This document, the Prospectus, which comprises a prospectus relating to Entertainment One Ltd. (the Company ) has been prepared in accordance with the Prospectus Rules made by the Financial Services Authority (the Prospectus Rules ) pursuant to section 73A of the Financial Services and Markets Act 2000 ( FSMA ) and has been approved by the Financial Services Authority in accordance with section 87A of FSMA. This document has been filed with the Financial Services Authority and will be made available to the public in accordance with the Prospectus Rules. Application has been made to the Financial Services Authority and to the London Stock Exchange respectively for admission of all of the Common Shares to a standard listing on the Official List and to trading on the London Stock Exchange s main market for listed securities (together Admission ). No application has been made or is currently intended to be made for the Common Shares to be admitted to listing or dealt with on any other exchange. It is expected that Admission will become effective and that dealings on the London Stock Exchange in the Common Shares will commence on 15 July 2010 (ISIN: CA29382B1022). Ann III (4.1, 4.7, 6.1 and 6.2) The Common Shares have not been, and will not be, registered under the United States Securities Act 1933 or under the securities laws of any state, district or other jurisdiction of the United States, or of Canada, Japan or Australia, or any other jurisdiction and no regulatory clearances in respect of the Common Shares have been, or will be, applied for in any jurisdiction other than the UK. Prospective investors should read the entire document and, in particular, the risk factors set out in the section headed Risk Factors of this document when considering an investment in the Company. Investors should rely only on the information in this document. No person has been authorised to give any information or make any representations other than those contained in this document and, if given or made, such information or representations must not be relied on as having been authorised by the Company. Without prejudice to any obligation of the Company to publish a supplementary prospectus pursuant to section 87G of FSMA or paragraph 3.4 of the Prospectus Rules, the publication of this document does not, under any circumstances, create any implication that there has been no change in the affairs of the Group since, or that the information contained herein is correct at any time subsequent to, the date of this document. The information on the Company s website does not form a part of this document. ENTERTAINMENT ONE LTD. (incorporated in Canada under the Canada Business Corporations Act) Introduction to Standard Listing on the Official List Ann III (2) Ann I (5.1.1 and 5.1.2) Ann III (4.2) Singer Capital Markets Limited Marwyn Capital LLP Cenkos Securities plc Joint Broker Financial Adviser Joint Broker The Company is not offering any Common Shares nor any other securities in connection with Admission. This document does not constitute an offer to sell, or the solicitation of an offer to subscribe for or buy any Common Shares nor any other securities in any jurisdiction. The Common Shares will not be generally made available or marketed to the public in the UK, Canada or in any other jurisdiction in connection with Admission. This Prospectus has not been approved by any securities regulatory authority in Canada nor has any securities regulatory authority in Canada expressed an opinion about these securities, and it is an offence to claim otherwise. The distribution of this document in certain jurisdictions may be restricted by law and therefore persons into whose possession this document comes should inform themselves about and observe any such restrictions, including those in the paragraphs that follow. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction. No action has been taken or will be taken in any jurisdiction that would permit possession or distribution of this document or any other publicity material relating to the Common Shares, in any country or jurisdiction where action for that purpose is required. Accordingly, neither this document nor any other material in relation to the Common Shares may be distributed or published in any jurisdiction where to do so would breach any securities laws or regulations of any such jurisdiction or give rise to an obligation to obtain any consent, approval or permission, or to make any application, filing or registration. References to Defined Terms Certain terms used in this document, including certain capitalised terms and certain technical and other terms, are defined, and certain selected industry and technical terms used in this document are defined and explained, in Part VII (Definitions) of this document. Copies of this document will be available free of charge during normal business hours on any weekday (except Saturdays, Sundays and public holidays) at the offices of Mayer Brown International LLP, 201 Bishopsgate, London EC2M 3AF and on the Company s website www.entertainmentonegroup.com from the date of this document until the date which is one month from the date of Admission. Prospective investors should not treat the contents of this document as advice relating to legal, taxation, investment or any other matters. Prospective investors should inform themselves as to: (a) the legal requirements within their own countries for the purchase, holding, transfer, repurchase or other disposal of Common Shares; (b) any foreign exchange restrictions applicable to the purchase, holding, transfer, repurchase or other disposal of Common Shares which they might encounter; and (c) the income or other taxation consequences which may apply in their own countries as a result of the purchase, holding transfer, repurchase or other disposal of Common Shares. Prospective investors must rely upon their own representatives, including their own legal advisers and accountants as to legal, taxation, investment and other related matters concerning the Company and an investment therein.
CONTENTS Page SUMMARY INFORMATION 3 RISK FACTORS 8 CONSEQUENCES OF STANDARD LISTING 15 DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS 17 FORWARD LOOKING STATEMENTS 19 PRESENTATION OF FINANCIAL AND OTHER INFORMATION 20 PART I INFORMATION ON ENTERTAINMENT ONE 21 PART II DIRECTORS AND CORPORATE GOVERNANCE 31 PART III OPERATING AND FINANCIAL REVIEW 37 PART IV HISTORICAL FINANCIAL INFORMATION 52 PART V TAXATION 276 PART VI ADDITIONAL INFORMATION 282 PART VII DEFINITIONS 324 2
SUMMARY INFORMATION The following summary information should be read as an introduction to the more detailed information appearing elsewhere in this document. Any decision to invest in Common Shares should be based on consideration of the document as a whole. Where a claim relating to the information contained in this document is brought before a court, a plaintiff investor may, under any relevant national legislation of a member state of the European Economic Area which has implemented the relevant provisions of the Prospectus Directive (Directive 2003/71/EC), be required to bear the costs of translating this document before legal proceedings are initiated. Civil liability attaches to the persons responsible for this summary and any persons who are responsible for any translation of the summary, but only if the summary is misleading, inaccurate or inconsistent when read together with the other parts of this document. PR2.1.7 1. Introduction Entertainment One is an international entertainment group with operations incorporating film and television. During the year ended 31 March 2010, Entertainment One released 123 films theatrically and produced 213 half hours of television content, broadcast in over 180 countries. The Group s current rights library includes more than 20,000 film and television titles, 2,400 hours of television programming and 45,000 music tracks and is distributed across all media formats. The Group was admitted to trading on the AIM market of the London Stock Exchange on 29 March 2007, and since then has gone on to complete a number of acquisitions within North America, the UK and Europe. The Group employs approximately 1,500 staff worldwide. The Group s total sales for the year ended 31 March 2010 were 444.2 million, representing growth of 30 per cent. over the prior year. The Group s underlying EBITDA increased from 25.3 million to 34.3 million over the same period. 2. Reasons for moving to the Official List Since its admission to AIM in 2007, the Group has expanded significantly through organic and acquisitive growth and as a result, the Directors believe that a move to a standard listing on the Official List and to trading on the main market of the London Stock Exchange is now appropriate. In conjunction with the move to a standard listing, the Group is also inserting the Company as the new ultimate holding company, and listed entity, of the Group, through a Restructuring. The Board believes that the insertion of this new Canadian incorporated ultimate holding company, and Admission, will further improve its market perception and attract a wider investor base. Concurrently Entertainment One (Cayman) will continue into Canada and be amalgamated with the Company. The Board believes these measures will enable Entertainment One to simplify its group structure and more efficiently address certain regulatory requirements applicable to businesses operating in the Canadian film and television distribution industry. 3. Business of the Group The Group is operated through two divisions: Entertainment, comprising Film and Television Film: Entertainment One acquires and exploits feature film rights across all media (including theatrical, DVD, TV and digital) in the UK, Canada, US and Benelux; and Television: Entertainment One produces original television programming in North America and the UK for broadcast in domestic and international markets. Distribution Entertainment One owns wholesale home entertainment distribution operations in Canada and the US. 3
The Directors believe the key strengths of the Group are as follows: vertically integrated and diversified multi-territory film distribution and television production business operating in growing international markets; highly experienced and proven management team; strong operational cash flows and balance sheet supporting growth plans; established, long term relationships with suppliers and customers; and substantial long-term library of film, television and music rights. The Directors believe that these strengths mean that Entertainment One is well positioned to build on its recent growth and deliver on its strategy going forward. 4. Restructuring Entertainment One (Cayman) is currently the ultimate holding company of the Group. On completion of the Restructuring, and on Admission, the Company will be the holding company for the Group. Entertainment One (Cayman) is, at the date of this document, subject to a scheme of arrangement in the Cayman Islands which, if approved by both (a) a majority in number; and (b) 75 per cent. by value of the ordinary shareholders of Entertainment One (Cayman) voting in person or by proxy at the court convened meeting of the ordinary shareholders of Entertainment One (Cayman), and sanctioned by the Grand Court of the Cayman Islands, will result in the holders of ordinary shares of Entertainment One (Cayman) exchanging their ordinary shares in Entertainment One (Cayman) on a one for one basis for Common Shares, and Entertainment One (Cayman) becoming a wholly owned subsidiary of the Company. Ann I (7.1) It is currently anticipated that the scheme of arrangement will become effective at 5.00 p.m. UK time on Wednesday 14 July 2010 resulting in the holders of ordinary shares of Entertainment One (Cayman) exchanging their shares for Common Shares at that time. Admission of the Common Shares to the Official List is currently expected to occur at 8.00 a.m. UK time on Thursday 15 July 2010. Should the shareholders of Entertainment One (Cayman) not approve the scheme of arrangement or should the Grand Court of the Cayman Islands refuse to sanction the scheme of arrangement, the scheme of arrangement will not complete, shareholders of Entertainment One (Cayman) will not exchange their ordinary shares for Common Shares, Entertainment One (Cayman) will not become a wholly owned subsidiary of the Company and Admission will not take place. In these circumstances, Entertainment One (Cayman) will continue as the ultimate holding company of the Group, and its ordinary shares will continue to be admitted to trading on AIM. Following Admission, Entertainment One (Cayman), which will at that time be a wholly owned subsidiary of the Company, will continue into Canada and will, pursuant to Cayman Islands law and Canadian law, become a Canadian incorporated company on or around 15 July 2010. Once Entertainment One (Cayman) has continued into Canada it will then, as a matter of Canadian law, be amalgamated with the Company on or around 15 July 2010 so that the Company will take on all of the assets and obligations of Entertainment One (Cayman). This will simplify the Group structure, by removing an intermediate holding company from the Group, but will not affect any of the rights attaching to the Common Shares. Immediately after the effective time of the Restructuring, in accordance with the terms of the Exchangeable Shares, 6972501 Canada Inc. will initiate the exchange of all of its issued and outstanding Exchangeable Shares. It is expected that the holders of the Exchangeable Shares will receive 15,620,395 Common Shares. 5. Canadian Heritage In order to meet certain Canadian regulatory requirements for film and television distribution companies under the Investment Canada Act, the Company must ensure that a majority of the Company s voting shares are owned by Canadians (as defined in the Investment Canada Act) and the Company is controlled in fact by Canadians (as defined in the Investment Canada Act). To do this, the Company has put in its capital structure 4
a class of Preferred Variable Voting Shares. The votes attached to the Preferred Variable Voting Shares as a class will be automatically adjusted so that they, together with the votes attached to the Common Shares that are owned by Canadians (as determined based on enquiries the Company will make of the holders of Common Shares), will equal a minimum of 51 per cent. of the votes attached to all shares in the capital of the Company, which is sufficient to ensure that control in fact remains with Canadians for the purposes of the Investment Canada Act. The Preferred Variable Voting Shares, which will not be transferable without the consent of the Board, will be held by the Company s Chief Executive Officer Darren Throop, who is a Canadian, and will not be listed on any stock exchange. 6. Summary of the financial information The table below sets out the Company s summary financial information for the periods indicated, in each case prepared in accordance with IFRS. The data has been extracted without material adjustment from the historical financial information in Part IV (Historical Financial Information) of this document. As this is only a summary, investors are advised to read the whole of this document, and not rely on just the summarised information. Ann I (3.1) Summary Consolidated Income Statement Financial year ended 31 March 000 2010 2009 2008 Revenue 444,172 342,643 264,375 Underlying EBITDA 34,334 25,256 18,620 Amortisation of intangible assets (17,488) (15,168) (11,067) Depreciation (2,019) (1,699) (1,007) Share-based payment charge (2,743) (4,171) (5,797) One-off items (1,582) (29,677) (2,249) Operating profit/(loss) 10,502 (25,459) (1,500) Net finance charges (3,627) (5,550) (6,176) Profit/(loss) before tax 6,875 (31,009) (7,676) Income tax (charge)/credit (321) 578 (879) Profit/(loss) for the year 6,554 (30,431) (8,555) Earnings/(loss) per share: Basic pence 4.6 (23.2) (9.5) Diluted pence 4.3 (23.2) (9.5) Summary Consolidated Balance Sheet Financial year ended 31 March 000 2010 2009 2008 Non-current assets 217,678 217,950 162,723 Current assets 247,113 176,358 122,627 Total assets 464,791 394,308 285,350 Non-current liabilities 97,286 106,892 70,265 Current liabilities 203,492 154,215 91,507 Total liabilities 300,778 261,107 161,772 Net assets 164,013 133,201 123,578 Total equity 164,013 133,201 123,578 5
Summary Consolidated Cash Flows Financial year ended 31 March 000 2010 2009 2008 Net cash from operating activities 85,201 35,851 28,718 Net cash used in investing activities (82,468) (59,433) (178,792) Net cash from financing activities 3,106 16,815 166,558 Net increase/(decrease) in cash and cash equivalents 5,839 (6,767) 16,484 Cash and cash equivalents at the beginning of the year 11,767 16,484 Effects of exchange rate fluctuations on cash held 951 2,050 Cash and cash equivalents at the end of the year 18,557 11,767 16,484 7. Strategy for growth The Directors intend to grow the Group s business through continued investment in film rights and television production. The Directors will also continue to review opportunities to expand the geographic footprint of the Group through acquisitions and other forms of strategic partnerships in key territories. 8. Dividend policy The current focus for the Company will continue to be on delivering capital growth for Shareholders and therefore the Board will only commence the payment of dividends as and when it is appropriate and practicable. Ann I (20.7) 9. Current trading and prospects Trading in the first two months of the current financial year has been in line with management expectations. The Directors are confident that the positive momentum in the business will continue. Ann I (12) 10. Standard Listing The Company is seeking a standard listing on the Official List, and as a consequence additional on-going requirements and protections applicable to a premium listing under the Listing Rules will not apply to the Company. In particular, the provisions of Chapters 6 to 13 of the Listing Rules, being additional requirements for listing of equity securities (listing principles, sponsors, continuing obligations, significant transactions, related party transactions, dealing in own securities and treasury shares and contents of circulars), will not apply, however the Company voluntarily intends to comply with the requirements of the AIM Rules 12 to 16 in relation to substantial transactions, related party transactions, reverse takeovers, fundamental change of business, and certain provisions of the Listing Rules, and the Company intends that it will continue to conduct its activities as if such requirements continued to apply to it following Admission (in so far as reasonably practicable). It should be noted that the UK Listing Authority will not have the authority to monitor the Company s voluntary compliance with any of the Listing Rules applicable to companies with a premium listing, (and will not do so) nor will it impose sanctions in respect of any breach of such requirements by the Company. 11. Risk Factors The attention of prospective investors is drawn to the fact that ownership of the Common Shares will involve a variety of risks: Ann III (2) Ann I (4) Failure to achieve audience acceptance for entertainment programming produced or distributed by the Group. Changes in consumer preferences with respect to the format of entertainment. Relationships with third party content producers and suppliers. Failure to maintain existing relationships with customers. 6
Results of operations depend on number, timing and success of releases. Losing market share to competitors. Failure of the Group to retain key personnel. Imitation by third parties of the Group s intellectual property and associated litigation costs. Failure by the Group to implement successfully its strategy. Fluctuations in exchange rates. Elimination or scaling back of the CRTC s policies relating to Canadian content programming, funding and tax credits. Loss of the Group s Canadian status. Changes in international business affecting distribution activities. Industrial action by unions providing personnel to the production of motion pictures and/or television programmes. Increases in interest rates. Dependence by the Group on management information systems and access to the internet. Changes in taxation legislation, regulation or its interpretation in different jurisdictions. Terms on which future funding may be available could restrict acquisitions. Influence of significant shareholders over the Group s business following Admission. Voting influence over the business of the Company by holders of Preferred Variable Voting Shares. Substantial future sales of Common Shares or the availability of Common Shares for future sale. Volatility in the value of an investment in Common Shares and the market price for Common Shares. Ability of the Company to pay dividends is not guaranteed. Additional future offerings of Common Shares by the Company or the public perception that an offering or sale may occur. 7
RISK FACTORS Any investment in the Common Shares is subject to a number of risks. Accordingly, prior to making any investment decision, prospective investors should carefully consider all the information contained in this document and in particular, the risk factors described below. Some of the following factors relate principally to the Group s business and the sector in which it operates. Other factors relate principally to an investment in the Common Shares. Ann I (4) Ann III (2) The Board considers the following risks and other factors to be material for potential investors in the Company but the risks and uncertainties described are not intended to be exhaustive, are not set out in order of priority and are not the only ones that may face the Group. Additional risks and uncertainties not currently known to the Group, or that the Group currently deems immaterial, may also have an adverse effect on the Group s business, financial condition, prospects and/or results of operations. In such a case, the market price of the Common Shares could decline and investors may lose all or part of their investment. Shareholders and prospective investors should read this section in conjunction with this entire document. 1. Risks relating to market conditions Risks related to the nature of the entertainment industry The entertainment industry involves a substantial degree of risk. Audience acceptance of entertainment programming is a factor not only of the response to the production s artistic components, but also to the reviews of critics, promotions, the quality and acceptance of other competing forms of entertainment programming released into the marketplace at or near the same time, the availability of alternative forms of entertainment and leisure time activities, general economic conditions, public tastes generally and other intangible factors, all of which could change rapidly and most of which are beyond the control of the Group. A lack of audience acceptance for the entertainment programming produced or distributed by the Group could have a material adverse effect on the Group s business, results of operations, prospects and financial condition. Entertainment industry trends The entertainment industry is constantly undergoing change with respect to the formats through which movies, television programming and recorded music are ultimately delivered to the consumer. Recently, the effects of such changes have been most obvious in the retail distribution of recorded music with the advent of internet downloads. The Board believes that the changes in consumer preferences will continue to be felt across the Group s businesses. Although the Group does have all-rights ownership, there can be no assurance that the Group will be able to assess these changes in the industry and make effective changes to its business to respond to or capitalise upon such changes, and any such failure could result in a material adverse effect on the Group s business, results of operations, prospects or financial condition. Ann I (12.1) The entertainment industry continues to undergo significant changes driven by technological developments. The Group cannot accurately predict the overall effect that technological growth or the availability of alternative forms of entertainment may have on the potential revenue from, and profitability of, the entertainment content produced or distributed by the Group. In particular, the conversion of content into digital formats may make it easier for consumers to create, transmit and share high quality unauthorised copies of motion pictures, television programs or recorded music. As a result, consumers may be able to download and distribute unauthorised or pirated copies of copyrighted motion pictures, television programs or recorded music over the internet. As long as pirated content is available on the internet, some consumers may choose to download pirated versions of such content rather than attend theatres to watch motion pictures or rent or purchase motion pictures, television programs or recorded music. Some consumers may also purchase pirated DVDs of motion pictures or television series rather than purchase them from authorised vendors. Significant growth in these consumer practices could have an adverse impact on the Group s business and results of operations. 8
Dependence on relationships with content producers and suppliers The Group obtains distribution rights for motion pictures from third party content producers. The Board believes that the Group s financial performance is, and will continue to be, affected by its continued relationship with these content producers and the ability of these content producers to continue to produce motion pictures that receive significant audience acceptance. A certain number of these content suppliers are affiliates of major studios that have their own distribution capability in the markets in which the Group operates. There can be no assurance that these or other content producers would not determine, or be required by their respective parent companies, to use this intracompany distribution capability rather than contracting with the Group for distribution rights. The loss of one or more of these relationships with content producers could have an adverse effect on the business of the Group. The Distribution division also relies on relationships with a number of suppliers in relation to the supply of home entertainment products. These suppliers are often not the same as those content producers from which the Group obtains distribution rights. The Distribution division has not entered into written, long-term contracts with all of its suppliers and relationships with such suppliers are largely based on historical verbal relationships. Although it has long standing relationships with these suppliers, there can be no assurance that these suppliers will not discontinue or change their relations with the Group. The failure of the Group to maintain these existing relationships could have an adverse effect on its operations. Dependence on customer relationships Historically, the Group has not entered into written agreements with certain of its customers. As a result, these customers may, without notice or penalty, terminate their relationship with the Group at any time. In addition, if these customers decide to continue their relationship with the Group, there can be no guarantees that they will purchase the same amount of products as in the past or that any purchase will be on similar terms. The failure of the Group to maintain its existing relationships could have a material adverse effect on the Group s business, results of operations, prospects or financial condition. Fluctuation of financial results The results of operations for any period are dependent on the number, timing and commercial success of motion pictures, television programs and music albums delivered or released during that period, none of which can be predicted with certainty or are entirely within the control of the Group. Consequently, the Group s results of operations may fluctuate materially from period to period and the results of any one period are not necessarily indicative of results for future periods. Competition The Group faces competition from other companies which supply similar products through wholesale/fulfilment and/or retail distribution channels. Some of its competitors have substantially greater marketing and financial resources than the Group which means they may be able to compete aggressively on pricing. Such competition may result in the Group losing market share which would have a material adverse effect on the Group s business, results of operations prospects or financial condition. Dependence on key personnel The Group is dependent on members of its senior management team and skilled personnel at all levels and believes that its future financial success and ability to meet its financial objectives will depend, in part, on its ability to retain highly skilled management and personnel. The Group is also dependent on the implementation of adequate succession planning procedures in respect of key roles, to ensure continuity. Further, the departure from the Group of any of the Executive Directors or certain senior employees could, in the short-term, have an adverse effect on the Group s business, results of operations prospects or financial condition. The Board cannot give any assurances that they, or any of the members of the senior management, will remain with the Group, although the Board believes that the Group offers competitive remuneration packages which are attractive to its current and future personnel. If the Group does not succeed in retaining skilled personnel, it may not be able to grow its business as anticipated, which could have an adverse effect on the Group s business, results of operations prospects or financial condition. 9
Protection of intellectual property Distribution rights to filmed entertainment and recorded music are granted legal protection under the copyright laws of Canada, the United Kingdom, the United States, Holland and most other foreign countries, which impose substantial civil and criminal sanctions for unauthorised duplication and exhibition of motion pictures. From time to time, various third parties contest or infringe upon the Group s intellectual property rights. There can be no assurance that the Group s actions to establish and protect copyright, trade-marks and other proprietary rights will be adequate to prevent imitation by others of motion pictures, television programming or music albums produced and/or distributed by the Group or to prevent third parties from seeking to block the Group s distribution and exploitation of contract rights as a violation of their trade-marks and proprietary rights. Moreover, there can be no assurance that others will not assert rights in, or ownership of, the Group s trade-marks and other proprietary rights, or that the Group will be able to successfully resolve these conflicts. If a claim is made against the Group, any litigation to defend the claim could be costly and divert the time and resources of management, regardless of the merits of the claim. The results of the business may be adversely affected if the Group were to lose litigation relating to intellectual property, either through the requirement to pay monetary damages or the requirement to cease the sale of certain products or the exploitation of certain rights. Investment strategy There can be no certainty that the Group will be able to implement successfully the strategy set out in this document. The ability of the Group to implement its strategy in a competitive market requires effective planning and management control systems. The Group s future growth will depend on its ability to expand and improve operational, financial and management information and control systems in line with its growth. Failure to do so could have an adverse effect on the Group s business, results of operations and financial condition. Impacts of fluctuations in exchange rates Approximately 57 per cent. of Entertainment One s revenues are generated in Canadian dollars, 17 per cent. in US dollars, 19 per cent. in UK pounds sterling and 7 per cent. in Euro. Therefore, fluctuations in exchange rates between the Canadian dollar, the US dollar, the UK pound sterling and the Euro may have a material impact on the Group s business, results of operations and financial condition. Reliance on distribution of Canadian content and government funding The Company s library includes a number of motion picture and television titles that are certified as Canadian content programming or Cancon. The titles produced by the Company s television production operations in Canada are also certified as Cancon. Canadian broadcasters are required by the CRTC, as a condition of their broadcast licences, to devote a certain amount of their programming schedules to the broadcast of Cancon and to spend a certain portion of their revenues on Cancon. There can be no assurance that the CRTC s policies applicable to Canadian broadcasters with respect to Cancon will not be eliminated or scaled back, thereby reducing the advantages that they currently provide to the Company as a supplier of such programs. In addition, substantially all of the Company s programs are contractually required by broadcasters to be certified as Canadian under the CRTC s policies. Although the Company has taken measures to ensure that it continues to be Canadian under the Investment Canada Act, there can be no assurance that the Company s programming will continue to qualify as Cancon. In the event a production does not qualify for certification as Canadian, the Company would be in default under any government incentive and broadcast licenses for that production, Canadian broadcasters would not be able to use the programs to meet their Canadian programming obligations, and the broadcaster could refuse acceptance of the Company s productions. In addition to license fees from domestic and foreign broadcasters and financial contributions from coproducers, the Company finances a significant portion of its production budgets from certain governmental incentive programs and tax credits in Canada, as described under Part VI (Additional Information). There can 10
be no assurance that such incentive programs or tax credits will not be reduced, amended or eliminated or that the Company or any production will qualify for them. Any such change could have a material adverse impact on the Company s business, results of operations, prospects or financial condition. Loss of the Group s Canadian status The Company and its subsidiaries are able to benefit from a number of licenses, incentive programs and Canadian government tax credits as a result of the Company being Canadian as defined under the Investment Canada Act. Although the Company has taken measures through the Preferred Variable Voting Shares to ensure that its Canadian status is maintained, there can be no assurance that the Minister of Canadian Heritage may nevertheless determine that the Company is not a Canadian-controlled entity under the Investment Canada Act. If the Company lost its Canadian status, this would have a material adverse affect on the Group s business, results of operations, prospects or financial condition. International distribution activities The Group has television and motion picture distribution operations in North America and Europe and, as a result, its business is subject to certain risks inherent in international business, many of which are beyond its control. These risks include: laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws; changes in local regulatory requirements, including restrictions on content; differing cultural tastes and attitudes; differing degrees of protection for intellectual property; and the instability of foreign economies and governments. Events or developments related to these and other risks associated with international trade could adversely affect the Group s business. Strikes or Other Union Job Actions A strike by, or a lockout of, one or more of the unions that provide personnel essential to the production by the Group s content partners of motion pictures and television programs could delay or halt the delivery of completed motion pictures or television programmes to the Group. Such a halt or delay, depending on the length of time and the number of productions affected, could cause a delay or interruption in the timing of the release of new motion pictures and the number of pictures available for release, which could have a material adverse effect on the Group s business, results of operations, prospects or financial condition. The impact of any changes in Interest Rates The Group seeks to mitigate the impact of any changes in interest rates through derivative financial instruments. Any movements in rates may affect the applicable interest rate on any unhedged portion of the Group s senior debt and an increase in rates could reduce the headroom available under the Group s financial banking covenants. Dependence on Management Information Systems The Group s ability to conduct its business, including maintaining financial controls, is based in part on the efficient and uninterrupted operation of its computer systems, including its management information systems and access to the internet. The Group has in-house information technology resources and the Board believes that it has properly structured information technology solutions. However, if any of the Group s financial, personnel, email, internet access or other information technology systems or other systems or processes were to be disabled or did not operate properly, for any significant period of time, by reason of events beyond the Group s control (for example, computer viruses, problems with the internet or sabotage), the Group could 11
suffer disruption to its business, liability to its stakeholders, loss of data, regulatory intervention or reputational damage. Changes to Taxation Legislation The Group operates in a number of different tax jurisdictions. In any of the jurisdictions, the tax rules and their interpretation may change. Any change in taxation legislation or regulation or its interpretation could affect the value of the Group s assets, the Group s ability to provide returns to Shareholders or otherwise have an adverse effect on the Group s business, results of operations, financial condition or prospects. Further, any reliefs from taxation that may be available to the Group in the future may not be in accordance with the assumptions made by the Group as to its future performance (these assumptions being based on the current legislative position and any known future changes). If the assumptions made by the Group as to such taxation reliefs available do not prove correct, the Group s ability to provide returns to Shareholders may be affected and there may be an adverse effect on the Group s business, results of operations prospects or financial condition. Future financing Although the Group has no current plans to do so, the Group may deliver growth through further material acquisitions and/or investments, for which additional sources of finance may be required. There can be no assurance that should the Group seek to deliver such growth it will be able to raise those funds, whether on acceptable terms or at all. If further financing is obtained by issuing equity securities or convertible debt securities, the existing shareholdings may be diluted and the new securities may carry rights, privileges and preferences superior to the Common Shares. If the Group were to seek to deliver such growth through debt financing, the Group may incur significant borrowing costs. 2. Risks relating to the Common Shares Influence of Marwyn (and its related parties) over the Group s business following Admission On Admission, Marwyn (and its related parties) will hold, directly and indirectly through a voting trust, up to 41.3 per cent. of the Common Shares. James Corsellis, Non-Executive Chairman of the Company and Mark Watts, a Non-Executive Director of the Company, are members of Marwyn. Whilst the Board considers that the Group is capable of carrying on its business independently of Marwyn (and its related parties), notwithstanding their shareholding, Marwyn may influence certain matters requiring the approval of the Shareholders as a whole. There could also be a conflict between the interests of Marwyn (and its related parties) and the Company s other Shareholders with respect to, for example, dividend policy. Additionally, Marwyn has sufficient voting power, amongst other things, to exert a degree of control over the Company and in particular to delay or deter a change of control. Control of the Company by Holders of Preferred Variable Voting Shares In order to meet certain Canadian regulatory requirements for film and television distribution companies under the Investment Canada Act, the Company must ensure that a majority of the Company s voting shares are owned by Canadians (as defined in the Investment Canada Act) and the Company is controlled in fact by Canadians (as defined in the Investment Canada Act). To do this, the Company has put in its capital structure a class of Preferred Variable Voting Shares. The votes attached to the Preferred Variable Voting Shares as a class will be automatically adjusted so that they, together with the votes attached to the Common Shares that are owned by Canadians (as determined based on enquiries the Company will make of the holders of Common Shares), will equal a minimum of 51 per cent. of the votes attached to all shares in the capital of the Company, which is sufficient to ensure that control in fact remains with Canadians for the purposes of the Investment Canada Act. The Preferred Variable Voting Shares, which will not be transferable without the consent of the Board, will be held by the Company s Chief Executive Officer Darren Throop, who is a Canadian, and will not be listed on any stock exchange. Accordingly in circumstances where Canadians own less than 51 per cent. of the votes attached to the Common Shares, the Preferred Variable Voting Shares allow the Chief Executive Officer to exercise a voting influence over the business and affairs of the Company where submitted to a vote of shareholders of the Company. 12
Substantial future sales of Common Shares could impact on the market price of Common Shares The Board cannot predict what effect, if any, future sales of Common Shares, or the availability of Common Shares for future sale, will have on the market price of Common Shares. Sales of substantial numbers of Common Shares in the public market, or the perception or any announcement that such sales could occur, could adversely affect the market price of Common Shares and may make it more difficult for Shareholders to sell their Common Shares at a time and price which they deem appropriate. There may be volatility in the value of an investment in Common Shares and the market price for Common Shares may fluctuate Following Admission, the trading price of the Common Shares may be subject to wide fluctuations in response to a range of events and factors (including those referred to in this section), such as variations in operating results, changes in financial estimates and recommendations by securities analysts, the share price performance of other companies that investors may deem comparable to the Group, the general market perception of entertainment companies, news reports relating to trends in the Group s markets or the wider economy, legislative changes in the Group s sector and other factors outside of the Group s control. Such events and factors may adversely affect the trading price of the Common Shares, regardless of the performance of the Group. Stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for securities and any such fluctuation may be unrelated to the Group s operating performance or prospects. Prospective investors should be aware that the value of the Common Shares could go down as well as up and investors may therefore not recover their original investment, especially as the market in the Common Shares may have limited liquidity. The Company s ability to pay dividends is not guaranteed As a matter of Canadian law, the Company cannot declare or pay dividends if there are reasonable grounds for believing that the Company is, or would after the payment of dividends be, unable to pay its liabilities as they become due or if the realisable value of the Company s assets is less than the aggregate of its liabilities and stated capital of all its classes of shares. The ability of the Company to pay dividends in respect of Common Shares will depend on the level of earnings, reserves, any ongoing capital requirements and cash position. The payment of any future dividends by the Company will be at the discretion of the Board after taking into account many factors, including the Company s operating results, financial condition and current and anticipated cash needs. For more information on the Company s dividend policy, see paragraph 10 of Part I (Information on Entertainment One). Further issues of Common Shares could impact of the market price of Common Shares It is possible that the Company may decide to offer additional Common Shares in the future although the Company has no current plans to do so. An additional offering of Common Shares by the Company or the public perception that an offering or sale may occur, could have an adverse effect on the market price of Common Shares. The Directors currently have no plans to issue any Common Shares (save in relation to satisfy the exercise of any options under the Entertainment One Share Schemes, the Marwyn Warrant, the Summit Option and the Exchangeable Notes) during the next 12 months. The Company is applying for a standard listing and accordingly the Company will not be required to comply with those protections applicable to a premium listing The Company is seeking a standard listing on the Official List, and as a consequence additional on-going requirements and protections applicable to a premium listing under the Listing Rules will not apply to the Company. In particular, the provisions of Chapters 6 to 13 of the Listing Rules being additional requirements for listing of equity securities (listing principles, sponsors, continuing obligations, significant transactions, related party transactions, dealing in own securities and treasury shares and contents of circulars) will not apply, however the Company voluntarily intends to comply with the requirements of the AIM Rules 12 to 16 in relation to substantial transactions, related party transactions, reverse takeovers and fundamental change 13
of business, and certain provisions of the Listing Rules, and the Company intends that it will continue to conduct its activities as if such requirements continued to apply to it following Admission (in so far as reasonably practicable). It should be noted that the UK Listing Authority will not have the authority to monitor the Company s voluntary compliance with any of the Listing Rules applicable to companies with a premium listing, (and will not do so) nor will it impose sanctions in respect of any breach of such requirements by the Company. 14
CONSEQUENCES OF STANDARD LISTING The Common Shares are expected to be admitted to a standard listing on the Official List and as a consequence additional on-going requirements and protections applicable to a premium listing under the Listing Rules will not apply to the Company. The Company will be listed under Chapter 14 of the Listing Rules on the basis of European Directive requirements and as a consequence a significant number of the Listing Rules will not apply to the Company. The listing will be classified as a standard listing under the Listing Rules. Shareholders in the Company will therefore not receive the full protections of the Listing Rules otherwise associated with a premium listing. An applicant that is applying for a standard listing of equity securities must comply with all the requirements listed in Chapter 2 of the Listing Rules, which specifies the requirements for listing for all securities. Where an application is made for the admission to the Official List of a class of shares, at least 25 per cent. of shares of that class must be distributed to the public in one or more EEA states. Listing Rule 14.3 sets out the continuing obligations applicable to the Company and requires that the Company s listed securities must be admitted to trading on a regulated market at all times. The applicant must have a minimum number of shares of any listed class (25 per cent.) in public hands at all times in the relevant jurisdictions and must notify the FSA as soon as possible if these holdings fall below the stated level. There are a number of other continuing obligations set out in Chapter 14 of the Listing Rules that will be applicable to the Company. These include requirements as to: (a) (b) (c) (d) (e) (f) forwarding of circulars and other documentation to the FSA for publication through the document viewing facility, and related notification to a regulatory information service; the provision of contact details of appropriate persons nominated to act as a first point of contact with the FSA in relation to compliance with the Listing Rules and Disclosure and Transparency Rules; the form and content of temporary and definitive documents of title; the appointment of a registrar; regulatory information service notification obligation in relation to a range of debt and equity capital issues; and compliance with, in particular, Chapters 4, 5 and 6 of the Disclosure and Transparency Rules. Chapter 14 of the Listing Rules, which sets out the requirements for standard listings, does not require the Company to comply with, inter alia, the provisions of Chapters 6 to 13 of the Listing Rules being additional requirements for listing of equity securities (listing principles, sponsors, continuing obligations, significant transactions, related party transactions, dealing in own securities and treasury shares and contents of circulars). Chapter 6 of the Listing Rules contains additional requirements for listing of equity securities, which are only applicable for companies with a premium listing. Consequently, the Company does not intend to comply with such provisions. The Company intends to comply with the Listing Principles set out in Chapter 7 of the Listing Rules which would otherwise apply to the Company if it were to obtain a premium listing on the Official List. The Company is not, however, subject to such Listing Principles and will not be required to comply with them. The Directors intend to ensure that Shareholders are provided with sufficient information in order for them to make an informed decision on any matter which they need to approve, and the Directors will also take independent financial advice where appropriate. The Company is not required, and does not intend, to appoint a listing sponsor under Chapter 8 of the Listing Rules to guide the Company in understanding and meeting its responsibilities under the Listing Rules. 15
The provisions of Chapter 9 of the Listing Rules (continuing obligations) will not apply to the Company. Chapter 9 includes provisions relating to transactions, including, inter alia, requirements relating to further issues of shares, the ability to issue shares at a discount in excess of 10 per cent. of market value, notifications and contents of financial information. Although the Company is not required to comply with Chapter 9 of the Listing Rules, it will voluntarily: (a) (b) (c) publish its preliminary statement of annual results (or the information from its annual financial report that is required to be communicated to the media pursuant to the Disclosure and Transparency Rules) through a regulatory information service as soon as possible after it has been approved and in any event within four months of the end of the period to which it relates and only after it has been agreed with the Company s auditors; notify a regulatory information service as soon as possible after the Directors have approved any decision to pay or make any dividend or other distribution or to withhold any dividend or interest payment; and publish its half yearly report to a regulatory information service as soon as possible after it has been approved and in any event within two months of the end of the period to which it relates. The Company is not required to comply with the Model Code on Directors dealings in shares of the Company set out in Chapter 9 of the Listing Rules. However, Entertainment One (Cayman) adopted a code of conduct in relation to the share dealings at the time of its AIM listing, and the Company will continue to follow such dealing code following Admission. The Company is not required to comply with Chapters 10, 11 and 12 under the Listing Rules (significant transactions, related party transactions, dealing in own securities and treasury shares). Entertainment One (Cayman) does however currently comply with the requirements of the AIM Rules in relation to substantial transactions, related party transactions, reverse takeovers and fundamental change of business (AIM Rules 12 to 16) and the Company intends that it will continue to conduct its activities as if such requirements continued to apply to it following Admission (in so far as reasonably practicable). It should be noted that neither the UK Listing Authority nor the London Stock Exchange will have the authority to monitor the Company s voluntary compliance with, nor impose sanctions in the event of a breach of, any such provisions. Chapter 13 of the Listing Rules contains provisions relating to the content of circulars and is only applicable to companies with a premium listing. Consequently, the Company does not intend to comply with such provisions. The Company confirms that, notwithstanding that upon Admission neither Listing Rule 5.2.5 (cancellation of listing) nor the equivalent protection currently provided under the AIM Rules will be applicable, in the event a cancellation of its listing were to be proposed, it would in any event seek Shareholder approval as if Listing Rule 5.2.5 of the Listing Rules was applicable to it. Pursuant to Listing Rule 5.2.5 this will mean, inter alia, that the Company would send a circular to its Shareholders containing certain information as specified in the Listing Rules and obtain the approval of not less than 75 per cent. of its Shareholders in the event that it proposes to seek a cancellation of its listing. It should be noted that the UK Listing Authority will not have the authority to monitor the Company s voluntary compliance with any of the Listing Rules applicable to companies with a premium listing (and will not do so) nor will it impose sanctions in respect of any breach of such requirements by the Company. 16
Directors DIRECTORS, SECRETARY, REGISTERED OFFICE AND ADVISERS James Corsellis (Non-Executive Chairman) Darren Throop (Chief Executive Officer) Patrice Theroux (President Filmed Entertainment) Giles Willits (Chief Financial Officer and Company Secretary) Bob Allan (Non-Executive Director) Sir George Bain (Non-Executive Director) Clare Copeland (Non-Executive Director) Garth Girvan (Non-Executive Director) Robert Lantos (Non-Executive Director) Mark Opzoomer (Non-Executive Director) Mark Watts (Non-Executive Director) Ann I (14.1) Company Secretary Registered Office Joint Broker Joint Broker Legal advisers to the Company as to English and US law Legal advisers to the Company as to Canadian law Financial adviser Giles Willits 175 Bloor Street East Suite 1400 North Tower Toronto, Ontario Canada M4W 3R8 Singer Capital Markets Limited One Hanover Street London United Kingdom W1S 1AX Cenkos Securities plc 6.7.8 Tokenhouse Yard London United Kingdom EC2R 7AS Mayer Brown International LLP 201 Bishopsgate London United Kingdom EC2M 3AF Osler, Hoskin & Harcourt LLP 100 King Street West 1 First Canadian Place Suite 6100, PO Box 50 Toronto, Ontario Canada M5X 1B8 Marwyn Capital LLP 11 Buckingham Street London United Kingdom WC2N 6DF Ann I (5.1.2) 17
Reporting Accountants and Auditors Bankers Registrars Depository Website Deloitte LLP 2 New Square Street London United Kingdom EC4A 3BZ JP Morgan Chase 125 London Wall London United Kingdom EC2T 5AJ Capita Registrars (Jersey) Limited 12 Castle Street St. Helier Jersey JE2 3RT Capita IRG Trustees Limited The Registry 34 Beckenham Road Beckenham Kent United Kingdom BR3 4TU www.entertainmentonegroup.com Ann III (10.1) Ann I (2.1) Ann III (4.3) 18
FORWARD LOOKING STATEMENTS Some of the statements under Summary Information, Risk Factors, Part I (Information on Entertainment One), Part III (Operating and Financial Review) and elsewhere in this document include forward-looking statements which reflect the Group s or, as appropriate, the Directors current views with respect to financial performance, business strategy, plans and objectives of management for future operations (including development plans relating to the Group s products and services). These statements include forward-looking statements both with respect to the Group and the sectors and industries in which the Group operates. Statements which include the words expects, intends, plans, believes, projects, anticipates, will, targets, aims, may, would, could, continue and similar statements of a future or forwardlooking nature identify forward looking statements. All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause the Group s actual results to differ materially from those indicated in these statements. These factors include but are not limited to those described in the section headed Risk Factors, which should be read in conjunction with the other cautionary statements that are included in this document. Any forward-looking statements in this document reflect the Group s current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the Group s business, results of operations, financial conditions, growth strategy and liquidity. These forward-looking statements speak only as of the date of this document. Subject to any obligations under the Prospectus Rules, the Disclosure and Transparency Rules and the Listing Rules and save as required by the FSA, the London Stock Exchange, or applicable law and regulations, the Company undertakes no obligation publicly to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. All subsequent written and oral forward-looking statements attributable to the Group or individuals acting on behalf of the Group are expressly qualified in their entirety by this paragraph. Prospective investors should specifically consider the factors identified in this document which could cause actual results to differ before making an investment decision. 19
PRESENTATION OF FINANCIAL AND OTHER INFORMATION Financial data The financial information in this document has been prepared in accordance with International Financial Reporting standards as adopted by the European Union. Certain figures contained in this document, including financial, statistical and operating information, have been subject to rounding adjustments. Accordingly, in certain circumstances, the sum of the numbers in a column or row in a table contained in this document may not conform exactly to the total figure given for that column or row. Market, economic and industry data Where third party information is used in this document the source of such information is identified. The information sourced from Oliver & Ohlbaum Associates Limited is accurately reproduced and, so far as the Company is aware and is able to ascertain from information published by Oliver & Ohlbaum Associates Limited, no facts have been omitted which would render the reproduced information inaccurate or misleading. Ann I (23.2) Ann III (10.4) Ann I (6.5) Currency presentation Unless otherwise indicated, all references in this document to pounds sterling, sterling,, pence or p are to the lawful currency of the UK, all references to C$ or Canadian dollars are to the lawful currency of Canada, all references to US$, $ or US dollars are to the lawful currency of the US and all references to or Euro are to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the Treaty establishing the European Community. No incorporation of website information The content of Entertainment One s website, any website mentioned in this Prospectus or any website directly or indirectly linked to these websites have not been verified and do not form part of this Prospectus. Investors should not rely on such information. References to defined terms Certain terms used in this document, including certain capitalised terms and other terms, are defined in Part VII (Definitions). 20
PART I INFORMATION ON ENTERTAINMENT ONE 1. INTRODUCTION Entertainment One is an international entertainment group with operations incorporating film and television. During the year ended 31 March 2010, Entertainment One released 123 films theatrically and produced 213 half hours of television content, broadcast in over 180 countries. The Group s current rights library includes more than 20,000 film and television titles, 2,400 hours of television programming and 45,000 music tracks and is distributed across all media formats. The Group is operated through two divisions: Entertainment, comprising Film and Television Film: Entertainment One acquires and exploits feature film rights across all media (including theatrical, DVD, TV and digital) in the UK, Canada, US and Benelux; and Television: Entertainment One produces original television programming in North America and the UK for broadcast in domestic and international markets. Distribution Entertainment One owns wholesale home entertainment distribution operations in Canada and the US. The Group was admitted to trading on the AIM market of the London Stock Exchange on 29 March 2007, and since then has gone on to complete a number of acquisitions within North America, the UK and Europe. The Group employs approximately 1,500 staff worldwide. The Group s total sales for the year ended 31 March 2010 were 444.2 million, representing growth of 30 per cent. over the prior year. The Group s underlying EBITDA increased from 25.3 million to 34.3 million over the same period. 2. HISTORY AND DEVELOPMENT/INFORMATION ON THE COMPANY Between 2003 and 2007, the operations of the Group s Distribution division were listed on the Toronto Stock Exchange as Entertainment One Income Fund. Ann I (5.1.5 and 7.1) In March 2007, Entertainment One (Cayman), the current ultimate holding company of the Group until completion of the Restructuring (as further described in paragraph 3 of this Part I (Information on Entertainment One)), acquired the assets of Entertainment One Income Fund and was admitted to trading on AIM. Since then, Entertainment One (Cayman) has completed a number acquisitions which have significantly expanded the Group s business model and international footprint. Entertainment One key milestones: March 2007 July 2007 August 2007 January 2008 Commences trading on AIM on completion of the acquisition of the operating business of the formerly Toronto Stock Exchange listed Entertainment One Income Fund Acquisition of Contender Entertainment (independent distributor of filmed entertainment in the UK) Acquisition of Seville Pictures (independent distributor of filmed entertainment in Canada) Acquisition of RCV Entertainment (independent distributor of filmed entertainment in Benelux) 21
September 2008 Acquisitions of Barna-Alper Productions and Blueprint Entertainment (independent producers of television programming in Canada); Oasis International (independent Canadian distributor of television programming internationally); and Maximum (independent Canadian sales and distribution business) Following these developments the Directors believe the Group stands today as a diversified, international, vertically integrated entertainment business, incorporating: multi-territory independent film distribution covering UK, Canada, Benelux and the US; leading independent television production businesses within Canada and the UK with well-established reach into the US and international markets; and a uniquely-positioned home entertainment distribution platform in Canada and the US. Since its admission to AIM in 2007, the Group has expanded significantly through organic and acquisitive growth and as a result, the Directors believe that a move to a standard listing on the Official List and to trading on the main market of the London Stock Exchange is now appropriate. In conjunction with the move to a standard listing, the Group is also inserting the Company as the new ultimate holding company, and listed entity, of the Group, as part of the Restructuring. The Board believes that the insertion of this new Canadian incorporated ultimate holding company, and Admission, will further improve its market perception and attract a wider investor base. Concurrently Entertainment One (Cayman) will continue into Canada and be amalgamated with the Company. The Board believes these measures will enable Entertainment One to simplify its group structure and more efficiently address certain regulatory requirements applicable to businesses operating in the Canadian film and television distribution industry. 3. RESTRUCTURING At the date of this document, Entertainment One (Cayman) is the ultimate holding company of the Group. On completion of the Restructuring and on Admission the Company will be the holding company for the Group. The board of Entertainment One (Cayman) has been reviewing both the country of incorporation of the ultimate holding company of the Group and the admission to trading of that company s shares for some time. The board of Entertainment One (Cayman) concluded that shareholders and the Group would be best served by a Canadian incorporated ultimate holding company and a standard listing on the Official List. Ann I (7.1) The board of Entertainment One (Cayman), and the Board, consider that the insertion of the Company, being Canadian incorporated, as the ultimate holding company of the Group will increase the attractiveness of the Group to existing and potential investors, enable the Group to simplify its group structure and more efficiently address certain Canadian regulatory requirements applicable to businesses operating in the Canadian film and television distribution industry. The board of Entertainment One (Cayman) and the Board believe that a move to a standard listing on the Official List will increase the public awareness and recognition of the Group and will raise its profile and status within its sector. Furthermore, the Board believes that in due course admission to a standard listing on the Official List should assist in increasing the liquidity of the Common Shares. Entertainment One (Cayman) is, at the date of this document, subject to a scheme of arrangement in the Cayman Islands which, if approved by both (a) a majority in number; and (b) 75 per cent. by value of the ordinary shareholders of Entertainment One (Cayman) voting in person or by proxy at the court convened meeting of the ordinary shareholders of Entertainment One (Cayman), and sanctioned by the Grand Court of the Cayman Islands, will result in the shareholders of Entertainment One (Cayman) exchanging their ordinary shares in Entertainment One (Cayman) on a one for one basis for Common Shares in the Company, and Entertainment One (Cayman) becoming a wholly owned subsidiary of the Company. The court hearing to sanction the scheme of arrangement will be heard by the Grand Court of the Cayman Islands on Friday 9 July 2010. Provided the Grand Court sanctions the scheme of arrangement, it is anticipated that the sanction order will be filed with the Cayman Islands registrar of companies on Monday 12 July 2010. The scheme of arrangement will then become effective at 5.00 p.m. UK time on Wednesday 14 July 2010 resulting in the shareholders of Entertainment One (Cayman) exchanging their ordinary shares 22
for Common Shares at that time. Admission of the Common Shares to the Official List is currently expected to occur at 8.00 a.m. UK time on Thursday 15 July 2010. Should the shareholders of Entertainment One (Cayman) not approve the scheme of arrangement or should the Grand Court of the Cayman Islands refuse to sanction the scheme of arrangement, the scheme of arrangement will not complete, shareholders of Entertainment One (Cayman) will not exchange their ordinary shares for Common Shares, Entertainment One (Cayman) will not become a wholly owned subsidiary of the Company and Admission will not take place. In these circumstances, Entertainment One (Cayman) will continue as the ultimate holding company of the Group, and its ordinary shares will continue to be admitted to trading on AIM. Following Admission Entertainment One (Cayman), which will at that time be a wholly owned subsidiary of the Company, will continue into Canada and will, pursuant to Cayman Islands law and Canadian law, become a Canadian incorporated company on or around 15 July 2010. Once Entertainment One (Cayman) has continued into Canada it will then, as a matter of Canadian law, be amalgamated with the Company on or around 15 July 2010 so that the Company will take on all of the assets and obligations of Entertainment One (Cayman). This will simplify the Group structure, by removing an intermediate holding company from the Group, but will not affect any of the rights attaching to the Common Shares. Immediately after the effective time of the Restructuring, in accordance with the terms of the Exchangeable Shares, 6972501 Canada Inc. will initiate the exchange of all of its issued and outstanding Exchangeable Shares. It is expected that the holders of the Exchangeable Shares will receive 15,620,395 Common Shares. 4. CANADIAN HERITAGE In order to meet certain Canadian regulatory requirements for film and television distribution companies under the Investment Canada Act, the Company must ensure that a majority of the Company s voting shares are owned by Canadians and the Company is controlled in fact by Canadians. To do this, the Company has put in its capital structure a class of Preferred Variable Voting Shares. The votes attached to the Preferred Variable Voting Shares as a class will be automatically adjusted so that they, together with the votes attached to the Common Shares that are owned by Canadians (as determined based on enquiries the Company will make of the holders of Common Shares), will equal a minimum of 51 per cent. of the votes attached to all shares in the capital of the Company, which is sufficient to ensure that control in fact remains with Canadians for the purposes of the Investment Canada Act. The Preferred Variable Voting Shares, which will not be transferable without the consent of the Board, will be held by the Company s Chief Executive Officer Darren Throop, who is a Canadian, and will not be listed on any stock exchange. 5. MARKET OVERVIEW Overview of global film and television markets Film In 2009, the global filmed entertainment market generated revenues of approximately $107 billion 1, incorporating box-office ticket sales; sales and rental of packaged home entertainment products; and revenues generated from television broadcasters, online access and digital streaming. Ann I (6.2) The US represents approximately 41 per cent. of the global film market. The next largest market is the Asian Pacific region, representing approximately 19 per cent., followed by the UK, Germany, France and Canada with filmed entertainment markets worth $7.4 billion, $5.1 billion, $4.9 billion and $4.2 billion respectively. Revenues from home video entertainment remain the single largest contributor to the global market (worth 48 per cent), with theatrical box office the second largest contributor, generating 28 per cent. of global filmed entertainment revenues. 2 Growth in the global film market is predominantly driven by the quality and consumer-appeal of the underlying creative product and the availability of distribution channels. Low-ticket entertainment has remained resilient to the current economic down-turn, and 2009 saw record box-office attendance across the 1 Global Film Market Forecast Update, May 2010, Oliver & Ohlbaum. 2 Global Film Market Forecast Update, May 2010, Oliver & Ohlbaum. 23
major Western markets. Although consumer retail prices for DVDs have come under pressure, the market has benefitted from increasing adoption of new technology following the emergence of Blu-ray as the dominant high-definition format and the increasing penetration of relevant hardware. Production and distribution in the US market is dominated by the major film studios. In non-us markets, independent distributors account for a significant proportion of local independently produced film, and US independent and international co-production output, often resulting in total market share of 40 per cent. of local box office revenues 3. Entertainment One is currently either the first or second largest, independent distributor in each of Canada, the UK and Benelux, its key geographical markets. The distributor plays a key role in the filmed entertainment value chain, facilitating production by entering into agreements to distribute films ahead of photography starting; developing and implementing targeted marketing strategies for movie releases; and allocating film releases across distribution channels to maximise customer exposure and revenue generation. The release of new product into each distribution channel is scheduled based on accepted industry standards to ensure that each channel enjoys a period of exclusivity before release into the subsequent channel. This helps to maximise revenue generation across the entire lifecycle of the movie. New distribution channels are expected to substitute existing channels to some degree, but also to grow the overall market by allowing additional platforms of exclusivity for new releases and also creating new routes to market to exploit older back-catalogue or library titles. The chart below illustrates the typical release schedule of a motion picture. Motion picture release cycle Television The global market for television subscriptions generates revenues of more than $155 billion 4, driving approximately C$120 billion 5 of content acquisition activity by broadcasters in the major western markets. The US is the largest global television market, with more than C$50 billion spent on programming each year. In Canada, C$11 billion of annual broadcaster revenues drive more than C$4 billion of investment by broadcasters in the acquisition of programming, with C$1 billion spent acquiring original programming from independent producers 6. The independent Canadian television production market is highly fragmented, with the top 20 producers controlling more than 60 per cent. of production and development spending in 2008 7. Production companies operating within the Canadian television market can be categorised between proprietary and service 3 From Middlemen to Mini Majors, April 2008, Oliver & Ohlbaum 4 Global Film Market Forecast Update, May 2010, Oliver & Ohlbaum 5 The Canadian Connection, June 2009, Oliver & Ohlbaum 6 The Canadian Connection, June 2009, Oliver & Ohlbaum 7 The Canadian Connection, June 2009, Oliver & Ohlbaum 24
producers. Service producers primary business is to provide location and production services to non-canadian producers looking to access the benefits of the Canadian financing environment, and as such do not control long-term ownership of the resultant programming. In contrast, proprietary producers focus on the creation and ongoing ownership of programming for exploitation in Canada and international markets. Entertainment One represents one of the largest proprietary independent producers in the Canadian market. The Canadian television production market is unique globally in terms of the extent to which government-sponsored financing is available to producers to create high-quality English-speaking television content for domestic broadcast and international distribution. The range of public and private subsidies available in Canada means that producers are able to produce programming at lower cost and with lower risk to their own capital. Within Canada, broadcaster licences are also tied to the compulsory acquisition and broadcast of minimum numbers of hours of Canadian-produced programming. In an economic environment where the large US and international broadcast networks are being increasingly squeezed by reduced advertising revenues, the Directors believe these broadcasters are increasingly looking to meet scheduling requirements via production markets such as Canada where cost and risk can be minimised without sacrificing overall production quality. The Directors believe that the Group s market-leading production capability aligned with established distribution reach into the US and other key international markets is therefore a critical point of differentiation. 6. BUSINESS OVERVIEW The Group operates through two divisions, the Entertainment division and the Distribution division. Ann I (6.1.1, 6.1.2 and 6.2, 12.1, 12.2) 6.1 Entertainment division Film business Entertainment One Film acquires rights from producers to promote and exploit feature films across all available distribution platforms, including theatrical exhibition, home entertainment, television and digital. Through Canada, the UK and Benelux, the film business currently operates in markets representing approximately 10 per cent. of global box office, and 15 per cent. of international box office outside of the US. Entertainment One released 123 motion pictures theatrically during the year to 31 March 2010, up from 111 during the year to 31 March 2009. In the last two years, the Group has implemented a transformational investment programme across its Film operations, with 86.5 million spent on the acquisition of rights over that period ( 50.6 million in the year ended 31 March 2010, and 35.9 million in the year ended 31 March 2009). Outside of its core geographic markets, during the year to 31 March 2010 Entertainment One has established distribution agreements in Australia, New Zealand and France enabling the Group to further its distribution capability. Ann I (6.4) The Group obtains distribution rights for motion pictures from a range of content suppliers, including a number of the US independent studios and a number of affiliates of the US major studios, plus local producers in each of its geographic markets. Rights may be acquired for individual motion pictures or for multiple motion pictures under multi-picture agreements or studio output agreements. Distribution rights to a motion picture are generally acquired for up to 25 years, but may in some cases be acquired in perpetuity. Under the terms of an output agreement, the Group commits to distribute all films delivered to it by the producer over the term of the agreement, typically between two and five years, and retains long-term distribution rights relating to those titles. Across each of its geographic markets, the film business customers include theatrical exhibitors, home entertainment retailers, television broadcasters and digital retailers. In September 2007, the Group signed a multi-territory output agreement with Summit Entertainment, which entitles Entertainment One to exclusive long term distribution rights on all Summit titles for the UK and Canadian markets produced until June 2011. Since September 2007, Entertainment One has released 13 titles under the Summit agreement, including Twilight, Knowing and Remember Me. For 25
the twelve months ended 31 March 2010, the film business also released Twilight Saga: New Moon, the second instalment in the Twilight Saga, which went on to generate one of the largest opening nights in Canadian and British box office history. The Film business also includes the Group s music label which is based in New York and produces and releases music tracks and albums from established artists across a wide variety of genres, including urban, rap, country, jazz and Christian. Geographic markets Canada During the year ended 31 March 2010, Entertainment One s film business released 59 titles theatrically in the Canadian market, including Twilight Saga: New Moon, The Imaginarium of Doctor Parnassus, Sorority Row, The Brothers Bloom, The Ghost Writer and Chloe. The Group expects to release over 60 feature films theatrically in Canada for the year to 31 March 2011. UK At the time of its acquisition by the Group in July 2007, Entertainment One s UK film operations was one of the largest independent distributors of content on DVD in the UK. Subsequently, Entertainment One has expanded its UK rights acquisition activity to focus on exploitation across all release platforms. During the year to 31 March 2009 Entertainment One launched its first four major theatrical releases in the UK. During the year to 31 March 2010 Entertainment One released 10 titles theatrically in the UK, including Twilight Saga: New Moon, Nativity and An Education, which won the Best Leading Actress BAFTA and was nominated for three Oscars TM, including Best Motion Picture. In the year to 31 March 2011 Entertainment One expects to release more than 15 theatrical titles in the UK. Benelux During the year to 31 March 2010 Entertainment One released 54 titles theatrically in the Benelux market, including Fame, 17 Again, Paranormal Activity, Edge of Darkness and local title Terug Naar De Kust. The Group expects to release over 60 feature films theatrically in Benelux in the year to 31 March 2011. US Within the US, Entertainment One predominantly acquires rights for exploitation in the home entertainment market and unlike other geographical markets, undertakes only small scale theatrical distribution. It is the Directors belief that a more extensive theatrical release strategy is not in the interests of the Group due to the dominance of the major studios and disproportionate level of investment required to distribute a film nationwide. However, the Directors do believe that its presence in the US market provides a strategic opportunity to expand Entertainment One s non-theatrical operations, through library acquisitions and the distribution of the Group s own television productions across North America. The multi-territory distribution opportunity The Directors strategy to date has been to build an international network of film distributors across key markets. A multi-territory presence amongst independent distributors is rare, with local markets typically characterised by a small number of established local independents competing with a tail of smaller sub-scale companies for the market share not taken by the major studios own distribution operations. 26
