Beate Uhse TABLE of CONTENTS

8976_Beate_U_Umschlag_engl 28.05.1999 11:00 Uhr Seite 1

ANNUAL REPORT 1998 Beate Uhse TABLE OF CONTENTS

2–3 Interview with Beate Rotermund

4–5 Letter to the shareholders

6–7 Market for erotica

8–9 Retail

10–11 Mail order

12–13 Wholesale

14–15 Multimedia

16–17 International operations

18 Management Board and Supervisory Board

19 Report of the Supervisory Board

21 Management report and consolidated accounts

Leading the growing market for erotica

Beate Uhse Beate Uhse AG · Gutenbergstraße 12 · 24941 Flensburg · www.beate-uhse.de 8976_Beate_U_Umschlag_engl 28.05.1999 11:00 Uhr Seite 1

ANNUAL REPORT 1998 Beate Uhse TABLE OF CONTENTS

2–3 Interview with Beate Rotermund

4–5 Letter to the shareholders

6–7 Market for erotica

8–9 Retail

10–11 Mail order

12–13 Wholesale

14–15 Multimedia

16–17 International operations

18 Management Board and Supervisory Board

19 Report of the Supervisory Board

21 Management report and consolidated accounts

Leading the growing market for erotica

Beate Uhse Beate Uhse AG · Gutenbergstraße 12 · 24941 Flensburg · www.beate-uhse.de 8976_Beate_U_Umschlag_engl 28.05.1999 11:01 Uhr Seite 2

The Beate Uhse Group in numbers Audit Opinion (in DM millions)

1996 1997 1998 “The accounting and the consolidated financial statements, which we have audited in accordance with professional standards, comply with the legal provisions. With due regard to the generally accepted accounting principles, the consolidated financial statements give a true and fair view of the net worth, financial position and results of operations of Beate Uhse Aktiengesellschaft. The group management report is in agreement with the consolidated financial statements.”

Hamburg, March 12, 1999

ARTHUR ANDERSEN Revenues 135.9 132.3 168.6 Our business Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft mbH Export ratio (in %) 2.6 4.5 5.5 is all about the nicest thing in the world… Jöns Wirtschaftsprüfer Total output 145.8 151.0 176.5

Möbus Wirtschaftsprüfer

Cost of materials 32.3 32.6 57.5

Personnel expenditure 28.1 29.5 37.1

Operating profit 15.2 25.0 7.9

Net profit 12.9 14.1 4.0

Earnings per share (in DM) ------0.42

NumberN of employees 466 477 706

Revenues per employees 291.6 277.4 238.8 in DM Thousands

47 8976_Beate_U_Umschlag_engl 28.05.1999 11:01 Uhr Seite 2

The Beate Uhse Group in numbers Audit Opinion (in DM millions)

Hamburg, March 12, 1999

Möbus Wirtschaftsprüfer

Cost of materials 32.3 32.6 57.5

Personnel expenditure 28.1 29.5 37.1

Operating profit 15.2 25.0 7.9

Net profit 12.9 14.1 4.0

Earnings per share (in DM) ------0.42

NumberN of employees 466 477 706

Revenues per employees 291.6 277.4 238.8 in DM Thousands

47 Erotica: a market without limits Beate Rotermund, founder of the Company and Chairwoman of the Supervisory Board - Axel Haubrok An interview with Beate Rotermund-Uhse

Axel Haubrok: Ms. Rotermund, 98 percent of all German adults today are aware of Beate Uhse. But what about the social acceptance and acknowledgement of your erotica company? Beate Rotermund: There have been enormous changes since Beate Uhse first started up 50 years ago. For me, the conver- sations which I frequently hold with people sitting next to me during long flights are particularly telling. 30 years ago, the people I talked to would express great interest in my company. But no-one would ever have admitted to actually shopping at Beate Uhse.

A.H.: And nowadays? B.R.: Over the past 15 years or so there has been a slow but steady change in attitudes. People are just as interested in our products and Beate as they were back then. But the difference is that today the people I talk to are quite willing to admit that they have bought something in a Beate Uhse store in 2 one town or another or ordered something Beate Uhse INTERVIEW

by mail. Sex and erotica have always been our mail-order business and the shops. They important. But it wasn't a subject that was will also continue to grow because it is very ever talked about. Things have changed important to be close to the customer. today.

A.H.: Talking of growth, why have you decided to A.H.: How have you managed to make Beate Uhse go public at this stage? synonymous with the erotica market? B.R.: Our goal is to become the style leader B.R.: Right from the outset I have used my in the Europe as well. We are primarily see- full name and photograph to express my king new licensees in all European countries. commitment to Beate Uhse products. Even And, of course, we are also investing a great the first mini catalogs did not only offer deal in future business such as the Internet products, they also took our customers' and multimedia. We view these sectors as questions seriously. We started offering harboring great potential for the future. customer advice - either in writing or over the phone - very early on and it is still free to this day. Another very important aspect A.H.: Does this mean that Beate Uhse will soon is our money-back guarantee. All this has be operating throughout Europe? given us high credibility on the part of B.R.: Of course, why not? Erotica is interna- customers and has been the key to our tional and knows no national borders. The success. Beate Uhse concept can be easily transplan- ted to other western countries. In 1998, we acquired other companies in the erotica A.H.: Were there no reservations about having a industry or entered into partnership woman at the top of the company? ventures with them. We want to pursue B.R.: Do you know what I say to that? Who this strategy to a greater extent in other would have dared say anything to me as a countries. mother of four? In fact, I think that being a woman has helped me enormously in this industry. A.H.: Ms. Rotermund, is the world ready for a listed erotica company? B.R.: Most definitely! The times when erotica A.H.: Did you never have any qualms about the companies would not have been touched morality of pornography? with a bargepole have for the most part B.R.: Pornography has been legal in Germany long since gone. Investors will clearly view since 1978 which is why Beate Uhse also sells us in terms of our yield and growth pornography. Of course, everything that we potential. We are market leaders in a highly do is strictly legal. We have never been on crisis-resistant market. We are entering the wrong side of the law. interesting growth segments such as the Internet and expanding on an international level. I think that private investors in A.H.: The experience of your competitors shows particular want to have a stake in com- that that is not always easy. panies whose products they are convinced B.R.: Yes, there is a fine line between legal will always be in demand regardless of what and illegal pornography. Although we did not the future holds. have any role models, we have always managed to avoid infringing the law and will continue to do so in the future. A.H.: Ms. Rotermund, thank you very much for this interesting interview.

A.H.: How is your company positioning itself for the future? B.R.: We want to continue being pioneers in all matters relating to erotica and sex in the new millenium. For example, we will be syste- matically expanding our Internet services, an area which offers enormous opportuni- ties. But this does not mean that we will be neglecting our traditional segments such as 3 ... share our sexy business

4 Beate Uhse LETTER TO THE SHAREHOLDERS

Dear future shareholders,

Beate Uhse AG is planning to go public in mid- 1999. In doing so, we want to secure the financial resources required to fuel our growth, particularly our international operations and our new media and Internet activities. We are convinced that Beate Uhse stock will be an attractive investment for you.

On our way to the stock exchange, we have pleasure in presenting you with our first annual report. It will continue to be a key element of our communication with you in the future. We will report to you on developments within the Beate Uhse Group on a frank and transparent basis.

At the end of 1998, Beate Uhse GmbH was converted by way of a change of legal form to a stock corporation as a prerequisite for the planned initial public offering. We took various capital- related measures at the beginning of 1999 to pre- pare the Company for the converging European capital markets and the requirements of the German stock markets. One key element was the conversion of our capital stock to Euros. A capital reduction was followed by the issue of bonus shares and a subsequent increase in the Company's capital stock by over Euro 12 million to a current Euro 33,630,000.

The Company's capital stock is divided into 33,630,000 shares of a nominal value of Euro 1.00 each.

In response to changed requirements, the Supervisory Board was extended to six members at the beginning of 1999. The Company's founder, Beate Rotermund, will remain Chairwoman of the Supervisory Board. She and the Company's management will ensure that Beate Uhse continues to be the most important and innovative company in the erotica market in the future.

Hans-Dieter Thomsen, CEO

5 The number of people shopping at erotica stores is growing steadily. Growing openness in sexual matters can be witnessed in all social groups and age brackets. A large number of Erotica and sex products female customers are also discover- ing this market. and services represent a growth In the early nineties, mail-order operations in particular and also market. trade via retail stores were boosted by a considerable upturn in demand. The sector is now experiencing a new boom on the Internet and in telecommunications. There is no reliable data on the size of the total market.

The main distribution channels for erotica and sex articles are retail stores and mail order, with the Internet playing an increasingly important role. In 1998, retail and mail-order sales were stable, while sales via the Internet and telecommunications business grew considerably.

