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DEAGDeutsche Entertainment AG

Annual Report 2003

DEAG Share: key figuresInternational security identification number (ISIN) DE0005513907Security identification number (SIN) 551390Ticker symbol ERMReuters ticker symbol EMRG.FTrading segment Prime StandardPrime sector MediaIndustry group Media + EntertainmentNumber of shares as at 31. 12. 2003 13.750.050 no-par-value sharesIssue price 35.28 EUR (corresponds to 11.76 EUR since the split)First quotation 14. 09. 1998Designated sponsors DZ Bank AG until 18. 11. 2003

VEM Aktienbank AG since 19. 11. 2003Shareholder structure Management approx. 30 %, Free Float approx. 70 %Changes in shareholders’ equity Share split in ratio 1:3 on 21. 06. 1999

Increase in capital of 1,092,259 shares on 30. 06. 2000Increase in capital of 764,241 shares on 13. 07. 2001Increase in capital of 760,000 shares on 08. 11. 2002

Increase in capital of 4,583,350 shares on 16. 12. 2003

2003 2002

Earnings per share (acc. to IAS) undiluted in EUR -1.65 -1.08Earnings per share (acc. to IAS) diluted in EUR -1.09 -1.08Number of shares on 31. 12. 13,750,050 9,166,700Highest / lowest price (on Xetra) in EUR 3.14 / 0.96 11.74 / 0.41Year-end price 31. 12. (on Xetra) in EUR 2.42 1.04Market capitalisation at highest / lowest price in EUR million 43.2 / 8.8 80 / 3.5Market capitalisation as at 31. 12. in EUR million 33.3 8.7

Convertible Bond (2003 / 2006): key figuresISIN DE0008335050WKN 833505Segment Regulated unofficial marketAccounting total par value in EUR 6,783,358 EURDenomination 4,583,350 Partial debentureCoupon NoIssue price in EUR 2.10 EURFirst quotation 18. 03. 2004

Development of DEAG share compared with TecDax (indexed)

1050

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675

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525

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225January February March April May June July August September October November December

DEAG

TecDax

Period of time: 02. 01. 2003 until 31. 12. 2003

52 DEAG Annual Report 2003

DEAG Annual Report 2003 – Table of Contents 53

TABLE OF CONTENTS

DEAG Group at a Glance 54

Foreword by the Management Board 55

Management Report and Group Management Report 56–65

Business Development of the DEAG Group 57–61

Restructuring and its Financial Effect on the Group 57

Expenditure on Developing and Implementing the Restructuring Concept 57

The Group’s Income and Assets Position 57–58

Organisation of Segments 58–59

Financing of the DEAG Group 59–60

Income and Assets Position of the DEAG Holding 60–61

Capital Market 61

Personnel Development 61

Report on Risk Management 62

General and Commercial Risks 62

Specific Company and Market Risks 62–64

Outlook for Financial Year 2004 65

Consolidated Financial Statements 66–88

Preliminary Remarks on Financial Reporting 66

Consolidated Balance Sheet 67

Consolidated Statement of Income 68

Consolidated Cash Flow Statement 69

Development of Shareholder’s Equity in the Group 70

Development of Fixed Assets in the Group 71

Notes on the Consolidated Financial Statements 72–85

Independent Auditor’s Report 86

Annual Financial Statements for DEAG Holding (Short Version) 87–88

Report of the Supervisory Board 89

Corporate Governance 90

Personal Data 91–93

Future-Oriented Statements 94

Financial Calendar 94

Imprint 94

54 DEAG Annual Report 2003 – DEAG Group at a Glance

DEAG Group at a Glance

2003 20022 Change on the year

Revenues (in EUR million) 127.3 100.2 27.1 Domestic (in EUR million) 67.7 51.8 15.9 Foreign (in EUR million) 59.6 48.4 11.2

EBITDA (in EUR million) 8.6 5.6 3.0 in % of revenues 6.8 5.6 53.9

EBIT (in EUR million) before restructuring expenditure1 4.3 1.2 3.1 in % of revenues 3.4 1.2 >100EBIT (in EUR million) after restructuring expenditure1 -7.8 -10.3 2.5 in % of revenues -6.1 1.2 -24.3

Cash flow (in EUR million) -3.1 -8.4 5.3

Balance sheet total (in EUR million) 110.6 129.5 -18.9

Total equity (in EUR million) 29.3 34.2 -4.9 in % of balance sheet total 26.5 26.4 -14.3

Earnings per share undiluted (in EUR) -1.54 -0.61 -0.93Earnings per share diluted (in EUR) -1.48 -0.61 -0.87

Employees (full-time) as at 31. 12. 169 216 -47

1 Restructuring, extraordinary depreciation and one-off factors2 Adjusted of changes in consolidation entity

DEAG Annual Report 2003 – DEAG Group at a Glance 55

FOREWORD BY THE MANAGEMENT BOARD

“Restructuring completed „and organic growth „prospects developed.”

Dear Shareholders, Dear Business Associates,

The last financial year was marked for the group by the completion of final restructuring tasks and by expansion and development of opera-tive business.

The adjustments to the group’s personnel and cost structure on which the restructuring concept was based were implemented on the neces-sary scale. During this process we also scrutinised our corporate struc-tures with a view to rearranging organisational workflows along with the personnel structure, thereby ensuring that structural streamlining led to no reduction in quality.

Of central importance was the combined capital increase completed on 16 December 2003, which was used to issue new shares and convert-ible bonds. This measure enabled us to pay off all previous liabilities to financing banks. Along with composition agreements with several bodies, in particular with STELLA Entertainment AG’s insolvency ad-ministrator, we succeeded in achieving a substantial reduction in inter-est charges and a near final settlement of possible litigation risks from the past.

The group’s operative business in 2003 was influenced especially by the pleasing developments in our Artists & Tours segment. Concerts and tours by artists such as the Rolling Stones, AC / DC, Metallica, Paul McCartney, Jon Bon Jovi and Peter Maffay’s Tabaluga, who enthralled audiences in Europe and worldwide, made a crucial contribution to-ward a successful operating result.

DEAG Deutsche Entertainment AG earned sales revenues of EUR 127.3 million in the last financial year, an increase of 27.1 % on the previous year after adjustment for changes in the consolidation entity. EBITDA improved by EUR 3 million to EUR 8.6 million. These key indicators of last year’s business trend, which deliberately ignore one-off charges for restructuring efforts and extraordinary amortisation of consolidated goodwill, demonstrate that our “Back to the Roots” mot-to, whereby forces were bundled and concentrated on the traditional core business while we simultaneously pushed organic growth, was the right strategy. In addition, they show that our operative business is both healthy and efficient and highly promising, and provides a stable, reli-able foundation for future-proof alignment of the business enterprise.

We will utilise and further consolidate this situation in the financial year 2004 setting numerous critical courses for the future. We will con-solidate our entry into the festivals segment last financial year by stag-ing the berlinova festival for the second time. By bringing in big names such as Massive Attack, Black Eyed Peas, Motörhead and Sportfreunde Stiller, as well as promising newcomers and popular DJs from Mayday, we plan to establish a permanent place in this market.

In a joint project with our sales partner Ticket Online GmbH, from 2004 we will be the first entertainment group to use an innovative, for-ward-looking technology to supplement our conventional sales chan-nels. This will enable us to reduce our sales costs significantly while simultaneously improving customer-friendliness and customer satisfac-tion.

In a new subsidiary, DEAG Classics AG, DEAG is bundling and ex-panding its activities in the classical music segment, which were previ-ously only sporadic. In addition to the Berlin Philharmonic concert, which is usually sold out, in August and September this year the new company will celebrate the first concerts under its own auspices, staging several events with the exceptionally talented singer Anna Netrebko.

In addition, DEAG will participate in Auric Entertainment GmbH, Düsseldorf. In this company, we will bundle business activities in con-nection with the Rheinarena in Düsseldorf, sporting events and the de-velopment of an events promotion agency in Russia. In the group, the activities of DEAG Classics AG and Auric Entertainment GmbH are being brought together in a new business segment, Classics & Sports.

In view of very successful progress with advance sales for concerts and tours starring Eric Clapton, Paul McCartney, Cher, Pink, Eros Ramazzotti, Elton John, Udo Jürgens and many other of our artists, along with the aforementioned reduction in costs and structural adjust-ment, we anticipate a further positive operating result for the financial year 2004. We are convinced that with our positioning and the long-term course we have set to perform our future tasks we are optimally equipped. Our special thanks are due to all employees, whose tremen-dous efforts and achievements, even in difficult phases, made the result outlined in this annual report possible. We thank our shareholders and business associates for the trust they have placed in us and assure them that we will seize the successfully completed restructuring of the group as an opportunity for a successful future outlook.

Peter L. H. Schwenkow Markus A. Fabis

56 DEAG Annual Report 2003 – Management Report and Group Management Report

The Management Board of DEAG Deutsche Entertainment AG has prepared this combined management report and group management report for DEAG Deutsche Entertainment AG. Given the integral significance for the Group of the asset, financial and income situation of DEAG AG as the parent company, we consider a combined version of the report to be appropriate.

Management Report and Group Management Report

DEAG Annual Report 2003 – Management Report and Group Management Report 57

1. BUSINESS DEVELOPMENT OF THE DEAG GROUP

1.1 Restructuring and its Financial Effect on the GroupThe financial year 2003 was marked to a special degree by the final restructuring measures. A fundamental feature of these restructuring measures was a debt remission by the creditor banks and the final clari-fication of all residual risks arising from the STELLA Group and Qi-vive GmbH insolvencies. In December 2003, we carried out a capital increase in cash and issued a convertible bond to finance these measures. In the course of the capital increase, KTG Kunersdorf Beteiligungsge-sellschaft mbH & Co. KG and AURIC GmbH & Co. KG joined the ranks of shareholders as a strategic investor. The EUR 15.3 million in-flow of funds raised by these capital measures was not enough, however, to stabilise the liquidity situation on a lasting basis, so a EUR 4.0 mil-lion bridging mortgage was taken out. To complete the restructuring process, the inflow of funds was put to the following uses:

Debt Remission by Creditor BanksOn 13 November 2003, the Management Board succeeded in negotiat-ing with the creditor banks an agreement by which, in return for a one-off redemption payment of EUR 13.5 million plus accrued interest, less repayments made by that date, the creditor banks agreed to waive their remaining claims against DEAG and Mr Peter Schwenkow and to release all collateral assigned subject to payment of the redemption sum by 31 December 2003.

Costs of Capital ProcurementCapital procurement costs totalling EUR 2.4 million were incurred, of which EUR 1.3 million has been paid to date.

Settlement of Residual RisksIn a settlement negotiated with the STELLA Entertainment AG and Broadway Musical Management GmbH insolvency administrator, it was agreed that in return for due payment of a redemption sum of at least EUR 800,000, including EUR 100,000 as a debtor warrant bond, the administrator would waive all claims by the two companies that he represented. A EUR 350,000 instalment was paid on 31 December 2003. The sum outstanding is to be paid in several instalments by 31 March 2005.

Residual risks totalling EUR 3.75 million in connection with the STELLA insolvency were settled finally by the payment of EUR 2.5 million, including EUR 500,000 paid in March 2004. Further claims arising from this complex are now ruled out once and for all.

With Dresdner Bank it was agreed that in return for payment of a redemption sum of EUR 750,000 the bank would waive all further claims in connection with the STELLA Entertainment AG and Broad-way Musical Management GmbH insolvency. Due payment was made before 31 December 2003.

With Nord / LB Norddeutsche Landesbank Girozentrale it was agreed that in return for a redemption sum of EUR 350,000 to be paid by 31 December 2003 and for further payments totalling EUR 500,000 in 2005–2006, subject to the company’s liquidity position, the bank would dispense with all further damages claims against the company. The redemption sum due on 31 December 2003 was paid in time.

With Ringier AG, which holds a put option to acquire from DEAG Deutsche Entertainment AG 39 % of Good News Productions AG stock at a fixed purchase price, the company has contractually agreed that the put option originally scheduled for 30 June 2004 can now be exercised on 30 June 2006. In return, DEAG undertook to pay a pro-longation fee of EUR 700,000, which it did in March 2004.

1.2 Expenditure on Developing and Implementing the Restructuring ConceptCosts incurred in connection with the capital increase totalled EUR 900,000. They were netted out in the Group’s accounts against the inflow of funds from the capital increase with no effect on the operat-ing result. Restructuring expenditure amounted to a further EUR 12.7 million.

In the course of preparing the annual financial statements we also un-dertook a review of our investment portfolio and in the individual financial statements of companies that hold shares in associated un-dertakings wrote down investment valuations or claims against associ-ated undertakings by a total of EUR 10.1 million. In the consolidated financial statements these depreciations were reversed and replaced by EUR 10.1 million in extraordinary depreciations in consolidation-re-lated goodwill.

The result of restructuring expenditure, extraordinary depreciation and one-off factors is as follows:

in EUR million

Income from debt remission 10.7

Restructuring expenditure, one-off factors -13.6

Netting out costs of the capital increase 0.9 -12.7

Extraordinary depreciations -10.1

Result of restructuring -12.1

For detailed figures we refer to the statements on goodwill (Section 13) and restructuring expenditure, extraordinary depreciations and one-off factors (Section 37) in the Notes to the Consolidated Financial State-ments to 31 December 2003.

1.3 The Group’s Income and Assets Position

Income PositionWhere figures for the previous year are concerned, the following notes on the income figures relate to figures adjusted for the STELLA sub-group.

Sales increased by organic growth to EUR 127.3 million from EUR 100.2 million, corresponding to a 27.1 % increase.

The gross operating result from sales was EUR 26.3 million against EUR 23.9 million the previous year and was down slightly on the year, to 20.7 % from 23.9 %, as a percentage of sales. That was due to a change in product mix, especially in the tours business in Germany.


Sales costs totalled 10.3 % of sales revenues, compared with 10.8 % the previous year, and increased accordingly at a lower rate than sales revenues.

Administrative expenses were down to EUR 8.6 million from EUR 12.5 million. As a percentage of sales they amounted to 6.8 % com-pared with 12.5 % the previous year. This marked decline was due in particular to the success of cost reduction measures.

The other operating income and expenditure balance was EUR -4.1 million after EUR -4.9 million the previous year. Here too, the decline is due to successful cost reduction.

Restructuring expenditure, extraordinary depreciations and one-off factors totalled EUR 12.1 million against EUR 11.4 million the previ-ous year. Please see the notes for a breakdown of the figures.