The Directors believe that a successful multi-territory infrastructure can, for the first time, provide producers with an alternative to both the fragmented local independent model and the major studio model for international distribution. Furthermore, the Directors believe having a presence in multiple territories brings a number of key benefits to the distributor. Increased scale allows the distributor to negotiate with suppliers such as DVD replicators and cinema-reel printers for optimum pricing. In addition, the ability to offer to an independent producer a single-source distribution solution for a group of key international markets reduces the producer s transaction costs and provides it with a more efficient means of financing production (the producer uses the signed distribution agreements as surety with a bank to access interim financing to fund production). This positioning also allows the distributor the opportunity to negotiate commercially improved terms whether in relation to the initial pricing to secure distribution rights, or in the balance of risk and benefits further along into the life of the distribution agreement (e.g. in the length of the agreement, the form of revenue-sharing arrangements or the level of cost recoupment). Although the majority of movies are still acquired by the Group on a territory-by-territory basis (due to differences between local consumer tastes and other factors) where possible the Group seeks to acquire movies across its international footprint. The Directors believe that further expansion into other selected international markets would further enhance this proposition. Television With the acquisitions of Blueprint Entertainment, Barna-Alper Productions, Oasis International and Maximum in September 2008, Entertainment One established itself as a leading independent television company in Canada. Together with its UK-based kids animation capability, Entertainment One provides broadcasters within Canada, the UK and internationally with access to North American production and award winning kids animation. During the year to 31 March 2010 the Group invested approximately 24 million in television production and produced 213 half hours of content. The business controls a content library that includes more than 2,400 hours of television programming. Within Canada, the television business currently has a number of projects in production and its shows currently airing include Megabuilders, Kenny vs. Spenny, The Bridge and Majority Rules. With an established presence in Los Angeles, the Directors believe Entertainment One has a considerable reach into the US broadcast markets. The Group has recently achieved notable successes with The Bridge, Rookie Blue, and Hung receiving commissions from major US networks CBS, ABC and HBO respectively. Outside Canada, the Group s UK-based kids animation operation has released five titles, including Peppa Pig, Ben & Holly s Little Kingdom, and Lost and Found, all of which have received BAFTAs for pre-school entertainment. Alongside the broadcast of these titles, the Group also exploits the merchandising and licensing rights associated with its kids properties and management recognise the value of these ancillary opportunities provided by successful kids-focussed programming. Kids remains a key element of the Group s television strategy going forward. The television business customers typically include conventional and specialty terrestrial and cable/satellite television broadcasters in Canada, the US, the UK, and other international markets. Major shows are currently being broadcast on CTV and Canwest Global in Canada, ABC, HBO and Nickelodeon in the US, and Five and Nickelodeon in the UK. The Group is focussed on producing commercially successful programming while minimising financial risk and retaining maximum exploitation in-house. The television business Canadian productions benefit from the significant government-backed financing initiatives available to Canadian producers (as described in paragraph 5 of Part I (Information on Entertainment One) and paragraph 8 of Part VI (Additional Information)) and retain the benefit from the commercial opportunities existing in the US and international broadcast markets. The Directors believe the combination of Entertainment One s focus on audience appealing programmes, its financing advantage, and its international distribution and co-production 27
relationships to be critical in differentiating the business and in building a library of original programming with long-term value. The production process The Group creates and develops original concepts or existing properties (such as books or biographies) into television programmes, series and made-for-television movies. The Group manages all aspects of a programme s development, financing, production and distribution. The television business assesses the domestic and international appeal, the financing profile, and the longer-term revenue generation potential of each programme it develops and produces. The Group s production strategy encompasses a diverse range of programming which provides it with a number of alternative revenue streams and access to a range of markets. Production decisions also take into account the desire to maintain a production slate diversified across genres and target markets, and production approval is typically only given once. Entertainment One requires that at least 85 per cent. of the production budget has been secured through Canadian government financial assistance and/or broadcaster pre-sales before production commences. In addition to developing and creating its own productions, the Group may enter into co-productions where it considers financial, creative and strategic relationship opportunities to be attractive. Co-production relationships allow the business to expand its output and to access international talent and properties with more global appeal. The Directors believe that Canada s existing international co-production treaty arrangements will continue to enable it to produce programming that will qualify as local content for markets outside of Canada (e.g. in the European Union), in which broadcasters (as in Canada) are required as part of the regulatory environment to include minimum levels of locally produced content in their broadcast schedules. 6.2 Distribution division Alongside the rights ownership and production activities of the Entertainment division, the Group also operates a physical home entertainment distribution operation in North America, through which it distributes both its own and third party home entertainment product. Canada The Distribution division s Canadian operations are conducted from a 113,000 square foot leasehold distribution centre in Brampton, Ontario, along with two other distribution facilities in Calgary and Montreal. The Canadian operations are primarily focussed on filmed entertainment, with a large majority of sales in the year ended 31 March 2010 coming from DVDs. The Distribution division distributes products from all of the leading film studios and music labels, including Disney, Paramount and Sony, alongside a large range of other independent production houses. The Group is also the exclusive non-direct Canadian distributor for Universal Home Video, Fox Studios and Warner Home Video to customers who do not have a direct relationship with the producers themselves. The Distribution division s Canadian operation currently serves more than 3,000 customers including retail chains, internet-based retailers and individual retail and rental stores. It is also a major internetbased order-fulfilment wholesaler of home entertainment products in Canada. In addition to its exclusive agreements with certain suppliers, the Group also has a number of customer relationships through which it has exclusive access to retailers home entertainment shelf space. The Distribution division is not exposed to the risk of stock obsolescence on the third party inventory that it distributes. United States The Distribution division s US operations are conducted out of a single 100,000 square foot leasehold office and distribution centre in Port Washington, New York. This facility handles all of Entertainment 28
One s US physical and digital music and video distribution. The US distribution business is focused on the distribution of exclusive independent music and video product in a variety of formats. The business has seen strong growth in video by leveraging the Group s own US and Canadian owned content and access to Entertainment One s global film partners. As a result of these initiatives, home video content reached 35 per cent. of total sales during the year to 31 March 2010, up from 28 per cent. in the previous year. 21 per cent. of revenues were from digital income and 44 per cent. of sales came from physical music distribution. Unlike its distribution operations in Canada, in the US the Distribution division does not distribute the products of major film studios and music labels, but instead focuses on exclusive distribution from independent content producers alongside content produced and licensed by the Group s Entertainment division. The Distribution division services over 1,000 customer accounts in the United States, including retail chains, retail stores, and internet retailers and digital accounts. Inventory in the US is held on a consignment basis on behalf of suppliers, minimising working capital requirements and removing the risk of inventory obsolescence. 6.3 Other In addition to its entertainment and distribution operations, the Group operates a small home entertainment retail chain in Canada of around 50 stores branded CD Plus. The stores are all located in leased premises in smaller cities and towns across Canada, where markets are typically underserved by the large retail chains. The Directors consider these retail operations to be non-core and the number of stores has been significantly reduced with more than 30 stores closed since March 2007. 7. STRATEGY FOR GROWTH The Directors intend to grow the Group s business through continued investment in film rights and television production. The Directors will continue to review opportunities to expand the geographic footprint of the Group through acquisitions and other forms of strategic partnerships in key territories. 8. MANAGEMENT EXPERTISE The Company s executive management team is currently headed by Darren Throop who has been Chief Executive of the Group since 2003. Previously he has held senior management positions at Records On Wheels and CD Plus, both predecessor businesses of Entertainment One (Cayman), and has over twenty years experience in the home entertainment industry. Mr. Throop is supported by both Patrice Theroux, President Filmed Entertainment, and Giles Willits, Chief Financial Officer. Mr. Theroux has over twenty-five years experience in the motion picture distribution industry, and was previously Chief Executive of Toronto Stock Exchange listed Motion Picture Distribution Inc. Mr. Theroux joined the Group in 2007. Before joining the Group in 2007, Mr. Willits was Director of Group Finance of FTSE-100 grocer J Sainsbury plc. Prior to joining Sainsburys, he was Group Corporate Development Director and Interim Group Finance Director at Woolworths Group plc, where he was also Finance Director of Entertainment UK Limited, at the time the leading distributor of home entertainment products in the UK. Further information relating to management s experience and roles with the Group can be found at paragraph 1 of Part II (Directors and Corporate Governance). 9. ADMISSION, SETTLEMENT AND DEALING ARRANGEMENTS Application has been made to the UK Listing Authority for the Common Shares to be listed on the Official List and to the London Stock Exchange for the Common Shares to be admitted to trading on the London Stock Exchange s main market for listed securities. It is expected that Admission will become effective and the dealings in the Common Shares will commence on Thursday 15 July 2010. Ann III (6.1) CREST is a paperless settlement procedure enabling securities to be evidenced otherwise than by a certificate and transferred otherwise than by written instrument. Securities issued by certain non-uk registered companies, such as the Company cannot be held or transferred in the CREST system. 29
However, to enable investors to settle such securities through CREST, the Company has entered into a Depository Interest arrangement. Depository Interests allow certified shares issued by companies in non-uk jurisdictions to be dematerialised and settled electronically. The paper-based stock is transferred to the Depository who then issues the Depository Interests to the individual shareholder s CREST account on a one-for-one basis and provides the necessary custodial services. The Depository Interest can then be traded and settled within the CREST system in the same way as any other CREST security. As the Common Shares cannot themselves be dematerialised and admitted to CREST, the Company has adopted the Depository Interest facility operated by the Depository so that Shareholders have the choice of whether they want to hold their Common Shares in certified form or in uncertified form through the Depository Interest facility. Shareholders of the Company who elect to hold their Common Shares through a Depository Interest in uncertified form through the Depository Interest facility will be bound by the terms of the Deed Poll. A summary of the Deed Poll is found at paragraph 19 of Part VI (Additional Information) and a copy is available for inspection as set out in paragraph 26 of Part VI (Additional Information). The Company s share register will show the Depository, Capita IRG Trustees Limited as the holder of the Common Shares, but the beneficial interest will remain with the Shareholders who will continue to receive all the rights attaching to the Common Shares as they would have if they had themselves been entered on the register. Common Shares will be transferred or issued to an account for the Depository (or its nominated custodian) and the Depository will issue Depository Interests to participating members. The Depository Interests will be traded and settled via the CREST system. Depository Interest Holders can withdraw their Common Shares back into certified form at any time using standard CREST messages. Conversion into, and transfer of, Depository Interests are not currently subject to stamp duty or SDRT. CREST is a voluntary system and holders of the Common Shares who wish to receive and retain share certificates will be able to do so. Share certificates will be despatched to Shareholders by first-class post within 14 days of the date of Admission. No temporary documents of title will be issued. For holders of ordinary shares in Entertainment One (Cayman) who hold their ordinary through the current Depository Interest facility for Entertainment One (Cayman), at or shortly after the Admission, the records of the Depository will be updated without any action on the part of those shareholders to reflect their new interest in the Company. After Admission, holders of ordinary shares in Entertainment One (Cayman) will continue to hold their interest in Common Shares by way of a Depository Interest. 10. DIVIDEND POLICY The current focus for the Company will continue be to on delivering capital growth for Shareholders and therefore the Board will only commence the payment of dividends as and when it is appropriate and practicable. Ann I (20.7) 11. TAXATION The attention of investors is drawn to the information regarding taxation in relation to Admission which is set out at Part V (Taxation). These details are, however, intended only as a general guide to the current tax position under UK and Canadian taxation law for certain types of investor. Investors who are in any doubt as to their tax position or who are subject to tax in jurisdictions other than the UK and Canada are strongly advised to consult their professional advisers. Ann III (4.11) 12. FURTHER INFORMATION Your attention is drawn to the additional financial and other information set out in Part IV (Historical Financial Information) and Part VI (Additional Information). In particular, the risk factors set out in the section headed Risk Factors should be considered carefully. 30
PART II DIRECTORS AND CORPORATE GOVERNANCE 1. DIRECTORS The Directors, who are all current directors of Entertainment One (Cayman), were appointed to the Board of the Company on 21 May 2010. Date of current Date of expiry of contract/letter current contract/ Name Age Position of appointment notice period Non-Executive Chairman James Henry Merrick Corsellis 40 Non-executive 21 May 2010 6 months Chairman Executive Directors Darren Dennis Throop 45 Chief Executive 1 September None* 1 2008 Patrice Theroux 48 President Filmed 31 March 2010 31 March 2013* 2 Entertainment Giles Kirkley Willits 43 Chief Financial 31 March 2010 12 months* Officer Non-Executive Directors Robert William Allan 63 Non-executive 21 May 2010 6 months Director Sir George Sayers Bain 71 Non-executive 21 May 2010 6 months Director Robert Gregory Clare Copeland 74 Non-executive 21 May 2010 6 months Director Garth Malcolm Girvan 61 Non-executive 21 May 2010 6 months Director Robert Lantos 61 Non-executive 21 May 2010 6 months Director Mark William Opzoomer 52 Non-executive 21 May 2010 6 months Director Mark Watts 36 Non-executive 21 May 2010 6 months Director Ann I (16.1 and 16.2) 1 Although no notice is required, if Mr. Throop is dismissed without cause he is entitled a lump sum equal to 24 months compensation. 2 If Mr. Theroux is dismissed without cause he is entitled to be a lump sum equal to 24 months compensation. If his contract is not renewed by the Company the lump sum will equal 12 months compensation. * Notice by employee to Company is six months. The business address of each of the Directors is 175 Bloor Street East, Suite 1400, North Tower, Toronto, Canada M4W 3R8. The management expertise and experience of each of the Directors is set out below: James Corsellis, (Non-Executive Chairman) (40) James founded one of the earliest strategic technology consultancies in 1994 and was Chief Executive Officer of icollector plc, a leading provider of live auction trading platforms. He is currently a managing 31
partner of Marwyn Capital and Marwyn Investment Management, a director of Marwyn Value Investors as well as a director of Marwyn Capital I and Marwyn Materials Limited. Darren Throop, Chief Executive Officer (45) Darren has over 20 years of executive management experience in the entertainment industry. Darren has been Chief Executive Officer of Entertainment One since July 2003 and has been in the Group since 1999. Previously Darren was the owner of Urban Sound Exchange between 1991 and 1999 when it was acquired by the Group. Patrice Theroux, President Filmed Entertainment (48) Patrice has over 25 years of experience in the motion picture distribution industry and until June 2006 was president and CEO of the Toronto stock exchange listed Motion Picture Distribution LP, a leading independent film distribution company with operations in Canada, the UK and Spain. Patrice is Chairman of the Canadian Association of Film Distributors and Exporters. Giles Willits, Chief Financial Officer (43) Giles joined the executive board of Entertainment One in May 2007. He was formerly Director of Group Finance at J Sainsbury plc from 2005 to 2007 and Group Corporate Development Director and Interim Group Finance Director at Woolworths Group plc. Before this Giles held a number of finance and general management positions within Kingfisher plc and Sears Plc. Giles is a Chartered Accountant having qualified with PricewaterhouseCoopers. Bob Allan, Non-Executive Director (63) Between 1997 and 2006, Bob was Vice-President of MDS Capital Corp, a North American venture capital company engaged in health and life science investments. Previously, Bob was Vice-President Financial Operation at the laboratory services division of MDS Inc., a public health and life sciences company. Prior to joining MDS, Bob was a Vice-President of Unitel Communications Inc. Bob is a Chartered Accountant and a member of the Canadian Institute of Chartered Accountants. Sir George Bain, Non-Executive Director (71) Sir George has over 40 years of academic and professional experience in the field of economics. He was Principal of the London Business School between 1989 and 1997 and President and Vice-Chancellor of The Queen s University of Belfast between 1998 and 2004. He was previously a non-executive director of Blackwell Publishers Ltd, The Economist Group, Electra Private Equity Plc, and Bombardier Aerospace Shorts Brothers Plc. He is currently a non-executive director of The Canada Life Group (UK) Ltd, Canada Life Capital Corporation and Great-West Lifeco Inc. Clare Copeland, Non-Executive Director (74) Clare is currently the chief executive of Falls Management Company, a developer and operator of Casino Niagara and Fallsview Casino since 2005. Clare is also chairman of Toronto Hydro Corporation, a Canadian energy distribution company. Between 2000 and 2002 Clare was chairman and chief executive of OSF Inc., a manufacturer of retail store interiors. Clare is also a director of Danier Leather Inc., MDC Corporation, Chesswood Income Fund and several other Canadian companies. Garth Girvan, Non-Executive Director (61) Garth is currently a partner at the Canadian law firm McCarthy Tétrault LLP having joined the firm in 1978. Garth is currently a non-executive director of the Canadian entertainment company Imax Corporation and was previously a director of Silcorp Limited and the Canadian beverage distributor Corby Distilleries Limited. Garth is called as a barrister in Ontario (1978), Alberta (1982) and New York (1986). 32
Robert Lantos, Non-Executive Director (61) Robert has more than 35 years experience in the motion picture and television industry. He is the producer of Cannes and Golden Globe winning and Academy Award nominated films including Being Julia, Eastern Promises and The Sweet Hereafter. He currently owns Serendipity Point Films, a film and television production company based in Toronto and Los Angeles. Prior to 1998, Robert was Chairman and CEO of Alliance Communications Corporation. Mark Opzoomer, Non-Executive Director (52) Mark is a partner in Bond Capital Partners, providers of lower mid-market growth capital. Mark is a non-executive of Blinkx plc, Newbay Software Limited and Expedite 5 inc. He is also President and co-founder of Zattikka Limited, an online social and browser games publisher. Mark was previously non-executive director, then CEO of Rambler Media Limited. Prior to this Mark was the Managing Director and Regional Vice-President of Yahoo! Europe. Prior to joining Yahoo! Europe, Mark was Deputy Chief Executive of Hodder Headline plc, a LSE-listed book publishing company, and previously Commercial and Finance Director of Sega Europe Ltd and Commercial Director of Virgin Communications Ltd. Mark is a Chartered Accountant and has an MBA from IMD, Lausanne, Switzerland. Mark Watts, (Non-Executive Director) (36) Mark has been advising the boards of UK public companies since 1998. Mark is currently a Managing Partner in Marwyn Capital and Marwyn Investment Management. He is also a director of Melorio plc, Silverdell plc, Praesepe plc, and Advanced Computer Software plc. Mark was previously a director of Inspicio plc and Talarius plc. 2. COMPENSATION In the financial year ended 31 March 2010, the aggregate total remuneration paid (including contingent or deferred compensation) and benefits in kind granted (under any description whatsoever) to each of the Directors by members of the Group was 2.2 million. Such remuneration was paid as follows ( 000): Ann I (15.1) Fee/Basic Pension Name Salary Bonus Benefits Contribution Total Directors James Corsellis 54 54 Darren Throop 374 374 7 18 773 Patrice Theroux 302 302 13 617 Giles Willits 238 238 12 42 530 Bob Allan 35 35 Sir George Bain 35 35 Clare Copeland 35 35 Garth Girvan 35 35 Mark Opzoomer 35 35 Robert Lantos 35 35 Mark Watts 27 27 The Group has not set aside or accrued any amounts in the financial year ending 31 March 2010 to provide pension, retirement or similar benefits to any of the Directors, save as disclosed in this paragraph 2 of Part II (Directors and Corporate Governance), which come to an aggregate amount of 60,000. Ann I (15.2) The Company also has an out-performance incentive plan that allocates up to 5 million to an incentive pool to be paid to executive directors in the future, conditional on the sale of the Company for no less than 2.25 per share or the Company s share price achieving a share price of 2.25 per share after 29 March 2010. 33
3. CORPORATE GOVERNANCE As a standard listed company, Entertainment One is not required to comply with the provisions of the Combined Code that apply to companies with a premium listing on the Official List. As at the date of this document, the Group complies with, and following Admission will continue to comply with, the principles set out in Section 1 of the Combined Code, other than those provisions of the Combined Code that make reference to provisions of the Listing Rules which do not apply to a standard listed issuer, and the following matters: Ann I (16.4) The Board does not have a senior independent director as it is not currently required to appoint one under the corporate governance regime applicable to AIM issuers. It is the intention of the Board that one of the existing independent Non-Executive Directors be appointed senior independent director, and his role defined, during the current financial year. The Chairman, James Corsellis, is not an independent director, due to his relationship with Marwyn as further outlined in paragraph 11.6 of Part VI (Additional Information). The Nomination Committee comprises James Corsellis, Mark Watts and Clare Copeland. Neither James Corsellis nor Mark Watts are considered to be independent directors due to their relationships with Marwyn as further outlined in paragraph 11.6 of Part VI (Additional Information) and accordingly the Nomination Committee does not comprise a majority of independent non-executive directors. The Combined Code recommends that directors should have notice periods of one year or less. Darren Throop and Patrice Theroux have notice periods as set out in paragraph 1 of this Part II (Directors and Corporate Governance). The Combined Code recommends that the annual report contains certain information on the work of the Nomination Committee, the Board s evaluation of itself and its committees, reviews of internal controls, the provision of non-audit services and steps taken to develop an understanding of major shareholders views. The Group is not currently required to report on these matters under the corporate governance regime applicable to AIM issuers: however, the Company intends to report on these matters in future annual reports, to the extent applicable to a standard listed issuer. Non-Executive Directors do not typically attend meetings with major shareholders although are available to attend if specifically requested. An overview of the Group s corporate governance procedures is given below. Corporate Governance in Canada As at the date of this document the Company complies with, and will on Admission comply with, the corporate governance rules and regulations set out in the CBCA, as well as the requirements under Canadian common law. However, the Company is not a reporting issuer in any jurisdiction in Canada and therefore is not required to comply with the corporate governance requirements set out in the securities laws of each province and territory in Canada. The Board composition and committees The Group is controlled through the Board, which comprise a Non-Executive Chairman, three Executive Directors and seven other Non-Executive Directors and is responsible to Shareholders for the proper management of the Company and the Group. The Chairman is James Corsellis and the Chief Executive Officer is Darren Throop. The Chairman, James Corsellis is not considered to be independent due to his relationship with Marwyn, which on Admission will hold a 41.3 per cent. direct and indirect interest in the Common Shares of the Company. He is available for consultation by Shareholders whenever appropriate. Five Non-Executive Directors, Bob Allan, Sir George Bain, Clare Copeland, Garth Girvan, and Mark Opzoomer are considered to be independent. Mark Watts is not considered to be independent due to his relationship with Marwyn. Robert Lantos is not considered to be independent due to his ownership of Serendipity Point Films, with which the Group has an output agreement and which co-produces a number of 34
TV productions with the Group, on commercial terms, and his being a 3 per cent. shareholder in the Company. The Non-Executive Directors bring a wide range of experience and expertise to the Group s activities and provide a strong balance to the Executive Directors. The Directors can obtain independent professional advice at the Company s own expense in the performance of their duties as Directors. The Board operates both formally, through Board and committee meetings, and informally, through regular contact amongst Directors and senior executives. There is a schedule of matters that are specifically referred to the Board for its decision, including approval of interim and annual results, setting and monitoring strategy and examining acquisition possibilities. The Board is supplied with information, in a timely manner, in a form and quality appropriate to enable it to discharge its duties. The composition of the Board provides an appropriate blend of experience and qualifications, and the number of Non-executive Directors provides a strong base for ensuring appropriate corporate governance of the Company. In accordance with principles of good corporate governance, the Company has established a Remuneration Committee, an Audit Committee and a Nomination Committee. Remuneration Committee The Remuneration Committee comprises Clare Copeland (as Chairman), James Corsellis and Garth Girvan. It is responsible for determining and agreeing with the Board the framework for the remuneration of the Executive Directors and such other members of the management, who receive an annual remuneration exceeding 200,000 and report into the Chief Executive, as it is designated to consider. It is furthermore responsible for determining the total individual remuneration packages of each Director including, where appropriate, bonuses, incentive payments and share options. Ann I (16.3) The Remuneration Committee considers all aspects of the Executive Directors remuneration, including participation in the Entertainment One Share Schemes. The remuneration of the Non-Executive Directors is considered by the Board following recommendations by the Executive Directors. Additionally, the Remuneration Committee reviews succession planning for Executive Directors and management each year. Audit Committee The Audit Committee comprises Bob Allan (as Chairman), James Corsellis, Mark Watts and Mark Opzoomer. The Audit Committee receives and reviews reports from management and the Company s auditors relating to the annual and interim accounts and the accounting and internal control systems in use by the Company. Ann I (16.3) The Audit Committee s principal functions include: Ensuring that appropriate accounting systems and financial controls are in operation and that the Company s financial statements comply with statutory and other requirements. To consider and make recommendations relating to the appointment, re-appointment and removal of the external auditors and monitor the scope, cost-effectiveness and objectivity of the audit, including monitoring any non-audit services provided by the external auditors. Reviewing the interim and annual results and reports to Shareholders, and considering any matters raised by the external auditors. To keep under review the appropriateness of the accounting policies of the Company used in preparing its financial statements. Monitoring the integrity of the financial statements of the Group and formal announcements relating to the Group s financial performance, and reviewing and challenging where necessary significant financial reporting judgements contained therein. Review corporate acquisitions to consider risk, accounting policies and related considerations. Reviewing whistle-blowing arrangements within the Company. 35
Nomination Committee The Nomination Committee comprises James Corsellis (as Chairman), Mark Watts and Clare Copeland. It is responsible for reviewing the structure, size and composition (including the skills, knowledge and experience) of the Board, preparing a description of the role and capabilities required for a particular appointment and identifying and nominating suitable candidates to fill Board positions as and when they arise. The Nomination Committee reports formally to the Board on all proceedings of the Nomination Committee. 36
PART III OPERATING AND FINANCIAL REVIEW 1. Introduction The following discussion and analysis of the Group s financial condition and results of operations is derived from and should be read in connection with the financial information set out in Part IV (Historical Financial Information). The financial information included in this Part III (Operating and Financial Review) has been extracted without material adjustment from the financial information referred to in Part IV (Historical Financial Information) or has been extracted without material adjustment from the Group s accounting records which formed the underlying basis of such financial information. Ann I (9.1) The following discussion of the Group s financial condition and results of operations contains forward-looking statements that involve risks and uncertainties and that are based on assumptions about its future business development. As a result of many factors, including the risk factors set out in the section headed Risk Factors and elsewhere in this document, the Group s actual results may differ materially from those anticipated by these forward-looking statements. Each Shareholder should read this document as a whole and not rely solely on the summarised financial information set out below. 2. Overview 2.1 History/Information on the Company Entertainment One (Cayman) was incorporated in January 2007 and shortly afterwards acquired the assets of Entertainment One Income Fund and was admitted to trading on AIM on 29 March 2007. Since then, Entertainment One (Cayman) has completed a number of acquisitions including Contender Entertainment (an independent distributor of filmed entertainment in the UK) in July 2007 for consideration of 45.2 million, Seville Pictures (an independent Canadian film distributor) in August 2007 for consideration of 2.5 million and, RCV Entertainment (an independent film distributor in the Benelux) in January 2008 for consideration of 31.4 million. Additionally, Barna-Alper Productions, Blueprint Entertainment, Oasis International and Maximum (Canadian television production and distribution) were acquired in September 2008 for an aggregate consideration of 31.9 million. Ann I (5.1.5) Following these acquisitions the Group has become a leading independent entertainment content owner that acquires film and television rights and exploits these rights in all media in more than 180 countries. The Group currently operates in Canada, the US, the UK and the Benelux through its two divisions: Entertainment (comprising Film and Television) and Distribution. Together, Entertainment and Distribution represent the Group s extensive expertise in film distribution and television production/distribution, kids content, licensing and distribution. The Group s content library includes more than 20,000 film and television titles, 2,400 hours of television programming and 45,000 music tracks and is distributed across all media formats. 2.2 Operating Segments The Group analyses its business into two key business segments, Entertainment and Distribution. The principal activity of the Entertainment division is the acquisition and exploitation of filmed entertainment rights across all media and the production of television content. The Distribution division comprises the Group s physical warehousing and distribution businesses in Canada and the US. In 2010 Entertainment represented 50 per cent. (2009: 39 per cent.) of Group revenue with Distribution representing 46 per cent. (2009: 53 per cent.) of Group revenue. Additionally, the Group operates a smaller non-core retail operation in Canada whose results are included within Other. 37
2.3 Group Strategy The Group s strategy is based on the ownership and control of entertainment rights for exploitation across all media channels. It is the Group s intention to continue to pursue its strategy through investing in organic growth and seeking opportunities to increase its scale through corporate activity. The Group s Film business offers independent film producers an alternative to the major studios model, while enabling Entertainment One to build competitive advantage in the market and deliver improved cost efficiency at a lower risk. With a large portfolio of theatrical releases each year the Group manages the risk associated with any one title. Moving forward, the business will grow the number of films it distributes by enhancing relationships with current production partners as well as expanding the list of independent producers from which it acquires film rights. While leveraging its established capabilities in its current markets, the business will also look to expand its multi-territory distribution infrastructure. Television diversifies the Group s revenue across the spectrum of filmed entertainment. With established reach into the US and international broadcast markets, the Group s television business is well positioned to drive long-term value from original programming across multiple genres. It typically controls the worldwide rights, across all platforms, to all of its productions. In Canada and the US, the Distribution division delivers physical and digital content to more than 4,000 retail partners. Alongside leveraging this network to market the Group s own library of content, the business provides third-party distribution services to a wide range of content producers including the major Hollywood studios. 3. Current trading and prospects Current trading and prospects Trading in the first two months of the current financial year has been in line with management expectations. The Directors are confident that the positive momentum in the business will continue. Ann I (20.9, 12.1, 12.2) 4. Key performance indicators Management consider a variety of financial and non-financial key performance indicators ( KPI s ) when analysing the financial performance of the business. The principal financial KPI s are: Revenue (the consideration receivable from the sales of goods and services. It is stated net of any rebates and discounts) Underlying EBITDA (defined as operating profit excluding operating one-off items, share-based payment charges, depreciation and amortisation of intangible assets) Investment in content and TV (including capitalised production costs associated with the television segment) Operating cash flow (defined as trading profit adjusted for depreciation and amortisation plus the change in working capital before tax adjustments) Net debt (defined as cash, long term borrowings, debentures, interim production financing and deferred finance charges) In addition to these principal KPI s there are different KPI s for the Entertainment division and the Distribution division respectively. For example, the Entertainment division also considers KPI s such as number of theatrical releases, number of DVD releases and half hours of TV production delivered, whilst the Distribution division also considers the value of units returned as a percentage of the value dispatched. 5. Significant factors affecting the Group s results of operations Set out below are certain key factors which the Directors believe have affected the Group s results of operations, or could affect its results of operations in the future. Ann I (9.2.1 and 9.2.3) 38
5.1 Investment in Content The Group s operating results and its financial results, as well as the comparability of these results have been and may continue to be affected by a number of external factors including: the conditions in the markets in which it operates; consumer demand for content; technological advances in entertainment; exchange rates; interest rates; as well as internal factors such as costs of overheads and inventory management; acquisitions and the successful integration thereof; and management of employees. An increase in investment in content rights is fundamental to achieving the Group s aim of providing Shareholders with improved and sustainable returns. The continued availability of good quality content, particularly in relation to filmed entertainment, is considered as part of the corporate planning process. The risk of reduced availability of content is mitigated through the continual development of relationships with producers and other key stakeholders across the full spectrum of the entertainment industry. In addition, by following its current strategy, the Group is becoming a more attractive partner for the sellers of entertainment rights. 5.2 Market conditions The Group s results are partly dependent on the box office performance of its titles and sales into the home entertainment market including DVD, Blu-ray, digital and television. The success of individual titles in the home entertainment market is dependent on a number of factors including quality of the product and success of the marketing campaign. While conditions in each of the Group s market channels may fluctuate, the Group mitigates its risk to any particular market through its focus on the quality of acquisitions and directing subsequent marketing investment to the channels in which it is believed that an acceptable financial return will be made. The Group s US businesses were historically focused on the music market, which has declined significantly in recent years. The Group has addressed this decline through restructuring the US businesses and implementing a strategy to increase home video sales. 5.3 Exchange Rates The Group reports its consolidated results in pounds sterling. The Group however operates in Canada, the UK, the US and Benelux and exploits media rights in more than 180 countries, which exposes the Group to the financial risks of changes in foreign currency exchange rates. These risks comprise translation risk, resulting from the requirement to present the results from different territories in the Group s reporting currency, and transactional risk. Transactional risk arises where business units enter into contracts denominated in a currency other than their local reporting currency. These include minimum guarantee payments to film studios, which are often denominated in US Dollars. The Group uses foreign exchange forward contracts when appropriate, and otherwise uses natural hedging methods where possible, to minimise exposure in these areas. In its analysis of results in paragraph 6 of Part III (Operating and Financial Review) constant currency is used to measure performance. Constant currencies are calculated by retranslating the comparative figures using weighted average exchange rates for the respective year. 5.4 Seasonality The Group s exposure to seasonality varies by division. The results of the Entertainment division are impacted by the number and timing of film releases. The release dates are not entirely in the control of the Group and are determined largely by the production and releasing schedules of each film s producer. Revenues from television productions are driven by contracted delivery dates with primary broadcasters and can fluctuate significantly from period to period. Results of the Distribution division reflect seasonal patterns with the fourth calendar quarter providing the highest sales due to the increased consumer spending that accompanies the holiday season. 5.5 Banking facilities and covenants The Group has a committed secured multi-currency revolving credit facility (the Facility ), which matures in September 2012. At 31 March 2010, using prevailing exchange rates, the total available Ann I (10.3) 39
facility was $180 million. The interest rate payable in respect of drawings under this facility is at a margin of up to 3.5 per cent. over relevant local benchmark rates. A non-utilisation fee of 0.50 per cent. to 0.75 per cent. is payable in respect of amounts available but undrawn under this facility. The Facility is secured over assets in the Group. The Group was in compliance with its financial covenants at 31 March 2010. Key financial covenants under the Facility, which exclude the TV production businesses, include a minimum consolidated net worth, a minimum fixed charge coverage ratio, a maximum leverage ratio and restrictions on overhead and capital expenditure. The minimum consolidated net worth covenant requires shareholder equity to be greater than or equal to the sum of 90 million plus 50 per cent. of annual net income plus 100 per cent. of new equity invested in the borrowers since the Facility was put in place. The fixed charges coverage ratio requires consolidated EBITDAR divided by fixed charges to be greater than or equal to 1.75 times for any consecutive rolling four-quarter period until 31 December 2009 and 2.0 times thereafter. The leverage ratio requires the calculation of senior debt, minus cash balances, divided by consolidated EBITDA to be less than or equal to 2.75 times for the quarters from 31 March 2010 until 31 December 2010 and less than or equal to 2.25 times thereafter. The overhead expense restriction limits the sum of all annual allocated and unallocated overhead expenses of the credit parties to be less than or equal to 60 million for the year ending 31 March 2009, this amount increasing by 10 per cent. per annum thereafter. The capital expenditure restriction limits capital expenditure to be less than or equal to $4.0 million or currency equivalent per annum. In addition the Group is subject to a borrowing base, which restricts the funds available to draw down under the Facility to a sum calculated based on the level of certain cash, inventory and receivables balances and a proportion of the Group s independent annual library valuation. At 31 March 2010 the borrowing base was a sum in excess of the available Facility. 5.6 Acquisitions The Group s historic results have been impacted by a number of acquisitions as described in paragraph 2.1 of this Part III (Operating and Financial Review). In July 2007 the Group acquired Contender Entertainment, a distributor of filmed entertainment in the UK, for consideration of 45.2 million. In August 2007 the Group acquired Seville Pictures, an independent Canadian film distributor, for consideration of 2.5 million. Additionally in January 2008 the Group acquired RCV Entertainment, an independent film distributor in Benelux for a consideration of 31.4 million. These acquisitions in the year ended 31 March 2008 added 28.4 million to revenue in that financial year. In September 2008, the Group acquired Barna-Alper Productions, Blueprint Entertainment, Oasis International and Maximum for an aggregate consideration of 31.9 million. This transaction contributed an aggregate 25.2 million of revenue in the period to 31 March 2009. 6. Results of operations 6.1 Description of key income statement line items (a) Revenue Revenue represents the amounts receivable for goods and services provided in the normal course of business, net of discounts and excluding value added tax (or equivalent). Revenue is derived from the licensing, marketing and distribution of feature films, television, video programming and music rights. Revenue is also derived from retail and merchandising sales. 40
(b) (c) Underlying EBITDA Underlying EBITDA refers to operating profit/(loss) excluding operating one-off items, sharebased payment charges, depreciation and amortisation of intangible assets. Operating profit/(loss) Operating profit/(loss) refers to earnings before interest and tax. Historical profit and loss accounts Financial year ended 31 March Variance Variance 000 2010 2009 2008 2009 2010 2008 2009 Revenue 444,172 342,643 264,375 +101,529 +78,268 Underlying EBITDA 34,334 25,256 18,620 +9,078 +6,636 Amortisation of intangible assets (17,488) (15,168) (11,067) 2,320 4,101 Depreciation (2,019) (1,699) (1,007) 320 692 Share-based payment charge (2,743) (4,171) (5,797) +1,428 +1,626 One-off items (1,582) (29,677) (2,249) +28,095 27,428 Operating profit/(loss) 10,502 (25,459) (1,500) +35,961 23,959 Net finance charges (3,627) (5,550) (6,176) +1,923 +626 Profit/(loss) before tax 6,875 (31,009) (7,676) +37,884 23,333 Taxation (321) 578 (879) 899 +1,457 Profit/(loss) after tax 6,554 (30,431) (8,555) +36,985 21,876 Earnings/(loss) per share: Basic earnings/(loss) per share 4.6 (23.2) (9.5) Diluted earnings/(loss) per share 4.3 (23.2) (9.5) 6.2 Comparison of the financial results of the Group for the years ended 31 March 2010 and 31 March 2009 The following sets out the principal factors affecting the Group s results of operations during the twelve months ended 31 March 2010 compared with the twelve months ended 31 March 2009. Ann I (9.1, 9.2.2, 9.2.3 and 20.1) (a) Revenue Revenue segmental analysis for the years ended 31 March 2010 and 2009 2010 2009 000 External Internal Total External Internal Total Entertainment 205,280 46,539 251,819 119,593 37,630 157,223 Distribution 213,684 17,300 230,984 193,084 19,009 212,093 Other 25,208 25,208 29,966 29,966 Eliminations (63,839) (63,839) (56,639) (56,639) Consolidated 444,172 444,172 342,643 342,643 The Group reported another year of strong growth driven by the increased investment in film and television content over the last two years. Revenue increased by 30 per cent. from 342.6 million to 444.2 million. Adjusting for the effects of currency and prior year acquisitions, revenue increased by 18 per cent. In the Entertainment division, which comprises the Film and Television businesses, revenue grew by 60 per cent. from 157.2 million to 251.8 million. In the Film business revenue grew 63 per cent. to 208.1 million (2009: 127.3 million). On a constant currency basis Film 41
revenue grew 52 per cent. Revenue growth was driven by a strong schedule of 123 theatrical releases during the year. 50.6 million was invested in content, up 14.7 million compared to 2009 to support the continued growth of the Film businesses. Revenues from the US music label, were 15 per cent. lower on a constant currency basis following the decision to reduce investment in music content. Television revenues were up 46 per cent. to 43.7 million (2009: 29.9 million), up 21 per cent. (adjusting for prior year acquisitions and on a constant currency basis) due to an increase in the number of shows delivered to 213 half hours and a strong performance in the Kids business. In the Distribution division revenues were up 9 per cent. to 231.0 million (2009: 212.1 million). On a constant currency basis revenues were broadly in line with the previous year. In Canada market share increased although the DVD market declined 5 per cent. year on year. DVD volumes were 2.5 per cent. lower although the impact on the business was mitigated by increased sales of higher margin Blu-ray discs and games. Vendor Managed Inventory revenues, where the company retains ownership and management of inventory in certain retail outlets, continued to create incremental opportunities and sales grew by more than 25 per cent. in this area. Revenues in the US business were also broadly in line with the previous year as increasing focus is being placed on growing sales in home video in partnership with the Group s Entertainment division. (b) Underlying EBITDA Underlying EBITDA segmental analysis for the years ended 31 March 2010 and 2009 000 2010 2009 Entertainment 26,538 15,711 Distribution 13,257 13,376 Other (922) (108) Eliminations & Group Costs (4,539) (3,723) Consolidated 34,334 25,256 Earnings before interest, tax, depreciation, amortisation, share-based payments and one-off items ( underlying EBITDA ) increased strongly, by 36 per cent. Adjusting for exchange translation benefit and prior year acquisitions, underlying EBITDA increased by 25 per cent. The Group s investment in content and programmes continued to increase and as a result earnings were depressed due to the accounting requirement to recognise the full cost of Print and Advertising ( P&A ) at the point it is incurred. P&A increased in the year from 40.2 million to 60.1 million. In the Entertainment division underlying EBITDA increased by 69 per cent. from 15.7 million to 26.5 million. In the Film business, on a constant currency basis, despite P&A spend increasing by 39 per cent. to 58.0 million, underlying EBITDA more than doubled from 7.7 million to 18.1 million. This increase mainly reflects the growth in number and success of film releases in the year. In the Television business underlying EBITDA was broadly flat despite the higher revenue, due mainly to the profile of shows delivered in the year and an increase in marketing and infrastructure costs to support delivery of the increased television pipeline. In the Distribution division underlying EBITDA was broadly maintained at 13.3 million (2009: 13.4 million). (c) Cost of sales Cost of sales increased by 27 per cent. from 270.1 million to 341.7 million. 42
No one-off items were allocated to cost of sales in 2010. In 2009 one-off items allocated to cost of sales were 13.2 million. Excluding one off items in the prior year, cost of sales increased by 33 per cent. mainly reflecting increased content amortisation and print and advertising as the business continues to grow and exploit its film and television catalogue. (d) (e) Gross profit Gross profit increased by 29.9 million to 102.4 million (2009: 72.5 million) mainly due to the increased scale of the business and absence of one-off items in cost of sales referred to in paragraph 6(c) above. Administrative expenses Administrative expenses decreased by 6 per cent. from 98.0 million to 91.9 million. One-off items relating to administrative expenses in 2010 were 1.6 million (2009: 16.5 million) and included 0.4 million of initial costs incurred as part of the graduation to the Main Market of the London Stock Exchange and proposed migration of the Group to Canada. Remaining one-off items comprise the loss on disposal of an investment and costs incurred in the year relating to completion of projects classified as one-off in the prior year including restructuring, abortive acquisition costs and rebranding. Excluding one-off items, administrative expenses in 2010 were 90.3 million compared to 81.5 million in 2009. The increase was in line with the expansion of the Group in the year. Ann I (9.2.2 ) (f) (g) Operating profit/(loss) Operating profit was 10.5 million compared to a loss in 2009 of 25.5 million. The movement from 2009 was primarily due to the absence of significant one-off items as discussed in paragraphs 6(c) and 6(e) above. Net finance charges Reported net finance charges decreased from 5.6 million to 3.6 million. A number of items impacted net finance charges, in particular the effects of buying back 74 per cent. of exchangeable notes at a discount in February 2010, which resulted in a one-off gain of 7.3 million. Other one-off items include movements in the fair value of financial instruments and, in the prior year, the impact of an extension to the maturity period of the Exchangeable Notes. Adjusting for these items net finance charges increased year on year from 7.1 million to 10.0 million. The increase is due mainly to higher debt balances following the increased investment in content and payments associated with acquisition of the Television businesses in September 2008. Other factors contributing to the higher charge include 0.8 million higher amortisation of deferred finance charges, due to a full year impact following the refinancing in September 2008, and the absence of 0.7 million foreign exchange gains that were recognised in the prior year. The weighted average interest cost was 6.3 per cent. compared to 7.1 per cent. in the prior year giving a cash interest cover of 6.0 times underlying EBITDA (2009: 6.3 times). (h) Taxation The tax charge for the year was 0.3 million (2009: 0.6 million credit) giving an effective tax rate of 4.7 per cent. compared to an effective tax rate of 1.9 per cent. in the previous year. The low effective rate arises mainly due to the one-off gain from the repurchase of Exchangeable Notes in the year. The rate is also distorted by the impact of non-deductible share-based payment charges. On an adjusted basis, excluding one-off items, amortisation of intangible assets, share-based payment charges and other net finance items, the effective tax rate was 20 per cent. (2009: 43
28 per cent.). This is lower than the average tax rates of the countries in which the Group operates due to benefits in some jurisdictions from utilising historic tax losses. The adjusted effective rate is anticipated to increase in future years as these losses are utilised. (i) Earnings/(loss) per share Reported profit after tax was 6.6 million compared to a loss in the prior year of 30.4 million reflecting the absence of significant one-off items in the year to 31 March 2010. Consequently the reported diluted earnings per share was 4.3 pence (2009: loss of 23.2 pence). On an adjusted basis profit after tax was 17.6 million, 48 per cent. ahead of the prior year. The adjusted diluted earnings per share was 11.5 pence (2009: 8.6 pence), up 34 per cent. The number of shares used in the earnings per share calculations includes the weighted impact of 19.5 million shares that were issued in February 2010 in connection with the repurchase of Exchangeable Notes (as discussed in paragraph 6(g) above). 6.3 Comparison of the financial results of the Group for the years ended 31 March 2009 and 31 March 2008 The following sets out the principal factors affecting the Group s results of operations during the twelve months ended 31 March 2009 compared with the twelve months ended 31 March 2008. Ann I (9.1, 9.2.2, 9.2.3 and 20.1) (a) Revenue Revenue segmental analysis for the years ended 31 March 2009 and 2008 2009 2008 000 External Internal Total External Internal Total Entertainment 119,593 37,630 157,223 47,361 26,527 73,888 Distribution 193,084 19,009 212,093 187,202 15,306 202,508 Other 29,966 29,966 29,812 29,812 Eliminations (56,639) (56,639) (41,833) (41,833) Consolidated 342,643 342,643 264,375 264,375 The Group s revenue to 31 March 2009 reflects the progress in the year with revenue increasing by 30 per cent. from 264.4 million to 342.6 million. The impact of exchange translation due to the weakening in Sterling contributed 36 million. Adjusting for acquisitions and on a constant currency basis, revenue was boosted by strong growth of 36 per cent. in the Film business, although in total reduced by 2.3 per cent. due to a 30 per cent. sales decline in the US music and distribution businesses. In the Entertainment division, Film revenue grew 123 per cent. to 118.4 million in 2009 (2008: 53.0 million). Adjusting for acquisitions in the previous year and on a constant currency basis revenue grew 36 per cent. Film revenue growth was driven by a strong schedule of over 110 theatrical releases during the year. 35.6 million was invested in content, up 12.5 million compared to 2008, to support the continued growth of the businesses. Revenues in the music business in 2009 declined 5.2 million, or 23 per cent. to 16.9 million. For the same period, based on constant currency, revenues declined 9.3 million or 35 per cent. It was a difficult year for the music business driven by the significant downturn in the wider US music market. The Television businesses were acquired in September 2008 and recorded revenues of 23.0 million following acquisition. On a full year basis, also adjusting for constant currency, Television revenues were 27.4 million (2008: 28.8 million) down 5 per cent. due to fewer but more profitably structured shows. The Distribution division revenues were down 5 per cent. to 212.1 million in 2009 (2008: 202.5 million). Using constant currencies, revenues decreased over the same period by 8 per cent. primarily reflecting the challenging US music market conditions. 44
(b) (c) Underlying EBITDA Underlying EBITDA segmental analysis for the years ended 31 March 2009 and 2008 000 2009 2008 Entertainment 15,711 9,220 Distribution 13,376 14,222 Other (108) (112) Eliminations & Group Costs (3,723) (4,710) Consolidated 25,256 18,620 Earnings before interest, tax, depreciation, amortisation, share based payments and one-off items ( underlying EBITDA ) increased strongly, by 36 per cent. to 25.3 million (2008: 18.6 million). Adjusting for acquisitions and 2.9 million of exchange translation benefit, underlying EBITDA fell by 12.2 per cent., mainly due to the downturn in the US businesses and increased content amortisation and P&A spend driven by more film releases. As the Group s investment in content and release activity experienced significant growth, earnings were depressed due to the accounting requirement to recognise the full cost of P&A at the point it is incurred, rather than in line with revenue recognition over the exploitation life of a movie. In the Entertainment division underlying EBITDA increased from 9.2 million to 15.7 million, up 71 per cent. Underlying EBITDA for Film in 2009 was 9.5 million, down 12 per cent. on 2008 ( 10.7 million) after adjusting for acquisitions and on a constant currency basis. This reflects increased P&A expenditure of 33.4 million (2008: 14.8 million) and higher content amortisation, driven by increased release activity, particularly in the UK and Canadian markets. Underlying EBITDA for Television, assuming the businesses had been acquired at the start of the prior year and on a constant currency basis, was up 33.0 per cent. in 2009 to 5.6 million (2008: 4.2 million) as a result of the business retaining a greater proportion of profit participation on the shows produced. In the Distribution division underlying EBITDA decreased from 14.2 million to 13.4 million although on a constant currency basis was down 18.8 per cent. primarily reflecting the challenging US music market conditions. (d) Cost of sales Cost of sales increased from 201.1 million to 270.1 million (34 per cent.). One-off items relating to cost of sales in 2009 were 13.2 million and comprised write-down of label advances ( 11.4 million) and write down of investment in content in relation to the receivership of Woolworths Group PLC ( 1.8 million). No one off items were allocated to cost of sales in 2008. Excluding one-off items cost of sales in 2009 were 256.9 million compared to 201.1 million in 2008, up 28 per cent. The increase mainly reflects the growth of the business following the acquisitions in the previous year. (e) (f) Gross profit Gross profit increased by 9.2 million to 72.5 million (2008: 63.3 million) mainly due to the increased scale of the business. Administrative expenses Administrative expenses increased from 64.8 million to 98.0 million, up 51 per cent. One-off items relating to administrative expenses in 2009 were 16.5 million (2008: 2.2 million). 2009 one-off items included impairment of goodwill on acquisition 45
( 9.9 million), rebranding costs ( 1.7 million), restructuring costs ( 4.2 million) and impairment of net irrecoverable trading receivables relating to the receivership of Woolworths Group plc ( 0.7 million). Excluding one-off items administrative expenses in 2009 were 81.5 million compared to 62.6 million in 2008. The increase is in line with the increased revenue in the period. (g) (h) (i) Operating loss Operating losses increased by 24.0 million from 1.5 million to 25.5 million primarily due to the increase in one-off items from 2.2 million to 29.7 million as discussed in paragraphs 6(d) and 6(f) above. Net finance charges Reported net finance charges decreased from 6.2 million in 2008 to 5.6 million in 2009. A number of items impacted net finance charges including movements in the fair value of financial instruments, one-off items relating to early settlement of financing facilities and, in the current year, the impact of an extension to the maturity period of the Exchangeable Notes. These items totalled a 1.4 million net charge in 2008 compared to a net 1.6 million credit in 2009. Excluding both these items and also the impact of exchange gains of 0.7 million (2008: losses of 0.8 million), the underlying net finance charges in 2009 were 7.8 million compared to 3.9 million in 2008, reflecting the increase in net borrowings following the acquisitions in the 2008 financial year. The weighted average interest cost was 7.1 per cent. compared to 7.6 per cent. in 2008. Taxation The tax credit for the year was 0.6 million (2008: 0.9 million charge) giving an effective rate of 1.9 per cent. compared to a negative effective rate of 11.5 per cent. in 2008. The low effective rate arises mainly due to unrecognised tax losses in certain jurisdictions in which the Group operates and is also distorted by the impact of non-deductible share-based payment charges and the write off of certain brought forward deferred tax assets. On an adjusted basis, excluding one-off items, amortisation of intangible assets, share-based payment charges and other net finance items, the effective rate was 28 per cent. (2008: 44 per cent.). (j) Loss per share Reported loss after tax increased from 8.6 million to 30.4 million due to the impact of oneoff items. Consequently the reported diluted loss per share was 23.2 pence (2008: 9.5 pence). Adjusting for one-off items, amortisation of acquired intangibles, share-based payment charges, financing net fair value movements, early settlement cost on refinancing, reset of Exchangeable Notes and associated tax effects profit after tax was 11.9 million or 65 per cent. ahead of 2008. The adjusted diluted earnings per share was 8.1 pence (2008: 7.2 pence), up 12.5 per cent. 6.4 Historical Cash Flow including acquisitions and capital expenditure (a) 2010 to 2009 Net cash and cash equivalents increased by 5.8 million during the year compared to a decrease of 6.8 million in 2009. Ann I (10.2) Cash inflows from operating activities at 85.2 million were significantly ahead of the previous year reflecting the improved underlying EBITDA and strong cash generation from the Group s investments made in the last three years. 46
Net cash used in investing activities increased to 82.5 million in 2010 from 59.4 million in 2009. The Group invested 74.7 million in content rights and television programmes in the year (2009: 47.8 million) and incurred cash costs in 2010 of 5.9 million relating to the acquisition of the Television businesses in the prior year. It is anticipated that investment in content rights and television programmes will continue to increase in the new financial year. Purchases of property, plant and equipment in 2010 were 0.9 million compared to 1.7 million in 2009. Net cash inflows from financing activities were 3.1 million in 2010 compared to 16.8 million in 2009. The inflows in 2010 included 10.0 million proceeds from a share issue. (b) 2009 to 2008 Net cash and cash equivalents decreased by 6.8 million in 2009 compared to an increase of 16.5 million in 2008. Cash inflows from operating activities increased to 35.9 million in 2009 from 28.7 million in 2008 due mainly to the increase in underlying EBITDA in the year. Net cash used in investing activities reduced to 59.4 million in 2009 from 178.8 million in 2008. The period to 31 March 2008 included 159.9 million costs of acquiring subsidiaries, which included the purchase of the Entertainment One Income Fund, Contender Entertainment Group, Seville Entertainment Inc. and RCV Entertainment BV. In 2009 costs of acquiring subsidiaries were 8.9 million and comprised the acquisition of the Television businesses: Barna-Alper Productions, Blueprint Entertainment (including its subsidiary Oasis International) and Maximum. Excluding costs of acquiring subsidiaries net cash used in investing activities increased from 18.9 million in 2008 to 50.5 million due to increased investment in content and television programmes. Purchases of property, plant and equipment in 2009 were 1.7 million, the same as in 2008. Net cash inflows from financing activities were 16.8 million in 2009 compared to 166.6 million in 2008. The inflows in 2008 mainly represented the proceeds from a share issue and financing facilities drawn down to fund the acquisitions. 7. Liquidity and capital resources The Group manages its exposure to liquidity risk by regularly reviewing the long and short term cash flow projections for the business against facilities and other resources available to it. Regular reports are made assessing current facilities and debt and in the shorter term, weekly and monthly reports are circulated showing current drawdown versus available headroom. Ann I (10.1, 10.3, 10.4 and 20.1) The Group s primary financing arrangements are a credit and guaranty agreement entered into on 19 September 2008 pursuant to which a syndicate of lenders, including JPMorgan Chase Bank, N.A., Barclays Bank PLC, Bank of America, N.A., The Toronto Dominion Bank, Royal Bank of Canada and Alliance & Leicester Commercial Finance PLC, agreed to provide a senior secured revolving credit facility in the aggregate principal amount of $150 million, which may be increased by up to $25 million in certain circumstances, subject to a borrowing base limit. The credit facility was made available to refinance existing indebtedness, to finance the acquisition of film, television and music libraries (directly or by way of corporate acquisition) and for general working capital purposes. Advances under the credit facility may be made in US dollars, Canadian dollars, Euro or pounds sterling and bear interest at the prevailing prime rate, federal funds effective rate, US dollar LIBOR rate, Sterling LIBOR rate or EURIBOR rate, as applicable, plus, in each case, the applicable margin and the applicable cost factor to those base rates. Letters of credit and bankers acceptances are also available under the credit facility. The credit facility is guaranteed by Entertainment One (Cayman) and its subsidiaries) and is secured against substantially all of the assets of Entertainment One (Cayman) and such subsidiaries. The credit facility matures on 18 September 2012 with no scheduled repayments of principal required prior to maturity. On 30 December 2010, the total Canadian Dollar commitment shall be reduced by C$11.5 million. On 29 December 2011, the total US Dollar commitment shall be reduced by $1.0 million, 47
the total sterling commitment shall be reduced by 0.6 million, the total Euro commitment shall be reduced by 0.7 million and the total Canadian dollar commitment shall be reduced by C$13.9 million. The borrowers have agreed to pay a quarterly commitment fee to each lender based on the average amount by which such lender s commitment exceeded its share of the letters of credit, bankers acceptances and loans outstanding during the preceding quarter. On 22 June 2009 the Group re-denominated its $ senior credit facility into local currencies and also expanded its facility by $7.5 million. Subsequently the Group further expanded its facility by $17.5 million, and First California Bank and US Bank joined the syndicate. As at 31 March 2010 the facility in local currencies was $36.5 million, 32.6million, C$80.7 million and 10.5 million. Using exchange rates at 31 March 2010 this translated to an overall facility of $180 million. The credit facility is subject to customary terms and conditions, including restrictions on incurring indebtedness, granting liens or guarantees, making investments, selling assets, and making capital expenditures without the prior consent of the lenders. The credit facility is also subject to the maintenance of certain financial covenants (excluding the Television production businesses), including minimum consolidated net worth, minimum fixed charges coverage ratio, a maximum ratio of net debt under the credit facility to consolidated EBITDA and restrictions on capital expenditure and overheads. In addition the Facility also includes a borrowing base, which restricts the funds available to draw down under the Facility to a sum calculated based on the level of certain cash, inventory and receivables balances and a proportion of the Group s independent annual library valuation. In addition to its main credit facility the Group funds its television productions through Interim Production Financing. Interim Production Financing is independent of the Group s senior credit facility and is not secured over all of the Group s assets. It is attributable to the television production companies within the Television business and represents shorter-term working capital financing relating to specific television production projects. Facilities are obtained from a number of lenders including Royal Bank of Canada, National Bank of Canada, First California Bank and Bank Leumi. These facilities are secured on a production-by-production basis over future revenue commitments. At 31 March 2010 approved loans under Interim Production Financing arrangements were approximately C$60 million. On 9 January 2008 E-One UK Ltd, a UK subsidiary of Entertainment One (Cayman), issued 19,600,000 aggregated principal guaranteed senior subordinated Exchangeable Notes maturing September 2013. The Exchangeable Notes attract an accrued interest of 10 per cent. per annum payable on maturity. The 5,100,000 Exchangeable Notes that are not held intra-group are exchangeable for 7.5 million Common Shares at 0.68 per Common Share. At 18 June 2010, (being the latest practicable date prior to the publication of this document), the Group had drawn down $126 million under the primary credit facility and $39 million under its Interim Production Financing arrangements. 8. Capitalisation and indebtedness of the Group The following table shows the capitalisation of the Group and the indebtedness of the Group as at 31 March 2010: 000 As at 31 March 2010 Total Current Debt Secured Interim Production Financing 18.1 Secured Bank overdrafts 0.3 Total Non-Current Debt Secured Senior Debt Facility 78.8 Secured Interim Production Financing 5.9 Unsecured Exchangeable Notes 5.6 Total gross indebtedness 108.7 Ann 1 (10.3) Ann III (3.2) 48
000 As at 31 March 2010 Total shareholders equity: Share capital 0.8 Share premium account 138.3 Other Reserves 52.5 Retained earnings (19.8) Own Shares (7.8) Total capitalisation 164.0 Secured Senior debt facility 78.8 Interim production financing 24.0 Bank overdrafts 0.3 Unsecured Cash (18.6) Exchangeable Notes 5.6 Net current financial indebtedness 90.1 9. Qualitative disclosures about financial risks The Group s financial risk management objectives consist of identifying and monitoring those risks which have an adverse impact on the value of the Group s financial assets and liabilities or on reported profitability and on the cash flows of the Group. Financial risk management The Board considers that the main risks arising from the Group s financial instruments are interest rate risk, foreign currency risk, credit risk, liquidity risk and covenant risk. The use of financial derivatives is governed by the Group s policies approved by the Board. The Group does not use derivative financial instruments for speculative purposes. Ann I (10.3) Interest rate risk The Group has an exposure to interest rate risk arising principally from changes in US Dollar, Canadian Dollar, Sterling and Euro interest rates. The exposure to fluctuating interest rates is managed by capping portions of debt using interest rate collars and fixing portions of debt using interest rate swaps, which aims to optimise net finance expense and reduce excessive volatility in reported earnings. As at March 2010 the longest term of any debt held by the Group is the Exchangeable Notes until 2013. Foreign exchange risk The Group s operating activities expose it to the financial risks of changes in foreign currency exchange rates. These risks comprise translation risk, resulting from the requirement to present the results from different territories in the Group s reporting currency, and transactional risk. Transactional risk arises where business units enter into contracts denominated in a currency other than their local reporting currency. These include minimum guarantee payments to film studios, which are often denominated in US Dollars. The Group uses foreign exchange forward contracts when appropriate, and otherwise uses natural hedging methods where possible, to minimise exposure in these areas. Credit risk Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The Group controls credit risk by entering into financial instruments only with highly credit-rated counterparties. The Group has no significant concentrations of credit risks, with exposure spread over a large number of counterparties and customers. 49
Liquidity risk In order to maintain liquidity to ensure that sufficient funds are available for ongoing operations and future developments, the Group uses a mixture of long-term and short-term debt finance. As at 31 March 2010 the Group had 18.6 million of cash and net debt of 86.1 million. The Group s policy throughout the period has been to minimise risk by placing funds in low risk cash deposits but also to maximise the return on funds placed on deposit. The Group meets its day to day working capital requirements and funds its investment in content though a multi currency C$80.7 million, 10.5 million, 32.6 million and $36.5 million capped revolving credit facility (the Facility ) which matures in September 2012 and is secured on assets in the Group. Under the terms of the Facility the Group is able to draw down in the local currencies of its operating businesses. The amounts drawn down as at 31 March 2010 were C$58.0 million, 10.4 million, 16.5 million and $23.1 million. Covenant risk The Group must comply with a number of financial covenants as part of its Facility. The covenants under the Facility include, inter alia, net debt/underlying EBITDA, fixed interest cover and net worth. The Group monitors actual and forecast compliance with these covenants and reports regularly to its bankers. As at the date of this document, the Group has operated within its covenants and at 31 March 2010 had undrawn amounts of 39.8 million under the Facility. The directors consider that should the covenants be adversely impacted by the risks set out above there are a number of mitigating actions which would enable it to continue in compliance with the terms of its facility. 10. Critical accounting policies Critical accounting estimates and judgments are those that require the application of management s most challenging, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sufficiently sensitive to result in materially different results under different assumptions and conditions. The areas requiring the use of estimates and critical judgements that may significantly impact the Group s earnings and financial position are detailed further below. 10.1 Intangible assets The Group recognises intangible assets acquired as part of business combinations at fair value at the date of acquisition. The determination of these fair values is based upon management s judgement and includes assumptions on the timing and amount of future incremental cash flows generated by the assets and selection of an appropriate cost of capital. Furthermore, management must estimate the expected useful lives of intangible assets and charge amortisation on these assets accordingly. 10.2 Impairment of goodwill The Group is required to test, at least annually, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a suitable discount rate in order to calculate the present value of these cash flows. Actual outcomes could vary. 10.3 Investment in content rights The Group capitalises investment in content rights and releases to cost of sales on a revenue forecast basis. Amounts capitalised are reviewed at least quarterly and any that appear to be irrecoverable from future revenues are written off to cost of sales during the period the loss becomes evident. The estimate of future revenues depends on management judgement and assumptions based on the pattern of historical revenue streams and the remaining life of each contract. 50
10.4 Share-based payments The charge for share-based payments is determined based on the fair value of awards at the date of grant by use of the Binomial model which require judgements to be made regarding expected volatility, dividend yield, risk free rates of return and expected option lives. 10.5 Deferred tax Deferred tax assets require management s judgement in determining the amounts to be recognised. In particular, judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration to the timing and level of future taxable income. 10.6 Income tax The actual tax on the result for the year is determined according to complex tax laws and regulations. Where the effect of these laws and regulations is unclear, estimates are used in determining the liability for tax to be paid on past profits which are recognised in the financial statements. The Group considers the estimates, assumptions and judgements to be reasonable but this can involve complex issues which may take a number of years to resolve. The final determination of prior year tax liabilities could be different from the estimates reflected in the financial statements. 51
PART IV PART A: HISTORICAL FINANCIAL INFORMATION ON THE COMPANY Financial Information on Entertainment One Ltd. Balance Sheet The Company was incorporated on 14 April 2010. As at 15 June 2010 the balance sheet of the Company was as follows: Ann I (3.1, 3.2, 20 and 25) Ann III (10.2) Notes Current assets Cash and cash equivalents 6 Current Liabilities Other financial liabilities 4 (6) Equity Share capital 4 6 Other reserves 4 (6) 1. General information Entertainment One Ltd., is a company incorporated in Canada under the CBCA. The address of the registered office is 175 Bloor Street East, Suite 1400, North Tower, Toronto, Ontario, Canada M4W 3R8. Entertainment One Ltd. has not traded since incorporation. These financial statements are presented in pounds sterling. 2. Accounting policies The financial statements have been presented in accordance with applicable law and International Financial Reporting Standards (IFRS). The financial statements have been prepared in accordance with the historical cost convention. Cash and cash equivalents comprise cash in hand. 3. Basis of preparation The Company has not commenced business operations as of the date of these financial statements and therefore has not presented a profit and loss account, cash flow statement or statement of total recognised gains and losses. The balance sheet has been prepared in accordance with the historical cost convention. 4. Share capital and changes in equity The Company was incorporated on 14 April 2010 with an authorised share capital of an unlimited number of Common Shares of no par value. At incorporation none of the Common Shares were issued or outstanding. On 21 May 2010 the Company issued 10 common shares of no par value for C$1.00 each to Mark Trachuk, a partner of Osler, Hoskin & Harcourt LLP, the Company s Canadian lawyers. On 21 May 2010, the Company and Mark Trachuk entered into an agreement pursuant to which the Company granted Mr Trachuk a put right and Mr Trachuk granted the Company a call right in respect of the 10 Common Shares issued to Mr Trachuk on 21 May 2010, in each case exercisable on the effective date of 52
the scheme of arrangement. Immediately prior to completion of the scheme of arrangement on 14 July 2010, the Company intends to exercise its call right and require Mr Trachuk to sell his 10 Common Shares to the Company for C$10. The Company recorded a liability reflecting its intention to repurchase the 10 Common Shares. As this is a transaction with a shareholder the corresponding entry has been reflected in other reserves. On 21 May 2010, the articles of the Company were amended to authorise an unlimited number of preferred variable voting shares of no par value. On 17 June 2010 the Company issued 100 Preferred Variable Voting Shares of no par value for C$0.01 each. As set out in note 8, on 14 July 2010 the Company will issue 167,547,358 Common Shares of no par value. 5. Auditors The auditors to the Company are Deloitte LLP, 2 New Street Square, London, EC4A 3BZ. There was no remuneration paid to the auditors. 6. Staff costs There were no staff employed and staff costs were nil. 7. Related party transactions There were no related party transactions. 8. Subsequent events Pursuant to a scheme of arrangement in the Cayman Islands, on 14 July 2010 the Company will acquire the entire issued ordinary share capital of the Cayman incorporated company Entertainment One Ltd., comprising 151,926,963 ordinary shares in exchange for the issuance of 151,926,963 common shares. Immediately following completion of the scheme of arrangement, the company will acquire 14,468,348 exchangeable shares in the capital of 6972501 Canada Inc. and 1,000,000 Maximum Deferred Exchangeable Shares in exchange for the issuance of 15,620,395 common shares in the Company. 53