... and Beate Uhse’s position

Most erotica retailers are small to mid-size companies. There are roughly 800 sex shops in Germany, with Beate Uhse being the leading chain-store operator. Most other companies have only regional importance.

Mail-order operations in Germany are dominated by two companies. Other suppliers play only a minor role.

On the Internet, it is primarily the mail-order companies which have carved up the market between themselves. They are the only ones able to cope with the high logistical demands of this business.

As an all-rounder supplying all segments, Beate Uhse is something of an exception in the erotica market. This special status is due to the Company's range of products and services, which are oriented to market requirements, and its expertise and openness as a pioneer of new ways of opening up the market. Beate Uhse has been setting high standards in the erotica market for over 50 years and has been steadily extending its market leadership role. Such high awareness levels and a positive image of the type enjoyed by Beate Uhse take a long time to achieve, are expensive and require decades of committed management.

6 Beate Uhse THE MARKET FOR EROTICA

The growth outlook for retail and mail-order operations is stable. One of the reasons for the shift in growth rates is changing consumer behavior. More and more customers are discover- ing the new media, particularly the Internet, as a way of shopping. In addition, completely new and highly interesting customer groups can be reached via electronic media. The Internet has already become a key driving force behind the erotica market and will become even more important in the future.

7 The shops are situated in top locations in nearly all German cities. In many places they form an entirely natural part of the retail landscape but nonetheless attract particular attention on the part of The Beate Uhse Group is the passers-by. Many customers take a look round one of the best-known e rotica retailer many Beate Uhse stores while doing their shopping. in Germany The naked figures: 50 pro- prietary and 56 licensed stores in Germany. In 1998, the Company extended its leading position in Southern Germany by means of various acquisitions. Three new stores were taken over in Munich alone. They are situated in easily accessible locations, e.g. Stachus, with direct cinema access. Small towns

The first Beate Uhse Shop in Berlin Center

8 Beate Uhse RETAIL

are served by licensees under the “Beate Uhse Up to 150,000 visitors come to this major tourist International” name. attraction in Berlin each year. The museum has direct access to a Beate Uhse store, one of the The key to the success of Beate Uhse's retail sto- most successful outlets in Germany.. res is the wide range of over 6,000 articles. The most popular product groups are lingerie, Beate Uhse aims to open three new outlets of its videos and magazines. The shops of course also own in Germany each year. In addition, five new have competent and friendly staff and attractive licensees a year are to be signed. The company furnishings to enhance customers' shopping also wants to tap additional business potential in experience. The range of services is supplemented the amusement arcade segment; thus, in January by numerous video cabins and the Beate Uhse 1999, one of Europe's largest amusement arcades Group's six own cinemas. joined the Beate Uhse Group.

Berlin plays a very special role in the Company's activities. The world's largest museum of erotica was opened in Berlin in 1996, by Beate Uhse, of course. 3,000 exhibits from all over the world are on display on 1,200 square meters of floor space.

9 Mail-order operations form the core of the Company’s business.

Its long-standing tradition in mail-order business steadily growing share of women. The range makes Beate Uhse an almost unrivaled supplier of erotic lingerie in particular enjoys very in Germany. Convenient and anonymous home considerable popularity. Erotica toys and videos shopping is what makes our mail-order business are also very successful mail-order products. so popular with customers. A new catalog is sent out to customers five times In 1998, Beate Uhse received almost half a million a year and is supplemented by additional special orders. It is particularly encouraging to note the catalogs. The main catalog is also available from

10 Beate Uhse MAIL–ORDER

newsagents. Beate Uhse offers free advice and an unlimited money-back guarantee. Orders can be placed around the clock, e.g. by phone or fax or via the Internet, and are delivered within 24 - 48 hours.

Experts estimate that the conventional mail- order business will develop steadily over the next few years. Beate Uhse therefore acquired its com- petitor, Becker Versand in 1998, in order to extend its own market share.

The growing popularity of on-line shopping will give additional fresh impetus to the mail-order business. Customers are increasingly using direct and simple ordering methods. The multimedia presentation of products opens up entirely new possibilities beyond the scope of the printed catalog.

Changes in ordering channels

76.1

70 68.6 62.2 60

31.3 30 27.8

21.6 20

This is what your mail 10 6.5 looks like: discretion is a 3.6 2.3 fundamental element of the Beate Uhse mail 96 97 98 96 97 98 96 97 98 order service. Mail

Telephone

Internet

The Internet is the ordering medium of the future for mail-order trading. 11 Against the backdrop of an increasingly international wholesale market, the Beate Uhse Group decisively strengthened its position in 1998.

Sales according to product groups (in % of total)

Magazines/books 62.8% Videos 18.5% Condoms 1.4% Erotica toys 11.2% Sexy underwear 2.1% Other 4.0%

12 Beate Uhse WHOLESALE

With its new subsidiary ZBF, in which it holds a In 1998, ZBF strengthened its own market posi- 50% stake, Beate Uhse is today the leader of the tion by signing exclusive contracts with various German wholesale erotica market. suppliers. In addition, it acquired two producers – Lavetra GmbH and Pleasure Verlag GmbH. Retail stores are supplied on a daily basis from These measures made a substantial contribution the central warehouse in Wiesbaden, ensuring to boosting the quality of ZBF's purchasing that customers always find the products they are operations. seeking. In addition, retail customers can pur- Today, Beate Uhse's range comprises approx. chase merchandise directly from the warehouse. 11,000 articles, allowing the Company to offer a The latest products and trends are displayed at unique array of products. New products are to be trade fairs held each spring and autumn. added this year, particularly in the premium- Distribution activities are backed up by the price segment, notably videos and erotica toys, to Company's own external sales force. additionally boost sales.

11,000 products in our range to fulfill all desires

13 er ONLINE & AUDIOTEX pe

One of many CD-ROM- productions of 1998

http://www Beate Uhse MULTIMEDIA

Beate Uhse is the rotica market leader on the Internet. With 3.3 million visits er month, Beate Uhse's Internet sites are some of the most popular in Germany. Measured in terms of the length of stay, Beate Uhse's Internet presence is absolutely unrivaled in Germany. 100 domains with over 120,000 regularly updated pages of erotica offer customers a full array of erotica and sex-related products and services.

Erotica and sex on the Internet are extremely popular for obvious reasons: anonymity, ease of access, e.g. it is easy to meet people, no ties, i.e. no obligations and no taboos, according to Alvin Cooper of Stanford University.

All of the Group's multimedia activities are handled by the subsidiary Aktuelle Information, which, after many years of close collaboration, was fully taken over in 1998. Various chat forums, live on-line erotic shows and contact exchanges are offered via the Internet or T-Online, in addition to an extensive Audiotex 0190 telephone service. .beate-uhse.de

Internet and telephone business harbors enormous growth potential for the Beate Uhse Group. Erotica and sex are currently the fastest-growing segments on the Internet. Moreover, the term " sex" is the most frequently entered word in the Internet search engines. Beate Uhse figures out prominently here. In addition to the domain name www.beate-uhse.de the company also secured the domain www.sex.de.

The ever-growing emergence of the Internet and deregulation of the telecommunications markets have unleashed growth potential for the Company throughout Europe. Beate Uhse is one of the small number of companies whose full range of Internet services operates at a profit.

15 Switzerland Basel 2x Zürich 3x Brugg 1x Luzern 1x Bern 1x St. Gallen 1x Biel 1x Spreitenbach 1x Davos 1x Pratteln 1x Aarau 1x St. Margrethen 1x Jona (June 99) 1x

Austria Innsbruck 1x Vienna 3x Graz 2x Bergheim 1x Salzburg 1x Erotica kn Linz 1x Klagenfurt 1x Völz 1x

Spring/Summer 99 Wiener Neustadt 1x Brunn am Gebirge 1x Spittal/Drau 1x

Italy Bozen 1x

Spain Palma de Mallorca 1x

16 Beate Uhse INTERNATIONAL OPERATIONS

Beate Uhse is represented in numerous countries in Western and Central Europe.

Licensees operate in Austria, Switzerland, Spain, Portugal, Hungary, Poland and Italy. In particular, the Company's recent entry into the Italian market has proven once again that the Beate Uhse concept is easy to multiply and transplant to other countries. This also, or rather especially, applies to countries which at first glance do not appear to hold much promise for this business, e.g. on account of the large religious percentage in the population or a less open-minded attitude towards erotica.

At the moment there are 28 franchise or licensed stores in European countries outside Germany (15 in Switzerland, 11 in Austria, 1 in Spain and 1 in ows no bounds

Italy). Beate Uhse's mail-order operations are also represented by licensees in Switzerland, Austria, Portugal, Hungary and Poland. These countries are supplied directly from Germany.

Other key elements of the Beate Uhse Group's international activities are Internet services. The Internet is proving to be a very effective instrument for internationalizing the Company's business as the extensive multimedia activities allow the Beate Uhse brand to be launched on individual international markets quickly and at an early stage.