Earnings before taxes and minority interests declined from EUR 13.3 million to EUR 10.7 million due to interest expenditure up EUR 1.9 million and investment income down EUR 3.2 million on the year. In the previous year, income from the sale of our 33.3 % shareholding in Velomax Berlin Hallen Betriebs GmbH made a major contribution toward the result, whereas in the year under review deconsolidation-re-lated expenditure imposed nothing but a burden on the result.

Taxes on corporate income and business profits were EUR -0.3 million as against EUR 3.7 million in 2002, and while in the previous year de-ferred tax income and expenses totalled EUR 7.9 million and EUR 4.8 million respectively, in the year under review net deferred tax income was EUR 1.0 million.

In the year under review the share of minority interests in the result was EUR -1.1 million (profit share) as opposed to EUR 1.8 million (loss share) in the previous year.

Net loss of the Group for the year increased from EUR -5.2 million to EUR -14.7 million, due almost entirely to restructuring expenditure.

Earnings per share (undiluted) deteriorated from EUR -0.61 in the pre-vious year to EUR -1.54 in the year under review. Taking into account the shares potentially outstanding as a result of the convertible bond issue, diluted 2003 earnings per share were EUR -1.48.

Assets PositionThe balance sheet total was down 14.6 % from EUR 129.5 million in the previous year to EUR 110.6 million in the year under review. On the assets side the decline was due mainly to extraordinary write-downs of EUR 10.1 million in consolidation-related goodwill. Goodwill to-talled EUR 33.5 million compared with EUR 47.1 million the previ-ous year.

Receivables due from associated companies were higher, too, by EUR 200,000.

Lastly, other short-term assets, including accruals and deferrals, were down EUR 1.3 million.

On the capital side, short-term liabilities were down to EUR 80.1 mil-lion from EUR 94.9 million, due in particular to the EUR 20.4 million debt remission or repayment of amounts due to banks and to the repay-ment or remission of EUR 5.9 million owed to Mr Peter Schwenkow. These were offset in part by raising a EUR 4.0 million bridging loan, issuing EUR 4.6 million in convertible bonds and creating reserves that were EUR 6.2 million higher year on year.

Equity capital was down to EUR 29.3 million from EUR 34.2 million in 2002. Yet the capital stock and capital reserve increased by EUR 9.8 million, taking into account EUR 900,000 in capital increase costs. The EUR -14.7 million net loss of the Group for the year led to a decrease in equity, but the equity ratio in the year under review was 26.5 % compared with 26.4 % in the previous year.

1.4 Organisation of SegmentsOur segmentation complies with IAS 14 requirements. Our primary reporting format is by segment, which corresponds to our internal re-porting system, too.

Our three segments are organised as follows:

Artists & Tours As at the end of financial year 2003 Artists & Tours was in terms of sales our most important segment. Millennium Entertainment GmbH, Berlin, functions as an intermediate holding company. The segment also includes BALOU ENTERTAINMENT Konzertagentur GmbH & Co. KG, Cologne, and coco tours Veranstaltungs GmbH, Berlin. It further includes our 50 % holding in Marshall Arts Ltd., London, and our 51 % holding in Good News AG, Glattbrug, Switzerland. Lastly, it includes the 70 % holding in Entertainment One AG, Zürich, which together with Global Concerts GmbH, Munich, and Musicland GmbH, Munich, as wholly-owned subsidiaries of Entertainment One AG constitute the Marcel Avram business.

Urban Entertainment In this segment, Concert Concept Veranstaltungs GmbH, Berlin, is the intermediate holding company that directly holds all shares in related and associated companies that do business in the segment. The related companies are wholly owned. Along with Concert Concept Veranstal-tungs GmbH, which is active itself as a regional promoter, this segment includes our other regional promoting and venue activities, such as the Jahrhunderthalle in Frankfurt am Main, Jahrhunderthalle Besitzgesell-schaft mbH & Co. KG and the operating company Kultur- und Kon-gresszentrum Jahrhunderthalle GmbH. Lastly, the segment includes the remaining business activities of the Media & Commerce segment, which was discontinued in financial year 2001.

Theatres This segment includes, along with the intermediate holding company Broadway Varieté Management GmbH, Berlin, our variety theatres Va-rieté Theater Betriebs GmbH, Berlin, and Friedrichsbau Varieté Stutt-gart Betriebs- und Verwaltungs GmbH, Stuttgart.


Business Development by SegmentSales trend by segment in EUR’000

2003 2002(adjusted)

Change on the year

Artists & Tours 118,806 79,776 +48.9 %

Urban Entertainment 5,829 15,496 -62.4 %

Theatres 8,113 11,419 -29.0 %

Segment performance before restructuring expenditure, extraordinary depreciations and one-off factorsOperating Result (EBIT) in EUR’000

2003 2002(adjusted)

Change on the year

Artists & Tours 4,495 954 >100 %

Urban Entertainment 977 1,965 -50.3 %

Theatres -355 782 >100 %

Artists & ToursSales Revenues: In the Artists & Tours segment, the year under review saw a marked increase in sales revenues by all companies. The main contribution to-ward this marked improvement in sales was, however, made by Good News Productions AG (up EUR 10.4 million, +28.6 %) and the Enter-tainment One sub-group (up EUR 25.4 million, >+100 %).

Segment Performance: Segment performance improved almost fivefold in 2003. This trend, in keeping with the sales trend, was borne by all companies in the segment, with material contributions being made by Good News Pro-ductions AG (+15.0 %) and the Entertainment One sub-group, which boosted its operating result from EUR -3.2 million in 2002 to EUR 2.6 million in 2003.

Urban EntertainmentSales Revenues: EUR 5.0 million of the decline in sales revenues was attributable to companies that were retired from the consolidation entity in the previ-ous year. Adjusted for this factor, the sales decline was EUR 4.2 million (4.2 %) and related mainly to the sales decline at Concert Concept GmbH (EUR -3.3 million). As the result of a change in strategy, the company held and will continue to hold fewer events of its own, con-centrating instead on the higher-margin provision of venues, as is re-flected in overall segment performance.

Segment Performance: Companies retired in the previous year accounted for EUR 0.9 mil-lion of that year’s operating result. Adjusted for this factor, segment performance at EUR 1.0 million in 2003 was still on a par with the previous year’s adjusted level (EUR 1.1 million).

TheatresSales Revenues: In the Theatres segment, sales revenues declined once more due to the deconsolidation of our 50 % holding in Apollo Varieté GmbH as at 1 January 2003. In the previous year, that company’s share of sales rev-enues amounted to EUR 2.3 million. Adjusted for this share, the previ-

ous year’s sales revenues totalled EUR 9.1 million, so the adjusted sales decline amounts to 11 %.

The sales decline is due almost entirely to lower capacity utilisation at Wintergarten Varieté GmbH. In the last financial year the company was especially hard hit by intensified competition in the Berlin market. We are assuming that competition will ease markedly in 2004 so that the sales decline can be largely made good.

Segment Performance: Due to the sales trend, segment performance declined markedly in 2003, too. In the previous year, the deconsolidated Apollo Varieté GmbH accounted for EUR 0.4 million of segment earnings. We ex-pect the rate of return to be back in the black in 2004 as a result of less fierce competition and strict cost management.

1.5 Financing of the DEAG Group

Group Cash Flow Statement (short version)

in EUR’000 2003 2002

Cash flow before change to net current assets -3,068 -8,420

Inflow / outflow of funds from current business activities -786 2,559

Inflow / outflow of funds from investment activities -359 744

Inflow / outflow of funds from financing activities -126 -2,355

Operative change in working capital -1,271 948

Currency effects -36 21

Financial resources at start of year 38,807 37,838

Financial resources at end of year 37,500 38,807

The DEAG Group’s cash resources, including securities held as current assets, totalled EUR 37.5 million as at 31 December 2003. The balance of cash resources, securities and amounts owed to banks totalled EUR 33.5 million in all as at 31 December 2003. This positive balance was countervailed by EUR 21.6 million in advance ticket sales.

We are working on the assumption that financial obligations from op-erating activities, including investments, debt servicing and fulfilment of residual obligations arising from restructuring, can only be met in full in 2004 from the inflow of funds from current business activity and from the inventory of liquid resources and securities if the projected additional inflow of funds can be generated from parts of the Jahrhun-derthalle site in Frankfurt. Initial contracts for the utilisation of parts of the Jahrhunderthalle site have already been signed. Additional inflows of funds will also need to be generated from the sale of plots adjoining the Frankfurt Jahrhunderthalle, from the assessment of tax credit and from taking up additional overdraft facilities. If this is not achieved, or


not achieved in full, a material influence on the financial position can-not be ruled out. We refer to our notes under the headings “Specific Company and Industry Risks” and “Risks of Future Development.” As at 31 March 2004, the amounts that DEAG AG, the holding company, owed to banks and new overdraft facilities totalled EUR 5.2 million. Further lending facilities are available.

Key Financial FiguresThe Group’s financial objectives relate largely to capital profitability, capital structure and third-party indebtedness.

For financial year 2003, the return on total capital employed within the Group is stated and compared with the previous year as follows:

Calculation of return on total capital employed

in EUR’0002003 2002 2002

adjusted

Net loss for the year -14,678 -9,132 -5,210

+ Restructuring + expenditure 12,129 11,426 11,426

+ Scheduled depreciation of + goodwill 3,608 3,637 3,637

+ Net interest income 4,353 2,532 2,474

+ / - Expenditure / income + from income tax 287 -4,111 -3,670

Adjust result for the year 5,699 4,352 8,657

Consolidated balance sheet total at start of financial yr. 129,485 188,710 136,519

Consolidated balance sheet total at end of financial yr. 110,609 129,485 129,485

Average assets 120,047 159,098 133,002

Total return on capital employed in % 4.7 2.7 6.5

1.6 Income and Assets Position of DEAG Deutsche Entertainment AG (Holding)

Income PositionThe net result for financial year 2003 amounts to EUR -17.4 million.

It breaks down as follows:

in EUR million

Administrative costs -5.1

Result from investments -10.1

Interest result -1.7

Extraordinary result -1.0

Other result components 0.5

Net result for the year -17.4

We further note the following:EUR -7.0 million of the result from investments consists of deprecia-tions on associated companies, EUR -4.7 million of expenses incurred as a result of profit and loss transfer agreements, EUR 0.9 million of income from profit and loss transfer agreements and EUR 0.7 million of dividend income.

The interest result consists of EUR -2.9 million in interest paid and EUR 1.2 million in interest earned. Interest income consists mainly of EUR 1.1 million in interest earned from associated companies and EUR 132,000 in short-term interest income.

The extraordinary result consists of the following:

in EUR million

Income from debt remission 10.7

Expenditure:

Risks arising from the STELLA insolvency -2.8

Prolongation fee -0.7

Settlement agreements -1.6

Anticipated losses related to incomplete contracts -2.2

Project risks -1.5

Expenses incurred in connection with capital procurement -2.4

Other expenditure -0.5

Total expenditure -11.7

Extraordinary result -1.0

Assets PositionThe balance sheet total was down (-35.1 %) to EUR 33.6 million from EUR 51.8 million.

On the asset side the reduction was almost entirely due to writedowns on holdings in associated companies (EUR 7 million) and to claims against associated companies (EUR 1.3 million). In the course of pre-paring the annual financial statements and completing our restructur-ing we carried out a review of the entire investment portfolio and as a result undertook extraordinary depreciations on the basis of reduced utility values.

On the capital side the reduction was as follows:

in EUR million 31. 12. 2003 31. 12. 2002 Change

Liabilities 14.1 32.4 -18.3

Reserves 10.2 3.3 6.9

Equity capital 9.3 16.1 -6.8

33.6 51.8 -18.2


We further note the following:Liabilities were reduced by EUR 26.4 million as a result of debt remis-sions by and capital repayments to the creditor banks and to DEAG shareholder Peter Schwenkow. They were increased when new loans totalling EUR 4.0 million were raised and EUR 4.6 million in con-vertible bonds was issued. In respect of the convertible bond issue we further review to our notes under the heading “Capital Measures” and in respect of financing to our notes under the heading “Financing of the DEAG Group.”

Reserves increased by EUR 6.9 million as a result of risk provisions made in connection with restructuring. The reserves include provision for commitments and risks arising from the insolvency of STELLA En-tertainment AG (EUR 3.1 million), for anticipated losses related to in-complete contracts (EUR 2.1 million), for project risks (EUR 1.5 mil-lion), for capital procurement costs (EUR 0.8 million), for the Ringier Verlag option fee (EUR 0.7 million), for risks arising from subsidiaries’ business activities (EUR 0.7 million), for commitments arising from the insolvency of Qivive GmbH (EUR 0.5 million), for consulting and inspection (EUR 0.2 million), for unpaid invoices (EUR 0.2 million), for personnel costs (EUR 0.2 million) and for other provisions (EUR 0.2 million).

Equity capital was reduced by EUR 6.8 million as a result of the EUR -17.4 million net loss for the year, which was atfset in part by an increase in capital resulting from the EUR 10.6 million capital increase. The equity ratio is 27.7 %, compared with 31 % in the previous year. As at 31 December 2003, DEAG AG’s equity capital totalled EUR 9.3 million. If material deleterious repercussions were to affect the assets, financial and earnings position, a loss of half the capital stock could not be ruled out. The risks that might become relevant in this context are outlined in the following Report on Risk Management.

1.7 Capital Market

Share Price Development:The stock market environment proved unsettled in the year under re-view. Until mid-2003 the market was a little on the weak side and marked by uncertainty, then a slight improvement followed. While the DEAG share for the most part went along with the market, in mid-year it gained ground in comparison with its index. In August the share price exceeded EUR 2 and went on, after a peak of EUR 3.14, to stay at this level. The closing price on 31 December 2003 was EUR 2.42 (previous year: EUR 1.04).

In the first three months of 2004, the successful completion of capital measures in December 2003 was reflected by a clear trend toward price recovery.

Capital MeasuresThe capital measures consisted of a capital increase to create 4,583,350 new shares at a price of EUR 2.33, raising net issue proceeds amount-ing to EUR 10.6 million, and an issue of 4,583,350 convertible bonds at EUR 1 each, raising a further EUR 4.6 million. The EUR 4,583,350 capital increase was entered in the Commercial Register of the Berlin-Charlottenburg district court (Amtsgericht) on 16 December 2003.