PART B: ACCOUNTANTS REPORT ON THE COMPANY The Board of Directors on behalf of Entertainment One Ltd. 175 Bloor Street East Suite 1400 North Tower Toronto Ontario Canada M4W 3R8 21 June 2010 Dear Sirs, Entertainment One Ltd. We report on the financial information set out Part A of Part IV (Historical Financial Information) of the prospectus dated 21 June 2010 of Entertainment One Ltd. (the Company ) (the Prospectus ). This financial information has been prepared for inclusion in the Prospectus on the basis of the accounting policies set out in Note 2 to the financial information. This report is required by Annex I item 20.1 of Commission Regulation (EC) No 809/2004 (the Prospectus Directive Regulation ) and is given for the purpose of complying with that requirement and for no other purpose. Responsibilities The Directors are responsible for preparing the financial information on the basis of preparation set out in Note 2 and Note 3 to the financial information and in accordance with IFRS as adopted by the EU. It is our responsibility to form an opinion as to whether the financial information gives a true and fair view, for the purposes of the Prospectus, and to report our opinion to you. Save for any responsibility arising under Prospectus Rule 5.5.3R(2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in accordance with this report or our statement, required by and given solely for the purposes of complying with Annex I item 23.1 of the Prospectus Directive Regulation, consenting to its inclusion in the Prospectus. Basis of opinion We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of significant estimates and judgments made by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the entity s circumstances, consistently applied and adequately disclosed. We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error. Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in jurisdictions outside the United Kingdom, including the United States of America, and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices. 54
Opinion In our opinion, the financial information gives, for the purposes of the Prospectus, a true and fair view of the state of affairs of the Company as at the date stated and of its changes in equity for the period then ended in accordance with the basis of preparation set out in Note 2 and Note 3 and in accordance with IFRS as adopted by the EU. Declaration For the purposes of Prospectus Rule 5.5.3R(2)(f), we are responsible for this report as part of the Prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the Prospectus in compliance with Annex I item 1.2 and Annex III item 1.2 of the Prospectus Directive Regulation. Yours faithfully Deloitte LLP Chartered Accountants Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ( DTT ), a Swiss Verein, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTT and its member firms. 55
PART C: CONSOLIDATED FINANCIAL INFORMATION ON THE GROUP FOR THE YEARS ENDED 31 MARCH 2010, 2009 AND 2008 SECTION A: YEAR ENDED 31 MARCH 2010 Entertainment One Ltd. Annual Report & Accounts 2010 Entertainment One Ltd. is a leading independent international entertainment group specialising in the acquisition, production and distribution of film and television content across all media. Entertainment One s 2010 hits: 123 theatrical releases in the year positions the Film business as number one or number two independent in its core markets Television production and Kids businesses maintain growth momentum with 213 half hours of programming delivered in 2010 International partnerships expand global Film and TV distribution network Significantly improved debt leverage as net debt reduced Step up to the Main Market of the London Stock Exchange anticipated in July 2010 Financial highlights Revenue up 30 per cent. (2009: 342.6m) 444.2m Underlying EBITDA up 36 per cent.* (2009: 25.3m) 34.3m Film and TV Investment up 56 per cent. (2009: 47.8m) 74.7m Operating cash flow up 137 per cent. (2009: 35.9m) 85.2m * Underlying EBITDA refers to operating profit/(loss) excluding one-off items, share-based payment charges, depreciation and amortisation of intangible assets. 56
CONTENTS Page OVERVIEW 1 BUSINESS & FINANCIAL REVIEW 8 GOVERNANCE 24 DIRECTORS 26 DIRECTORS REPORT 28 DIRECTORS REMUNERATION REPORT 30 CORPORATE GOVERNANCE 32 FINANCIAL STATEMENTS 34 COMPANY INFORMATION 72 57
OVERVIEW Entertainment One focuses on its strengths in film and television, where it is recognised as a leader in the independent distribution sector. Through successful relationships with its industry partners the Group continues to build its position as a leading independent in its core markets. 20,000 Film & television titles in library 2,400 Television library hours $220m Library valuation Entertainment Film Entertainment One Film acquires rights to distribute films across multiple territories including Canada, the UK, the Benelux and the United States. Rights acquired are exploited across all media windows including: Theatrical distribution (box office) Home entertainment (DVD/Blu-ray, rental and retail) Television (broadcasters) Digital (downloading/video on demand) Ownership of content rights over a period of up to 25 years enables Entertainment One to maximise financial return through its growing library of 20,000 film and television titles. Entertainment One s production partners include the large Hollywood independent studios such as Summit Entertainment, River Road Entertainment, Lakeshore Entertainment and Morgan Creek. Market position With 123 theatrical releases in the year, the Film division has confirmed its position as a leading multi territory distribution partner for independent studios and offers film producers an alternative to the major studios. This position enables Entertainment One to build competitive advantage in the market and deliver improved cost efficiency at a lower risk. Growth opportunity Moving forward, the business will increase the number of films it distributes by enhancing relationships with current production partners as well as growing the list of independent producers from which it acquires film rights. While expanding on established capabilities in its current markets, the business will also look to further increase its multi-territory distribution infrastructure which has recently been extended to include France, Australia and New Zealand. Television Entertainment One Television is a leading production, international sales, licensing and merchandising business operating in Canada and the UK. In Canada, the business sells and distributes both its own and third party productions to over 500 broadcasters in 150 countries, including the major U.S. and Canadian networks and international pay 58
TV channels. It typically controls the worldwide rights across all distribution channels to all of its productions. Through federal funding and other incentive structures, the Canadian production financing environment allows the business to produce premium content across diversified genres and formats whilst significantly reducing Entertainment One s capital at risk. In the UK, Entertainment One Kids creates, produces and distributes children s entertainment with broadcasting partners including Nick Jr. and Channel 5, across 180 territories. Through its dedicated Licensing and Merchandising team the business maximizes the benefits from owning Kids properties. Market position The Television business has established itself as the number one proprietary Canadian TV producer, delivering high profile programmes into the U.S., Canadian and international markets. The Kids division includes the number one girls pre-school property in the UK, Peppa Pig, and is a recognised market leader in the UK. Growth opportunity With its established reach into both the U.S. and international broadcast markets plus support from Canadian financing incentives, the Group s television business is well positioned to drive long-term value through expansion of its programming slate across multiple genres and formats. Kids will leverage its success to date to expand the number of Kids properties and extend its reach into other territories. Distribution The Distribution division delivers the Group s own and third party content through both physical and digital channels, to over 4,000 retail partners through its extensive network across Canada and the U.S. The division provides distribution services to a wide range of content producers, including the major Hollywood studios. Market position Entertainment One s Distribution division is the largest wholesaler of home entertainment product in Canada and the largest independent distributor for video and music in the U.S. Growth opportunity The division will drive future growth through expanding its long standing relationships with the industry s largest producers and retailers which have been built over the past 25 years. 59
SPOTLIGHT ON FILM Entertainment One Film delivered a strong performance in the year with a total of 123 releases including The Twilight Saga: New Moon, a film that set numerous new box office records in Canada and the UK. Strategic focus Entertainment One Film has three core areas of focus: to increase the number of films distributed from independent producers and through output deals; to use its extensive experience to expand into new territories through partnerships and acquisitions; and to grow its digital business in line with the development of the market. Film Slate There is a strong pipeline of over 130 theatrical box office releases slated for the coming year including The Twilight Saga: Eclipse in June. Other prominent releases include; Fair Game (starring Sean Penn and Naomi Watts), Letters to Juliet (Amanda Seyfried, Gael Garcia Bernal, and Vanessa Redgrave), The Joneses (Demi Moore and David Duchovny), Furry Vengeance (Brendan Fraser and Brooke Shields), Tree of Life (Brad Pitt and Sean Penn) and Red (Bruce Willis, Morgan Freeman and Helen Mirren). Key Performance Indicators Theatrical Releases 123 Investment in Content 51m Market The film market grew in 2009 to over US$107 billion and has shown consistent growth over the past five years. It is forecast to continue to increase in size to over US$114 billion by 2014. It is estimated that independent film distributors account for approximately 28 per cent. of the market with the major studios making up the balance. Over the next five years there is forecast to be a swing away from the established home entertainment channel of DVD with digital developments driving growth in the box office, downloading and video on demand. Well financed independents distributors such as Entertainment One continue to see a strong pipeline of quality commercial films from Hollywood producers despite the recent general economic challenges. Digital Digital is a key part of Group strategy and Entertainment One embraces the opportunity to exploit our film content through digital channels Digital represents a growing segment of the Group s revenues, offering a low cost model to improve margins The Group operates a significant digital infrastructure 2010 saw Entertainment One sign the first independent multi-territory deal with itunes 60
SPOTLIGHT ON TV Entertainment One Television grew revenues over the year with 213 half hours of production delivered to major U.S. and Canadian networks and International broadcasters. Strategic focus Entertainment One Television is focused on building its production library, developing further partnerships with both producers and broadcasters and diversifying its production across multiple genres and formats, including an emphasis on the Kids business. In addition it will seek to take advantage of opportunities to leverage synergies across the Group. Television Production Slate The Television business is focused on increasing its slate with forthcoming productions including Call Me Fitz (starring Jason Priestley) and Haven based on a novella by Stephen King. Following successful pilots, recent commissions include series of Men With Brooms and Skins. Further developments continue to be pursued including a one hour drama series based on John Grisham s novel The Firm. Television Production Lifecycle Typical Production Financing in Canada Key Performance Indicators Production half hours delivered 213 Investment in Programmes 24m Market The global market for television subscriptions and license fees is worth in excess of U.S. $150 billion annually. Broadcasters use these revenues to commission new productions. The benefit of the Canadian tax credit regime enables Entertainment One to remain competitive in delivering high quality content while maintaining worldwide rights ownership in perpetuity. Kids TV Entertainment One Television has an established Kids business in the UK which is anchored by the country s number one girls pre-school property Peppa Pig. The unit performed well through the continued success of both Peppa Pig and Ben & Holly s Little Kingdom. During the year the addition of the distribution rights to the Amberwood catalogue which include the properties The Secret World of Benjamin Bear and Rob the Robot help further expand the Kids business reach with Broadcasters The licensing and merchandising unit is dedicated to securing and driving retail opportunities for the Group s proprietary brands. The unit generated over 100 million of retail sales in 2009 through its licensing and merchandising agreements. Kids is focused on growth through building new properties in partnership with broadcasters and will look to drive the development of its existing properties through both new territory sales and additional Licensing and Merchandising deals. 61
BUSINESS PERFORMANCE AND FINANCIAL REVIEW, YEAR ENDED 31 MARCH 2010 In just three years since listing Entertainment One has increased revenues by 68 per cent. and more than trebled underlying ebitda through a strategy of acquisition and content investment in film and television Darren Throop Chief Executive Officer OVERVIEW The financial year to 31 March 2010 saw the Group s content investment strategy delivering strong earnings growth and positive free cash flow. Since listing on AIM in 2007 the Group has invested 140 million in content rights, transforming the financial profile of the Group with Film and Television now representing 50 per cent. of revenue and 68 per cent. of underlying EBITDA in the year to 31 March 2010. Entertainment One s Film business success continued with 123 theatrical releases including The Imaginarium of Dr. Parnassus, Astroboy and The Twilight Saga: New Moon which delivered a recordbreaking box office performance on its opening weekend. The business is now established as the number one or number two independent distributor in each of its three core territories. The Group also continued to develop its footprint, expanding into Australia, New Zealand and France through partnership deals with local independent distributors, extending the Group s market reach for its growing catalogue. The continued investment in content rights helped underpin the Group s independent library valuation which increased from US$175 million to US$220 million. Library revenues represented 28 per cent. of Film revenues in the year to 31 March 2010. The Television business continued to expand both its production slate and the scale of its productions delivering 213 half hours of programming including the new network series Rookie Blue and The Bridge. The business continues to win new commissions including second series of Call Me Fitz and Hung while new drama series Haven, based on a novella by Stephen King, is expected to premiere in the US and Canada in July 2010. This strong pipeline will help underpin future success in the international sales markets. Within Television, the Kids business had another strong year. Peppa Pig is now the number one girls preschool property in the UK and has generated over 100 million of retail sales through its merchandising and licensing agreements. In addition Ben & Holly s Little Kingdom, which launched on Nick Jr in April 2009, won a BAFTA for Best Pre-School Animation and is already being broadcast in more than 70 countries. Digital continues to represent a growing part of the business, generating almost 20 million in revenues in the year to 31 March 2010. The Group continues to embrace the exciting opportunities this channel to market has to offer and during the year enhanced its service infrastructure and signed the first multi-territory independent film distributor deal with itunes. These initiatives provide a solid base from which the business will benefit as this segment of the market grows. The Distribution business in North America performed well. The Canadian operation continues to win new business and increase market share, while the US business grew through increased video and digital volume. During the year the Group extended its financing facility and at 31 March 2010 (based on prevailing exchange rates) had facilities available of US$180 million with US$60 million of headroom on its drawdown position at the year end. In addition in January 2010 the Company raised 10.3 million of equity to repurchase 74 per cent. of its exchangeable notes debt at a significant discount for 9.0 million. As a result of the repurchase and the positive free cash flow, adjusted net debt was down year on year resulting in a reduction in adjusted net debt leverage to 1.8 times underlying EBITDA (2009: 3.2 times). 62
In March the Company announced the proposed move of the Group s listing from AIM to the Main Market of the London Stock Exchange and expects this to complete during July 2010. At the same time the Group plans to simplify the corporate structure, and re-domicile to Canada from the Cayman Islands. The Directors believe that these steps will give the Group a higher profile, increase liquidity and enhance the Group s reach to a wider range of investors, providing a platform for future growth and improved shareholder value. OUTLOOK Looking forward, the Group remains optimistic about its expected performance in the forthcoming year. The Film business has a strong slate of releases planned, and the Television business continues to grow its programme pipeline and successfully build the profile of the Group internationally. Distribution continues to perform to plan. Over the last three years the Group has established itself as a leading independent entertainment content and distribution business and continues to target corporate acquisition opportunities and partnerships to extend its operations while reviewing opportunities for consolidation in existing markets. STRATEGY The Group s strategy is based on the ownership and control of entertainment rights for exploitation across all media channels. It is the Group s intention to continue to pursue its strategy through investing in organic growth and seeking opportunities to increase its scale through corporate activity. The Group s Film business offers independent film producers an alternative to the major studios model, while enabling Entertainment One to build competitive advantage in the market and deliver improved cost efficiency at a lower risk. With a large portfolio of theatrical releases each year the Group manages the risk associated with any one title. Moving forward, the business will grow the number of films it distributes by enhancing relationships with current production partners as well as expanding the list of independent producers from which it acquires film rights. While leveraging its established capabilities in its current markets, the business will also look to expand its multi-territory distribution infrastructure. Television diversifies the Group s revenue across the spectrum of filmed entertainment. With established reach into the U.S. and international broadcast markets, the Group s Television business is well positioned to drive long-term value from original programming across multiple genres. It typically controls the worldwide rights, across all platforms, to all of its productions. In Canada and the U.S., the Distribution division delivers physical and digital content to more than 4,000 retail partners. Alongside leveraging this network to market the Group s own library of content, the business provides third-party distribution services to a wide range of content producers including the major Hollywood studios. CORE MARKETS The main markets that impact on the Group s businesses are Film and Television. Both markets continue to develop with a positive outlook. Film Market The Film market is split into three key segments: box office, home entertainment (including home video and digital) and television. In 2009, despite the global economic climate, the market increased by just over 1 per cent. to US $107 billion with strong box office performance and growth in digital channels offsetting a modest decline in home video and television. The overall market is expected to continue to grow over the next three years. Global box office had a record year in 2009, generating revenues of US$29.7 billion, up almost 6 per cent. on the prior year. This trend was mirrored in the key markets in which the Group operates. Canada was up 6 per cent. year on year, with the UK and Benelux up 5 per cent. and 7 per cent. respectively. The performance of an individual title relies not only upon the health of the overall market but also on the quality 63
of the product and its consumer acceptance. There is, however, a strong relationship between the box office success of a title and its future sales in the other distribution channels. Entertainment One s share of box office in its core markets positioned the Group as either number one or number two in each territory among independent distributors. Box office revenues are expected to continue to grow, supported by an increasing number of digital screens in cinemas and the continued development of 3D. The home entertainment market comprises physical media such as DVD and Blu-ray discs as well as digital channels including internet downloads and video on demand. Success in this channel is driven by the quality of product, consumer acceptance and box office performance (where a title has previously been released theatrically). The home entertainment market continues to represent the largest proportion of a film s revenues over the life of a title and as such the dynamics of this segment of the market are a key driver of the performance of the Group. The global home entertainment market was worth US$55.1 billion in 2009 compared to US$54.4 billion in 2008, with strong growth in Blu-ray and digital broadly offsetting a 2.8 per cent. decline in the traditional DVD market. This trend is predicted to continue with the overall market forecast to remain broadly level over the next few years with a similar profile in the countries in which the Group operates. Television Market The Television market is influenced heavily by television broadcasters who derive their revenues from advertising and also directly from consumers through license fees or subscriptions. These revenues flow into the industry as broadcasters provide direct financing for new television productions and license content from independent producers and distributors. The global economic downturn has had an impact on the television industry across the globe, as advertising revenues have fallen. This has resulted in cuts to broadcaster budgets for the funding of new productions and the acquisition of content from distributors. There are recent signs of recovery in advertising revenues and as a result broadcasters are expected to increase expenditure in the future. The Group s television production business in Canada continues to benefit from a robust production financing environment supported by Government led financing initiatives. This allows the business to continue to deliver high quality content while also maintaining the rights to the content in perpetuity. This has enabled the Group to expand its slate of productions with the major US networks, at a time when the sector has been negatively impacted by an overall market decline of 4 per cent. in 2009. The Television market is forecast to return to growth over the next five years. 64
SUMMARY FINANCIAL PERFORMANCE The Group has reported another year of strong growth driven by the increased investment in film and television content over the last two years. Revenue increased by 30 per cent. from 342.6 million to 444.2 million. Adjusting for the effects of currency and prior year acquisitions, revenue increased by 18 per cent. Reported profit before tax was 6.9 million compared to a loss of 31.0 million in the prior year. Excluding depreciation, amortisation, share-based payments and one-off items, adjusted profit before tax was 22.1 million compared to 16.4 million in 2009 and was driven mainly by the growth of the Film business in the year to 31 March 2010. Earnings before interest, tax, depreciation, amortisation, share-based payments and one-off items ( underlying EBITDA ) increased strongly, by 36 per cent. Adjusting for exchange translation benefit and prior year acquisitions, underlying EBITDA increased by 25 per cent. The Group s investment in content and programmes continued to increase and as a result earnings were depressed due to the accounting requirement to recognise the full cost of Print and Advertising ( P&A ) at the point it is incurred. P&A increased in the year from 40.2 million to 60.1 million. 2010 2009 2009 Proforma, Reported Reported Constant Currency (audited) (audited) (unaudited)* 000 000 % 000 % Revenue 444,172 342,643 29.6% 375,642 18.2% Underlying EBITDA 34,334 25,256 35.9% 27,579 24.5% Print and Advertising 60,124 40,220 49.5% 43,221 39.1% Investment in content & programmes 74,663 47,838 56.1% 63,848 16.9% * Unless otherwise stated, in order to provide like for like comparisons, the discussion of results and analysis of comparisons to the prior year are on an unaudited constant currency and proforma basis. For the purposes of this analysis constant currencies have been calculated by retranslating the comparative figures using weighted average exchange rates for the year to 31 March 2010. The proforma information used for the prior year includes the full year results of the Television businesses that were acquired in September 2008. DIVISIONAL REVIEWS The Group is split into two divisions: Entertainment and Distribution. ENTERTAINMENT The Entertainment division comprises the Film and Television businesses. Film Film comprises the Group s film operations in the UK, Canada, the US and Benelux. These businesses acquire and exploit film content through all major channels (theatrical, home entertainment, television and digital). The US film business focuses mainly on home entertainment, including digital. Revenue increased by 52 per cent. in the year to 208 million due in particular to growth in the UK and in Canada. Despite P&A spend increasing by 39 per cent. to 58.0 million underlying EBITDA more than doubled from 7.7 million to 18.1 million. Investment in content was 50.6 million as the Group continues to invest in future releases to drive growth. 2010 2009 2009 Reported Reported Constant Currency (audited) (audited) (unaudited) Film* 000 000 % 000 % Revenue 208,112 127,333 63.4% 136,711 52.2% Underlying EBITDA 18,104 7,054 156.6% 7,721 134.5% Print and Advertising 57,994 39,059 48.5% 41,810 38.7% Investment in content 50,607 35,918 40.9% 37,820 33.8% * Results of the UK Kids business are now included within Television and prior year figures in the above table have been adjusted accordingly. 65
The Group continues to expand its multi-territory slate and released a number of films in multiple territories in 2009/10. These included Sorority Row, Bandslam, Astroboy, The Imaginarium of Dr. Parnassus and Remember Me. In 2010/11 the multi-territory slate is expected to continue to grow with cross-border releases of titles including family movie Furry Vengeance (starring Brendan Fraser and Brooke Shields), romantic comedy Letters to Juliet (Amanda Seyfried, Gael Garcia Bernal and Vanessa Redgrave) and action thriller Red (Bruce Willis, Morgan Freeman and Helen Mirren). The business also expanded its international footprint allowing it to release content under the Group s label in Australia, New Zealand and, just after the year end, in France following agreements with local distributors. Following on from the success of Twilight in the previous financial year, November 2009 saw the release of the second film in the Twilight Saga series. The Twilight Saga: New Moon was one of the top 10 grossing films globally in 2009, achieving box office takings of over US$700 million, and broke box office records in both the UK and Canadian markets, where the Group controls distribution rights. The film was released on DVD in March 2010 and with total sales of almost two million units in the first month of release is one of the highest selling DVDs in 2010 in both territories. The first of the Twilight films has achieved over two million DVD sales to date in the UK and almost one million in Canada. The third film in the five part series, The Twilight Saga: Eclipse, is due for release in June 2010. In the UK revenue more than doubled in the first full year since the launch of its theatrical business. Ten films were released theatrically compared to four in the previous year. In addition to the multi-territory films, other successful releases included the BAFTA award winning and Oscar TM nominated film An Education, and the Christmas themed family film Nativity. Home video was driven by strongly performing series such as Ashes to Ashes, kids DVDs The Gruffalo and Peppa Pig and film DVDs including Bronson, Damage and Dead Snow. 2010/11 will see another strong slate of theatrical releases. In addition to multi-territory titles, UK releases will include the comedy The Joneses (starring Demi Moore and David Duchovny), thriller Fair Game (Sean Penn and Naomi Watts), The Way Back (Colin Farrell, Mark Strong and Saoirse Ronan) and the Company s first 3D release The Hole 3D. In addition to the theatrically released titles, DVD releases will include Streetdance 3D, Bodyguards and Assassins and The Tortured. In Canada revenue increased by over 50 per cent. as the business continued to invest to build its catalogue. 59 titles were released theatrically including Roman Polanski s The Ghost Writer and Atom Egoyan s thriller Chloe. The home video business expanded rapidly, growing revenues by over 70 per cent. In addition to the multi-territory titles, DVD releases included Push, Steven Soderbergh s Che, Ong Bak 2, Sunshine Cleaning and Universal Soldier A New Beginning. Major theatrical releases for 2010/11 include Splice (starring Adrien Brody and Sarah Polley), Tree of Life (Brad Pitt and Sean Penn), The Killer Inside Me (Jessica Alba, Casey Affleck, Kate Hudson and Bill Pullman) and Barney s Version (Paul Giamatti, Dustin Hoffman, Minnie Driver and Scott Speedman). DVD releases will include Unthinkable (Samuel L. Jackson and Michael Sheen), Triage (Colin Farrell and Paz Vega), The Runaways (Kristen Stewart and Dakota Fanning) and Centurion (starring Michael Fassbender). In the Benelux revenues were in line with the strong performance in the previous year and the business maintained its position as the leading independent distributor in the market. Theatrical sales were supported by a strong box office with the most successful releases including Fame, 17 Again, Edge of Darkness, Paranormal Activity and local titles Terug naar de Kust and the second in the Sinterklaas (Santa Claus) family film series. Home video revenues were broadly in line with the prior year while sales to television broadcasters were lower due to the challenging market conditions. Another strong slate of releases is expected during 2010/11 including Wes Craven s Scream 4 (starring Courteney Cox, David Arquette and Neve Campbell), thriller Dream House (Daniel Craig, Rachel Weisz and Naomi Watts), dance movie Streetdance 3D and the third film in the Sinterklaas series. US video label revenues almost doubled, delivering 104 DVD releases including The Haunted Airman, Night Train, Motherhood, Baby on Board and Staten Island. Forthcoming releases in 2010 include The Greatest, Love Ranch, Ellery Queen, American Bandits and a re-release of the classic La Dolce Vita. 66
Film also incorporates the results of the US music label. Revenue from the US Music label, which represents just over 3 per cent. of the Group s revenues and less than 3 per cent. of underlying EBITDA, was down 15 per cent. compared to prior year. The lower revenues follow the decision to reduce investment in music content following the decline in the market in the second half of the previous financial year. A number of successful releases on the Group s music label included new albums by DJ Khaled, Slim Thug and Brian McKnight. 2010 will see releases from artists including Jim Jones, Dorrough, Zakk Wylde and Vivian Green. Television Television comprises the television production and international sales businesses acquired in September 2008 and, for the first time, the UK Kids business. On a proforma and constant currency basis, revenue increased by 21 per cent. to 43.7 million. Investment in content was similar to the prior year. 2010 2009 2009 Proforma, Reported Reported Constant Currency (audited) (audited) (unaudited) Television* 000 000 % 000 % Revenue 43,707 29,890 46.2% 36,268 20.5% Underlying EBITDA 8,434 8,657 (2.6%) 8,782 (4.0%) Investment in content & programmes 24,057 11,920 101.8% 26,028 (7.6%) * Results of the UK Kids business are now included within the Television business and prior year figures in the above table have been adjusted accordingly. Underlying EBITDA was broadly flat despite the higher revenue due mainly to the profile of shows delivered in the year and an increase in marketing and infrastructure costs to support delivery of the increased television pipeline. 2009/10 saw the delivery of 213 half hours of production compared to 163 in the prior year, including Kids. Major shows delivered included network police drama series The Bridge and new series of established scripted titles such as Kenny Vs Spenny and non-scripted titles such as Megabuilders, Re-Vamped, Outlaw Bikers and Party Mamas. A number of shows were partially delivered at the end of the financial year including 9 out of 13 episodes of Rookie Blue (originally commissioned under the working title Copper) and 4 episodes of the new crime drama Shattered. HBO comedy Hung premiered to critical acclaim, becoming the highest rated debut series in the network s history. Three TV films were delivered during the year: When Love is Not Enough: The Lois Wilson Story, Made and Living Out Loud and three pilots: Men With Broom, Skins and Summer Camp. The Television business has a growing profile in the international television market and has already succeeded in selling a number of recent titles to overseas broadcasters in Europe and Latin America. There are a number of productions currently in the pipeline for delivery in 2010/11 including drama series Haven, based on a novella by Stephen King, which is expected to premiere in the US and Canada in July, comedy series Call me Fitz (starring Jason Priestly) and new series of Re-Vamped, Party Mamas and Outlaw Bikers. 2010/11 will also see delivery of the remaining episodes of Rookie Blue which is scheduled to premiere on ABC and Canwest in June, and Shattered. Recent commissions include second series of Call me Fitz and Hung, while the pilots of Men With Brooms and Skins have both been ordered to series. A deal has also been announced to produce a one hour drama series based on John Grisham s bestselling book The Firm. A number of other series have received development commissions for further scripts and at 31 March 2010 contracted revenues not yet recognised relating to work in progress were 21 million. The Kids business had another excellent year. In the UK, Ben & Holly s Little Kingdom and Lost and Found both won BAFTA awards while Peppa Pig, which continues in production, is now the number one girls preschool licensed property in the UK. In Canada a first series was delivered of Majority Rules while a production and development deal was signed to create a half-hour kids television comedy series based on the legendary rock band KISS. A long-term deal was also agreed with Canadian kids production company, Amberwood Entertainment, giving the Group worldwide distribution rights to more than 240 half hours of Amberwood s catalogue of titles including The Secret World of Benjamin Bear, Rob the Robot, Hoze Houndz and Katie and Orbie. 67
DISTRIBUTION The Distribution division comprises the Group s physical warehousing and distribution businesses in Canada and the US. Overall revenue at 231 million was in line with the prior year. 2010 2009 2009 Reported Reported Constant Currency (audited) (audited) (unaudited) Distribution 000 000 % 000 % Revenue 230,984 212,093 8.9% 231,197 (0.1%) Underlying EBITDA 13,257 13,376 (0.9%) 14,723 (10.0%) The Canadian business sells DVDs and other home entertainment products for the Group s own Entertainment division and also for the major US studios and other third party producers. As a consequence its sales are impacted by the strength of the overall home entertainment market in Canada. Revenue was broadly in line with the previous year, representing an increase in market share as the DVD market declined 5 per cent. year on year. DVD volumes were 2.5 per cent. lower although the impact on the business was mitigated by increased sales of higher margin Blu-ray discs and games. Vendor Managed Inventory revenues, where the company retains ownership and management of inventory in certain retail outlets, continued to create incremental opportunities and sales grew by more than 25 per cent. in this area. The US business distributes DVDs, and other home entertainment products for the Group s in-house video and music labels and other third parties. In response to the declining US music market and following the successful business restructuring in early 2009 increasing focus is being placed on growing sales in home video in partnership with the Group s entertainment division. Home video made up 23 per cent. of revenue compared to 14 per cent. in the previous year. GROUP COSTS Group costs at 4.5 million (2009: 3.8 million) before one-off items were higher than the prior year mainly due to the corporate function expanding to support the growth of the Group. OTHER FINANCIAL INFORMATION A summary of adjusted financial information is presented in order to provide information to investors and excludes the following: one-off items, amortisation of acquired intangible assets, share-based payments and non-recurring items within net finance charges. Adjusted operating profit increased 37 per cent. to 32.1 million (2009: 23.5 million) reflecting the growth in underlying EBITDA. Adjusted profit before tax increased 35 per cent. to 22.1 million reflecting the increased operating profit partially offset by higher finance charges. Adjusted (audited) Reported (audited) 2010 2009 2010 2009 000 000 000 000 Underlying EBITDA 34,334 25,256 34,334 25,256 One-off items (1,582) (29,677) Amortisation of intangible assets (199) (49) (17,488) (15,168) Depreciation (2,019) (1,699) (2,019) (1,699) Share-based payments (2,743) (4,171) Operating profit/(loss) 32,116 23,508 10,502 (25,459) Net finance charges (10,033) (7,103) (3,627) (5,550) Profit/(loss) before tax 22,083 16,405 6,875 (31,009) Taxation (4,493) (4,530) (321) 578 Profit/(loss) after tax 17,590 11,875 6,554 (30,431) 68
One-off Items One-off items totalled 1.6 million and included 0.4 million of initial costs incurred as part of the graduation to the Main Market of the London Stock Exchange and proposed migration of the Group to Canada. This project is expected to be completed in July 2010 and is anticipated to cost a further 1.6 million in the 2010/11 financial year. Remaining one-off items comprise costs incurred in the year relating to completion of projects classified as one-off in the prior year. Amortisation of Intangible Assets and Depreciation Amortisation of intangible assets increased from 15.2 million to 17.5 million and depreciation increased by 0.3 million to 2.0 million primarily reflecting a full year s impact of the Television businesses which were acquired in the prior year. Share Options The share-based payments charge of 2.7 million decreased in line with the vesting profile of the share options. 0.1 million of the charge in the year ended 31 March 2010 relates to options granted in the year while the remainder relates to options granted following formation of the Group in 2007, the majority of which have now vested. A new three year incentive plan has been implemented for the Board executives from 1 April 2010. On 24 May 2010, in association with the ongoing commercial relationship with Summit Entertainment LLC ( Summit ), 2,500,000 warrants were issued to Summit. These warrants are subject to time related vesting criteria. Net Finance Charges Reported net finance charges decreased from 5.6 million to 3.6 million. A number of items impact net finance charges, in particular the impact of buying back 74 per cent. of exchangeable notes at a discount in February 2010, which resulted in a one-off gain of 7.3 million. Other one-off items include movements in the fair value of financial instruments and, in the prior year, the impact of an extension to the maturity period of the exchangeable notes. Adjusting for these items net finance charges increased from 7.1 million to 10.0 million. The increase is due mainly to higher debt balances following the increased investment in content and payments associated with acquisition of the Television businesses in September 2008. Other factors contributing to the higher charge include 0.8 million higher amortisation of deferred finance charges, due to a full year impact following the refinancing in September 2008, and the absence of 0.7 million foreign exchange gains that were recognised in the prior year. The weighted average interest cost was 6.3 per cent. compared to 7.1 per cent. in the prior year, giving a cash interest cover of 6.0 times underlying EBITDA (2009: 6.3 times). Tax The tax charge for the year was 0.3 million (2009: 0.6 million credit) giving an effective tax rate of 4.7 per cent. compared to an effective tax rate of 1.9 per cent. in the previous year. The low effective rate arises mainly due to the one-off gain from the repurchase of exchangeable notes in the year. The rate is also distorted by the impact of non-deductible share-based payment charges. On an adjusted basis, excluding one-off items, amortisation of intangible assets, share-based payments and other net finance items, the effective tax rate was 20 per cent. (2009: 28 per cent.). This is lower than the average tax rates of the countries in which the Group operates due to benefits in some jurisdictions from utilising historic tax losses. The adjusted effective rate is anticipated to increase in future years as these losses are utilised. Earnings per Share Reported profit after tax was 6.6 million compared to a loss in the prior year of 30.4 million reflecting the absence of significant one-off charges in the year to 31 March 2010. Consequently the reported diluted earnings per share was 4.3 pence (2009: loss of 23.2 pence). On an adjusted basis profit after tax was 17.6 million, 48 per cent. ahead of the prior year. The adjusted diluted earnings per share was 11.5 pence 69
(2009: 8.6 pence), up 34 per cent. The number of shares used in the earnings per share calculations include the weighted impact of 19.5 million shares that were issued in February 2010 in connection with the repurchase of exchangeable notes. Cashflow and Financing The Group s cash balances increased by 5.8 million during the year. 31 March 31 March 2010 2009 000 000 Net cash from operating activities 85,201 35,851 Investment in content rights and TV programmes (74,663) (47,838) Purchase of other non-current assets* (1,973) (2,931) Free cash flow 8,565 (14,918) Acquisition of subsidiaries (5,916) (8,924) Net interest paid (5,699) (3,978) Net proceeds from issue of ordinary shares 10,035 Cash paid on repurchase of exchangeable notes (9,000) Cash from other financing activities 7,854 21,053 Net increase/(decrease) in cash and cash equivalents 5,839 (6,767) * Other non-current assets comprise property, plant and equipment and intangible software. Cash flows from operating activities at 85.2 million were significantly ahead of the previous year reflecting the improved underlying EBITDA and strong cash generation from the Group s investments made in the last three years. Net working capital balances were broadly unchanged compared to last year. The Group invested 74.7 million in content rights and television programmes in the year (2009: 47.8 million) and incurred cash costs relating to the acquisition of the Television businesses in the prior year of 5.9 million. Investment in content rights and television programmes is anticipated to continue to increase in the new financial year. The Group s overall net debt reduced from 89.8 million to 86.1 million as follows: 31 March 31 March 2010 2009 000 000 Net debt at 31 March (89,795) (47,828) Movement in cash and cash equivalents 5,839 (6,767) Net movement in borrowings (7,854) (21,053) Repurchase of exchangeable notes 15,586 Foreign exchange movements (5,534) (2,861) Other items (4,298) (11,286) Net debt at 31 March (86,056) (89,795) 70
The net debt balances at 31 March 2010 comprise the following: 000 000 2010 2009 JP Morgan Senior Revolving Credit Facility 74,703 69,097 Cash and other items (excl. Television Production) (17,116) (7,420) Senior Net Debt 57,587 61,677 Exchangeable Notes 5,612 18,642 Adjusted Net Debt 63,199 80,319 Television Production Net Debt 22,857 9,476 Net Debt at 31 March 86,056 89,795 The reduction in net debt comprises a decrease in senior net debt of 4.1 million and a decrease in exchangeable notes of 13.0 million offset by an increase of 13.4 million in net debt arising from investment in the Television Production business. Adjusted net debt leverage (defined as adjusted net debt divided by underlying EBITDA) reduced significantly during the year and was 1.8 times at 31 March 2010 compared to 3.2 times in the prior year. The Group continues to expect to reduce its adjusted net debt leverage in the new financial year. Senior Net Debt The Senior Net Debt balance was 57.6 million, down 4.1 million from the previous year end as a result of the strong performance of the business. In the first half of the year the Group re-denominated its US Dollar senior credit facility into local currencies and also expanded its facility by US$7.5 million. In October 2009 the Group further expanded its facility by US$15 million. At 31 March 2010, using prevailing exchange rates, the total available facility was US$180 million. The Group does not anticipate drawing on these additional amounts but they provide the Group with capital to pursue its strategic objectives should opportunities become available. Exchangeable Notes The exchangeable notes are subordinated to the senior credit facility and do not contain covenants that would result in the exchangeable notes becoming payable prior to the end of their term in September 2013. Interest on the exchangeable notes is not payable in cash but accrues and is payable alongside the principal on maturity if the option to convert to equity is not exercised. In January 2010 the Company raised 10.3 million of equity to repurchase 74 per cent. of the exchangeable notes debt at a discount for 9.0 million. This resulted in a one-off gain of 7.3 million. Television Production Net Debt Television Production net debt increased year on year to 22.9 million reflecting the success of the business in growing its production slate. The Television Production financing is independent of the Group s senior credit facility and is not secured over all of the Group s assets. It is attributable to individual production companies within the Television business and represents shorter-term working capital financing that is arranged and secured on a productionby-production basis. Financial Position and Going Concern Basis The Group s net assets increased from 133.2 million at 31 March 2009 to 164.0 million at 31 March 2010. The increase of 30.8 million was mainly due to the strong trading in the year and impact of the gain on repurchase of exchangeable notes. The directors acknowledge guidance issued by the Financial Reporting Council relating to going concern. The directors consider it appropriate to prepare the accounts on a going concern basis, as set out in Note 2 to the financial statements. 71
RISKS The Board considers risk assessment, identification of mitigating actions and internal control to be fundamental to achieving the Group s strategic objectives. The Corporate Governance report on pages 32 to 33 describes the systems and processes through which the directors manage and mitigate risks. The Board considers that the principal risks to achieving its objectives are set out below. The Board recognises that the nature and scope of the risks can change and so reviews the risks faced by the Group as well as the systems and processes to mitigate them. Attracting and retaining the best people Entertainment is fundamentally a people business and the ability to attract, recruit and retain quality staff is a risk in a highly competitive labour market. We continue to invest in our people, ensuring that we recruit and retain the right calibre of staff with the skills, experience and talent to grow the business. We seek to ensure we have appropriate management development programmes to assess, manage and develop our people s leadership skills, talents and experiences throughout the organisation. Strategy execution The entertainment industry is continually changing and the Group will seek to identify and anticipate risks regarding our assumptions and understanding of these changes, including economic conditions, in order to ensure the strategy remains appropriate. Corporate planning processes are in place to ensure that the strategies of the individual businesses within the Group are aligned and contribute to the delivery of shareholder value. Acquisition effectiveness A significant driver of our strategy is growth through acquisitions in new territories around the world and consolidation opportunities in our current markets. The risks associated with this approach are mitigated through clearly defined investment criteria, detailed due diligence from the Company s professional advisers, the requirement, where appropriate, for management to remain with the target business post acquisition and through robust financial and operational post acquisition and integration plans. Content investment opportunities An increase in investment in content rights is fundamental to achieving the Group s aim of providing shareholders with improving and sustainable returns. The continued availability of good quality content, particularly in relation to filmed entertainment, is considered as part of the corporate planning process. The risk of reduced availability of content is mitigated through the continual development of relationships with producers and other key stakeholders across the full spectrum of the entertainment industry. In addition, by following the current strategy of the Group the business is becoming a more attractive partner for the sellers of entertainment rights. Financial risk management The Board considers that the main risks arising from the Group s financial instruments are interest rate risk, foreign currency risk, credit risk, liquidity risk and covenant risk. The use of financial derivatives is governed by the Group s policies approved by the Board of Directors. The Group does not use derivative financial instruments for speculative purposes. Interest rate risk The Group has an exposure to interest rate risk arising principally from changes in US Dollar, Canadian Dollar, Sterling and Euro interest rates. The exposure to fluctuating interest rates is managed by capping portions of debt using interest rate collars and fixing portions of debt using interest rate swaps, which aims to optimise net finance expense and reduce excessive volatility in reported earnings. At 31 March 2010 the longest term of any debt held by the Group was until 2013. 72
Foreign exchange risk The Group s operating activities expose it to the financial risks of changes in foreign currency exchange rates. These risks comprise translation risk, resulting from the requirement to present the results from different territories in the Group s reporting currency, and transactional risk. Transactional risk arises where business units enter into contracts denominated in a currency other than their local reporting currency. These include Minimum Guarantee payments to film studios, which are often denominated in US Dollars. The Group uses foreign exchange forward contracts when appropriate, and otherwise uses natural hedging methods where possible, to minimise exposure in these areas. Credit risk Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The Group controls credit risk by entering into arrangements only with highly credit-rated counterparties. The Group has no significant concentrations of credit risks, with exposure spread over a large number of counterparties and customers. Liquidity risk In order to maintain liquidity to ensure that sufficient funds are available for ongoing operations and future developments, the Group uses a mixture of long-term and short-term debt finance. As at 31 March 2010 the Group had 18.6 million of cash and net debt of 86.1 million. The Group s policy throughout the year has been to minimise risk by paying down debt with surplus funds when available. The Group meets its day to day working capital requirements and funds its investment in content through a revolving credit facility ( Facility ) which matures in September 2012 and is secured on assets in the Group. Under the terms of the Facility the Group is able to draw down in the local currencies of its operating businesses. The amounts drawn down by currency at 31 March 2010 are shown in note 22 to the financial statements. Covenant risk The Group must comply with a number of financial covenants as part of its Facility. The covenants under the Facility include, inter alia, net debt/underlying EBITDA, fixed interest cover and net worth. The Group monitors actual and forecast compliance with these covenants and reports regularly to its bankers. At the date of this report the Group has operated within its covenants and at 31 March 2010 had undrawn amounts of 39.8 million under the Facility. The directors consider that should the covenants be adversely impacted by the risks set out above there are a number of mitigating actions which would enable it to continue in compliance with the terms of its Facility. 73
DIRECTORS The step up to the Main Market of the London Stock Exchange provides a great opportunity to drive improved shareholder value. James Corsellis Chairman Darren Throop, Chief Executive Officer (45) Darren has over 20 years of executive management experience in the entertainment industry. Darren has been Chief Executive Officer of Entertainment One since July 2003 and has been in The Group since 1999. Previously Darren was the owner of Urban Sound Exchange between 1991 and 1999 when it was acquired by the Group. Patrice Theroux, President Global Filmed Entertainment (47) Patrice has over 25 years of experience in the motion picture distribution industry and until June 2006 was president and CEO of the Toronto stock exchange listed Motion Picture Distribution LP, a leading independent film distribution company with operations in Canada, the UK and Spain. Patrice is Chairman of the Canadian Association of Film Distributors and Exporters. Giles Willits, Chief Financial Officer (43) Giles joined the executive board of Entertainment One in May 2007. He was formerly Director of Group Finance at J Sainsbury plc from 2005 to 2007 and Group Corporate Development Director and Interim Group Finance Director at Woolworths Group plc. Before this Giles held a number of finance and general management positions within Kingfisher plc and Sears Plc. Giles is a chartered accountant having qualified with PricewaterhouseCoopers. James Corsellis, Non-Executive Chairman (40) James founded one of the earliest strategic technology consultancies in 1994 and was Chief Executive Officer of icollector plc, a leading provider of live auction trading platforms. He is currently a managing partner of Marwyn Capital and Marwyn Investment Management, a director of Marwyn Value Investors as well as a director of Marwyn Capital I and Marwyn Materials Limited. Bob Allan, Non-Executive Director (63) Between 1997 and 2006, Bob was Vice-President of MDS Capital Corp, a North American venture capital company engaged in health and life science investments. Previously, Bob was Vice-President Financial Operation at the laboratory services division of MDS Inc., a public health and life sciences company. Prior to joining MDS, Bob was a Vice-President of Unitel Communications Inc. Bob is a Chartered Accountant and a member of the Canadian Institute of Chartered Accountants. Sir George Bain, Non-Executive Director (71) Sir George has over 40 years of academic and professional experience in the field of economics. He was Principal of the London Business School between 1989 and 1997 and President and Vice-Chancellor of The Queen s University of Belfast between 1998 and 2004. He was previously a non-executive director of Blackwell Publishers Ltd, The Economist Group, Electra Private Equity Plc, and Bombardier Aerospace Shorts Brothers Plc. He is currently a non-executive director of The Canada Life Group (UK) Ltd, Canada Life Capital Corporation and Great-West Lifeco Inc. 74
Clare Copeland, Non-Executive Director (74) Clare is currently the chief executive of Falls Management Company, a developer and operator of Casino Niagara and Fallsview Casino since 2005. Clare is also chairman of Toronto Hydro Corporation, a Canadian energy distribution company. Between 2000 and 2002 Clare was chairman and chief executive of OSF Inc., a manufacturer of retail store interiors. Clare is also a director of Danier Leather Inc., MDC Corporation, Chesswood Income Fund and several other Canadian companies. Garth Girvan, Non-Executive Director (61) Garth is currently a partner at the Canadian law firm McCarthy Tétrault LLP having joined the firm in 1978. Garth is currently a non-executive director of the Canadian entertainment company Imax Corporation and was previously a director of Silcorp Limited and the Canadian beverage distributor Corby Distilleries Limited. Garth is called as a barrister in Ontario (1978), Alberta (1982) and New York (1986). Robert Lantos, Non-Executive Director (61) Robert has more than 35 years experience in the motion picture and television industry. He is the producer of Cannes and Golden Globe winning and Academy Award Nominated films including Being Julia, Eastern Promises, and The Sweet Hereafter. He currently owns Serendipity Point Films, a film and television production company based in Toronto and Los Angeles. Prior to 1998, Robert was Chairman and CEO of Alliance Communications Corporation. Mark Opzoomer, Non-Executive Director (52) Mark is a partner in Bond Capital Partners, providers of lower mid-market growth capital. Mark is a non-executive of Blinkx plc, Newbay Software Limited and Expedite 5 inc. He is also President and co-founder of Zattikka Limited, an online social and browser games publisher. Mark was previously non-executive director, then CEO of Rambler Media Limited. Prior to this Mark was the Managing Director and Regional Vice-President of Yahoo! Europe. Prior to joining Yahoo! Europe, Mark was Deputy Chief Executive of Hodder Headline plc, a LSE-listed book publishing company, and previously Commercial and Finance Director of Sega Europe Ltd and Commercial Director of Virgin Communications Ltd. Mark is a Chartered Accountant and has an MBA from IMD, Lausanne, Switzerland. Mark Watts, (Non-Executive Director) (36) Mark has been advising the boards of UK public companies since 1998. Mark is currently a Managing Partner in Marwyn Capital and Marwyn Investment Management. He is also a director of Melorio plc, Silverdell plc, Praesepe plc, and Advanced Computer Software plc. Mark was previously a director of Inspicio plc and Talarius plc. 75
DIRECTORS REPORT The directors present their report and audited financial statements for the year ended 31 March 2010. Registered office The registered office of Entertainment One Ltd. is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Principal activities The Group s principal activity is the acquisition and exploitation of entertainment rights across all media and the production of television content. In addition, the Group owns distribution channels to retailers in territories where it can capture additional margin and improve delivery of products to consumers. Business review The Business and Financial Review sets out a comprehensive review of the development and performance of the business for the year ended 31 March 2010 and is set out on pages 8 to 23. Risk management and internal controls Disclosures can be found in note 35 to the financial statements and the Corporate Governance section on pages 32 to 33. Share capital Details of new share issues during the year are shown in note 24 to the financial statements. Post balance sheet events On 31 March 2010 the Company announced that it is seeking a standard listing on the main market of the London Stock Exchange. Concurrently, subject to shareholder approval it would be seeking to migrate to Canada following a Court approved Scheme of Arrangement in the Cayman Islands. It is expected that the move to the main market and migration to Canada will be completed during July 2010. Further details are set out in note 33 to the financial statements. Directors The directors who held office during the year were: James Corsellis Darren Throop Patrice Theroux Giles Willits Bob Allan Sir George Bain Clare Copeland Garth Girvan Robert Lantos Mark Opzoomer Mark Watts (Appointed 24 June 2009) David Williams (Resigned 24 June 2009) Full biographical details of the current directors are set out on page 26. 76
Directors interests The beneficial interests of the directors and their families in the shares of the Company are shown below. Options granted under the Company s employee share plans are shown in the Directors Remuneration Report on pages 30 to 31. At 31 March 2010 Number of ordinary shares Darren Throop 4,786,818 Patrice Theroux 430,457 Giles Willits 320,000 Sir George Bain 28,182 Mark Watts 1,000 Robert Lantos beneficially owns 3,126,828 Class S shares in the Company. No changes took place in the interests of directors between 31 March 2010 and the date of signing of this report. Directors interests (if any) in contracts of significance to the Group s business are set out in note 32 to the financial statements. Creditor payment policy The Group s policy is to agree terms of payment prior to commencing trade with a supplier and to abide by those terms on the timely submission of satisfactory invoices. Trade creditors for the Group at 31 March 2010 were equivalent to 87 days purchases (31 March 2009: 87 days ). Disabled employees Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees. Going concern The directors continue to adopt the going concern basis in preparing the annual report and accounts. Further details are set out in note 2 to the financial statements. Auditors A resolution for the reappointment of Deloitte LLP as auditors will be proposed at the Annual General Meeting. Annual General Meeting The timing of the Annual General Meeting is dependent on the successful migration of the Company to Canada and approval of the Scheme of Arrangement. Notice of such meeting will be sent under separate cover. Statement of directors responsibilities for the Annual Report The directors are responsible for preparing the Annual Report and the financial statements. The directors are required to prepare financial statements for the Group in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs). 77
International Accounting Standard 1 requires that financial statements present fairly for each financial period the Group s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board s Framework for the Preparation of Financial Statements. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. Directors are also required to: properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity s financial position and financial performance. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group, for safeguarding the assets and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Group s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions. Each of the persons who is a director at the date of approval of this report confirms that: the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and the business review includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties they face. By order of the Board 78
DIRECTORS REMUNERATION REPORT Remuneration Committee The Remuneration Committee reviews the performance of executive directors and sets the scale and structure of their remuneration and the basis of their service agreements with due regard to the interests of shareholders. To ensure that the Company s remuneration practices are market competitive, the Committee takes advice from various independent sources. The Board determines the remuneration of the non-executive directors with the support of external professional advice if required. No director participates in any discussion regarding his or her own remuneration. Policy on executive directors remuneration The policy of the Board is to provide executive remuneration packages designed to attract, motivate, reward and retain executive directors. The aim of the Group s remuneration policy is to ensure that these key executives are appropriately rewarded for their individual contributions to the Group s performance, commensurate with their duties and responsibilities. The Remuneration Committee believes that shareholders interests are best served by providing executives with remuneration packages which have a significant emphasis on performance related pay, through long-term share incentive schemes. The Board considers that packages of this nature are consistent with prevailing practice and are necessary to retain and reward executives of the calibre the Group requires. The main components of executive directors remuneration, which can be mirrored with senior executives, are basic salary, annual performance related bonus and share options. Basic annual salary Each executive director s basic salary is reviewed annually by the Committee. In deciding upon appropriate levels of remuneration the Committee believes that the Company should offer levels of base pay that reflect individual responsibilities compared to similar jobs in comparable companies. Annual bonus payments The Committee establishes the objectives which must be met for an annual cash bonus to be paid. Share option incentives The Company operates a number of employee share option schemes (note 34 to the financial statements) and the Committee has responsibility for supervising the schemes and the grant of share options under these schemes. On 31 March 2010 the Board approved the implementation of a new equity incentivisation scheme for the Executive Directors. Under the new scheme, participants will only be rewarded if shareholder value is created, thereby aligning the interests of the participants directly with those of shareholders. Out-performance incentive plan The Company also has an out-performance incentive plan that allocates up to 5 million to an incentive pool to be paid to executive directors in the future, conditional on the sale of the Company for no less than 2.25 per share or the Company s share price achieving a share price of 2.25 per share. Additional benefits The executive directors receive private medical insurance and life assurance cover. Darren Throop and Giles Willits are also entitled to an annual pension allowance. 79
Directors emoluments The remuneration of each of the directors for the year ended 31 March 2010 (or period that they served as directors during the period) is set out as follows: Salary Other and fees Bonus benefits Pension Total 2009 000 000 000 000 000 000 Executive Darren Throop 1 374 374 7 18 773 581 2 Patrice Theroux 1 302 302 13 617 556 Giles Willits 238 238 12 42 530 542 2 Non-executive James Corsellis 54 54 35 Bob Allan 35 35 39 Sir George Bain 35 35 35 Clare Copeland 35 35 35 Garth Girvan 35 35 35 Robert Lantos 35 35 17 Mark Opzoomer 35 35 35 Mark Watts 3 27 27 David Williams 4 14 14 60 Total 1,219 914 32 60 2,225 1,970 1 Canadian executive director remuneration has been translated at the CAD:GBP rate 1.739 (2009: 1.913). 2 Prior year balance has been adjusted to include contributions to personal pension plans. 3 Appointed 24 June 2009. 4 Resigned 24 June 2009. Salary and fees shown above include fees paid in respect of duties as directors. Other benefits relate mainly to the provision of company cars or car allowances and private medical insurance. Directors interests in share options The interests in share options of the current executive directors at 31 March 2010 were as follows: At 31 March Cancelled At 31 March Exercise Scheme 2009 in year 2010 price ( ) Darren Throop Executive Share Plan 3,452,643 (1,173,899) 2,278,744 0.01 Patrice Theroux Executive Share Plan 3,452,643 (1,173,899) 2,278,744 0.01 Giles Willits Employee Benefit Trust 3,027,643 (901,899) 2,125,744 Total executive share options 9,932,929 (3,249,697) 6,683,232 Certain share options in the existing scheme were cancelled on the implementation of a new equity incentivisation scheme for the executive directors, as detailed in note 34 to the financial statements. 80
CORPORATE GOVERNANCE Statement by the directors on compliance with the code of best practice As an AIM listed company, Entertainment One Ltd. is not required to comply with the provisions of the Combined Code on Corporate Governance ( the Combined Code ) that applies to companies with a premium London Stock Exchange listing. However, the Board recognises the importance and value of good corporate governance procedures and accordingly have selected those elements of the Combined Code that they consider relevant and appropriate to the Group, given its size and structure. An overview of the Group s corporate governance procedures is given below. The Board The Group is controlled through a Board of Directors, which at 31 March 2010 comprised a non-executive chairman, three executive directors and seven other non-executive directors and is responsible to shareholders for the proper management of the Company and the Group. The Chairman is James Corsellis and the Chief Executive Officer is Darren Throop. Five non-executive directors, Bob Allan, Sir George Bain, Clare Copeland, Garth Girvan, and Mark Opzoomer are considered to be independent. Two non-executive directors, Robert Lantos, Mark Watts and the Chairman, James Corsellis, are not considered to be independent. The non-executive directors bring a wide range of experience and expertise to the Group s activities and provide a strong balance to the executive directors. The Board operates both formally, through Board and committee meetings, and informally, through regular contact amongst directors and senior executives. There is a schedule of matters that are specifically referred to the Board for its decision, including approval of interim and annual results, setting and monitoring strategy and examining acquisition possibilities. The Board is supplied with information, in a timely manner, in a form and quality appropriate to enable it to discharge its duties. The directors can obtain independent professional advice at the Company s own expense in the performance of their duties as directors. Board Committees The Board Committees comprise the Audit Committee, the Remuneration Committee and the Nominations Committee. Audit Committee The Chairman of the Audit Committee is Bob Allan with James Corsellis, Mark Opzoomer and Mark Watts as the other non-executive members. No one other than the Audit Committee s Chairman and members is entitled to be present at a meeting of the Audit Committee but the Company s external auditors together with the Chief Executive Officer and the Chief Financial Officer are also invited to attend the meetings. The Audit Committee operates under terms of reference agreed with the Board and meets at least twice a year. The Audit Committee considers the adequacy and effectiveness of the risk management and control system of the Group. It reviews the scope and results of the external audit, its cost effectiveness and the objectivity of the auditors. It also reviews, prior to publication, the interim results, preliminary announcement and the Annual Report. The Audit Committee also met regularly during the year to review the move to a standard listing on the Main Market of the London Stock Exchange and migration of the Company to Canada. Remuneration Committee The Remuneration Committee is chaired by Clare Copeland with, James Corsellis and Garth Girvan as members. The Committee meets periodically as required and is responsible for overseeing the policy 81
regarding executive remuneration and for approving the remuneration packages for the Group s executive directors. It is also responsible for reviewing incentive schemes for the Group as a whole. Nominations Committee The Nominations Committee is chaired by James Corsellis with Clare Copeland and Mark Watts as members. The Nominations Committee meets as required to select and propose to the Board suitable candidates of appropriate calibre for appointment as directors. The Committee would normally expect to use the services of professional external advisors to help in the search for and selection of candidates. Board and committee meeting attendance The table below sets out the attendance at Board and committee meetings by presence or by telephone of individual directors. Full Board meetings Audit Remuneration Nominations Directors attended Committee Committee Committee Darren Throop 7 of 7 Patrice Theroux 6 of 7 Giles Willits 7 of 7 James Corsellis 6 of 7 5 of 5 2 of 3 1 of 1 Bob Allan 6 of 7 5 of 5 Sir George Bain 5 of 7 Clare Copeland 6 of 7 3 of 3 1 of 1 Garth Girvan 4 of 7 3 of 3 Robert Lantos 3 of 7 Mark Opzoomer 5 of 7 2 of 4 Mark Watts 1 5 of 5 3 of 4 David Williams 2 2 of 2 1 of 1 1 of 1 1 Appointed 24 June 2009. 2 Resigned 24 June 2009. Shareholder communication The Board is committed to maintaining good communications with shareholders. The executive directors maintain a regular dialogue with analysts and institutional investors to discuss the Company s performance and future prospects. The Company responds formally to all queries and requests for information from existing and prospective shareholders. In addition, the Company seeks to regularly update shareholders through stock exchange announcements and wider press releases on its activities. The Annual General Meeting will provide an opportunity for shareholders to address questions to the Chairman or the Board directly. Published information, including regulatory news, is available on the Group s website, www.entertainmentonegroup.com. Risk management and internal controls The directors are responsible for the Group s system of internal control and for reviewing its effectiveness whilst the role of management is to implement Board policies on risk management and control. It should be recognised that the Group s system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve the Group s business objectives and can only provide reasonable, and not absolute, assurance against material misstatement or loss. 82
The Group operates a series of controls to meet its needs. These controls include, but are not limited to, a clearly defined organisational structure, written policies, a comprehensive annual strategic planning and budgeting process and detailed monthly reporting. The annual budget is approved by the Board as part of its normal responsibilities. In addition, the budget figures are regularly re-forecast to facilitate the Board s understanding of the Group s overall position throughout the year and this re-forecasting is reported to the Board in addition to the reporting of actual results during the year. The Audit Committee receives reports from management and the external auditors concerning the system of internal control and any material control weaknesses. Any significant risk issues are referred to the Board for consideration. When acquisitions are made, the Group s controls and accounting policies are implemented during the first full year of ownership. The Board has considered the need for an internal audit function, but has concluded that at this stage in the Group s development the internal control systems in place are appropriate for the size and complexity of the Group. 83
FINANCIAL STATEMENTS The strong financial performance enabled the Group to further strengthen the balance sheet through increased content investment while also improving leverage and reducing debt. Giles Willits Chief Financial Officer 84
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF ENTERTAINMENT ONE LTD. We have audited the Group financial statements of Entertainment One Ltd. for the year ended 31 March 2010 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity and the related notes 1 to 36. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Ann I 20.4.1 This report is made solely to the Company s members, as a body, in accordance with Rule 19 of the AIM Rules for Companies. Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the Directors Responsibilities Statement, the directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s (APB s) Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. Opinion on financial statements In our opinion the Group financial statements: give a true and fair view of the state of the Group s affairs as at 31 March 2010 and of its profit for the year then ended; and have been properly prepared in accordance with IFRSs as adopted by the European Union. Deloitte LLP Chartered Accountants London United Kingdom 24 May 2010 85
Consolidated Income Statement For the year ended 31 March 2010 Year ended Year ended 31 March 31 March 2010 2009 Notes 000 000 Revenue 3 444,172 342,643 Cost of sales (341,731) (270,123) Gross profit 102,441 72,520 Administrative expenses (91,939) (97,979) Operating profit/(loss) 4 10,502 (25,459) Analysed as: Underlying EBITDA 34,334 25,256 Amortisation of intangible assets 12,13 (17,488) (15,168) Depreciation 15 (2,019) (1,699) Share-based payment charge 34 (2,743) (4,171) One-off items 5 (1,582) (29,677) 10,502 (25,459) Finance income 6 7,777 4,866 Finance costs 6 (11,404) (10,416) Profit/(loss) before tax 6,875 (31,009) Income tax (charge)/credit 7 (321) 578 Profit/(loss) for the year 6,554 (30,431) Attributable to: Equity holders of the parent 6,554 (30,431) Earnings/(loss) per share Basic pence 10 4.6 (23.2) Diluted pence 10 4.3 (23.2) 86
Consolidated Statement of Comprehensive Income For the year ended 31 March 2010 Year ended Year ended 31 March 31 March 2010 2009 000 000 Profit/(loss) for the year 6,554 (30,431) Exchange differences on translation of foreign operations 10,585 21,456 Fair value gains on cash flow hedges 488 Tax relating to components of other comprehensive income (123) Total comprehensive income/(loss) for the year 17,504 (8,975) Attributable to: Equity holders of the parent 17,504 (8,975) 87
Consolidated Balance Sheet As at 31 March 2010 31 March 31 March 31 March 2010 2009 2008 Notes 000 000 000 Assets Non-current assets Goodwill 11 105,045 99,699 80,681 Investment in programmes 12 26,014 19,446 4,672 Other intangible assets 13 77,366 87,397 70,465 Investments 14 128 471 319 Property, plant and equipment 15 5,397 6,453 5,031 Other receivables 18 1,714 1,239 549 Deferred tax assets 8 2,014 3,245 1,006 Total non-current assets 217,678 217,950 162,723 Current assets Inventories 16 47,831 40,137 40,659 Investment in content rights 17 65,346 47,670 33,899 Trade and other receivables 18 114,187 75,635 31,585 Current tax assets 704 1,149 Other financial assets 21 488 Cash and cash equivalents 19 18,557 11,767 16,484 Total current assets 247,113 176,358 122,627 Total assets 464,791 394,308 285,350 Liabilities and equity Non-current liabilities Interest bearing loans and borrowings 22 86,236 87,739 60,339 Provisions 23 124 272 Other payables 20 494 3,076 621 Deferred tax liabilities 8 10,556 15,953 9,033 Total non-current liabilities 97,286 106,892 70,265 Current liabilities Trade and other payables 20 177,582 133,198 83,720 Current tax liabilities 4,865 3,509 303 Interest bearing loans and borrowings 22 18,377 13,823 3,539 Provisions 23 492 1,351 907 Other financial liabilities 21 2,176 2,334 3,038 Total current liabilities 203,492 154,215 91,507 Total liabilities 300,778 261,107 161,772 88
31 March 31 March 31 March 2010 2009 2008 Notes 000 000 000 Equity Share capital 24 797 675 587 Share premium 138,268 126,352 126,352 Treasury shares 24 (7,819) (7,819) (7,819) Other reserves 24 13,865 14,915 639 Currency translation reserve 38,746 28,161 6,705 Retained earnings (19,844) (29,083) (2,886) Total equity 164,013 133,201 123,578 Total liabilities and equity 464,791 394,308 285,350 These consolidated financial statements were approved by the Board of Directors on 24 May 2010. Giles Willits Director 89
Consolidated Cash Flow Statement For the year ended 31 March 2010 Year ended Year ended 31 March 31 March 2010 2009 Notes 000 000 Operating activities Operating profit/(loss) 10,502 (25,459) Adjustments for: Depreciation 15 2,193 1,699 Amortisation of other intangible assets 13 16,884 14,127 Amortisation of content rights 17 37,646 21,137 Amortisation of television programmes 12 18,759 12,066 Foreign exchange movements 138 (267) Share-based payment charge 34 2,743 4,171 Impairment 11,13,17 24,416 (Increase)/decrease in inventories (7,699) 546 Increase in trade and other receivables (29,975) (36,766) Increase in trade and other payables 38,779 19,976 (Decrease)/increase in provisions (983) 296 Net cash inflow from trading activities 88,987 35,942 Income tax paid (3,786) (91) Net cash from operating activities 85,201 35,851 Investing activities Interest received 84 260 Acquisition of subsidiaries (net of cash acquired) 25 (5,916) (8,924) Investment in content rights (50,875) (37,639) Investment in television programmes (23,788) (10,199) Purchases of property, plant and equipment 15 (944) (1,661) Purchases of intangible software assets (1,029) (1,270) Net cash used in investing activities (82,468) (59,433) Financing activities Proceeds on issue of shares (net of costs) 24 10,035 Increase in interest bearing loans and borrowings 34,264 125,419 Repayment of interest bearing loans and borrowings (43,209) (107,771) Net drawdown of production financing 7,799 3,405 Interest paid (5,783) (4,238) Net cash from financing activities 3,106 16,815 Net increase/(decrease) in cash and cash equivalents 5,839 (6,767) Cash and cash equivalents at beginning of the year 11,767 16,484 Effects of exchange rate fluctuations on cash held 951 2,050 Cash and cash equivalents at end of year 19 18,557 11,767 90
Consolidated Statement of Changes in Equity For the year ended 31 March 2010 Currency Share Share Treasury Other translation Retained Total capital premium shares reserves reserve earnings equity 000 000 000 000 000 000 000 Total comprehensive income for the period 6,705 (8,555) (1,850) Shares issued during the period 552 123,238 123,790 Consideration shares 35 7,833 7,868 Share issue costs (4,719) (4,719) Purchase of own shares (7,819) (7,819) Warrants issued during the period 639 639 Share-based payment charge 5,669 5,669 At 31 March 2008 587 126,352 (7,819) 639 6,705 (2,886) 123,578 Total comprehensive income for the year 21,456 (30,431) (8,975) Shares issued during the year 88 14,276 14,364 Share-based payment charge 4,234 4,234 At 31 March 2009 675 126,352 (7,819) 14,915 28,161 (29,083) 133,201 Total comprehensive income for the year 365 10,585 6,554 17,504 Shares issued during the year 122 11,916 (1,415) 10,623 Share-based payment charge 2,685 2,685 At 31 March 2010 797 138,268 (7,819) 13,865 38,746 (19,844) 164,013 91