This year, Beate Uhse plans to open at least 10 new licensed stores outside Germany. It is currently seeking to open its first store in France. This will be immediately followed by international expansion throughout western Europe. After all, erotica and sex transcend all national borders.

17 Beate Uhse MANAGEMENT BOARD AND SUPERVISORY BOARD

Hans-Dieter Thomsen

Ulrich Hülle Beate Rotermund

Members of the Management Board (March 1999)

Hans-Dieter Thomsen, Chairman

Ulrich Hülle

Bogdan Hofmann

Bogdan Hofmann Dirk Riedel

Members of the Supervisory Board (March 1999)

Beate Rotermund, Chairwoman

Richard Orthmann, Deputy Chairman

Detlef Bindert

Dirk Riedel Jens Jensen

Gesa Münzmaier

Dörte Tischer 18 Beate Uhse REPORT OF THE SUPERVISORY BOARD

By means of shareholders’ resolutions passed on the proposal for the appropriation of the August 18 and September 28, 1998 Beate Uhse Company's retained earnings. No objections were Holding GmbH was converted to Beate Uhse AG, by raised. The Supervisory Board approved and way of a change of legal form. The shareholders of accepted the financial statements prepared by Beate Uhse Holding GmbH were Beate Rotermund the Management Board. The Supervisory Board and Ulrich Rotermund. Beate Uhse Holding GmbH accepts the Management Board's proposal for the was the general partner of Beate Uhse GmbH & appropriation of the Company's retained ear- Co. Kommanditgesellschaft. nings.

The Company’s change of legal form was entered The Management Board has prepared a report in the Commercial Register at the local court of detailing relations with affiliated companies pur- Flensburg under the number HRB 3737 on suant to § 312 of the German Stock Corporation November 13, 1998. The stock corporation initially Law (AktG), upon which the auditor has rendered traded under the name of Beate Uhse Holding the following unqualified opinion: Aktiengesellschaft and was then renamed Beate Uhse Aktiengesellschaft. “Following our audit, which we carried out in accordance with professional standards, and sub- The Supervisory Board was kept informed in sequent evaluation, we confirm that detail of the situation and development of the Company at regular meetings as well as by means 1. the factual information in the report is of written and oral reports in fiscal 1998. The correct, Supervisory Board was given monthly reports on 2. the Company did not make any disproportional the state of the Company's business. payments as part of the transactions listed in the report In addition to current business, fundamental 3. there are no circumstances warranting a mate- strategic issues were discussed, with the acquisi- rially different assessment of the measures tions and preparations for the IPO planned for detailed in the report by the Management 1999 also playing a role. Board.”

With respect to business strategy, questions rela- The Supervisory Board has examined the depen- ting to product and customer policies as well as dent company report and the auditor's report. No necessary measures and reactions to changing objections were raised. market conditions were dealt with. The Supervisory Board wishes to express its grati- The financial statements and consolidated finan- tude and acknowledgement to the Management cial statements as well as the management Board, the Employee Council and employees for report and group management report were audi- their great commitment and work. ted by Arthur Andersen Wirtschaftsprüfungs- gesellschaft Steuerberatungsgesellschaft mbH, Hamburg. The audit did not reveal any irregulari- ties. An unqualified auditor's opinion was rende- Flensburg, March 17, 1999 red. Beate Rotermund The Supervisory Board examined at length the Chairwoman of the Supervisory Board financial statements and consolidated financial statements as well as the management report and the group management report in addition to

19 20 Beate Uhse

Management report and the financial statements of the Beate Uhse Group

Page 22 Market/sales

Page 23 Acquisitions

Page 24 Procurement, investments, financing measures

Page 25 Employees

Page 26 Net worth and financial positions

Page 27 Result of operations

Page 28 Outlook

Page 29 Dependent company report

Page 30–31 Consolidated balance sheet

Page 32 Income statement

Page 33 Cash flow statement

Page 34–43 Notes to the consolidated financial statements

Page 44–45 Fixed assets movements schedule

Page 46 Consolidated companies

Page 47 Auditor's opinion

21 Group Management Report for Fiscal Year 1998

THE BUSINESS

Market and The Business in General The trend towards a general slowdown in consumption in Germany only partially affected the market for erotica in 1998. Preliminary publications relating to the Berlin erotica trade fair in December 1998 addressed the slower development in the traditional field of retail and wholesale trade in erotica but also addressed interesting growth in new market areas. Export business also went well with most suppliers recording healthy growth. Services and marketing via the new media and the internet in particular have been developing well in the past few years and recor- ded good to very good rates of growth as opposed to sales made in retail stores. There were a few acquisitions in both the manufacturing and the retail sectors. Due to an upturn in aggressive pricing, in particular in the area of video products, competition became fiercer on both the industrial and the commercial side. In the sales sector the retail and wholesale trade are developing forms of discount selling which influence this area of the erotica sector with highly progressive conditions. In the new federal states there is an increase in the streamlining of locations, although this is to be viewed as a normal consequence of the post-reunification boom.

Sales Development The Beate Uhse group is present in the German market in all typical sales channels and in neighboring European countries in the retail trade and in some cases also in mail order channels. Apart from retail, mail order and wholesale trade, distribution via multimedia technologies (including telephone, internet, videotext) is also gaining importance. The Beate Uhse group was able to maintain its position in spite of the relatively weak German market. In 1998 consolidated sales increased by DM 36 million from DM 132 million to DM 168 million. While sales in the traditional areas went down by almost DM 5 million, overall group sales enjoyed significant growth due to acquisitions with a sales volume consolidated on a pro rata basis of DM 41 million. The reason for the stagnation in the traditional areas is the changing consumption patterns of the customers. The Beate Uhse group saw this development and took it into account in making the acquisitions during 1998. These acquisitions are explained below. As the majority of these acquisitions were made in the second half of the year, significant amounts of sales of companies acquired in 1998 have not yet been fully reflected in these financial statements. Taking the effective set of companies forming the group as of December 31, 1998 into consideration, the sustained sales potential of the current Beate Uhse group for the whole of 1998 amounts to a sales volume of DM 203 million.

22 Acquisitions In 1998 the Beate Uhse group acquired either directly or through its subsidiaries the following companies or participations which were only partially reflected in the group sales due to different acquisition dates and thus different dates of initial consolidation:

Sector Company or group name Annual sales 1998

Multimedia Aktuelle Information-group DM 34 million Mail order trade Becker KG, Inh. Walter Becker Nachfolge GmbH DM 1 million Erotica wholesale trade ZBF Zeitschrift-Buch- und Film-Vertriebs GmbH DM 64 million Erotica publishing company Pleasure Verlag GmbH, publishing company /trade/sales DM 3 million Product manufacturer Lavetra GmbH DM 3 million Media agency W & A Agentur für Werbung und Anzeigenvermittlung GmbH DM 6 million Retail trade/cinema/gaming amusement arcades and shops DM 8 million

By acquiring the multimedia group Aktuelle Information, the Beate Uhse group led the way in opening up a new market. Aktuelle Information offers visual and/or audio services relating to erotica and other leisure areas via the various networks of the Telekom and other network operators. The company cooperates not only with Deutsche Telekom’s T-Online but also with almost all major providers (including AOL, Compuserve, etc.) It has successfully conducted online mail order for the Beate Uhse group for some years in conjunction with numerous advertising campaigns. This comprises what is nowadays termed e-commerce with, cross- border trade via the internet. Aktuelle Information not only offers its services directly to end consumers but also acts as a technological intermediary between other providers of services and their end customers. In the past it primarily offered its services in Germany but is now increasingly extending its services abroad. Furthermore, Aktuelle Information leads the field in the technological development of new payments systems, working in close cooperation with its online partners. As a result of a generation change the Beate Uhse group was able to acquire the largest German wholesaler of erotica, ZBF GmbH, together with a European partner. As the margins on almost all trade levels of the erotica segment are above average, this acquisition was considered to be purposeful and desirable considering the group’s planned growth strategy. The well established rival in the mail order trade, Becker KG, Inh. Walter Becker Nachfolge GmbH, was taken over at the beginning of 1998 and was also a result of a generation change. The range of goods offered in the catalogues of both mail order companies comple- ment each other ideally. The two suppliers of erotic products, Pleasure Verlag GmbH and Lavetra GmbH, are long-standing and reliable suppliers to the Beate Uhse group. The takeover decisions were made jointly by our wholesale division and our 50% partner in order to ensure that the group is supplied with high-quality products on a long-term basis and that the acquisitions are suited to the group from a business point of view. The advertising agency Spezialagentur W & A Agentur für Werbung und Anzeigenvermittlung GmbH has already been working for the group and other customers for several years. In 1998 the company’s expanding business volume presented an opportunity for a takeover. In the area of retail selling and amusement arcades three well established operations in a top location in the center of Munich were taken over as of December 31, 1998.