The new shares were admitted for trading on the Regulated Market (General Standard) on 19 December 2003 and listed at the same time in the Frankfurt stock exchange’s Prime Standard segment, to which stricter reporting regulations apply. The 4,583,350 newly placed shares were allocated to the existing listing on 23 December 2003.

Implementation of the capital increase in cash increased DEAG’s capi-tal stock by EUR 4,583,350 from EUR 9,166,700 to EUR 13,750,050. Initially, existing shareholders were offered new shares as a rights issue at a ratio of two to one. New shares that were not acquired in this way were then put on sale as a public offering on the capital market at a fixed price of EUR 2.33. The capital increase was oversubscribed.

The DEAG 2003 / 2006 convertible bond issue amounts to a total EUR 6,783,358 and is divided into 4,583,350 bearer bonds with equal enti-tlement and a par value of EUR 1.48 each. The term of the bond issue began on 1 December 2003 and ends on 30 November 2006. By the terms of the loan, every bondholder is irrevocably entitled to convert each individual bond with a par value of EUR 1.48 into an individual DEAG voting share during two time windows after the 2005 and 2006 annual meetings of shareholders and at the end of the term. The con-vertible bonds have been traded over the counter since 18 March 2004 under the Security No. WKN 833505.

Successful Investor RelationsDEAG fulfils the transparency requirements of Deutsche Börse’s Prime Standard premium segment. During the year under review, investor relations activities were aimed in particular at informing institutional investors, financial analysts and private investors about DEAG in a timely, transparent and reliable manner. Our annual meeting of share-holders, held at the Berlin Wintergarten variety theatre and attended by about 200 visitors, and the investor relations section of the DEAG website were important instruments in informing our private investors about DEAG’s strategy and operating development. We invited institu-tional investors, analysts and financial journalists to the accounts press conference or the analysts’ conference, to the equity forum and to three investors’ nights with Mariah Carey in Hamburg, Berlin and Munich. In the course of roadshows we also held about twenty one-to-one talks with potential investors and briefed the financial community about our quarterly results in conference calls.

In the course of the capital measures we changed our designated spon-sor. Since 19 November 2003, designated sponsorship has been in the hands of VEM Aktienbank AG and no longer in those of DZ Bank AG.

1.8 Personnel DevelopmentThe annual average number of people employed by the Group was 256, or 168 full-time equivalents, compared with 1,025 (642 FTEs) in the previous year. This marked decline was due mainly to changes in the consolidation entity in connection with the STELLA Group in the first quarter of 2002 and the deconsolidation of Apollo Varieté Betriebs GmbH, Düsseldorf, as at 1 January 2003. DEAG Deutsche Entertain-ment AG employed an annual average 21 staff (20 FTEs) as against 31 (29 FTEs) in the previous year. This decline was due to personnel reduction in connection with the restructuring.


2. REPORT ON RISK MANAGEMENT

§ 91 Par. 2 of the German Companies Act (Aktiengesetz) requires the Management Board to undertake suitable measures and, in particular, to set up a monitoring system, to ensure early recognition of develop-ments that might pose a threat to the Company’s continued existence. Risks form an inherent part of entrepreneurial activity. Swift growth and successful activity presuppose that strategic and operative risks are recognised, evaluated and reported. Risk management is a constant, proactive activity by all employees in positions of responsibility. In the course of ongoing restructuring of the DEAG Group during 2003, fur-ther personnel reduction led to a partial reallocation of tasks and rear-rangement of responsibilities. The risk management system documen-tation has yet to be revised accordingly.

The Management Board plays an active key role in risk management. At two to three Board meetings per month, all material business activi-ties in the various segments are discussed and documented, and clear responsibilities for handling them are assigned. Risk management at DEAG consists mainly of operative controlling (holding), operative project controlling and controlling of investments in subsidiaries and affiliated companies. The risk management system further involves monitoring liability risks arising from legal transactions and disputes, and tax risks.

On the basis of the existing system it can be stated that an effective risk management system fulfilling statutory minimum requirements is in place at DEAG. On this basis risks can definitely be identified in good time to take appropriate risk management action.

2.1 General and Commercial RisksTo minimise existing contractual, tax and industrial law risks we use the services of both in-house experts and external specialists to help us make decisions and shape business processes. Where risks cannot be avoided we endeavour to take out appropriate insurance cover, espe-cially for events risks. Currency risks are covered, with due considera-tion for financial aspects, by obtaining in advance the foreign currency that will be required. Interest rate risks are either reduced or covered by decisions on interest terms. To ensure that our employees’ profes-sional and legal conduct is irreproachable, guidelines and instructions are in place in essential areas, such as payments, purchasing, staff ap-pointments and business travel, and we provide in-house and exter-nal staff training and continuing education facilities. Our IT depart-ment uses only standard software. Technical operations, including data backup, are handled by qualified staff. Technical operations, including data backup, have since 1 May 2002 been provided by DCW Software Deutschland GmbH’s external computing centre and by an external IT service provider.

2.2 Specific Company and Market Risks

The Company’s Continued Existence The DEAG Group, and DEAG Deutsche Entertainment AG in par-ticular, has in recent years put an extensive restructuring process in place. Massive burdens have arisen for DEAG’s corporate substance, especially in connection with the STELLA Entertainment AG, BMM

Broadway Musical Management GmbH and Qivive GmbH insolven-cies. For financial year 2004 the successful implementation of measures planned or initiated by the Management Board to raise corporate fi-nance and to expand the Company’s commercial operations will be of crucial importance. If the measures initiated were to fail either wholly or in part, the Company’s continued existence would be in jeopardy. The Company’s Future Capital RequirementEven if the Company’s succeeds in implementing the corporate finan-cial measures initiated, further funding will be needed to cover possible financial requirements.

The Company aims to generate from the DEAG Group’s operative business the cash that it needs to cover its capital requirements and, if necessary, to raise further external funding or capital resources. The Company’s ability to raise external funding is limited by the few assets that are still available to provide collateral. Against this background it is uncertain whether the Company will be able in future to meet all its capital requirements and have the requisite cash resources available on time. Failure by the Company to meet future capital requirements would jeopardise its continued existence.

Dependence on Management and Qualified StaffDue mainly to conditions in the industry, the success of DEAG Group’s commercial activity will depend to a very large extent on its ability to secure and maintain the services of highly qualified management and staff in management, the acquisition of artists, customer care and mar-keting. Failure by the DEAG Group to do so could have a seriously det-rimental effect on the Group’s assets, financial and earnings position.

Dependence on Existing and Development of New Business RelationshipsDEAG’s commercial success and entrepreneurial risk depend to a large extent in all three segments – Artists & Tours, Urban Entertainment, Theatres – on its ability to enter into business relationships with such artists, producers and others in the media and entertainment business whose performances and productions are in keeping with the public taste at the given time and are suitable for generating large audience figures.

DEAG currently maintains business relations with various artists and other commercial partners who have been and continue to be of great importance for its past and present business activity. These business relationships are based in part on one-off contracts for certain events and tours and in part on longer-term framework contracts that DEAG and the artist in question may renew on expiry. If one or more of these business relationships were not to be sustainable, that could have a det-rimental effect on the DEAG Group’s business activities and its assets, financial and earnings position.

Significant factors in this connection include business relationships with different artists and their managers and with international concert organisers who decide on concert tour allocations.

Given that the public’s taste is constantly changing, DEAG is also de-pendent for its future commercial success on being able to establish


new business relationships with such artists, producers and others in the media and entertainment business whose performances and pro-ductions correspond to the prevailing future public taste. Failure by DEAG to establish new business relationships to the extent that it considers necessary could also have a detrimental effect on the DEAG Group’s assets, financial and earnings position.

In view of the prevailing contractual and economic conditions relating to the holding of concerts and other events, it is of considerable impor-tance for DEAG to enjoy a financial standing that is regarded as suf-ficient by existing or potential business partners. Failure by DEAG to improve its financial standing sufficiently could also prove detrimental to the Company’s ability to establish or maintain business relationships that it considers desirable. That in turn could have negative repercus-sions on the DEAG Group’s commercial activity and on its assets, fi-nancial and earnings position.

Ticket Sales, Fluctuations in Audience FiguresDEAG’s commercial success depends fundamentally on audience fig-ures at concerts, variety shows and other events with which the Com-pany is associated in one way or another. Audience figures are deter-mined by various factors, including in particular the appeal of the event and venue in question, the ticket prices and the way in which events are marketed. Experience shows that audience figures vary seasonally and in relation to the weather at both open-air and indoor events. If audience figures are too low and ticket sales for the events in question fall short of DEAG’s expectations, that too could, depending on the number of events affected and on the services DEAG provides toward holding them, materially impair DEAG’s assets, financial and earnings position.

Availability of Sales ChannelsTo market concerts, variety shows and other events successfully it is of great importance to have suitable sales channels at your disposal for ticket sales and, in particular, for advance bookings. Especially for supraregional concert tours there are very few providers of suitable ad-vance booking systems in Germany. Failure by DEAG to have access to suitable sales channels for ticket sales in the numbers desired could prove seriously detrimental to the DEAG Group’s assets, financial and earnings position.

Availability of VenuesSuitable venues must be available to hold successful concert tours and other productions and events.

The DEAG Group has at its disposal in the Urban Entertainment seg-ment the Waldbühne in Berlin, the Jahrhunderthalle in Frankfurt am Main and the Hallenstadion in Zurich, and in the Theatres segment the Wintergarten in Berlin and the Friedrichsbau in Stuttgart. Except for the Jahrhunderthalle in Frankfurt am Main, which the DEAG Group owns, the other venues are leased. Should the Company in future, on expiry of the leases or for other reasons, no longer have access to these venues, that could have a detrimental effect on its business activity and its assets, financial and earnings position.

The Zurich Hallenstadion, the lease of which is held by DEAG Group

company Good News Productions AG, is to undergo conversion from June 2004. For the duration of the works the Hallenstadion will be ei-ther unavailable or available only to a limited extent for use as an events venue. Given the importance of the Hallenstadion for the Swiss events market, it cannot readily be assumed that Good News Productions AG will have access to other suitable venues during the conversion works. During what is likely to be a 14-month period of works at the Hal-lenstadion, an impairment of Good News Productions AG’s business activities cannot be ruled out.

In the Artists & Tours segment it is essential, if concert tours are to be held successfully, to have suitable venues available at various places for the events in question and to be able to negotiate terms with the venue operators. Failure by DEAG to do so to the desired extent or on the desired terms could have a negative effect on DEAG’s business activities and on its assets, financial and earnings position.

Failure to Recognise in Time Risks that Pose a Threat to the Company’s ExistenceIn our opinion the existing monitoring system set up to identify at an early stage any trends that might threaten the Company’s continued existence fulfils company law and other requirements. Monitoring of business activities to identify material risks at an early stage is currently undertaken to a large extent by the Company’s CEO, Peter Schwenkow. In addition, subsidiaries and affiliated companies are managed fairly in-dependently, due in part to organisational and industry-related reasons. There can be no ruling out the possibility that the Company might not recognise material risks until a point in time when they could no longer be dealt with, or no longer dealt with to the extent that would have been possible if they had been identified at an early stage. A develop-ment of this kind could seriously impair DEAG’s assets, financial and earnings position over and above the material risks outlined above and likewise jeopardise the Company’s continued existence.

Exchange Rate RisksSome of the fees that the Company pays are denominated in US dol-lars. Sales revenues generated by the event in question are, in contrast, for the most part invoiced in euros. USD and EUR exchange rate fluc-tuations may therefore affect both business operations and the finan-cial and earnings position, especially the companies’ operating margins, thereby leading to exchange rate profits and losses.

Holding StructureThe Company itself undertakes virtually no operative business, per-forming instead a holding function for the DEAG Group. The Com-pany’s assets currently consist for the most part of shareholdings in its operative subsidiaries. With some of them the Company has profit and loss transfer agreements. To earn a profit the Company therefore de-pends on DEAG Group operating companies earning profits and trans-ferring them to it. Conversely, the Company is contractually bound by the profit and loss transfer agreements to offset any losses that these subsidiaries make. This obligation could have materially detrimental effects on the Company’s assets, financial and earnings position.

Competitive and Market EnvironmentIrrespective of a concentration process that has been apparent in recent


years, the DEAG Group faces intensive competition in its three seg-ments Artists & Tours, Urban Entertainment and Theatres. In the proc-ess, DEAG is contending not only with immediate competitors who of-fer services similar to its own but, in the final analysis, with all providers of leisure events. A number of the DEAG Group’s current or potential competitors have larger financial and other resources at their disposal and might therefore be more successful at maintaining or establishing business relationships that are significant for market success. In view of this competitive situation there can be no guarantee that the DEAG Group will either extend or even maintain its present market position. A deterioration of its market position could have a detrimental effect on the DEAG Group’s assets, financial and earnings position.

Future Development of Leisure and Consumer BehaviourOrganising and marketing concerts, variety shows and other events suc-cessfully at admission prices that earn an appropriate return depends to a substantial extent on the leisure and consumer behaviour of the general public, with the German, the UK and the Swiss public being mainly relevant for DEAG’s business activities. If the interest of the re-spective public in attending events of this kind were to decline because, for example, leisure priorities in general were to change or because the general income trend were to have a detrimental effect on consumer readiness where leisure events were concerned, that too could seriously impair DEAG’s assets, financial and earnings position.

Legal DisputesVarious DEAG Group companies are currently engaged in court or out-of-court disputes over substantial claims. A significant number of these legal and other disputes were resolved by payments as part of the restructuring concept. If the remaining legal and other disputes were resolved to the DEAG Group’s detriment, that would have an imme-diate negative effect on the Company’s assets, financial and earnings position and might jeopardise its continued existence. What is more, DEAG’s business activities could be seriously affected indirectly if los-ing these legal and other disputes were to impair the Company’s finan-cial standing and thereby make it more difficult for DEAG to maintain or establish business relations with its preferred business partners to the extent envisaged.

Tax SituationThe Company or one of its subsidiaries last underwent a tax audit in 2000 for the years 1996 to 1998, for which a final report has been filed. For financial years since 1999 there can be no ruling out the possibil-ity of further tax demands due to the tax authorities taking a different view of situations, especially in respect of sales taxes and taxes stopped at source. Sufficient provision has been made for risks of this kind.

Liability Risks Arising from Commercial ActivityThe DEAG Group has taken out insurance policies of various kinds with a view to covering risks in connection with its business activity, and especially in connection with the holding and cancellation of con-certs and other events. Mention must therefore be made of the risk that concerts or other events have to be called off at short notice because the artist is not performing or cannot perform (due, for example, to indis-position of the artist or closure of the venue). If DEAG were to have failed to take out any or sufficient insurance cover on such occasions or in the case of other damaging events, the obligations arising from the

damaging event could seriously impair DEAG’s assets, financial and earnings position.

