 million). Cash outflows were due to the negative EBITDA in the amount of €38.8 million (2011: negative €28.1 million) and the changes in working capital in the amount of negative €12.7 million (2011: cash inflow in the amount of €2.9 million).

Cash flows from investing activities amounted to negative €123.4 million (2011: negative €131.9 million). Payments into the capital reserves of Sky Deutschland KG in the amount of €155.0 million (2011: €168.1 million) exceeded cash inflows of €32.6 million (2011: €41.5 million) from interest received. In addition, further investments led to cash outflows of €1.0 million (2011: €5.3 million).

Cash flow from financing activities amounted to €130.5 million (2011:

€201.8 million). The proceeds from the capital increase exceeded interest payments.

The balance of liquid funds at the balance sheet date amounted to €0.5 million (2011: €44.9 million).

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Sky Deutschland AG | Annual Report 2012