23 Procurement The optimization of the procurement function was started a few years ago and continued in 1998. As it became clear that the group would take over the German wholesaler ZBF GmbH, the group increased its purchases at the beginning of the year and integrated ZBF GmbH in its corporate product policy. The Beate Uhse group benefited from the improved purchasing transparency and purchasing power associated with the takeover, also with respect to large foreign suppliers. The suppliers to the Beate Uhse group fulfill current quality standards and can prove their compliance with the appropriate certifica- tions. Prices for the main product groups remained stable during 1998.

Investments The Beate Uhse group maintained its investment volume (excluding financial assets) of the past few years and invested a total of DM 9.2 million in factory and office equipment. The additions mainly relate to the following areas:

Warehouse and shipment DM 2.5 million Video cabins DM 2.4 million Store fixtures DM 0.8 million Leasehold improvements DM 0.8 million EDP DM 0.8 million Vehicle fleet DM 0.7 million

These amounts do not reflect any conspicuous trends and correspond to the figures drawn from many years’ experience.

Financing The changes in the equity of the Company had no impact on the Company’s readiness to provide financing. These changes are depicted in the notes to the consolidated financial statements which resulted from the corporate law procedures of the split, reorganization and merger. However, due to the aforementioned major acquisitions the Company had capital requirements of some DM 80 million during 1998. As a rule these acquisitions were financed on favorable terms by borrowing from banks with long-standing business relations with the Company. The terms of the loans were based on the expected cash-flow power of the acquired company (e.g. the 50% participation in Scala KG) and took into account the shareholders’ capital raising measures and the initial public offering planned for 1999. The share capital of the parent company was increased in November 1998 and resulted in an increase in equity of DM 43.8 million. This increase in share capital initially raised the total equity of the group by DM 43.8 million. However this amount was reduced again by DM 36.6 million because part of the goodwill from the acquisitions was offset against the capital reserve and the credit difference from initial consolidation as of December 31, 1998. As of year-end 1998 the liabilities to banks amount to DM 51.4 million; representing an increase of DM 35.8 million over the prior year.

24 Employees The average number of employees in the group increased by 48% from 477 employees in 1997 to 706 employees in 1998. This increase is primarily due to the expansion of the group. The Beate Uhse group is very concerned with the training of young people; last year it increased the number of its apprenticeship programs from 4 to 7. New areas of apprentice training are in the media design, electronics information and telecommunications systems and information technology areas. There is a training consulting service available to all employees which ensures that interested employees receive comprehensive training. Beate Uhse AG, Versandhaus GmbH, Deutschland GmbH and Blue Movie GmbH are bound by an in-house pay scale agreement which corresponds to the pay scale for the retail trade. The newly acquired companies as part of the initial public offering are at present not bound by a pay scale agreement. The cooperation between the workers’ council and the management is constructive. In the past, opposing views have been settled internally and in an objective manner. The corporate culture has traditionally been good. The scope of duties and the responsibility of each employee are laid out in a job description. Qualified evaluations are a prerequisite for pay raises and promotions. The existing management philosophy is adapted to changing environmental factors at appropriate intervals. As a consequence there is low employee turnover. At present 17 executive employees participate in a profit sharing plan as part of their compensation schemes. The total amount of profit sharing is less than 2% of total wage and salary cost. In addition to the standard benefits the Beate Uhse group also offers its employees numerous fringe benefits such as employee discounts, gifts on special occasions and sport grants resulting in a good working atmosphere and low employee turnover.

25 PRESENTATION OF THE SITUATION

Financial Position As a result of various events in 1998, the financial position of the consolidated balance sheet of Beate Uhse AG underwent considerable changes compared to 1997. The loss of the outstanding capital contribution of DM 8 million is due to the split in 1998 of the former parent company Beate Uhse GmbH & Co. KG and was connected to the contribution of the outstanding limited partner’s contribution to the Company. DM 65.6 million of the increase in intangible assets relates to goodwill and DM 1.9 million relates to acquired film and image rights from the initial consolidation of the companies acquired in 1998. As of year-end goodwill was reduced to DM 29.8 million as part of the goodwill was offset against the capital reserve and part was set off against credit differences from the initial consolidation. Property, plant and equipment decreased by DM 42.3 million compared to the prior year.Along with the normal additions and disposals of day-to-day operations this decrease mainly relates to the removal of non-necessary real estate with a value of DM 48.0 million as part of the split and the increase of DM 3.2 million resulting from the expansion of the group. The increase in financial assets, inventories, receivables and other assets is likewise largely a consequence of the acquisitions, although the inventories rose by an additional DM 2.7 million as a different valuation method was applied in comparison with the prior year as a result of the tax field audit completed in 1997. The increase in the prepaid expenses of DM 9.1 million mainly relates to a long-term prepayment of rent for several retail properties acquired in 1998. As a result of the measures described above the balance sheet total increased overall by 20% from almost DM 120 million to some DM 144 million.

Equity The equity reflects a reduction associated with the aforementioned split on the one hand and the effective increase in share capital of almost DM 44 million on the other hand. This is reduced by offsetting the capital reserve against part of the goodwill. The special item with an equity portion was also completely released due to the split. The quite distinct increase in pension accruals is not only due to the expansion of the group, but also to the fact that the new Heubeck mortality tables were taken as a basis for the valuation. The increase in tax accruals results in roughly equal amounts from the expansion of the group and the current provision for taxes on income. The increase in borrowed capital was mainly due to the partial financing of the newly acquired companies as well as the expansion of the group.

26 Results of Operations Due to the expansion of the group during the period under review, the results of operations of the group are only comparable to a limited extent with those of the prior year. The Beate Uhse group was able to increase its sales in the period under review by DM 36 million, representing an increase of 27.3%. This development is mainly due to the inclusion of the companies which had joined the group for the first time. Another factor severely limiting the comparability of the income statements of 1998 and 1997 is the other operating income which is DM 10 million lower in 1998. DM 8.5 million of this amount relates to non-operating income, of which KDM 7,471 applies to the result of a field audit for past years which was concluded in 1997. Furthermore, there was a transfer of income from licensing in the sales area and the loss of income not belonging to the core business and which was shed as part of the split. The group’s results for the year decreased by DM 10 million. The profit margin thus declined from 10.7% in 1997 to 2.4% in 1998. One cause of this development is the aforementioned reduction in the non-operating positions and positions not relating to the accounting period within other operating income. Furthermore, the cost of materials rose by 76.4% in absolute terms due not only to the expansion of the group but also to the higher material costs associated with the first time inclusion of the wholesale company ZBF GmbH in the consolidation. In addition, the following changes led to the decrease in the consolidated results for the year: The rise in personnel expenses of DM 7.6 million is, in addition to moderate pay rises, mainly a result of the expansion of the group which is also a central reason for the rise in the average number of employees in 1998 from 477 to 706. The increase in operating expenses from DM 53.6 million in 1997 by DM 7.0 million to DM 60.6 million is likewise largely due to the expansion of the group. Of the types of operating expenses, the following changes are to be highlighted:

Rent and cost of premises plus DM 2.5 million Advertising expenses plus DM 3.0 million Legal and consulting fees plus DM 1.6 million Telephone, postage, freight outward plus DM 1.9 million

The development of legal and consulting fees, in particular,must be viewed in conjunction with the corporate restructuring due to the planned initial public offering. Finally, the consolidated results for the year were also negatively affected by the decrease in the financial and investment results as well as by the non-operating results. The main factor in this respect relates to the net interest expense of DM 1.3 million which is mainly associated with the various acquisitions. Income from the transfer of losses of DM 0.3 million relates to the result from the final balance sheet assumed by the limited partners of the former Beate Uhse GmbH & Co. KG in the context of the split. The investment result shown in the prior year related to the profit distribution from an investment not eliminated in 1997 as the initial consolidation took place as of December 31, 1997.

27 Anticipated Development The Beate Uhse group grew considerably in the course of 1998, in particular as a result of acquisitions. Assuming that all new acquisitions of the group as of December 31, 1998 could have been consolidated for the whole of 1998, group sales for 1998 would have risen to DM 203 million compared to DM 132 million in 1997. Based on this premise the sustained adjusted results of the group would have increased accordingly. The Beate Uhse group will be building on this basis in fiscal year 1999 and in subsequent years. In the future investments will be focu- sed on companies in market segments that have been able to meet new market demands over the past few years and which are expected to experience clear growth in terms of sales and income. At the same time the group is planning to enter new business areas in conjunction with the initial public offering. This is currently in the planning stages and these new areas will be restricted to neighboring European countries in the short term and further afield in the medium term. In addition to these new markets the core business is being continually expanded and existing market positions are being secured. The strategy that has proven to be successful thusfar will remain unchanged and targets the group’s own stores in top locations in German cities and all types of licensed stores in smaller towns and abroad. For the year as a whole the management board assumes a sales volume increase of varying degrees in all areas of trade as well as in the fast changing service sector. No notable increases are expected with regard to prices in either the sales or the procurement areas. It is hoped that the wage and income rises will not significantly threaten this trend. On the whole the earnings situation will clearly improve in comparison with 1998 as some of the companies acquired in 1998, in particular Aktuelle Information – Unternehmensgruppe, will be included in the consolidated income statement for the whole year for the first time. Additionally, the net interest income will clearly improve due of the receipt of funds from the initial public offering. On the other hand, the earnings situation will be negatively affected by the considerable expenses connected with the planned initial public offering. Negotiations for possible takeovers of companies in Germany and abroad have been initiated and will be continued. The Company will only make acquisitions of those companies that fully fit in with the group’s strategy and whose earnings will contribute to the group results after a reasonable period of time.