Risks of Future Development§ 289 Par. 1 of the German commercial code (Handelsgesetzbuch) re-quires us to indicate risks associated with future development. This management report and additional information about the financial year include forward-looking assumptions and estimates associated with risks that may lead to actual results differing from our expecta-tions. Risks of this kind result especically from a changed market en-vironment, from growing intensity of competition from existing and new competitors, from interest rate and currency risks and from other political and economic events that are neither foreseeable nor can be influenced.

As part of our report on the risks associated with future development, the Management Board would like to draw attention to the following points:

Financial Risks:

A. DEAG intends to sell plots of land adjoining the Jahrhundert-halle in Frankfurt am Main that has been classified as an invest-ment property since acquisition. The cash plan for 2004 here provides for a net inflow of EUR 5.7 million in funds.

B. The cash plan includes tax refunds totalling several million euros the date for which is not yet known.

C. For the Group’s financial development it is necessary for opera-tive business to develop as planned, in particular for the new lines of business to make their projected earnings contribution, and for cost reductions planned for 2004 to be implemented as per schedule.

D. Loans promised or confirmed must be made available on the due date.

Successful implementation of these points will in view of their com-mercial importance exert a material influence on the further develop-ment or the continued existence of DEAG AG and the Group.

Dependency ReportFor the financial year 2003 there was once more no ruling out the possibility that DEAG might be regarded as a de facto dependent enterprise controlled by Berlin businessmann Peter Schwenkow. The Management Board has accordingly, as in previous years, drawn up a dependency report in accordance with § 312 of the German Compa-nies Act (Aktiengesetz) on its direct and indirect relationships with Mr Schwenkow. At the end of the report the Management Board states that on the basis of the circumstances of which it was aware at the time the Company received an appropriate consideration for every le-gal transaction or measure it undertook or refrained from undertaking and was not put to disadvantage by measures being undertaken or not undertaken. No measures were undertaken or not undertaken at Mr Schwenkow’s behest or in his interest.


3. OUTLOOK FOR FINANCIAL YEAR 2004

On the basis of the tour contracts either signed or under negotiation for the financial year 2004 and of advance bookings taken since Novem-ber 2003, we anticipate Group sales on a par with 2003 in the coming financial year. In view of the restructuring measures undertaken and of the resulting reduction in cost of materials and further strict cost management, we also anticipate an operating result at least on a par with the previous year. Taking into account non-recurring restructur-ing expenses and substantially reduced interest expenditure, we expect 2004 earnings per share to be positive.

A fundamental precondition for business development in 2004 is suc-cessful implementation of the corporate financing measures initiated or planned by the Management Board that we have outlined under the headings General and Commercial Risks and Risks of Future Develop-ment. If the measures initiated or planned were to fail wholly or in part, a threat to the Group’s future could not be ruled out.

Berlin, 31 March 2004

DEAG Deutsche Entertainment AGThe Management Board

Peter L. H. Schwenkow Markus A. Fabis

66 DEAG Annual Report 2003 – Consolidated Financial Statements

CONSOLIDATED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR 1 JANUARY 2003 TO 31 DECEMBER 2003

· Preliminary Remarks on Financial Reporting

· Consolidated Balance Sheet

· Consolidated Statement of Income

· Consolidated Cash Flow Statement

· Development of Shareholder’s Equity in the Group

· Development of Fixed Assets in the Group

· Notes on the Consolidated Financial Statements

· Independent Auditor’s Report

· Annual Financial Statements for DEAG Holding · (Short Version)

Consolidated Financial Statements

PRELIMINARY REMARKS ON FINANCIAL REPORTING

The Management Board of DEAG Deutsche Entertainment Aktien-gesellschaft is responsible for preparing the Individual Financial State-ments and the Consolidated Financial Statements and also for the in-formation contained in the Management Report and the Group Man-agement Report.

Besides the Individual Financial Statements for DEAG Deutsche En-tertainment Aktiengesellschaft prepared in accordance with commer-cial principles (HGB) [Commercial Code], the Management Board has also prepared Consolidated Financial Statements in compliance with the International Accounting Standards Board, London (IASB). The Management Report and the Group Management Report have been prepared in compliance with the provisions of the HGB.

According to the principles of commercial law, it has not been neces-sary to prepare Consolidated Financial Statements since financial year 1999. The Management Board has applied the exemption provision of § 292a, HGB. Following the resolution passed in the General Meeting, the Supervisory Board engaged BDO Deutsche Warentreuhand Ak-tiengesellschaft, Berlin, as independent auditors to audit the Individual Financial Statements and Consolidated Financial Statements and also the Management Report and Group Management Report.

The Supervisory Board and the Auditor jointly discussed in detail in the Balance Sheeting Meeting the Individual Financial Statements and Consolidated Financial Statements, the Management Report and Group Management Report and also the corresponding Audit Reports. The result of this Audit appears in the Supervisory Board Report.

The Consolidated Financial Statements, the Management Report and Group Management Report provide a reliable and internationally com-parable basis for the evaluation of the entire Group and its solvency for our shareholders and any other interested parties.

DEAG Annual Report 2003 – Consolidated Financial Statements 67

Consolidated Balance Sheet

Consolidated balance sheet assets Notes31. 12. 2003in EUR’000

31. 12. 2002in EUR’000

Liquid funds 6 36,411 38,807

Short-term investments / marketable securities 7 1,089 0

Trade accounts receivable 8 6,793 6,982

Accounts receivable due from associated persons and companies 9 776 623

Inventories 10 1,833 5,401

Deferred items and other short-term assets 11 19,840 21,125

Total current assets 66,742 72,938

Fixed assets 12 / 24 2,433 2,349

Goodwill 15 / 24 33,460 47,138

Intangible assets 13 54 80

Participations 14 6 0

Investments in associated companies 14 20 86

Deferred tax assets 22 / 37 7,894 6,894

Total assets 110,609 129,485

Liabilities and shareholders’ equity31. 12. 2003in EUR’000

31. 12. 2002in EUR’000

Bank loans payable 16 4,013 20,435

Convertible bond 17 4,583 0

Trade accounts payable 18 8,305 5,866

Accounts payable due to associated persons and companies 19 940 7,334

Accruals 20 14,731 8,564

Sales accruals and deferrals 21 21,604 26,484

Other short-term liabilities 23 25,966 26,209

Total short-term liabilities 80,142 94,892

Minority interest 26 1,172 401

Shareholders’ equity 25

Share capital 13,750 9,167

Additional paid-in capital 56,175 50,916

Retained earnings / accumulated deficit -40,660 -25,982

Accumulated other comprehensive income 30 91

Shareholders’ equity 29,295 34,192

Total liabilities and equity 110,609 129,485


Consolidated Statement of Income

in EUR’000 Notes

01. 01. to31. 12. 2003

01. 01. to31. 12. 2002

Adjustmentof STELLA-

sub-groupQ1 2002

01. 01. to31. 12. 2002

adjusted

Revenues 28 127,325 139,991 39,811 100,180

Cost of revenues 29 -100,991 -104,455 -28,194 -76,261

Gross profit 26,334 35,536 11,617 23,919

Distribution costs 30 -13,214 -19,863 -9,108 -10,755

Administration costs 31 -8,585 -17,199 -4,674 -12,525

Other operating income 32 16,415 9,740 1,493 8,247

Other operating expenses 33 -12,346 -5,598 -2,279 -3,319

Operating income before depreciation (EBITDA) 8,604 2,616 -2,951 5,567

Scheduled Depreciation 34 -4,292 -8,929 -4,534 -4,395

Operating income (EBIT) before restructuring expenditure1 4,312 -6,313 -7,485 1,172

Restructuring expenditure1 38 -12,128 -11,426 0 -11,426

Operating income (EBIT) after restructuring expenditure1 -7,816 -17,739 -7,485 -10,254

Interest income and expenses 35 -4,353 -2,532 -58 -2,474

Result from investments and participations 36 -1,068 5,213 3,055 2,158

Earnings from associated companies 14 7 44 0 44

Foreign currency exchange gains / losses -156 -213 -1 -212

Other income / expenses 66 54 0 54

Result before taxes and minority interest -13,320 -15,173 -4,489 -10,684

Income tax 37 -287 4,111 441 3,670

Result before minority interest -13,607 -11,062 -4,048 -7,014

Minority interest 26 -1,071 1,930 126 1,804

Net loss -14,678 -9,132 -3,922 -5,210

Retained earnings or loss carried forward -25,982 -16,850 -21,878 5,028

Retained earnings / accumulated deficit -40,660 -25,982 -25,800 -182

Earnings per share (undiluted) in EUR 25 -1.54 -1.08 – -0.61

Earnings per share (diluted) in EUR 25 -1.48 -1.08 – -0.61

Weighted average shares outstanding (undiluted) 25 9,504,027 8,483,340 – 8,483,340

Weighted average shares outstanding (diluted) 25 9,885,973 8,483,340 – 8,483,340

1 Restructuring, extraordinary depreciation and one-off factors


Consolidated Cash Flow Statement

in EUR’000 2003 2002

Group result -14,678 -9,132

Depreciation and amortisation 14,362 8,929

Not affecting payments: Change in reporting entity due to disposal 1,413 1,815

Result from valuation in accordance with IAS 40 0 1,600

Reversal of accruals from contractual warranties 6,398 -5,873

Waiver of receivable -10,700 0

Minority interests 1,071 -716

Deferred taxes (net) -1,000 -5,023

Result from valuation of associated companies 66 -20

Cash flow before changes in net current assets -3,068 -8,420

Net interest income 4,353 2,532

Changes to receivables, other assets and prepaid expenses 3,552 -859

Changes to liabilities without financial debts -5,623 9,306

Net cash from operating activities -786 2,559

Outflows for investments in … … intangible assets -11 -1,128

… tangible assets -884 -372

… acquisition of participations 0 0

Asset disposals 85 952

Interest income 451 1,292

Net cash used in investment activities -359 744

Capital increase at DEAG Deutsche Entertainment AG (Holding) 10,678 1,110

Costs of raising capital (net) -906 -52

Acquisition of own shares 70 -185

Changes to financial debts 4,013 903

Repayment of financial debts -13,435 0

Net cash from convertible bond 4,583 0

Interest expenditure -4,804 -3,824

Minority interest 0 -10

Share dividends of minority interests -325 -297

Net cash from financing activities -126 -2,355

Changes in liquidity -1,271 948

Effects of exchange rates -36 21

Liquid funds as at 01. 01 38,807 37,838

Liquid funds as at 31. 12. 37,500 38,807


Development of Shareholders’ Equity within the Group

Number of shares issued

DEAG subscribed

capital in EUR’000

DEAG capital reserve

in EUR’000

Retained earnings

in EUR’000

Accumulated other

incomein EUR’000

Share capital

in EUR’000

Balance as at 31. 12. 2001 8,406,700 8,407 50,486 -16,850 70 42,113

Capital increase from authorised capital 760,000 760 350 0 0 1,110

Costs of raising capital 0 0 -32 0 0 -32

Sale of own shares 0 0 112 0 0 112

Consolidated net loss 0 0 0 -9,132 0 -9,132

Changes from currency translation 0 0 0 0 21 21

Balance as at 31. 12. 2002 9,166,700 9,167 50,916 -25,982 91 34,192

Capital increase from authorised capital 4,583,350 4,583 6,095 0 0 10,678

Costs of raising capital 0 0 -906 0 0 -906

Sale of own shares 0 0 70 0 0 70

Consolidated net loss 0 0 0 -14,678 0 -14,678

Changes from currency translation 0 0 0 0 -61 -61

Balance as at 31. 12. 2003 13,750,050 13,750 56,175 -40,660 30 29,295


Development of Fixed Assets in the Group

Aquistion and production costs in EUR’000

Intangible assets

without goodwill

Goodwill Land and buildings

Technical equipment

and machinery

Other equipment,

office, and plant

equipment

Investments Fixed assets

Consolidated balance as at 01. 01. 2003 462 58,623 3,746 729 3,282 2,340 69,182

Additions 11 0 116 516 246 13 902

Transfers 0 0 -38 0 -81 -73 -192

Changes to the reporting entity and currency adjustments -3 0 -19 -58 -186 0 -266

Acqusition costs balance as at 31. 12. 2003 470 58,623 3,805 1,187 3,261 2,280 69,626

Depreciation in EUR’000

Intangible assets

without goodwill

Goodwill Land and buildings

Technical equipment

and machinery

Other equipment,

office, and plant

equipment

Investments Fixed assets

Consolidated balance as at 01. 01. 2003 382 11,485 2,645 543 2,221 2,254 19,530

Additions 34 13,678 95 134 417 0 14,358

Disposals 0 0 -9 0 -66 0 -75

Changes to the reporting entity and currency adjustments 0 0 -8 -27 -125 0 -160

Depreciation balance as at 31. 12. 2003 416 25,163 2,723 650 2,447 2,254 33,653

Book values as at 31. 12. 2003 54 33,460 1,082 537 814 26 35,973

Book values as at 31. 12. 2002 80 47,138 1,101 186 1,061 86 49,652

72 DEAG Annual Report 2003 – Notes on the Consolidated Financial Statements

1. ACCOUNTING PRINCIPLES

These Consolidated Financial Statements for DEAG Deutsche Enter-tainment AG (DEAG) were prepared applying § 292a Pars. 1 and 2 of the German Commercial Code (Handelsgesetzbuch / HGB) in ac-cordance with the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB), London, as valid on the closing date and with the interpretations of the Standing Interpretations Committee. The financial statements conform to the EU Directive on Consolidated Accounting (Directive 83 / 349 / EEC).

The consolidated financial statements are based on the financial state-ments of companies in the Group. These were prepared applying the HGB, including the accounting standards passed by the German Stand-ardisation Council (DRSC) as at the closing date in accordance with § 342 HGB and the German Companies Act (Aktiengesetz / AktG). The financial statements for foreign companies were prepared in ac-cordance with their national regulations, following continuously and uniformly applied accounting and valuation principles. In doing so, available options were exercised so that the financial statements drawn up under commercial law comply to a large extent with IAS. Any dif-ferences in accounting and valuation are explained in the notes.