Notes to the Financial Statements For the year ended 31 March 2010 1. Nature of operations and general information Entertainment One Ltd. and subsidiaries ( the Group ) principal activity is the creation, acquisition and exploitation of entertainment rights across all media and the production of television content. In addition, the Group owns distribution channels to retailers in territories where it can capture additional margin and improve delivery of products to consumers. The Group is a leading international independent entertainment business currently operating in Canada, the United Kingdom, the United States and the Rest of Europe. Segmental information is disclosed in note 3. Entertainment One Ltd. is the Group s ultimate Parent Company, is incorporated in the Cayman Islands and is domiciled in Jersey. Entertainment One Ltd. shares are listed on the Alternative Investment Market of the London Stock Exchange. Entertainment One Ltd. presents its consolidated financial statements in Pounds Sterling ( ), which is also the functional currency of the Parent Company. These consolidated financial statements were approved for issue by the Board of Directors on 24 May 2010. 2. Accounting policies Basis of presentation The financial statements have been prepared under the historical cost convention on a going concern basis and in accordance with applicable International Financial Reporting Standards as adopted by the EU and IFRIC interpretations ( IFRS ). The Group financial statements comply with Article 4 of the EU IAS Regulation. Accounting standards At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective: IFRS 1 (amended 2009) Additional Exemptions for First-time adopters (effective for annual periods beginning on or after 1 January 2010) IFRS 1 (amended 2010) Limited Exemption from Comparative IFRS 7 Disclosures for Firsttime Adopters (effective for annual periods beginning on or after 1 July 2010) IFRS 2 (amended 2009) Share-based Payments Group Cash-settled Share-based Payment Transactions (effective for annual periods beginning on or after 1 January 2010) IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2013) IAS 24 (revised 2009) Related Party Disclosures (effective for annual periods beginning on or after 1 January 2011) IAS 32 (amended 2009) Financial instruments: Presentation Classification of Rights Issues (effective for annual periods beginning on or after 1 February 2010) IFRIC 14 (amended) Prepayments of a Minimum Funding Requirement (effective for annual periods beginning on or after 1 January 2011) IFRIC 17 Distributions of Non-cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009) IFRIC 18 Transfers of Assets from Customers (effective for transfers received on or after 1 July 2009) IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010) Improvements to IFRSs (April 2009) (effective for annual periods beginning on or after 1 July 2009 or 1 January 2010, varies by standard). 92
The directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group s financial statements in the period of initial application. Implementation of new accounting standards In the current financial year, the Group has adopted IFRS 8 Operating Segments, IAS 1 Presentation of Financial Statements (revised 2007), IAS 23 Borrowing costs (revised) and minor amendments to a number of other accounting standards. In addition, the Group has early adopted IFRS 3 (revised 2008) Business Combinations. The main impact of adopting these standards is: IFRS 8 requires operating segments to be identified on a basis consistent with internal management structure and reporting, and has not resulted in a change to the segments presented. IAS 1 (revised) requires the presentation of a statement of changes in equity as a primary statement, separate from the income statement and statement of comprehensive income. IAS 1 permits the components of the income statement to continue to be presented in a separate income statement. The Group has taken this option. IAS 23 (revised) eliminates the option to expense all borrowing costs when incurred. This change has no impact on these financial statements. IFRS 3 (revised) requires all acquisition related costs to be recognised as expenses rather than added to goodwill. There are no material impacts of this change on these financial statements. Use of additional performance measures The Group presents one-off items, underlying EBITDA, adjusted profit before tax and adjusted earnings per share information. These measures are used by the Group for internal performance analysis and incentive compensation arrangements for employees. The terms one-off items, underlying and adjusted may not be comparable with similarly titled measures reported by other companies. The term underlying EBITDA refers to operating profit or loss excluding operating one-off items, share-based payment charges, depreciation and amortisation of intangible assets. The terms adjusted profit before tax and adjusted earnings per share refer to the reported measures excluding operating one-off items, amortisation of intangbile assets arising on acquisition, one-off items relating to the Group s financing arrangements and share-based payment charges. Going concern The directors acknowledge the latest guidance issued by the Financial Reporting Council in October 2009: Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009. The Group s activities, together with the factors likely to affect its future development are set out in the Business & Financial Review on pages 8 to 23. The Group meets its day to day working capital requirements and funds its investment in content through a revolving credit facility ( Facility ) which matures in September 2012 and is secured on assets held in the Group. Under the terms of the Facility the Group is able to draw down in the local currencies of its operating businesses. The amounts drawn down by currency at 31 March 2010 are shown in note 22 to the accounts. The Facility is subject to a series of covenants including fixed charge cover, net debt against EBITDA and capital expenditure. The Group has a track record of cash generation and is in full compliance with its existing bank facility covenant arrangements. As at 31 March 2010 the Group had 18.6 million of cash, 86.1 million of net debt and undrawn amounts under the Facility of 39.8 million. As explained in the risks section on page 22 the Group is exposed to uncertainties arising from the economic climate and also in the markets in which it operates. Market conditions could lead to lower than anticipated demand for the Group s products and services and exchange rate volatility could also impact reported performance. The Directors have considered the impact of these and other uncertainties and factored them 93
into their financial forecasts and assessment of covenant headroom. The Group s forecasts and projections, taking account of reasonable possible changes in trading performance (and available mitigating actions), show that the Group will be able to operate within the expected limits of the Facility and provide headroom against the covenants for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements. Reclassification in 2009 balance sheet Interest payable of 2.4 million accrued relating to the Group s exchangeable notes, previously classified within Other payables, has been reclassified to interest bearing loans and borrowings at 31 March 2009. Basis of consolidation The consolidated financial statements comprise the financial statements of Entertainment One Ltd. and its subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting periods as the Parent Company, using consistent accounting policies. Subsidiaries are consolidated in accordance with the requirements of IAS 27 and are fully consolidated from the date of acquisition and continue to be consolidated until the date of disposal. Jointly controlled entities are those entities over whose activities the Group has joint control, established by contractual agreement and are accounted for using proportional consolidation from the date that joint control commences. Contractual arrangements establish joint control over each joint venture classified as such. No single venturer is in a position to control the activity unilaterally. All intra-group balances, transactions, income and expenses and unrealised profits and losses resulting from intra-group transactions that are recognised in assets, are eliminated in full. Goodwill Goodwill represents the excess of the cost of acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units (CGUs) which are tested for impairment annually or more frequently if there are indications that goodwill might be impaired. The CGUs indentified are the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other groups of assets. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Investment in programmes Investment in programmes that are in development and for which the realisation of expenditure can be reasonably determined, are classified and capitalised in accordance with IAS 38 as productions in progress within investment in programmes. On completion of production the cost of investment is reclassified as investment in programmes. Also included within investment in programmes are programmes acquired on acquisition of subsidiaries. Amortisation of investment in programmes is charged to cost of sales unless it arises from revaluation on acquisition of subsidiaries in which case it is charged to administrative expenses. The maximum useful life is considered to be 10 years. Borrowing costs Borrowing costs directly attributable to the acquisition or production of a qualifying asset (such as investment in programmes) form part of the cost of that asset and are capitalised. Government grants A government grant is recognised when there is reasonable assurance that any conditions attached to the grant will be satisfied and the grants will be received. Government grants are recognised at fair value. 94
Other intangible assets Other intangible assets acquired by the Group are stated at cost less accumulated amortisation. Amortisation is charged to administrative expenses in the income statement on a straight-line basis over the estimated useful life of intangible fixed assets unless such lives are indefinite. Other intangible assets mainly comprise amounts arising on consolidation of acquired subsidiaries such as exclusive content agreements and libraries, customer relationships, exclusive distribution rights, brands and trade names and non-compete agreements. They also include amounts arising in relation to costs of software. Exclusive content agreements and libraries Customer relationships Exclusive distribution rights Brands and trade names Non-compete agreements Software 5 to 20 years depending on nature and life of the rights acquired 10 years 5 years 10 years 3 years 3 years Investments Unlisted investments are valued at their fair value with changes in fair value recognised directly in equity until the investment is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is brought into the net profit or loss for the period. Property, plant and equipment Property, plant and equipment are stated at original cost less accumulated depreciation. Depreciation is charged to write off cost less estimated residual value of each asset over their estimated useful lives using the following methods and rates: Leasehold improvements Fixtures, fittings and equipment Over the term of the lease 20% 30% reducing balance The asset s residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. Impairment of assets The Group reviews the carrying amounts of its property, plant and equipment and intangible assets annually to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Investment in content rights Investment in content rights are capitalised in the consolidated balance sheet if such amounts are considered recoverable against future revenues. These costs are amortised to cost of sales on a revenue forecast basis over a period not exceeding 10 years from the date of initial release. Acquired libraries are amortised over a period not exceeding 20 years. Amounts capitalised are reviewed at least quarterly and any portion of the unamortised amount that appears not to be recoverable from future revenues is written off to cost of sales during the period the loss becomes evident. Balances are included within current assets if they are expected to be realised within the normal operating cycle of the business. The normal operating cycle of the business can be greater than 12 months. In general at least 80 per cent. of film content is amortised within 12 months of theatrical release. 95
In the ordinary course of business the Group contracts with film producers to acquire rights to exploit films. Certain of these agreements require the Group to pay Minimum Guaranteed advances ( MG s), the largest portion of which often becomes due when the film is received by the Group, usually some months subsequent to signing the contract. MG s are recognised in the balance sheet when a liability arises, usually on delivery to the Group. Inventories Inventories are valued at the lower of cost (including direct expenditure and other appropriate attributable costs incurred in bringing inventories to their present location and condition) and net realisable value. Cost is calculated using the weighted average method. Financial instruments Financial assets and financial liabilities are recognised on the Group s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Trade and other receivables Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Trade and other payables Trade payables are not interest bearing and are stated at their nominal value. Derivative financial instruments and hedging The Group uses derivative financial instruments to reduce its exposure to foreign exchange and interest rate movements. The Group does not hold or issue derivative financial instruments for financial trading purposes. Derivative financial instruments are classified as held-for-trading and recognised in the balance sheet at fair value. Derivatives designated as hedging instruments are classified on inception as cash flow hedges, net investment hedges or fair value hedges. Changes in the fair value of derivatives designated as cash flow hedges are recognised in equity, to the extent that they are deemed effective. Ineffective portions are immediately recognised in the income statement. When the hedged item effects profit or loss then the amounts deferred in equity are recycled to the income statement. For net investment hedges, to the extent that movements in the fair values of these instruments effectively offset the underlying risk being hedged, they are recognised in the translation reserve until the period during which a foreign operation is disposed of or partially disposed of, at which point the cumulative gain or loss is recognised in the income statement, offsetting the cumulative difference recognised on the translation of the net investment. Fair value hedges record the change in the fair value in the income statement, along with the changes in the fair value of the hedged asset or liability. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are immediately recognised in the income statement. Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss. 96
Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Treasury shares The Entertainment One Ltd. shares held in the Employee Benefit Trust are classified in shareholders equity as treasury shares and are recognised at cost. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the original cost being taken to revenue reserves. No gain or loss is recognised in the financial statements on the purchase, sale, issue or cancellation of equity shares. Interest bearing loans and borrowings All interest bearing loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process. Interim production financing relates to short-term financing for the Group s television productions. Interest payable on interim production financing loans is capitalised and forms part of the cost of production of investment in programmes. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of this obligation. The expense relating to any provision is presented in the income statement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Operating leases Rentals payable under operating leases are charged to income on a straight line basis over the term of the relevant lease. Share-based payments The Group issues equity-settled and cash-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of equity-settled share-based payments is expensed on a straight line basis over the vesting period, based on the Group s estimate of shares that will eventually vest. Fair value is measured by means of a Binomial valuation model. The expected life used in the model has been adjusted, based on management s best estimate, for the effect of non-transferability, exercise restrictions, and behavioural considerations. For cash-settled share-based payments a liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balance sheet date. 97
Segmental reporting The Group s operating segments are identified on the basis of internal reports that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The Chief Executive Officer has been identified as the chief operating decision maker. The Group has two reportable segments: Entertainment and Distribution based on the types of products and services from which each segment derives its revenues. Revenue recognition Revenue represents the amounts receivable for goods and services provided in the normal course of business, net of discounts and excluding value added tax (or equivalent). Revenue is derived from the licensing, marketing and distribution of feature films, television, video programming and music rights. Revenue is also derived from retail and merchandising sales. Revenue from the exploitation of film and music rights is recognised based upon the contractual terms of each agreement. Revenue is recognised where there is reasonable contractual certainty that the revenue is receivable and will be received. Revenue from television licensing represents the invoiced value of licence fees which is recognised when the licence term has commenced, the production is available for delivery, substantially all technical requirements have been met and collection of the fee is reasonably assured. Revenue from the sale of own or co-produced TV productions is recognised when the production is available for delivery and there is reasonable contractual certainty that the revenue is receivable and will be received. Revenues from the sale of DVD, video and audio stocks are recognised at the point at which goods are despatched. A provision is made for returns based on historical trends. Revenue from retail sales is recognised at the point of sale to customers. Revenue on licensing and merchandising sales represents the invoiced value of licence fees which is recognised when the licence terms have commenced and collection of the fee is reasonably assured. Pension costs Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in Pounds Sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements. In preparing the financial statements of the individual companies, transactions in currencies other than the entity s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. Foreign exchange differences arising on the settlement of such transactions and from translating monetary assets and liabilities denominated in foreign currencies at year end exchange rates are recognised in the income statement. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at average exchange rates for the period. Foreign exchange differences arising, if any, are classified as equity and transferred to the Group s translation reserve. Such translation differences are recognised as income or expenses in the period in which the operation is disposed of. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. 98
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt within equity. The Group s liability for deferred tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities. This applies when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Significant judgements and estimates The preparation of consolidated financial statements under IFRS requires the Group to make estimates and assumptions that affect the application of policies and reported amounts. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below. Intangible assets The Group recognises intangible assets acquired as part of business combinations at fair value at the date of acquisition. The determination of these fair values is based upon management s judgement and includes assumptions on the timing and amount of future incremental cash flows generated by the assets and selection of an appropriate cost of capital. Furthermore, management must estimate the expected useful lives of intangible assets and charge amortisation on these assets accordingly. Impairment of goodwill The Group is required to test, at least annually, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a suitable discount rate in order to calculate the present value of these cash flows. Actual outcomes could vary. 99
Investment in content rights The Group capitalises investment in content rights and releases to cost of sales on a revenue forecast basis. Amounts capitalised are reviewed at least quarterly and any that appear to be irrecoverable from future revenues are written off to cost of sales during the period the loss becomes evident. The estimate of future revenues depends on management judgement and assumptions based on the pattern of historical revenue streams and the remaining life of each contract. Share-based payments The charge for share-based payments is determined based on the fair value of awards at the date of grant by use of the Binomial model which require judgements to be made regarding expected volatility, dividend yield, risk free rates of return and expected option lives. The list of inputs used in the Binomial model to calculate the fair values is provided in Note 34. Deferred tax Deferred tax assets and liabilities require management s judgement in determining the amounts to be recognised. In particular, judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration to the timing and level of future taxable income. Income tax The actual tax on the result for the year is determined according to complex tax laws and regulations. Where the effect of these laws and regulations is unclear, estimates are used in determining the liability for tax to be paid on past profits which are recognised in the financial statements. The Group considers the estimates, assumptions and judgements to be reasonable but this can involve complex issues which may take a number of years to resolve. The final determination of prior year tax liabilities could be different from the estimates reflected in the financial statements. 3. Segmental analysis Operating segments The Group has adopted IFRS 8 Operating Segments with effect from 1 April 2009. IFRS 8 requires operating segments to be identified on the basis of internal reports of those components of the Group that are evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. In contrast, the prior standard, IAS 14 Segment Reporting, required the Group to identify two sets of segments: business and geographical, using a risks and returns approach. Despite the change in Standard the identification of the Group s reportable segments has not changed from the prior year. For internal reports and management purposes, the Group is currently organised into two main reportable segments based on the types of products and services from which each segment derives its revenue entertainment and distribution. These divisions are the basis on which the Group reports its operating segment information. The types of products and services from which each reportable segment derives its revenues are as follows: Entertainment the acquisition and exploitation of filmed entertainment and music rights across all media and the production of television content. Distribution the ownership of distribution channels to retailers in territories and media where the Group can capture additional margin and improve delivery of products to consumers. Included within Other is a non-core retail operation in Canada. Segment information for the year ended 31 March 2010 is presented below. Inter-segment sales are charged at prevailing market prices. 100
Entertainment Distribution Other Eliminations Consolidated 000 000 000 000 000 Segment revenues External sales 205,280 213,684 25,208 444,172 Inter-segment sales 46,539 17,300 (63,839) Total segment revenues 251,819 230,984 25,208 (63,839) 444,172 Segment results Segment underlying EBITDA 26,538 13,257 (922) (29) 38,844 Group costs (4,510) Underlying EBITDA 34,334 Depreciation and amortisation (19,507) Share-based payment charge (2,743) One-off items (1,582) Operating profit 10,502 Finance income 7,777 Finance costs (11,404) Profit before tax 6,875 Tax (321) Profit after tax 6,554 Segment assets Total segment assets 308,163 144,815 7,563 (433) 460,108 Unallocated corporate assets 4,683 Consolidated total assets 464,791 Segment information for the year ended 31 March 2009 is presented below. Inter-segment sales are charged at prevailing market prices. Entertainment Distribution Other Eliminations Consolidated 000 000 000 000 000 Segment revenues External sales 119,593 193,084 29,966 342,643 Inter-segment sales 37,630 19,009 (56,639) Total segment revenues 157,223 212,093 29,966 (56,639) 342,643 Segment results Segment underlying EBITDA 15,711 13,376 (108) 95 29,074 Group costs (3,818) Underlying EBITDA 25,256 Depreciation and amortisation (16,867) Share-based payment charge (4,171) One-off items (29,677) Operating loss (25,459) Finance income 4,866 Finance costs (10,416) Loss before tax (31,009) Tax 578 Loss after tax (30,431) 101
Entertainment Distribution Other Eliminations Consolidated 000 000 000 000 000 Segment assets Total segment assets 265,914 116,570 7,191 (753) 388,922 Unallocated corporate assets 5,386 Consolidated total assets 394,308 Products and services from which reportable segments derive their revenues The Group s operating segments derive their external revenues from the following products and services: Segment Segment revenues revenues 2010 2009 000 000 Entertainment Film 161,573 83,325 Entertainment Television 43,707 36,268 Distribution 213,684 193,084 Other 25,208 29,966 External sales 444,172 342,643 Geographical information The Group s significant operations are located in Canada, the United States, the United Kingdom and Benelux. The Entertainment division is located in all of these geographies. The Group s Distribution operations are located in Canada and the United States. The following table provides an analysis of the Group s revenue based on the location of the customer and the carrying amount of segment non-current assets by the geographical area in which the assets are located for the year ended 31 March: External Non-current External Non-current revenues assets* revenues assets* 2010 2010 2009 2009 000 000 000 000 Canada 246,848 119,571 217,341 104,780 United States 76,519 23,680 65,031 31,527 United Kingdom 79,083 26,522 28,343 49,063 Rest of Europe 38,963 45,891 30,849 29,335 Other 2,759 1,079 444,172 215,664 342,643 214,705 * Non-current assets by location exclude amounts relating to deferred tax assets. 4. Operating profit/loss Profit/loss for the year is stated after (crediting)/charging: Year ended Year ended 31 March 31 March 2010 2009 000 000 Net foreign exchange gains (138) (267) Total depreciation of property, plant and equipment (note 15) 2,193 1,699 Amortisation of intangible assets (note 13) 16,884 14,127 Amortisation of investment in programmes (note 12) 18,759 12,066 Employee benefits (note 30) 46,261 44,399 One-off items (note 5) 1,582 29,677 102
During the year the Group obtained the following services from the Company s auditors: Year ended Year ended 31 March 31 March 2010 2009 000 000 Audit fees Fees payable for the audit of the Group s annual accounts 391 402 Fees payable for the audit of the Group s subsidiaries 98 98 Other services Services relating to corporate finance transactions 814 Tax services 245 875 Other services 58 201 792 2,390 5. One-off items One-off items are items of income and expenditure that are non-recurring and, in the judgement of management, should be disclosed separately on the basis that they are material, either by their nature or their size, to provide a further understanding of the Group s financial performance and enable comparison of financial performance between periods. Items of income or expense that are considered by management for designation as one-off are as follows: Year ended Year ended 31 March 31 March 2010 2009 Notes 000 000 Restructuring and abortive acquisition costs (a) 955 3,878 Rebranding (b) 321 1,672 Loss on disposal of investment (c) 306 US Music and Distribution businesses (d) 21,648 Receivership of Woolworths Group plc (e) 2,479 1,582 29,677 (a) Restructuring and abortive acquisition costs Restructuring and abortive acquisition costs in the current year include 0.4 million for the initial costs incurred as part of the proposed step up to the Main Market of the London Stock Exchange and corporate reorganisation and the final tranche of costs relating to a business reorganisation and abortive acquisition in the prior year. Prior year restructuring costs are in relation to the reorganisation of businesses and abortive acquisitions costs principally relating to a proposed reverse takeover that was abandoned in December 2008. (b) (c) Rebranding As part of the Group s strategy to become the leading independent entertainment content business, in January 2009 the Group announced that it would be introducing consistent corporate branding throughout the business. Consequently certain trade names arising on acquisition were written off in the prior year. Costs in the current year are principally additional legal costs relating to the rebranding. Loss on disposal of investment Loss on disposal of investment relates to an investment held in the Canadian Distribution business that was disposed of during the year. 103
(d) (e) US Music and Distribution businesses One-off items relating to the US Music and Distribution businesses in the prior year comprised the write down of label advances and impairment of goodwill following the significant acceleration in the decline in the US music market in the second half of that financial year. Receivership of Woolworths Group plc Receivership of Woolworths Group plc in the prior year comprised the impairment of irrecoverable trading receivables and the write down of investment in content following Woolworths Group plc and its wholly owned subsidiary Entertainment UK Ltd being placed into administrative receivership in November 2008. The tax impact of one-off items was 0.3 million (2009: 1.7 million). 6. Finance income and finance costs Finance income and finance costs comprise: Year ended Year ended 31 March 31 March 2010 2009 Notes 000 000 Finance income Interest income 84 283 Reset of exchangeable notes (note 22) (a) 1,479 Gain on repurchase of exchangeable notes (note 22) (a) 7,250 Increase in fair value of derivative instruments (note 21) (a) 443 2,432 Net foreign exchange gains 672 7,777 4,866 Finance costs Interest expense arising on bank loans and overdrafts (5,590) (4,270) Amortisation of deferred finance charges (b) (1,977) (1,808) Interest expense arising on exchangeable notes (note 22) (2,507) (2,610) Decrease in fair value of derivative instruments (note 21) (a) (1,287) (1,728) Net foreign exchange losses (43) (11,404) (10,416) Net finance charges (3,627) (5,550) (a) Items excluded from the calculation of adjusted earnings after tax in note 10. (b) Included in the prior year amount is 0.6 million relating to accelerated amortisation of deferred finance charges following the refinancing. 7. Tax Year ended Year ended 31 March 31 March 2010 2009 000 000 Current tax 4,381 2,858 Current tax adjustments in respect of prior years 943 (370) Deferred tax origination and reversal of temporary differences (1,725) (4,030) Deferred tax adjustments in respect of prior years (278) 100 Deferred tax changes in tax rates or tax laws (678) (42) Deferred tax asset (recognition)/write downs or reversals (2,322) 906 Tax charge/(credit) 321 (578) 104
The charge/(credit) for the year can be reconciled to the profit/(loss) in the income statement as follows: Year ended Year ended 31 March 31 March 2010 2009 000 % 000 % Profit/(loss) before tax 6,875 (31,009) Taxes at applicable domestic rates (131) (1.9) (9,558) 30.8 Effect of income that is exempt from taxation (1,038) (15.1) (1,257) 4.1 Effect of expenses that are not deductible in determining taxable profit 1,129 16.4 1,158 (3.7) Effect of deferred tax (recognition)/write downs or reversal (2,322) (33.8) 906 (2.9) Effect of losses/temporary differences not recognised 2,223 32.3 8,304 (26.8) Effect of irrecoverable withholding tax 473 6.9 181 (0.6) Effect of tax rate changes (678) (9.9) (42) 0.1 Prior year items 665 9.7 (270) 0.9 Income tax charge/(credit) and effective tax rate for the year 321 4.7 (578) 1.9 Taxation is calculated at the rates prevailing in the respective jurisdictions. The standard tax rates in each jurisdiction are 32.7 per cent. in Canada (2009: 32.8 per cent.), 35.5 per cent. in the United States (2009: 36.5 per cent.), 28.0 per cent. in the United Kingdom (2009: 28.0 per cent.), 20.0 per cent. in Hungary (2009: 20 per cent.), 0.0 per cent. in Jersey (2009: 0.0 per cent.), and 25.5 per cent. in the Netherlands (2009: 25.5 per cent.). 8. Deferred tax assets and liabilities The following are the major deferred tax assets and liabilities recognised by the Group and movements thereon during the year. Accelerated Unused Sharetax Intangible tax based depreciation assets losses payments Other Total 000 000 000 000 000 000 At 31 March 2008 351 (9,286) 228 211 469 (8,027) Acquisition of subsidiaries 13 (6,034) (696) (6,717) Prior year items (118) 36 (19) (101) Credit/(charge) to income (580) 2,571 1,973 (243) (583) 3,138 Exchange differences 38 (1,232) 28 62 74 (1,030) Effect of change in tax rates 3 26 29 At 31 March 2009 (296) (13,945) 2,232 30 (729) (12,708) Prior year items (191) (511) 323 657 278 Credit/(charge) to income 67 3,053 (1,254) 2,181 4,047 Charge to equity (123) (123) Exchange differences (8) (774) 197 (129) (714) Effect of change in tax rates 678 678 At 31 March 2010 (428) (11,499) 1,498 30 1,857 (8,542) 105
The deferred tax balances have been reflected in the balance sheet as follows: 31 March 31 March 2010 2009 000 000 Deferred tax assets 2,014 3,245 Deferred tax liabilities (10,556) (15,953) (8,542) (12,708) Utilisation of deferred tax assets is dependent on the future profitability of the Group. The Group has recognised deferred tax assets totalling 0.8 million (2009: 2.2 million) in relation to tax losses carried forward, as the Group considers that, on the basis of forecasts, there will be sufficient taxable profits in the future against which these losses will be offset. At the balance sheet date, the Group has unrecognised deferred tax assets of 10.5 million (2009: 11.2 million) relating to tax losses and other temporary differences available for offset against future profits. The assets have not been recognised due to the unpredictability of future profit streams. Included in unrecognised deferred tax assets are 4.3 million and 0.9 million (2009: 4.7 million) relating to losses that will expire by 2029 and 2030 respectively. Other losses are expected to expire as a result of the Group s restructuring. At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was 13.1 million (2009: 8.7 million). No liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. There were no temporary differences arising in connection with interests in joint ventures. 9. Dividends The directors are not recommending payment of a dividend (2009: nil). 10. Earnings/(loss) per share Year ended Year ended 31 March 31 March 2010 2009 Pence Pence Basic earnings/(loss) per share 4.6 (23.2) Diluted earnings/(loss) per share 4.3 (23.2) Adjusted basic earnings per share 12.3 9.1 Adjusted diluted earnings per share 11.5 8.6 Basic earnings/(loss) per share has been calculated by dividing the earnings/(loss) attributable to shareholders by the weighted average number of shares in issue during the year, including the S class shares, after deducting Treasury shares. The adjusted basic earnings per share calculation is based on the basic loss per share calculation after allowing for adjusted items. Diluted and adjusted diluted earnings per share have been calculated after adjusting the weighted average number of shares used in the basic and adjusted basic calculation to assume the conversion of all potentially dilutive shares. 106
Reconciliations of the profit and loss used in the basic and diluted earnings calculations to profit and loss used in the adjusted earnings/(loss) per share calculations are set out below. Year ended Year ended 31 March 31 March 2010 2009 000 000 For basic and diluted earnings/(loss) per share Profit/(loss) for the financial year 6,554 (30,431) For adjusted basic and diluted earnings/(loss) per share Profit/(loss) for the financial year 6,554 (30,431) Add back: One-off items 1,582 29,677 Amortisation of acquired intangibles 17,289 15,119 Share-based payments 2,743 4,171 Financing net fair value movements 844 (704) Gain on repurchase of exchangeable notes (7,250) Early settlement cost on refinancing 630 Reset of exchangeable notes (1,479) Direct tax effect of above items (4,172) (5,108) Adjusted earnings after tax 17,590 11,875 Weighted average number of shares in issue Basic 142,610,865 131,151,599 Dilution for share options 10,975,542 7,264,279 Adjusted diluted 153,586,407 138,415,878 The weighted average number of dilutive potential shares for the year to 31 March 2009 has been adjusted following reclassification of certain shares. The impact increases the previously reported adjusted diluted earnings per share for the year to 31 March 2009 by 0.5 pence. 11. Goodwill 31 March 31 March 2010 2009 000 000 Cost and carrying value at beginning of year 99,699 80,681 Acquisition of subsidiaries 199 16,885 Impairment losses for the year (9,981) Exchange differences 5,147 12,114 Cost and carrying value at end of year 105,045 99,699 Goodwill acquired in business combinations is allocated to the cash generating units (CGUs) that are expected to benefit from that business combination. Entertainment comprises Filmed Entertainment and US Music, Distribution comprises Canada and US Distribution. Impairment testing for goodwill The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. An impairment loss is recognised if the carrying value of a CGU exceeds its recoverable amount. The recoverable amount of a CGU is determined from value in use calculations based on the net present value of discounted cash flows. In assessing value in use, the estimated future cash flows are derived from the most recent financial budget and three year forecasts and an assumed growth rate. A terminal value is 107
calculated by discounting using an appropriate weighted average cost of capital. Any impairment losses are recognised in the income statement as an expense. Key assumptions used in value in use calculation Key assumptions used in the value in use calculations for each CGU, together with resulting headroom or shortfall compared to carrying value, are set out below: Terminal Period Discount Growth of specific CGU rate rate cash flows Entertainment 14% 3% 5 years Distribution Canada 11% 0% 5 years Distribution US 11% 0% 5 years US Music was identified as a separate CGU in the prior year and now represents less than 4 per cent. of Group revenues and less than 3 per cent. of Group underlying EBITDA. Consequently, given that US Music goodwill was impaired and written down to zero in the prior year, it has been aggregated within the Entertainment CGU on the grounds of materiality. The calculations of the value in use for all CGUs are most sensitive to the operating profit, discount rate and growth rate assumptions. Operating profits Operating profits are based on budgeted increases in revenue resulting from new investment in content rights, investment in TV productions and growth in the relevant markets. Discount rates A pre-tax discount rate is applied to calculate the net present value of the CGU. The pre-tax discount rate is based on the Group WACC of 12 per cent. The discount rate is amended where specific country and operational risks are sufficiently significant to have a material impact on the outcome of the impairment test. Terminal growth rate estimates The terminal growth rates range from 0 per cent. to +3 per cent. (2009: 3 per cent. to +3 per cent.) beyond the end of year 5 and do not exceed the long-term projected growth rates for the relevant market. Period of specific cash flows Specific cash flows reflect the period of detailed forecasts prepared as part of the Group s annual planning cycle. The carrying value of goodwill, translated at year-end exchange rates is allocated as follows: 31 March 31 March 2010 2009 CGU 000 000 Entertainment 68,678 65,669 Distribution Canada 23,191 20,199 Distribution US 13,176 13,831 105,045 99,699 Sensitivity to change in assumptions With regard to the assessment of value in use of the CGUs, Entertainment and Canada Distribution calculations show that there is at least 50 million headroom when compared to current carrying values and consequently management believes that no reasonable change in the above key assumptions would cause the carrying value of the units to materially exceed their recoverable amount. Underlying EBITDA used in the terminal value calculations would need to decrease by more than 50 per cent. before headroom is eliminated. 108
US Distribution was impaired in the prior year and calculations this year show a similar value in use. Consequently any future deterioration in the key variables used in the value in use calculation may result in a further assessment of the carrying value of goodwill needing to be carried out. 12. Investment in programmes Investment in Productions in programmes progress Total Total 31 March 31 March 31 March 31 March 2010 2010 2010 2009 000 000 000 000 Cost Amounts brought forward 27,911 4,794 32,705 5,637 Acquisition of Subsidiaries 14,715 Additions 21,450 21,450 11,288 Transfers from/(to) investment in programmes 24,509 (24,509) Exchange differences 6,141 514 6,655 1,065 Amounts carried forward 58,561 2,249 60,810 32,705 Amortisation Amounts brought forward (13,259) (13,259) (965) Charge for the year (18,759) (18,759) (12,066) Exchange differences (2,778) (2,778) (228) Amounts carried forward (34,796) (34,796) (13,259) Net carrying amount 23,765 2,249 26,014 19,446 Included in amortisation above is 604,000 (2009: 1,041,000) attributable to programmes valued on acquisition of subsidiaries and charged to administrative expenses. Borrowing costs of 585,000 (2009: 686,000) on the Canadian Television interim production financing were included in the cost of investment in programmes during the year. 13. Other intangible assets Exclusive content Trade Exclusive Non agreements names distribution Customer compete and libraries and brands agreements relationships agreements Software Total 000 000 000 000 000 000 000 Cost Cost at 1 April 2008 32,431 7,678 18,003 17,165 4,832 581 80,690 Acquisition of subsidiaries 5,413 2,445 10,743 1,047 19,648 Additions 1,270 1,270 Exchange differences 4,133 1,345 4,866 2,919 1,064 149 14,476 Cost at 31 March 2009 41,977 9,023 25,314 30,827 6,943 2,000 116,084 Additions 1,029 1,029 Reclassification 123 123 Exchange differences 256 381 1,474 5,302 742 458 8,613 Cost at 31 March 2010 42,233 9,404 26,788 36,129 7,685 3,610 125,849 109
Exclusive content Trade Exclusive Non agreements names distribution Customer compete and libraries and brands agreements relationships agreements Software Total 000 000 000 000 000 000 000 Amortisation Amortisation at 1 April 2008 (2,851) (638) (3,426) (1,717) (1,590) (3) (10,225) Charge for the year (4,485) (1,313) (4,200) (2,238) (1,842) (49) (14,127) Impairment losses (1,298) (1,298) Exchange differences (690) (190) (1,336) (326) (491) (4) (3,037) Amortisation at 31 March 2009 (8,026) (3,439) (8,962) (4,281) (3,923) (56) (28,687) Charge for the year (4,802) (2,431) (4,522) (2,878) (2,052) (199) (16,884) Reclassification (123) (123) Exchange differences (40) (192) (875) (1,070) (587) (25) (2,789) Amortisation at 31 March 2010 (12,868) (6,062) (14,359) (8,229) (6,562) (403) (48,483) Carrying amount at 31 March 2009 33,951 5,584 16,352 26,546 3,020 1,944 87,397 Carrying amount at 31 March 2010 29,365 3,342 12,429 27,900 1,123 3,207 77,366 Impairment losses of 1.3 million were recognised in the prior year on trade names and brands relating to an exercise to rebrand a number of business units. 14. Investments Other investments of 128,000 (2009: 471,000, 2008: 319,000), are classified as available-for-sale. 15. Property, plant and equipment Fixtures, Leasehold fittings and improvements equipment Total Notes 000 000 000 Cost Cost at 1 April 2008 659 5,392 6,051 Acquisition of subsidiaries 23 151 174 Additions 416 1,245 1,661 Disposals (11) (7) (18) Exchange differences 117 1,609 1,726 Cost at 31 March 2009 1,204 8,390 9,594 Additions 303 641 944 Disposals (45) (18) (63) Reclassification 218 (170) 48 Exchange differences 220 446 666 Cost at 31 March 2010 1,900 9,289 11,189 110
Fixtures, Leasehold fittings and improvements equipment Total Notes 000 000 000 Depreciation Depreciation at 1 April 2008 (107) (913) (1,020) Charge for the year (192) (1,507) (1,699) Disposals 5 1 6 Exchange differences (27) (401) (428) At 31 March 2009 (321) (2,820) (3,141) Charge for the year (a) (445) (1,748) (2,193) Disposals 25 8 33 Reclassification (33) (15) (48) Exchange differences (96) (347) (443) Accumulated depreciation at 31 March 2010 (870) (4,922) (5,792) Carrying amount at 31 March 2009 883 5,570 6,453 Carrying amount at 31 March 2010 1,030 4,367 5,397 (a) Included within the depreciation charge for the year is 174,000 relating to completion of a prior year restructuring and is classified within one-off items. 16. Inventories Inventories comprise finished goods of 47,831,000 (2009: 40,137,000, 2008: 40,659,000). 17. Investment in content rights 31 March 31 March 2010 2009 000 000 Cost at beginning of year 47,670 33,899 Acquisition of subsidiaries 2,189 Additions 52,882 38,305 Amortisation charge for the year (37,646) (21,137) Impairment losses for the year (13,137) Exchange differences 2,440 7,551 Cost at end of year 65,346 47,670 18. Trade and other receivables 31 March 31 March 31 March 2010 2009 2008 000 000 000 Current Trade receivables 73,486 48,701 24,264 Less: Amounts provided for doubtful debts (1,407) (2,339) (797) 72,079 46,362 23,467 Other receivables 33,355 17,822 1,735 Prepayments and accrued income 8,753 11,451 6,383 Trade and other receivables 114,187 75,635 31,585 Non-current Other receivables 1,714 1,239 549 111
Trade receivables are generally non-interest bearing, however, interest may be charged on overdue balances in certain geographies. The average credit period taken on sales is 70 days (2009: 71 days). Trade receivables are provided for based on estimated irrecoverable amounts, determined by reference to past default experience. Included in the Group s trade receivable balance are debtors with a carrying amount of 10.7 million (2009: 11.8 million) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. Ageing of past due but not impaired receivables: 31 March 31 March 31 March 2010 2009 2008 000 000 000 Less than 60 days 6,793 6,892 3,330 Between 60 90 days 651 1,705 622 More than 90 days 3,230 3,193 1,872 Total 10,674 11,790 5,824 The Group does not hold any collateral over these balances. Movement in the amounts provided for doubtful debts: 31 March 31 March 2010 2009 000 000 Opening balance (2,339) (797) Acquisition of subsidiaries (53) Impairment losses recognised (945) (2,205) Impairment losses reversed 203 239 Amounts recovered during the year 239 62 Amounts written off as uncollectable 1,564 405 Exchange differences (129) 10 Closing balance (1,407) (2,339) In determining the recoverability of a trade receivable the Group considers any change to the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. Management has credit policies in place and the exposure to credit risk is monitored by individual operating divisions on an ongoing basis. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. Ageing of impaired receivables: 31 March 31 March 31 March 2010 2009 2008 000 000 000 Less than 60 days (65) (379) (30) Between 60 90 days (11) (203) (3) More than 90 days (1,331) (1,757) (764) Total (1,407) (2,339) (797) 112
Trade and other receivables are held in the following currencies as at 31 March, with those balances held in currencies other than Pounds Sterling converted at the exchange rate at the balance sheet date: Pounds Canadian US Sterling Euros Dollars Dollars Other Total 000 000 000 000 000 000 Current 2,795 6,582 12,114 10,086 8 31,585 Non-current 183 366 549 As at 31 March 2008 2,795 6,582 12,297 10,452 8 32,134 Current 9,519 5,513 45,896 14,674 33 75,635 Non-current 725 514 1,239 As at 31 March 2009 9,519 5,513 46,621 15,188 33 76,874 Current 22,220 5,003 73,136 13,730 98 114,187 Non-current 1,319 395 1,714 As at 31 March 2010 22,220 5,003 74,455 14,125 98 115,901 The directors consider that the carrying amount of trade and other receivables approximates to their fair value. Included within other receivables is 19.3 million (2009: 8.5 million) relating to government grants owing to the TV production businesses. 19. Cash and cash equivalents Cash and cash equivalents are held in the following currencies (those held in currencies other than Pounds Sterling have been converted at the exchange rate at the balance sheet date): 31March 31March 31March 2010 2009 2008 000 000 000 Pounds Sterling 2,235 1,756 3,925 US Dollars 3,652 3,863 3,127 Canadian Dollars 11,133 5,606 6,903 Euros 1,489 523 2,517 Other currencies 48 19 12 18,557 11,767 16,484 The credit risk on cash and cash equivalents is limited because the counterparties are banks with high creditratings assigned by international credit-rating agencies. The directors consider that the carrying amount of cash and cash equivalents approximates to their fair value. 113
20. Trade and other payables 31 March 31 March 31 March 2010 2009 2008 000 000 000 Current Trade payables 89,117 78,671 66,133 Accruals and deferred income 73,059 42,048 9,435 Other payables 15,406 12,479 8,152 Trade and other payables 177,582 133,198 83,720 Non-current Other payables 494 3,076 621 Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. For most suppliers no interest is charged but for overdue balances interest is charged at various interest rates. Trade and other payables are held in the following currencies (those held in currencies other than Pounds Sterling have been converted at the exchange rate at the balance sheet date): Pounds Canadian US Sterling Euros Dollars Dollars Other Total 000 000 000 000 000 000 Current 10,362 4,466 46,986 21,900 6 83,720 Non-current 621 621 As at 31 March 2008 10,362 4,466 47,607 21,900 6 84,341 Current 14,468 11,224 83,821 23,667 18 133,198 Non-current 3,076 3,076 As at 31 March 2009 14,468 11,224 86,897 23,667 18 136,274 Current 34,859 10,750 108,351 23,598 24 177,582 Non-current 494 494 As at 31 March 2010 34,859 10,750 108,845 23,598 24 178,076 The directors consider that the carrying amount of trade and other payables approximates to their fair value. 21. Other financial assets and liabilities 31 March 31 March 31 March 2010 2009 2008 000 000 000 Other financial assets Forward foreign currency contracts 488 Total other financial assets 488 Other financial liabilities Interest rate derivatives (1,743) (2,184) (456) Embedded equity option (433) (150) (2,582) Total other financial liabilities (2,176) (2,334) (3,038) Net other financial assets and liabilities (1,688) (2,334) (3,038) Included in interest rate derivatives above are interest rate collars ( collars ) and interest rate swaps ( swaps ) which the Group puts in place to limit interest rate risk. 114
The notional principal amounts of the outstanding collars at 31 March 2010 were 9.7 million and 10.0 million (2009: 12.0 million and 10.0 million). The collars carry cap rates of 4.75 per cent. (Euro) and 7.00 per cent. (Pounds Sterling) and floor rates of 2.99 per cent. (Euro) and 4.87 per cent. (Pounds Sterling). The Pounds Sterling collar incorporates a kick-in rate of 6.25 per cent. should the interest rate on the quarterly settlement dates fall below the floor rate of 4.87 per cent. These collars are recognised at fair value which is determined using the discounted cash flow method based on market data. The currency split of the marked to market values of the collars was 1,131,186 (Pounds Sterling) and 136,982 (Euro) (2009: 1,252,656 and 231,238). The notional principal amounts of the outstanding swaps at 31 March 2010 were USD $10.3 million, 8.3 million, 9.1 million and CAD $42.7 million (2009: USD $11.8 million, 8.3 million, 11.9 million and CAD $54.9 million). The 8.3 million swap is not effective until 31 December 2010, when the collar, currently 9.7 million, expires. The swaps carry fixed rates of 1.84 per cent., 3.49 per cent., 2.83 per cent. and 1.70 per cent. respectively. These swaps are recognised at fair value which is determined using the discounted cash flow method based on market data. The currency split of the marked to market values of the swaps was 67,106 (US Dollars), 210,134 (Euro), 204,319 (Pounds Sterling) and 6,373 (Canadian Dollars) (2009: 27,361 (US Dollars), 89,232 (Euro), 164,857 (Pounds Sterling) and 418,056 (Canadian Dollars)). The Group also uses forward currency contracts to hedge transactional exposures. These contracts are denominated in US Dollars and primarily cover minimum guarantee payments in the UK and Benelux. At 31 March 2010, the total notional principal amount of outstanding currency contracts was 6.1 million and 7.4 million. The embedded equity option arising from the exchangeable notes (note 22) has been recognised at fair value. The fair value of 0.4 million (2009: 0.2 million) was determined using the Binomial model based on available market data as at 31 March 2010. 22. Interest bearing loans and borrowings 31 March 31 March 31 March 2010 2009 2008 000 000 000 Bank borrowings 75,002 69,097 47,349 Exchangeable notes 5,612 18,642 16,529 Interim production financing 23,999 13,823 Total borrowings 104,613 101,562 63,878 Amount due for settlement within 12 months 18,377 13,823 3,539 Amount due for settlement after 12 months 86,236 87,739 60,339 The carrying amounts of the Group s borrowings as at 31 March are denominated in the following currencies: Pounds Canadian US Sterling Euros Dollars Dollars Total 000 000 000 000 000 Bank borrowings 14,305 11,330 16,817 4,897 47,349 Exchangeable notes 16,529 16,529 As at 31 March 2008 30,834 11,330 16,817 4,897 63,878 Bank borrowings 21,908 6,948 26,705 13,536 69,097 Exchangeable notes 18,642 18,642 Interim production financing 13,823 13,823 As at 31 March 2009 40,550 6,948 40,528 13,536 101,562 115
Pounds Canadian US Sterling Euros Dollars Dollars Total 000 000 000 000 000 Bank borrowings 14,826 9,293 36,092 14,791 75,002 Exchangeable notes 5,612 5,612 Interim production financing 22,734 1,265 23,999 As at 31 March 2010 20,438 9,293 58,826 16,056 104,613 The directors consider that the carrying amount of interest bearing loans and borrowings approximates to their fair value. The principal features of the Group s borrowings are as follows: (i) The Group has a four year multi-currency secured revolving credit facility with a syndicate of banks managed by JP Morgan Chase Bank N.A. The facility may be funded in US Dollars, Canadian Dollars, Sterling or Euro with repayment due on 18 September 2012. These interest bearing loans and borrowings are secured by the assets of the Group. The facility at 31 March 2010 at closing exchange rates was USD $180 million. (ii) At 31 March 2010, the Group had available 39.8 million (2009: 31.5 million) of undrawn committed borrowing facilities under the JPM facility in respect of which all conditions precedent had been met. (iii) Exchangeable notes of 19.6 million were issued, at their fair value, on 9 January 2008. Interest and principal on the notes are payable on maturity, which is 19 September 2013. The notes are convertible into equity of Entertainment One Ltd at the holders option. The fair value of the exchangeable notes of 19.6 million was split into the embedded equity option and liability elements at inception which are accounted for separately. The embedded equity option had a fair value at inception of 2.5 million and is re-measured at each reporting date (note 21). The liability element had a fair value of 17.1 million at inception and is accounted for using the amortised cost method. In the prior year the liability element was reset following extension to the maturity of the exchangeable notes and a gain of 1.5 million was recognised in finance income. On 2 February 2010 the Company repurchased exchangeable notes with a carrying value of 16.3 million for a total consideration of 9.0 million. As the repurchase was at a discount a one-off gain of 7.3 million has been recognised in finance income (note 6). (iv) The TV production businesses have Canadian Dollar interim production credit facilities with Royal Bank of Canada and National Bank of Canada bearing interest at Bank prime plus a margin. Amounts drawn down under these facilities at 31 March 2010 were 24.0 million (2009: 13.8 million). These facilities are secured by the future revenue commitments of the individual television production businesses. The weighted average interest rates on all bank borrowings are not materially different from their nominal interest rates. The weighted average interest rate on all interest bearing loans and borrowings is 6.3 per cent. (2009: 7.1 per cent.). 23. Provisions Restructuring Other provision provisions Total 000 000 000 At 31 March 2008 907 272 1,179 At 31 March 2009 1,157 318 1,475 Utilised in the year (930) (278) (1,208) Exchange difference 199 26 225 As at 31 March 2010 426 66 492 116
The restructuring provision relates to non-recurring restructuring, severance and warehouse closure costs to be incurred in delivery of cost-reduction measures. Included within other provisions are royalty provisions representing management s best estimate of the Group s liability to music licensors based on past experience and industry knowledge. All amounts are due for settlement within 12 months. 24. Share capital and other reserves 31 March 31 March 31 March 31 March 2010 2010 2009 2009 Share capital C$ C$ Authorised: 250,000,000 ordinary shares of C$0.01 each (2009: 200,000,000 shares) 2,500,000 2,000,000 25,000,000 S Class shares of C$0.01 each (2009: 25,000,000 shares) 250,000 250,000 Issued and fully paid: 151,926,963 ordinary shares of C$0.01 each (2009: 129,996,149 shares) 1,519,270 701,656 1,299,961 586,670 15,620,395 S Class shares of C$0.01 each (2009: 16,899,762 shares) 156,204 95,127 168,998 88,167 1,675,474 796,783 1,468,959 674,837 Other reserves 13,865,283 14,915,631 The Company has ordinary shares and S Class shares which carry no right to dividends. At 31 March 2010, 7,595,286 (2009: 7,595,286) of the issued share capital was held as Treasury Shares by the Employee Benefit Trusts to satisfy the exercise of options under the Group s share option schemes (note 34), at a cost of 7,819,596 (2009: 7,819,596). On 2 February 2010 the Company issued 19,499,400 ordinary shares at 0.53 each ( 10,035,000 net of costs) in relation to the repurchase of exchangeable notes as detailed in note 22. On 7 January 2010 the Company issued 1,152,047 S Class shares in respect of deferred consideration related to the acquisition of Maximum Film Distribution Inc. and Maximum Film International Inc. in September 2008. These S Class shares rank pari passu with the existing S Class shares in the share capital of the Company. In accordance with the exchangeable share terms of the sale and purchase agreements for the TV businesses acquired in September 2008, the following ordinary shares were issued to vendors during the year in exchange for S Class shares: On 2 November 2009 340,912 shares. On 13 January 2010 1,735,817 shares. On 24 March 2010 354,685 shares. Concurrently with the issue of ordinary shares, S Class shares were redeemed by the Company on a one-forone basis. Other reserves include: 4 million share warrants issued to Marwyn Value Investors L.P. (formerly Marwyn Neptune Fund) on the completion of the acquisition of Entertainment One Income Fund in 2007, accounted for as a share-based payment under IFRS 2 with a fair value of 639,000 (2009: 639,000) (note 34); 12,861,058 (2009: 14,276,631) reserves for S class shares in relation to the acquisition of the Canadian TV businesses in 2008; and cash flow hedging reserves of 365,225 (2009: nil). 117
25. Acquisitions There were no acquisitions in the current year. In the prior year the Group acquired 100 per cent. of the issued share capital of Barna-Alper Productions Inc., Blueprint Entertainment Corporation, which also included the subsidiary Oasis Pictures Inc., and Maximum, comprising Maximum Film Distribution Inc, and Maximum Film International Inc. Amounts recognised in the cash flow statement in the year to 31 March 2010 relate to the first tranche of earn-out payments in relation to these acquisitions with the final payments due in the next financial year. 26. Net Debt Year ended 31 March 2010 000 As at 31 March 2009 (89,795) Movement in cash and cash equivalents 5,839 Net movement in borrowings (7,854) Repuchase of exchangeable notes 15,586 Foreign exchange movements (5,534) Other items (4,298) As at 31 March 2010 (86,056) 27. Contingent liabilities and commitments Operating lease commitments The Group leases various offices under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. Year ended Year ended 31 March 31 March 2010 2009 000 000 Minimum lease payments under operating leases recognised in income 7,054 6,751 At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Year ended Year ended 31 March 31 March 2010 2009 000 000 Within one year 6,545 5,634 In the second to fifth years inclusive 12,460 11,985 After five years 2,016 2,303 21,021 19,922 Future capital expenditure (including investment in content rights) Year ended Year ended 31 March 31 March 2010 2009 000 000 Contracted for but not provided 44,250 40,277 118
28. Subsidiaries Details of the Company s principal subsidiary undertakings at 31 March 2010 are as follows: Country of Proportion Name incorporation held Principal activity E1 Entertainment UK Limited* England and Wales 100% Content ownership E1 Entertainment Benelux BV Holland 100% Content ownership (formerly RCV Entertainment BV)* Entertainment One Limited Canada 100% Content ownership & Partnership* distribution Seville Pictures Inc.* Canada 100% Content ownership E1 Films Canada Inc.* Canada 100% Content ownership Videoglobe 1 Inc.* Canada 100% Distribution E1 Entertainment US LP (formerly U.S. 100% Content ownership & Koch Entertainment LP)* distribution Earl Street Finance kft Hungary 100% Investment company 4384768 Canada Inc.* Canada 49% Investment company Earl Street Capital Inc.* U.S. 100% Investment company Seville Entertainment Inc.* Canada 100% Investment company E-One UK Limited England and Wales 100% Investment company E1 Entertainment Holding Holland Holland 100% Investment company BV (formerly Eone Holding Holland BV)* 6972501 Canada Inc.* Canada 49% Investment company E1 Television BAP Ltd.* Canada 100% TV Production E1 Television International Ltd.* Canada 100% Film & TV sales & distribution E1 Television Productions Inc.* Canada 100% TV Production * Owned through intermediate holding companies. The proportion held is equivalent to the percentage of voting rights held. The Group also owns 100 per cent. of the non-voting shares of 4384768 Canada Inc. and 6972501 Canada Inc. All of the above subsidiary undertakings have been consolidated in the Group financial statements under the acquisition method of accounting. 4384768 Canada Inc. and 6972501 Canada Inc. have been included as subsidiaries because management are in a position to direct the operations of these companies. No minority interest is being recognised because the Group is entitled to all of the economic benefits through ownership of the non-voting equity. 29. Investment in joint ventures Details of the Company s significant joint venture arrangements at 31 March 2010 are as follows: Country of Proportion Name incorporation held Principal activity One Voice Media Inc. Canada 51% Advertising Get Lucky Television Productions Inc. Canada 51% TV Production KVS V Productions Inc. Canada 50% TV Production Shattered Productions Ltd. Canada 49% TV Production 7093438 Canada Inc. Canada 51% TV Production GiGi III Productions Inc. Canada 50% TV Production Coach Productions Inc. Canada 20% TV Production Meet Phil Productions Inc. Canada 30% TV Production 119
Contractual arrangements establish joint control over each joint venture listed above. No single venturer is in a position to control the activity unilaterally. Effect of proportional consolidation of joint ventures The following presents, on a condensed basis, the effect of including joint ventures in the Group financial statements using proportional consolidation: Year ended Year ended 31 March 31 March 2010 2009 000 000 Income statement Revenue 9,555 3,336 Cost of sales (6,033) (1,668) Gross profit 3,522 1,668 Administrative expenses (317) (207) Operating profit 3,205 1,461 Net financing income 4 Profit before tax 3,205 1,465 Income tax credit/(expense) 301 (286) Profit after tax 3,506 1,179 Balance sheet Investment in programmes 7,294 308 Cash and cash equivalents 877 233 Trade and other receivables 8,485 2,078 Total assets 16,656 2,619 Trade and other payables 13,759 2,069 Current tax liabilities 471 Equity shareholders funds 2,897 79 Total equity and liabilities 16,656 2,619 30. Employee benefits The average monthly number of employees (including executive directors) was: Year ended Year ended 31 March 31 March 2010 2009 Canada 1,151 1,264 United States 197 217 United Kingdom 71 56 Rest of Europe 42 44 1,461 1,581 120
Their aggregate remuneration comprised: Year ended Year ended 31 March 31 March 2010 2009 000 000 Wages and salaries 38,933 35,797 Share-based payment charges 2,743 4,171 Social security costs 3,617 3,497 Pension costs 968 934 46,261 44,399 Included within wages and salaries are termination payments totalling nil (2009: 0.2 million). 31. Directors and key management compensation The remuneration of the executive directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Year ended Year ended 31 March 31 March 2010 2009 000 000 Short-term employee benefits 1,920 1,679 Share-based payments 1,249 2,354 3,169 4,033 Further details of directors emoluments (unaudited) can be found in the Directors Remuneration Report on pages 30 to 31. 32. Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Marwyn Value Investors L.P. (formerly Marwyn Neptune Fund) held 69,141,393 ordinary shares in the Company as at 31 March 2010 (2009: 57,766,889), amounting to 41.3 per cent. (2009: 39.3 per cent.) of the issued share capital of the Company. In addition, Marwyn Value Investors L.P. holds warrants over 4,000,000 ordinary shares (2009: 4,000,000) and owns 5.1 million of the Company s exchangeable notes (key terms of which are set out in note 22). Marwyn Value Investors L.P. is deemed to be a related party of Entertainment One Ltd. by virtue of this significant shareholding. James Corsellis, Mark Watts and David Williams are partners of Marwyn Capital LLP, partners of Marwyn Investment Management LLP, directors of Marwyn Partners Limited and directors of Marwyn Investments Group Limited and are therefore deemed to be related parties of Entertainment One Ltd. by virtue of a common director or member. During the year the Company paid fees of 0.2 million (2009: 0.4 million) to Marwyn Capital LLP for corporate finance advisory services under the terms of their advisory agreement pursuant to which Marwyn Capital agreed to provide general strategic and corporate financial services to the Company for a fixed monthly fee of 15,000 plus expenses with additional fees for each corporate transaction to be agreed. During the year the Group expensed fees of 0.1 million (2009: 0.2 million) to Marwyn Partners Limited for office and infrastructure costs under the terms of an arrangement pursuant to which Marwyn Partners provided temporary accommodation and associated back office support services (such as secretarial and IT support). The Company terminated this arrangement during the year. 121
At 31 March 2010 the Group owed Marwyn Capital LLP 30,000 (2009: 70,000). The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. A company in which Darren Throop owns an interest is the landlord of a retail store front location used by the retail business in Halifax, Nova Scotia, Canada. The amount paid during the year was 24,000 (2009: 24,311). This store was closed in March 2010. Robert Lantos is owner of Serendipity Point Films ( Serendipity ). The Group has an output agreement with Serendipity covering distribution of all Serendipity titles within the Canadian market. Serendipity also co-produces a number of TV productions with the Group. The Group owed Serendipity 0.2 million at 31 March 2010 (2009: 0.1 million). In addition, included in other payables are amounts owing to an entity over which Robert Lantos has a beneficial interest in respect of final amounts due following the purchase of the TV businesses in September 2008. The TV businesses were acquired prior to Mr. Lantos becoming a director of the Company. During the year payments of 1.2 million (2009: 1.4 million) were made to One Voice Media Inc., a joint venture of the Group (note 29). The Group owed 0.2 million (2009: 0.4 million) to One Voice Media Inc. as at 31 March 2010. The Group owed 0.5 million (2009: 0.3 million) to its joint venture television production companies and was owed 0.2 million (2009: 0.3 million) by its joint venture television production companies as at 31 March 2010. 33. Events after the balance sheet date On 31 March 2010 the Company announced that it is in dialogue with the UK Listing Authority ( UKLA ) regarding changing its listing from AIM to a Standard Listing on the Main Market of the London Stock Exchange (the Main Market ). The Board considers the current size, increasing maturity and ambition of the Group to be more appropriately served by a listing on London s Main Market. Subject to UKLA and other approvals as required, it is the Group s intention to move on to the Main Market following the announcement of its full year results and contemporaneously with the redomiciliation of the Group as described below. In addition the Group will be establishing its ultimate Parent Company in Canada. The Board believes this will enable the Group to simplify its structure and more efficiently address certain regulatory requirements applicable to businesses operating in the Canadian film and television distribution industry. It is anticipated that the relocation will be undertaken through a scheme of arrangement in the Cayman Islands, which is subject to the approval of the Cayman Islands courts and the Company s shareholders. On 24 May 2010, in association with the ongoing commercial relationship with Summit Entertainment LLC ( Summit ), 2,500,000 warrants were issued to Summit. These warrants are subject to time related vesting criteria. 34. Share-based payments Equity-settled share schemes The Group has a number of share option schemes and employee benefit trusts for its employees and directors. Details of any grants to directors during the year are given in the Directors Remuneration Report on page 31. The share-based payment charge for equity-settled share schemes for the year ended 31 March 2010 was 2.7 million (2009: 4.2 million). 122
A summary of the movement in share options is as follows: Weighted Weighted Executive average Employee average Share exercise Benefit exercise Plan price Trust price (Number) (pence) (Number) ( ) As at 31 March 2008 10,931,928 21.5 5,817,643 Options granted 1,550,000 3.6 450,000 Options forfeited (360,139) As at 31 March 2009 12,481,928 19.2 5,907,504 Options granted 950,000 19.1 75,000 Options forfeited (2,708,569) (901,899) As at 31 March 2010 10,723,359 19.2 5,080,605 Exercisable at 31 March 2009 3,376,957 11.8 2,093,922 Exercisable at 31 March 2010 7,183,597 11.7 3,356,700 The contractual life of an option under these schemes is between 3 and 5 years. The weighted average contractual life remaining of the options in existence at the end of the year was 2.3 years (2009: 2.5 years) and their weighted average exercise price was 16 pence (2009: 13 pence). There are certain performance criteria to be met before share options are exercisable with 33 per cent. of the options vesting in tranches over a three year performance period, 33 per cent. vesting dependent on performance against annual underlying EBITDA targets and the remainder vesting dependent on share price targets. The majority of share options vest in accordance with these performance criteria. Fair value of share options The fair value of share options granted during the year was calculated using the Binomial model. The assumptions used in the model were: Year ended Year ended 31 March 2010 31 March 2009 Executive Employee Executive Employee Share Benefit Share Benefit Plan Trust Plan Trust Fair value at measurement date 4.4 pence 30.5 pence 69.1 pence 70.9 pence Weighted average share price 19.1 pence 30.5 pence 91.5 pence 94.0 pence Weighted average exercise price 19.1 pence 3.6 pence Expected volatility 30.0% 30.0% 30.0% 29.7% Expected life 3.0 years 3.0 years 3.0 years 3.0 years Dividend yield Risk free interest rate 1.91% 1.91% 3.94% 3.94% The expected volatility is based on the Company s share price from the period since trading first began adjusted where appropriate for unusual volatility. The expected life used in the model is based on management s best estimate of the average expected time period for the exercise of an option by its holder. Management participation share plan On 31 March 2010 the Company implemented a new plan for the executive directors. Under the new scheme, participants will only be rewarded if shareholder value is created, thereby aligning the interests of the participants directly with those of shareholders. The new scheme does not effect the rights of other members 123
of those plans and they continue as before. There is no impact on profit in the current year of the new plan and none of the outstanding options had vested at 31 March 2010. The number of shares that would be issued under this scheme if the performance criteria is met is calculated based on the increase in market capitalisation of the Company since 31 March 2010. Any new equity issued is adjusted for so that the participants of the scheme do not benefit from the increased market capitalisation. Cash-settled share-based payments The carrying amount of the liability relating to the cash-settled options under the Canadian deferred bonus scheme at 31 March 2010 is 0.1 million (2009: 0.1 million). No cash-settled options under this scheme were forfeited during the year (2009: 25,000). Until this liability is settled it is remeasured at each reporting date with changes in fair value recognised in the income statement. Other share-based payment awards On completion of the acquisition of Entertainment One Income Fund four million share warrants were issued to Marwyn Value Investors L.P. (formerly Marwyn Neptune Fund). The conditions for exercising these are 50 per cent. when the share price reaches 1.25 and the remaining 50 per cent. when the share price reaches 1.50. The fair value of the share warrants was determined using a binomial option pricing model. Awards have been valued using an assumed exercise behaviour that recognises the exercise restrictions (note 24). 35. Financial risk management The Group s overall risk management programme seeks to minimise potential adverse effects on its financial performance and focuses on mitigation of the unpredictability of financial markets as they affect the Group. The Group s activities expose it to interest rate risk, foreign currency risk, credit risk and liquidity risk. These risks are managed by the Chief Financial Officer under policies approved by both the Board and the Audit Committee, which are summarised below. Interest rate risk management The Group has no significant interest-bearing assets and the Group s borrowings are at floating rates. The exposure to fluctuating interest rates is managed by capping portions of debt using interest rate collars and fixing portions of debt using interest rate swaps, which aims to optimise net finance costs and reduce excessive volatility in reported earnings. At 31 March 2010 the longest term of any debt held by the Group was until 2013. A simultaneous 1 per cent. increase in the Group s variable interest rates in each of Pounds Sterling, Euros, U.S. Dollars and Canadian Dollars at the end of 31 March 2010 would result in a 0.5 million (2009: 0.2 million) decrease to the Group s profit before tax and a decrease of 1 per cent. would result in a 1.0 million (2009: 0.8 million) increase to the Group s profit before tax. The difference is due to the impact of the interest rate collars and swaps. Foreign currency risk management The Group has significant investments in overseas operations. The majority of the Group s operations are domestic within their country of operation. The Group seeks to create a natural hedge of this exposure through its policy of aligning approximately the currency composition of its net borrowings with its forecast operating cash flows. The group undertakes net investment hedging where appropriate. The Group undertakes foreign currency transaction hedging using forwards for significant transactions. The Group s policy is to translate profits of overseas operations using average exchange rates. However, it is the Group s policy not to hedge exposure arising from profit translation. 124
The following table illustrates the Group s sensitivity to foreign exchange rates on its financial instruments. Sensitivity is calculated on financial instruments as at 31 March 2010 denominated in non-functional currencies for all operating units within the Group. The sensitivity analysis includes only outstanding foreign currency denominated monetary items including external loans. The percentage movement applied to each currency is based on management s measurement of foreign exchange rate risk. 31 March 31 March 2010 2009 Income Income statement statement +/ 000 +/ 000 10% appreciation of the US dollar (327) (589) 10% appreciation of the Canadian dollar (169) 62 Counterparty risk management Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The Group controls credit risk by entering into financial instruments only with highly credit-rated authorised counterparties which are reviewed and approved regularly by the Board. Counterparties positions are monitored on a regular basis to ensure that they are within the approved limits and there are no significant concentrations of credit risk. The Group considers its maximum exposure to credit risk as follows: 31 March 31 March 2010 2009 000 000 Cash and cash equivalents 18,557 11,767 Trade and other receivables 72,079 46,362 90,636 58,129 Liquidity risk management The Group maintains a prudent liquidity risk management position by having sufficient cash and availability of funding through an adequate amount of committed credit facilities. Management monitors rolling forecasts of the Group s liquidity reserve on the basis of expected cash flows. At 31 March 2010, the undrawn uncommitted facility amount was 38.1 million (2009: 31.5 million). The table below analyses the Group s financial liabilities which will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. 125
Trade and Interest other bearing payables borrowings Total 000 000 000 Amount due for settlement at 31 March 2010: Within one year 82,595 18,377 100,972 One to two years 5,931 5,931 Two to five years 84,368 84,368 82,595 108,676 191,271 Amount due for settlement at 31 March 2009: Within one year 85,526 13,823 99,349 One to two years 5,020 5,020 Two to five years 92,810 92,810 90,546 106,633 197,179 Interest on borrowings is calculated based on borrowings held at the balance sheet date without taking into account any potential future drawdowns. Floating rate interest is estimated using spot rates as at the balance sheet date. The exchangeable notes are convertible to equity at the option of the holders at any time before the redemption date in September 2013. If not converted at this date or redeemed earlier, they will be redeemed at principal plus accrued interest at the contractual redemption date. As such, these notes have been classified in the two to five year band. Derivative contracts include interest rate collars and swaps and foreign currency forwards which are settled net. There are no expected cash flows on the interest rate collars or swaps based on spot interest rates as at the balance sheet date. Financial liabilities denominated in currencies other than Pounds Sterling are converted to Pounds Sterling using closing exchange rates as of the balance sheet date. Capital risk management The Group s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to optimise the weighted average cost of capital and tax efficiency subject to maintaining sufficient financial flexibility to undertake its investment plans. In order to maintain or adjust the capital structure, the Group may issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of a leverage ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total interest bearing loans and borrowings (as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as equity as shown in the consolidated balance sheet plus net debt. The leverage ratio is: 31 March 31 March 2010 2009 000 000 Interest bearing loans and borrowings (note 22) 104,613 101,562 Cash and cash equivalents (note 19) (18,557) (11,767) Net debt 86,056 89,795 Total capital 250,069 222,996 Leverage ratio 34.4% 40.3% 126
Management has reviewed the year end leverage ratio and considers it appropriate based on the profile of the Group. 36. Financial instruments Financial instruments at fair value Effective 1 January 2009, the Group adopted the amendment to IFRS 7 for financial instruments that are measured in the balance sheet at fair value. This requires disclosure of fair value measurements grouped into the following levels: Level 1 fair value measurements derived from unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 fair value measurements derived from inputs, other than quoted prices included within level 1, that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and Level 3 fair value measurements derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data. At 31 March 2010 the Group had 0.4 million of financial assets and 2.2 million financial liabilities grouped into Level 2. The carrying value of the Group s financial instruments approximate their fair value. 127
COMPANY INFORMATION Nominated adviser and joint broker Joint broker Legal advisers to the company (UK & U.S.) Legal advisers to the company (Cayman Islands) Legal advisers to the company (Canada) Bankers Registrars Auditors Financial adviser to the company Singer Capital Markets Limited One Hanover Street London W1S 1AX United Kingdom Cenkos Securities plc 6.7.8 Tokenhouse Yard London EC2R 7AS United Kingdom Mayer Brown International LLP 201 Bishopsgate London EC2M 3AF United Kingdom Maples and Calder PO Box 309 Ugland House Grand Cayman KY1 1104 Cayman Islands Osler, Hoskin & Harcourt LLP 100 King Street West 1 First Canadian Place Toronto, Ontario M5X 1B8 Canada JPMorgan Chase 125 London Wall London EC2Y 5AJ United Kingdom Capita Registrars (Jersey) Limited Victoria Chambers Liberation Square 1/3 The Esplanade St. Helier JE4 0FF, Jersey Deloitte LLP 2 New Street Square London EC4A 3BZ United Kingdom Marwyn Capital LLP 11 Buckingham Street London WC2N 6DF United Kingdom 128
SECTION B: YEAR ENDED 31 MARCH 2009 Entertainment One Ltd. Annual Report & Accounts 2009 Entertainment One Ltd is a leading international entertainment business operating in Canada, the UK, Holland, Belgium and the US. The Group operates a unique vertically integrated and diversified international film, television and music content distribution business. Entertainment One s strategic focus is on multi-territory film and television rights ownership and distribution. Strategic Highlights Successfully building a strong pipeline of film releases and a track record of acquisition success Expanded the Group s activities into Canadian TV Production with acquisition of Barna-Alper, Blueprint and Oasis in September 2008 Provided foundation for growth in investment having secured a new four year multi-currency financing facility Financial Highlights 343m 25.3m Revenue up 29.6 per cent. Underlying EBITDA up 35.6 per cent. (2008: 264 million) (2008: 18.6 million) 1 47.8m Investment in content and programmes up 176 per cent. (2008: 17.4 million) 35.9m Operating cash flow up 25.1 per cent. (2008: 28.7 million) 1 Underlying EBITDA refers to operating loss excluding one-off items, share-based payment charges, depreciation and amortisation of intangible assets. 129