28 Dependent Company Report The Company prepared a dependent company report after it was obligated to do so for a period of almost 2 months in 1998 on the basis of its shareholder structure. The report was audited by the supervisory board and by the auditor of the Company and bears the following final statement of the board of management: “Pursuant to § 312 (2)AktG, the board of management declares that under the conditions known to us at the time in which the legal transactions were concluded or the measures were taken, the Company received appropriate counterperformance for each legal trans- action and was not prejudiced by any of the measures.”

Flensburg, March 1, 1999

Hans-Dieter Thomsen Bogdan Hofmann Ulrich Hülle Dirk Riedel

29 Consolidated balance sheet as of December 31, 1998

ASSETS

1998 1997 DM DM

Outstanding contributions to subscribed capital – 8,000,000.00

Fixed assets Intangible assets Franchise, trademarks, patents, licenses and similar rights 2,794,341.23 923,316.00 Goodwill 29,776,217.12 792,918.90

32,570,558.35 1,716,234.90

Property, plant and equipment Land, leasehold rights and buildings, including buildings on non-owned land 5,406,447.19 52,858,720.69 Other equipment, factory and office equipment 25,054,167.35 19,759,462.00 Advance payments and plant and machinery under construction 247,437.93 396,822.03

30,708,052.47 73,015,004.72

Financial assets Shares in affiliated companies 284,805.37 – Participations 23,621.75 5,202.00 Reinsurance policy 837,547.20 476,886.80 Other loans 710,196.01 437,209.20

1,856,215.33 919,298.00

65,134,826.15 75,650,537.62

Current assets Inventories Raw materials, consumables and supplies 1,197,496.47 850,896.39 Work-in-process 327,797.10 345,039.24 Finished goods and trading stock 25,832,300.83 14,653,689.29

27,357,594.40 15,849,624.92

Receivables and other assets Trade receivables 20,005,403.52 5,951,654.93 Receivables from affiliated companies 532,937.43 – Receivables from other group companies 142,484.08 – Other assets 14,823,262.31 4,208,272.64

35,504,087.34 10,159,927.57

Checks, cash on hand, balances on post office bank account and at banks 6,616,393.96 9,629,672.11

69,478,075.70 35,639,224.60

Prepaid expenses 9,388,809.53 242,755.92

Deferred tax assets 294,374.00 –

144,296,085.38 119,532,518.14

30 EQUITY AND LIABILITIES

1998 1997 DM DM

Equity Share capital 48,000,000.00 – General partner’s capital – 10,000.00 Limited liability capital accounts – 51,630,178.37 Capital reserve –– Compensating item for minority shareholders 1,888.16 – Consolidated net earnings 3,424,445.77 –

51,426,333.93 51,640,178.37

Special item with equity portion 145,725.71 22,635,416.54

Accruals Pension accruals 5,402,160.50 4,313,467.00 Tax accruals 14,561,409.05 11,152,802.90 Other accruals 8,113,285.71 7,522,182.90

28,076,855.26 22,988,452.80

Liabilities Liabilities to banks 51,356,889.35 15,552,121.31 Advance payments received on account of orders 920.12 – Trade payables 5,976,728.13 3,354,083.28 Liabilities to affiliated companies 254,398.18 – Liabilities to other group companies – 6,250.00 Other liabilities 7,054,487.90 3,335,648.34 – thereof from taxes: DM 2.025.991,80 (prior year: DM 2.115.634,84) – thereof for social security: DM 1.065.176,42 (prior year: DM 692.267,66)

64,643,423.68 22,248,102.93

Deferred income 3,746.80 20,367.50

144,296,085.38 119,532,518.14

31 Consolidated income statement for fiscal year 1998

1998 1997

TDM TDM

Sales 168,589,091.80 132,331,137.93 Increase or decrease in finished goods and work-in-process 738,118.23 1,257,540.73 Own work capitalized 294,719.45 376,100.88 Other operating income 6,921,032.37 17,052,336.39 Cost of materials –57,541,065.06 –32,611,537.81 Personnel expenses Wages and salaries – 30,491,236.08 –24,779,597.05 Social security, pension and other benefit costs –6,649,037.86 –4,767,478.26 –thereof for pensions: DM 866,522.49 (prior year: DM 248,373.44) Depreciation on intangible assets and property, plant and equipment –10,208,606.06 –8,603,035.12 Other operating expenses –60,626,015.63 –53,603,440.83 Income from participations 0.00 300,000.00 –thereof from affiliated companies: DM 0.00 (prior year: DM 300,000.00) Income from profit and loss transfer agreements 48,104.44 0.00 Other interest and similar income 340,628.71 327,178.93 –thereof from affiliated companies: DM 0.00 (prior year: DM 415.26) Interest and similar expenses –3,509,681.88 –2,255,916.30 –thereof to affiliated companies: DM 0.00 (prior year: DM 773.05)

Results of ordinary activities 7,906,052.43 25,023,289.49

Taxes on income –1,867,474.60 –7,897,232.60 Other taxes –2,304,350.53 –2,980,562.42 Income from transfer of losses 290,128.68 0.00

Net income for the year 4,024,355.98 14,145,494.47

Loss carried forward from prior year –599,910.21 –

Consolidated net earnings 3,424,445.77 –

32 Cash flow statement

The following cash flow statement shows the change to the group’s financial and liquidity position:

1998 1997 1996

KDM KDM KDM

Net income for the year 4,024 14,145 12,934 Write-ups on property, plant and equipment due to tax field audit –51 –7,471 – Depreciation on intangible assets and property, plant and equipment 10,209 8,603 8,125 Net provisions to the accruals for pensions and similar obligations 1,089 189 307

Cash Flow 15,271 15,466 21,366

Decrease/Increase in assets and increase/decreased in equity and liabilities Inventories –11,508 –5,996 357 Accounts receivable, trade and other assets –25,786 1,776 13,386 Accruals 4,000 8,639 –6,801 Liabilities 6,574 –2,020 1,495

Cash flow from/-used in operating activities –11,449 17,865 29,803

Goodwill from initial consolidations (prior to offsetting of reserves) –58,736 –793 – Investments in intangible assets –3,245 –600 –523 Prepaid expenses –9,000 – – Investments in property, plant and equipment –15,150 –8,721 –58,494 Investments in financial assets –1,068 –471 –185 Asset disposal (at net book values) 48,857 634 3,466 Net reversals of/provisions to special items –22,490 221 22,008

Investing activities –60,832 –9,730 –33,728

Increase/decrease in outstanding capital contributions 8,000 – –8,000 Increase of share capital 48,000 – 28,000 Decrease in fixed limited liability capital accounts –44,010 – – Increase in capital reserve (prior to offsetting of goodwill) 29,700 – – Increase in compensating item for minority shareholders 2 – – Increase in loss carryforward –600 – – Increase/decrease in liabilities to banks 35,805 –13,320 26,375 Increase/decrease in variable limited liability capital accounts (excluding net income for the year) –7,630 –1,206 –32,049

Cash flow from financing activities 69,267 –14,526 14,326

Increase/decrease in cash and cash equivalents –3,014 –6,391 10,401 Cash and cash equivalents at the beginning of the fiscal year 9,630 16,021 5,620

Cash and cash equivalents at year-end 6,616 9,630 16,021

33 Notes on the Consolidated Financial Statements as of December 31, 1998

I. GROUP ORGANIZATION

1. Parent Company The parent company is Beate Uhse Aktiengesellschaft, Flensburg, (Beate Uhse AG), which has been entered in the Commercial Register at the Local Court Flensburg under No. 3737 since November 13, 1998. As of the balance sheet date of the prior year Beate Uhse GmbH & Co. Kommanditgesellschaft, Flensburg (Beate Uhse KG), prepared voluntary consolidated financial statements, from which last year’s figures were taken. The general partner of Beate Uhse KG was Beate Uhse Holding GmbH, Flensburg, the legal predecessor of Beate Uhse AG. As a result of these changes and the expansion of the group in 1998, the consolidated financial statements of Beate Uhse AG as of December 31, 1998 are comparable only to a limited extent with the financial statements of the prior year.The changes to the companies included in the group are depicted below on page 36.