The individual financial statements of the companies included were drawn up to the closing date for the consolidated financial statement. Reported values based on tax regulations are not taken over in the con-solidated financial statement. The conversion of reported values to ac-cord with IAS rules was done at group level outside the individual fi-nancial statements prepared under commercial law, in what is referred to as Commercial Balance Sheet II.

The accounting and evaluation methods applied in the consolidated financial statements to 31 December 2002 were retained fundamen-tally unchanged.

Since 2001, alongside IAS 1 we have applied the Deutsche Börse AG guidelines on Structured Quarterly Reports. In principle, these guide-lines are obligatory only for interim reports. With a view to ensuring comparability and consistency of presentation, as a matter of principle we use the structured layout for the consolidated financial statements to the extent that it does not vary significantly from IAS.

Furthermore, since 1 January 2001, our consolidated statement of in-come layout has followed the internationally customary cost-of-sales accounting format. In view of the capital market requirement to show earnings before interest, taxes and depreciations (EBITDA), deprecia-tion is shown separately in the profit and loss statement. Given the significance of expenses incurred for restructuring the Group, we show them separately, reduced by income earned from the restructuring. Thus we show an operating result (EBIT) before and after restructur-ing, extraordinary depreciation and one-off factors.

The items summarised in the consolidated balance sheet and in the con-solidated statement of income are explained in the notes.

When drawing up the consolidated financial statements, to a limited

extent estimates and assumptions have to be made that affect the level and presentation of assets and liabilities, income and expenses shown in the balance sheet, and of contingent liabilities. Actual figures may subsequently differ from these estimates.

Variances between commercial law accounting and valuation princi-ples and IAS are identified with reference to the corresponding IAS regulation.

2. CONSOLIDATION PRINCIPLES

Consolidated EntityWe, DEAG Deutsche Entertainment Aktiengesellschaft, the parent company, include in the consolidated financial statements those sub-sidiaries under our control. Control exists if we have the majority of voting rights at our disposal, either directly or indirectly. Companies acquired or disposed of during the financial year are included from the date of acquisition or up until the date of sale.

On the balance sheet date, the consolidated entity comprised 19 fully consolidated German and foreign companies. Two joint ventures are consolidated pro rata and one participating interest is evaluated as an associated enterprise according to the equity method as specified in IAS 28. One participating interest is reported at cost of acquisition because of its marginal significance.

The change in the consolidated entity does not impair comparability with the previous year. In the previous year, meaningfulness was af-fected considerably by the elimination of the STELLA sub-group. Thus the previous year’s income statement is shown once with the actual figures and once with the figures after adjustment to take account of the STELLA sub-group.

Consolidation MethodsCapital consolidation involves offsetting the acquisition costs of par-ticipating interests against equity at the time of starting up or acquiring the respective subsidiary. Depreciation of value-adjusted subsidiaries was reversed for the purpose of consolidation. Interim gains and losses from intra-group sales of equity holdings were reversed. The differential amounts included in the values reported for holdings in joint ventures and associated companies are established by the same principles.

The asset-side variations arising from capital consolidation were record-ed as goodwill in the consolidated balance sheet unless allocable hidden reserves or charges of individual assets or debts are shown. In the case of indirect participations, goodwill is ascertained in the context of step-by-step consolidation.

Receivables, liabilities and accruals, as well as expenses and income be-tween consolidated companies were consolidated. Any intermediate results of intra-group deliveries and performance rendered were elimi-nated. Any depreciation or value adjustments of intra-group receivables in the individual financial statements were reversed in favour of the group result.

DEAG Annual Report 2003 – Notes on the Consolidated Financial Statements 73

On the balance sheet date, along with the parent company DEAG the following companies were fully consolidated:

Participating interests in associated companies valued by the equity method were reported at the relevant equity percentage in accordance with the book value method, unless they were of secondary significance for the group.

In the context of pro rata consolidation, the respective assets and debts were included in the consolidated financial statements in line with the proportion of capital held by the parent company. Consolidation was undertaken by the same methods.

Segment Company Shareholding

Artists & Tours Entertainment One AG, Zürich (Switzerland) 70 %

Global Concerts GmbH, Munich 70 %

Musicland GmbH, Munich 70 %

coco tours Veranstaltungs GmbH, Berlin 100 %

Millennium Entertainment GmbH, Berlin 100 %

BALOU ENTERTAINMENT Konzertagentur GmbH & Co. KG, Cologne 100 %

Good News Productions AG, Glattbrugg (Switzerland) 90 %

B+R Event AG, Zürich (Schweiz) 90 %

EM Event Marketing AG, Wangen near Olten (Switzerland) 90 %

Fortissimo AG, Glattbrugg (Switzerland) 90 %

Urban Entertainment Concert Concept Veranstaltungs-GmbH, Berlin 100 %

Kultur- und Kongresszentrum Jahrhunderthalle GmbH, Frankfurt am Main 100 %

Unicorn Entertainment Services GmbH, Berlin 100 %

Metropolis Asset Management GmbH, Berlin 100 %

Jahrhunderthalle Besitzgesellschaft mbH & Co. KG, Berlin 100 %

EMC Entertainment Media & Commerce GmbH, Berlin 100 %

Bravo Charlie Vermögensverwaltungs AG, Berlin 100 %

Theatres Wintergarten Varieté Theater Betriebs GmbH, Berlin 100 %

Friedrichsbau Varieté Betriebs- und Verwaltungs GmbH, Stuttgart 100 %

Broadway Varieté Management GmbH, Berlin 100 %

The following companies are run as joint ventures and consolidated in line with pro rata consolidation regulations in line with the share of capital owned directly or indirectly by DEAG Deutsche Entertainment Aktengesellschaft:


Artists & Tours Marshall Arts Ltd., London (UK) 50 %

Ticketnet Ltd., London (UK) 50 %

The following company is carried in the balance sheet as an associated company:


Urban Entertainment EIB European Insurance Brokers GmbH, Hamburg 50 %


3. FOREIGN CURRENCY TRANSLATION PRINCIPLES

Current receivables and liabilities and credit balances at banks reported in a foreign currency in the individual financial statements are trans-lated into EUR at the mean exchange rate on the balance sheet date.We regard our subsidiaries in Switzerland and the United Kingdom as independent companies that operate in their own economic and cur-rency circle. The operative currency is the respective national currency.

Currency translation of foreign financial statements into EUR is ef-fected in accordance with IAS 21 at the mean rate on the balance sheet date. Currency differences arising from converting net assets at differ-ent exchange rates from the previous year are treated as neutral to earn-ings. Currency differences are reported in equity as cumulative other earnings.

The exchange rates of currencies of significance to us changed as follows:

Closing rate in EUR

Average rate in EUR

2003 2002 2003 2002

1 Pound Sterling 1.4188 1.5373 1.4428 1.5665

1 Swiss Franc 0.6419 0.6827 0.6567 0.6792

4. BALANCE SHEET ACCOUNTING AND VALUATION PRINCIPLES

Notes on the Balance SheetIntangible assets purchased are capitalised at cost of acquisition and depreciated in a straight line over an anticipated useful life of three to eight years. Goodwill acquired in connection with acquisitions is capitalised in accordance with IAS 22 and depreciated in a straight line. Useful life is estimated as eight to 20 years.

Fixed assets are valued at cost of acquisition or production plus inciden-tal acquisition costs minus acquisition cost reductions and, in the case of items subject to wear and tear, less use-related depreciation. Financ-ing costs are not capitalised. Depreciation is in a straight line over the anticipated useful life.

Movable fixed assets with acquisition costs up to EUR 410 (low value assets) were fully depreciated in the year of acquisition.

Maintenance expenditure constitutes an expense at the time it is

incurred unless the result is a substantial change in or extension of potential use.

Scheduled depreciation of fixed assets is based essentially on the following periods of useful life:

– Buildings, fixtures and fittings 4 to 17 years – Plant and machinery 3 to 10 years – Tools and equipment 3 to 18 years

If reductions in the value of intangible assets or tangible fixed assets are ascertained, extraordinary depreciation is applied. The value attribut-able to the intangible assets or tangible fixed assets is ascertained on the basis of future income surpluses or net sales proceeds (impairment test). An annual check is undertaken of assets where value reductions are suspected.

If items are used under the terms of operating leasing, leasing payments are based on the acquisition costs paid by the lessor for the leased ob-ject, a standard rate of interest less an appropriate residual value. Exten-sion or purchase options and price adjustment clauses are not agreed as a matter of principle.

Shares in non-consolidated companies are reported in the balance sheet at market value or acquisition cost, in accordance with IAS 39. Shares in associated companies are reported at equity in accordance with IAS 28. Differential amounts resulting from initial consolidation are allo-cated following the same principles as for full consolidation.

Inventories are valued at acquisition or production cost. If net sales proceeds on the balance sheet date are less that the cost of acquisition, appropriate value adjustments are made. All payments on account for fees and individually allocable contract preparation costs are included under inventories.

Receivables, other assets and liquid funds are reported in the balance sheet at nominal value. Any necessary adjustments of individual values to cover probable default risks are taken into account.

Financial investments in real estate are valued in accordance with IAS 40 at the attributable value based on market prices derived from pur-chase offers.

The accruals concept gives rise to deferred expenses and deferred in-come. These are reported at the prepaid amounts. Deferred expenses are essentially prepaid costs and other accruals. Deferred income relates

There were the following year-on-year changes in the consolidated entity:

Company Addition / Disposal due to

Date

Musicland GmbH, Munich Start-up 01. 04. 2003

Apollo Varieté Betriebs GmbH, Düsseldorf Sale 01. 01. 2003

Metropolis Asset Management GmbH, Berlin Sale 01. 10. 2003


exclusively to income from sales of prepaid tickets for concerts and theatre or variety performances after the balance sheet date. These are reported as deferred revenue from prepaid ticket sales.

Accruals are valued at the amount sound business judgement deems necessary on the balance sheet date to cover future payment obligations, discernible risks and uncertain commitments.

In accordance with IAS 12, deferred taxation is calculated on the basis of different assigned values for assets and liabilities in the commercial balance sheet and the tax balance sheet, of facts in the context of Com-mercial Balance Sheet II, of consolidation processes and of realisable losses brought forward.

Deferred tax expenses and tax income are offset in the balance sheet.Liabilities are accrued at nominal value.

In the repurchase operation relating to our 39 % holding in Good News AG, the agreed repurchase obligation was accrued at the comple-tion amount and the difference between purchase price and completion

amount shown as a deferred expense. Amortisation will be over the contract term.

In accordance with IAS 1, liabilities and accruals falling due within one year are reported as current items.

Notes to the Statement of IncomeSales revenues include all income from services rendered. The service relating to a concert, a show or a tour is considered as having been ren-dered at the end of the concert or show run. Income is booked at the time the services have been rendered.

Interests and other costs on external capital are booked as current ex-penses.

5. SEGMENT REPORTING

In accordance with the provisions of IAS 14, individual financial state-ment data is segmented by areas at work and regions, with presentation

Segment dataTheatres Artists & Tours Urban Entertainment

in EUR’000 2003 2002 2003 2002 2003 2002

Revenues 8,113 51,230 118,806 79,776 5,829 15,496

Other income 536 4,330 6,114 1,785 2,761 2,130

… including internal income 0 0 6,072 5,550 33 1,031

Total earnings 8,649 55,560 124,920 81,561 8,590 17,626

… including STELLA sub-group 0 41,304 0 0 0 0

Segment result (EBIT) before to restructuring1 -355 -3,953 4,495 954 977 1,965

… including STELLA sub-group 0 -6,135 0 0 0 0

Depreciation / Amortisation

… of goodwill, scheduled 225 302 2,438 2,349 156 6

… of goodwill, extraordinary 4 0 10,064 0 6 0

… of other assets 168 4,645 242 198 154 190

… including STELLA sub-group 0 4,534 0 0 0 0

Book value of segment assets 2,600 3,838 94,930 104,491 15,879 16,399

External funds of segment 3,810 3,844 75,112 77,371 2,696 3,350

Full-time employees as at Dec. 31 83 113 45 54 18 22

Return on sales -4.4 % -7.7 % 3.7 % 1.2 % 16.7 % 12.7 %

… adjusted by STELLA sub-group 0.0 % 7.9 % 0.0 % 0.0 % 0.0 % 0.0 %

Return on net assets < 0 % < 0 % 22.5 % 3.5 % 7.3 % 15.1 %

… adjusted by STELLA sub-group < 0 % < 0 % 0.0 % 0.0 % 0.0 % 0.0 %


The DEAG Group splits its business operations into three segments, the contents of which are described in the Management Report:


being oriented to our internal reporting. Accounting by segment is in-tended to render transparent the profitability and prospects of success of the Group’s individual lines of business.

Notes on the SegmentsInternal income relates to services rendered between the Group compa-nies in a segment. The exchange of performance between segments and between the segments and the holding company is adjusted in the con-solidation column. The consolidation column also includes the services of the DEAG holding company. Services are charged at standard mar-ket rates and correspond in principle to external source prices.

Reconciliation from segment to group data

Total of segments Consolidation Group

in EUR’000 2003 2002 2003 2002 2003 2002

Income from sales 132,748 146,502 -5,426 -6,511 127,322 139,991

Other income 8,875 8,245 -679 -70 8,196 8,175

… including internal income 6,105 6,581 -6,105 -6,581 0 0

Total earnings 141,623 154,747 -6,105 -6,581 135,518 148,166

Segment result (EBIT) before restructuring 4,581 -1,034

Unallocated expenditure and income (including consolidation effects) -269 -5,279

Operating result (EBIT) before restructuring expenditure1 4,312 -6,313

Restructuring expenditure1 -12,128 -11,426

Operating result (EBIT) after restructuring expenditure1 -7,816 -17,739

Result from associated companies 7 44

Other financial result -5,511 2,522

Result before taxes and minority shares -13,320 -15,173

Taxes on income and earnings -287 4,111

Result before minority shares -13,607 -11,062

Minority shares (profit / previous year: loss) -1,071 1,930

Net loss of the Group -14,678 -9,132


Investments include fixed assets, intangible assets and external partici-pating interests. The return on sales is derived from the segment result (EBIT) divided by the segment sales. The return on net assets is derived from the segment result (EBIT) divided by the net assets.

The return on sales is derived from the operating result (EBIT before restructuring expenditure) divided by the income from sales.

The Group’s return on net assets is derived from the operating result (EBIT before restructuring expenditure) divided by consolidated net assets.


The breakdown of segment data by regional sub-division is shown be-low. The Group companies concerned are acquisitions Good News Group in Switzerland and Marshall Arts Ltd. in the United Kingdom.