CONTENTS Page OVERVIEW 1 BUSINESS AND FINANCIAL REVIEW 2 STRATEGY 3 MARKETS 5 BUSINESS PERFORMANCE 6 FINANCIAL REVIEW 14 RISKS 18 DIRECTORS 20 DIRECTORS REPORT 22 DIRECTORS REMUNERATION REPORT 24 CORPORATE GOVERNANCE 26 INDEPENDENT AUDITORS REPORT 28 FINANCIAL STATEMENTS 29 NOTES TO THE FINANCIAL STATEMENTS 33 COMPANY INFORMATION 65 130
STRATEGY The Group s strategy is based on the ownership and control of film, television, kids and music rights for exploitation across all media channels. It is the Group s intention to continue to pursue its strategy both through investing in organic growth and seeking opportunities to increase its scale through corporate activity. The strategy is focused on developing a multi-territory distribution infrastructure. This offers independent film and TV producers an alternative to the major studios model, while enabling the Group to build competitive advantage in the market and deliver improved cost efficiency at lower risk. Television diversifies the Group s revenue across the spectrum of filmed entertainment. Supported by Canadian financing incentives and with established reach into the US and international broadcast markets, the Group s television business is well positioned to drive long-term value from original programming across multiple genres. It typically controls worldwide rights to the productions in which it is involved. The Board believes that additional opportunities exist to consolidate the Group s position within its existing geographic markets and to expand into selected new markets where the Group can further leverage its business model. Library information Content library valuation US$175 million Number of film titles 4,000 Hours of original tv programming 2,800 Number of music tracks 15,000 131
MARKETS Global film entertainment revenues now represent approximately US$100 billion 1, with distributor revenues representing over US$50 billion 1. The Group s markets across film and television remain robust with a number of factors expected to drive growth going forward. The US music market has experienced significant challenges as consumption models change, although underlying consumer demand remains strong. FILM Box Office The Group s film businesses currently operate in markets representing more than 15 per cent. 1 of global box office and 25 per cent. 1 of the box office market outside the US. Global box office performance has remained resilient to the economic downturn, with most Western markets reporting record attendance and revenue figures for 2008. The current economic environment has put pressure on film financing, leaving producers with more limited options to secure funding and delivering a strong pipeline of attractive content opportunities to the Group. Home Entertainment Home Entertainment revenues have come under some pressure in recent years as consumer pricing has fallen. However, unit volumes remain robust and pricing levels have now stabilised. During the year Blu-ray emerged as the dominant high-definition home entertainment technology. Sales of Blu-ray discs are expected to drive growth in the short to medium term as hardware penetration rates and consumer acceptance increases. Home Entertainment remains the largest segment of the global film market, contributing more than 50 per cent. 1 of total film revenues. Television The expansion in the number and variety of broadcast channels has provided increased routes to market for film rights distributors. The expansion of services such as video-on-demand have replaced the traditional rental model to some extent, but have also expanded the size of the market overall. Television broadcasters are experiencing pressure from reduced advertising revenues during the current economic cycle, but the market for movie content, particularly in the servicing of specialty and premium subscription channels, remains strong. New Media New media channels, including digital streaming of movies, remains in its infancy although advances in hardware and bandwidth technologies have progressed significantly over the last year. These new channels present new opportunities for rights distributors as additional routes to market. Threats from piracy and filesharing remain, but are not expected to present comparable challenges as those experienced by the music industry due to structural differences around product characteristics, download quality, device portability and the broader consumer experience. TELEVISION The global market for television subscriptions and license fees is worth in excess of US$150 billion 2 annually. Within Canada alone, approximately C$4.5 billion 1 was spent on programming by local broadcasters in 2008. Through federal funding and other incentive structures, the Canadian production financing environment allows the Group to produce premium North American content across diversified genres whilst significantly mitigating risks to the Group s own capital. In the current economic climate, defined by materially reduced advertising revenues, broadcasters internationally are seeking to access premium content from new sources and outside the traditional major US production environment. The Group 1 Source: Oliver & Ohlbaum 2 Source: PWC Global Entertainment and Media Outlook 2008-12 132
is ideally placed to capitalise on this trend and has a strong track record in securing US network commissions and control of the worldwide rights for its productions. The Group also has a growing presence in the kids TV segment in the UK and Canada which provides the opportunity to further develop its properties through licensing and merchandising. MUSIC The US music market has experienced significant challenges, driven by changes in consumer behaviour towards digital sales alongside continued piracy and file-sharing threats. Business models are adapting to reflect this but have typically been slow to react across the industry. Overall demand for the consumption of music content shows no signs of deteriorating and the Group has restructured and focused its music operations on remaining profitable in the face of current market dynamics. 133
BUSINESS PERFORMANCE 130 139 Planned film releases 2009/2010 Half hour TV shows produced over 80m 111 Planned investment in content rights and Film releases 2008/2009 programmes 2009/2010 OVERVIEW In its second year since listing on AIM Entertainment One has made excellent progress in pursuing its strategy to become the world s leading independent filmed entertainment and distribution business. The financial year to 31 March 2009 saw the first full period of ownership of the companies acquired during the previous year, alongside expansion into the Canadian TV Production market. In January 2009 the Group rebranded its businesses under one banner. Film performed strongly in the year, supported by over 110 releases across the division and the first major releases under the Group s output agreement with Summit Entertainment. These included Twilight, the first of three teenage vampire movies based on Stephenie Myers series of internationally bestselling novels, and Knowing starring Nicolas Cage. Both movies reached number one at the box office in the UK and Canada. In addition the increase in film investment has set up an exciting slate in all the Group s territories with more than 130 planned theatrical releases in the new financial year. Television also performed well, delivering 139 half hours of programming in the period following acquisition. The Group currently has a number of shows airing on broadcast networks internationally and has recently enjoyed notable success, with drama series The Bridge being sold to both CTV Globemedia and to the major US network CBS, and Copper sold to Canwest Global and ABC in the US. These shows are due for broadcast in the new financial year. Across the Group, revenue is underpinned by a content library that now incorporates over 4,000 film titles, 2,800 hours of original television programming and 15,000 music tracks, which are exploited across the five countries in which the Group operates and internationally. Canada Distribution delivered robust results against the backdrop of a tough consumer market. The US Music and Distribution businesses have been restructured following a significant deterioration in the US music market during the year. The successful refinancing of the Group s banking facilities in September 2008 has provided additional working capital to support the continued growth in content investment that will drive the delivery of the Group s strategy. The facility is underpinned by the latest valuation of the Company s content library at June 2008 of US$175 million. In February 2009, after a period of significant share price underperformance, the Board announced that a review would be undertaken to look at ways of increasing shareholder value. A successful partial offer by the Group s largest shareholder was followed by an improvement in the share price. However, the Board continues to believe that the Company remains significantly undervalued and remains focused on driving share price performance through the current AIM listing. In the medium term the Board will assess the opportunity to access other public markets when broader financial market conditions improve. 134
OUTLOOK The Group remains optimistic in its ability to continue to grow the business and deliver its strategy in the face of a challenging macro-economic environment. The Film division has a high quality slate of future releases and plans to increase investment in content further, while the Television business has started the new financial year strongly and has a number of new shows due for broadcast delivery in the coming year. In total the Group plans to invest over 80 million in content and TV production in the new financial year. The Canadian Distribution business remains well positioned to absorb the impact of margin pressure through growth in volume, both from new contracts and continued expansion of its Vendor Managed Inventory programme, while the US Music and Distribution businesses have stabilised following restructuring. SUMMARY FINANCIAL PERFORMANCE The Group s results to 31 March 2009 reflect the strategic progress in the year with revenue increasing by 29.6 per cent. from 264.4 million to 342.6 million. The impact of exchange translation due to the weakening in Sterling contributed 36 million. Adjusting for acquisitions and currency effects revenue was boosted by strong growth of 36.0 per cent. in the Film division, although in total reduced by 2.3 per cent. due to a 30 per cent. sales decline in the US Music and Distribution businesses. The reported loss before tax was 31.0 million compared to a loss of 7.7 million in the prior year due to the impact of one-off items of 29.7 million. These include 25.2 million of non cash charges, primarily relating to impairment of the US businesses following a significant decline in the US music market. Earnings before interest, tax, depreciation, amortisation, share based payments and one-off items ( underlying EBITDA ) increased strongly, by 35.6 per cent. Adjusting for acquisitions and 2.9 million of exchange translation benefit, underlying EBITDA fell by 12.2 per cent., mainly due to the downturn in the US businesses and increased content amortisation and Print and Advertising ( P&A ) spend driven by more film releases. As the Group s investment in content and release activity experiences significant growth, earnings are depressed due to the accounting requirement to recognise the full cost of P&A at the point it is incurred (on release of the film), rather than in line with revenue recognition over the exploitation life of a movie. Proforma, Constant Reported (audited) Currency 1 (unaudited) 2009 2008 2009 2008 000 000 % 000 000 % Revenue 342,643 264,375 29.6% 347,070 355,253 2.3% Underlying EBITDA 25,256 18,620 35.6% 25,005 28,491 12.2% P&A 40,220 14,825 171.3% 40,438 23,086 75.2% 1 Unless otherwise stated, in order to provide like for like comparisons, the discussion of results and analysis of comparisons to the prior year are on an unaudited proforma and constant currency basis. For the purposes of this analysis proforma includes the operating results for businesses acquired by the Group as if they had been acquired on the first day of the comparative period. In addition the results are shown on a constant currency basis. Constant currencies have been calculated by retranslating the comparative figures using weighted average exchange rates for the year to 31 March 2009. DIVISIONAL REVIEWS The Group is split into two divisions: Entertainment and Distribution. Entertainment The Entertainment division comprises the Film, TV and US Music businesses. Film Film comprises the businesses in the UK (formerly Contender), Benelux (formerly RCV) and Canada (formerly Seville Entertainment). It also includes the growing US Film unit. Revenue grew 36.0 per cent. to 118.4 million with underlying EBITDA at 9.5 million, down 11.5 per cent. on 2008. This reflects 135
increased P&A expenditure of 33.4 million (2008: 14.8 million) and higher content amortisation, driven by increased release activity, particularly in the UK and Canadian markets. 2009 2008 2008 Proforma, Reported Reported Constant Currency (audited) (audited) (unaudited) Film 000 000 % 000 % Revenue 118,351 53,036 123.2% 87,053 36.0% Underlying EBITDA 9,488 7,449 27.4% 10,716 11.5% P&A 33,360 8,162 308.7% 14,786 125.6% Investment in content and programmes 35,626 12,397 187.4% 23,137 54.0% Overall revenue growth was driven by a strong schedule of over 110 theatrical releases during the year. 35.6 million was invested in content, up 12.5 million compared to the previous year, to support the continued growth of the businesses. The new branding was launched across the businesses and saw the release of the first movies under the multiterritory agreement with Summit Entertainment. In particular the opening movie in the Twilight franchise was a major success, achieving a global box office of US$380 million and was in the top 10 highest grossing films worldwide in 2008. The sequels New Moon and Eclipse are planned for release in both territories in November 2009 and June 2010 respectively. In the UK revenue increased by over 20 per cent. as the business successfully launched its first major theatrical releases, Twilight, Knowing, Franklyn and Sex Drive, in the second half of the financial year. Production and licensing also performed well with strong growth in the kids category where sales more than doubled. Peppa Pig is now one of the two leading properties in the pre-school segment and the portfolio continues to expand through investment in titles such as Ben and Holly s Little Kingdom, Humf and Lost and Found. The home video business had a disappointing year due in particular to turbulence in the market following the failure of Woolworths Group plc, which resulted in a one-off charge of 2.5 million including a write off of amounts owing from its distribution business Entertainment UK Ltd. A strong slate of theatrical releases is planned for the UK in 2009/2010 including Bandslam (starring Vanessa Hudgens), I Love You Philip Morris (Jim Carrey and Ewan McGregor) and Away We Go (directed by Sam Mendes) while DVD releases will include the film Bronson alongside the latest series of Ashes to Ashes, Spooks and an animated version of the childrens classic The Gruffalo. A new series of Peppa Pig and further development of Little Kingdom and Humf will continue to expand the production and licensing business. In Canada, the film business expanded rapidly in the year, more than doubling revenue. In addition to the Summit titles (Twilight, Knowing, Sex Drive and Push) an additional 47 movies were released theatrically. These included Waltz with Bashir, Che and Sunshine Cleaning. Maximum, the film sales and distribution business acquired in September was successfully integrated and the portfolio has also been expanded following deals with Serendipity Point Films, Christal Films and an extension to the existing distribution agreement with fitness and lifestyle company Gaiam to include video on demand and digital rights. These developments have significantly increased the scale of our Canadian business which now controls a library of more than 1,100 titles. Alongside increased theatrical release activity, DVD releases included Never Back Down, Shake Hands with the Devil, Before the Devil Knows You re Dead and Flawless while TV releases included P2, The Air I Breathe and My Winnipeg. Looking forward, in addition to New Moon, theatrical releases in 2009/2010 include The Brothers Bloom, Sorority Row, Astro Boy and The Imaginarium of Dr. Parnassus (starring Johnny Depp, Jude Law, the late Heath Ledger and directed by Terry Gilliam). 136
The Benelux business had a record year following its acquisition by the Group in January 2008. This business already has a leading position in its local market and continues to secure a strong pipeline of titles from the main independent studios in Hollywood. Theatrical releases performed well, including Defiance (starring Daniel Craig) and Bangkok Dangerous (Nicolas Cage). Home video also had a strong year, including the releases of Eastern Promises, Resident Evil and Golden Compass. TV sales were 3 per cent. weaker due in part to TV broadcasters reducing their acquisition budgets, however video on demand grew rapidly, offsetting part of this shortfall. Theatrical releases scheduled in 2009/2010 include 17 Again (Zac Efron and Matthew Perry), Edge of Darkness (Mel Gibson and Ray Winstone) and a remake of the 1980 s hit musical Fame. Home video releases include Coco Avant Chanel and My Bloody Valentine. TV TV comprises Television (formerly Barna-Alper Productions Inc and Blueprint Entertainment Corporation) and International Sales (formerly Oasis Pictures Inc), all of which were acquired in September 2008 and have now been fully integrated into the Group under one brand. Synergies anticipated at the time of the acquisitions, particularly in the back office, have been achieved following relocation to the Group s offices in Toronto. These businesses provide scale to the Group s Canadian content and add a substantial library of series and movies to the portfolio. These include factual programming such as Outlaw Bikers, Mega Builders, Frontiers of Construction and Turning Points of History; drama, including Da Vinci s Inquest, The Best Years and Whistler; and comedy including Kenny vs Spenny, Testees, The Dating Guy and Til Death Do Us Part. In the period on a proforma basis revenues were down 4.7 per cent. on the prior year due to fewer but more profitably structured shows. Underlying EBITDA was up 33.0 per cent. to 5.6 million as a result of the business retaining a greater proportion of profit participation on the shows produced. 2009 2009 2008 Proforma, Reported Proforma Constant Currency (audited) (unaudited) (unaudited) TV 000 000 000 % Revenue 23,004 27,432 28,797-4.7% Underlying EBITDA 5,948 5,595 4,207 33.0% P&A 591 730 541 34.9% Investment in content and programmes 7,982 20,801 11,577 79.7% Television has performed well since acquisition and a number of shows were delivered in the first calendar quarter of 2009. These included new series of Kenny vs Spenny, Best Years, and Exes and Oh s. The pilot episode of a new drama, The Bridge, was delivered to CTV Globemedia during the year and will be broadcast by CTV and CBS as a major new series, underpinning the Group s continued success in the US market. A series order for Copper marked E1 Television s second major network deal post-acquisition and is expected to air on ABC and Canwest Global in early 2010. The remaining slate for 2009/2010 is also strong, with highlights including the comedy Hung which will premiere on HBO in June 2009, the drama series Shattered and the teen series Majority Rules. Through its international sales operations, the Television group continued to exploit and build its catalogue of over 2,800 hours of programming. Performance in the period since acquisition benefited in particular from distribution of internally produced content, including the comedy series Testees and Hallmark TV Movies of the Week Soccer Mom, Mail Order Bride and The Gambler, The Girl and The Gunslinger, alongside third party titles such as ReGenesis (Season 4) and Would Be Kings. Strong interest in the Group s content has been evident at recent industry fairs and the business is looking forward to continued growth in revenues by maximising the exploitation of internally produced programming and third party content. Music Revenues in the Music business declined 9.3 million to 16.9 million reducing Underlying EBITDA by 1.7 million to 0.3 million. It has been a difficult year for the business driven by the significant downturn 137
in the wider US music market, particularly in the second half. This was due to a number of factors including the impact of the deteriorating economic climate on consumer spending and an acceleration of the decline in physical CD sales resulting from the migration to digital format and a reduction in shelf space available for CD s across the retail industry. As a consequence, and despite an increase in digital sales of 27 per cent., the market contracted by 9 per cent. in the year to 31 March due to a 20 per cent. decline in physical sales. 2009 2008 2008 Reported Reported Constant Currency (audited) (audited) (unaudited) Music 000 000 % 000 % Revenue 16,918 22,089 23.4% 26,172 35.4% Underlying EBITDA 275 1,771 84.5% 2,012 86.3% Investment in content 4,230 4,965 14.8% 5,740 26.3% A restructuring programme was implemented in the second half of the financial year to ensure that the business has an appropriate cost base to continue to operate profitably into the future. This included the consolidation of a number of functions from the offices in Manhattan into the US Distribution business Port Washington facility. The Music business will also be investing less in new artists going forward. Forthcoming releases in 2009/2010 include albums by Jim Jones & Webstar, The Alchemist, DJ Khaled, Hatebreed and The Wiggles. Costs of the restructuring, combined with a write off of advances and impairment to goodwill that was booked on acquisition of the business, resulted in a one-off charge of 21.6 million. Distribution The Distribution division comprises the Group s physical warehousing and distribution businesses in Canada and the US. Overall revenues were down 7.6 per cent. with underlying EBITDA down 18.8 per cent. primarily reflecting the challenging US market conditions. 2009 2008 2008 Reported Reported Constant Currency (audited) (audited) (unaudited) Distribution 000 000 % 000 % Revenue 212,093 202,508 4.7% 229,587 7.6% Underlying EBITDA 13,376 14,222 5.9% 16,469 18.8% Canada Distribution The Canadian distribution business performed well given the challenging economic climate, with robust sales and underlying EBITDA. The impact of pricing pressure was offset by strong volume performance, in particular as a result of the expansion of the Vendor Managed Inventory programme which is continuing to open up new routes to market. During the year Blu-ray emerged as the dominant new high-definition home entertainment technology. Sales of Blu-ray discs have begun to show significant growth as hardware penetration increases and consumer acceptance becomes established and by March 2009 represented 9 per cent. of the home video market. New contracts were signed during the year including an extension of the existing relationship with Warner Home Video and these will support the business into the new financial year. In addition the Canadian box office, which is a key leading indicator for the business, has held up well in the last 12 months with gross receipts increasing 3 per cent. over the same period in the previous year, underpinning expectations for performance of new DVD and Blu-ray releases in the coming months. Costs remain under close scrutiny and following the consolidation of the facilities in Western Canada focus is on driving working capital efficiencies through effective inventory management. 138
US Distribution US Distribution was impacted by the significant decline in the CD market, which resulted in a reduction in both sales and underlying EBITDA. As the move from physical to digital formats in the music market accelerates the business is increasingly looking towards video content which reached 14 per cent. of volumes in 2008/2009, up from 8 per cent. in the previous year. During the year the business renewed its long-term distribution deal with Death Row Records, whose catalogue includes Tupac, Snoop Dogg and Dr. Dre. GROUP COSTS Group costs at 3.8 million (2008: 4.0 million) before one-off items were broadly in line with prior year. 139
FINANCIAL REVIEW Key performance indicator 8.1p 35.9 m Adjusted diluted earnings per share 2009 Operating cash flow 2009 2008: 7.2p 2008: 28.7 million OTHER FINANCIAL INFORMATION A summary of adjusted financial information is presented in order to provide information to investors and excludes the following: one-off items, amortisation of acquired intangible assets, share based payments and non-recurring items within net finance charges. Adjusted operating profit increased from 17.6 million to 23.5 million reflecting the growth in underlying EBITDA and the full year impact of the businesses acquired during the previous year. Adjusted profit before tax increased 27.1 per cent. to 16.4 million reflecting the increased operating profit partially offset by higher finance charges. Adjusted (audited) Reported (audited) 2009 2008 2009 2008 000 000 000 000 Underlying EBITDA 25,256 18,620 25,256 18,620 One-off items (29,677) (2,249) Amortisation of intangible assets (49) (3) (15,168) (11,067) Depreciation (1,699) (1,007) (1,699) (1,007) Share-based payments (4,171) (5,797) Operating profit/(loss) 23,508 17,610 (25,459) (1,500) Net finance charges (7,103) (4,747) (5,550) (6,176) Profit/(loss) before tax 16,405 12,863 (31,009) (7,676) Taxation (4,530) (5,663) 578 (879) Profit/(loss) after tax 11,875 7,200 (30,431) (8,555) One-off Items One-off items totalled 29.7 million. These included a large non-cash impairment in the US Music and Distribution businesses of 21.3 million and write offs of 2.5 million following the failure of Woolworths Group plc in the UK. The balance comprises a write off of legacy trade names following the rebranding, costs of restructuring and a proposed acquisition that was aborted in December 2008. The cash element of these items was 4.5 million. Amortisation of intangible assets and depreciation Amortisation of intangible assets increased from 11.1 million to 15.2 million and depreciation increased by 0.7 million to 1.7 million reflecting the annualised impact of the acquisitions in the previous year and inclusion of the TV businesses in the current year. Share-based payments The share-based payments charge of 4.2 million decreased in line with the vesting profile of the share options. 0.7 million of the charge in the year ended 31 March 2009 relates to options granted in the year. The balance relates mainly to charges in respect of options granted following formation of the Group in 2007. 140
Net finance charges Reported net finance charges decreased from 6.2 million to 5.6 million. A number of items impact net finance charges including movements in the fair value of financial instruments, one-off costs relating to early settlement of financing facilities and, in the current year, the impact of an extension to the maturity period of the exchangeable debenture. These items totalled a 1.4 million net charge in the prior year compared to a net 1.6 million credit in 2009. Excluding both these items and also the impact of exchange gains of 0.7 million (2008: losses of 0.8 million), the underlying net finance charges in 2009 were 7.8 million compared to 3.9 million in the prior year, reflecting the increase in net borrowings following the acquisitions in 2007/2008. The weighted average interest cost was 7.1 per cent. compared to 7.6 per cent. in the prior year, giving an underlying interest cover of 3.3 times underlying EBITDA (2008: 3.7 times). Tax The tax credit for the year was 0.6 million (2008: 0.9 million charge) giving an effective rate of 1.9 per cent. compared to a negative effective rate of 11.5 per cent. in the previous year. The low effective rate arises mainly due to unrecognised tax losses in certain jurisdictions in which the Group operates and is also distorted by the impact of non-deductible share-based payment charges and the write off of certain brought forward deferred tax assets. On an adjusted basis, excluding one-off items, amortisation of intangible assets, share-based payments and other net finance items, the effective rate was 28 per cent. (2008: 44 per cent.). Earnings and loss per share Reported loss after tax increased from 8.6 million to 30.4 million due to the impact of one-off items. Consequently the reported diluted loss per share was 23.2 pence (2008: 9.5 pence). On an adjusted basis profit after tax was 11.9 million or 65 per cent. ahead of the prior year. The adjusted diluted earnings per share was 8.1 pence (2008: 7.2 pence), up 12.5 per cent. Cash flow and financing The Group s cash balances decreased by 6.8 million during the year. 31 March 31 March 2009 2008 000 000 Net cash from operating activities 35,851 28,718 Investment in content rights and TV programmes (47,838) (17,362) Acquisition of subsidiaries (8,924) (159,857) Purchase of other non-current assets 1 (2,931) (2,295) Net interest paid (3,978) (4,042) Cash from other financing activities 21,053 171,322 Net (decrease)/increase in cash and cash equivalents (6,767) 16,484 1 Other non-current assets comprise property, plant and equipment and intangible software. Cash flows from operating activities were 25 per cent. ahead of the previous year reflecting the improved underlying EBITDA, partially offset by working capital which increased in line with the growth in the filmed entertainment business. The Group invested 47.8 million in content rights and television programmes in the year (2008: 17.4 million) and incurred cash costs relating to the acquisition of the Television businesses of 8.9 million. Prior year acquisitions totalled 159.9 million and principally comprised the purchase of the Entertainment One Income Fund and the filmed entertainment businesses. The Group s net debt increased by 40.0 million, from 47.4 million to 87.4 million at 31 March 2009, mainly reflecting the investment in content and acquisitions during the year which more than offset the operating cash flows generated. 141
000 000 At 31 March 2008 (47,394) Cash outflows (6,767) New loan advances (137,006) Loan repayments 115,953 Cash outflow adjusted for financing activity (27,820) Debt assumed on acquisition of TV businesses (9,607) Decrease in value of exchangeable debenture 277 Foreign exchange movements (2,861) At 31 March 2009 (87,405) The net debt balances at 31 March 2009 comprise the following: 000 Cash and other items (excl. Television Production) (7,540) JP Morgan Senior Revolving Credit Facility 69,097 JP Morgan Net Debt 61,557 Exchangeable Debenture 16,252 Net Television Production Debt 9,596 87,405 On 19 September 2008 the Group signed a new four-year multi-currency US$150 million senior credit facility led by JP Morgan. This replaced the Group s existing debt facilities and provided additional capital to the Group for continued growth alongside greater flexibility and certainty of funding for the foreseeable future. Subsequent to the year end, following the weakening in the US Dollar, the Group has redenominated its facility into local currencies and has also raised an additional US$7.5 million under its funding agreement. Interim Production Financing arises following the acquisition of the Television production companies. These businesses source short term financing which is secured on assets and future contracted revenue streams. Financial position and going concern basis The Group s net assets increased from 123.6 million at 31 March 2008 to 133.2 million at 31 March 2009. The increase of 9.6 million was mainly due a 21.5 million benefit from foreign exchange on non-sterling denominated net assets and 14.3 million from the issue of exchangeable shares relating to the acquisition of the Canadian TV businesses in September 2008, which was partially offset by the loss for the year. The directors acknowledge the latest guidance issued by the Financial Reporting Council in November 2008 relating to going concern. The directors consider it appropriate to prepare the accounts on a going concern basis, as set out in note 2 to the financial statements. 142
RISKS The Board considers risk assessment, identification of mitigating actions and internal control to be fundamental to achieving the Group s strategic objectives. The Corporate Governance report on pages 26 to 27 describes the systems and processes through which the directors manage and mitigate risks. The Board considers that the principal risks to achieving its objectives are set out below. The Board recognises that the nature and scope of the risks can change and so reviews the risks faced by the Group as well as the systems and processes to mitigate them. Attracting and retaining the best people Entertainment is fundamentally a people business and the ability to attract, recruit and retain quality staff is a risk in a highly competitive labour market. We continue to invest in our people, ensuring that we recruit and retain the right calibre of staff with the skills, experience and talent to grow the business. We seek to ensure we have appropriate management development programmes to assess, manage and develop our people s leadership skills, talents and experiences throughout the organisation. Strategy execution The entertainment industry is continually changing and the Group will seek to identify and anticipate risks regarding our assumptions and understanding of these changes, including economic conditions, in order to ensure the strategy remains appropriate. Corporate planning processes are in place to ensure that the strategies of the individual businesses within the Group are aligned and contribute to the delivery of shareholder value. Acquisition effectiveness A significant driver of our strategy is growth through acquisitions in new territories around the world and consolidation opportunities in our current markets. The risks associated with this approach are mitigated through clearly defined investment criteria, detailed due diligence from the Company s professional advisers, the requirement, where appropriate, for management to remain with the target business post acquisition and through robust financial and operational post acquisition and integration plans. Content investment opportunities An increase in investment in content rights is fundamental to achieving the Group s aim of providing shareholders with improving and sustainable returns. The continued availability of good quality content, particularly in relation to filmed entertainment, is considered as part of the corporate planning process. The risk of reduced availability of content is mitigated through the continual development of relationships with producers and other key stakeholders across the full spectrum of the entertainment industry. In addition, by following the current strategy of the Group the business is becoming a more attractive partner for the sellers of entertainment rights. Financial risk management The Board considers that the main risks arising from the Group s financial instruments are interest rate risk, foreign currency risk, credit risk, liquidity risk and covenant risk. The use of financial derivatives is governed by the Group s policies approved by the Board of Directors. The Group does not use derivative financial instruments for speculative purposes. Interest rate risk The Group has an exposure to interest rate risk arising principally from changes in US Dollar, Canadian Dollar, Sterling and Euro interest rates. The exposure to fluctuating interest rates is managed by capping portions of debt using interest rate collars and fixing portions of debt using interest rate swaps, which aims to optimise net finance expense and reduce excessive volatility in reported earnings. At 31 March 2009 the longest term of any debt held by the Group was until 2013. 143
Foreign exchange risk The Group s operating activities expose it to the financial risks of changes in foreign currency exchange rates. These risks comprise translation risk, resulting from the requirement to present the results from different territories in the Group s reporting currency, and transactional risk. Transactional risk arises where business units enter into contracts denominated in a currency other than their local reporting currency. These include Minimum Guarantee payments to film studios, which are often denominated in US Dollars. The Group uses foreign exchange forward contracts when appropriate, and otherwise uses natural hedging methods where possible, to minimise exposure in these areas. Credit risk Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The Group controls credit risk by entering into financial instruments only with highly credit-rated counterparties. The Group has no significant concentrations of credit risks, with exposure spread over a large number of counterparties and customers. Liquidity risk In order to maintain liquidity to ensure that sufficient funds are available for ongoing operations and future developments, the Group uses a mixture of long-term and short-term debt finance. As at 31 March 2009 the Group had 11.8 million of cash and net debt of 87.4 million. The Group s policy throughout the period has been to minimise risk by placing funds in low risk cash deposits but also to maximise the return on funds placed on deposit. The Group meets its day to day working capital requirements and funds its investment in content through a revolving credit facility ( Facility ) which matures in September 2012 and is secured on assets in the Group. Under the terms of the Facility the Group is able to draw down in the local currencies of its operating businesses. The amounts drawn down by currency at 31 March 2009 are shown in note 22 to the accounts. Covenant risk The Group must comply with a number of financial covenants as part of its Facility. The covenants under the Facility include, inter alia, net debt/underlying EBITDA, fixed interest cover and net worth. The Group monitors actual and forecast compliance with these covenants and reports regularly to its bankers. At the date of this report the Group has operated within its covenants and at 31 March 2009 had undrawn amounts of 31 million under the Facility. The directors consider that should the covenants be adversely impacted by the risks set out above there are a number of mitigating actions which would enable it to continue in compliance with the terms of its facility. 144
DIRECTORS Darren Throop, Chief Executive Officer (44) Darren has over 20 years of executive management experience in the home entertainment products industry. Darren has been Chief Executive Officer of Entertainment One since July 2003 and has been in the Group since 1999. Previously Darren was the owner of Urban Sound Exchange between 1991 and 1999 when it was acquired by CDPlus. Giles Willits, Chief Financial Officer (42) Giles joined the board of Entertainment One in March 2007. He was formerly director of group finance at J Sainsbury plc from 2005 to 2007 and group corporate development director and interim group finance director at Woolworths Group plc. Before this Giles held a number of finance and operational management roles within Kingfisher plc and Sears Plc. Giles is a chartered accountant having qualified with PricewaterhouseCoopers. Patrice Theroux, President Global Filmed Entertainment (46) Patrice has over 25 years of experience in the motion picture distribution industry and until June 2006 was president and CEO of Motion Picture Distribution LP, where he managed one of the world s leading independent distribution operations, including MPD in Canada, Momentum Pictures in the UK and Aurum Producciones in Spain. David Williams, Non-Executive Chairman (57) David has 40 years experience in the investment market. He has served as chairman in both executive and non-executive capacities for a number of companies, both public and private. He has overseen the development of these companies through both organic and acquisitive growth as well as dealing with turnaround situations. David is currently chairman of Augean PLC, Praesepe Plc, Marwyn Value Investors Limited. Marwyn Value Investors II Limited and ZETAR Plc as well as Marwyn Investments Group and its subsidiary companies. Bob Allan, Non-Executive Director (62) Between 1997 and 2006, Bob was vice-president of MDS Capital Corp, a North American venture capital company engaged in health and life science investments. Previously, Bob was vice-president financial operation at the laboratory services division of MDS Inc., a public health and life sciences company. Prior to joining MDS, Bob was a vice-president of Unitel Communications Inc. Bob is a chartered accountant and a member of the Canadian Institute of Chartered Accountants. Sir George Bain, Non-Executive Director (70) Sir George has over 40 years of academic and professional experience in the field of economics. He was Principal of the London Business School between 1989 and 1997 and President and Vice Chancellor of The Queen s University Belfast between 1998 and 2004. He was previously a non-executive director of Blackwell Publishers Ltd, The Economist Group, Electra Private Equity plc and Bombardier Aerospace Shorts Brothers plc. He is currently a non-executive director of The Canada Life Group (UK) Ltd and Canada Life Capital Corporation and Great-West Lifeco. Inc. Clare Copeland, Non-Executive Director (73) Clare is currently the chief executive of Falls Management Company, a commercial development and casino in Niagara Falls, Ontario, Canada. Clare is also chairman of Toronto Hydro Corporation, a Canadian electricity provider. Between 2000 and 2002 Clare was chairman and chief executive of OSF Inc., a manufacturer of retail store interiors. Between 1993 and 1999, he was chief executive of People s Jewellers 145
Corporation, a jewellery retailer. Clare is also currently a trustee of Chesswood Income Trust and RioCan Real Estate Investment Trust and a director of Danier Leather Inc. James Corsellis, Non-Executive Director (38) James is a managing partner of Marwyn Investment Management LLP. James was previously chief executive officer of icollector plc, a leading provider of live auction trading platforms. Over the past four years at Marwyn, James has undertaken 67 transactions, raising in excess of 1.2 billion in acquisition funding for Marwyn backed management teams and special purpose acquisition vehicles. He is currently a director of Marwyn Investments Group Limited, Concateno Plc and is a member of Marwyn Capital LLP. Garth Girvan, Non-Executive Director (60) Garth is currently a partner at the Canadian law firm McCarthy Tétrault LLP having joined the firm in 1978. Garth is currently a non-executive director of the Canadian entertainment company Imax Corporation and was previously a director of Silcorp Limited and the Canadian beverage distributor Corby Distilleries Limited. Garth is called as a barrister in Ontario (1978), Alberta (1982) and New York (1986). Robert Lantos, Non-Executive Director (60) Robert has more than 35 years experience in the motion picture industry. He is the producer of Cannes and Golden Globe winning and Academy Award Nominated films including Eastern Promises, Fugitive Pieces and Being Julia. He was owner of Maximum Film Distribution and Maximum Film International, the film distribution companies recently acquired by the Company and also owns Serendipity Point Films, a film and television production company based in Toronto, Canada. Prior to 1998, Mr. Lantos was co-founder and Chairman of Alliance Communications Corporation. Mark Opzoomer, Non-Executive Director (51) Mark is a partner in Bond Capital Partners, providers of lower mid-market growth capital. Mark is a nonexecutive of Blinkx plc, Newbay Software Limited and WebReservations International. He was previously non-executive director, then CEO of Rambler Media Limited. Prior to this Mark was the Managing Director and Regional Vice-President of Yahoo! Europe. Prior to joining Yahoo! Europe, Mark was Deputy Chief Executive of Hodder Headline plc, a LSE-listed book publishing company, and previously Commercial and Finance Director of Sega Europe Ltd and Commercial Director of Virgin Communications Ltd. Mark is a chartered accountant, a member of the Canadian Institute of Chartered Accountants, and has an MBA from IMD, Lausanne, Switzerland. 146
DIRECTORS REPORT The directors present their report and audited financial statements for the year ended 31 March 2009. Reporting period The Company was incorporated on 11 January 2007 and commenced trading on 29 March 2007 upon acquisition of the Entertainment One Income Fund. Consequently the comparative reporting period is from the date of incorporation to 31 March 2008. Registered office The registered office of Entertainment One Ltd. is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Principal activities The Group s principal activity is the acquisition and exploitation of entertainment rights across all media. In addition, the Group owns distribution channels to retailers in territories where it can capture additional margin and improve delivery of products to consumers. Business review The Business and Financial Review sets out a comprehensive review of the development and performance of the business for the year ended 31 March 2009 and is set out on pages 2 to 19. Risk management and internal controls Disclosures can be found in note 36 to the financial statements and the Corporate Governance section on pages 26 to 27. Share capital Details of new share issues during the period are shown in note 24. Post balance sheet events Details of post balance sheet events are set out in note 34. Directors The directors who held office during the year were: Darren Throop Giles Willits Patrice Theroux David Williams Bob Allan Sir George Bain Clare Copeland James Corsellis Garth Girvan Robert Lantos (Appointed 24 September 2008) Mark Opzoomer Mark Trachuk (Resigned 24 September 2008) Full biographical details of the current directors are set out on pages 20 to 21. 147
Directors interests The beneficial interests of the directors and their families in the shares of the Company are shown below. Options granted under the Company s employee share plans are shown in the Directors Remuneration Report on pages 24 to 25. At 31 March 2009 Number of shares Darren Throop 4,205,000 Patrice Theroux 93,457 Giles Willits 20,000 Robert Lantos 1 1,120,000 1 In addition, Robert Lantos also beneficially owns 2,563,349 Class S shares in the Company. During the period, no director had any material interest in any contract of significance to the Group s business. Policy of payment of creditors The Group s policy is to agree terms of payment prior to commencing trade with a supplier and to abide by those terms on the timely submission of satisfactory invoices. Trade creditors for the Group at 31 March 2009 were equivalent to 87 days purchases (31 March 2008: 88 days ). Disabled employees Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees. Going concern The directors continue to adopt the going concern basis in preparing the annual report and accounts. Further details are set out in note 2 to the financial statements. Auditors A resolution for the reappointment of Deloitte LLP as auditors will be proposed at the forthcoming Annual General Meeting. Annual General Meeting The Annual General Meeting of the Company will be held on 29 September 2009, notice of such meeting will be sent under separate cover. Statement of directors responsibilities for the Annual Report The directors are responsible for preparing the Annual Report and the financial statements. The directors are required to prepare financial statements for the Group in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs). International Accounting Standard 1 requires that financial statements present fairly for each financial period the Group s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board s Framework for the Preparation of Financial Statements. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. Directors are also required to: 148
properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity s financial position and financial performance. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group, for safeguarding the assets and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Group s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions. Each of the persons who is a director at the date of approval of this report confirms that: the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and the business review includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties they face. By order of the Board 149
DIRECTORS REMUNERATION REPORT As an AIM listed company incorporated in the Cayman Islands, Entertainment One Ltd. is not required to prepare a directors remuneration report. However, the Company has chosen to disclose the following information on directors remuneration which the Company considers appropriate. Remuneration Committee The Remuneration Committee reviews the performance of executive directors and sets the scale and structure of their remuneration and the basis of their service agreements with due regard to the interests of shareholders. To ensure that the Company s remuneration practices are market competitive, the Committee takes advice from various independent sources. The Board determines the remuneration of the non-executive directors with the support of external professional advice if required. No director participates in any discussion regarding his or her own remuneration. Policy on executive directors remuneration The policy of the Board is to provide executive remuneration packages designed to attract, motivate, reward and retain executive directors. The aim of the Group s remuneration policy is to ensure that these key executives are appropriately rewarded for their individual contributions to the Group s performance, commensurate with their duties and responsibilities. The Remuneration Committee believes that shareholders interests are best served by providing executives with remuneration packages which have a significant emphasis on performance related pay, through longterm share incentive schemes. The Board considers that packages of this nature are consistent with prevailing practice and are necessary to retain and reward executives of the calibre the Group requires. The main components of executive directors remuneration, which can be mirrored with senior executives, are basic salary, annual performance related bonus and share options. Basic annual salary Each executive director s basic salary is reviewed annually by the Committee. In deciding upon appropriate levels of remuneration the Committee believes that the Company should offer average levels of base pay reflecting individual responsibilities compared to similar jobs in comparable companies. Annual bonus payments The Committee establishes the objectives which must be met for an annual cash bonus to be paid. Share option incentives The Company operates a number of employee share option schemes (note 35) and the Committee has responsibility for supervising the schemes and the grant of share options under these schemes. In the current year the Committee made share option awards to key directors and employees in respect of performance and following successful acquisitions. Out-performance incentive plan The Company also has an out-performance incentive plan that allocates up to 5 million to an incentive pool to be paid to executive directors in the future, conditional on the sale of the Company for no less than 2.25 per share or the Company s share price achieving a share price of 2.25 per share following the third anniversary of Admission. Additional benefits The executive directors receive private medical insurance and life assurance cover. 150
Giles Willits is also entitled to an annual pension allowance of 17.5 per cent. of basic salary which is payable directly into his nominated pension fund. Directors emoluments The remuneration of each of the directors for the year ended 31 March 2009 (or period that they served as directors during the period) is set out as follows: Salary and fees Bonus Benefits Total 2008 000 000 000 000 000 Executive Darren Throop 261 270 4 535 491 Giles Willits 1 238 251 12 501 438 Patrice Theroux 274 270 12 556 497 Peter Pigott 2 53 Non-executive David Williams 60 60 60 Bob Allan 39 39 38 Sir George Bain 35 35 35 Clare Copeland 35 35 38 James Corsellis 35 35 35 Garth Girvan 35 35 38 Robert Lantos 3 17 17 Mark Opzoomer 35 35 35 Mark Trachuk 4 24 24 38 Total 1,088 791 28 1,907 1,796 1 In addition Giles Willits received 41,562 contribution to a personal pension plan (2008: 34,000). 2 Resigned 28 August 2007. 3 Appointed 24 September 2008. 4 Resigned 24 September 2008. Salary and fees shown above include fees paid in respect of duties as directors. Benefits relate mainly to the provision of company cars or car allowances and private medical insurance. Directors interests in share options The interests in share options of the current executive directors at 31 March 2009 were as follows: At 31 March Granted At 31 March Exercise Scheme 2009 2008 in year 2009 price ( ) Darren Throop Executive Share Plan 2,702,643 750,000 3,452,643 0.01 Giles Willits Employee Benefit Trust 2,577,643 450,000 3,027,643 Patrice Theroux Executive Share Plan 2,702,643 750,000 3,452,643 0.01 Total executive share options 7,982,929 1,950,000 9,932,929 151
CORPORATE GOVERNANCE Statement by the directors on compliance with the code of best practice As an AIM listed company, Entertainment One Ltd. is not required to comply with the provisions of the Combined Code on Corporate Governance ( the Combined Code ) that applies to companies with a full London Stock Exchange listing. However, the Board recognises the importance and value of good corporate governance procedures and accordingly have selected those elements of the Combined Code that they consider relevant and appropriate to the Group, given its size and structure. An overview of the Group s corporate governance procedures is given below. The Board The Group is controlled through a Board of Directors, which at 31 March 2009 comprised a non-executive chairman, three executive directors and seven other non-executive directors and is responsible to shareholders for the proper management of the Company and the Group. The Chairman is David Williams and the Chief Executive Officer is Darren Throop. Six non-executive directors, Bob Allan, Sir George Bain, Clare Copeland, Garth Girvan, Robert Lantos and Mark Opzoomer are considered to be independent. The independent non-executive directors bring a wide range of experience and expertise to the Group s activities and provide a strong balance to the executive directors. The Board operates both formally, through Board and committee meetings, and informally, through regular contact amongst directors and senior executives. There is a schedule of matters that are specifically referred to the Board for its decision, including approval of interim and annual results, setting and monitoring strategy and examining acquisition possibilities. The Board is supplied with information, in a timely manner, in a form and quality appropriate to enable it to discharge its duties. The directors can obtain independent professional advice at the Company s own expense in the performance of their duties as directors. Board Committees The Board Committees comprise the Audit Committee, the Remuneration Committee, the Nominations Committee and the Acquisitions Committee, each of which operate within defined terms of reference. Audit Committee The Chairman of the Audit Committee is James Corsellis with Bob Allan and David Williams as the other non-executive members. No one other than the Audit Committee s Chairman and members is entitled to be present at a meeting of the Audit Committee but the Company s external auditors together with the Chief Executive Officer and the Chief Financial Officer are also invited to attend the meetings. The Audit Committee operates under terms of reference agreed with the Board and meets at least twice a year. The Audit Committee considers the adequacy and effectiveness of the risk management and control system of the Group. It reviews the scope and results of the external audit, its cost effectiveness and the objectivity of the auditors. It also reviews, prior to publication, the interim results, preliminary announcement and the Annual Report. Remuneration Committee The Remuneration Committee comprises David Williams (as Chairman), James Corsellis and Clare Copeland. The Committee meets periodically as required and is responsible for overseeing the policy regarding executive remuneration and for approving the remuneration packages for the Group s executive directors. It is also responsible for reviewing incentive schemes for the Group as a whole. 152
Nominations Committee The Nominations Committee is chaired by James Corsellis and its other members are Clare Copeland and David Williams. The Nominations Committee meets as required to select and propose to the Board suitable candidates of appropriate calibre for appointment as directors. The Committee would normally expect to use the services of professional external advisors to help in the search for and selection of candidates. Acquisitions Committee The Acquisitions Committee is chaired by Darren Throop with James Corsellis, Giles Willits, Patrice Theroux and Sir George Bain as members. The Acquisitions Committee will source and identify potential acquisitions, negotiate the terms of any potential acquisition and coordinate due diligence, negotiations and preliminary documentation subject to full Board approval. Board and committee meeting attendance The table below sets out the attendance of directors at Board and committee meetings by presence or by telephone of individual directors. Full Board meetings Audit Remuneration Nominations Acquisitions Directors attended Committee Committee Committee Committee Darren Throop 7 of 7 1 of 1 Giles Willits 7 of 7 1 of 1 Patrice Theroux 5 of 7 1 of 1 David Williams 5 of 7 2 of 3 2 of 2 Bob Allan 7 of 7 3 of 3 Sir George Bain 5 of 7 2 of 2 1 of 1 Clare Copeland 7 of 7 1 of 1 James Corsellis 5 of 7 3 of 3 2 of 2 1 of 1 1 of 1 Garth Girvan 7 of 7 Robert Lantos 1 3 of 4 Mark Opzoomer 3 of 7 Mark Trachuk 2 3 of 3 1 of 1 1 of 1 1 Appointed 24 September 2008. 2 Resigned 24 September 2008. Shareholder communication The Board is committed to maintaining good communications with shareholders. The executive directors maintain a regular dialogue with analysts and institutional investors to discuss the Company s performance and future prospects. The Company responds formally to all queries and requests for information from existing and prospective shareholders. In addition, the Company seeks to regularly update shareholders through stock exchange announcements and wider press releases on its activities. The Annual General Meeting will provide an opportunity for shareholders to address questions to the Chairman or the Board directly. Published information, including regulatory news, is available on the Group s website, www.entertainmentonegroup.com. Risk management and internal controls The directors are responsible for the Group s system of internal control and for reviewing its effectiveness whilst the role of management is to implement Board policies on risk management and control. It should be recognised that the Group s system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve the Group s business objectives and can only provide reasonable, and not absolute, assurance against material misstatement or loss. 153
The Group operates a series of controls to meet its needs. These controls include, but are not limited to, a clearly defined organisational structure, a comprehensive annual strategic planning and budgeting process and detailed monthly reporting. The annual budget is approved by the Board as part of its normal responsibilities. In addition, the budget figures are regularly re-forecast to facilitate the Board s understanding of the Group s overall position throughout the year and this re-forecasting is reported to the Board in addition to the monthly reporting of actual results. The Audit Committee receives reports from management and the external auditors concerning the system of internal control and any material control weaknesses. Any significant risk issues are referred to the Board for consideration. When acquisitions are made, the Group s controls and accounting policies are implemented during the first full year of ownership. The Board has considered the need for an internal audit function, but has concluded that at this stage in the Group s development the internal control systems in place are appropriate for the size and complexity of the Group. 154
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF ENTERTAINMENT ONE LTD. We have audited the Group financial statements of Entertainment One Ltd. for the year ended 31 March 2009 which comprise the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity and the related notes 1 to 37. These Group financial statements have been prepared under the accounting policies set out therein. Ann I 20.4.1 This report is made solely to the Company s members, as a body, in accordance with Rule 19 of the AIM Rules for Companies. Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors Responsibilities. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Group financial statements give a true and fair view. We also report to you whether in our opinion the information given in the Directors Report is consistent with the Group financial statements. The information given in the Directors Report includes that specific information presented in the Business Review that is cross referred from the Business Review section of the Directors Report. In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding director s remuneration and other transactions is not disclosed. We read the other information contained in the Annual Report as described in the contents section and consider whether it is consistent with the audited Group financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any further information outside the Annual Report. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements. 155
Opinion In our opinion: the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group s affairs as at 31 March 2009 and of its loss for the year then ended; and the information given in the Directors Report is consistent with the Group financial statements. Deloitte LLP Chartered Accountants and Registered Auditors London United Kingdom 23 June 2009 156
FINANCIAL STATEMENTS Consolidated Income Statement For the year ended 31 March 2009 Year ended Period ended 31 March 31 March 2009 2008 Notes 000 000 Revenue 3 342,643 264,375 Cost of sales (270,123) (201,094) Gross profit 72,520 63,281 Administrative expenses (97,979) (64,781) Operating loss 4 (25,459) (1,500) Analysed as: Underlying EBITDA 25,256 18,620 Amortisation of intangible assets 12,13 (15,168) (11,067) Depreciation 15 (1,699) (1,007) Share-based payment charge 35 (4,171) (5,797) One-off items 5 (29,677) (2,249) (25,459) (1,500) Finance income 6 4,866 795 Finance costs 6 (10,416) (6,971) Loss before tax (31,009) (7,676) Income tax credit/(charge) 7 578 (879) Loss for the period (30,431) (8,555) Attributable to: Equity holders of the parent (30,431) (8,555) Loss per share Basic and diluted pence 10 (23.2) (9.5) 157
Consolidated Balance Sheet As at 31 March 2009 31 March 31 March 2009 2008 Notes 000 000 Assets Non-current assets Goodwill 11 99,699 80,681 Investment in programmes 12 19,446 4,672 Other intangible assets 13 87,397 70,465 Investments 14 471 319 Property, plant and equipment 15 6,453 5,031 Other receivables 18 1,239 549 Deferred tax assets 8 3,245 1,006 Total non-current assets 217,950 162,723 Current assets Inventories 16 40,137 40,659 Investment in content rights 17 47,670 33,899 Trade and other receivables 18 75,635 31,585 Current tax assets 1,149 Cash and cash equivalents 19 11,767 16,484 Total current assets 176,358 122,627 Total assets 394,308 285,350 Liabilities and equity Non-current liabilities Interest bearing loans and borrowings 22 85,349 60,339 Provisions 23 124 272 Other payables 20 5,466 621 Deferred tax liabilities 8 15,953 9,033 Total non-current liabilities 106,892 70,265 Current liabilities Trade and other payables 20 133,198 83,720 Current tax liabilities 3,509 303 Interest bearing loans and borrowings 22 13,823 3,539 Provisions 23 1,351 907 Other financial liabilities 21 2,334 3,038 Total current liabilities 154,215 91,507 Total liabilities 261,107 161,772 Equity Share capital 24 675 587 Share premium 126,352 126,352 Treasury shares 24 (7,819) (7,819) Other reserves 24 14,915 639 Currency translation reserve 28,161 6,705 Retained earnings 25 (29,083) (2,886) Total equity 133,201 123,578 Total liabilities and equity 394,308 285,350 158
These consolidated financial statements were approved by the Board of Directors on 23 June 2009. Giles Willits Director 159
Consolidated Cash Flow Statement For the year ended 31 March 2009 Year ended Period ended 31 March 31 March 2009 2008 Notes 000 000 Operating activities Operating loss (25,459) (1,500) Adjustments for: Depreciation 15 1,699 1,007 Amortisation of other intangible assets 13 14,127 10,102 Amortisation of content rights 17 21,137 10,160 Amortisation of television programmes 12 12,066 965 Foreign exchange movements (267) (489) Share-based payment charge 35 4,171 5,797 Impairment 11,13,17 24,416 Decrease in inventories 546 514 Increase in trade and other receivables (36,766) (3,421) Increase in trade and other payables 19,976 5,743 Increase in provisions 296 886 Net cash inflow from trading activities 35,942 29,764 Income tax paid (91) (1,046) Net cash from operating activities 35,851 28,718 Investing activities Interest received 260 722 Acquisition of subsidiaries (net of cash acquired) 26 (8,924) (159,857) Investment in content rights 17 (37,639) (15,581) Net investment in television programmes 12 (10,199) (1,781) Purchases of property, plant and equipment 15 (1,661) (1,714) Purchases of intangible software assets 13 (1,270) (581) Net cash used in investing activities (59,433) (178,792) Financing activities Proceeds from share issue 100,002 Loan repaid on acquisition (3,875) New loan advances 125,419 79,504 Loan repayments (107,771) (4,309) Net drawdown of production financing 3,405 Interest paid (4,238) (4,764) Net cash from financing activities 16,815 166,558 Net (decrease)/increase in cash and cash equivalents (6,767) 16,484 Cash and cash equivalents at beginning of the period 16,484 Effects of exchange rate fluctuations on cash held 2,050 Cash and cash equivalents at end of period 19 11,767 16,484 160
Consolidated Statement of Changes in Equity For the year ended 31 March 2009 Currency Issued Share Treasury Other translation Retained shares premium shares reserves reserve earnings Total equity 000 000 000 000 000 000 000 Loss for the period (8,555) (8,555) Shares issued during the period 552 123,238 123,790 Consideration shares 35 7,833 7,868 Share issue costs (4,719) (4,719) Purchase of own shares (7,819) (7,819) Foreign currency translation 6,705 6,705 Warrants issued during the period 639 639 Share-based payment charge 5,669 5,669 At 31 March 2008 587 126,352 (7,819) 639 6,705 (2,886) 123,578 Loss for the year (30,431) (30,431) Shares issued during the year 88 14,276 14,364 Foreign currency translation 21,456 21,456 Share-based payment charge 4,234 4,234 At 31 March 2009 675 126,352 (7,819) 14,915 28,161 (29,083) 133,201 161
Notes to the Financial Statements For the year ended 31 March 2009 1. Nature of operations and general information Entertainment One Ltd. and subsidiaries ( the Group ) principal activity is the creation, acquisition and exploitation of entertainment rights across all media. In addition, the Group owns distribution channels to retailers in territories where it can capture additional margin and improve delivery of products to consumers. The Group is a leading international independent entertainment business currently operating in Canada, the United Kingdom, the United States and the Rest of Europe. Segmental information is disclosed in note 3. Entertainment One Ltd. is the Group s ultimate Parent Company and is incorporated in the Cayman Islands and is domiciled in Jersey. Entertainment One Ltd. shares are listed on the Alternative Investment Market of the London Stock Exchange. Entertainment One Ltd. has presented its consolidated financial statements in Pounds Sterling ( ), which is also the functional currency of the Parent Company. These consolidated financial statements were approved for issue by the Board of Directors on 23 June 2009. 2. Accounting policies Basis of presentation The financial statements have been prepared under the historical cost convention on a going concern basis and in accordance with applicable International Financial Reporting Standards as adopted by the EU and IFRIC interpretations ( IFRS ). The Group financial statements comply with Article 4 of the EU IAS Regulation. Accounting standards At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements, were in issue but not yet effective: IFRS 1 (amended)/ias 27 (amended) IFRS 2 (amended) IFRS 3 (revised 2008) IFRS 8 IAS 1 IAS 23 IAS 27 (revised 2008) IAS 32 (amended)/ias 1 (amended) IFRIC 12 IFRIC 13 IFRIC 14 IFRIC 15 IFRIC 16 Improvements to IFRSs (May 2008) Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate Share-based payments Vesting Conditions and Cancellations Business Combinations Operating Segments Presentation of Financial Statements revised Borrowing costs revised Consolidated and Separate Financial Statements Puttable Financial Instruments and Obligations Arising on Liquidation Service Concession Arrangements Customer Loyalty Programmes The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Agreements for the Construction of Real Estate Hedges of a Net Investment in a Foreign Operation The directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group s financial statements in the period of initial application. Use of non-defined measures The Group presents one-off items, underlying EBITDA, adjusted profit before tax and adjusted earnings per share information. These measures are used by the Group for internal performance analysis and incentive compensation arrangements for employees. The terms one-off items, underlying and adjusted are not defined terms under IFRS and may therefore not be comparable with similarly titled measures reported by 162
other companies. They are not intended to be a substitute for, or superior to, GAAP measurements of profit. The term underlying EBITDA refers to operating loss excluding operating one-off items, share-based payment charges, depreciation and amortisation of intangible assets. The terms adjusted profit before tax and adjusted earnings per share refer to the reported measures excluding operating one-off items, amortisation of intangible assets arising on acquisition, one-off items relating to the Group s financing arrangements and share-based payment charges. Going concern The directors acknowledge the latest guidance issued by the Financial Reporting Council in November 2008: An Update for Directors of Listed Companies: Going Concern and Liquidity Risk. The Group s activities, together with the factors likely to affect its future development are set out in the Business and Financial Review on pages 2 to 19. The Group meets its day to day working capital requirements and funds its investment in content through a revolving credit facility ( Facility ) which matures in September 2012 and is secured on assets held in the Group. Under the terms of the Facility the Group is able to draw down in the local currencies of its operating businesses. The amounts drawn down by currency at 31 March 2009 are shown in note 22 to the accounts. The Facility is subject to a series of covenants including fixed charge cover, net debt against EBITDA and capital expenditure. The Group has a track record of cash generation and is in full compliance with its existing bank facility covenant arrangements. As at 31 March 2009 the Group had 11.8 million of cash, 87.4 million of net debt and undrawn amounts under the Facility of 31.5 million. As explained in the risks section on pages 18 to 19 the Group is exposed to uncertainties arising from the economic climate and also in the markets in which it operates. Market conditions could lead to lower than anticipated demand for the Group s products and services and exchange rate volatility could also impact reported performance. The directors have considered the impact of these and other uncertainties and factored them into their financial forecasts and assessment of covenant headroom. The Group s forecasts and projections, taking account of reasonable possible changes in trading performance (and available mitigating actions), show that the Group will be able to operate within the expected limits of the Facility and provide headroom against the covenants for the foreseeable future. In the directors view, the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. For this reason the directors continue to adopt the going concern basis in preparing the financial statements. Comparative information The Company was incorporated on 11 January 2007 and commenced trading on 29 March 2007 on acquisition of Entertainment One Income Fund. Comparative information is for the period from the date of incorporation to 31 March 2008. Basis of consolidation The consolidated financial statements comprise the financial statements of Entertainment One Ltd. and its subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting periods as the Parent Company, using consistent accounting policies. Subsidiaries are consolidated in accordance with the requirements of IAS 27 and are fully consolidated from the date of acquisition and continue to be consolidated until the date of disposal. Jointly controlled entities are those entities over whose activities the Group has joint control, established by contractual agreement and are accounted for using proportional consolidation from the date that joint control commences. Contractual arrangements establish joint control over each joint venture classified as such. No single venturer is in a position to control the activity unilaterally. 163
All intra-group balances, transactions, income and expenses and unrealised profits and losses resulting from intra-group transactions that are recognised in assets, are eliminated in full. The accounting policies followed by the Group are shown below: Goodwill Goodwill represents the excess of the cost of acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units (CGUs) which are tested for impairment annually or more frequently if there are indications that goodwill might be impaired. The CGUs indentified are the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other groups of assets. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Investment in programmes Investment in programmes that are in development and for which the realisation of expenditure can be reasonably determined, are classified and capitalised in accordance with IAS 38 as programme development costs under non-current assets. On first exploitation of the property the cost of investment is reclassified as investment in programmes. Also included within investment in programmes are properties acquired on acquisition of subsidiaries. Amortisation of investment in programmes is charged to cost of sales unless it arises from revaluation on acquisition of subsidiaries in which case it is charged to administrative expenses. The maximum useful life is considered to be 10 years. Other intangible assets Other intangible assets acquired by the Group are stated at cost less accumulated amortisation. Amortisation is charged to administrative expenses in the income statement on a straight-line basis over the estimated useful life of intangible fixed assets unless such lives are indefinite. Other intangible assets mainly comprise amounts arising on consolidation of acquired subsidiaries such as exclusive content agreements and libraries, customer relationships, exclusive distribution rights, brands and trade names and non-compete agreements. They also include amounts arising in relation to costs of software. Exclusive content agreements and libraries Customer relationships Exclusive distribution rights Brands and trade names Non-compete agreements Software 5 to 15 years depending on nature and life of the rights acquired 10 years 5 years 10 years 3 years 3 years Investments Unlisted investments are valued at their fair value with changes in fair value recognised directly in equity until the investment is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is brought into the net profit or loss for the period. Property, plant and equipment Property, plant and equipment are stated at original cost less accumulated depreciation. Depreciation is charged to write off cost less estimated residual value of each asset over their estimated useful lives using the following methods and rates: Leasehold improvements Fixtures, fittings and equipment Over the term of the lease 20 per cent. 30 per cent. reducing balance 164
The asset s residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. Impairment of assets The Group reviews the carrying amounts of its property, plant and equipment and intangible assets annually to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Investment in content rights Investment in content rights, currently available for exploitation, is capitalised in the consolidated balance sheet if such amounts are considered recoverable against future revenues. These costs are amortised to cost of sales on a revenue forecast basis over a period not exceeding 10 years from the date of initial release. Amounts capitalised are reviewed at least quarterly and any portion of the unamortised amount that appears not to be recoverable from future revenues is written off to cost of sales during the period the loss becomes evident. Balances are included within current assets if they are expected to be realised within the normal operating cycle of the business. The normal operating cycle of the business can be greater than 12 months. In general at least 80 per cent. of film content is amortised within 12 months of theatrical release. In the ordinary course of business the Group contracts with film producers to acquire rights to exploit films. Certain of these agreements require the Group to pay minimum guaranteed advances ( MGs ), the largest portion of which often becomes due when the film is received by the Group, usually some months subsequent to signing the contract. Historically, the Group has accounted for the full contracted MG on the balance sheet at the point of entering into these contracts, with the asset recorded in Investment in content rights and the liability in Other payables. However, following further consideration of the full contractual terms, the directors consider that these contracts are executory in nature and consequently have concluded that the MGs should only be recognised in the balance sheet when a liability arises, usually on delivery to the Group. This treatment has been adopted in the current year and has been applied retrospectively, with the effect of reducing both investment in content and trade and other payables by 9.6 million as at 31 March 2008 in the balance sheet. Inventories Inventories are valued at the lower of cost (including direct expenditure and other appropriate attributable costs incurred in bringing inventories to their present location and condition) and net realisable value. Cost is calculated using the weighted average method. Financial instruments Financial assets and financial liabilities are recognised on the Group s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Trade and other receivables Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Trade and other payables Trade payables are not interest bearing and are stated at their nominal value. 165
Derivative financial instruments and hedging The Group uses derivative financial instruments to reduce its exposure to foreign exchange and interest rate movements. The Group does not hold or issue derivative financial instruments for financial trading purposes. Derivative financial instruments are classified as held-for-trading and recognised in the balance sheet at fair value. Derivatives designated as hedging instruments are classified on inception as cash flow hedges, net investment hedges or fair value hedges. Changes in the fair value of derivatives designated as cash flow hedges are recognised in equity, to the extent that they are deemed effective. Ineffective portions are immediately recognised in the income statement. When the hedged item effects profit or loss then the amounts deferred in equity are recycled to the income statement. For net investment hedges, to the extent that movements in the fair values of these instruments effectively offset the underlying risk being hedged, they are recognised in the translation reserve until the period during which a foreign operation is disposed of or partially disposed of, at which point the cumulative gain or loss is recognised in the income statement, offsetting the cumulative difference recognised on the translation of the net investment. Fair value hedges record the change in the fair value in the income statement, along with the changes in the fair value of the hedged asset or liability. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are immediately recognised in the income statement. Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Treasury shares The Entertainment One Ltd. shares held in the Employee Benefit Trust are classified in shareholders equity as treasury shares and are recognised at cost. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the original cost being taken to revenue reserves. No gain or loss is recognised in the financial statements on the purchase, sale, issue or cancellation of equity shares. Interest bearing loans and borrowings All interest bearing loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process. Interim production financing relates to short-term financing for the Group s television productions. Interest payable on interim production financing loans is capitalised and forms part of the cost of production of investment in programmes. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. 166
Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of this obligation. The expense relating to any provision is presented in the income statement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Operating leases Rentals payable under operating leases are charged to income on a straight line basis over the term of the relevant lease. Share-based payments The Group issues equity-settled and cash-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of equity-settled share-based payments is expensed on a straight line basis over the vesting period, based on the Group s estimate of shares that will eventually vest. Fair value is measured by means of a binomial valuation model. The expected life used in the model has been adjusted, based on management s best estimate, for the effect of non-transferability, exercise restrictions and behavioural considerations. For cash-settled share-based payments a liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balance sheet date. Segmental reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. The Group has three business segments: Entertainment, Distribution and Other. A geographical segment is a component of the Group that operates within a particular economic environment and is subject to risks and returns that are different from those of components operating in other economic environments. The Group currently operates in four geographical segments: Canada, the US, the UK and the Rest of Europe. Revenue recognition Revenue represents the amounts receivable for goods and services provided in the normal course of business, net of discounts and excluding value added tax (or equivalent). Revenue is derived from the licensing, marketing and distribution of feature films, television, video programming and music rights. Revenue is also derived from retail and merchandising sales. Revenue from the exploitation of film and music rights is recognised based upon the contractual terms of each agreement. Revenue is recognised on a receivable basis where there is reasonable contractual certainty that the revenue is receivable and will be received. Revenue from television licensing represents the invoiced value of licence fees which is recognised when the licence term has commenced, delivery to licensee has occurred and substantially all technical requirements have been met and collection of the fee is reasonably assured. Revenues from the sale of DVD, video and audio stocks are recognised at the point at which goods are despatched. A provision is made for returns based on historical trends. Revenue from retail sales is recognised at the point of sale to customers. Revenue on licensing and merchandising sales represents the invoiced value of licence fees which is recognised when the licence terms have commenced and collection of the fee is reasonably assured. 167