2. Summary of the Companies Included in the Consolidated Financial Statements The set of affiliated companies of Beate Uhse AG consists of the companies listed below. The consolidated financial statements of Beate Uhse AG comprise the individual financial statements of Beate Uhse AG and the companies named in I.2.1 and I.2.2.

2.1. Fully Consolidated Group Companies

Share Initial consolidation Name, seat Abbreviation % in 1998 as of

Versandhaus Beate Uhse GmbH, Flensburg Versandhaus GmbH 100.0 FKA Reprotechnik GmbH, Flensburg FKA GmbH 100.0 Vital-Partner Handels GmbH, Flensburg Vital-Partner GmbH 100.0 Jan. 1, 1998 Becker KG, Inh. Walter Becker Nachfolge GmbH, Flensburg Becker GmbH 100.0 Beate Uhse Grundstücksverwaltungs GmbH, Flensburg Beate Uhse GmbH 100.0 Beate Uhse Grundstücksgesellschaft bR, Flensburg Beate Uhse GbR 99.5 AI Aktuelle Information GmbH, AI GmbH 100.0 Oct. 1, 1998 Agentur für Telekommunikation, Norderfriedrichskoog Beate Uhse Deutschland GmbH, Flensburg Deutschland GmbH 100.0 Blue Movie Filmtheater-Betriebs GmbH, München Blue Movie Filmtheater GmbH 100.0 Dec. 31, 1998 “Las Vegas City” Spiel- und Unterhaltungsautomaten Las Vegas GmbH 100.0 Dec. 31, 1998 Betriebs-GmbH, München HENRY’S SEX Vertriebs GmbH, München Henry’s GmbH 100.0 Dec. 31, 1998 Blue Movie Bar & Filmstudio GmbH, Flensburg Blue Movie GmbH 100.0 W & A Agentur für Werbung und Anzeigenvermittlung GmbH, W & A GmbH 100.0 Dec. 31, 1998 Flensburg AI Aktuelle Information GmbH TOP Holding & Co KG, AI TOP Holding KG 100.0 Oct. 1, 1998 Norderfriedrichskoog METAVOX Service & Communikation GmbH & Co KG, Düsseldorf METAVOX KG 52.0 Oct. 1, 1998 AI Aktuelle Information GmbH, AI KG 100.0 Oct. 1, 1998 Agentur für Telekommunikation & Co. KG, Norderfriedrichskoog AAAAAA Aktuelle Information GmbH, Norderfriedrichskoog AAAAAA GmbH 100.0 Oct. 1, 1998 ERO Online GmbH Agentur für Telekommunikation ERO Online GmbH 100.0 Oct. 1, 1998 Online Internet Dienste, Norderfriedrichskoog AAAAAAAAAAAA ABO GmbH Online Dienste, Norderfriedrichskoog ABO GmbH 100.0 Oct. 1, 1998 COM Online GmbH Multimedia Service & Co KG, Flensburg COM Online KG 100.0 Oct. 1, 1998

34 2.2. Companies Included on a Pro Rata Basis pursuant to §310 HGB The companies listed below, in which Beate Uhse AG directly or indirectly holds 50% of the shares, were consolidated on a pro rata basis in accordance with §310 of the German Commercial Code (HGB).

Share Initial consolidation Name, seat Abbreviation % in 1998 as of

Scala Beteiligungs GmbH, Iserlohn Scala GmbH 50.0 March 2, 1998 (formation) Scala Großhandel GmbH & Co. KG, Iserlohn Scala KG 50.0 March 2, 1998 (formation) ZBF Zeitschrift-, Buch- und Filmvertriebs GmbH, Wiesbaden ZBF GmbH 50.0 Jan. 1, 1998 Pleasure Verlag GmbH Verlag/Handel/Vertrieb, Bebra Pleasure GmbH 50.0 Dec. 31, 1998 Lavetra GmbH, Offenbach Lavetra GmbH 50.0 Dec. 31, 1998

2.3. Companies not Included in the Consolidated Financial Statements The affiliated companies listed below were not included in the consolidated financial statements because of their insignificance in accordance with §296 (2)HGB.

Share Name, seat Abbreviation %

COM Online Verwaltungs GmbH, Flensburg COM Online GmbH 100.0 SEX.DE Sex Erotik Kontakte Online GmbH, Norderfriedrichskoog SEX.DE GmbH 100.0 METAVOX Service & Communikation GmbH, Düsseldorf METAVOX GmbH 100.0 Arena Online-Spiele GmbH & Co. KG, Flensburg Arena Online KG 75.0 Arena Online-Spiele Entwicklungs GmbH, Flensburg Arena Online GmbH 100.0 Erotic World B. V. COM-VTX Rekencentrum, Niederlande Erotic World B. V. 100.0

35 3. Changes in the Legal Background and the Companies Forming the Group in the Fiscal Year Changes in the Legal Background of Beate Uhse AG Based on a shareholders’ resolution on August 18, 1998 Beate Uhse AG was created by changing the legal form of Beate Uhse GmbH in a reorganization with effect retroactive to January 1, 1998. Up to this point the company had exclusively functioned as managing general partner of Beate Uhse KG. With a resolution at the extraordinary shareholders’ meeting of the Company still operating under the name of Beate Uhse Holding Aktiengesellschaft on September 28, 1998, the share capital was increased by DM 33,000,000 to DM 33,150,000 through contribution in kind. The contributions to the new shares of DM 33,000,000 were made by transferring all of the limited partner’s shares, including the capital accounts in Beate Uhse KG. As a result of this merger all net assets and business activities, including all rights and duties, were transferred to Beate Uhse Holding Aktiengesellschaft. Beate Uhse AG thus became the parent company within the definition of §290 HGB of the companies previously included in the consolidated financial statements of Beate Uhse KG. With a resolution at the extraordinary shareholders’ meeting on November 11, 1998, the share capital was increased by a further DM 14,850,000. This share capital was split into 2,970,000 bearer shares at a nominal value of DM 5.00 each and the company name was changed to Beate Uhse Aktiengesellschaft.

Expansion of the Group The corporate acquisitions effected in 1998 clearly enlarged the set of companies forming the group in comparison with the prior year. With regard to the companies included in the consolidated financial statements for the first time in 1998 reference is made to the disclosures in I.2. As a result of the change to the set of companies forming the group, the material positions of the consolidated financial statements have changed as follows:

KDM

Fixes assets 16,450 Inventories 9,546 Trade receivables 14,742 Other assets 7,921 Accruals 4,116 Liabilities to banks 19,954 Trade payables 3,793 Other liabilities 4,656 Sales 41,432 Cost of materials 27,425 Personnel expenses 7,123 Other operating expenses 7,100

36 Split of Beate Uhse KG At the Beate Uhse KG partners’ meeting on August 28, 1998 it was decided that one limited partner would withdraw by means of a split, effective August 31, 1998. The claim for compensation was settled by the transfer of certain assets not belonging to the core business of the Beate Uhse group. The negative capital account that resulted from the division was compensated for by the withdrawing limited partner. Assets with the following values were transferred within the context of the split.

Land 7,572,462.00 Buildings 40,360,090.00 Factory and office equipment 93,524.00 Financial assets 50,000.00 Special items with an equity portion –22,317,203.00

25,758,873.00

As a result of the split rental income decreased by KDM 1,296 compared with the prior year. Furthermore, Beate Uhse Flugzeug- vercharterung GmbH & Co. KG, Flensburg, was no longer included in the consolidation as of January 1, 1998. During the prior year this company had contributed KDM 22 to the consolidated result.

37 II. GENERAL ACCOUNTING, VALUATION AND CONSOLIDATION PRINCIPLES

A. General Accounting and Valuation Principles The individual financial statements of Beate Uhse AG and the financial statements of the subsidiaries included in the consolidated financial statements for fiscal year 1998 were prepared according to the provisions of the German Commercial Code (HGB)and German Stock Corporation Law (AktG). The assets and liabilities of the consolidated subsidiaries included in the consolidated financial statements pursuant to §300 (2) HGB are uniformly valued according to the methods used for the financial statements of the parent company.

1. Fixed Assets Intangible assets and property, plant and equipment are capitalized at acquisition or manufacturing cost within the definition of §255 HGB. Depreciation is taken according to the straight-line method over the expected useful lives of the equipment at rates permitted by tax law. Low-value assets with individual acquisition costs below DM 800.00 are fully depreciated in the year of acquisition. Financial assets are stated at acquisition cost. In the event of lasting impairments of value the Company undertakes appropriate write-downs.