Group

in EUR’000 2003 2002

Revenues of Artists & Tours segment 118,806 79,776

… thereof:

Marshall Arts (UK) 12,750 10,350

Good News Group (Switzerland) 46,850 36,440

Book value of Artists & Tours segment assets 94,930 104,491

… thereof:

Marshall Arts (UK) 2,235 2,826

Good News Group (Switzerland) 15,831 19,770

6. LIQUID FUNDS

Cash in hand and credit balances at banks are shown as liquid funds. Of the credit balances shown, EUR 6.889 million relates to pledged trust funds with restraint on disposal. The corresponding liability, for which the credit is pledged as collateral, is reported under other liabili-ties as tax liabilities.

7. INVESTMENTS HELD AS CURRENT ASSETS

This item refers to a short-term financial investment in a money market fund.

8. TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable are due within one year.

9. ACCOUNTS RECEIVABLE DUE FROM ASSOCIATED PERSONS AND COMPANIES

Receivables comprise:

in EUR’000 31. 12. 2003 31. 12. 2002

Accounts due from companies in which a participation is held 19 395

Accounts due from associated parties and companies 757 228

776 623

The accounts are due for payment within one year.

10. INVENTORIES

This item is made up as follows:

in EUR’000 31. 12. 2003 31. 12. 2002

Finished products and goods 44 56

Advance payments 1,789 5,345

Inventories 1,833 5,401

Payments in advance refers to advance payments to artists for events in 2004.

Other informationGroup

in EUR’000 2003 2002

Book value of segment asset 113,435 124,728

Shares in affiliates 20 86

Unallocated assets 0 9,318

Consolidated asset values 113,455 134,132

External funds of segment 81,643 84,565

Unallocated external funds 2,517 15,375

Consolidated external funds 84,160 99,940

Net assets 29,295 34,192

Full-time employees as at Dec. 31 169 216

Return on sales 3.4 % -4.5 %

Return on net sales 3.8 % -33.7 %


11. DEFERRED ITEMS AND OTHER SHORT-TERM ASSETS

in EUR’000 31. 12. 2003 31. 12. 2002

Other short-term assets 17,121 16,804

Deferrals 2,719 4,321


The deferred items show essentially the insurance premiums, rents and third-party tickets prepaid in the year under review. The total amount will take effect as expenses in 2004. In addition, EUR 2 million of de-ferred interest resulting from a purchase agreement is allocated to this item. This relates to the sale of the 39 % holding in Good News Pro-ductions AG. The amount will be amortised in line with the contract period until 30 June 2006.

Other short-term assets relate essentially to:

in EUR’000 31. 12. 2003 31. 12. 2002

Transfer of Jahrhunderthalle site (IAS 40) 11,898 11,898

Due from tax authorities 2,558 2,094

Insurance claims 424 0

Loans 324 194

15,204 14,186

Other 1,917 2,618


12. FIXED ASSETS

The breakdown of and changes in this item in the year under review are apparent from the asset schedule.

In 2003, investments in fixed assets totalled EUR 0.9 million (2002: EUR 0.3 million). They relate to:

in EUR’000

Installations in buildings 116

Plant and machinery 516

Other fixtures and fittings, tools and equipment 246

Security charges totalling EUR 5 million in favour of creditors are reg-istered against the Frankfurt Jahrhunderthalle site.

13. INTANGIBLE ASSETS

Intangible assets include specifically concessions and advance pay-ments. Depreciation of EUR 34,000 (2002: EUR 71,000) is allocated to intangible assets.

The development of this item during the reporting year is apparent from the schedule of assets.

14. FINANCIAL ASSETS

The development of financial assets is apparent from the schedule of assets.

The item showing EUR 20,000 (2002: EUR 86,000) relates to shares in associated companies and the EUR 6,000 to the book value of a participating interest which we did not consolidate in view of its insig-nificant affect on the group’s asset and income situation and for reasons of consolidation exclusion in accordance with IAS 27 (13).

The associated companies item relates to our 50 % share in EIB Enter-tainment Insurance Brokers GmbH, Hamburg. Equity amounted to EUR 39,000 on 31 December 2003. Net earnings for 2003 amount to approximately EUR 14,000.

15. GOODWILL

This item relates to asset-side variances revealed within the context of capital consolidation and shown as goodwill. The reported values were checked on 31 December 2003. As a result, five consolidation-related goodwill items were depreciated extraordinarily due to EUR 10.1 mil-lion in reductions of utility value. Utility value is established on the basis of anticipated income surpluses of the companies, discounted by 8 %. The extraordinary depreciation is shown in the statement of in-come under restructuring expenditure, extraordinary depreciation and one-off factors.

16. BANK LOANS PAYABLE

Bank loans payable related exclusively to a bridging loan for the Frank-furt Jahrhunderthalle property which is secured by mortgages totalling EUR 5 million. The agreed interest rate is 8.5 %. Interest is paid quar-terly, with the first payment being made on 31 March 2004.

17. CONVERTIBLE BOND

The Management Board decided on 22 August / 13 November 2003 with the Supervisory Board’s approval dated 14 November 2003 to is-sue a convertible bond for a total nominal value of EUR 6,783,358, di-vided into 4,583,350 individual bonds, each with a face value of EUR 1.48. Shareholders were granted indirect subscription rights. This was done by letting VEM Aktienbank AG, Munich, subscribe to and take over the bonds at an issue price of EUR 1 per bond subject to an un-dertaking to offer them to shareholders for subscription at a ratio of 2:1 and at an issue price of EUR 1 per bond. Subscription rights are ruled out for residual amounts. To give conversion rights to bond holders, the General Meeting of Shareholders held on 17 June 2003 resolved to


create conditional capital of EUR 4,583,350. The convertible bond has been tradable over the counter since 18 February 2004.

The term of the convertible bond runs up until 30 November 2006.

18. TRADE ACCOUNTS PAYABLE

These liabilities related to outstanding payments for services already received.

They are payable within one year.

19. ACCOUNTS PAYABLE DUE TO ASSOCIATED PERSONS AND COMPANIES

Consisting of:

in EUR’000 31. 12. 2003 31. 12. 2002

Due to companies with which a participation relationship exists 43 644

Due to related parties 897 6,690

Inventories 940 7,334

These liabilities are payable within one year.

20. ACCRUALS

This item developed as follows.

Other accruals comprise mainly provision for risks in the context of restructuring.

In principle, these commitments fall due within one year.

21. SALES DEFERRALS AND ACCRUALS

This item includes customers’ takings for concert and theatre tickets for events in 2004. The item will affect income in 2004.

22. DEFERRED TAXES

The deferred tax credits totalling EUR 12.7 million (2002: EUR 11.7 million) are exclusively tax credits on accumulated losses brought for-ward, against which deferred tax liabilities of EUR 4.7 million for valu-ation variances in respect of the Frankfurt Jahrhunderthalle were offset (same tax authority).

23. OTHER SHORT-TERM LIABILITIES

This item includes essentially:

in EUR’000 31. 12. 2003 31. 12. 2002

Tax liabilities 11,758 11,730

Social security liabilities 832 503

Other 13,376 13,976

25,966 26,209

Tax liabilities include EUR 6.8 million in artists’ tax for the year 1998. The artist has appealed to the fiscal court. Credit balances held in trust have been pledged as security.

Other liabilities include EUR 12.5 million relating to a repurchase agreement. This repurchase agreement relates to the sale of our 39 % in-terest in Good News Productions AG. Under the terms of the purchase agreement, Ringier Verlag AG granted DEAG the right to purchase the Good News Shares sold at an agreed purchase price less 50 % of the dividends accrued by Ringier Verlag AG from the Good News shares sold or to which it is entitled up until 30 June 2006. DEAG granted Ringier Verlag AG a corresponding selling right.

Accruals

in EUR’000

As at01. 01. 2003

Consump-tion

Retransfer Allocation Retirement from decon-

solidation

As at 31. 12. 2003

Tax for previous years 2,005 316 507 0 -164 1,018

Taxes for assessment period 2003 0 0 0 742 0 742

Accounts outstanding 443 410 48 1,601 0 1,586

Personnel obligations 499 294 144 396 0 457

Risks from current business 3,012 0 0 1,650 0 4,662

Consulting and audit costs 300 211 12 326 0 403

Other accruals 2,305 1,186 83 4,827 0 5,863

8,564 2,417 794 9,542 -164 14,731


Liabilities arising from the repurchase agreement were valued at the anticipated completion amount on the balance sheet date.

Liabilities totalling EUR 13.5 million fall due within one year.

24. COLLATERALISATION

On the basis of the Securities Pool Agreement concluded in financial year 2002, during financial year 2003 DEAG and various companies in the Group pledged their shares in Concert Concept Veranstaltungs-GmbH, Unicorn Entertainment Services GmbH, Broadway Varieté Management GmbH, Friedrichsbau Varieté Stuttgart Betriebs- und Verwaltungs GmbH, Wintergarten Varieté Theater Betriebsgesells-chaft mbH, BALOU ENTERTAINMENT Konzertagentur GmbH & Co. KG, Good News Productions AG, Entertainment One AG and Marshall Arts Ltd. as security for loans from DZ Bank, Berliner Bank, NordLB, Stadtsparkasse Köln and Commerzbank (hereinafter the Creditor Banks).

The Creditor Banks still have two charges in the sum of EUR 3 million and EUR 2 million on sites on the Frankfurt Jahrhunderthalle land that were ordered in financial year 2002. In addition, in May 2003 a EUR 3 million charge on the main Frankfurt Jahrhunderthalle site was assigned to the Creditor Banks. All the said securities were released after repayment of the remaining liabilities in December 2003 or assigned by the Creditor Banks in accordance with DEAG’s instructions.

To provide security for DEAG’s liabilities arising from the EUR 4 mil-lion loan from Stadtsparkasse Düsseldorf, the aforesaid charges for EUR 3 million and EUR 2 million were first restricted to secondary sites at the Frankfurt Jahrhunderthalle and then assigned to Stadtspar-kasse Düsseldorf.

To provide security for DEAG’s liabilities arising from the 2003 / 2006 zero coupon convertible bond issue, in December 2003 a charge in the sum of EUR 2 million plus interest and incidentals on the main Jahrhunderthalle site was assigned to VEM Aktienbank AG as trus-tee in the interest of the loan creditors (Unterliedbach land register at Frankfurt am Main district court, Höchst section, Page 4156, consecu-tive number 5, less a partial area yet to be measured which is shown on the plan attached as Annex 7.2 to the convertible bond terms and conditions). In Section III of the aforementioned land register, real rights up to a maximum of EUR 4 million plus interest and incidentals amounting to no more than 18 % per annum may take precedence over the charge.

In addition, in February 2004 the following holdings were pledged to VEM Aktienbank AG as trustee in the interest of loan creditors as specified in the convertible bond terms and conditions:

– Pledging of 805 registered shares, each with a face value of CHF 1,000, in Entertainment One AG, entered in the com-panies register of Schwyz canton (Switzerland) under company number CH-170.3.023.703-8 with share capital of CHF 1,150,000;

– Pledging of membership of coco tours Veranstaltungs GmbH arising from its participation as limited partner with a liabil-ity deposit of DM 49,500 and a 99 % profit share in Balou Entertainment Konzertagentur GmbH & Co. KG, entered in the companies register of Cologne District Court under HRA 15569;

– Charge on 950 “B” ordinary shares in Marshall Arts Limited, London (United Kingdom), with share capital of GBP 1,900 divided into 950 “A” ordinary shares and 950 “B” ordinary shares with a face value of GBP 1 per share.

25. EQUITY

The Company’s capital stock amounts to EUR 13,750,050, divided into 13,750,050 ordinary registered shares in the form of no-par-value individual share certificates each with a book share of EUR 1 in capital stock.

The Company’s Management Board on 13 November 2003 decided, as approved by the Supervisory Board on 14 November 2003, to make use of the authorisation to increase capital stock (authorised capital) given to it by the General Meeting of Shareholders held on 17 June 2003 and to increase the Company’s capital stock by EUR 4,583,350 from EUR 9,166,700 to EUR 13,750,050 by issuing 4,583,350 registered indi-vidual shares each with a book share of EUR 1 in capital stock.

The shares were issued within the framework of a capital increase at an issue price of EUR 2.33 each.

The EUR 4,583,350 capital increase was entered in the companies reg-ister of Berlin-Charlottenburg District Court on 16 December 2003.The Company’s capital is fully paid up.

The capital reserve contains the additional funds raised from DEAG’s share issue less the capital increase from company funds to adjust sub-scribed capital following the change-over to the euro. The EUR 6.1 million addition shown in the consolidated financial statements relates to the additional funds in connection with the capital increase imple-mented, less capital procurement costs of EUR 906,000 (SIC 17) and the purchase of own shares (EUR 70,000).

The balance sheet loss includes past results of companies included in the consolidated financial statements and consolidated net earnings for the current financial year.

Earnings per share are calculated by dividing group profit by the weighted number of shares outstanding. As at 31 December 2003, there were 4,583,350 shares outstanding from the convertible bond issue that could potentially dilute earnings per share.

Undiluted earnings per share are calculated on the basis of 9,504,027 shares and diluted earnings on the basis of 9,885,973 shares.


Date Action Shares issued

Own shares

Month 2003

Shares in circulation

Weighted average

number of shares in

circulation

Stock as at …

01. 01. 2003 Stock at start of year 9,166,700 9,100,330

31. 01. 2003 January 9,100,330

28. 02. 2003 February 9,100,330

31. 03. 2003 March 9,100,330 9,100,330 31. 03. 2003

30. 04. 2003 April 9,100,330

31. 05. 2003 May 9,100,330

30. 06. 2003 Own shares transferd to an employee 150 June 9,100,480 9,100,355 30. 06. 2003

31. 07. 2003 July 9,100,480

31. 08. 2003 August 9,100,480

30. 09. 2003 Sale of own shares for payment in cash 64,990 September 9,165,470 9,107,618 30. 09. 2003

30. 10. 2003 October 9,165,470

30. 11. 2003 November 9,165,470

31. 12. 2003 Issue of new shares for cash contributions 4,583,350 December 13,748,820 9,504,027 31. 12. 2003

31. 12. 2003 Issue of new shares for cash deposits with potential shares (convertible bonds) 9,166,700

December. 18,332,170 9,885,973 31. 12. 2003

According to IAS 33, the number of shares for working out undiluted and diluted earnings per share is calculated as follows:

Conditional CapitalIn addition, capital stock is to be increased conditionally by up to EUR 4,583,350, divided into up to 4,583,350 individual shares with an ar-ithmetical share in capital stock of EUR 1 per share. The background to this conditional capital is the resolution passed at the General Meeting of Shareholders on 17 June 2003 authorising the Management Board with the Supervisory Board’s consent to issue convertible bonds or op-tions on one or more occasions up until 31 May 2008, with a total face value of up to EUR 10 million and for a term of up to five years. Bond holders can be granted conversion or option rights to up to 4,583,350 registered individual shares in DEAG Deutsche Entertainment AG, equal to a EUR 4,583,350 share of capital stock.