Pension costs Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in Pounds Sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements. In preparing the financial statements of the individual companies, transactions in currencies other than the entity s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. Foreign exchange differences arising on the settlement of such transactions and from translating monetary assets and liabilities denominated in foreign currencies at year end exchange rates are recognised in the income statement. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at average exchange rates for the period. Foreign exchange differences arising, if any, are classified as equity and transferred to the Group s translation reserve. Such translation differences are recognised as income or expenses in the period in which the operation is disposed of. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities. This applies when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Significant judgements and estimates The preparation of consolidated financial statements under IFRS requires the Group to make estimates and assumptions that affect the application of policies and reported amounts. Estimates and judgements are 168
continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below. Intangible assets The Group recognises intangible assets acquired as part of business combinations at fair value at the date of acquisition. The determination of these fair values is based upon management s judgement and includes assumptions on the timing and amount of future incremental cash flows generated by the assets and selection of an appropriate cost of capital. Furthermore, management must estimate the expected useful lives of intangible assets and charge amortisation on these assets accordingly. Impairment of goodwill The Group is required to test, at least annually, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a suitable discount rate in order to calculate the present value of these cash flows. Actual outcomes could vary. Investment in content rights The Group capitalises investment in content rights and releases to cost of sales on a revenue forecast basis. Amounts capitalised are reviewed at least quarterly and any that appear to be irrecoverable from future revenues are written off to cost of sales during the period the loss becomes evident. The estimate of future revenues depends on management judgement and assumptions based on the pattern of historical revenue streams and the remaining life of each contract. Share-based payments The charge for share-based payments is determined based on the fair value of awards at the date of grant by use of the Binomial model which require judgements to be made regarding expected volatility, dividend yield, risk free rates of return and expected option lives. The list of inputs used in the Binomial model to calculate the fair values is provided in note 35. Deferred tax Deferred tax assets and liabilities require management s judgement in determining the amounts to be recognised. In particular, judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration to the timing and level of future taxable income. Income tax The actual tax on the result for the year is determined according to complex tax laws and regulations. Where the effect of these laws and regulations is unclear, estimates are used in determining the liability for tax to be paid on past profits which are recognised in the financial statements. The Group considers the estimates, assumptions and judgements to be reasonable but this can involve complex issues which may take a number of years to resolve. The final determination of prior year tax liabilities could be different from the estimates reflected in the financial statements. 3. Business and geographical segments Business segments For management purposes, the Group is currently organised into two main operating divisions entertainment and distribution. These divisions are the basis on which the Group reports its primary segment information. 169
Principal activities are as follows: Entertainment the acquisition and exploitation of filmed entertainment and music rights across all media and the production of television content. Distribution the ownership of distribution channels to retailers in territories and media where the Group can capture additional margin and improve delivery of products to consumers. Included within Other is a non-core retail operation in Canada. Segment information for the year ended 31 March 2009 is presented below. Inter-segment sales are charged at prevailing market prices. Entertainment Distribution Other Eliminations Consolidated 000 000 000 000 000 Revenue External sales 119,593 193,084 29,966 342,643 Inter-segment sales 37,630 19,009 (56,639) Total revenue 157,223 212,093 29,966 (56,639) 342,643 Result Underlying EBITDA 15,711 13,376 (108) 95 29,074 One-off costs (21,138) (6,325) (132) (27,595) Depreciation and amortisation (9,593) (7,115) (159) (16,867) Segment result (15,020) (64) (399) 95 (15,388) Unallocated corporate expenses Group costs (3,818) Share-based payments (4,171) One-off costs (2,082) Operating loss (25,459) Finance income 4,866 Finance costs (10,416) Loss before tax (31,009) Tax 578 Loss after tax (30,431) Other information Capital additions 42,030 1,643 289 43,962 Balance sheet Assets Segment assets 265,914 116,570 7,191 (753) 388,922 Unallocated corporate assets 5,386 Consolidated total assets 394,308 Liabilities Segment liabilities (106,998) (51,471) (773) 181 (159,061) Unallocated corporate liabilities (102,046) Consolidated total liabilities (261,107) 170
Segment information for the period ended 31 March 2008 is presented below. Inter-segment sales are charged at prevailing market prices. Entertainment Distribution Other Eliminations Consolidated 000 000 000 000 000 Revenue External sales 47,361 187,202 29,812 264,375 Inter-segment sales 26,527 15,306 (41,833) Total revenue 73,888 202,508 29,812 (41,833) 264,375 Result Underlying EBITDA 9,220 14,222 (112) (676) 22,654 One-off costs (359) (1,545) (1,904) Depreciation and amortisation (6,149) (5,823) (102) (12,074) Segment result 2,712 6,854 (214) (676) 8,676 Unallocated corporate expenses Group costs (4,034) Share-based payments (5,797) One-off costs (345) Operating loss (1,500) Finance income 795 Finance costs (6,971) Loss before tax (7,676) Tax (879) Loss after tax (8,555) Other information Capital additions 50,297 37,386 478 88,161 Unallocated capital additions 58 Consolidated total capital additions 88,219 Balance sheet Assets Segment assets 166,220 109,787 7,207 (2,685) 280,529 Unallocated corporate assets 4,821 Consolidated total assets 285,350 Liabilities Segment liabilities (34,660) (48,895) (818) 2,217 (82,156) Unallocated corporate liabilities (79,616) Consolidated total liabilities (161,772) 171
Geographical segments The Group s operations are located in Canada, the United States, the United Kingdom and the Rest of Europe. The Entertainment division is located in all geographies. The Group s Distribution operations are located in Canada and the United States. The following table provides an analysis of the Group s revenue by geographical destination for the period ended 31 March: 2009 2008 000 000 Canada 217,749 171,538 United States 65,914 68,833 United Kingdom 30,210 18,645 Rest of Europe 28,770 5,359 342,643 264,375 The following is an analysis of the carrying amount of segment assets, and capital additions, analysed by the geographical area in which the assets are located: Segment Capital Segment Capital assets additions assets additions 2009 2009 2008 2008 000 000 000 000 Canada 208,565 40,185 111,359 32,780 United States 51,575 333 52,295 20,281 United Kingdom 73,026 3,421 63,511 22,419 Rest of Europe 55,756 23 53,364 12,681 Segment assets 388,922 43,962 280,529 88,161 Unallocated corporate assets 5,386 4,821 58 394,308 43,962 285,350 88,219 4. Operating loss Loss for the period is stated after charging/(crediting): Year ended Period ended 31 March 31 March 2009 2008 000 000 Net foreign exchange gains (267) (489) Depreciation of property, plant and equipment (note 15) 1,699 1,007 Amortisation of intangible assets (note 13) 14,127 10,102 Amortisation of investment in programmes (note 12) 12,066 965 Employee benefits (note 31) 44,399 35,281 One-off items (note 5) 29,677 2,249 172
The Group obtained the following services from the Company s auditors: Year ended Period ended 31 March 31 March 2009 2008 000 000 Audit fees Fees payable for the audit of the Group s annual accounts 402 273 Fees payable for the audit of the Group s subsidiaries 98 65 Other services Services relating to corporate finance transactions 814 1,340 Tax services 875 25 Other services 201 115 2,390 1,818 Charged to operating loss 1,301 580 Charged to the balance sheet 1,089 1,238 2,390 1,818 The amounts charged to the balance sheet relate to capitalised acquisition costs treated in accordance with IFRS 3. 5. One-off items One-off items are items of income and expenditure that are non-recurring and, in the judgement of management, should be disclosed separately on the basis that they are material, either by their nature or their size, to provide a further understanding of the Group s financial performance and enable comparison of financial performance between periods. Items of income or expense that are considered by management for designation as one-off are as follows: Year ended Period ended 31 March 31 March 2009 2008 Notes 000 000 US Music and Distribution businesses (a) 21,648 Restructuring and abortive acquisition costs (b) 3,878 1,993 Receivership of Woolworths Group plc (c) 2,479 Rebranding (d) 1,672 Retention bonuses (e) 256 29,677 2,249 (a) US Music and Distribution businesses During the year there has been a significant acceleration in the decline in the US music market which has impacted on the Group s business. The one-off cost comprises three elements: a write down of label advances of 11,355,000 which has been recorded in cost of sales; impairment of goodwill on acquisition of 9,981,000 and restructuring costs of 312,000 which has been recorded in administrative expenses. The write down of label advances follows a detailed management review of carrying values in the light of the scaling down of expected future sales and likelihood of recoupment. Impairment to goodwill has been calculated in accordance with the requirement of IAS 36 and is described in more detail in note 11. 173
(b) (c) (d) (e) Restructuring and abortive acquisition costs Restructuring costs have been incurred in relation to the reorganisation of businesses during the year. These include completion of the rationalisation of the Western Canada warehousing footprint, which commenced in the previous financial year, and the integration of the former Koch Canada into the Distribution and Film businesses. Abortive acquisition costs include due diligence and legal costs principally relating to the proposed reverse takeover that was abandoned in December 2008. These costs have been recorded in administrative expenses. Receivership of Woolworths Group plc On 26 November 2008 Woolworths Group plc ( Woolworths ) and its wholly owned subsidiary Entertainment UK Ltd were placed into administrative receivership. At the time Woolworths comprised approximately 800 stores throughout the UK and represented a significant share of the UK DVD market. Entertainment UK was the largest distributor of DVD s in the UK serving a number of major retailers including Woolworths. All the Woolworths stores were subsequently closed and Entertainment UK ceased trading by December 2008. The financial impact of these events on the Group comprises two elements: an impairment of net irrecoverable trading receivables of 697,000 and a write down of investment in content of 1,782,000. The write down of investment in content arises as management consider the demise of Woolworths to have significantly impacted the structure of the UK market for distribution of DVD s. Consequently, following a detailed review of the content library, it has been concluded that the ability to exploit certain titles and genres has been impaired. The impairment has been recorded in cost of sales. Rebranding As part of the Group s strategy to become the leading independent entertainment content business, on 22 January 2009 the Group announced that it would be introducing consistent corporate branding throughout the business. Consequently 1,298,000 attributed to certain trade names arising on acquisition by the Group have been written off. The remaining amount comprises legal and administrative costs associated with the rebranding. These costs have been recorded in administrative expenses. Retention bonuses Retention bonuses in the prior year were included within the terms and conditions of the employment contracts of some senior managers employed by businesses acquired in the period ended 31 March 2008. The tax impact of one-off items was 1.7 million (2008: 0.6 million). 6. Finance income and finance costs The finance income and finance costs comprise: Year ended Period ended 31 March 31 March 2009 2008 Notes 000 000 Finance income Interest receivable 283 795 Gain on revaluation of embedded equity option (note 21) 2,432 Reset of exchangeable debenture (note 22) 1,479 Net foreign exchange gains 672 4,866 795 174
Year ended Period ended 31 March 31 March 2009 2008 Notes 000 000 Finance costs Interest payable on bank loans and overdrafts (4,182) (3,158) Other interest payable (88) (185) Amortisation of deferred finance charges (1,178) (374) Interest payable on exchangeable debenture (note 22) (1,956) (883) Early settlement costs (a) (630) (873) Amortisation of exchangeable debenture (note 22) (654) (166) Loss on revaluation of embedded equity option (note 21) (100) Decrease in fair value of derivative instruments (note 21) (1,728) (456) Net foreign exchange losses (776) (10,416) (6,971) Net finance charges (5,550) (6,176) (a) The current year amount relates to accelerated amortisation of deferred finance charges on the cancellation of the previous banking facility following the refinancing described in note 22. The prior year amount comprised an early settlement cost of 0.9 million following conversion of an exchangeable debenture. 7. Tax Year ended Period ended 31 March 31 March 2009 2008 000 000 Current tax 2,488 1,175 Deferred tax (3,066) (296) Tax (credit)/charge (578) 879 The charge for the period can be reconciled to the loss in the income statement as follows: Year ended Year ended 31 March 31 March 2009 2008 000 % 000 % Loss before tax (31,009) (7,676) Taxes at applicable domestic rates (9,558) 30.8 (1,816) 23.7 Effect of income that is exempt from taxation (1,257) 4.1 (231) 3.0 Effect of expenses that are not deductible in determining taxable profit 1,158 (3.7) 1,802 (23.5) Effect of deferred tax write downs or reversal 906 (2.9) Effect of losses/temporary differences not recognised 8,304 (26.8) 939 (12.3) Effect of irrecoverable withholding tax 181 (0.6) 191 (2.5) Effect of tax rate changes (42) 0.1 (6) 0.1 Prior year items (270) 0.9 Income tax (credit)/expense and effective tax rate for the period (578) 1.9 879 (11.5) 175
Taxation is calculated at the rates prevailing in the respective jurisdictions. The standard tax rates in each jurisdiction are 32.8 per cent. in Canada (2008: 32.5 per cent.), 36.5 per cent. in the US (2008: 37.5 per cent.), 28.0 per cent. in the UK (2008: 30 per cent.), 20 per cent. in Hungary (2008: 20 per cent.), 0 per cent. in Jersey (2008: 0 per cent.), and 25.5 per cent. in the Netherlands (2008: 25.5 per cent.). 8. Deferred tax assets and liabilities The following are the major deferred tax assets and liabilities recognised by the Group and movements thereon during the current period. Accelerated Unused tax Intangible tax Share-based depreciation assets losses payments Other Total 000 000 000 000 000 000 Acquisition of subsidiaries 179 (11,286) 2,181 725 (8,201) Credit/(charge) to income 161 2,265 (2,034) 209 (329) 272 Exchange differences 12 (282) 73 2 73 (122) Effect of change in tax rates (1) 17 8 24 At 31 March 2008 351 (9,286) 228 211 469 (8,027) Acquisition of subsidiaries 13 (6,034) (696) (6,717) Prior year items (118) 36 (19) (101) Credit/(charge) to income (580) 2,571 1,973 (243) (583) 3,138 Exchange differences 38 (1,232) 28 62 74 (1,030) Effect of change in tax rates 3 26 29 At 31 March 2009 (296) (13,945) 2,232 30 (729) (12,708) The deferred tax balances have been reflected in the balance sheet as follows: 31 March 31 March 2009 2008 000 000 Deferred tax assets 3,245 1,006 Deferred tax liabilities (15,953) (9,033) (12,708) (8,027) Utilisation of deferred tax assets is dependent on the future profitability of the Group. The Group has recognised deferred tax assets totalling 2.2 million in relation to tax losses carried forward, as the Group considers that, on the basis of forecasts, there will be sufficient taxable profits in the future against which these losses will be offset. At the balance sheet date, the Group has unrecognised deferred tax assets of 11.2 million (2008: 1.7 million) relating to tax losses and other temporary differences available for offset against future profits. The assets have not been recognised due to the unpredictability of future profit streams. Included in unrecognised deferred tax assets is 4.7 million (2008: 1.1 million) relating to losses that will expire by 2029. Other losses may be carried forward indefinitely. At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was 8.7 million (2008: 1.2 million). No liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. There were no temporary differences arising in connection with interests in joint ventures. 176
9. Dividends The directors are not recommending payment of a dividend (2008: nil). 10. Earnings/loss per share Year ended Period ended 31 March 31 March 2009 2008 Pence Pence Basic and diluted loss per share (23.2) (9.5) Adjusted basic earnings per share 9.1 8.0 Adjusted diluted earnings per share 8.1 7.2 Basic and diluted loss per share have been calculated by dividing the loss attributable to shareholders by the weighted average number of shares in issue during the period after deducting Treasury shares. The adjusted basic earnings per share calculation is based on the basic loss per share calculation above after allowing for adjusted items. Adjusted diluted earnings per share has been calculated after adjusting the weighted average number of shares used in the adjusted basic calculation to assume the conversion of all potentially dilutive shares. Reconciliations of the losses used in the calculations and the loss and adjusted earnings/(loss) per share calculations are set out below. Year ended Period ended 31 March 31 March 2009 2008 000 000 For basic and diluted loss per share Loss for the financial period (30,431) (8,555) For adjusted basic and diluted earnings per share Loss for the financial period (30,431) (8,555) Add back: One-off items 29,677 2,249 Amortisation of acquired intangibles 15,119 11,064 Share-based payments 4,171 5,797 Financing net fair value movements (704) 556 Early settlement cost on refinancing 630 Reset of exchangeable debenture (1,479) Early settlement cost on conversion of debenture 873 Tax effect of above items (5,108) (4,784) Adjusted earnings after tax 11,875 7,200 Weighted average number of shares in issue Basic 131,151,599 90,166,431 Dilutive potential shares for adjusted earnings per share calculation 16,152,167 10,167,198 Adjusted diluted 147,303,766 100,333,629 177
11. Goodwill 31 March 31 March 2009 2008 000 000 Cost and carrying value at beginning of period 80,681 Acquisition of a subsidiaries 16,885 78,715 Impairment losses for the period (9,981) Exchange differences 12,114 1,966 Cost and carrying value at 31 March 99,699 80,681 Goodwill acquired in business combinations is allocated to the cash generating units ( CGUs ) that are expected to benefit from that business combination. In the prior year goodwill was allocated to two CGUs, Entertainment and Distribution. At 31 March 2009, as a consequence of the specific characteristics of the US market which became apparent during the second half of the year, goodwill has been further allocated within each CGU. Entertainment comprises Filmed Entertainment and US Music, Distribution comprises Canada and US Distribution. Impairment testing for goodwill The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. An impairment loss is recognised if the carrying value of a CGU exceeds its recoverable amount. The recoverable amount of a CGU is determined from value in use calculations based on the net present value of discounted cash flows. In assessing value in use, the estimated future cash flows are derived from the most recent financial budget and three year forecasts and an assumed growth rate. A terminal value is calculated by discounting using an appropriate weighted average cost of capital ( WACC ). Any impairment losses are recognised in the income statement as an expense. Key assumptions used in value in use calculation Key assumptions used in the value in use calculations for each CGU, together with resulting headroom or shortfall compared to carrying value, are set out below: Terminal Period Discount Growth of specific CGU rate rate cashflows Entertainment Filmed Entertainment 14% 3% 5 years Music 13% 3% 3 years Distribution Canada 11% 0% 3 years US 11% 0% 5 years The calculations of the value in use for all CGUs are most sensitive to the operating profit, discount rate and growth rate assumptions. Operating profits Operating profits are based on budgeted increases in revenue resulting from new investment in content rights, investment in TV productions and growth in the relevant markets. Discount rates A pre-tax discount rate is applied to calculate the net present value of the CGU. The pre-tax discount rate is based on the Group WACC of 13 per cent. The discount rate is amended where specific country and operational risks are sufficiently significant to have a material impact on the outcome of the impairment test. Terminal growth rate estimates The terminal growth rates range from 3 per cent. to +3 per cent. (2008: 3 per cent.) beyond the end of year 3 or 5 and do not exceed the long-term projected growth rates for the relevant market. 178
Period of specific cash flows Specific cash flows reflect the period of detailed forecasts prepared as part of the Group s annual planning cycle. These have been extended to five years for the purposes of the Filmed Entertainment and Distribution businesses to ensure that the impact of investments planned over the planning period are reflected in the calculations. Impairment of US Music and Distribution businesses and carrying value of CGU s During the year to 31 March 2009 there was a significant acceleration in the decline in the US music market due in part to reduced consumer spending and the growing impact of digital replacing physical revenue streams. Until this change, the Group s US businesses had been resilient to the gradual market decline and based on past performance had continued to forecast modest growth. Forecasts and plans have been updated to reflect the revised market dynamics and this has resulted in an impairment to goodwill of 5.0 million in the Music business and 5.0 million in the Distribution business. The carrying value of goodwill, translated at year-end exchange rates, after recognition of impairment losses, is allocated as follows: 31 March 31 March 2009 2008 CGU 000 000 Entertainment Filmed Entertainment 65,669 44,803 Music 3,735 Distribution Canada 20,199 18,187 US 13,831 13,956 99,699 80,681 Sensitivity to change in assumptions With regard to the assessment of value in use of the CGUs, other than in respect of the US Distribution and Music CGUs, calculations show that there is at least 50 million headroom when compared to current carrying values and consequently management believes that no reasonable change in the above key assumptions would cause the carrying value of the units to materially exceed their recoverable amount. Underlying EBITDA used in the terminal value calculations would need to decrease by more than 40 per cent. before headroom is eliminated. 12. Investment in programmes 31 March 31 March 2009 2008 000 000 Cost Amounts brought forward 5,637 Acquisition of subsidiaries 14,715 3,856 Additions 6,494 Productions in progress 4,794 1,781 Exchange differences 1,065 Amounts carried forward 32,705 5,637 Amortisation Amounts brought forward (965) Charge for the period (12,066) (965) Exchange differences (228) Amounts carried forward (13,259) (965) Net carrying amount 19,446 4,672 179
Included in amortisation charge for the period above is 1,041,000 (2008: 965,000) attributable to programmes revalued on acquisition of subsidiaries and charged to administrative expenses. 13. Other intangible assets Exclusive content Trade Exclusive Nonagreements names distribution Customer compete and libraries and brands agreements relationships agreements Software Total 000 000 000 000 000 000 000 Cost Acquisition of subsidiaries 31,691 7,345 17,172 15,419 4,515 76,142 Additions 581 581 Exchange differences 740 333 831 1,746 317 3,967 Cost At 31 March 2008 32,431 7,678 18,003 17,165 4,832 581 80,690 Acquisition of subsidiaries 5,413 2,445 10,743 1,047 19,648 Additions 1,270 1,270 Exchange differences 4,133 1,345 4,866 2,919 1,064 149 14,476 Cost at 31 March 2009 41,977 9,023 25,314 30,827 6,943 2,000 116,084 Amortisation Charge for the period (2,829) (630) (3,381) (1,690) (1,569) (3) (10,102) Exchange differences (22) (8) (45) (27) (21) (123) Amortisation at 31 March 2008 (2,851) (638) (3,426) (1,717) (1,590) (3) (10,225) Charge for the period (4,485) (1,313) (4,200) (2,238) (1,842) (49) (14,127) Impairment losses (1,298) (1,298) Exchange differences (690) (190) (1,336) (326) (491) (4) (3,037) Amortisation at 31 March 2009 (8,026) (3,439) (8,962) (4,281) (3,923) (56) (28,687) Carrying amount at 31 March 2008 29,580 7,040 14,577 15,448 3,242 578 70,465 Carrying amount at 31 March 2009 33,951 5,584 16,352 26,546 3,020 1,944 87,397 Following an exercise to rebrand a number of business units, certain amounts previously attributed on acquisition of those businesses to trade names and brands are impaired. An impairment loss of 1,298,000 was recognised in the income statement. 14. Investments Other investments comprise of 471,000 (2008: 319,000), all of which are classified as available-for-sale. 15. Property, plant and equipment Fixtures, Leasehold fittings and improvements equipment Total 000 000 000 Cost Acquisition of subsidiaries 504 3,641 4,145 Additions 99 1,615 1,714 Disposals (7) (7) Exchange differences 56 143 199 Cost at 31 March 2008 659 5,392 6,051 180
Fixtures, Leasehold fittings and improvements equipment Total 000 000 000 Acquisition of subsidiaries 23 151 174 Additions 416 1,245 1,661 Disposals (11) (7) (18) Exchange differences 117 1,609 1,726 Cost at 31 March 2009 1,204 8,390 9,594 Depreciation Charge for the period (106) (901) (1,007) Exchange differences (1) (12) (13) At 31 March 2008 (107) (913) (1,020) Charge for the period (192) (1,507) (1,699) Accumulated depreciation eliminated on asset disposals 5 1 6 Exchange differences (27) (401) (428) Accumulated depreciation at 31 March 2009 (321) (2,820) (3,141) Carrying amount at 31 March 2008 552 4,479 5,031 Carrying amount at 31 March 2009 883 5,570 6,453 16. Inventories Inventories comprise finished goods of 40,137,000 (2008: 40,659,000). 17. Investment in content rights 31 March 31 March 2009 2008 000 000 Cost at beginning of period 33,899 Acquisition of subsidiaries 2,189 25,116 Additions 38,305 17,522 Amortisation charge for the period (21,137) (10,160) Impairment losses for the period (13,137) Exchange differences 7,551 1,421 Cost at 31 March 47,670 33,899 18. Trade and other receivables 31 March 31 March 2009 2008 000 000 Current Trade receivables 48,701 24,264 Less: Amounts provided for doubtful debts (2,339) (797) 46,362 23,467 Other receivables 17,822 1,735 Prepayments and accrued income 11,451 6,383 75,635 31,585 Non-current Other receivables 1,239 549 181
Trade receivables are generally non-interest bearing, however, interest may be charged on overdue balances in certain geographies. The average credit period taken on sales is 71 days (2008: 58 days). Trade receivables are provided for based on estimated irrecoverable amounts, determined by reference to past default experience. Included in the Group s trade receivable balance are debtors with a carrying amount of 11.8 million (2008: 5.8 million) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. Ageing of past due but not impaired receivables: 31 March 31 March 2009 2008 000 000 Less than 60 days 6,892 3,330 Between 60-90 days 1,705 622 More than 90 days 3,193 1,872 Total 11,790 5,824 The Group does not hold any collateral over these balances. Movement in the amounts provided for doubtful debts: 31 March 31 March 2009 2008 000 000 Opening balance (797) Acquisition of subsidiaries (53) (1,304) Impairment losses recognised (2,205) (40) Impairment losses reversed 239 265 Amounts recovered during the period 62 52 Amounts written off as uncollectable 405 347 Exchange differences 10 (117) Closing balance (2,339) (797) In determining the recoverability of a trade receivable the Group considers any change to the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. Management has credit policies in place and the exposure to credit risk is monitored by individual operating divisions on an ongoing basis. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. Ageing of impaired receivables: 31 March 31 March 2009 2008 000 000 Less than 60 days (379) (30) Between 60 90 days (203) (3) More than 90 days (1,757) (764) Total (2,339) (797) 182
Trade and other receivables are held in the following currencies as at 31 March, with those balances held in currencies other than Pounds Sterling converted at the exchange rate at the balance sheet date: Pounds Canadian US Sterling Euros Dollars Dollars Other Total 000 000 000 000 000 000 Current 2,795 6,582 12,114 10,086 8 31,585 Non-current 183 366 549 As at 31 March 2008 2,795 6,582 12,297 10,452 8 32,134 Current 9,519 5,513 45,896 14,674 33 75,635 Non-current 725 514 1,239 As at 31 March 2009 9,519 5,513 46,621 15,188 33 76,874 The directors consider that the carrying amount of trade and other receivables approximates to their fair value. 19. Cash and cash equivalents Cash and cash equivalents are held in the following currencies (those held in currencies other than Pounds Sterling have been converted at the exchange rate ruling at the balance sheet date): 31 March 31 March 2009 2008 000 000 Pounds Sterling 1,756 3,925 US Dollar 3,863 3,127 Canadian Dollar 5,606 6,903 Euros 523 2,517 Other currencies 19 12 11,767 16,484 The credit risk on cash and cash equivalents is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The directors consider that the carrying amount of cash and cash equivalents approximates to their fair value. 20. Trade and other payables 31 March 31 March 2009 2008 000 000 Current Trade payables 78,671 66,133 Accruals and deferred income 42,048 9,435 Other payables 12,479 8,152 133,198 83,720 Non-current Other payables 5,466 621 Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 87 days (2008: 88 days). For most suppliers no interest is charged but for overdue balances interest is charged at various interest rates. 183
Trade and other payables are held in the following currencies (those held in currencies other than Pounds Sterling have been converted at the exchange rate at the balance sheet date): Pounds Canadian US Sterling Euros Dollars Dollars Other Total 000 000 000 000 000 000 Current 10,362 4,466 46,986 21,900 6 83,720 Non-current 621 621 As at 31 March 2008 10,362 4,466 47,607 21,900 6 84,341 Current 14,468 11,224 83,821 23,667 18 133,198 Non-current 2,389 3,077 5,466 As at 31 March 2009 16,857 11,224 86,898 23,667 18 138,664 The directors consider that the carrying amount of trade and other payables approximates to their fair value. 21. Other financial liabilities 31 March 31 March 2009 2008 000 000 Interest rate collar 1,484 456 Interest rate swaps 700 Embedded equity option 150 2,582 2,334 3,038 The Group puts in place interest rate collars ( collars ) and interest rate swaps ( swaps ) to limit interest rate risk. The notional principal amounts of the outstanding collars at 31 March 2009 were 12.0 million and 10.0 million (2008: 14.4 million and 10.0 million). The collars carry cap rates of 4.75 per cent. (Euro) and 7.00 per cent. (Pounds Sterling) and floor rates of 2.99 per cent. (Euro) and 4.87 per cent. (Pounds Sterling). The Pounds Sterling collar incorporates a kick-in rate of 6.25 per cent. should the interest rate on the quarterly settlement dates fall below the floor rate of 4.87 per cent. These collars are recognised at fair value which is determined using the discounted cash flow method based on market data. The currency split of the marked to market values of the collars was 1,252,656 (Pounds Sterling) and 231,238 (Euro) (2008: 447,514 and 8,368). The notional principal amounts of the outstanding swaps at 31 March 2009 were US$11.8 million, 8.3 million, 11.9 million and C$54.9 million. The 8.3 million swap is not effective until 31 December 2010, when the collar, currently 12 million, expires. The swaps carry fixed rates of 1.84 per cent., 3.49 per cent., 2.83 per cent. and 1.70 per cent. respectively. These swaps are recognised at fair value which is determined using the discounted cash flow method based on market data. The currency split of the marked to market values of the swaps was 27,361 (US Dollars), 89,232 (Euro), 164,857 (Pounds Sterling) and 418,056 (Canadian Dollars). The embedded equity option arising from the exchangeable debenture (note 22) has been recognised at fair value. The fair value of 0.2 million (2008: 2.6 million) was determined using the binomial model based on available market data as at 31 March 2009. 184
22. Interest bearing loans and borrowings 31 March 31 March 2009 2008 000 000 Bank borrowings 69,097 47,349 Exchangeable debenture 16,252 16,529 Interim production financing 13,823 Total borrowings 99,172 63,878 Amount due for settlement within 12 months 13,823 3,539 Amount due for settlement after 12 months 85,349 60,339 The carrying amounts of the Group s borrowings as at 31 March are denominated in the following currencies: Pounds Canadian US Sterling Euros Dollars Dollars Total 000 000 000 000 000 Bank borrowings 14,305 11,330 16,817 4,897 47,349 Exchangeable debenture 16,529 16,529 As at 31 March 2008 30,834 11,330 16,817 4,897 63,878 Bank borrowings 21,908 6,948 26,705 13,536 69,097 Exchangeable debenture 16,252 16,252 Interim production financing 13,823 13,823 As at 31 March 2009 38,160 6,948 40,528 13,536 99,172 The directors consider that the carrying amount of interest bearing loans and borrowings approximates to their fair value. The principal features of the Group s borrowings are as follows: (i) (ii) (iii) On 19 September 2008, the Group drew down funds under a new four year US$150 million multicurrency secured revolving credit facility with a syndicate of banks managed by JP Morgan Chase Bank N.A. The funds were used to repay loans under the Group s previous borrowing facilities with Barclays Bank plc and Toronto Dominion Bank, which were then cancelled. The facility may be funded in US Dollars, Canadian Dollars, Sterling or Euro as at 31 March 2009 with repayment due on 18 September 2012. These interest bearing loans and borrowings are secured by the assets of the Group. At 31 March 2009, the Group had available 31.5 million (2008: 14.3 million) of undrawn committed borrowing facilities under the JP Morgan facility in respect of which all conditions precedent had been met. Exchangeable debentures of 19.6 million were issued, at their fair value, on 9 January 2008. Interest and principal on the debentures are payable on maturity, which is 19 September 2013. The debentures are convertible into equity of Entertainment One Ltd. at the reset exchange price of 0.9078 per share at the holders option (initial exchange price was 1.1348). The exchange price may be reset again after 24 months from issue date. The fair value of the exchangeable debentures of 19.6 million was split into the embedded equity option and liability elements at inception which are accounted for separately. The embedded equity option had a fair value at inception of 2.5 million and is remeasured at each reporting date (note 21). The liability element had a fair value of 17.1 million at inception and is accounted for using the amortised cost method. Following the Group refinancing in September 2008, the maturity of the exchangeable debentures was extended to 19 September 2013 and in 185
accordance with IAS 39 the carrying value of the liability element was revalued. The impact was a reduction to the carrying value of 1.5 million which is shown as a credit in finance income (note 6). (iv) The TV production businesses have a Canadian Dollar production credit facility with Royal Bank of Canada and National Bank of Canada bearing interest at Bank prime plus a margin ranging from 0.5 per cent. to 1.0 per cent. Amounts drawn down under these facilities at 31 March 2009 were 13.8 million and were classified as current loans. These facilities are secured by the future revenue commitments of the television production businesses. The weighted average interest rates on all bank borrowings are not materially different from their nominal interest rates. The weighted average interest rate on all interest bearing loans and borrowings is 7.1 per cent. (2008: 7.6 per cent.). 23. Provisions Restructuring Other provision provisions Total 000 000 000 At 1 April 2008 907 272 1,179 Additional provision in the year 990 257 1,247 Utilised in the year (875) (269) (1,144) Exchange difference 135 58 193 As at 31 March 2009 1,157 318 1,475 Amount due for settlement within 12 months 1,157 194 1,351 Amount due for settlement after 12 months 124 124 The restructuring provision relates to the non-recurring restructuring, severance and warehouse closure costs to be incurred in delivery of cost-reduction measures. Included within other provisions are royalty provisions representing management s best estimate of the Group s liability to music licensors based on past experience and industry knowledge. 24. Share capital and other reserves 31 March 31 March 31 March 31 March 2009 2009 2008 2008 Share capital C$ C$ Authorised: 200,000,000 ordinary shares of C$0.01 each 2,000,000 2,000,000 25,000,000 S Class shares of C$0.01 each 250,000 Issued and fully paid: 129,996,149 ordinary shares of C$0.01 each 1,299,961 586,670 1,299,961 586,670 16,899,762 S Class shares of C$0.01 each 168,998 88,167 1,468,959 674,837 1,299,961 586,670 Other reserves 14,915,000 639,000 The Company has ordinary shares and S Class shares which carry no right to fixed income. On 24 September 2008 the Company issued 16,899,762 new S Class shares as part of the consideration for the acquisition of the Canadian TV businesses (note 26). All shares issued carry equal voting rights and there is no right to dividends. 186
At 31 March 2009, 7,595,286 (2008: 7,595,286) of the issued share capital was held as Treasury Shares by the Employee Benefit Trusts to satisfy the exercise of options under the Group s share option schemes (note 35), at a cost of 7,819,596 (2008: 7,819,596). Other reserves include 4 million share warrants issued to Marwyn Neptune Fund on the completion of the acquisition of Entertainment One Income Fund, accounted for as a share-based payment under IFRS 2 with a fair value of 639,000 (2008: 639,000) (note 35); and 14,276,000 reserves for S class shares in relation to the acquisition described in note 26. 25. Retained earnings 31 March 31 March 2009 2008 000 000 Opening balance (2,886) Loss for the period (30,431) (8,555) Credit to equity for equity-settled share-based payments 4,234 5,669 Balance at 31 March (29,083) (2,886) 26. Acquisitions Acquisitions are accounted for using the purchase method of accounting and are incorporated into the Group s balance sheet at the fair value at the date of acquisition. The fair values of all acquisitions made during the current year are provisional pending final determination of balances acquired. On 24 September 2008 the Group acquired 100 per cent. of the issued share capital of each of the following companies, involved in television production and film and television international sales and distribution: (i) (ii) (iii) Barna-Alper Productions Inc.; Blueprint Entertainment Corporation which also includes the subsidiary Oasis Pictures Inc.; and Maximum, comprising Maximum Film Distribution Inc. and Maximum Film International Inc. Total consideration of C$60.9 million ( 31.9 million), comprises C$32.4 million ( 17.0 million) to be paid in cash (excluding directly attributable acquisition costs) and C$28.5 million ( 14.9 million) to be satisfied by the allotment of S class shares to the vendors of the acquired entities. 187
Barna-Alper Productions Inc. The book value and provisional fair value of the net assets at the date of acquisition were as follows: Book value Fair value 000 000 Net assets acquired: Intangible assets 4,657 Property, plant and equipment 72 72 Investment in programmes 6,891 6,891 Trade and other receivables 3,976 3,976 Cash and cash equivalents 664 664 Interest bearing loans and borrowings (5,889) (5,889) Trade and other payables (3,376) (3,376) Deferred tax liabilities (292) (1,676) 2,046 5,319 Goodwill arising on acquisition 2,501 Total consideration 7,820 Satisfied by: Cash consideration and costs associated with acquisition 2,643 Deferred consideration to be settled by cash and shares 5,177 7,820 Net cash outflow arising on acquisition: Cash consideration and costs associated with acquisition 2,643 Less cash and cash equivalents acquired (664) 1,979 Barna-Alper Productions Inc. contributed 5.0 million revenue and 0.8 million profit to the Group s loss before tax for the period between the date of acquisition and 31 March 2009. 188
Blueprint Entertainment Corporation The book value and provisional fair value of the net assets at the date of acquisition were as follows: Book value Fair value 000 000 Net assets acquired: Intangible assets 14,658 Property, plant and equipment 96 96 Investments 102 102 Inventories 23 23 Investment in programmes 7,824 7,824 Investment in content rights 1,584 1,584 Trade and other receivables 6,677 6,677 Cash and cash equivalents 1,781 1,781 Interest bearing loans and borrowings (3,718) (3,718) Trade and other payables (12,556) (12,556) Deferred tax liabilities (585) (4,942) 1,228 11,529 Goodwill arising on acquisition 10,445 Total consideration 21,974 Satisfied by: Cash consideration and costs associated with acquisition 7,261 Deferred consideration to be settled by cash and shares 14,713 21,974 Net cash outflow arising on acquisition: Cash consideration and costs associated with acquisition 7,261 Cash and cash equivalents acquired (1,781) 5,480 Blueprint Entertainment Corporation contributed 20.1 million revenue and 5.0 million profit to the Group s loss before tax for the period between the date of acquisition and 31 March 2009. 189
Maximum The book value and provisional fair value of the net assets at the date of acquisition were as follows: Book value Fair value 000 000 Net assets acquired: Intangible assets 333 Property, plant and equipment 6 6 Investment in content rights 605 605 Trade and other payables (226) (226) Deferred tax liabilities (99) 385 619 Goodwill arising on acquisition 3,939 Total consideration 4,558 Satisfied by: Cash consideration and costs associated with acquisition 1,465 Deferred consideration to be settled by cash and shares 3,093 4,558 Net cash outflow arising on acquisition: Cash consideration and costs associated with acquisition 1,465 Cash and cash equivalents acquired 1,465 Maximum contributed 0.1 million revenue and 0.2 million loss to the Group s loss before tax for the period between the date of acquisition and 31 March 2009. Total contribution to group revenue and operating loss If all acquisitions had been completed on the first day of the current trading period, 1 April 2008, Group revenues for the period would have been 347.1 million and the Group s loss attributable to equity holders would have been 30.7 million. 27. Net Debt Year ended 31 March 2009 000 000 At 31 March 2008 (47,394) Cash outflows (6,767) New loan advances (137,006) Loan repayments 115,953 Cash outflow adjusted for financing activity (27,820) Interim production financing debt assumed on acquisition of television businesses (9,607) Decrease in value of exchangeable debenture 277 Foreign exchange movements (2,861) At 31 March 2009 (87,405) 190
28. Contingent liabilities and commitments Operating lease commitments The Group leases various offices under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. Year ended Period ended 31 March 31 March 2009 2008 000 000 Minimum lease payments under operating leases recognised in income 6,751 5,522 At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Year ended Period ended 31 March 31 March 2009 2008 000 000 Within one year 5,634 5,258 In the second to fifth years inclusive 11,985 12,494 After five years 2,303 3,487 19,922 21,239 Future capital expenditure (including investment in content rights) Year ended Period ended 31 March 31 March 2009 2008 000 000 Contracted for but not provided 40,277 21,427 29. Subsidiaries Details of the Company s principal subsidiary undertakings at 31 March 2009 are as follows: Country of Proportion Name incorporation held Principal activity E1 Entertainment UK Limited (formerly Contender Limited)* England and Wales 100% Content ownership RCV Entertainment BV* Holland 100% Content ownership Entertainment One Limited Partnership* Canada 100% Content ownership & distribution Seville Pictures Inc.* Canada 100% Content ownership E1 Films Canada Inc.* Canada 100% Content ownership Videoglobe 1 Inc.* Canada 100% Distribution Koch Entertainment LP* US 100% Content ownership & distribution Earl Street Finance kft Hungary 100% Investment company 4384768 Canada Inc.* Canada 49% Investment company Earl Street Capital Inc.* US 100% Investment company Seville Entertainment Inc.* Canada 100% Investment company E-One UK Limited England and Wales 100% Investment company Eone Holding Holland BV (formerly The Movie Association BV)* Holland 100% Investment company Eone Holding Holland BV (formerly The Movie Association BV)* Holland 100% Investment company 191
Country of Proportion Name incorporation held Principal activity 6972501 Canada Inc.* Canada 49% Investment company E1 Television BAP Ltd. (formerly Barna-Alper Productions Inc.) Canada 100% Investment company E1 Television International Ltd. (formerly Oasis Pictures Inc.) Canada 100% E1 Television Productions Inc. (formerly Blueprint Entertainment Corporation) Canada 100% TV Production * Owned through an intermediate holding company. Film & TV sales & distribution The proportion held is equivalent to the percentage of voting rights held. The Group also owns 100 per cent. of the non-voting shares of 4384768 Canada Inc. and 6972501 Canada Inc. All of the above subsidiary undertakings have been consolidated in the Group financial statements under the acquisition method of accounting. 4384768 Canada Inc. and 6972501 Canada Inc. have been included as subsidiaries because management are in a position to direct the operations of these companies. No minority interest is being recognised because the Group are entitled to all of the economic benefits through ownership of the non-voting equity. 30. Investment in joint ventures Details of the Company s joint ventures at 31 March 2009 are as follows: Country of Proportion Name incorporation held Principal activity One Voice Media Inc. Canada 51% Advertising Get Lucky Television Productions Inc. Canada 51% TV Production KVS V Productions Inc Canada 50% TV Production Shattered Productions Ltd Canada 49% TV Production 7093438 Canada Inc Canada 51% TV Production GiGi III Productions Inc Canada 50% TV Production Contractual arrangements establish joint control over each joint venture listed above. No single venturer is in a position to control the activity unilaterally. Effect of proportional consolidation of joint ventures The following presents, on a condensed basis, the effect of including joint ventures in the Group financial statements using proportional consolidation: Year ended Period ended 31 March 31 March 2009 2008 000 000 Income statement Revenue 3,336 781 Cost of sales (1,668) (206) Gross profit 1,668 575 Administrative expenses (207) (106) Operating profit 1,461 469 Net financing income 4 1 Profit before tax 1,465 470 Income tax expense (286) (147) Profit after tax 1,179 323 192
31 March 31 March 2009 2008 000 000 Balance sheet Property, plant and equipment 308 19 Cash and cash equivalents 233 290 Trade and other receivables 2,078 173 Total assets 2,619 482 Trade and other payables 2,069 4 Current tax liabilities 471 147 Equity shareholders funds 79 331 Total equity and liabilities 2,619 482 31. Employee benefits The average monthly number of employees (including executive directors) was: Year ended Period ended 31 March 31 March 2009 2008 000 000 Canada 1,264 1,152 United States 217 227 United Kingdom 56 43 Rest of Europe 44 45 1,581 1,467 Their aggregate remuneration comprised: Year ended Period ended 31 March 31 March 2009 2008 000 000 Wages and salaries 35,797 26,359 Share-based payment charges 4,171 5,797 Social security costs 3,497 2,519 Pension costs 934 606 44,399 35,281 Included within wages and salaries are termination payments totalling 0.2 million (2008: 0.4 million). 32. Directors and key management compensation The remuneration of the directors and members of the Operating Executive, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. 193
Year ended Period ended 31 March 31 March 2009 2008 000 000 Short-term employee benefits 1,906 1,877 Share-based payments 2,354 3,303 4,260 5,180 Further details of directors emoluments (unaudited) can be found in the Directors Remuneration Report on pages 24 to 25. 33. Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Marwyn Neptune Fund held 57,766,889 ordinary shares in the Company as at 31 March 2009 (2008: 35,831,789), amounting to 39.3 per cent. (2008: 27.6 per cent.) of the issued share capital of the Company. In addition, Marwyn Neptune Fund holds warrants over 4,000,000 ordinary shares (2008: 4,000,000). Marwyn Neptune Fund is deemed to be a related party of Entertainment One Ltd. by virtue of this significant shareholding. On 9 January 2008 Marwyn Neptune Fund participated in the issue of exchangeable debentures by the Company when it purchased 5.1 million. The terms and conditions of these exchangeable debentures are described in note 22. David Williams and James Corsellis are partners of Marwyn Capital LLP, partners of Marwyn Investment Management LLP, directors of Marwyn Partners Limited and directors of Marwyn Investments Group Limited and are therefore deemed to be related parties of Entertainment One Ltd. by virtue of a common director or member. During the year the Company paid fees of 0.4 million (2008: 1.2 million) to Marwyn Capital LLP for corporate finance advisory services under the terms of their advisory agreement pursuant to which Marwyn Capital agreed to provide general strategic and corporate financial services to the Company for a fixed monthly fee of 15,000 plus expenses with additional fees for each acquisition to be agreed. During the year the Group expensed fees of 0.2 million (2008: 75,484) to Marwyn Partners Limited for office and infrastructure costs under the terms of their arrangement pursuant to which Marwyn Partners provides temporary accommodation and associated back office support services (such as secretarial and IT support). Subsequent to the year end the Company has terminated this arrangement. At 31 March 2009 the Group owed Marwyn Partners Limited nil (2008: 4,466) and Marwyn Capital LLP 70,000 (2008: 28,121). The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. Mark Trachuk is a partner of Osler, Hoskin & Harcourt LLP, the Group s Canadian lawyers. The Group incurred fees of 2.3 million (2008: 1.2 million) during the year ended 31 March 2009. At 31 March 2009 the Group owed Osler, Hoskin & Harcourt LLP 1.1 million (2008: 129,167). Mark Trachuk resigned as a director of Entertainment One Ltd. on 24 September 2008. A company in which Darren Throop directly and/or indirectly owns an interest is the landlord of a retail store front location used by the retail division in Halifax, Nova Scotia. The amount paid during the year was 24,311 (2008: 23,182). Robert Lantos is owner of Serendipity Point Films ( Serendipity ). Upon acquisition of Maximum (owned by Robert Lantos) the Group simultaneously entered into an output agreement with Serendipity covering distribution of all Serendipity titles within the Canadian market. The Group owed the vendors including Robert Lantos 0.3 million at 31 March 2009. 194
During the year payments of 1.4 million (2008: 0.7 million) were made to One Voice Media Inc., a joint venture of the Group (note 30). The Group owed 0.4 million (2008: 22,402) to One Voice Media Inc. as at 31 March 2009. The Group owed 0.3 million to its joint venture television production companies and was owed 0.3 million by its joint venture television production companies as at 31 March 2009. 34. Events after the balance sheet date Subsequent to the year end, following the weakening in the US Dollar, the Group has redenominated its syndicated revolving credit facility into local currencies and has also raised an additional US$7.5 million under its funding agreement set out in note 22. 35. Share-based payments Equity-settled share schemes The Group has a number of share option schemes and Employee Benefit Trusts for its employees and directors. Details of grants to directors during the period are given in the Directors Remuneration Report on page 25. The share-based payment charge for equity-settled share schemes for the year ended 31 March 2009 was 4.2 million (2008: 5.8 million). The share options in issue as at 31 March 2009 were as follows: Number Option scheme granted Year of grant Exercise price Executive Share Plan US participants 2,202,643 2007 US participants 625,000 2007 111.5 pence Canadian participants 6,542,021 2007 0.5 pence Canadian participants 1,675,000 2008 11.5 pence Other participants 1,437,264 2008 103.5 pence Employee Benefit Trusts No 1 2,577,643 2007 No 1 450,000 2008 No 2 2,303,889 2007 No 2 575,972 2008 18,389,432 The contractual life of an option under these schemes is between three and five years. The weighted average contractual life remaining of the options in existence at the end of the year was 2.5 years (2008: 3.4 years) and their weighted average exercise price was 13 pence (2008: 14 pence). 195
A summary of the movement in share options is as follows: Weighted Weighted Executive average Employee average Share exercise Benefit exercise Plan price Trust price Options outstanding (Number) (pence) (Number) ( ) Options granted 11,262,324 20.8 5,817,643 Options forfeited (293,685) 0.5 Options exercised (36,711) 0.5 At 31 March 2008 10,931,928 21.5 5,817,643 Options granted 1,550,000 3.6 450,000 Options forfeited (360,139) At 31 March 2009 12,481,928 19.2 5,907,504 Exercisable at 31 March 2008 1,231,560 0.5 688,087 Exercisable at 31 March 2009 3,376,957 11.8 2,093,922 There are certain performance criteria to be met before share options are exercisable, with 33.3 per cent. of the options vesting in tranches over a three year performance period, 33.3 per cent. vesting dependent on performance against annual EBITDA targets and the remainder vesting dependent on share price targets. All share options vest in accordance with these performance criteria with the exception of 375,000 of shares granted by the Employee Benefit Trusts. These shares vest in tranches over a two year performance period. Fair value of share options The fair value of share options granted was calculated using the Binomial model. The assumptions used in the model were: Executive Employee Share Benefit Plan Trust At 31 March 2009 Fair value at measurement date 69.1 pence 70.9 pence Weighted average share price 91.5 pence 94.0 pence Weighted average exercise price 3.6 pence Expected volatility 30.0% 29.7% Expected life 3.0 years 3.0 years Dividend yield Risk free interest rate 3.94% 3.94% At 31 March 2008 Fair value at measurement date 69.7 pence 84.7 pence Weighted average share price 102.2 pence 105.7 pence Weighted average exercise price 20.8 pence Expected volatility 30.4% 29.9% Expected life 3.3 years 2.9 years Dividend yield Risk free interest rate 5.10% 5.40% The expected volatility is based on a weighting of the Company s share price from the period since trading first began and the historic volatility of businesses comparable to the Company over a period of time equal in length to the relevant expected life of the option and ending at the date of grant. The expected life used in the model is based on management s best estimate of the average expected time period for the exercise of an option by its holder. 196
Cash-settled share-based payments The carrying amount of the liability relating to the cash-settled options under the Canadian deferred bonus scheme at 31 March 2009 is 0.1 million (2008: 0.1 million). 25,000 cash-settled options under this scheme were forfeited during the year (2008: 22,026). Until this liability is settled it is remeasured at each reporting date with changes in fair value recognised in the income statement. Other share-based payment awards On completion of the acquisition of Entertainment One Income Fund 4 million share warrants were issued to Marwyn Neptune Fund. The conditions for exercising these are 50 per cent. when the share price reaches 1.25 and the remaining 50 per cent. when the share price reaches 1.50. The fair value of the share warrants was determined using a binomial option pricing model. Awards have been valued using an assumed exercise behaviour that recognises the exercise restrictions (note 24). 36. Financial risk management The Group s overall risk management programme seeks to minimise potential adverse effects on its financial performance and focuses on mitigation of the unpredictability of financial markets as they affect the Group. The Group s activities expose it to interest rate risk, foreign currency risk, credit risk and liquidity risk. These risks are managed by the Chief Financial Officer under policies approved by both the Board and the Audit Committee, which are summarised below. Interest rate management The Group has no significant interest-bearing assets and the Group s borrowings are at floating rates. The exposure to fluctuating interest rates is managed by capping portions of debt using interest rate collars and fixing portions of debt using interest rate swaps, which aims to optimise net finance expense and reduce excessive volatility in reported earnings. At 31 March 2009 the longest term of any debt held by the Group was until 2013. A simultaneous 1 per cent. increase in the Group s variable interest rates in each of Pounds Sterling, Euros, US Dollars and Canadian Dollars at the end of 31 March 2009 would result in a 0.2 million (2008: 0.4 million) decrease to the Group s profit before tax and a decrease of 1 per cent. would result in a 0.8 million (2008: 0.5 million) increase to the Group s profit before tax. The difference is due to the impact of the interest rate collars and swaps. Foreign currency risk management The Group has significant investment in overseas operations. The majority of the Group s operations are domestic within their country of operation. The Group seeks to create a natural hedge of this exposure through its policy of aligning approximately the currency composition of its net borrowings with its forecast operating cash flows. At the moment the Group only undertakes foreign currency transaction hedging for very significant transactions. The Group s policy is to translate profits of overseas operations using average exchange rates. However, it is the Group s policy not to hedge exposure arising from profit translation. The following table illustrates the Group sensitivity to fluctuations in the major currencies in which it transacts. Sensitivity is calculated on financial assets and liabilities as of 31 March 2009 denominated in nonfunctional currencies for all operating units within the Group. The percentage movement applied to each currency is based on management s measurement of foreign exchange rate risk. 197
31 March 31 March 2009 2008 Income Income statement statement +/- 000 +/- 000 Pounds Sterling +/- 10% increase (2008: 5%) (1) 50 US Dollars +/- 10% increase (2008: 5%) (589) (256) Canadian Dollars +/- 10% increase (2008: 5%) 62 52 Euros +/- 10% increase (2008: 5%) 711 567 Counterparty risk management Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The Group controls credit risk by entering into financial instruments only with highly credit-rated authorised counterparties which are reviewed and approved regularly by the Board. Counterparties positions are monitored on a regular basis to ensure that they are within the approved limits and there are no significant concentrations of credit risk. The Group considers its maximum exposure to credit risk as follows: 31 March 31 March 2009 2008 000 000 Cash and cash equivalents 11,767 16,484 Trade and other receivables 46,362 23,467 58,129 39,951 Liquidity risk management The Group maintains a prudent liquidity risk management position by having sufficient cash and availability of funding through an adequate amount of committed credit facilities. Management monitors rolling forecasts of the Group s liquidity reserve on the basis of expected cash flows. At 31 March 2009, the undrawn uncommitted facility amount is 31.5 million (2008: 14.3 million). The table below analyses the Group s financial liabilities which will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Trade and Interest other bearing payables borrowings Total 000 000 000 Amount due for settlement at 31 March 2009: Within one year 85,526 13,823 99,349 One to two years 5,020 5,020 Two to five years 92,810 92,810 90,546 106,633 197,179 198
Trade and Interest other bearing payables borrowings Total 000 000 000 Amount due for settlement at 31 March 2008: Within one year 83,210 6,751 89,961 One to two years 277 6,546 6,823 Two to five years 69,665 69,665 83,487 82,962 166,449 Interest on borrowings is calculated based on borrowings held at the balance sheet date without taking into account any potential future drawdowns. Floating rate interest is estimated using spot rates as at the balance sheet date. The exchangeable debentures are convertible to equity at the option of the holders at any time before the redemption date in September 2013. Per the terms and conditions of the exchangeable debenture this date was reset during the year following the Group s refinancing. If not converted at this date or redeemed earlier, they will be redeemed at principal plus accrued interest at the contractual redemption date. As such, these debentures have been classified in the two to five year band. Derivative contracts include interest rate collars and swaps which are settled net. There are no expected cash flows on the interest rate collars or swaps based on spot interest rates as at the balance sheet date. Financial liabilities denominated in currencies other than Pounds Sterling are converted to Pounds Sterling using closing exchange rates as of the balance sheet date. Capital risk management The Group s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to optimise the weighted average cost of capital and tax efficiency subject to maintaining sufficient financial flexibility to undertake its investment plans. In order to maintain or adjust the capital structure, the Group may issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of a leverage ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total interest bearing loans and borrowings (as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as equity as shown in the consolidated balance sheet plus net debt. The leverage ratio is: 31 March 31 March 2009 2008 000 000 Interest bearing loans and borrowings 99,172 63,878 Cash and cash equivalents (11,767) (16,484) Net debt 87,405 47,394 Total capital 220,606 170,972 Leverage ratio 39.6% 27.7% Management has reviewed the year end leverage ratio and considers it appropriate based on the profile of the Group. 199
37. Classification of financial instruments The tables below split financial instruments by category: Carrying value Fair value 2009 2009 31 March 2009 000 000 Cash and cash equivalents (note 19) 11,767 11,767 Loans and receivables: Trade and other receivables (note 18) 46,362 46,362 Total financial assets 58,129 58,129 Financial liabilities measured at amortised cost: Interest bearing loans and borrowings (note 22) (99,172) (99,172) Trade and other payables (129,939) (129,939) Held for trading financial liabilities: Other financial liabilities (note 21) (2,334) (2,334) Total financial liabilities (231,445) (231,445) Cash and cash equivalents (note 19) 16,484 16,484 Loans and receivables: Trade and other receivables (note 18) 23,467 23,467 Total financial assets 39,951 39,951 Financial liabilities measured at amortised cost: Interest bearing loans and borrowings (note 22) (63,878) (63,878) Trade and other payables (83,487) (83,487) Held for trading financial liabilities: Other financial liabilities (note 21) (3,038) (3,038) Total financial liabilities (150,403) (150,403) 200
COMPANY INFORMATION Nominated adviser and broker Joint broker Legal advisers to the Company (UK & US) Singer Capital Markets Limited One Hanover Street London W1S 1AX United Kingdom Evolution Securities Limited 100 Wood Street London EC2V 7AN United Kingdom Mayer Brown International LLP 201 Bishopsgate London EC2M 3AF United Kingdom Legal advisers to the Maples and Calder Company (Cayman Islands) PO Box 309 Ugland House Grand Cayman KY1 1104 Cayman Islands Legal advisers to the Osler, Hoskin & Harcourt LLP Company (Canada) PO Box 50 1 First Canadian Place Toronto, Ontario M5X 1B8 Canada Bankers (UK, Europe & North America) Registrars Auditors Financial adviser to the Company JP Morgan Chase Bank, N.A. 125 London Wall London EC2Y 5AJ United Kingdom Capita Registrars (Jersey) Limited 12 Castle Street St. Helier JE2 3RT Jersey Deloitte LLP 2 New Street Square London EC4A 3BZ United Kingdom Marwyn Capital LLP 11 Buckingham Street London WC2N 6DF United Kingdom 201
Entertainment One Ltd. PO Box 309GT Ugland House South Church Street Grand Cayman Cayman Islands www.entertainmentonegroup.com 202
SECTION C: YEAR ENDED 31 MARCH 2008 An action packed year Entertainment One Annual Report & Accounts 2008 203
CONTENTS Page TAKING AIM 1 THE JOURNEY SO FAR... 2 A WINNING STRATEGY 4 BUSINESS REVIEW 6 DIRECTORS 24 DIRECTORS REPORT 26 DIRECTORS REMUNERATION REPORT 28 CORPORATE GOVERNANCE 30 INDEPENDENT AUDITORS REPORT 32 FINANCIAL STATEMENTS 33 COMPANY INFORMATION 72 204
TAKING AIM Entertainment One Ltd is a leading international entertainment content and distribution business operating in Canada, the UK, Europe and the US. Since listing on AIM in March 2007 the Group has undergone a period of transformation and is successfully executing its strategy to build the leading independent entertainment content ownership and distribution business. The Group is split into two divisions Entertainment and Distribution. The Entertainment division focuses on the exploitation of content rights in filmed entertainment and music. The Distribution division focuses on the physical distribution of entertainment product in Canada and the US. 205
THE JOURNEY SO FAR... This has been an action packed first year for the Group. The business has become a significant player in filmed entertainment following acquisitions in Canada, the UK and Europe and has further consolidated its position as a leading independent music record label and physical entertainment distribution business in Canada and the US. 29 March 2007 Admission to trading on AIM upon completion of the acquisition of the operations of Entertainment One Income Fund for a total consideration of C$194 million. 14 May 2007 Entertainment One announces acquisition of Navarre Entertainment Media Inc. a distributor of independent music labels in the US for a total consideration of US$6.5 million. 5 July 2007 Entertainment One acquires Contender Entertainment Group, a rights ownership and exploitation business and a leading independent distributor of DVD content in the UK, for 49.1 million. 17 August 2007 Entertainment One acquires Seville Entertainment Inc., a leading Canadian film distribution company and entertainment rights owner, for C$5.2 million ( 2.5 million). 20 September 2007 Entertainment One announces a multi-territory all rights agreement with Summit Entertainment, a leading Hollywood studio, to exclusively distribute all titles released by Summit for the UK and Canada for the next 3 years. 9 January 2008 Entertainment One announces agreement to acquire the Benelux distribution company, RCV Entertainment, with a long-term all rights library of 1,900 titles for a total consideration of 41.5 million. 20 and 27 March 2008 Entertainment One announces that it has agreed output deals with the independent studios THINKFilm and Yari Film Group. Revenue Underlying EBITDA Pro forma 1 292.1m 21.5m Reported 2 264.4m 18.6m 1 Pro forma results are based on trading from 1 April 2007 to 31 March 2008 for all businesses owned by the Group during the period. 2 Reported results are based on the audited statutory results of the Group. 206
A WINNING STRATEGY Entertainment One s strategy is to become the world s leading independent content ownership and distribution business. The strategy is to acquire, own and exploit entertainment rights across the spectrum of distribution channels through both organic growth and the acquisition of established content ownership and distribution businesses in the world s developed markets. There is an opportunity to create an international content rights distribution infrastructure through the consolidation of independent film distributors in different territories around the world. Such infrastructure offers an alternative to the major studios that has the scale and financial security to support film producers while at the same time creating a business able to command a stronger, more competitive position in the market allowing for reduced acquisition costs, improved cost efficiencies, greater access to capital and lower portfolio risk. Entertainment One has started delivering on this consolidation strategy with the acquisitions already completed and has identified further opportunities in English speaking and European markets. 207
BUSINESS REVIEW CONTENTS Page STRATEGY 8 MARKETPLACE 10 BUSINESS PERFORMANCE 12 FINANCIAL REVIEW 18 RISKS 22 208
STRATEGY Entertainment One s goal is to become the world s leading independent content ownership and distribution business. The strategy is to acquire, own and exploit entertainment rights across the spectrum of distribution channels (including movie theatres, home entertainment, television and digital delivery platforms) through both organic growth and the acquisition of established content ownership and distribution businesses in key international markets. Entertainment One International Content Ownership and Distribution. Organic Growth Single picture acquisitions from independent producers. Long-term output deals with independent producers. Acquisition of film and television libraries. Acquisition Acquisition of established content businesses in target territories. The Board believes that the role of the content distributor offers the best risk/return profile within the entertainment value chain. The distributor can diversify risk through the ownership of multiple rights but also contracts to own the content for long periods of time (up to 25 years) across all media channels. The Board has no intention to undertake film production but would consider television production in certain territories where the circumstances dictate an acceptable risk/return profile. Management has identified an opportunity to create an international distribution infrastructure through consolidation in different territories around the world. Such an infrastructure offers content owners an alternative to the major studios having the scale and security to support the producer s film financing requirements whilst creating a business able to command a stronger, more competitive position in the market allowing for reduced content acquisition costs, improved cost efficiencies, greater access to capital and lower portfolio risk. Entertainment One has started delivering on this consolidation strategy with four acquisitions having already been completed and has identified additional English-speaking and European markets with opportunities for further acquisitions. Establishing a presence in emerging markets will only form part of the expansion plans when the timing for entry into these markets is deemed to be appropriate. The growth of the Group through both organic investment and additional strategic acquisitions will allow it to leverage its scale to deliver improved margins. As the business expands it will become a more attractive partner to film producers which in turn will allow the Group to access more film content. As the scale of the Group increases, its ability to negotiate increased revenues and reduced costs through supply side efficiencies will improve, in particular lowering print and advertising ( P&A ) expenditure. The Group s Distribution businesses continue to be leaders in their respective markets providing a solid foundation as the Entertainment division expands. Their strategies focus on improving operational efficiency and working capital management while continuing to maximise revenues. 209
MARKETPLACE The global entertainment market continues to grow with 2007 seeing growth in filmed entertainment and music continuing to migrate from the physical to digital format. The outlook is positive with growth forecast in both the film and music markets. Filmed Entertainment The filmed entertainment market forecast remains positive with growth expected in all of the major exploitation windows including movie theatres, home entertainment and television. In addition the change in formats, as the digital and internet channels develop, is expected to provide additional opportunities for market growth, although at present these represent only a small percentage of the overall market. As the Group expands its ownership of filmed entertainment rights it will be well positioned to take advantage of these market opportunities. The overall size of the global filmed entertainment market based on gross consumer receipts is valued at over $100 billion and is dominated by the US market which accounts for 46 per cent. of the market. It is estimated that $51 billion of this total is earned by distributors with independent distributors sharing 28 per cent. of this total, giving them a market valued at $14.6 billion of which management believe the Group s target market size is $4 billion. The breakdown of the global filmed entertainment market by exploitation window highlights the importance of home entertainment (DVD) which accounts for approximately 53 per cent. of all revenues. The theatrical and television broadcast windows account for approximately 25 per cent. and 22 per cent. respectively. Video on demand (VOD) and Internet TV (IPTV) currently account for only a small part of the market. Market forecasts predict growth across all filmed entertainment exploitation windows, with the total market increasing to $115 billion by 2012. This growth is primarily the result of the development of the VOD/IPTV window but is also supported by the onset of Blu-Ray and the expansion of the digital cinema experience. This growth also highlights the change in the mix of film production toward independent films and the increasing importance of the international markets. The Board believes that this provides strong support for the Group s strategy. Music The US music market continues to develop as the channels shift from a physical to digital format. The digital market now accounts for approximately 25 per cent. of US music revenues. The US market is forecast to grow over the long term from $10.5 billion in 2007 to $11.3 billion in 2011, but in the short term will see a slight decline as the fall in physical sales continues to outpace the rapid growth of digital revenues. The Board believes the size of this market and the Group s ability to exploit growing digital revenues provide an ongoing opportunity for the music business. Market data on pages 9, 10 and 11 for filmed entertainment based on Oliver & Ohlbaum report From Middlemen to Mini Majors Prospects for global, independent film distribution to 2012. Market data for music based on PWC report Global Entertainment and Media Outlook: 2007 2011. 210
BUSINESS PERFORMANCE The Group has undergone a year of transformation and is successfully executing its strategy. Since listing on AIM the business has become a significant player in filmed entertainment distribution following acquisitions in Canada, the UK and Europe and has further consolidated its position as a leading independent music record label and physical entertainment distribution business in Canada and the US. The Group is split into two divisions, Entertainment and Distribution. The Entertainment division focuses on the exploitation of content rights in filmed entertainment and music while the Distribution division focuses on the physical distribution of entertainment product in Canada and the US. Financial overview The results for the period reinforce the combined strength of the Group with the Distribution business providing a solid foundation for the growth of the Entertainment division, which has benefited from the contribution of acquisitions completed during the period. Reported revenue for the period is 264.4 million with underlying EBITDA of 18.6 million and a loss before tax of 7.7 million. Due to the number of acquisitions within Filmed Entertainment during the period the business review focuses on unaudited pro forma performance which includes the results of all businesses as if they had been owned by the Group for the full trading period. The Group has performed in line with management expectations in this period of significant change, delivering strong growth in pro forma operating EBITDA of 23 per cent. to 25.6 million. Summary Income Statement for the period to 31 March 2008 Pro forma 2 Actual Constant Reported 1 Exchange Rates Exchange Rates 3 2008 2008 2007 2007 000 000 000 % 000 % Revenue 264,375 292,050 288,537 1 293,600 (1) Operating EBITDA 4 22,654 25,572 20,548 24 20,830 23 Group costs 5 (4,034) (4,034) Underlying EBITDA 6 18,620 21,538 1 Reported results are the audited statutory results for the Group. 2 Pro forma results are unaudited and are based on trading from 1 April 2007 to 31 March 2008 for all businesses owned by the Group during that period. Prior year comparatives are stated on the same basis and equivalent trading period. 3 Constant foreign exchange rates present the prior year comparatives at the same rate as the current year. 4 Operating EBITDA is the loss before tax before Group costs, share-based payment charges, interest, one off items, depreciation and amortisation of intangible assets. 5 Group Costs are costs (excluding share-based payment charges) that cannot be allocated to a specific operating division. 6 Underlying EBITDA is the loss before tax before share-based payment charges, interest, one off items, depreciation and amortisation of intangible assets. 211
Entertainment The Group s Entertainment division operates in Filmed Entertainment and Music. Filmed Entertainment In less than a year the Filmed Entertainment division has established itself as a significant player in the global film entertainment market following the acquisitions of: Contender Entertainment Group ( Contender ) which was acquired in July 2007 for 49.1 million and established a UK presence for the Group. Contender is one of the leading independent filmed entertainment distributors in the UK with the capability to exploit content across all windows, a library of over 500 television and film rights and is the creator of the very successful childrens television programmes Peppa Pig and Tractor Tom, for which it owns worldwide rights in perpetuity. Seville Pictures ( Seville ) which was acquired in August 2007 for 2.5 million, is a leading film distribution business and content owner in Canada. Seville exploits filmed content across all windows and also has a film library of over 700 films, including worldwide rights to over 100 films. RCV Entertainment ( RCV ) which was acquired in January 2008 for 31.4 million is a leading independent Benelux film distributor and content owner with a long-term library of circa 1,900 feature films in all media including theatrical, home entertainment, television and new media. Its focus is on acquiring titles from independent US producers. The benefits of developing a multi-territory infrastructure can already be seen through the announcement in September 2007 of a three year output deal for the UK and Canada with Summit Entertainment, the independent Hollywood studio. This deal alone will deliver approximately 25 movies over the next three years in both the UK and Canada and will be a strong driver of growth. Future titles include Sex Drive (starring James Marsden), Twilight (starring Kristen Stewart) and Knowing (starring Nicolas Cage). In addition the Group has been successful in signing a strong slate of new film and television properties including Edge of Darkness (starring Mel Gibson), Law Abiding Citizen (starring Gerard Butler), The Marc Pease Experience (starring Ben Stiller), as well as Eddie the Eagle (starring Steve Coogan) and Mr. Nice (starring Rhys Ifans). The business is seeing a commercial benefit from multi-territory acquisitions and has also been able to deliver improved cost efficiencies as a result of increasing the Group s operational scale. In March the Group announced another two Canadian output deals with Yari Film and THINKFilm. These, along with Summit Entertainment, underline the success of the business in establishing itself in the film distribution market. Future releases from Yari Film include Nothing But the Truth (starring Kate Beckinsdale and Matt Dillon) and from THINKFilm Bordertown (starring Jennifer Lopez and Antonio Banderas). As part of the THINKFilm deal Entertainment One also acquired THINKFilm s library rights for Canada. The library of 235 critically acclaimed and commercially proven titles includes the hit movies Crouching Tiger, Hidden Dragon and The Assassination of Richard Nixon. Filmed Entertainment Financial Overview for the period to 31 March 2008 Pro forma 2 Actual Constant Reported 1 Exchange Rates Exchange Rates 3 2008 2008 2007 2007 000 000 000 % 000 % Revenue 53,036 80,712 79,356 2 81,643 (1) Operating EBITDA pre content amortisation 13,460 25,192 27,511 (8) 27,995 (10) Operating EBITDA 7,449 10,367 12,727 (19) 13,074 (21) Investment in content 10,616 20,300 15,923 27 17,738 14 Reported revenue in the period is 53.0 million with operating EBITDA of 7.5 million. Pro forma revenue was 80.7 million with pro forma operating EBITDA pre content amortisation of 25.2 million and 212