2. Inventories Inventories are stated at acquisition or manufacturing cost or at the lower realizable value. The principle of the lower of cost or market is observed. On the basis of the result of a tax field audit completed during the previous year, the method for valuing inventories used by the subsidiary Deutschland GmbH was changed. Therefore, the valuation adjustments on the inventories stated at acquisition and manufacturing cost for Deutschland GmbH were KDM 2,684 lower, although the inventories themselves were stated at almost the same amount.

3. Receivables and Other Assets Receivables and other assets are stated at nominal value. Doubtful accounts are provided for by setting up appropriate individual bad debt allowances. A lump-sum allowance of 1% has been set up for trade receivables. Foreign currency receivables are translated at the lower of the bid rates on the balance sheet date or the date of origin.

4. Accruals The fair market values of the pension commitments are calculated according to actuarial methods on the basis of an interest rate of 6%. This covers pension obligations towards employees. The valuation of the pension accruals was based on the new mortality tables for calculating pension accruals that were published in November 1998. The use of the new mortality tables resulted in an increase in the pension accruals of KDM 383. A deferred tax asset was set up to cover temporary differences between taxable income according to tax law and the result according to commercial law to account for expected tax relief in subsequent fiscal years within the definition of §274 (2)HGB. In setting up the other accruals the recognizable risks and contingent liabilities are taken into account in an appropriate manner. They are presented in the amount that is seen as necessary according to prudent business judgment.

5. Liabilities Liabilities have been stated at their repayment amount. Foreign currency liabilities were translated at the higher of the selling rates on balance sheet date or the date of origin.

38 B. Consolidation Principles The consolidated financial statements were prepared as of the balance sheet date of the parent company Beate Uhse AG, December 31, 1998. The financial statements or the interim financial statements of the included subsidiaries were also prepared as of the balance sheet date of the parent company.

1. Capital Consolidation The capital consolidation of the subsidiaries is carried out according to the book value method pursuant to §301 (1)HGB. Based on this method the book values of the participations are compared with the prorated equity subject to compulsory consolidation at the time of the acquisition of the shares, or if the shares have been acquired at different times, at the time at which the company became a subsidiary. If a debit difference occurs within the scope of the initial consolidation pursuant to §301 (1)HGB, it is written up on individual assets of the subsidiaries if the value of the assets is higher than the previous carrying value. Any remaining difference is shown on the assets side as goodwill whereas a credit difference resulting from the capital consolidation is deducted from goodwill. Furthermore, the capital reserve shown in the individual financial statements of Beate Uhse AG of DM 29,700,000 was offset against goodwill pursuant to the right of election of §309 HGB. Goodwill from the capital consolidation will be amortized over its expected useful life beginning the year after initial consolidation.

2. Offsetting of Receivables and Liabilities All receivables and liabilities between the companies included in the consolidated financial statements of Beate Uhse AG have been eliminated.

3. Consolidation of Income and Expenses Sales, expenses and income between the companies included in the group have been eliminated.

4. Elimination of Unrealized Results of Intra-Group Transactions Results relating to inventories are eliminated if they originated from deliveries made whilst the related companies belonged to the group.

5. Pro Rata Consolidation The same consolidation principles are applied to companies that were included in the consolidated financial statements on a pro rata basis pursuant to §310 HGB.

39 III. EXPLANATIONS TO THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED INCOME STATEMENT

A. Consolidated Balance Sheet 1. With respect to the development of fixed assets reference is made to page 44. 2. Financial assets relate to participations in affiliated companies not included in the consolidation, claims from reinsurance policies and loans to licenseholders. 3. With the exception of receivables from security deposits of KDM 75, the receivables and other assets are due within one year. 4. Prepaid expenses mainly relate to prepayments of rent which are released into income over the remaining term of the rental agreements. 5. The prepaid expenses item relating to the expected tax relief in subsequent fiscal years concerns the tax relief of subsequent fiscal years which has been capitalized as a deferred tax asset and which was set up on the assumption of a tax burden of 50% due to the different treatment by commercial and tax law of the pension accrual as of the balance sheet date and due to a non-tax deductible provision for contingent losses. 6. The fully paid-in share capital amounts to DM 48,000,000. It is divided into 9,600,000 bearer shares of DM 5.00 each. Mr. Ulrich Rotermund notified the Company that he held a majority stake in the share capital in a letter dated November 16, 1998. 7. The special item with equity portion was set up for the utilization of special depreciation pursuant to §4 (1) of the Assisted Areas Act (Fördergebietsgesetz) and §7g EStG in conjunction with §3 of the Zonal Border Development Act (Zonenrandförderungs- gesetz). As a result of the division of the former Beate Uhse KG effected as of August 31, 1998, the special item decreased by DM 22,317,203.00. 8. The valuation of the pension accruals was based on new mortality tables for calculating pension accruals that were published in November 1998. The use of the new mortality tables led to an increase in the pension accruals of KDM 383. 9. Other accruals consist mainly of accruals for bonuses, employees’ vacation and overtime entitlements, interest expenses for payment of tax arrears, social security contributions, expenses arising from the financial statements and tax advisory services as well as for outstanding commercial invoices. 10. KDM 15,265 of the liabilities are due after five years while KDM 7,085 are due between one and five years.

The liabilities are secured as follows:

Liabilities to KDM Collateral

Hamburgische Landesbank, Hamburg 15,265 Partial mortgage on land of Potsdam Waldstadt-Center Flensburger Sparkasse, Flensburg 9,000 Absolute guarantee by Beate Uhse AG BfG Bank AG, Mannheim 7,006 Absolute guarantee by Beate Uhse AG Dresdner Bank AG, Wiesbaden 1,087 General assignment of all receivables from the provision of goods and services of ZBF Zeitschrift-Buch- und Film-Vertriebs GmbH, Wiesbaden

40 11. There are contingent liabilities pursuant to § 251 HGB resulting from the discounting of notes of KDM 531 and from the assumption of guarantees of KDM 1,618 as well as from the insolvency insurance (Mutual Benefit Association for Pension Security (PSV)) for pension commitments to employees who withdrew in 1981 in the context of the split which then took place. As of the balance sheet date the present values of these obligations amount to KDM 442.

As of December 31, 1998 there were the following financial obligations:

1999 2000 2001 2002 2003 Total and later

KDM KDM KDM KDM KDM KDM

Rent for premises 16,979 15,434 13,173 11,854 66,701 124,141 Incidental rental expenses 932 788 596 533 2,095 4,944 Rent to affiliated enterprises 72 72 72 72 137 425 Rent for fittings 52 40 25 12 5 134 Servicing contracts 205 93 31 – – 329 Cleaning contracts 239 – – – – 239 Consulting 1,934 782 – – – 2,716 Royalties to the German Performing 62 – – – – 62 Rights Society (Gema) Security and protection services 31 – – – – 31 Short-term leasing 77 19 – – – 96 Leases with a purchase option 100 – – – – 100 Leasing 159 134 55 43 146 537

20,842 17,362 13,952 12,514 69,084 133,754

There were no further contingent liabilities subject to compulsory disclosure.

41 B. Consolidated Income Statement

1. Sales relate to the following segments:

1998 1997

KDM KDM

Sales of goods 129,100 101,140 Cinemas and video cabins 18,349 18,944 Internet/telephone services 13,056 2,006 Licenses 2,611 1,637 Other 5,473 8,604

168,589 132,331

With respect to business activities the break down of sales according to geographic markets is as follows:

1998 1997

KDM KDM

Germany 159,376 126,376 Abroard 9,213 5,955

168,589 132,331

2. Cost of materials is shown in a total amount. No distinction is made between expenses for raw materials, consumables and supplies and purchased materials and expenses for purchased supplies.

3. Other operating income mainly consists of rental income and income from services. KDM 1,716 of other operating income concerns income not relating to the accounting period and non-operating income.

4. Other operating expenses mainly include rental expenses and expenses for premises, advertising expenses, legal and consulting fees, c.o.d. charges and maintenance costs. KDM 929 of other operating expenses concerns income not relating to the accounting period and non-operating expenses.

5. Income from participations (KDM 48) relates to a company not included in the consolidated financial statements pursuant to §296 (2) HGB.

6. Interest and similar expenses result mainly from the acquisitions made during the fiscal year.

7. Taxes on income mainly relate to trade tax on earnings as well as corporate tax and the solidarity surcharge of the parent company. The income taxes relate exclusively to results from ordinary activities.

42 IV. OTHER DISCLOSURES

1. The average number of employees during the period under review was:

1998 1997

Blue-collar employees 159 115 White-collar employees 547 362

706 477

The numbers of employees of the companies included in the group on a pro rata basis were accounted for at 50% (blue-collar employees: 31; white-collar employees: 22).