On 22 August / 13 November 2003 the Management Board, as ap-proved by the Supervisory Board on 14 November 2003, made use of the powers it had been given and issued up to 4,583,350 bonds with a total face value of up to EUR 6,783,358 that give their holders the right to convert them into up to 4,583,350 shares in the company.

The conditional capital increase will be implemented only to the extent that the holders of option and conversion rights attached to the bonds and / or options issued by the Company up until 31 May 2008 on the basis of the Management Board’s authorisation dated 17 June 2003 ex-ercise those conversion or option rights, or that holders of convertible bonds issued on the basis of the authorisation granted by the General Meeting of Shareholders on 17 June 2003 who are obliged to convert fulfil their obligation to do so. New shares will share in profits from the beginning of the financial year in which they come into being by exercise of conversion or option rights or by fulfilment of conversion

obligations. The Management Board is authorised with the Supervisory Board’s approval to specify the further details as to how the capital in-crease is implemented.

DEAG Deutsche Entertainment AG has not subscribed to any shares in the context of the Company’s conditional capital increase.

26. MINORITY INTERESTS

Minority interests are shown in the form of shares in paid up and earned equity that DEAG neither holds directly nor indirectly.

in EUR’000

As at 01. 01. 2003 401

Share in net earnings for 2003 1,071

Dividend distributions -325

Currency effects 25

As at 31. 12. 2003 1,172


27. INFORMATION ON RELATIONSHIPS WITH RELATED PARTIES IN ACCORDANCE WITH IAS 24

According to IAS 24, the Management Board of DEAG Deutsche En-tertainment AG, its shareholders and the Supervisory Board come into consideration as related parties.

There were the following legal connections with Mr Peter Schwenkow, who as CEO and main shareholder is a related party:

A. Loan agreement between Mr Peter Schwenkow and DEAGMr Schwenkow in the year 2003 continued to place at DEAG’s dis-posal the credit framework granted to him by DZ Bank at the begin-ning of 2000 in connection with the acquisition by DEAG of STELLA assets. The credit agreement between Mr Schwenkow and DEAG came to an end with the early redemption of liabilities to creditor banks on 19 December 2003 and the accompanying renunciation of claims by the creditor banks.

DEAG has undertaken to reimburse to Mr Schwenkow at the first time of asking all interest, commission and costs incurred by him under the DZ loan agreement. Interest was charged on to DEAG up until 19 December 2003. Additionally, DEAG reimbursed to Mr Schwenkow the costs he incurred for his legal advice relating to the DZ loan agree-ment and the redemption agreement. In addition, DEAG has under-taken to pay Mr Schwenkow a channelling and liability commission of 2.5 % per annum of the drawn funds, payable into an account to be nominated by him. These sums were also paid before the end of the financial year.

B. Secondary Liability, Acceptance of CostsMr Schwenkow has in three cases accepted secondary liability to DEAG’s creditors for certain DEAG liabilities. In these cases DEAG has reimbursed Mr Schwenkow for the costs he incurred to legal advice in connection with these legal dealings.

C. Travel Expenses, Entertainment Expenses, Corporate GiftsIn the financial year 2003, Mr Schwenkow made a large number of business trips on DEAG’s behalf. The majority of travel costs incurred were billed directly to DEAG, but in on some occasions they were paid by Mr Schwenkow and reimbursed by DEAG within the context of travel expense settlement. They were paid in accordance with the provisions laid down in DEAG’s travel expenses guidelines. Where the particular activity could be directly allocated to individual subsidiaries, DEAG passed these costs on internally to the relevant subsidiary.

DEAG also reimbursed Mr Schwenkow, mainly within the context of travel expense settlement, with the cost of hospitality provided in the course of business and, to a minor extent, the cost of flowers and simi-lar presents given as corporate gifts.

Members of the Management Board receive annual emoluments with a fixed and a variable components. During the year under review, emolu-ments for the group totalled EUR 949,000 (2002: EUR 1,538,000).

Members of the Supervisory Board are remunerated in line with the ar-ticles of incorporation. In the year under review, remuneration totalled EUR 98,000 (2202: EUR 100,000). The Company also reimbursed travel costs of EUR 3,000 incurred in connection with Supervisory Board meetings (220: EUR 4,000). In addition, the law firm of a Su-pervisory Board member charged a total of EUR 27,000 (2002: EUR 30,000) for legal and consulting services.

28. REVENUES

The segment account shows the breakdown of revenues by line of busi-ness and geographical market.

29. REVENUE COSTS

The cost of materials, purchased services, particularly fees, personnel expenses, event-related hire charges and other material costs incurred to achieve sales revenue are recorded as revenue costs.

30. DISTRIBUTION COSTS

Distribution costs include personnel expenses, advertising and travel costs, cost of premises and other distribution-related material costs.

31. ADMINISTRATION COSTS

Administration costs include personnel expenses, legal and consulting costs, cost of premises and other administration-related material costs.

32. OTHER OPERATING INCOME

Other operating income comprises essentially:

in EUR’000 2003 2002

Reimbursement of costs to Rolling Stones 6,463 0

Income from retransfer of accruals 794 2,340

Asset disposals 977 0

Damages 809 0

Insurance payment 234 371

Canteen income at STELLA in Q1 0 1,493

Other 7,138 3,150

Consolidation measures 0 2,386

16,415 9,740


33. OTHER OPERATING EXPENDITURE

Other operating expenditure comprises essentially:

in EUR’000 2003 2002

Costs incurred for Rolling Stones 6,940 0

Itemised allowances / Risk provision 333 2,955

Other expenditure for STELLA in Q1 0 2,280

Damages 891 0

Other taxes 98 0

Losses from fixed asset disposals 0 8

Other 4,084 355

12,346 5,598

34. DEPRECIATION / AMORTISATION

Depreciation / amortisation was as follows:

in EUR’000 2003 2002

Amortisation of consolidation-related goodwill 3,608 3,637

Depreciation of other fixed assets and intangibles 684 5,292

4,292 8,929

35. NET INTEREST INCOME

Net interest income includes:

in EUR’000 2003 2002

Other interest and similar income 451 389

Other interest and similar expenditure -4,804 -2,921

-4,353 -2,532

36. NET EARNINGS FROM PARTICIPATING INTERESTS

This item relates essentially to expenses in the individual financial state-ments and in the group resulting from changes in the consolidated entity.

37. INCOME TAX

Actual tax liabilities for the current financial year and previous years are calculated on the basis of the amounts expected to be payable to the tax authority, applying the tax rates in force on the balance sheet date. Deferred tax claims and tax liabilities are calculated on the basis of the rates that were valid on the balance sheet date.

in EUR’000 2003 2002

Actual tax expenses 1,287 912

Deferred tax income resulting mainly from the utilisation of losses carried forward in the future and temporary variances -1,000 -5,023

Tax expenses / income 287 -4,111

Income tax includes all income tax paid or payable in the respective countries and all tax accruals.

Income tax includes corporate income tax, trade tax on earnings, soli-darity surchage and the corresponding foreign taxes.

Tax accruals are formed in order to record all substantial limited-period variances between the individual financial statement and the tax bal-ance sheet and limited-period variances due to consolidation adjust-ments. In addition, deferred tax claims are capitalised to the extent that tax-deductible losses have been carried forward.

The rate of corporate income tax in Germany is 25 % plus a 5.5 % solidarity surchage. The trade tax deductible when establishing income for corporate income tax purposes varies between 17 % and 19.7 %, de-pending on the local authority. Asset-side tax accruals were calculated on the basis of a rate of 40 %.

Income tax rate in the United Kingdom is approximately 33 % and in Switzerland approximately 22 %.

Tax expenses resulting from application of the DEAG tax rate can be translated into actual tax expenses as follows:

in EUR’000 2003 2002

Earnings before income tax and minority interests -13,320 -5,173

Tax income at the DEAG AG tax rate -5,328 -6,069

Tax expenses / income as per income statement 287 -4,111

Translation amount -5,615 -1,958

Goodwill amortisation 5,471 1,455

Tax-free income and non-deductible expenses 64 -2,064

Different tax rates -847 -1,040

Value adjustment asset-side tax accrual 927 3,607

5,615 1,958


Deferred tax assets and liabilities is made up as follows:

in EUR’000 31. 12. 03 31. 12. 02

Deferred tax credit for DEAG AG losses carried forward and temporary differences 12,653 11,653

Deferred tax liability for value write-up Jahrhunderthalle Frankfurt -4,759 -4,759

Net deferred tax claim 7,894 6,894

Tax claims have been shown in the form of an overall balance after netting out because with one and the same tax authority it is possible to offset.

Deferred tax credits were formed exclusively for tax losses at DEAG AG and taking into account temporary differences in the group. Appropri-ate reductions were made to guard against the risk of non-recognition for tax purposes or of a failure to utilise.

38. RESTRUCTURING, EXTRAORDINARY DEPRECIATION AND ONE-OFF FACTORS

This item is made up as follows:

in EUR million

Income from waiver of claims outstanding

10.7

Expenses:

Extraordinary depreciation -10.1

Obligations and risks resulting from STELLA’s insolvency -2.8

Composition agreements -1.6

Project risks -1.5

Option fee -0.7

Write-down of receivables -0.5

Contract cancellation risks -0.4

Expenses in connection with capital procurement -1.5

Personnel expenses and overheads -2.6

Other expenses -1.1

Total expenses 22.8

Restructuring, extraordinary depreciation and one-off factors -12.1

39. PERSONNEL EXPENSES

in EUR’000 2003 2002

Wages and salaries 10,829 12,010

Social security contributions 1,907 1,870

12,763 13,880

40. AVERAGE NUMBER OF EMPLOYEES DURING THE YEAR

Head count 2003 2002

Theatres 157 771

… of which STELLA sub-group 0 556

Artists & Tours 59 57

Urban Entertainment 19 166

Holding company (DEAG) 21 31

256 1.025

On 31 December 2003 the Group employed 169 full-time staff (2002: 216).

41. OFF BALANCE SHEET CONTINGENCIES

On the balance sheet date, there were no contingencies relating to secu-rities and guarantees provided for third parties.

42. OTHER FINANCIAL COMMITMENTS

In addition to the accruals and liabilities in the balance sheet and the contingencies, the following financial commitments exist:

in EUR’000

Other Order liabili-

ties

Rent Leasing Total

2004 433 12,668 1,603 285 14,989

2005–08 525 0 3,550 366 4,441

959 12,668 5,153 651 19,430

43. STATEMENT OF CONFORMITY IN ACCORDANCE WITH § 161 AKTG

The Management Board and the Supervisory Board have issued a state-ment of conformity with the recommendations of the government commission on a German Corporate Governance Code in accordance with § 161 AktG and made it permanently accessible to shareholders.

The full statement can be found in this annual report (page 90) and on the Internet at www.deag.de/ir.


44. LITIGATION RISKS

Substantial litigation risks on the balance sheet dateThe damages claim filed against DEAG by the landlord of a musical theatre used originally by a STELLA subsidiary was upheld in the sec-ond-instance court. An appeal has been filed with the Federal Supreme Court against the refusal to admit an appeal on points of law. A claim against the insolvency administrator of the STELLA subsidiary was assigned to the plaintiff and is expected to cover approx. two thirds of the sued-for amount. An accrual of EUR 1 million exists to cover the rest of the claim.

A claim filed by a former DEAG Management Board member for re-payment of royalties was dismissed in the court of first instance. The plaintiff has appealed against the ruling. The law firm looking after the case expects the second-instance court to dismiss the action, too.

There was a dispute under landlord and tenant law between DEAG and its landlord. The court case has now ended.

The Frankfurt tax office issued the group company Jahrhunderthalle Besitzgesellschaft mbH & Co. KG with a demand for payment of ad-ditional land transfer tax. An appeal was filed against this demand. Fol-lowing a decision by the Federal Fiscal Court, provisional collection of the contested demand has been suspended. The lawyers looking after the case are confident that the appeal will be allowed in the principal proceedings, too.

Adequate provision has been made to cover all risks.

45. EVENTS AFTER THE BALANCE SHEET DATE

In January 2004, we lost a court case in the court of second instance. We have filed an appeal against the refusal to allow an appeal on points of law. Accruals have been formed for the risk.

In February 2004, a notarised contract of sale was concluded relating to the sale of the first part of the Jahrhunderthalle Frankfurt site for a purchase price of EUR 6.5 million.

In March 2004, a loan agreement for EUR 0.5 million was concluded. The shares in Concert Concept Veranstaltungs GmbH, Berlin, were pledged as collateral.

On 31 March 2004, a further loan of EUR 0.7 million was taken out. Further loans are expected to be taken out in the second quarter of 2004.


DEAG Deutsche Entertainment AktiengesellschaftThe Management Board

86 DEAG Annual Report 2003 – Independent Auditor’s Report

INDEPENDENT AUDITOR’S REPORT

We have audited the consolidated financial statements drawn up by DEAG Deutsche Entertainment Aktiengesellschaft for the financial year 1 January 2003 to 31 December 2003, comprising balance sheet, income statement, statement of changes in shareholders’ equity, cash flow statement and notes. The company’s Management Board is re-sponsible for drawing up the consolidated financial statements and for their content. Our responsibility is to judge on the basis of our audit whether the consolidated financial statements accord with Internation-al Financial Reporting Standards (IFRS).

We conducted our audit of the consolidated financial statements in ac-cordance with German audit regulations following the principles laid down by the German Institute of Auditors (IDW) supplemented by the International Standards on Auditing (ISA). These require us to plan and carry out the audit so as to be able to judge with sufficient certainty whether the consolidated financial statements are free from material misstatements. During the audit, evidence of the values reported and information given in the consolidated financial statements is assessed on the basis of random samples. The audit includes assessing the ac-counting principles applied and the Management Board’s material esti-mates as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a sufficiently reliable basis on which to form an opinion.