pro forma operating EBITDA of 10.4 million. The EBITDA performance reflects the impact of the strategy to increase investment in film content and the associated film P&A costs which get expensed as incurred on the release of a film. Investment in content rights, which is the amounts paid to producers to secure film rights, is higher than the prior year reflecting the Group s strategy. More specifically the performance is driven by the results from the Group s acquisitions. Contender had a good year driven by the success of DVD titles such as Life on Mars and Series 6 of Spooks. In addition Peppa Pig, the pre school cartoon series, announced a broadcast deal with US network Noggin (owned by Nickelodeon) and grew licensing and merchandising activities. Looking forward the growth in the film slate which includes Franklyn (starring Ryan Phillippe) and Travelling (starring Jennifer Aniston), in combination with the new childrens TV animation programmes, Humf and Little Kingdom, provide an exciting line up for further top line growth in the business. RCV also performed well with a further expansion of its film library from the release of top titles including The Golden Compass, Hairspray, Fracture and Rendition. The strength of the library continued to support the strong performance of the business. The line up for the forthcoming year again looks positive with titles including Defiance (starring Daniel Craig) and Bangkok Dangerous (starring Nicolas Cage). Seville, which now includes the results of the Group s video label Paradox, expanded its film investment activity. In particular it released two larger titles, P2 and Penelope, which impacted EBITDA as upfront P&A costs were expensed on release of the films during the period. The renewal and expansion of the output deal with Image through Paradox, announced in December 2007, provides rights to Image product in all major windows including digital rights through to 2012. The upcoming year will see further growth with a significant increase in the number of releases including titles such as The Lonely Maiden (starring Morgan Freeman) and Assassination of a High School President (starring Mischa Barton). Music The Music division represents the results of the Group s US record label Koch Records which has over 15,000 active tracks in its library. Koch Records business model focuses on attracting and developing artist talent and maximising earnings through its low cost infrastructure. Music Financial Overview for the period to 31 March 2008 Actual Constant Exchange Rates Exchange Rates 2008 1 2007 2 2007 000 000 % 000 % Revenue 22,089 22,867 (3) 21,568 2 Operating EBITDA pre content amortisation 6,046 5,891 3 6,040 Operating EBITDA 1,771 784 126 739 140 Investment in content 4,965 4,302 15 4,245 17 1 Reported results are the audited statutory results for Music. 2 Prior year comparatives are for the trading period 1 April 2006 to 31 March 2007 and are unaudited. Trading over the period has been robust with a solid revenue performance relative to the market of 22.1 million, and strong growth in operating EBITDA to 1.8 million. This has been driven by artist successes such as DJ Khaled, Unk and Jim Jones and growing digital sales which now account for over 29.2 per cent. of revenues. 213
Key Performance Indicators 25.3m Pro Forma Investment in content rights (2008 financial year) 3,721 films Library Distribution The Distribution division delivered strong results through its two operating businesses Entertainment One Canada ( E1 Canada ) and Koch Entertainment. Overall revenues were up 11 per cent. at 202.5 million with operating EBITDA up 8.1 million to 14.2 million. Distribution Financial Overview for the period ended 31 March 2008 Actual Constant Exchange Rates Exchange Rates 2008 1 2007 2 2007 000 000 % 000 % Revenue 202,508 181,429 12 183,193 11 Operating EBITDA 14,222 6,168 131 6,111 133 1 Reported results are the audited statutory results for Distribution. 2 Prior period comparatives are for the trading period 1 April 2006 to 31 March 2007 and are unaudited. Distribution Canada This has been a positive year for E1 Canada driven by a strong box office performance in Canada in 2007 which delivered good DVD sales. The business has continued to develop as a result of its strong market position. The focus has been on growing revenues through increasing market share whilst improving the efficiency of the operating model. During the year E1 Canada has welcomed new customers and expanded its Vendor Managed Inventory services. In addition, E1 Canada has enhanced its operational performance through the rationalisation of its distribution infrastructure which in June 2007 saw the closure of the Winnipeg operation and in March 2008 the announcement of the consolidation of its operations in Western Canada. The business is also focused on improving systems to drive further operational performance in particular the management of inventory stock turn. The success of these initiatives will allow the business to continue to deliver a solid financial performance. Distribution US The Group s US distribution business, operated through Koch Entertainment, further strengthened its position as the leading independent distributor in the US through a deal with Navarre that consolidated 70 exclusive independent distribution contracts into the Koch business. This enabled the business to continue its success despite the ongoing challenges of the physical music market. In addition, growth of digital sales supported the improved performance of the business. Koch Entertainment continues to focus on driving improved operating efficiencies and delivering reduced returns processing costs as well as benefits to cash management in the 2009 financial year. The business is well positioned to take advantage of video opportunities as they develop over the coming period. Key Performance Indicators In excess of 40m Planned investment in content rights (2009 financial year) 238 films Future releases 214
Outlook The outlook for the year is positive and it is expected there will be further acquisition led growth as the business continues to execute its strategy. Further business acquisitions, both within new and existing territories, are expected and will further enhance the scale of the business in the film and TV markets and also ensure that the Filmed Entertainment division can maximise the operating and financial upsides that a multi-territory infrastructure offers. In tandem with this activity there will be an increase in the investment in content rights. The Group plans to spend in excess of 40.0 million on content rights across the Group in the 2009 financial year, up from 25.3 million (on a pro forma basis) in 2008. This increased investment will be focused on film content acquisitions which will attract increased year on year P&A costs as the movies are released theatrically but will generate strong revenues. Across the Group the plan is to release upward of 238 films. Looking forward the Distribution division is focused on maintaining steady growth as markets develop including reviewing digital opportunities, and will build on this with further improvements in operating efficiencies, in particular focused on stock and working capital management. 215
FINANCIAL REVIEW Reported revenue for the period was 264.4 million with underlying EBITDA of 18.6 million. Underlying profit before tax was 2.0 million resulting in an underlying loss per share of 0.03 pence. The loss before tax was 7.7 million with a basic loss per share of 9.49 pence. Summary Consolidated Income Statement (Audited) 000 Revenue 264,375 Underlying EBITDA 18,620 Depreciation and amortisation of intangibles assets (12,074) Share-based payments (5,797) One-off costs (2,249) Net finance costs (6,176) Loss before tax (7,676) Analysed as: Underlying profit before tax 1,965 Share based payment charge (5,797) Financing fair value movements and amortisation (722) Early settlement cost on conversion of debenture (873) One off items (2,249) (7,676) Income tax expense (879) Loss after tax (8,555) Underlying profit before tax was 2.0 million and reflects a successful trading period in the underlying businesses acquired in March 2007. The financial results from subsequent acquisitions (Navarre, Contender, Seville and RCV) traded in line with management expectations and have been included from the date of acquisition. The underlying EBITDA of 18.6 million includes Group costs of 4.0 million which include directors remuneration and professional and advisory fees associated with running a publicly quoted company. As the Group continues to expand and develop in the new financial year these costs are expected to increase. The loss before tax of 7.7 million reflects the impact of one off costs of 2.2 million, non cash charges relating to the share-based payments charge of 5.8 million and amortisation of intangible assets of 11.1 million. Depreciation and amortisation The total charge of 12.1 million includes 11.1 million in relation to the amortisation of intangible assets identified in the fair value review completed following the acquisition activity during the period. This is expected to increase in the 2009 financial year reflecting the full year s charge for all the acquisitions made during the period. Depreciation was 1.0 million and will also increase in the 2009 financial year to reflect a full year s charge following the completed acquisitions. Share-based payments There is a charge of 5.8 million in the period relating to share options awarded to all executives and the senior management of the Group. The majority of the options granted during the period relate to those awarded following the acquisition of the operations of Entertainment One Income Fund in March 2007. 216
One off items The Group has non-recurring costs of 2.2 million primarily associated with the reorganisation of the business following the acquisition of the operations of Entertainment One Income Fund in March 2007. These reorganisation costs relate to the restructuring of the Canadian Distribution warehouse infrastructure completed in June 2007 and associated severance costs. In addition, the Group has established a provision in respect of the consolidation of the Western Canadian Distribution facilities which include the closure of a further warehouse. Net finance costs Summary of Net Finance Costs 000 Interest receivable (795) Interest payable on bank loans and borrowings 3,158 Interest payable on exchangeable debentures 883 Other finance costs 725 Underlying net finance costs 3,971 Net foreign exchange losses 776 Fair value movements 556 Early settlement cost on conversion of debenture 873 Net finance costs 6,176 Key Performance Indicators Revenue Underlying EBITDA Pro forma 292.1m 21.5m Reported 264.4m 18.6m The underlying net finance costs are 4.0 million. This excludes fair value movements arising from marked to market adjustments for interest rate collars entered into by the Group as part of the establishment of the Group s UK and European banking facilities, and the embedded equity option identified on the exchangeable debenture issued in January 2008. A non-recurring early settlement cost of 0.9 million arising on the conversion of the exchangeable debenture issued in March 2007, along with foreign exchange losses primarily associated with the retranslation of the Group s Euro term loan have also been excluded for the purposes of calculating underlying net finance costs. In addition, the exchangeable debenture issued in January 2008 is amortised over the life of the financial instrument resulting in a 0.2 million charge (included within other finance costs). This amortisation represents only a three month charge and will therefore increase in the 2009 financial year to reflect a full year s charge. The weighted average interest rate as at 31 March 2008 was 7.6 per cent., with underlying interest cover of 4.7 times of underlying EBITDA. Tax The total tax charge for the year was 0.9 million with an effective charge of 11.5 per cent. This charge in the period primarily reflects the impact of non-deductible share-based payment charges and other costs that are incurred by the Group that do not attract tax relief. Loss per share Reported basic and diluted loss per share for the period was 9.49 pence. Underlying basic and diluted loss per share was 0.03 pence. This is impacted by the calculation of the weighted average number of shares that 217
is, under IFRS, calculated from 11 January 2007, the date of incorporation. However, the Group did not commence trading until 29 March 2007, on the acquisition of the operations of Entertainment One Income Fund. Although not in line with the guidance in IAS 33, a trading period underlying basic and diluted loss per share of 0.02 pence has been calculated based on the weighting of shares over the 12 month trading period. This is helpful in the understanding of the loss per share as it matches the trading period with the weighted average shares issued. Foreign exchange Underlying EBITDA includes a foreign exchange gain of 0.5 million reflecting the net impact of transactional gains or losses during the period. The balance sheet reflects the currency fluctuations on translating overseas results into pounds sterling. For full details of the impact of foreign currency fluctuations on the Group s financial position and performance, see note 38 to the consolidated financial statements. Cashflow Summary of Consolidated Cash Flow Statement Operating activities 28,718 Investing activities (178,792) Financing activities 166,558 Net cash increase in cash and cash equivalents 16,484 Net debt Cash at bank and in hand 16,484 Debt (63,878) Net debt 47,394 During the period ended 31 March 2008, the Group generated cash from operating activities of 28.7 million driven by the strong underlying EBITDA performance and an improvement in working capital. The cash outflow from investing activities primarily relates to the successful acquisition of five businesses during the period along with the continued investment in content rights. The cash inflow from financing activities reflects debt and equity required to fund acquisitions during the period. 000 Corporate acquisitions The five acquisitions during the period have resulted in the need to value intangible assets and goodwill. This has resulted in the creation of intangible assets of 80.0 million and goodwill of 78.7 million. The intangible assets balance is based on the allocation of the purchase price across defined categories including exclusive content agreements and libraries, exclusive distribution agreements and customer relationships less any amortisation charged during the period. Goodwill is largely attributable to the anticipated profitability and market share of these new businesses, along with the deemed value of the workforce and infrastructure. In addition, goodwill includes amounts recognised on the creation of deferred tax liabilities arising on the acquisition of intangible assets. The Group has a rigorous investment review process which includes full financial and legal due diligence by our professional advisers and review by the Acquisitions Committee and the Board, where necessary. The Group has clearly defined investment criteria which include a review of the key investment financial multiples, discounted cashflow valuations and a determination of the impact the proposed acquisition will have on Group earnings per share. 218
Investment in content rights Content investment at the balance sheet date totalled 77.8 million and comprised content rights acquired directly from producers ( 43.5 million), intangible assets acquired through acquisition of other businesses ( 29.6 million) and investment in programmes ( 4.7 million). It should be noted that content rights acquired directly from producers are amortised in line with forecast revenues (which normally results in an average of 80 per cent. being amortised within 12 months of theatrical release). The investment in content rights during the period was 15.6 million and this investment has supported the Group s strategy of developing a diverse library of titles available for exploitation over a number of years. The 2009 financial year will see the Group continue to build on the strategy with further investment of approximately 40.0 million. Net debt The Group s net debt (including an exchangeable debenture) at 31 March 2008 was 47.4 million, leveraging the business at 2.5 times underlying EBITDA. The Group has interest bearing loans and borrowings at a fixed and floating rate. Key Performance Indicators Operating cash flow 28.7m Net debt 47.4m 219
RISKS The Board considers risk assessment, identification of mitigating actions and internal control to be fundamental to achieving the Group s strategic objectives. The Corporate Governance report on page 31 describes the systems and processes through which the directors manage and mitigate risks. The Board considers that the principal risks to achieving its objectives are set out below. The Board recognises that the nature and scope of the risks can change and so reviews the risks faced by the Group as well as the systems and processes to mitigate them. Attracting and retaining the best people Entertainment is fundamentally a people business and the ability to attract, recruit and retain quality staff is a risk in a highly competitive labour market. We continue to invest in our people, ensuring that we recruit and retain the right calibre of staff with the skills, experience and talent to grow the business. We seek to ensure we have appropriate management development programmes to assess, manage and develop our people s leadership skills, talents and experiences throughout the organisation. Strategy execution The entertainment industry is continually changing and the Group will seek to identify and anticipate risks regarding our assumptions and understanding of these changes, including economic conditions, in order to ensure the strategy remains appropriate. Corporate planning processes are in place to ensure that the strategies of the individual businesses within the Group are aligned and contribute to the delivery of shareholder value. Acquisition effectiveness A significant driver of our strategy is growth through acquisitions in new territories around the world and consolidation opportunities in our current markets. The risks associated with this approach are mitigated through clearly defined investment criteria, detailed due diligence from the Company s professional advisers, the requirement, where appropriate, for management to remain with the target business post acquisition and through robust financial and operational post acquisition and integration plans. Content investment opportunities An increased investment in content rights is fundamental to achieving the Group s aim of providing shareholders with improving and sustainable returns. The continued availability of good quality content, particularly in relation to filmed entertainment, is considered as part of the corporate planning process. The risk of reduced availability of content is mitigated through the continual development of relationships with producers and other key stakeholders across the full spectrum of the entertainment industry. In addition, by following the current strategy of the Group the business is becoming a more attractive partner for the sellers of entertainment rights. Financial risk management The Board considers that the main risks arising from the Group s financial instruments are interest rate risk, foreign currency risk, credit risk, liquidity risk and covenant risk. The use of financial derivatives is governed by the Group s policies approved by the Board of Directors. The Group does not use derivative financial instruments for speculative purposes. The Group s activities expose it primarily to the financial risks of changes in foreign currency exchange rates. The Group uses foreign exchange forward contracts when appropriate, and otherwise uses natural hedging methods where possible, to minimise exposure in this area. Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The Group controls credit risk by entering into financial instruments only with highly credit-rated counterparties. The 220
Group has no significant concentrations of credit risks, with exposure spread over a large number of counterparties and customers. In order to maintain liquidity to ensure that sufficient funds are available for ongoing operations and future developments, the Group uses a mixture of long-term and short-term debt finance. The Group s policy throughout the period has been to minimise risk by placing funds in low risk cash deposits but also to maximise the return on funds placed on deposit. The Group must comply with a number of financial covenants as part of their borrowing facilities. The Group monitors actual and forecast compliance with these covenants and makes regular reports to its bankers. Further details are provided in note 38 of the consolidated financial statements. 221
DIRECTORS Darren Throop, Chief Executive Officer (43) Darren has over 20 years of executive management experience in the home entertainment products industry. Darren has been Chief Executive Officer of Entertainment One since July 2003 and has been in the Group since 1999. Previously Darren was the owner of Urban Sound Exchange between 1991 and 1999 when it was acquired by CDPlus. Giles Willits, Chief Financial Officer (41) Giles joined the executive board of Entertainment One in May 2007 having previously been Director of Group Finance at J Sainsbury plc since 2005. Prior to joining Sainsbury, Giles spent six years at Woolworths Group plc where he was most recently Group Corporate Development Director and interim Group Finance Director. During his time at Woolworths Group he was also Finance Director of Entertainment UK Limited, the largest wholesale distributor of home entertainment products in the UK. He has previously held a number of finance and general management positions within Kingfisher plc and Freemans Plc. Giles is a chartered accountant having qualified with PricewaterhouseCoopers. Patrice Theroux, President Global Filmed Entertainment (45) Patrice has over 25 years of experience in the motion picture distribution industry and until June 2006 was president and CEO of Motion Picture Distribution LP, where he managed one of the world s leading independent distribution operations, including MPD in Canada, Momentum Pictures in the United Kingdom and Aurum Producciones in Spain. David Williams, Non-Executive Chairman (55) David has 35 years experience in the investment market. He has served as chairman in both executive and non-executive capacities for a number of companies, both public and private. He has overseen the development of these companies through both organic and acquisitive growth as well as dealing with turnaround situations. David is currently chairman of Aldgate Capital Plc, Augean PLC, Drury Lane Capital Plc, Marwyn Value Investors Limited and Silverdell Plc as well as Marwyn Investments Group and its subsidiary companies. Bob Allan, Non-Executive Director (61) Between 1997 and 2006, Bob was vice-president of MDS Capital Corp, a North American venture capital company engaged in health and life science investments. Previously, Bob was vice-president financial operation at the laboratory services division of MDS Inc., a public health and life sciences company. Prior to joining MDS, Bob was a vice-president of Unitel Communications Inc. Bob is a chartered accountant and a member of the Canadian Institute of Chartered Accountants. Sir George Bain, Non-Executive Director (69) Sir George has over 40 years of academic and professional experience in the field of economics and industrial relations. He was Principal of the London Business School between 1989 and 1997 and President and Vice Chancellor of The Queen s University Belfast between 1998 and 2004. He was previously a nonexecutive director of Blackwell Publishers Ltd, The Economist Group, the Northern Ireland Advisory Board of the Bank of Ireland, Bombardier Aerospace Shorts Brothers plc, Iain More Associates, and Electra Private Equity plc. He is currently a non-executive director of The Canada Life Group (UK) Ltd and Canada Life Capital Corporation. Clare Copeland, Non-Executive Director (72) Clare is currently the chief executive of Falls Management Company, a commercial development and casino in Niagara Falls, Ontario, Canada. Clare is also chairman of Toronto Hydro Corporation, a Canadian 222
electricity provider. Between 2000 and 2002 Clare was chairman and chief executive of OSF Inc., a manufacturer of retail store interiors. Between 1993 and 1999, he was chief executive of People s Jewellers Corporation, a jewellery retailer. Clare is also currently a trustee of Chesswood Income Trust and RioCan Real Estate Investment Trust and a director of Danier Leather Inc. James Corsellis, Non-Executive Director (37) James is a managing partner of Marwyn Investment Management LLP. James was previously chief executive officer of icollector plc, a leading provider of live auction trading platforms. Over the past two years at Marwyn, James has undertaken 21 transactions, raising in excess of 600 million in acquisition funding for Marwyn backed management teams and special purpose acquisition vehicles. He is currently a director of Marwyn Investments Group Limited, Aldgate Capital Plc, Drury Lane Capital Plc, Concateno Plc and deputy chairman of Catalina Holdings Ltd and is a member of Marwyn Capital LLP. Garth Girvan, Non-Executive Director (59) Garth is currently a partner at the Canadian law firm McCarthy Tétrault LLP having joined the firm in 1978. Garth is currently a non-executive director of the Canadian entertainment company Imax Corporation and the Canadian beverage distributor Corby Distilleries Limited and was previously a director of Silcorp Limited. Garth is called as a barrister in Ontario (1978), Alberta (1982) and New York (1986). Mark Opzoomer, Non-Executive Director (50) Mark is currently CEO of Rambler Media Limited, one of the largest internet portals in Russia. Previously Mark was the Managing Director and Regional Vice-President of Yahoo! Europe from 2001 to 2003. Prior to joining Yahoo! Europe, Mark was Deputy Chief Executive of Hodder Headline plc and previously Commercial and Finance Director of Sega Europe Ltd and Commercial Director of Virgin Communications Ltd. Mark is also one of the founding partners and a director of Bond Capital Partners Ltd, a provider of late stage structured finance to mid-market companies in Europe. Mark is a chartered accountant, a member of the Canadian Institute of Chartered Accountants, and has an MBA from IMD, Lausanne, Switzerland. Mark Trachuk, Non-Executive Director (46) Mark is currently a partner at the Canadian law firm Osler, Hoskin & Harcourt LLP. Mark practised in Osler s London office from 1991 to 1994 and 1996 to 1999 when he was managing partner and spent extended periods in Asia practising in Osler s Singapore office. Mark is called as a barrister and solicitor in Ontario (1989) and British Columbia (1993) and is qualified as a solicitor in England and Wales (1993). 223
DIRECTORS REPORT The directors present their report and audited financial statements for the period ended 31 March 2008. Reporting period The Company was incorporated on 11 January 2007 and commenced trading on 29 March 2007 upon acquisition of the Entertainment One Income Fund. The reporting period is from the date of incorporation to 31 March 2008. Registered office The registered office of Entertainment One Ltd. is Ugland House, South Church Street, George Town, Grand Cayman, Cayman Islands. Principal activities The Group s principal activity is the acquisition and exploitation of entertainment rights across all media. In addition, the Group owns distribution channels to retailers in territories where it can capture additional margin and improve delivery of products to consumers. Business review The Business review sets out a comprehensive review of the development and performance of the business for the period ended 31 March 2008 and is set out on pages 6 to 23 of this report. Risk management and internal controls Disclosures can be found in note 38 to the consolidated financial statements and the Corporate Governance section on page 31. Share capital Details of new share issues during the period are shown in note 23. Post balance sheet events There have been no significant post balance sheet events except as referred to in note 36 to the financial statements. Directors The directors who held office during the period were: Darren Throop Appointed 29 March 2007 Giles Willits Appointed 29 March 2007 Patrice Theroux Appointed 28 August 2007 Peter Pigott Appointed 29 March 2007, Resigned 28 August 2007 David Williams Appointed 11 January 2007 Bob Allan Appointed 29 March 2007 Sir George Bain Appointed 29 March 2007 Clare Copeland Appointed 29 March 2007 James Corsellis Appointed 11 January 2007 Garth Girvan Appointed 29 March 2007 Mark Trachuk Appointed 29 March 2007 Mark Opzoomer Appointed 29 March 2007 Full biographical details of the current directors are set out on pages 24 to 25. 224
Directors interests The beneficial interests of the directors and their families in the shares of the Company are shown below. Options granted under the Company s employee share plans are shown in the Directors Remuneration Report on pages 28 to 29. At 31 March 2008 Number of shares Darren Throop 1,525,000 Patrice Theroux 93,457 Giles Willits 20,000 During the period, no director had any material interest in any contract of significance to the Group s business. Donations During the period the Group made charitable donations of 24,936, principally to local charities serving the communities in which the Group operates. The Group did not make any political donations during the period. Policy of payment of creditors The Group s policy is to agree terms of payment prior to commencing trade with a supplier and to abide by those terms on the timely submission of satisfactory invoices. Trade creditors for the Group at 31 March 2008 were equivalent to 88 days purchases. Disabled employees Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees. Going concern At 31 March 2008, the directors have a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. Accordingly, they have adopted the going concern basis in preparing the financial statements. Auditors Deloitte & Touche LLP were appointed as auditors during the period and have indicated their willingness to continue in office. A resolution for their reappointment will be proposed at the forthcoming Annual General Meeting. Annual General Meeting The Annual General Meeting of the Company will be held on 24 September 2008, notice of such meeting has been sent with these accounts. Statement of directors responsibilities for the Annual Report The directors are responsible for preparing the Annual Report and the financial statements. The directors are required to prepare financial statements for the Group in accordance with International Financial Reporting Standards as adopted by the EU (IFRSs). International Accounting Standard 1 requires that financial statements present fairly for each financial period the Group s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition 225
criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board s Framework for the Preparation of Financial Statements. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. Directors are also required to: properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity s financial position and financial performance. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group, for safeguarding the assets and for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Group s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions. Each of the persons who is a director at the date of approval of this report confirms that: the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and the business review includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties they face. By order of the Board 226
DIRECTORS REMUNERATION REPORT As an AIM listed company incorporated in the Cayman Islands, Entertainment One Ltd. is not required to prepare a Directors Remuneration Report. However, the Company has chosen to disclose the following information on directors remuneration which the Company considers appropriate. Remuneration Committee The Remuneration Committee reviews the performance of executive directors and sets the scale and structure of their remuneration and the basis of their service agreements with due regard to the interests of shareholders. To ensure that the Company s remuneration practices are market competitive, the Committee takes advice from various independent sources. The Board determines the remuneration of the non-executive directors with the support of external professional advice if required. No Director participates in any discussion regarding his or her own remuneration. Policy on executive directors remuneration The policy of the Board is to provide executive remuneration packages designed to attract, motivate, reward and retain executive directors. The aim of the Group s remuneration policy is to ensure that these key executives are appropriately rewarded for their individual contributions to the Group s performance, commensurate with their duties and responsibilities. The Remuneration Committee believes that shareholders interests are best served by providing executives with remuneration packages which have a significant emphasis on performance related pay, through longterm share incentive schemes. The Board considers that packages of this nature are consistent with prevailing practice and are necessary to retain and reward executives of the calibre the Group requires. The main components of executive directors remuneration, which can be mirrored with senior executives, are basic salary, annual performance related bonus and share options. Basic annual salary Each executive Director s basic salary is reviewed annually by the Committee. In deciding upon appropriate levels of remuneration the Committee believes that the Company should offer average levels of base pay reflecting individual responsibilities compared to similar jobs in comparable companies. Annual bonus payments The Committee establishes the objectives which must be met for an annual cash bonus to be paid. Share option incentives The Company operates a number of employee share option schemes (note 37) and the Committee has responsibility for supervising the schemes and the grant of share options under these schemes. In the current period the Committee made share option awards to key directors and employees in respect of the placing on AIM and following successful acquisitions. Out-performance incentive plan The Company also has an out-performance incentive plan that allocates up to 5 million to an incentive pool to be paid to executive directors in the future, conditional on the sale of the Company for no less than 2.25 per share or the Company s share price achieving a share price of 2.25 per share following the third anniversary of Admission. 227
Additional benefits The executive directors receive private medical insurance and life assurance cover. Giles Willits is also entitled to an annual pension allowance of 17.5 per cent. of basic salary which is payable directly into his nominated pension fund. Directors emoluments The remuneration of each of the directors for the period ended 31 March 2008 (or period that they served as directors during the period) is set out below: Salary and fees Bonus Benefits Total Pension 000 000 000 000 000 Executive Darren Throop 243 245 3 491 Giles Willits 202 225 11 438 34 Patrice Theroux 242 245 10 497 Peter Pigott 1 51 2 53 Non-executive David Williams 60 60 Bob Allan 38 38 Sir George Bain 35 35 Clare Copeland 38 38 James Corsellis 35 35 Garth Girvan 38 38 Mark Opzoomer 35 35 Mark Trachuk 38 38 Total 1,055 715 26 1,796 34 1 Resigned 28 August 2007. Salary and fees shown above include fees paid in respect of duties as directors. Benefits relate mainly to the provision of Company cars or car allowances and private medical insurance. Directors interests in share options The interests in share options of the current executive directors at 31 March 2008 were as follows: Granted Exercised Forfeited at 31 March Exercise Scheme in period in period in period 2008 price ( ) Darren Throop 2007 Executive Share Plan 2,702,643 2,702,643 0.01 Giles Willits Employee Benefit Trust 2,577,643 2,577,643 Patrice Theroux 2007 Executive Share Plan 2,702,643 2,702,643 0.01 Peter Pigott 2007 Executive Share Plan 330,396 (36,711) (293,685) 0.01 Total executive share options 8,313,325 (36,711) (293,685) 7,982,929 228
CORPORATE GOVERNANCE Statement by the directors on compliance with the code of best practice As an AIM listed company, Entertainment One Ltd. is not required to comply with the provisions of the Combined Code on Corporate Governance ( the Combined Code ) that applies to companies with a full London Stock Exchange listing. However, the Board recognises the importance and value of good corporate governance procedures and accordingly have selected those elements of the Combined Code that they consider relevant and appropriate to the Group, given its size and structure. An overview of the Group s corporate governance procedures is given below. The Board The Group is controlled through a Board of Directors, which at 31 March 2008 comprised a non-executive chairman, three executive directors and seven other non-executive directors and is responsible to shareholders for the proper management of the Company and the Group. The Chairman is David Williams and the Chief Executive Officer is Darren Throop. Five non-executive directors, Bob Allan, Sir George Bain, Clare Copeland, Garth Girvan and Mark Opzoomer are considered to be independent. The independent non-executive directors bring a wide range of experience and expertise to the Group s activities and provide a strong balance to the executive directors. The Board operates both formally, through Board and Committee Meetings, and informally, through regular contact amongst directors and senior executives. There is a schedule of matters that are specifically referred to the Board for its decision, including approval of interim and annual results, setting and monitoring strategy and examining acquisition possibilities. The Board is supplied with information, in a timely manner, in a form and quality appropriate to enable it to discharge its duties. The directors can obtain independent professional advice at the Company s own expense in the performance of their duties as directors. Board Committees The Board Committees comprise the Audit Committee, the Remuneration Committee, the Nominations Committee and the Acquisitions Committee, each of which operate within defined terms of reference. Audit Committee The Chairman of the Audit Committee is James Corsellis with Bob Allan and David Williams as the other non-executive members. No one other than the Audit Committee s Chairman and members is entitled to be present at a meeting of the Audit Committee but the Company s external auditors together with the Chief Executive Officer and the Chief Financial Officer are also invited to attend the meetings. The Audit Committee operates under terms of reference agreed with the Board and meets at least twice a year. The Audit Committee considers the adequacy and effectiveness of the risk management and control system of the Group. It reviews the scope and results of the external audit, its cost effectiveness and the objectivity of the auditors. It also reviews, prior to publication, the interim results, preliminary announcement and the Annual Report. Remuneration Committee The Remuneration Committee comprises David Williams (as Chairman) and James Corsellis. The Committee meets periodically as required and is responsible for overseeing the policy regarding executive remuneration and for approving the remuneration packages for the Group s executive directors. It is also responsible for reviewing incentive schemes for the Group as a whole. 229
Nominations Committee The Nominations Committee is chaired by James Corsellis and its other members are Clare Copeland and Mark Trachuk. The Nominations Committee meets as required to select and propose to the Board suitable candidates of appropriate calibre for appointment as directors. The Committee would normally expect to use the services of professional external advisors to help in the search for and selection of candidates. Acquisitions Committee The Acquisitions Committee is chaired by Darren Throop with James Corsellis, Giles Willits, Patrice Theroux, Sir George Bain and Mark Trachuk as members. The Acquisitions Committee will source and identify potential acquisitions, negotiate the terms of any potential acquisition and coordinate due diligence, negotiations and preliminary documentation subject to full Board approval. Board and committee meeting attendance The table below sets out the attendance of directors at Board and committee meetings by presence or by telephone of individual directors. Full Board meetings Audit Remuneration Nominations Acquisitions Directors attended Committee Committee Committee Committee Darren Throop 8 of 8 3 of 3 Giles Willits 8 of 8 3 of 3 Patrice Theroux 5 of 6 3 of 3 Peter Pigott 1 2 of 2 David Williams 6 of 8 3 of 3 8 of 8 Bob Allan 7 of 8 3 of 3 8 of 8 Sir George Bain 7 of 8 3 of 3 Clare Copeland 8 of 8 1 of 1 James Corsellis 6 of 8 3 of 3 8 of 8 1 of 1 3 of 3 Garth Girvan 8 of 8 Mark Trachuk 6 of 8 1 of 1 3 of 3 Mark Opzoomer 5 of 8 1 Resigned 28 August 2007. Shareholder communication The Board is committed to maintaining good communications with shareholders. The executive directors maintain a regular dialogue with analysts and institutional investors to discuss the Company s performance and future prospects. The Company responds formally to all queries and requests for information from existing and prospective shareholders. In addition, the Company seeks to regularly update shareholders through stock exchange announcements and wider press releases on its activities. The first Annual General Meeting since the Company has been a listed entity will provide an opportunity for shareholders to address questions to the chairman or the Board directly. Published information, including regulatory news, is available on the Group s website, www.entertainmentonegroup.com. Risk management and internal controls The directors are responsible for the Group s system of internal control and for reviewing its effectiveness whilst the role of management is to implement Board policies on risk management and control. It should be recognised that the Group s system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve the Group s business objectives and can only provide reasonable, and not absolute, assurance against material misstatement or loss. 230
The Group operates a series of controls to meet its needs. These controls include, but are not limited to, a clearly defined organisational structure, a comprehensive annual strategic planning and budgeting process and detailed monthly reporting. The annual budget is approved by the Board as part of its normal responsibilities. In addition, the budget figures are regularly re-forecast to facilitate the Board s understanding of the Group s overall position throughout the year and this re-forecasting is reported to the Board in addition to the monthly reporting of actual results. The Audit Committee receives reports from management and the external auditors concerning the system of internal control and any material control weaknesses. Any significant risk issues are referred to the Board for consideration. When acquisitions are made, the Group s controls and accounting policies are implemented during the first full year of ownership. The Board has considered the need for an internal audit function, but has concluded that at this stage in the Group s development the internal control systems in place are appropriate for the size and complexity of the Group. 231
INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF ENTERTAINMENT ONE LTD. We have audited the Group financial statements (the financial statements ) of Entertainment One Ltd. for the period ended 31 March 2008 which comprise the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity and the related notes 1 to 39. These financial statements have been prepared under the accounting policies set out therein. Ann I 20.4.1 This report is made solely to the Company s members as a body, in accordance with Rule 19 of the AIM Rules for Companies. Our audit work has been undertaken so that we might state to the company s members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors responsibilities for preparing the Annual Report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view. We also report to you whether in our opinion the information given in the Directors Report is consistent with the financial statements. The information given in the Directors Report includes that specific information presented in the Business Review that is cross referred from the Business Review section of the Directors Report. In addition we report to you if, in our opinion, the company has not kept proper accounting records and if we have not received all the information and explanations we require for our audit. We read the other information contained in the Annual Report as described in the contents section, and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any further information outside the Annual Report. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. 232
Opinion In our opinion: the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group s affairs as at 31 March 2008 and of its loss for the period then ended; and the information given in the Directors Report is consistent with the financial statements. Deloitte & Touche LLP Chartered Accountants and Registered Auditors London United Kingdom 24 June 2008 233
FINANCIAL STATEMENTS Consolidated Income Statement For the period ended 31 March 2008 Period ended 31 March 2008 Notes 000 Revenue 3 264,375 Cost of sales (201,094) Gross profit 63,281 Administrative expenses (64,781) Operating loss 4 (1,500) Analysed as: Underlying EBITDA 18,620 Amortisation of intangible assets 12,13 (11,067) Depreciation 15 (1,007) Share-based payment charge 33 (5,797) One off items 5 (2,249) (1,500) Finance income 6 795 Finance costs 6 (6,971) Loss before tax (7,676) Analysed as: Underlying profit before tax 1,965 Share-based payment charge 33 (5,797) Financing fair value movements and amortisation 6 (722) Early settlement cost on conversion of debenture 6 (873) One off items 5 (2,249) (7,676) Income tax charge 7 (879) Loss for the period (8,555) Attributable to: Equity holders of the parent (8,555) Loss per share Basic and diluted pence 10 9.49 Underlying basic and diluted pence 10 0.03 234
Consolidated Balance Sheet As at 31 March 2008 31 March 2008 Notes 000 Assets Non-current assets Goodwill 11 80,681 Investment in programmes 12 4,672 Other intangible assets 13 70,465 Investments 14 319 Property, plant and equipment 15 5,031 Other receivables 17 549 Deferred tax assets 8 1,006 Total non-current assets 162,723 Current assets Inventories 16 40,659 Investment in content rights 43,547 Trade and other receivables 17 31,585 Cash and cash equivalents 18 16,484 Total current assets 132,275 Total assets 294,998 Liabilities and equity Non-current liabilities Interest bearing loans and borrowings 21 60,339 Provisions 22 272 Other payables 19 621 Deferred tax liabilities 8 9,033 70,265 Current liabilities Trade and other payables 19 93,368 Current tax liabilities 303 Interest bearing loans and borrowings 21 3,539 Provisions 22 907 Other financial liabilities 20 3,038 Total current liabilities 101,155 Total liabilities 171,420 Equity Share capital 23 587 Share premium 24 126,352 Treasury shares 25 (7,819) Warrant reserve 26 639 Currency translation reserve 27 6,705 Retained earnings 28 (2,886) Total equity 123,578 Total liabilities and equity 294,998 235
These consolidated financial statements were approved by the Board of Directors on 24 June 2008. Giles Willits Director 236
Consolidated Cash Flow Statement For the period ended 31 March 2008 Operating activities Operating loss Period ended 31 March 2008 Notes 000 (1,500) Adjustments for: Depreciation 15 1,007 Amortisation of acquired intangible assets 12,13 11,067 Amortisation of content rights 10,160 Foreign exchange movements (489) Share option charge 33 5,797 Decrease in inventories 514 Increase in trade and other receivables (3,421) Increase in trade and other payables 5,743 Increase in provisions 886 Net cash flow from trading activities 29,764 Income tax paid (1,046) Net cash from operating activities 28,718 Investing activities Interest received 722 Acquisition of subsidiaries (net of cash acquired) 29 (159,857) Investment in content rights (15,581) Investment in programmes 12 (1,781) Purchases of property, plant and equipment 15 (1,714) Purchases of intangible software assets 13 (581) Net cash used in investing activities (178,792) Financing activities Proceeds from share issue 100,002 Loan repaid on acquisition (3,875) New loan advances 79,504 Loan repayments (4,309) Interest paid (4,764) Net cash from financing activities 166,558 Net increase in cash and cash equivalents 16,484 Cash and cash equivalents at end of period 18 16,484 237
Consolidated Statement of Changes in Equity For the period ended 31 March 2008 Issued Currency share Share Treasury Warrant translation Retained Total capital premium shares reserve reserve earnings equity 000 000 000 000 000 000 000 Loss for the period (8,555) (8,555) Shares issued during the period 552 123,238 123,790 Consideration shares 35 7,833 7,868 Share issue costs (4,719) (4,719) Purchase of own shares (7,819) (7,819) Foreign currency translation 6,705 6,705 Warrants issued during the period 639 639 Share option charge 5,669 5,669 At 31 March 2008 587 126,352 (7,819) 639 6,705 (2,886) 123,578 238
Notes to the Financial Statements For the period ended 31 March 2008 1. Nature of operations and general information Entertainment One Ltd. and subsidiaries ( the Group ) principal activity is the acquisition and exploitation of entertainment rights across all media. In addition, the Group owns distribution channels to retailers in territories where it can capture additional margin and improve delivery of products to consumers. The Group is a leading international independent entertainment business currently operating in Canada, the United Kingdom, the United States and the Rest of Europe. Segmental information is disclosed in note 3. Entertainment One Ltd. is the Group s ultimate parent company and is incorporated in the Cayman Islands and is domiciled in Jersey. Entertainment One Ltd. shares are listed on the Alternative Investment Market of the London Stock Exchange. Entertainment One Ltd. has presented its consolidated financial statements in Pounds Sterling ( ), which is also the functional currency of the parent company. These consolidated financial statements were approved for issue by the Board of Directors on 24 June 2008. 2. Accounting policies Basis of presentation The financial statements have been prepared under the historical cost convention on a going concern basis and in accordance with applicable International Financial Reporting Standards as adopted by the EU and IFRIC interpretations ( IFRS ). As this is the Group s first reporting period the disclosures required by IFRS 1 concerning the transition from local GAAP to IFRS for comparative periods are not required. At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective: IFRS 8 IAS 1 IAS 23 IFRIC 11, IFRS 2 IFRIC 12 IFRIC 13 IFRIC 14 Operating Segments Presentation of Financial Statements revised Borrowing costs revised Group and Treasury Share Transactions Service Concession Arrangements Customer Loyalty Programmes The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction The directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group s financial statements in the period of initial application. Principal accounting policies of the Group The financial statements have been prepared in accordance with IFRSs adopted by the EU and therefore the Group financial statements comply with Article 4 of the EU IAS Regulation. Basis of consolidation The consolidated financial statements comprise the financial statements of Entertainment One Ltd. and its subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting periods as the parent company, using consistent accounting policies. Subsidiaries are consolidated in accordance with the requirements of IAS 27 and are fully consolidated from the date of acquisition and continue to be consolidated until the date of disposal. Minority interests represent the portion of profit or loss and net assets not held by the Group and are presented, where applicable, separately in the income statement and within equity in the consolidated balance sheet, separately from parent shareholders equity. 239
Jointly controlled entities are those entities over whose activities the Group has joint control, established by contractual agreement and are accounted for using proportional consolidation from the date that joint control commences. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions that are recognised in assets, are eliminated in full. The accounting policies followed by the Group are shown below: Goodwill Goodwill represents the excess of the cost of acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Investment in programmes Investment in programmes that are in development and for which the realisation of expenditure can be reasonably determined, are classified and capitalised in accordance with IAS 38, as programme development costs under non-current assets. On first exploitation of the property the cost of investment is reclassified as investment in programmes. Also included within investment in programmes are properties acquired on acquisition. A charge is made to write down the cost of completed programmes over their useful lives. The maximum useful life is considered to be 10 years. Other intangible assets Other intangible assets acquired by the Group are stated at cost less accumulated amortisation. Amortisation is charged to the income statement on a straight-line basis over the estimated useful life of intangible fixed assets unless such lives are indefinite. Other intangible assets comprise exclusive content agreements and libraries, customer relationships, exclusive distribution rights, brands and trade names and non-compete agreements. Exclusive content agreements and libraries Customer relationships Exclusive distribution rights Brands and trade names Non-compete agreements 5 to 15 years depending on nature and life of the rights acquired 10 years 5 years 10 years 3 years Investments Unlisted investments are valued at their fair value with changes in fair value recognised directly in equity until the investment is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is brought into the net profit or loss for the period. Property, plant and equipment Property, plant and equipment are stated at original cost less accumulated depreciation. Depreciation is charged to write off cost less estimated residual value of each asset over their estimated useful lives using the following methods and rates: Leasehold improvements Fixtures, fittings and equipment Over the term of the lease 20 per cent. 30 per cent. reducing balance 240
The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. Impairment of assets The Group reviews the carrying amounts of its property, plant and equipment and intangible assets annually to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Investment in content rights Investment in content rights, currently available for exploitation, are capitalised in the consolidated balance sheet if such amounts are considered recoverable against future revenues. These costs are amortised to cost of sales on a revenue forecast basis over a period not exceeding 10 years from the date of initial release. Amounts capitalised are reviewed at least quarterly and any portion of the unamortised amount that appears not to be recoverable from future revenues is written off to cost of sales during the period the loss becomes evident. Balances are included within current assets if they are expected to be realised within the normal operating cycle of the business. The normal operating cycle of the business can be greater than 12 months. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all direct estimated costs of completion and costs to be incurred in marketing, selling and distribution. Financial instruments Financial assets and financial liabilities are recognised on the Group s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Trade and other receivables Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Trade and other payables Trade payables are not interest bearing and are stated at their nominal value. Derivative financial instruments The Group s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group uses derivative financial instruments to reduce its exposure to foreign exchange and interest rate movements. The Group does not hold or issue derivative financial instruments for financial trading purposes but derivatives that do not qualify for hedge accounting are accounted for at fair value through the income statement. Derivative financial instruments are initially recognised at fair value at the contract date. The gain or loss on re-measurement to fair value is recognised immediately in the income statement. 241
Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Treasury shares The Entertainment One Ltd. shares held in the Employee Benefit Trust are classified in shareholders equity as treasury shares and are recognised at cost. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the original cost being taken to revenue reserves. No gain or loss is recognised in the financial statements on the purchase, sale, issue or cancellation of equity shares. Interest bearing loans and borrowings All interest bearing loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of this obligation. The expense relating to any provision is presented in the income statement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Operating leases Rentals payable under operating leases are charged to income on a straight line basis over the term of the relevant lease. Share based payments The Group issues equity-settled and cash-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of equity-settled share-based payments is expensed on a straight line basis over the vesting period, based on the Group s estimate of shares that will eventually vest. Fair value is measured by means of a binomial valuation model. The expected life used in the model has been adjusted, based on management s best estimate, for the effect of non-transferability, exercise restrictions, and behavioural considerations. 242
A liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balance sheet date for cash-settled share-based payments. Segmental reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. The Group has three business segments: entertainment, distribution and other. A geographical segment is a component of the Group that operates within a particular economic environment and is subject to risks and returns that are different from those of components operating in other economic environments. The Group currently operates in four geographical segments: Canada, the United States, the United Kingdom and the rest of Europe. Revenue recognition Revenue represents the amounts receivable for goods and services provided in the normal course of business, net of discounts and excluding value added tax (or equivalent). Revenue is derived from the licensing, marketing and distribution of feature films, television, video programming and music rights. Revenue is also derived from retail and merchandising sales. Revenue from the exploitation of film and music rights is recognised based upon the contractual terms of each agreement. Revenue is recognised on a receivable basis where there is reasonable contractual certainty that the revenue is receivable and will be received. Revenue from television licensing represents the invoiced value of licence fees which is recognised when the licence term has commenced, delivery to licensee has occurred and substantially all technical requirements have been met and collection of the fee is reasonably assured. Revenues from the sale of DVD, video and audio stocks are recognised at the point at which goods are despatched. A provision is made for returns based on historical trends. Revenue from retail sales is recognised at the point of sale to customers. Revenue on licensing and merchandising sales represents the invoiced value of licence fees which is recognised when the licence terms have commenced and collection of the fee is reasonably assured. Pension costs Payments to defined contribution retirement benefit plans are charged as an expense as they fall due. Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in Pounds Sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements. In preparing the financial statements of the individual companies, transactions in currencies other than the entity s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. Foreign exchange differences arising on the settlement of such transactions and from translating at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period. Foreign exchange differences arising, if any, are classified as equity and transferred to the Group s translation reserve. Such translation differences are recognised as income or expenses in the period in which the operation is disposed of. 243
Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt within equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities. This applies when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Significant judgements and estimates The preparation of consolidated financial statements under IFRS requires the Group to make estimates and assumptions that affect the application of policies and reported amounts. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are discussed below. Intangible assets The Group recognises intangible assets acquired as part of business combinations at fair value at the date of acquisition. The determination of these fair values is based upon management s judgement and includes assumptions on the timing and amount of future incremental cash flows generated by the assets and selection of an appropriate cost of capital. Furthermore, management must estimate the expected useful lives of intangible assets and charge amortisation on these assets accordingly. Impairment of goodwill The Group is required to test, at least annually, whether goodwill has suffered any impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a suitable discount rate in order to calculate the present value of these cash flows. Actual outcomes could vary. 244
Investment in content rights The Group capitalises investment in content rights and releases to cost of sales on a revenue forecast basis. Amounts capitalised are reviewed at least quarterly and any that appear to be irrecoverable from future revenues are written off to cost of sales during the period the loss becomes evident. The estimate of future revenues depends on management judgement and assumptions based on the pattern of historical revenue streams and the remaining life of each contract. Share-based payments The charge for share-based payments is determined based on the fair value of awards at the date of grant by use of the Binomial model which require judgements to be made regarding expected volatility, dividend yield, risk free rates of return and expected option lives. The list of inputs used in the Binomial model to calculate the fair values are provided in Note 37. Deferred tax Deferred tax assets and liabilities require management judgement in determining the amounts to be recognised. In particular, judgement is used when assessing the extent to which deferred tax assets should be recognised with consideration to the timing and level of future taxable income. Income tax The actual tax on the result for the year is determined according to complex tax laws and regulations. Where the effect of these laws and regulations is unclear, estimates are used in determining the liability for tax to be paid on past profits which are recognised in the financial statements. The Group considers the estimates, assumptions and judgements to be reasonable but this can involve complex issues which may take a number of years to resolve. The final determination of prior year tax liabilities could be different from the estimates reflected in the financial statements. 3. Business and geographical segments Business segments For management purposes, the Group is currently organised into two main operating divisions entertainment and distribution. These divisions are the basis on which the Group reports its primary segment information. Principal activities are as follows: Entertainment the acquisition and exploitation of filmed entertainment and music rights across all media. Distribution the ownership of distribution channels to retailers in territories and media where the Group can capture additional margin and improve delivery of products to consumers. Included within other is a non-core retail operation in Canada. Segment information for the period ended 31 March 2008 is presented below. Entertainment Distribution Other Eliminations Consolidated 000 000 000 000 000 Revenue External sales 47,361 187,202 29,812 264,375 Inter-segment sales 26,527 15,306 (41,833) Total revenue 73,888 202,508 29,812 (41,833) 264,375 245
Inter-segment sales are charged at prevailing market prices. Entertainment Distribution Other Eliminations Consolidated 000 000 000 000 000 Result Operating EBITDA 9,220 14,222 (112) (676) 22,654 One-off costs (359) (1,545) (1,904) Depreciation and amortisation (6,149) (5,823) (102) (12,074) Segment result 2,712 6,854 (214) (676) 8,676 Unallocated corporate expenses Group costs (4,034) Share-based payments (5,797) One off costs (345) Operating loss (1,500) Finance income 795 Finance costs (6,971) Loss before tax (7,676) Tax (879) Loss after tax (8,555) Other information Capital additions 50,297 37,386 478 88,161 Unallocated capital additions 58 Consolidated total capital additions 88,219 Balance sheet Assets Segment assets 175,868 109,787 7,207 (2,685) 290,177 Unallocated corporate assets 4,821 Consolidated total assets 294,998 Liabilities Segment liabilities (44,308) (48,895) (818) 2,217 (91,804) Unallocated corporate liabilities (79,616) Consolidated total liabilities (171,420) Geographical segments The Group s operations are located in Canada, the United Kingdom, the United States and the Rest of Europe. The Entertainment division is located in all geographies. The Group s Distribution divisions are located in Canada and the United States. The following table provides an analysis of the Group s revenue by destination: Revenue by geographical market 000 Canada 171,538 United States 68,833 United Kingdom 18,645 Rest of Europe 5,359 264,375 246
The following is an analysis of the carrying amount of segment assets, and capital additions, analysed by the geographical area in which the assets are located: Carrying amount of Capital segment assets additions 000 000 Canada 111,619 32,780 United States 52,295 20,281 United Kingdom 65,470 22,419 Rest of Europe 60,793 12,681 Segment assets 290,177 88,161 Unallocated corporate assets 4,821 58 294,998 88,219 4. Operating loss Loss for the period is stated after charging/(crediting): Period ended 31 March 2008 000 Net foreign exchange gains (489) Depreciation of property, plant and equipment 1,007 Amortisation of intangible assets 11,067 Employee benefits (note 33) 35,281 One off items (note 5) 2,249 During the period the Group obtained the following services from the Company s auditors: Period ended 31 March 2008 000 Audit fees Fees payable for the audit of the Company s annual accounts 273 Fees payable for the audit of the Company s subsidiaries 65 Other services Services relating to corporate finance transactions 1,340 Tax services 25 Other services 115 1,818 Charged to operating loss 580 Charged to the balance sheet 1,238 1,818 The amounts charged to the balance sheet relate to capitalised acquisition costs treated in accordance with IFRS 3. 247
5. One off items One off items are items of income and expenditure that are non-recurring and, in the judgement of management, should be disclosed separately on the basis that they are material, either by their nature or their size, to provide a further understanding of the Group s financial performance and enable comparison of financial performance between periods. Items of income or expense that are considered by management for designation as one off are as follows: Period ended 31 March 2008 000 Restructuring costs 1,648 Retention bonuses 256 Abortive acquisition costs 345 2,249 Restructuring costs have been incurred by the Group in reorganising some businesses following acquisition in order to deliver cost savings. The types of costs incurred include severance and warehouse closure costs. Retention bonuses were included within the terms and conditions of the employment contracts of some senior managers employed by businesses acquired in the period. The amounts are therefore contractual and were inherited on acquisition. These amounts are payable as one off bonuses and will not recur. Abortive acquisition costs include due diligence and legal costs for deals that did not complete. 6. Finance income and finance costs The finance income and finance costs comprise: Period ended 31 March 2008 000 Finance income Interest receivable 795 Finance costs Interest payable on bank loans and overdrafts (3,158) Other interest payable (185) Amortisation of deferred finance charges (374) Interest payable on exchangeable debentures (883) Early settlement cost on conversion of debenture (see below) (873) Amortisation of exchangeable debenture (166) Decrease in fair value of embedded equity option (note 20) (100) Decrease in fair value of interest rate collars (note 20) (456) Net foreign exchange losses (776) (6,971) On 31 July 2007, one of the Group s subsidiaries, 4384768 Canada Inc., converted a 10 million exchangeable debenture into shares of the Company (note 23). An early settlement cost of 0.9 million was incurred on conversion. 248
7. Tax Period ended 31 March 2008 000 Current tax 1,175 Deferred tax (296) 879 The charge for the period can be reconciled to the loss in the income statement as follows: Period ended 31 March 2008 000 % Loss before tax (7,676) Taxes at domestic rates applicable (1,816) 23.7 Effect of income that is exempt from taxation (231) 3.0 Effect of expenses that are not deductible in determining taxable profit 1,802 (23.5) Effect of losses not utilised 939 (12.3) Effect of irrecoverable withholding tax 191 (2.5) Effect of tax rate changes (6) 0.1 Income tax expense and effective tax rate for the period 879 (11.5) Taxation is calculated at the rates prevailing in the respective jurisdictions. The standard tax rates in each jurisdiction are 32.5 per cent. in Canada, 37.5 per cent. in the United States, 30 per cent. in the United Kingdom, 20 per cent. in Hungary, 0 per cent. in Jersey and 25.5 per cent. in the Netherlands. 8. Deferred tax assets and liabilities The following are the major deferred tax assets and liabilities recognised by the Group and movements thereon during the current period. Accelerated tax Intangible Unused tax Share-based depreciation assets losses payment Other Total 000 000 000 000 000 000 Acquired on acquisition 179 (11,286) 2,181 725 (8,201) Credit/(charge) to income 161 2,265 (2,034) 209 (329) 272 Exchange differences 12 (282) 73 2 73 (122) Effect of change in tax rates (1) 17 8 24 At 31 March 2008 351 (9,286) 228 211 469 (8,027) The deferred tax balances have been reflected in the balance sheet as follows: 31 March 2008 000 Deferred tax assets 1,006 Deferred tax liabilities (9,033) (8,027) Utilisation of deferred tax assets is dependent on the future profitability of the Group. 249
At the balance sheet date, the Group has unrecognised deferred tax assets relating to tax losses and other temporary differences of 1.7 million available for offset against future profits. The assets have not been recognised due to the unpredictability of future profit streams. Included in the unrecognised deferred tax asset is 1.1 million relating to losses that will expire by 2018. Other losses may be carried forward indefinitely. At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was 1.2 million. No liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. There were no temporary differences arising in connection with interests in joint ventures. 9. Dividends The directors are not recommending payment of a dividend. 10. Loss per share The calculation of the basic and dilutive loss per share is based on the loss attributable to equity holders of the parent of 8.6 million divided by the weighted average number of shares in issue during the period which is 90,166,431. The share options and warrants granted during the period are not dilutive for the purposes of the loss per share calculation as defined by IAS 33. The basic and diluted underlying loss per share have been calculated to allow shareholders to gain a further understanding of the trading performance of the Group. They are based on the basic and diluted loss per share calculations above, except that the results of the Group are adjusted for financing fair value movements and amortisation, share-based payments, the early settlement cost on conversion of the exchangeable debenture and one off items. Reconciliations of the losses used in the calculations and the loss and underlying loss per share calculations are set out below. Period ended 31 March 2008 000 For basic and diluted loss per share Loss for the financial period (8,555) For underlying basic and diluted loss per share Loss for the financial period (8,555) Add back: Financing fair value movements and amortisation 722 Share based payment (net of tax) 5,599 Early settlement cost on conversion of debenture (net of tax) 589 One off items (net of tax) 1,621 Underlying loss after tax (24) Pence Basic and diluted loss per share 9.49 Effect of financing fair value movements and amortisation (0.80) Effect of share-based payment (6.22) Effect of early settlement cost on conversion of debenture (0.65) Effect of one off items (1.79) Underlying basic and diluted loss per share 0.03 250
Trading period basic and diluted loss per share The above calculations utilise the weighted average number of shares in issue over the long period from 11 January 2007 to 31 March 2008. However the Group only started trading upon the acquisition of the operations of Entertainment One Income Fund on 29 March 2007. To help shareholders understand the trading performance of the Group over the 12 month trading period, a trading period loss per share has also been calculated for the period 29 March 2007 to 31 March 2008. Although this calculation is not in line with IAS 33 it provides a helpful comparison as the loss for the full period also represents the trading result for this same 12 month period. The weighted average number of shares weighted over the 12 month trading period is 109,032,756. The losses used for the basic and diluted loss per share calculations were applied to the loss per share calculation for trading period basic and diluted loss per share. The trading period loss and underlying loss per share calculations are set out below. Period ended 31 March 2008 Pence Trading period basic and diluted loss per share 7.85 Effect of financing fair value movements and amortisation (0.66) Effect of share-based payment (5.14) Effect of early settlement cost on conversion of debenture (0.54) Effect of one off items (1.49) Trading period basic and diluted underlying loss per share 0.02 11. Goodwill 000 Cost and carrying amount Recognised on acquisition of a subsidiary 78,715 Exchange differences 1,966 At 31 March 2008 80,681 Goodwill includes amounts recognised on the creation of deferred tax liabilities arising on the acquisition of intangible assets in business combinations in accordance with IFRS 3. Impairment testing for goodwill Goodwill acquired in business combinations is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. The carrying amount of goodwill had been allocated as follows: Total 000 Entertainment 59,633 Distribution 21,048 80,681 The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from the value in use calculations. In assessing value in use, the estimated future cash flows are calculated by preparing cash flow forecasts derived from the most recent financial budget and three year forecasts and an assumed growth rate of 3 per cent., which does not 251
exceed the long-term average growth rate of the relevant markets. The terminal value of the cash flow is then calculated by discounting using an appropriate weighted average cost of capital. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. Any impairment losses are recognised in the income statement as an expense. Key assumptions used in value in use calculation The calculations of the value in use for both cash-generating units are most sensitive to the operating profit, discount rate and growth rate assumptions. Operating profits Operating profits are based on budgeted increases in revenue resulting from new investment in content rights and growth in the relevant markets. Discount rates Discount rates reflect management s estimate of the risks specific to each unit. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. In determining appropriate discount rates for each unit, regard has been given to the yield on a 10-year government bond at the beginning of the budgeted year. Growth rate estimates Rates are based on the most recent financial budget and three year forecast and the assumed growth rate of 3 per cent. beyond the end of year 3. Sensitivity to change in assumptions With regard to the assessment of value in use of both cash-generating units management believes that there is no reasonable possibility that any change in the above key assumptions would cause the carrying value of the units to materially exceed their recoverable amount. 12. Investment in programmes Investment in programmes 000 Cost Acquisition of subsidiaries 3,856 Additions 1,781 At 31 March 2008 5,637 Amortisation Charge for the period (965) At 31 March 2008 (965) Carrying amount At 31 March 2008 4,672 252
13. Other intangible assets Exclusive content Trade Exclusive Non agreements names distribution Customer compete and libraries and brands agreements relationships agreements Software Total 000 000 000 000 000 000 000 Cost Acquisition of subsidiaries 31,691 7,345 17,172 15,419 4,515 76,142 Additions 581 581 Exchange differences 740 333 831 1,746 317 3,967 At 31 March 2008 32,431 7,678 18,003 17,165 4,832 581 80,690 Amortisation Charge for the period (2,829) (630) (3,381) (1,690) (1,569) (3) (10,102) Exchange differences (22) (8) (45) (27) (21) (123) At 31 March 2008 (2,851) (638) (3,426) (1,717) (1,590) (3) (10,225) Carrying amount At 31 March 2008 29,580 7,040 14,577 15,448 3,242 578 70,465 14. Investments Other investments comprise the following, all of which are classified as available-for-sale. Total 000 Unlisted investments 319 15. Property, plant and equipment Fixtures, Leasehold fittings and improvements equipment Vehicles Total 000 000 000 000 Cost Acquisition of subsidiaries 504 3,584 57 4,145 Additions 99 1,605 10 1,714 Disposals (7) (7) Exchange differences 56 136 7 199 At 31 March 2008 659 5,318 74 6,051 Depreciation Charge for the period (106) (882) (19) (1,007) Exchange differences (1) (11) (1) (13) At 31 March 2008 (107) (893) (20) (1,020) Carrying amount At 31 March 2008 552 4,425 54 5,031 16. Inventories 31 March 2008 000 Finished goods 40,659 253
17. Trade and other receivables 31 March 2008 000 Current Trade receivables 24,264 Less: Amounts provided for doubtful debts (797) 23,467 Other receivables 1,735 Prepayments and accrued income 6,383 31,585 Non-current Other receivables 549 Trade receivables are generally non-interest bearing, however, interest may be charged on overdue balances in certain geographies. The average credit period taken on sales is 58 days. Trade receivables are provided for based on estimated irrecoverable amounts, determined by reference to past default experience. Included in the Group s trade receivable balance are debtors with a carrying amount of 5.8 million which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are still considered recoverable. Ageing of past due but not impaired receivables: 31 March 2008 000 Less than 60 days 3,330 Between 60 90 days 622 More than 90 days 1,872 Total 5,824 The Group does not hold any collateral over these balances. Movement in the amounts provided for doubtful debts: 000 Acquired during the period (1,304) Impairment losses recognised (40) Impairment losses reversed 265 Amounts recovered during the period 52 Amounts written off as uncollectable 347 Exchange differences (117) Balance at 31 March 2008 (797) In determining the recoverability of a trade receivable the Group considers any change to the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. Management has a credit policy in place and the exposure to credit risk is monitored by individual operating divisions on an ongoing basis. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. 254
Ageing of impaired receivables: 31 March 2008 000 Less than 60 days (30) Between 60 90 days (3) More than 90 days (764) Total (797) Trade and other receivables are held in the following currencies as at 31 March 2008, with those balances held in currencies other than Pounds Sterling converted at the exchange rate at the balance sheet date: Pounds Canadian US Sterling Euros Dollars Dollars Other Total 000 000 000 000 000 000 Current 2,795 6,582 12,114 10,086 8 31,585 Non-current 183 366 549 2,795 6,582 12,297 10,452 8 32,134 The directors consider that the carrying amount of trade and other receivables approximates to their fair value. 18. Cash and cash equivalents Cash and cash equivalents are held in the following currencies (those held in currencies other than Pounds Sterling have been converted at the exchange rate ruling at the balance sheet date): 31 March 2008 000 Pound Sterling 3,925 US Dollar 3,127 Canadian Dollar 6,903 Euros 2,517 Other currencies 12 16,484 The credit risk on cash and cash equivalents is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The directors consider that the carrying amount of cash and cash equivalents approximates to their fair value. 19. Trade and other payables 31 March 2008 000 Current Trade payables 66,133 Accruals and deferred income 19,083 Other payables 8,152 93,368 Non-current Other payables 621 255
Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 88 days. For most suppliers no interest is charged but for overdue balances interest is charged at various interest rates. The Group has financial risk management policies in place to ensure that all payables are paid within the credit timeframes. Trade and other payables are held in the following currencies (those held in currencies other than Pounds Sterling have been converted at the exchange rate at the balance sheet date): Pounds Canadian US Sterling Euros Dollars Dollars Other Total 000 000 000 000 000 000 Current 12,321 11,894 47,247 21,900 6 93,368 Non-current 621 621 12,321 11,894 47,868 21,900 6 93,989 The directors consider that the carrying amount of trade and other payables approximates to their fair value. 20. Other financial liabilities 31 March 2008 000 Interest rate collar 456 Embedded equity option 2,582 3,038 The Group puts in place interest rate collars ( collars ) to limit excessive interest rate risk. The notional principal amounts of the outstanding collars at 31 March 2008 were 14.4 million and 10.0 million. The collars carry cap rates varying from 4.75 per cent. (Euro) to 7.00 per cent. (Pounds Sterling) and floor rates varying from 2.99 per cent. (Euro) to 6.25 per cent. (Pounds Sterling). These collars are recognised at fair value which is determined using discounted cash flow method based on market data. The currency split of the marked to market values collar was 447,514 (Pounds Sterling) and 8,368 (Euro). The embedded equity option arising from the exchangeable debenture (note 21) has been recognised at fair value. The fair value of 2.6 million was determined using the binomial model based on available market data as at 31 March 2008. 21. Interest bearing loans and borrowings 31 March 2008 000 Bank borrowings 47,349 Exchangeable debenture 16,529 63,878 Total borrowings Amount due for settlement within 12 months 3,539 Amount due for settlement after 12 months 60,339 256