2. The following were members of the board of management: Hans-Dieter Thomsen Chairman Udo Andresen until December 31, 1998 Ulrich Hülle since September 15, 1998 Isabell C. Kersten from October 1, 1998 to November 30, 1998 Bogdan Hofmann since January 1, 1999 Dirk Riedel since March 1, 1999

3. The total remuneration of the members of the board of management in the fiscal year was KDM 2,142. Severance payments of KDM 93 are included in this amount. In addition, one member of the Board of Management was granted a loan of KDM 85. The loan is due within one year and bears interest at a rate of 5%.

4. The following were members of the supervisory board: Beate Rotermund Chairman Detlef Bindert Deputy chairman Jens Jensen

No remuneration was paid for the activity of the supervisory board at the parent company. Remuneration for the supervisory board in subsidiaries was KDM 42 during the fiscal year 1998.

Flensburg, March 1, 1999

Hans-Dieter Thomsen Ulrich Hülle Bogdan Hofmann Dirk Riedel

43 Consolidated fixed assets movement schedule for fiscal year 1998

ACQUISITION COSTS

Jan. 1, 1998 Additions Jan. 1, Additions initial Disposals Reclassi- Dec. 31, 1998 field audit Additions consolidation Disposals division fikations 1998

DM DM DM DM DM DM DM DM

INTANGIBLE ASSETS Franchises, trademarks, patents, licenses and similar rights 7,177,526.22 – 1,351,989.19 1,892,924.53 63,885.47 – – 10,358,554.47 Goodwill 792,918.90 – – 65,643,160.42 36,607,000.94 – – 29,829,078.38

7,970,445.12 – 1,351,989.19 67,536,084.95 36,670,886.41 – – 40,187,632.85

PROPERTY, PLANT AND EQUIPMENT Land, leasehold rights and buildings, including buildings on non-owned land 57,225,894.72 – 199,005.63 1,626,144.00 – 53,049,500.65 – 6,001,543.70 Other equipment, factory and office equipment 55,269,081.77 55,262.00 9,192,936.45 2,108,748.44 6,237,435.32 2,609,254.16 2,172,369.04 59,951,709.22 Advance payments and plant and machinery under construction 396,822.03 – 2,022,984.94 – – – –2,172,369.04 247,437.93

112,891,798.52 55,262.00 11,414,927.02 3,734,892.44 6,237,435.32 55,658,754.81 – 66,200,689.85

FINANCIAL ASSETS Shares in affiliated companies 128,476.00 – – 284,850.37 128,476.00 – – 284,850.37 Participations 5,202.00 – – 23,621.75 5,202.00 – – 23,621.75 Reinsurance policy 476,886.80 – 110,019.93 250,640.47 – – – 837,547.20 Other loans 437,209.20 – 379,756.73 19,459.50 126,265.42 – – 710,196.01

1,047,774.00 – 489,776.66 578,608.09 259,943.42 – – 1,856,215.33

TOTAL 121,910,017.64 55,262.00 13,256,692.87 71,849,585.48 43,168,265.15 55,658,754.81 – 108,244,538.03

44 ACCUMULATED DEPRECIATION NET BOOK VALUE

Jan. 1, 1998 Additions Jan. 1, Additions initial Disposals Dez. 31, 1998 field audit Additions consolidation Disposals division 1998 1998 1997

DM DM DM DM DM DM DM DM DM

6,254,210.22 – 567,347.54 800,220.95 57,565.47 – 7,564,213.24 2,794,341.23 923,316.00 – – 52,861.26–––52,861.26 29,776,217.12 792,918.90

6,254,210.22 – 620,208.80 800,220.95 57,565.47 – 7,617,074.50 32,570,558.35 1,716,234.90

4,367,174.03 – 1,317,699.83 24,918.30 25,977.09 5,088,718.56 595,096.51 5,406,447.19 52,858,720.69

35,509,619.77 4,604.00 6,944,579.18 500,979.00 5,528,911.92 2,533,329.16 34,897,540.87 25,054,167.35 19,759,462.00

–––––––247,437.93396,822.03

39,876,793.80 4,604.00 8,262,279.01 525,897.30 5,554,889.01 7,622,047.72 35,492,637.38 30,708,052.47 73,015,004.72

128,476.00 – – – 128,476.00 – – 284,850.37 – –––––––23,621.755,202.00 –––––––837,547.20 476,886.80 –––––––710,196.01 437,209.20

128,476.00 – – – 128,476.00 – – 1,856,215.33 919,298.00

46,259,480.02 4,604.00 8,882,487.81 1,326,118.25 5,740,930.48 7,622,047.72 43,109,711.88 65,134,826.15 75,650,537.62

45 Group comparies as of December 31, 1998

Share capital/ limited liability Net income/ capital Equity net loss Share accounts Dec. 31, 1998 1998 Name, seat % KDM KDM KDM

Versandhaus Beate Uhse GmbH, Flensburg 100.0 7,001 7,001 –711 FKA Reprotechnik GmbH, Flensburg 100.0 100 335 178 Vital-Partner Handels GmbH, Flensburg 100.0 50 -120 –170 Becker KG, Inh. Walter Becker Nachfolge GmbH, Flensburg 100.0 50 255 177 Beate Uhse Grundstücksverwaltungs GmbH, Flensburg 100.0 50 97 4 Beate Uhse Grundstücksgesellschaft bR, Flensburg 99.5 0 0 –743 AI Aktuelle Information GmbH, 100.0 50 40 –1 Agentur für Telekommunikation, Norderfriedrichskoog Beate Uhse Deutschland GmbH, Flensburg 100.0 2,000 4,135 4,349 Blue Movie Filmtheater-Betriebs GmbH, München 100.0 50 16 –3 “Las Vegas City” Spiel- und Unterhaltungsautomaten 100.0 50 23 –29 Betriebs-GmbH, München HENRY’S SEX Vertriebs GmbH, München 100.0 50 46 –12 Blue Movie Bar & Filmstudio GmbH, Flensburg 100.0 50 74 9 W & A Agentur für Werbung und Anzeigenvermittlung GmbH, 100.0 50 161 146 Flensburg AI Aktuelle Information GmbH TOP Holding & Co KG, 100.0 600 568 –34 Norderfriedrichskoog METAVOX Service & Communikation GmbH & Co KG, Düsseldorf 52.0 100 130 31 AI Aktuelle Information GmbH, 100.0 500 10 9,177 Agentur für Telekommunikation & Co. KG, Norderfriedrichskoog AAAAAA Aktuelle Information GmbH, Norderfriedrichskoog 100.0 80 80 8,583 ERO Online GmbH Agentur für Telekommunikation 100.0 50 42 212 Online Internet Dienste, Norderfriedrichskoog AAAAAAAAAAAA ABO GmbH Online Dienste, Norderfriedrichskoog 100.0 50 42 172 COM Online GmbH Multimedia Service & Co KG, Flensburg 100.0 100 214 115 COM Online Verwaltungs GmbH, Flensburg 100.0 50 52 –10 SEX.DE Sex Erotik Kontakte Online GmbH, Norderfriedrichskoog 100.0 50 54 –302 METAVOX Service & Communikation GmbH, Düsseldorf 100.0 50 66 644 Arena Online-Spiele Entwicklungs GmbH, Flensburg 100.0 50 43 2 Arena Online-Spiele GmbH & Co KG, Flensburg 75.0 50 0 144 Scala Beteiligungs GmbH, Iserlohn 50.0 100 90 –10 Scala Großhandel GmbH & Co. KG, Iserlohn 50.0 1,000 695 –302 ZBF Zeitschrift-Buch- und Film-Vertriebs GmbH, Wiesbaden 50.0 500 5,769 644 Pleasure Verlag GmbH Verlag/Handel/Vertrieb, Bebra 50.0 50 188 144 Lavetra GmbH, Offenbach 50.0 140 225 2

46 8976_Beate_U_Umschlag_engl 28.05.1999 11:01 Uhr Seite 2

The Beate Uhse Group in numbers Audit Opinion (in DM millions)

Hamburg, March 12, 1999

Möbus Wirtschaftsprüfer

Cost of materials 32.3 32.6 57.5

Personnel expenditure 28.1 29.5 37.1

Operating profit 15.2 25.0 7.9

Net profit 12.9 14.1 4.0

Earnings per share (in DM) ------0.42

NumberN of employees 466 477 706

Revenues per employees 291.6 277.4 238.8 in DM Thousands

47 8976_Beate_U_Umschlag_engl 28.05.1999 11:00 Uhr Seite 1

ANNUAL REPORT 1998 Beate Uhse TABLE OF CONTENTS

2–3 Interview with Beate Rotermund

4–5 Letter to the shareholders

6–7 Market for erotica

8–9 Retail

10–11 Mail order

12–13 Wholesale

14–15 Multimedia

16–17 International operations

18 Management Board and Supervisory Board

19 Report of the Supervisory Board

21 Management report and consolidated accounts

Leading the growing market for erotica

Beate Uhse Beate Uhse AG · Gutenbergstraße 12 · 24941 Flensburg · www.beate-uhse.de