In our opinion, in accordance with IFRS the consolidated financial statements present a true picture of the Group’s asset, financial and earnings position and of cash flows during the financial year.

Our audit, which also covered the Management Board’s report for the financial year 1 January 2003 to 31 December 2003 on the Group’s and DEAG Deutsche Entertainment Aktiengesellschaft’s situation gave rise to no objections. In our opinion, together with the other information provided in the consolidated financial statements, it conveys an accu-rate idea of the Group’s position and that of DEAG Deutsche Enter-tainment Aktiengesellschaft, and accurately describes the risks inherent in future developments.

Without qualifying this opinion, with regard to the Company’s contin-ued existence we draw attention to the comments in the section of the Management Report for the Group and DEAG Deutsche Entertain-ment Aktiengesellschaft entitled Specific Company and Market Risks. It describes in detail the possible threats to the future survival of the Company and the Group.

We also confirm that the consolidated financial statements for the fi-nancial year 1 January 2003 to 31 December 2003 satisfy the condi-tions for the Company to be exempted from drawing up consolidated financial statements under German law.


BDO Deutsche Warentreuhand AktiengesellschaftWirtschaftsprüfungsgesellschaft Braasch Wollank Auditor Auditor

DEAG Annual Report 2003 – Annual Financial Statements for DEAG Holding 87

Balance Sheet Summary

Assets31. 12. 2003in EUR’000

31. 12. 2002in EUR’000

Tangible and intangible assets 183 333

Investments 12,747 19,782

Fixed assets 12,930 20,115

Receivables and prepaid expenses 19,910 31,313

Cash and cash equivalents / securities 755 330

Total current assets 20,665 31,643

Total assets 33,595 51,758

Liabilities31. 12. 2003in EUR’000

31. 12. 2002in EUR’000

Share capital 13,750 9,167

Additional paid-up capital 30,479 24,383

Reserve for own shares 0 69

Accumulated deficit -34,905 -17,533

Shareholders’ equity 9,324 16,086

Accruals 10,190 3,296

Convertible bond 4,583 0

Accounts payable due to financial institutions 4,012 20,399

Other accounts payable and deferred income 5,486 11,977

Total payables 14,081 32,376

Total liabilities 33,595 51,758

88 DEAG Annual Report 2003 – Annual Financial Statements for DEAG Holding

Consolidated Statement of Income

in EUR’000 01. 01.–31. 12. 2003 01. 01.–31. 12. 2002

Distribution costs -60 -525

General and administration costs -5,131 -5,652

Other operating expenses and income 520 1,651

Operating income / loss (EBIT) -4,671 -4,526

Interest income and expenses -1,702 -1,587

Depreciation on financial assets and marketable securities -7,010 0

Income from investments and participations -3,074 2,418

Result of short-term investments / marketable securities 66 47

Result from ordinary business activities -16,391 -3,648

Extraordinary result -1,037 17,141

Income tax -14 2

Net income / loss -17,442 13,495

Loss carried forward -17,532 -31,141

Amortisation of the reserve for own shares 69 113

Accumulated deficit -34,905 -17,533

The annual report containing the consolidated financial statements of DEAG Deutsche Entertainment AG as awarded an unqualified audit opinion by the BDO Deutschen Warentreuhand Aktiengesellschaft and Wirtschaftsprüfungsgesellschaft can be requested from the Investor Relations department.

DEAG Annual Report 2003 – Report of the Supervisory Board 89

REPORT OF THE SUPERVISORY BOARD

In the last financial year the Supervisory Board paid close attention to the Company’s situation and development and monitored the manage-ment continuously with the help of oral and written reports from the Management Board.

The general meeting of shareholders held on 17 June 2003 resolved that Prof. Dr Peter Raue, Wolf-D. Gramatke, Dr Günther R. Niethammer and Hans-Joachim Ziems should be reappointed as members of the Supervisory Board until the General Meeting of Shareholders in 2007. Dr Cornelis Lehment was newly appointed to the Supervisory Board. Michael von Sperber retired by rotation on 17 June 2003. No commit-tees were set up.

The business position, investment projects, the corporate restructur-ing strategy, proposed disposals, financial plans and cost and earnings trends were discussed in detail at five Supervisory Board meetings at-tended by the Management Board. All business transactions that ac-cording to the Company’s Articles of Association require Supervisory Board approval were examined closely at these meetings. The Supervi-sory Board satisfied itself in this way that the business was being prop-erly run.

The financial statements and consolidated financial statements, the management report and consolidated management report for the fi-nancial year 2003 were audited by the auditors instructed by the Su-pervisory Board, BDO Deutsche Warentreuhand Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Berlin, who issued an unqualified au-dit certificate. The auditors reported on the audit status at a Supervisory Board meeting and attended the Supervisory Board’s accounts meet-ing, where they reported on the audit findings, which the Supervisory Board noted and endorsed.

After concluding its own scrutiny, the Supervisory Board raised no ob-jections. It approved the financial statements, which are therefore final. It also approved the consolidated financial statements. The Supervisory Board agrees with the Management Board’s proposal for the applica-tion of net earnings.

The Management Board presented the report compiled in accordance with § 312 of the German Companies Act (Aktiengesetz) and exam-ined by the auditor on relationships with associated companies. The Supervisory Board approved the audit findings, which conclude with the following unqualified opinion:

“Having completed our audit and assessment as in duty bound, we certify that …

1. … the factual data in the report is correct,

2. … in the case of the legal acts cited in the report, payment made by the Company was not excessive or any detriment was made good,

3. … in the case of the measures cited in the report no circum-stances exist to suggest a substantially different assessment than that made by the Management Board.”

Berlin, 20 April 2004

The Supervisory Board

Signed: Prof. Dr Peter RaueChairman

90 DEAG Annual Report 2003 – Corporate Governance

CORPORATE GOVERNANCE The term “corporate governance” stands for responsible management and supervision of a company, with a focus on sustained value enhance-ment. It covers not only internal and external control mechanisms but also organisational workflows and the company’s business policy principles and guidelines. Good, transparent corporate governance encourages in-vestors, business associates, employees and the general public to have confidence in the company’s running and supervision. In February 2002, the commission appointed by the German govern-ment to draw up a corporate governance code published its first code of basic principles of corporate management, control and transparency. Extensive parts of the code are based on German statutory regulations for corporate management and supervision. The code also includes rec-ommendations going beyond the statutory regulations, though compa-nies may depart from these. § 161 AktG (Aktiengesetz / German Stock Corporation Act) requires companies to issue an annual declaration of conformity stating whether they follow these recommendations and, if not, to what extent they diverge from them. The code also includes suggestions that companies may choose not to follow without the need for disclosure. The government commission is developing the German corporate governance code continuously, adapting it to changing con-ditions as necessary. It was last amended on 21 May 2003. DEAG feels committed to value-oriented corporate governance and ensures efficient, responsible management and control in its group of companies. We inform our shareholders and the public continuously, frankly and comprehensively about the current and planned course of business. To provide up-to-date, regular information we use inter alia the investor relations section of our corporate website (www.deag.de/ir), which also provides public access to a corporate calendar of all DEAG’s key financial dates. We are also geared to national and in-ternational accounting standards. DEAG’s consolidated financial state-ment is drawn up in accordance with International Financial Reporting Standards (IFRS) and the financial statement of the DEAG holding company is prepared in accordance with the requirements of the Ger-man Commercial Code (Handelsgesetzbuch / HGB).

StatementThe Management Board and the Supervisory Board declare that the company followed the behavioural recommendations of the German government-appointed commission on the code of corporate manage-ment and control (the Code) in the financial year 2003 with the excep-tion of the departures listed below and that it intends to do so in future, likewise with the exception of the departures below. This does not apply to group companies abroad. 1. The existing D&O insurance does not provide for any

deductible.

2. In the notes to the consolidated financial statement, Manage-ment Board remuneration is not broken down into a fixed sum, performance-related components and components that act as long-term incentives.

3. The Supervisor Board has not formed any committees. There is no audit committee.

4. There is no provision for performance-related remuneration of Supervisory Board members.

5. There is no regular review of the remuneration system for the Management Board. Likewise, the remuneration system is not published and explained on the website, in the Annual Report or at the General Meeting of Shareholders.

In the financial year 2003, there was the following additional depar-ture:

Interim reports were not published within 45 days of the end of the reporting period.

Information provided for the financial year 2003 refers to the Corpo-rate Governance Code version dated 7 November 2002. In the finan-cial year ahead, the Corporate Governance Code version dated 21 May 2003 will be applied.

DEAG Annual Report 2003 – Personal Data 91

PERSONAL DATA

Board of DEAG

Peter Schwenkow

Place of residence Berlin

Profession CEO

Responsibility within the Group Strategic business development and operations

Group retainers Administrative Board Member of Good News Productions AG, Glattbrugg (CH)

Shares held as at 31. 12. 2003 249,561

Markus Alexander Fabis

Place of residence Gross Glienicke

Profession Board Member

Responsibility within the Group Finances and Human Resources

Group retainers Administrative Board Member of Good News Productions AG, Glattbrugg (CH) (retired on 01. 01. 2003)

Shares held as at 31. 12. 2003 2,150

92 DEAG Annual Report 2003 – Personal Data

PERSONAL DATA

Supervisory Board

Prof. Dr. Peter Raue


Position on Supervisory Board Chairman

Profession Lawyer and Notary Public

Retainers on other boards Supervisory Board member of IdealWert AG, Berlin and Hebbel Theater GmbH, Berlin

Group retainers –

Shares held as at 31. 12. 2003 –

Wolf-D. Gramatke

Place of residence Hamburg

Position on Supervisory Board Acting Chairman

Profession Freelance Consultant

Retainers on other boards Supervisory Board Chairman of Pixelpark AG, Berlin (since 01. 05. 2003)

Acting Supervisory Board Chairman of EuroArts Medien AG, Stuttgart

Supervisory Board Member of VIVA Media AG, Cologne

Supervisory Board Chairman of F.A.M.E. AG (in liquidations), Munich(retired on 31. 12. 2003)

Group retainers –


Michael von Sperber

Place of residence Wulfsen

Position on Supervisory Board Acting Chairman (retired on 17. 06. 2003)

Profession Auditor, Accountant, Lawyer

Retainers on other boards –

Group retainers –


Dr. Günther R. Niethammer

Place of residence Nuremberg

Position on Supervisory Board Supervisory Board Member

Profession Managing Partner, Odewald & Cie GmbH

Retainers on other boards Supervisory Board Member of ad pepper media International N.V., Hoofddorp, NL

Group retainers –


DEAG Annual Report 2003 – Personal Data 93

Hans-Joachim Ziems

Place of residence Bergisch Gladbach

Position on Supervisory Board Supervisory Board Member

Profession Business Consultant

Retainers on other boards Supervisory Board Chairman of RWTC Entwicklungs- und Beteiligungs AG, Cologne

Supervisory Board Chairman of VDN Vereinigte Deutsche Nickel-Werke AG, Düsseldorf (since 29. 01. 2004)

Administrative Board Member of Kirch Media WM AG, Zug (CH) (retired on 13. 02. 2003)

Administrative Board Member of Kirch Sport AG, Zug (CH) (retired on 13. 02. 2003)

Supervisory Board Member of ProSiebenSat.1 Media AG, Unterföhring (retired on 08. 08. 2003)

Group retainers –


Dr. Cornelis Lehment


Position on Supervisory Board Supervisory Board Member(retired on 20. 01. 2004)

Profession Lawyer


Group retainers –

Shares held as at 31. 12. 2003 1,050

Reinhard Mühl

Place of residence Hannover

Position on Supervisory Board Supervisory Board Member (appointed on 26. 01. 2004)

Profession Graduate Business Economist

Retainers on other boards Supervisory Board Chairman of KCP Kunersdorf Capital Partners AG, Hannover

Supervisory Board Chairman of KIH Kunersdorf Immobilien Holding AG, Hannover

Acting Supervisory Board Chairman of First IPO AG, Hannover

Supervisory Board Member of KCG Kunersdorf Consultans Group AG, Hannover

Group retainers –


Gerald Wagener

Place of residence Meerbusch

Position on Supervisory Board Supervisory Board Member(appointed on 26. 01. 2004, retired on 10. 03. 2004)

Profession Graduate Businessman


Group retainers –


94 DEAG Annual Report 2003 – Future-oriented Statements / Financial Calendar / Impressum

FUTURE-ORIENTED STATEMENTS

We would like to point out that the annual report contains future-ori-ented statements and other forecasts relating to the future development of DEAG AG and the Group.

This information and the forecasts represent estimates by the Man-agement Board made on the basis of all information available at time of writing. Should the assumptions on which the forecasts are based not be valid, or if the risks addressed in the risk report actually occur, then the actual results could deviate from the results that are currently expected.

DEAG is not obliged to publicly update or revise possible deviations in the results.

FINANCIAL CALENDAR 2004 OF DEAG DEUTSCHE ENTERTAINMENT AG

Thurs, 18. 03. 2004 Balance sheet press conference on the 2003 financial year

Fri, 19. 03. 2004 DVFA conference on the 2003 financial year

Fri, 14. 05. 2004 Interim Report as at 31. 03. 2004

Thurs, 17. 06. 2004 Annual General Meeting on the 2003 financial year



IMPRESSUM

Redaktion und KoordinationDEAG Deutsche Entertainment AG

Grafische Konzeption und GestaltungRaumzwo GmbH, Berlinwww.raumzwo.de

Weitere InformationenFür Analysten und Investoren, Investor Relations: [email protected]

Der Geschäftsbericht sowie aktuelle Informationen über die DEAG sind außerdem im Internet abrufbar unter www.deag.de/ir

DEAG Deutsche Entertainment AktiengesellschaftKurfürstendamm 63, D-10707 BerlinTelefon: 00 49 (0) 30-8 10 75-0Telefax: 00 49 (0) 30-8 10 75-5 [email protected]

IMPRINT

Editing and CoordinationDEAG Deutsche Entertainment AG

Graphic Conception and DesignRaumzwo GmbH, Berlinwww.raumzwo.de

Further InformationFor analysts and investors, Investor Relations: [email protected]

The Annual Report and current information on DEAG are posted on the internet at www.deag.de ir

DEAG Deutsche Entertainment AktiengesellschaftKurfürstendamm 63, D-10707 Berlin, GermanyPhone: 00 49 (0) 30-8 10 75-0Fax: 00 49 (0) 30-8 10 75-5 [email protected]

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