The carrying amounts of the Group s borrowings as at 31 March 2008 are denominated in the following currencies: Pounds Canadian US Sterling Euros Dollars Dollars Total 000 000 000 000 000 Bank borrowings 14,305 11,330 16,817 4,897 47,349 Exchangeable debenture 16,529 16,529 30,834 11,330 16,817 4,897 63,878 The directors consider that the carrying amount of interest bearing loans and borrowings approximates to their fair value. The other principal features of the Group s borrowings are as follows: (i) The Group has two principal banking facilities: (a) A North American loan facility of C$35.0 million and US$10.0 million as at 31 March 2008 with repayment due three years after initial draw down. (b) A European multi-currency facility of 25.6 million, including 20.1 million of term loan funding as at 31 March 2008. The term loan is repaid on a quarterly basis until 31 December 2010. (ii) Exchangeable debentures of 19.6 million were issued, at their fair value, on 9 January 2008. Interest and principal on the debentures are payable on maturity, which is three years from the issue date. The debentures are convertible into equity of Entertainment One Ltd. at an initial exchange price of 1.1348 per share at the holders option. The exchange price may be reset after 12 and 24 months from issue date. The fair value of the exchangeable debentures of 19.6 million was split into the embedded equity option and liability elements at inception and accounted for separately. The embedded equity option had a fair value at inception of 2.5 million and is re-measured at each reporting date (note 20). The liability element had a fair value of 17.1 million at inception and is accounted for using the amortised cost method. (iii) At 31 March 2008, the Group had available 14.3 million of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. (iv) All interest bearing loans and borrowings are secured by the assets of the Group, which totals 295.0 million at 31 March 2008. The weighted average interest rates on all bank borrowings are not materially different from their nominal interest rates. The weighted average interest rate on all interest bearing loans and borrowings is 7.6 per cent. 22. Provisions Royalty Restructuring provision provision Total 000 000 000 On acquisition of subsidiary 284 284 Additional provision in the period 4 894 898 Released in the period (12) (12) Exchange difference (4) 13 9 At 31 March 2008 272 907 1,179 Included in current liabilities 907 Included in non-current liabilities 272 1,179 257
The royalty provision represents management s best estimate of the Group s liability to licensors based on past experience and industry knowledge. The restructuring provision relates to the non-recurring restructuring, severance and warehouse closure costs to be incurred in delivery of cost-reduction measures. 23. Share capital 31 March 31 March 2008 2008 C$ Authorised: 200,000,000 ordinary shares of C$0.01 each 2,000,000 Issued and fully paid: 129,996,149 ordinary shares of C$0.01 each 1,299,961 586,670 The Company has one class of ordinary shares which carry no right to fixed income. The Company was incorporated on 11 January 2007 and on the same date issued a subscriber share for C$1. On 12 February 2007, the Company entered into a share split arrangement whereby each share of C$1 was subdivided into 100 shares of C$0.01 each. Following the share split, the authorised share capital was increased by C$1,990,000 to C$2,000,000 comprising 200,000,000 shares of C$0.01 each. On 29 March 2007, the Company was listed for trading on AIM and on the same date issued 80,000,000 shares for 1 each. The proceeds from this share issue were substantially used to fund the acquisition of the operations of Entertainment One Income Fund in Canada. In addition, 4,405,286 shares were issued on the same date for 1 each to the Employee Benefit Trust. On 6 July 2007, the Company issued 27,587,011 shares at 1.07 each. The proceeds from this share issue were used to fund the acquisition of Contender Entertainment Group. Of these shares 7,353,366 were consideration shares issued to the management of Contender Entertainment Group. In addition, 3,190,000 shares were issued on the same date for 1.07 each to the Employee Benefit Trust. On 31 July 2007, one of the Group s subsidiaries, 4384768 Canada Inc. converted a 10,000,000 exchangeable debenture into shares of the Company. The principal and the interest accrued on this debenture were converted into 11,848,000 shares at 0.95 each. On 20 August 2007, the Company issued 67,200 shares at 1.07 each in relation to the acquisition of Seville Entertainment Inc. On 10 January 2008, the Company issued 2,898,552 at 1.03 each. The proceeds from this share issue were used to fund the acquisition of RCV Entertainment BV. 24. Share premium Total 000 Premium arising on issue of new equity shares 123,238 Premium arising on consideration shares 7,833 Issue costs (4,719) Balance at 31 March 2008 126,352 258
25. Treasury shares Total 000 Acquired in the period (7,819) Balance at 31 March 2008 (7,819) This represents the cost of treasury shares in Entertainment One Ltd. purchased in the market and held by the Entertainment One Ltd. Employee Benefit Trusts to satisfy the exercise of options under the Group s share option schemes (note 37). At 31 March 2008 the Trusts held 7,595,286 shares in the Company. 26. Warrant reserve On completion of the acquisition of Entertainment One Income Fund 4 million share warrants were issued to Marwyn Neptune Fund. This has been accounted for as a share-based payment under IFRS 2 with a fair value of 639,000 (note 37). 27. Currency translation reserve Total 000 Exchange differences on translation of overseas subsidiaries 6,705 Balance at 31 March 2008 6,705 The currency translation reserve is used to record exchange differences arising from the translation of financial statements of overseas subsidiaries. 28. Retained earnings Total 000 Loss for the period (8,555) Credit to equity for equity-settled share-based payments 5,669 Balance at 31 March 2008 (2,886) 29. Acquisitions Acquisitions are accounted for using the purchase method of accounting and are incorporated into the Group s balance sheet at the fair value at the date of acquisition. The fair values of all acquisitions made during the current period are provisional awaiting final determination of the balances acquired. The following acquisitions were made during the period: Entertainment One Income Fund On 29 March 2007, the Group acquired the entire operating business of Entertainment One Income Fund for a total consideration of 83.4 million (excluding directly attributable acquisition costs). Proceeds from the initial share placing on 29 March 2007 were used to fund part of the cash consideration of this acquisition. The operating business of Entertainment One Income Fund was made up of three business units: Entertainment One Group, Koch Entertainment and CDPlus. Entertainment One Group is the largest distributor of DVDs, CDs and video games in Canada. Koch Entertainment exploits content rights, distributes home entertainment product and is the largest independent record label in the US. CDPlus owns a number of retail outlets across Canada. 259
The book and fair value of the net assets at the date of acquisition were as follows: Book value Fair value 000 000 Net assets acquired: Intangible assets 40,957 40,957 Investments 287 287 Property, plant and equipment 3,875 3,875 Deferred tax assets 1,542 1,542 Inventories 34,511 34,511 Investment in content 6,391 6,391 Trade and other receivables 17,458 17,458 Cash and cash equivalents 1,608 1,608 Trade and other payables (49,376) (49,376) Provision (284) (284) Deferred tax liabilities (2,689) (2,689) 54,280 54,280 Goodwill arising on acquisition 33,787 Total consideration 88,067 Satisfied by: Cash consideration 83,390 Directly attributable costs 4,677 88,067 Net cash outflow arising on acquisition: Cash consideration and costs associated with acquisition (87,427) Cash and cash equivalents acquired 1,608 (85,819) On completion of the acquisition of Entertainment One Income Fund 4 million share warrants were issued to one of the Group s advisors (note 26). This has been accounted for as a share-based payment under IFRS 2 with a fair value of 639,000 (note 37). This cost has been capitalised as a cost of the acquisition and has been included within directly attributable costs. This acquisition contributed 223.9 million to Group revenue for the period between the date of acquisition and 31 March 2008. Contribution to profit after tax in the post acquisition period cannot be calculated as it is impractical to allocate any costs, interest or tax as the assets of Navarre Entertainment Media Inc were incorporated into the existing operating business. Contender Entertainment Group On 5 July 2007, the Group acquired 100 per cent. of the issued share capital of Contender Limited (and its subsidiaries), the leading independent distributor of filmed entertainment on DVD in the UK, for a total consideration of 49.1 million (including a debt repayment of 3.9 million). Of the total consideration 37.3 million was paid in cash (excluding directly attributable acquisition costs) and 7.9 million was satisfied by the issue of consideration shares to the management of Contender Entertainment Group. In addition, the bank borrowings of Contender Entertainment Group of 3.9 million were repaid following the acquisition. 260
The book value and provisional fair value of the net assets at the date of acquisition were as follows: Book value Fair value 000 000 Net assets acquired: Intangible assets 1,899 20,474 Property, plant and equipment 147 147 Deferred tax assets 1,502 1,502 Inventories 1,144 1,144 Investment in content 4,381 4,381 Trade and other receivables 3,220 3,220 Cash and cash equivalents 2,201 2,201 Interest bearing loans and borrowings (3,875) (3,875) Trade and other payables (7,939) (7,938) Deferred tax liabilities (258) (5,460) 2,422 15,796 Goodwill arising on acquisition 30,916 Total consideration 46,712 Satisfied by: Cash consideration 37,337 Fair value of consideration shares 7,868 Directly attributable costs 1,507 46,712 Net cash outflow arising on acquisition: Cash consideration and costs associated with acquisition (38,844) Cash and cash equivalents acquired 2,201 (36,643) Contender Entertainment Group contributed 18.6 million revenue and 3.9 million to the Group s profit before tax for the period between the date of acquisition and 31 March 2008. Navarre Entertainment Media Inc On 14 May 2007, the Group acquired 100 per cent. of the issued share capital of Navarre Entertainment Media Inc, a distributor of independent music labels in the United States, for a total cash consideration of US$6.5 million ( 3.3 million). The book value and provisional fair value of the net assets of Navarre Entertainment Media Inc at the date of acquisition were as follows: Book value Fair value 000 000 Net assets acquired: Intangible assets 5,409 Inventories 915 915 Trade and other receivables 438 438 Trade and other payables (4,110) (4,110) (2,757) 2,652 Goodwill arising on acquisition 716 Total consideration 3,368 261
Book value Fair value 000 000 Satisfied by: Cash 3,286 Directly attributable costs 82 3,368 Net cash outflow arising on acquisition: Cash consideration and costs associated with acquisition (3,368) Navarre Entertainment Media Inc contributed 12.1 million of revenue to the Group between the date of acquisition and 31 March 2008. It is not practicable to allocate any costs, interest or tax as the assets acquired have essentially been incorporated into the existing operating business. Seville Entertainment Inc On 20 August 2007, the Group acquired 100 per cent. of the issued share capital of Seville Entertainment Inc (and its subsidiaries), a leading Canadian film distribution company and entertainment rights owner, for a total cash consideration of C$5.2 million ( 2.5 million). The book value and provisional fair value of the net assets of Seville Entertainment Inc at the date of acquisition were as follows: Book value Fair value 000 000 Net assets acquired: Intangible assets 574 Property, plant and equipment 29 29 Deferred tax assets 106 106 Inventories 590 590 Investment in content 2,898 2,898 Trade and other receivables 1,099 1,099 Cash and cash equivalents 142 142 Trade and other payables (3,795) (3,795) Deferred tax liabilities (184) 1,069 1,459 Goodwill arising on acquisition 1,204 Total consideration 2,663 Satisfied by: Cash 2,468 Directly attributable costs 195 2,663 Net cash outflow arising on acquisition: Cash consideration and costs associated with acquisition (2,663) Cash and cash equivalents acquired 142 (2,521) Seville Entertainment Inc contributed 4.4 million of revenue and an operating loss of 1.2 million to the Group s result for the period between the date of acquisition and 31 March 2008. 262
RCV Entertainment BV On 10 January 2008, the Group acquired 100 per cent. of the issued share capital of RCV Entertainment BV (and its subsidiaries), a leading independent film distributor in the Dutch and Belgian markets, for a total cash consideration of 41.5 million ( 31.4 million). The book value and provisional fair value of the net assets of RCV Entertainment BV at the date of acquisition were as follows: Book value Fair value 000 000 Net assets acquired: Intangible assets 12,584 Property, plant and equipment 94 94 Inventories 130 130 Investment in content 21,365 21,365 Trade and other receivables 6,589 6,589 Cash and cash equivalents 875 875 Trade and other payables (18,330) (18,330) Deferred tax liabilities (3,018) 10,723 20,289 Goodwill arising on acquisition 12,092 Total consideration 32,381 Satisfied by: Cash 31,363 Directly attributable costs 1,018 32,381 Net cash outflow arising on acquisition: Cash consideration and costs associated with acquisition (32,381) Cash and cash equivalents acquired 875 (31,506) RCV Entertainment BV contributed 5.4 million of revenue and a profit before tax of 0.8 million to the Group s result for the period between the date of acquisition and 31 March 2008. Total contribution to Group revenue and operating loss If all acquisitions had been completed on the first day of the current trading period, 29 March 2007, Group revenues for the period would have been 289.9 million and the Group s operating EBITDA would have increased by 2.7 million to 25.4 million. The revenues and profits for Navarre Entertainment Media Inc are not included in the above disclosure because this transaction was in substance an asset purchase, with certain trading assets and liabilities being transferred into a holding company which was subsequently acquired by the Group. Residual goodwill The goodwill arising on these acquisitions is largely attributable to the anticipated profitability and market share of these new businesses, along with the deemed value of the workforce and infrastructure. 263
30. Contingent liabilities and commitments Operating lease commitments The Group leases various offices under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. Period ended 31 March 2008 000 Minimum lease payments under operating leases recognised in income for the period 5,522 At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: 31 March 2008 000 Within one year 5,258 In the second to fifth years inclusive 12,494 After five years 3,487 21,239 Future capital expenditure (including investment in content rights) 31 March 2008 000 Contracted for but not provided 11,779 31. Subsidiaries Details of the Company s principal subsidiary undertakings at 31 March 2008 are as follows: Country of Proportion Name incorporation held Principal activity Contender Limited* England 100% Content ownership RCV Entertainment BV* Holland 100% Content ownership Entertainment One Limited Canada 100% Content ownership & Partnership* distribution Seville Pictures Inc.* Canada 100% Content ownership E1 Films Canada Inc.* Canada 100% Content ownership Videoglobe 1 Inc.* Canada 100% Distribution Koch Entertainment LP* US 100% Content ownership & distribution Earl Street Finance kft Hungary 100% Investment company 4384768 Canada Inc.* Canada 49% Investment company Earl Street Capital Inc.* US 100% Investment company Seville Entertainment Inc.* Canada 100% Investment company E-One UK Limited England 100% Investment company The Movie Association BV* Holland 100% Investment company * Owned through an intermediate holding company. 264
The proportion held is equivalent to the percentage of voting rights held. The Group also owns 100 per cent. of the non-voting shares of 4384768 Canada Inc. All of the above subsidiary undertakings have been consolidated in the Group financial statements under the acquisition method of accounting. 4384768 Canada Inc. has been included as a subsidiary because management are in a position to direct the operations of this company. No minority interest is being recognised because the Group are entitled to all of the economic benefits through ownership of the non-voting equity. 32. Investment in joint ventures Details of the Company s joint ventures at 31 March 2008 are as follows: Country of Proportion Name incorporation held Principal activity One Voice Media Inc. Canada 51% Advertising Effect of proportional consolidation of joint ventures The following presents, on a condensed basis, the effect of including joint ventures in the Group financial statements using proportional consolidation: Period ended 31 March 2008 000 Revenue 781 Cost of sales (206) Gross profit 575 Administrative expenses (106) Operating profit 469 Net financing income 1 Profit before tax 470 Income tax expense (147) Profit after tax 323 31 March 2008 000 Property, plant and equipment 19 Cash and cash equivalents 290 Trade and other receivables 173 Total assets 482 Trade and other payables 4 Current tax liabilities 147 Equity shareholders funds 331 Total equity and liabilities 482 265
33. Employee benefits The average monthly number of employees (including executive directors) was: Period ended 31 March 2008 Number Canada 1,152 United States 227 United Kingdom 43 Rest of Europe 45 1,467 Their aggregate remuneration comprised: Period ended 31 March 2008 000 Wages and salaries 26,359 Share-based payment charges 5,797 Social security costs 2,519 Pension costs 606 35,281 Included within wages and salaries are termination payments totalling 0.4 million. 34. Directors and key management compensation The remuneration of the directors and members of the Operating Executive, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Period ended 31 March 2008 000 Short-term employee benefits 1,877 Share-based payments 3,303 5,180 Further details of directors emoluments (unaudited) can be found in the Directors Remuneration Report on pages 28 to 29. 35. Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Marwyn Neptune Fund held 35,831,789 ordinary shares in the Company as at 31 March 2008, amounting to 27.6 per cent. of the issued share capital of the Company. In addition, Marwyn Neptune Fund holds warrants over 4,000,000 ordinary shares. Marwyn Neptune Fund is deemed to be a related party of Entertainment One Ltd. by virtue of this significant shareholding. 266
Marwyn Neptune Fund received an underwriting fee of 0.2 million with respect to the initial share placing on 29 March 2007. On 5 July 2007, the Group borrowed 2.5 million from Marwyn Neptune Fund. Interest accrues annually on this loan at a rate of LIBOR plus 6.75 per cent. This loan, principal and accrued interest, was repaid on 9 January 2008. On the same date, Marwyn Neptune Fund participated in the issue of exchangeable debentures by the Company when it purchased 5.1 million. The terms and conditions of these exchangeable debentures are described in note 21. David Williams and James Corsellis are partners of Marwyn Capital LLP, partners of Marwyn Investment Management LLP, directors of Marwyn Partners Limited and directors of Marwyn Investments Group Limited and are therefore deemed to be related parties of Entertainment One Ltd. by virtue of a common director or member. During the period the Company paid fees of 1.2 million to Marwyn Capital LLP for corporate finance advisory services under the terms of their advisory agreement pursuant to which Marwyn Capital agreed to provide general strategic and corporate financial services to the Company for a fixed monthly fee of 15,000 plus expenses with additional fees for each acquisition to be agreed. During the period the Group expensed fees of 75,484 to Marwyn Partners Limited for office and infrastructure costs under the terms of their arrangement pursuant to which Marwyn Partners provides temporary accommodation and associated back office support services (such as secretarial and IT support service). The arrangement is in place until the Company makes permanent arrangements and is terminable by either party on one month s notice. The Group owed Marwyn Partners Limited 4,466 and Marwyn Capital LLP 28,121 as at 31 March 2008. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. Mark Trachuk is a partner of Osler, Hoskin & Harcourt LLP, the Group s Canadian lawyers. The Group incurred fees of 1.2 million during the period ended 31 March 2008. The Group owed Osler, Hoskin & Harcourt LLP 129,167 as at 31 March 2008. A company in which Darren Throop directly and/or indirectly owns an interest is the landlord of a retail store front location used by the retail division in Halifax, Nova Scotia. The amount paid during the period was 23,182. During the period payments of 0.7 million were made to One Voice Media Inc., a joint venture of the Group (note 32). The Group was owed 22,402 by One Voice Media Inc. as at 31 March 2008. 36. Events after the balance sheet date There were no significant post balance sheet events. 37. Share-based payments Equity-settled share schemes The Group has a number of share option schemes and Employee Benefit Trusts for its employees and directors. Details of grants to directors during the period are given in the Directors Remuneration Report on page 29. The share-based payment charge for equity-settled share schemes for the period ended 31 March 2008 was 5.7 million. 267
The share options in issue as at 31 March 2008 were as follows: Number Date Exercise Option scheme granted granted price Executive Share Plan US participants 2,202,643 2007 US participants 625,000 2007 111.5 pence Canadian participants 6,542,021 2007 0.5 pence Canadian participants 125,000 2008 103.5 pence Other participants 1,437,264 2008 103.5 pence Employee Benefit Trusts No 1 2,577,643 2007 No 1 50,000 2008 No 2 2,552,000 2007 No 2 638,000 2008 16,749,571 The contractual life of an option under these schemes is between 3 and 5 years. The weighted average contractual life remaining of the options in existence at the end of the period was 3.4 years and their weighted average exercise price was 14 pence. A summary of the movement in share options during the period ended 31 March 2008 is as follows: Executive Employee Number of share options Share Plan Benefit Trust Total Granted during the period 11,262,324 5,817,643 17,079,967 Forfeited during the period (293,685) (293,685) Exercised during the period (36,711) (36,711) Outstanding at the end of the period 10,931,928 5,817,643 16,749,571 Exercisable at the end of the period 1,231,560 688,087 1,919,647 There are certain performance criteria to be met before share options are exercisable with 33.3 per cent. of the options vesting in tranches over a three year performance period, 33.3 per cent. vesting dependent on performance against annual EBITDA targets and the remainder vesting dependent on share price targets. All share options vest in accordance with these performance criteria with the exception of 375,000 of shares granted by the Employee Benefit Trusts. These shares vest in tranches over a two year performance period. 2007 Executive Employee Weighted average exercise price (in pence) Share Plan Benefit Trust Total Outstanding at the end of the period 21.5 14.0 Exercisable at the end of the period 0.5 0.3 268
Fair value of share options The fair value of share options granted during the period ended 31 March 2008 was calculated using the Binomial model. The inputs to this model were: Executive Share Plan 2007 Employee Benefit Trust Fair value at measurement date 69.7 pence 84.7 pence Weighted average share price 102.2 pence 105.7 pence Weighted average exercise price 20.8 pence Expected volatility 30.4% 29.9% Expected life 3.3 years 2.9 years Dividend yield Risk free interest rate 5.1% 5.4% The expected volatility is based on the historic volatility of businesses comparable to the Company over a period of time equal in length to the relevant expected life of the option and ending at the date of grant. The expected life used in the model is based on management s best estimate of the average expected time period for the exercise of an option by its holder. Cash-settled share-based payments The carrying amount of the liability relating to the cash-settled options under the Canadian deferred bonus scheme at 31 March 2008 is 0.1 million, which equates to the charge in the income statement for the period. 22,026 cash-settled options under this scheme vested during the period ended 31 March 2008. 7,342 of these shares were exercised and 14,684 were forfeited during the period. Until this liability is settled it is remeasured at each reporting date with changes in fair value recognised in the income statement. Other share-based payment awards On completion of the acquisition of Entertainment One Income Fund 4 million share warrants were issued to one of the Group s advisors. The conditions for exercising these are 50 per cent. when the share price reaches 1.25 and the remaining 50 per cent. when the share price reaches 1.50. The fair value of the share warrants was determined using a binomial option pricing model. Awards have been valued using an assumed exercise behaviour that recognises the exercise restrictions. 38. Financial risk management The Group s overall risk management programme seeks to minimise potential adverse effects on its financial performance and focuses on mitigation of the unpredictability of financial markets as they affect the Group. The Group s activities expose it to interest rate risk, foreign currency risk, credit risk and liquidity risk. These risks are managed by the Chief Financial Officer under policies approved by both the Board and the Audit Committee, which are summarised below. Interest rate management The Group has no significant interest-bearing assets and the Group s borrowings are at floating rates. The exposure to fluctuating interest rates is managed by capping portions of debt using interest rate collars, which aims to optimise net finance expense and reduce excessive volatility in reported earnings. At 31 March 2008 the longest term of any debt held by the Group was until 2011. A simultaneous 1 per cent. increase in the Group s variable interest rates in each of Pounds Sterling, Euros, US Dollars and Canadian Dollars at the end of March 2008, would result in a 0.4 million decrease to the Group s profit before tax and a decrease of 1 per cent. would result in a 0.5 million increase to the Group s profit before tax. The difference is due to the impact of the interest rate collars. 269
Foreign currency risk management The Group has significant investment in overseas operations. The majority of the Group s operations are domestic within their country of operation. The Group seeks to create a natural hedge of this exposure through its policy of aligning approximately the currency composition of its net borrowings with its forecast operating cash flows. At the moment the Group only undertakes foreign currency transaction hedging for very significant transactions. The Group s policy is to translate profits of overseas operations using average exchange rates. However, it is the Group s policy not to hedge exposure arising from profit translation. The following table illustrates the Group sensitivity to fluctuations in the major currencies in which it transacts. Sensitivity is calculated on financial assets and liabilities as of 31 March denominated in non-functional currencies for all operating units within the Group. The percentage movement applied to each currency is based on management s measurement on foreign exchange rate risk. 31 March 2008 Income statement +/- 000 Pounds Sterling +/- 5% increase 50 US Dollars +/- 5% increase (256) Canadian Dollars +/- 5% increase 52 Euros +/- 5% increase 567 Counterparty risk management Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The Group controls credit risk by entering into financial instruments only with highly credit-rated authorised counterparties which are reviewed and approved regularly by the Board. Counterparties positions are monitored on a regular basis to ensure that they are within the approved limits and there are no significant concentrations of credit risks. The Group considers its maximum exposure to credit risk as follows: 31 March 2008 000 Cash and cash equivalents 16,484 Trade and other receivables 23,467 39,951 Liquidity risk management The Group maintains a prudent liquidity risk management position by having sufficient cash and availability of funding through an adequate amount of committed credit facilities. Management monitors rolling forecasts of the Group s liquidity reserve on the basis of expected cash flows. At 31 March 2008, the undrawn uncommitted facility amount is 14.3 million. 270
The table below analyses the Group s financial liabilities which will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Interest Trade and bearing other payables borrowings Total Amount due for settlement: 000 000 000 Within one year 83,210 6,751 89,961 One to two years 277 6,546 6,823 Two to five years 69,665 69,665 83,487 82,962 166,449 Interest on borrowings is calculated based on borrowings held at the balance sheet date without taking into account any potential future drawdowns. Floating rate interest is estimated using spot rates as at the balance sheet date. The exchangeable debentures are convertible to equity at the option of the holders at any time before the redemption date in January 2011. If not converted at this date or redeemed earlier, they will be redeemed at principal plus accrued interest at the contractual redemption date. As such, these debentures have been classified in the two to five year band. Derivative contracts include interest rate collars which are settled net. There are no expected cash flows on the interest rate collars based on spot interest rates as at the balance sheet date. Financial liabilities denominated in currencies other than Pounds Sterling are converted to Pounds Sterling using closing exchange rates as of the balance sheet date. Capital risk management The Group s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to optimise the weighted average cost of capital and tax efficiency subject to maintaining sufficient financial flexibility to undertake its investment plans. In order to maintain or adjust the capital structure, the Group may issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of a leverage ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total interest bearing loans and borrowings (as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as equity as shown in the consolidated balance sheet plus net debt. The leverage ratio as at 31 March 2008 is: Period ended 31 March 2008 000 Interest bearing loans and borrowings 63,878 Cash and cash equivalents (16,484) Net debt 47,394 Total capital 170,972 Leverage ratio 27.7% Management has reviewed the year end leverage ratio and finds it appropriate based on the profile of the Group. 271
39. Classification of financial instruments The tables below split financial instruments by category: Carrying value Fair value 000 000 Cash and cash equivalents 16,484 16,484 Loans and receivables: Trade and other receivables (note 17) 23,467 23,467 Total financial assets 39,951 39,951 Financial liabilities measured at amortised cost: Interest bearing loans and borrowings (note 21) (63,878) (63,878) Trade and other payables (note 19) (83,487) (83,487) Held for trading financial liabilities: Other financial liabilities (note 20) (3,038) (3,038) Total financial liabilities (150,403) (150,403) 272
COMPANY INFORMATION Nominated adviser and broker Legal advisers to the company (UK & US) Legal advisers to the company (Cayman Islands) Bankers (UK & Europe) Bankers (North America) Registrars Auditors Legal advisers to the company (Canada) Kaupthing Singer & Friedlander Capital Markets Limited One Hanover Street London W1S 1AX United Kingdom Mayer Brown LLP 11 Pilgrim Street London EC4V 6RW United Kingdom Maples and Calder PO Box 309 GT Ugland House South Church Street George Town Grand Cayman Cayman Islands Barclays Bank 1 Churchill Place London E14 5HP United Kingdom TD Bank Financial Group 66 Wellington Street West Toronto M5K 1AZ Canada Capita Registrars (Jersey) Limited Victoria Chambers Liberation Square 1/3 The Esplanade St. Helier JE4 0FF Jersey Deloitte & Touche LLP 2 New Street Square London EC4A 3BZ United Kingdom Osler, Hoskin & Harcourt LLP 100 King Street West 1 First Canadian Place PO Box 50 Toronto M5X 1B8 Canada 273
Financial adviser to the company Depository Marwyn Capital LLP 11 Buckingham Street London WC2N 6DF United Kingdom Capita IRG Trustees Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 274
Entertainment One Ltd. PO Box 309GT Ugland House South Church street Grand Cayman Cayman Island www.entertainmentonegroup.com 275
PART V TAXATION The Company is incorporated in Canada and currently conducts its affairs in such a way that it is regarded as resident for tax purposes in Canada. This summary is prepared on the assumption that the Company will remain resident for tax purposes in Canada. Ann III (4.11) 1. UK TAXATION The following comments broadly outline the taxation position of UK Shareholders who are UK domiciled and resident or ordinarily resident in the UK for tax purposes and who are holding Common Shares beneficially as investments (other than under an individual savings account or former personal equity plans) and who have not (and are not deemed to have) acquired their Common Shares by virtue of an office or employment (including any former or prospective office or employment). The following comments provide general advice only and may not apply to certain classes of investor who may be subject to special rules (such as brokers, traders or dealers in securities, insurance companies, charities, collective investment schemes or pension providers). Each Shareholder s specific circumstances will impact on their taxation position. All Shareholders are recommended to obtain their own taxation advice. In particular, all Shareholders, including UK tax resident or ordinarily resident in the UK are advised to consider the potential impact of any relevant double tax agreements on their shareholding. The following comments are based on current UK tax legislation, case law and HMRC practice. Shareholders should also be aware that following the formation of the new Government in the United Kingdom, the Conservative Liberal Democrat coalition agreement dated 11 May 2010 notes that the Government plans to change the taxation of capital gains on non-business assets, such that those gains are taxed at rates at, or close to, those applied to income. No effective date is given for this change, which could possibly take effect following the first Budget, expected on 22 June. Any future disposal of shares by shareholders are likely to be affected by these changes. Taxation of Chargeable Gains UK Resident Individual Shareholders A disposal of Common Shares by a Shareholder who is (at any time in the relevant UK tax year) resident or ordinarily resident in the UK (and not otherwise covered by a specific concession) or (where the circumstances apply) who resumes UK tax residence without achieving the appropriate number of intervening years of non-residence, may give rise to a chargeable gain or allowable loss for the purpose of UK taxation of chargeable gains. Chargeable gains are currently liable to tax at a flat rate of 18 per cent., subject to the availability of any allowances, exemptions or reliefs. Non-UK Resident Individual Shareholders A Shareholder who is not resident in the UK for tax purposes but who carried on a trade, profession or vocation in the UK through a branch or agency and has used, held or acquired the Common Shares for the purpose of such trade, profession or vocation may also be subject to UK taxation on chargeable gains arising on a disposal of Common Shares if the Common Shares are deemed to be situated in the UK, subject to any relevant double tax agreements, allowances, exemptions or reliefs. Special rules apply to tax gains on disposals made by individuals at a time when they are temporarily not resident and not ordinarily resident in the UK. Further advice should be sought. Non-UK Domiciled Individual Shareholders Different and complex rules apply for individuals who are resident or ordinarily resident but not UK domiciled for UK tax purposes and for individuals who are resident but not ordinarily resident in the UK. These individuals should seek further advice. 276
UK Resident Corporate Shareholders UK Resident Corporate Shareholders will, on first principles, be chargeable to corporation tax on any gain made on the sale of Common Shares, unless the Substantial Shareholdings Exemption applies to exempt the gain from charge. Further advice should be sought. Companies are due indexation allowance which may also reduce the chargeable gain. Dividends UK Resident Individual Shareholders For the avoidance of doubt, the UK does not impose dividend withholding tax in any event. Any dividend on a Common Share (other than a capital dividend or certain capital gains dividends), including a stock dividend, paid or credited, or deemed to be paid or credited, by the Company to a Shareholder will be subject to Canadian withholding tax at the rate of 25 per cent. on the gross amount of the dividend, or such lesser rate as may be available to a Shareholder under any income tax convention that Canada may have in the country where the Shareholder is resident for the purposes of that convention. The terms of the Canada United Kingdom Tax Convention (the UK Canadian Double Taxation Treaty ) may reduce the dividend withholding tax rate to either 5 per cent. or 15 per cent. depending on the status of the UK Resident Shareholder, and various conditions being met. The amount of the dividend received plus the dividend withholding tax if any will represent taxable dividend income for the UK individual Shareholder. In these circumstances the Shareholder should be entitled to credit the dividend withholding tax (if any) against any liability to UK income tax. The credit would be limited to the lesser of the dividend withholding tax or the UK tax payable on the combined amount of the dividend plus dividend withholding tax. If the dividend withholding tax exceeds the UK tax payable on the dividend, the excess is neither creditable nor repayable. Any withholding tax suffered on dividends would instead reduce the gross dividend chargeable to UK tax. Individual Shareholders are entitled to a non-refundable 10 per cent. tax credit on dividends received from the Company. This tax credit is set against the individual s UK tax liability on the dividend, however, it is not possible for this tax credit to put the individual in a repayment position. The amount of tax payable on dividends received by a UK resident individual will depend on the type and extent of their other income for the relevant UK tax year. The basic rate of tax on dividends is 10 per cent. against which a non-refundable 10 per cent. tax credit is applied. Higher rates of tax may apply for certain individuals in receipt of dividends with effect from 6 April 2010 following the changes to the top rate of tax on dividends. The higher rates are 32.5 per cent. or 42.5 per cent. and in both cases the non-refundable 10 per cent. tax credit is applied, resulting in an effective tax rate of 25 per cent. or 36.11 per cent. respectively of the actual dividends provided any withholding tax suffered does not exceed the UK tax payable on the dividend. As noted above separate advice should be obtained by anyone who is UK resident but either not ordinarily resident or non-uk domiciled. The UK tax treatment of any holder of Common Shares who is resident in the UK, and carries on a trade, profession or vocation in the UK in relation to these Common Shares may be different from that described above and such Shareholder should seek his own tax advice. UK Resident Corporate Shareholder The terms of the UK/Canadian Double Taxation Treaty may reduce the dividend withholding tax rate to either 5 per cent. or 15 per cent. depending on the status of the UK resident corporate shareholder and various conditions being met. Dividends paid to a UK resident corporate Shareholder will be taxable income of the UK corporate shareholder unless the dividends fall within an exempt class and certain other conditions are met. It is 277
however expected that dividends paid by the company to a UK resident corporate Shareholder would generally be exempt, provided certain anti-avoidance provisions are not triggered. To the extent that dividends are not exempt, UK resident corporate Shareholders may be able to obtain credit for any withholding tax and any underlying tax paid by the Company, subject to certain conditions. The UK has complex double tax relief where UK resident companies receive dividends from non-uk resident companies and therefore UK Resident Corporate Shareholders should seek further advice on these issues. Inheritance Tax If any individual Shareholder is regarded as domiciled in the UK for inheritance tax purposes, inheritance tax may be payable in respect of the Common Shares on the death of the Shareholder or on any gift of the Common Shares during their lifetime which qualifies as a chargeable lifetime transfer, subject to any allowances, exemptions or reliefs. This is the case regardless of their residence and ordinary residence status. In the case of an individual Shareholder who is not regarded as domiciled in the UK for inheritance tax purposes at the date of death or gift, their liability to inheritance tax is limited to assets situated in the UK. Non-UK domiciled individual Shareholders may be regarded as deemed domiciled for inheritance tax purposes only following a long period of residence in the UK. It should be noted that the rules for determining whether someone is regarded as domiciled in the UK for inheritance tax purposes may be different for the rules in determining if someone is domiciled in the UK for income tax purposes. Further advice should be sought in these circumstances. To the extent Entertainment One (Cayman s) ordinary shares are not already treated as UK assets for inheritance tax purposes, then admittance of the Common Shares to the Official List, may result in the Common Shares being treated as UK assets for UK inheritance tax purposes. Admittance of the Common Shares to the Official List will not constitute a disposal of the Common Shares held by existing Shareholders. However, as the Common Shares will no longer be admitted to trading on AIM, this could have an adverse impact on the reliefs available from inheritance tax to individual Shareholders. Common Shares that were admitted to trading on AIM may qualify for business property relief (a relief from UK inheritance tax), provided that certain circumstances are met by both the Company and the Shareholder. However, Common Shares listed on the Official List are unlikely to benefit from business property relief from inheritance tax. Individual Shareholders who are in any doubt about the impact of this change on their tax position should obtain detailed tax advice from their own professional advisers. UK inheritance tax is a complex area and individuals should obtain their own advice in respect of this. UK Stamp Duty and Stump Duty Reserve Tax ( SDRT ) No stamp duty or SDRT is payable on the issue of Common Shares by the Company, whether issued in certificated form or in uncertificated form through CREST, unless they are issued into Depository or clearance arrangements and at the time of issue the Common Shares in question are registered on a Shareholders Register maintained in the UK. Provided the Common Shares continue to be registered only on a Shareholders Register maintained outside the UK and are not paired with UK shares, no SDRT is payable on any agreement to transfer Common Shares. However, the purchaser will normally be liable to pay SDRT at 0.5 per cent. of the consideration on any agreement to transfer Common Shares which are registered on a Shareholders Register which is maintained in the UK. The purchaser will normally be liable to pay SDRT at the same rate on any agreement to transfer Depository Interests representing the Common Shares unless the Company is centrally managed and controlled outside the UK, the underlying Common Shares are registered only on a Shareholders Register which is maintained outside the UK and Common Shares are listed on a recognised stock exchange (which expression includes the London Stock Exchange). Any liability to SDRT will normally be collected by a stockbroker or other intermediary member of the London Stock Exchange acting in the transaction. 278
Any document of transfer which acts to transfer Common Shares may be subject to stamp duty at 0.5 per cent. of the consideration for the transfer if the document of transfer is executed in the UK, or relates to any property situated in the UK, or to any matter or thing done, or to be done in the UK. Payment of stamp duty is not compulsory (if there is no SDRT charge arising) but documents may not be available for certain official purposes unless they have been duly stamped. Payment of any stamp duty and stamping of the relevant document within six years of the related agreement to transfer will normally cancel any SDRT charge arising on that agreement. Certain reliefs may be available to relieve charges to stamp duty or stamp duty reserve tax if appropriate conditions are satisfied. 2. CANADIAN FEDERAL INCOME TAX General The following discussion summarises the principal Canadian federal income tax considerations generally applicable to a shareholder who acquires Common Shares and who at all material times for the purposes of the Income Tax Act (Canada) (the Tax Act ) deals at arm s length with the Company and holds all Common Shares solely as capital property. It is assumed that the Common Shares will at all material times be listed on a stock exchange that is designated for the purposes of the Tax Act (which currently includes the London Stock Exchange). This summary is based on the current provisions of the Tax Act, including the regulations thereunder, and the UK/Canadian Double Taxation Treaty. This summary takes into account all specific proposals to amend the Tax Act and the regulations thereunder publicly announced by the Government of Canada to the date hereof and the Company s understanding of the current published administrative and assessing practices of the Canada Revenue Agency. It is assumed that all such amendments will be enacted substantially as currently proposed, and that there will be no other material change to any such law or practice, although no assurances can be given in these respects. Except to the extent otherwise expressly set out herein, this summary does not take into account any provincial, territorial or foreign income tax law or treaty. The information does not purport to be comprehensive or to describe all potential relevant tax considerations and does not generally consider tax relief or exemptions. This summary is not, and is not to be construed as, tax advice to any particular Shareholder. Each Shareholder is urged to obtain independent advice as to the Canadian income tax consequences of an investment in Common Shares applicable to the Shareholder s particular circumstances. Canadian Resident Shareholders. The following portion of the summary applies to Shareholders who at all relevant times are resident or deemed to be resident in Canada for the purposes of the Tax Act (a Resident Shareholder ). Certain Resident Shareholders whose Common Shares might not otherwise be capital property, may, in certain circumstances, be entitled to have the Common Shares and all other Canadian securities, as defined in the Tax Act, treated as capital property by making the irrevocable election permitted by subsection 39(4) of the Tax Act. This summary is not applicable to a purchaser that is a financial institution, as defined in the Tax Act, a trader or dealer in securities or a corporation whose principal business is the lending of money or the purchasing of debt obligations or a combination thereof. Disposition of Shares Generally, on a disposition or deemed disposition of a Common Share, a Resident Shareholder will realise a capital gain (or capital loss) equal to the amount, if any, by which the proceeds of disposition, net of any reasonable costs of disposition, exceed (or are less than) the adjusted cost base to the Resident Shareholder of the Common Share immediately before the disposition or deemed disposition. Generally, a Resident Shareholder is required to include in computing its income for a taxation year one-half of the amount of any capital gain (a taxable capital gain ). Subject to and in accordance with the provisions of the Tax Act, a Resident Shareholder is required to deduct one-half of the amount of any capital loss (an allowable capital loss ) realised in a taxation year from taxable capital gains realised by the Resident Shareholder in the year. Allowable capital losses in excess of taxable capital gains may be carried 279
back and deducted in any of the three preceding taxation years or carried forward and deducted in any subsequent taxation year against net taxable capital gains realised in such years subject to and in accordance with the provisions of the Tax Act. Capital gains realised by an individual may give rise to liability for alternative minimum tax. Dividends A Resident Shareholder will generally be required to include in computing its income for a taxation year any dividends received, or deemed to be received, by a Resident Shareholder on the Common Shares. In the case of a Resident Shareholder that is an individual (other than certain trusts), such dividends will be subject to the gross-up and dividend tax credit rules applicable to taxable dividends received from taxable Canadian corporations. A dividend will be eligible for the enhanced gross up and dividend tax credit if the recipient receives written notice from the Corporation designating the dividend as an eligible dividend within the meaning of the Tax Act. Taxable dividends received by an individual will be relevant in computing possible liability for alternative minimum tax. A dividend received or deemed to be received by a Resident Shareholder that is a corporation will generally be deductible in computing the corporation s taxable income. A private corporation as defined in the Tax Act, or any other corporation controlled, whether because of a beneficial interest in one or more trusts or otherwise, by or for the benefit of an individual (other than a trust) or a related group of individuals (other than trusts) will generally be liable to pay under Part IV of the Tax Act a refundable tax of 33.33 per cent. on dividends received or deemed to be received on the Common Shares to the extent such dividends are deductible in computing taxable income for the year. Additional refundable tax A Resident Shareholder that is a Canadian-controlled private corporation as defined in the Tax Act may be liable to pay an additional 6.67 per cent. refundable tax on certain investment income, including taxable capital gains. Non-Canadian Resident Shareholders The following portion of the summary applies to Shareholders who at all relevant times for the purposes of the Tax Act and any applicable income tax convention, are not, and are not deemed to be resident in Canada and does not use or hold, and will not be deemed to use or hold, the Common Shares in a business carried on in Canada (a Non-resident Shareholder ). Special rules, which are not discussed in this summary, may apply to a Shareholder that is an insurer that carries on an insurance business in Canada and elsewhere. Such Shareholders should consult their own tax advisers. Disposition of Shares A Shareholder generally will not be subject to Canadian tax on any capital gains realised by the Shareholder on a disposition of a Common Share unless the Common Share constitutes taxable Canadian property to the Shareholder for the purposes of the Tax Act. Where a Common Share is listed on a stock exchange that is designated for the purposes of the Tax Act (the London Stock Exchange is a designated exchange for this purpose), the Common Share (or an interest in or option to acquire a Common Share) will constitute taxable Canadian property of the Shareholder, if at any time during the 60 months preceding the disposition: the Shareholder, and any persons with whom the Shareholder did not deal at arm s length owned 25 per cent. or more of the issued shares of any class of the capital stock of the Company; and (pursuant to proposed legislation), more than 50 per cent. of the fair market value of the share was derived directly or indirectly from real or immovable property situated in Canada, Canadian resource property, timber resources property or a right to acquire such property. Such Shareholder may be eligible for relief pursuant to the UK/Canadian Double Taxation Treaty or any income tax convention that Canada may have with a country where the Shareholder is a resident for the purposes of the convention. Such Shareholder should obtain independent tax advice with respect to the availability of such relief. Further, for a Shareholder that is resident in the UK for the purposes of the 280
UK/Canadian Double Taxation Treaty, even if a Common Share does constitute taxable Canadian property of the Shareholder, the Shareholder should not be subject to Canadian income tax unless the Shareholder is a resident in Canada at any time during the fiscal year in which the Common Share is disposed of or has been resident in Canada at any time during the 6 years immediately preceding the disposition of the Common Shares. Dividends Any dividend on a Common Share (other than a capital dividend or certain capital gains dividends), including a stock dividend, paid or credited, or deemed to be paid or credited, by the Company to a Shareholder will be subject to Canadian withholding tax at the rate of 25 per cent. on the gross amount of the dividend, or such lesser rate as may be available to a Shareholder under any income tax convention that Canada may have in the country where the Shareholder is resident for the purposes of that convention. Pursuant to the UK/Canadian Double Taxation Treaty, the rate of withholding tax applicable to a dividend paid on a Common Share to an investor who is a resident of the United Kingdom for the purposes of the UK/Canadian Double Taxation Treaty will generally be reduced to 15 per cent. of the gross amount of the dividend. If a corporate investor who is a resident of the United Kingdom for the purposes of the UK/Canadian Double Taxation Treaty controls directly or indirectly 10 per cent. of the voting power in the Company paying the dividend, the rate of withholding tax may be reduced to 5 per cent.. The Company will be required to withhold any such tax from the dividend, and remit the tax directly to the Canada Revenue Agency for the account of the investor. Ann III (4.5) 281
PART VI ADDITIONAL INFORMATION 1. RESPONSIBILITY The Company and the Directors, whose names, business addresses and functions are set out in paragraph 1 of Part II (Directors and Corporate Governance) of this document, accept responsibility for the information contained in this document. To the best of the knowledge of the Directors and the Company (who have taken all reasonable care to ensure that such is the case) the information contained in this document is in accordance with the facts and contains no omissions likely to affect its import. Ann I (1.1 and 1.2) Ann III (1.1 and 1.2) 2. INCORPORATION AND REGISTRATION 2.1 The Company was incorporated under the CBCA under corporation number 752613-0 on 14 April 2010. On completion of the amalgamation with Entertainment One (Cayman), on or around 15 July 2010, the Company will, by operation of Canadian law be given a new corporation number. Ann I (5.1.2, 5.1.3 and 5.1.4) Ann III (4.2) 2.2 The Company s name since incorporation has been Entertainment One Ltd. 2.3 The registered office and principal place of business of the Company is at 175 Bloor Street East, Suite 1400, North Tower, Toronto, Ontario, Canada M4W 3R8 (telephone number: 001-416- 646 2400). 2.4 The principal laws and legislation under which the Company operates, and under which the Common Shares were created are the laws of Canada, including the Statutes. 2.5 The principal activities of the Group are the acquisition and exploitation of entertainment rights across all media. Ann I (5.1.2 and 5.1.4) Ann I (5.1.4) Ann III (4.2) Ann 1 (6.1) 3. GROUP ORGANISATION AND INFORMATION ON GROUP HOLDINGS 3.1 On completion of the Restructuring and on Admission the Company will be the ultimate parent company of the Group and will have the following significant subsidiary undertakings: Ann I (7.1, 7.2 and 25.1) Country Proportion Proportion (or Province where of ownership of voting applicable) of interest power Incorporation Trading Name (%) (%) or Formation activity 4384768 Canada Inc.* 100 % 49 % Canada Investment Company 6972501 Canada Inc.* 100 % 49 % Canada Investment Company Earl Street Capital Inc. 100 % 100 % USA Investment Company Earl Street Finance kft 100 % 100 % Hungary Investment Company E1 Entertainment UK 100 % 100 % England & Wales Content ownership Limited E-One UK Limited 100 % 100 % England & Wales Investment Company Entertainment One Ltd (Entertainment One 100 % 100 % Cayman Islands Investment Company (Cayman))** Entertainment One 100 % 49 % Ontario, Canada Content ownership & Limited Partnership* distribution E1 Films Canada Inc.* 100 % 49 % Canada Content ownership E1 Television BAP Ltd.* 100 % 49 % Canada Investment Company E1 Television International Ltd.* 100 % 49 % Canada Film & TV sales & distribution 282
Country Proportion Proportion (or Province where of ownership of voting applicable) of interest power Incorporation Trading Name (%) (%) or Formation activity E1 Television 100 % 49 % Canada TV Production Productions Inc.* E1 Entertainment 100 % 100 % Holland Investment Company Holding Holland BV E1 Entertainment U.S. LP 100 % 100 % US Content ownership & distribution E1 Entertainment 100 % 100 % Holland Content ownership Benelux BV Seville Pictures Inc.* 100 % 49 % Canada Content ownership Vidéoglobe 1 Inc.* 100 % 49 % Quebec, Canada Distribution * In order to meet certain Canadian regulatory requirements for film, television and video distribution companies under the Investment Canada Act, the ownership of each of 4384768 Canada Inc. and 6972501 Canada Inc. was structured such that the majority (51 per cent.) of the voting shares are currently held by Canadian management of the Company. The remaining voting shares are held by Earl Street Finance kft, a wholly-owned subsidiary of Entertainment One (Cayman). Entertainment One (Cayman) owns 100 per cent. of the economic interest in each of 4384768 Canada Inc. and 6972501 Canada Inc. through the ownership of 100 per cent. of the non-voting equity shares. As the Company s capital structure on completion of the Restructuring will ensure that control remains with Canadians for the purposes of the Investment Canada Act, following Admission the Company intends to acquire 100 per cent. of the voting shares of 4384768 Canada Inc. and 6972501 Canada Inc. Each of Entertainment One Limited Partnership, E1 Films Canada Inc., E1 Television BAP Ltd., E1 Television International Inc., E1 Television Ltd. Seville Pictures Inc. and Vidéoglobe 1 Inc. are wholly owned subsidiaries of either 4384768 Canada Inc. or 6972501 Canada Inc. or a combination of both. ** Following completion of the Restructuring and prior to Admission, Entertainment One (Cayman) will continue to Canada and amalgamate with the Company on 15 July 2010. 3.2 In addition, on completion of the Restructuring and on Admission the Company will have holdings in the following companies which are likely to have a significant effect on the Group s assessment of its own assets and liabilities, financial position or profits and losses and which are all incorporated and resident in the countries set out below: Ann I (7.1, 7.2 and 25) Proportion of Proportion ownership of voting interest power Country of Trading Company (%) (%) Incorporation activity Get Lucky Television Productions Inc. 51 % 51 % Canada TV Production KVS V Productions Inc. 50 % 50 % Canada TV Production One Voice Media Inc. 51 % 51 % Canada Advertising Shattered Productions Ltd. 49 % 49 % Canada TV Production 7093438 Canada Inc. 51 % 51 % Canada TV Production GiGi III Productions Inc. 50 % 50 % Canada TV Production 3.3 On Admission, all shares in the companies referred to in this paragraph 3 of Part VI (Additional Information) will be fully paid up. Ann III (4.4) 283
4. SHARE CAPITAL OF THE COMPANY 4.1 The following table shows the authorised and issued share capital of the Company as it will be on Admission. Ann I (21.1.1) Authorised Share Capital Issued and Outstanding Share Capital Preferred Variable Preferred Variable Common Shares Voting Shares Common Shares Voting Shares Nominal value Number Nominal value Number Nominal value Number Nominal value Number No par value Unlimited No par value Unlimited No par value 167,547,358 No par value 100 4.2 Other than pursuant to the Restructuring and the conversion of the Exchangeable Shares, no additional shares are being issued pursuant to Admission. The issued share capital of the Company on Admission will therefore be 167,547,358 Common Shares and 100 Preferred Variable Voting Shares (assuming that no further shares are issued as a result of the exercise of any options under the Entertainment One Share Schemes, the Marwyn Warrant, the Summit Option and the Exchangeable Notes between the date of this document and Admission). 4.3 The authorised but unissued share capital of the Company following Admission will be an unlimited number of Common Shares and an unlimited number of Preferred Variable Voting Shares. Of these shares, up to 35,446,390 are reserved for the issue of Common Shares in respect of options granted under the Entertainment One Share Schemes, the Marwyn Warrant, the Summit Option and the Exchangeable Notes representing 21.2 per cent. of the issued and outstanding share capital of the Company (assuming that no further shares are issued as a result of the exercise of any options under the Entertainment One Share Schemes, the Marwyn Warrant, the Summit Option and the Exchangeable Notes between the date of this document and Admission). The 35,446,390 Common Shares referred to above includes a maximum of 10,723,031 Common Shares relating to the Management Participation Scheme. Under the Management Participation Scheme, participants subscribed at fair market value for shares of a subsidiary that are exchangeable for Common Shares of an equivalent value upon satisfaction of certain conditions. The exchange for Common Shares under the Management Participation Scheme is conditional, amongst other things, on the performance of the Company s share price exceeding a compound annual growth rate of at least 12.5 per cent. For the maximum number of common shares to be issued under the Management Participation Scheme, the Company s share price would need to perform materially above the 12.5 per cent. hurdle rate and at significant multiples to the current prevailing price. 4.4 No shares in the capital of the Company are held by or on behalf of the Company or any other member of the Group. 4.5 The Common Shares have been assigned ISIN CA29382B1022. Ann I (9.1, 9.2) Ann I (21.1.5) Ann I (21.1.3) Ann III (4.1) 4.6 Save as disclosed in this document, since the date of its incorporation no share or loan capital of the Company has been issued or agreed to be issued, or is now proposed to be issued, for cash or any other consideration and, save as referred to in paragraph 23 of Part VI (Additional Information), no commission, discounts, brokerages or other special terms have been granted by the Company in connection with the issue or sale of any such capital. 4.7 Other than the Marwyn Warrant described at paragraph 18.6 of Part VI (Additional Information) and the Exchangeable Notes described at paragraph 18.8 of Part VI (Additional Information), the Company does not have in issue any securities not representing share capital and there are no outstanding debentures, convertible securities, exchangeable securities or securities with warrants issued or proposed to be issued by the Company. 4.8 Other than the Preferred Variable Voting Shares described in paragraph 5 of Part I (Information on the Company) and paragraph 6 of Part VI (Additional Information), there are no arrangements known to the Company and the Directors, the operation of which may at a subsequent date result in a change in control of the Company. Ann I (21.1.4) Ann I (18.4) 284
4.9 The Common Shares rank pari passu in all respects including in relation to voting rights and the right to receive dividends or other distributions declared, paid or made after Admission. 4.10 There have been no public takeover bids by third parties for all or any part of the Company s equity share capital during the period since its incorporation up to and including 18 June 2010 (being the latest practicable date prior to publication of this document) and there have been no public takeover bids by third parties for all or any part of Entertainment One (Cayman) s equity share capital during the period covered by the historical financial information set out in Part IV (Historical Financial Information) and up to and including 18 June 2010 (being the latest practicable date prior to publication of this document). 4.11 As at 18 June 2010 (being the latest practicable date prior to the publication of this document), options and other rights to acquire shares granted under the Entertainment One Share Schemes, the Marwyn Warrant, the Summit Option and the Exchangeable Notes were outstanding over a total of 35,446,390 Common Shares. Further information in relation to options and other rights granted under the Entertainment One Share Schemes, the Marwyn Warrant; the Summit Option and the Exchangeable Notes is included in paragraphs 11, 13 and 18.6 to 18.8 of Part VI (Additional Information). The 35,446,390 Common Shares referred to above, includes a maximum of 10,723,031 Common Shares relating to the Management Participation Scheme. Under the Management Participation Scheme, participants subscribed at fair market value for shares of a subsidiary that are exchangeable for Common Shares of an equivalent value upon satisfaction of certain conditions. The exchange for Common Shares under the Management Participation Scheme is conditional, amongst other things, on the performance of the Company s share price exceeding a compound annual growth rate of at least 12.5 per cent. For the maximum number of common shares to be issued under the Management Participation Scheme, the Company s share price would need to perform materially above the 12.5 per cent. hurdle rate and at significant multiples to the current prevailing price. Other than in connection with the Entertainment One Share Schemes, the Marwyn Warrant, the Summit Options, the Exchangeable Notes (and the Exchangeable Shares which will be exchanged prior to Admission), none of the Company s (or any of its subsidiary companies ) common or ordinary share capital is under option or agreed conditionally or unconditionally to be put under option. Ann I (18.2) Ann III (4.5) Ann III (4.10) Ann I (21.1.6) 5. SHARE CAPITAL HISTORY 5.1 The Company was incorporated on 14 April 2010 with an authorised share capital of an unlimited number of Common Shares of no par value. 5.2 The following changes in the authorised share capital of the Company were made in the period from incorporation to 18 June 2010 (being the latest practicable date prior to the publication of this document): Ann I (21.1.7) Ann III (4.6) (a) (b) on 21 May 2010, the Articles were amended to authorise an unlimited number of Preferred Variable Voting Shares of no par value. on 15 June 2010 pursuant to a Special Resolution the pre-emption provisions contained in Part 3, Article 3 of the Articles were disapplied in respect of: (i) (ii) (iii) (iv) the issuance of up to a maximum of 167,547,358 Common Shares to be issued as part of the Restructuring and the exchange of the Exchangeable Shares; the issuance of 100 Preferred Variable Voting Shares; the issuance of up to a maximum of 35,517,425 Common Shares to be issued to the optionholders under the Entertainment One Share Schemes, and holders of the Marwyn Warrant, the Summit Option and the Exchangeable Notes; and the issuance of equity securities (A) in connection with any rights issue in favour of the holders of Common Shares on the register of members at such record date or record dates as the Board may determine for the purposes of the issue where the Common 285
Shares respectively attributable to the interests of all such Shareholders are proportionate (as nearly as can be) to the respective number of Common Shares in the capital of the Company held by the Shareholders; and (B) the allotment (otherwise than pursuant to sub-paragraph (A) above) of up to an aggregate number of 25,132,104 Common Shares and/or Preferred Variable Voting Shares. 5.3 The following changes in the issued share capital of the Company were made in the period from incorporation to 18 June 2010 (being the latest practicable date prior to the publication of this document): Number of Consideration Date of issue Shares issued paid 21 May 2010 10 Common Shares C$10 On completion of the Restructuring, and prior to Admission, the Company will issue 167,547,358 Common Shares (assuming that no further shares are issued as a result of the exercise of any options under the Entertainment One Share Schemes, the Marwyn Warrant, the Summit Option and the Exchangeable Notes between 18 June 2010 (being the latest practicable date prior to the publication of this document) and Admission) to the holders of ordinary shares of Entertainment One (Cayman) on a one for one basis as part of the scheme of arrangement further described in paragraph 3 of Part I (Information of Entertainment One). Immediately prior to the effective time of the scheme of arrangement, the Company will purchase for C$10 and cancel the 10 Common Shares issued to Mark Trachuk, pursuant to the agreement described in paragraph 18.12 of Part VI (Additional Information). Additionally, in order to comply with the Investment Canada Act, the Company issued 100 Preferred Variable Voting Shares as further described in paragraph 5 of Part I (Information on Entertainment One) and paragraph 6 of Part VI (Additional Information). 6. SUMMARY OF ARTICLES OF THE COMPANY 6.1 Copies of the Articles are available on written request to the Company Secretary or available for inspection as detailed in paragraph 26 of Part VI (Additional Information). 6.2 Under the CBCA, the Company is not required to include objects in its constitutional documents. The CBCA provides that the Company has the capacity and rights, powers and privileges of an individual of full capacity, subject to any restrictions in its Articles. The Articles do not provide for any restrictions on the business that may be carried on by the Company. 6.3 The following is a summary of certain provisions of the Articles, By-laws and certain aspects of the CBCA. This summary does not purport to be complete and is qualified in its entirety by the full terms of the Articles, By-laws and the terms and provisions of the CBCA. Common Shares The following is a summary of the material rights, privileges, restrictions and conditions attaching to the Common Shares: Ann I (21.2.2) Ann I (21.2.1) Ann I (21.2.3) Ann III (4.5) (a) (b) (c) Each holder of Common Shares is entitled to receive notice of and to attend all meetings of Shareholders of the Company and to vote at such meetings, except meetings at which only holders of a specified class of shares (other than Common Shares) or specified series of shares are entitled to vote. Each holder of Common Shares is entitled, subject to any preferential rights attaching to any other class or series of shares of the Company, to receive dividends if, as and when declared on the Common Shares by the Company. Each holder shall be entitled, subject to any preferential rights attaching to any other class or series of shares of the Company, to participate in any distribution of the remaining property and assets of the Company upon the liquidation, dissolution or winding up of the Company. 286
Preferred Variable Voting Shares The following is a summary of the material rights, privileges, restrictions and conditions attaching to the Preferred Variable Voting Shares: Ann III (4.5) (a) (b) (c) (d) (e) (f) The votes attached to the Preferred Variable Voting Shares as a class are automatically adjusted so that they, together with the votes attached to the Common Shares that are owned by Canadians (as defined in the Investment Canada Act) (as determined based on inquiries the Company has made of holders of Common Shares and Depository Interests), equal 51 per cent. of the votes attached to all shares in the capital of the Company. The votes attached to the Preferred Variable Voting Shares as a class are, in aggregate, not less than 1 per cent. of the votes attached to all shares in the capital of the Company. The votes attached to the Preferred Variable Voting Shares as a class are determined based on the level of Canadian ownership of Common Shares ascertained through the Company s monitoring process. The Articles provide that the Company shall, not less than 25 days before each meeting of Shareholders, undertake inquiries or instruct the Registrar to undertake inquiries of the holders of Common Shares and Depository Interests held by brokers and other market intermediaries as to the level of Canadian ownership of Common Shares or Depository Interests representing entitlement to the underlying Common Shares in their respective accounts. If no response to these inquiries is received from a particular broker or market intermediary, the Common Shares or Depository Interests held by that broker or market intermediary will be deemed to be owned by non-canadians (as defined in the Investment Canada Act). If a Common Share is owned by one or more persons jointly and one such person is non-canadian then such Common Share, for the purpose of monitoring Canadian control of the Company, shall be deemed to be owned by such person who is non-canadian. The votes attached to the Preferred Variable Voting Shares as a class are determined once the level of Canadian (as defined in the Investment Canada Act) ownership of Common Shares has been established through this monitoring process. The Board will not approve or compel a transfer of Preferred Variable Voting Shares to a person that is not a current officer of the Company and a Resident Canadian, and it is the current intention of the Board that all of the Preferred Variable Voting Shares will be held by the individual that holds the position of Chief Executive Officer of the Company. The Preferred Variable Voting Shares are redeemable at the option of the Company for C$0.01 per share and, in the event of the liquidation, dissolution or other distribution of the Company s assets for the purpose of winding up of the Company s affairs, holders of Preferred Variable Voting Shares are entitled to one/one millionth of a Canadian cent. per share in priority to the holders of Common Shares, but have no further rights. Preferred Variable Voting Shares will not be entitled to receive dividends. The terms of the Preferred Variable Voting Shares and the Preferred Variable Voting Shareholders Agreement contain a coat-tail provision which prevents a holder of Preferred Variable Voting Shares from accepting an offer to purchase all or part of the holder s shares unless the party making the offer also offers to purchase, by way of a take-over bid, all of the outstanding Common Shares at a price per Common Share and on other terms and conditions as are approved by the Board. Ann III (4.8) Ann III (4.5) Variation of rights Subject to the CBCA, the Articles may by Special Resolution be amended to change the designation of all or any of its shares, and to add, change or remove any rights, privileges, restrictions and conditions, including rights to accrued dividends, in respect of all or any of its shares, whether issued or unissued. Transfer of Common Shares There are no restrictions in the Articles or By-Laws on the transferability of the Common Shares. Ann I (21.2.4) Ann III (4.8) 287
Transfer of Preferred Variable Voting Shares The Preferred Variable Voting Shares may only be transferred to a person who is a Resident Canadian and in accordance with the Articles and the Preferred Variable Voting Shareholders Agreement. The Preferred Variable Voting Shares are not listed on any stock exchange. Capital Variations Subject to the CBCA, the Articles may by Special Resolution be amended to change the shares of any class or series, whether issued or unissued, into a different number of shares of the same class or series or into the same or a different number of shares of other classes or series. Any class of shares may by Special Resolution be divided into different series of shares. Under the CBCA, the Company may by Special Resolution reduce its stated capital for any purpose, including for the purpose of (i) extinguishing or reducing a liability in respect of an amount unpaid on any share, (ii) distributing to the holder of an issued share of any class or series an amount not exceeding the stated capital of the class or series and (iii) declaring its stated capital to be reduced by an amount that is not represented by realisable assets. However, the Company shall not reduce its stated capital for any purpose, except for declaring its stated capital to be reduced by an amount that is not represented by realisable assets, if there are reasonable grounds for believing the Company would become insolvent. Dividends Under the CBCA, subject to any restriction in the Articles, the Board may declare and pay dividends, whether out of profits, capital or otherwise as it deems advisable. A dividend may be payable in shares or in property, including money. The Board may not declare and the Company may not pay a dividend if the Company is insolvent or if the payment of the dividend would render the Company insolvent. Directors The Board shall consist of such number of directors, being a minimum of three directors and a maximum of fifteen directors, as may from time to time be determined by resolution of the Board. Under the CBCA, at least a majority of the directors of the Company must be Resident Canadians. In addition, the By-Laws provide that at least 2 / 3 of the Board must be Canadian (as defined in the Investment Canada Act). The election of directors of the Company shall take place at the first meeting of Shareholders and at each succeeding annual meeting of Shareholders at which an election of directors is required. All the directors whose term has expired shall retire but, if qualified, shall be eligible for re-election. The number of directors to be elected at any such meeting shall be the number of directors then retiring unless the Shareholders otherwise determine. Where the Shareholders adopt an amendment to the Articles to increase the number or minimum number of directors, the Shareholders may, at the meeting at which they adopt such amendment, elect the additional number of directors authorised by the amendment. The election of directors shall be by Ordinary Resolution and the directors so elected shall hold office until the close of the annual meeting of Shareholders next following the election. If an election of directors is not held at the proper time, the incumbent directors shall continue in office until their successors are elected. Under the CBCA, the following persons are disqualified from being a director: (a) anyone who is less than 18 years of age; (b) anyone who is of unsound mind and has been so found by a court in Canada or elsewhere; (c) a person who is not a natural person; or (d) a person who has the status of bankrupt. Subject to the provisions of the CBCA, the Shareholders may, by Ordinary Resolution passed at a meeting called for such purpose, remove any director from office. The vacancy created by such removal may be filled at the same meeting, failing which it may be filled by the Board. Ann I (21.2.8) Ann III (4.5) Ann I (20.7.1) Ann III (4.5) Ann I (21.2.2) 288
Conflicts of Interest A director or officer who is a party to, or who is a director or officer of or has a material interest in any person who is a party to, a material contract or proposed material contract with the Company shall disclose the nature and extent of his interest at the time and in the manner provided by the CBCA. A director interested in a contract so referred to the Board shall not vote on any resolution to approve the same, except as provided by the CBCA. Share qualification A director need not hold any shares in the capital of the Company, but shall be entitled to receive notice of and to attend and speak at any general meeting of the Company or at any separate meeting of the holders of any class of shares of the Company. Appointment and Retirement of directors Subject to the CBCA, the annual meeting of Shareholders shall be held on such day and at such time in each year as the Board, or the chairperson of the Board, or the President in the absence of the chairperson of the Board, may from time to time determine, for the purpose of electing directors. Vacancies among the directors, except a vacancy resulting from an increase in the minimum or maximum number of directors or a failure to elect the number of directors provided for in the By-Laws, or appointment of additional directors (subject to a maximum of one third of the number of directors elected at the previous annual meeting of shareholders) may be made by the Board in accordance with the By-Laws. Neither the Articles, By-Laws nor the CBCA prescribe a minimum retirement age for directors. Indemnity Under the By-Laws, the Company shall indemnify a director or officer, but the director or officer must have acted honestly and in good faith with a view to the best interests of the Company, and in the case of a criminal or administrative proceeding or a proceeding involving a monetary penalty, the director or officer must have had reasonable grounds for believing that his or her conduct was lawful. Borrowing Powers Without limit to the powers of the Board as provided in the CBCA, the Board may exercise all the powers of the Company to borrow money and to issue, reissue, sell or pledge debt obligations of the Company. Meetings of Shareholders The Company is required to hold an annual meeting of Shareholders no later than 15 months after the last annual meeting and within 6 months after the end of the Company s preceding financial year for the purposes of reviewing the financial statements, electing directors, and appointing auditors. In addition, the directors of the Company may at any time call a special meeting of Shareholders. A holder of 5 per cent. of the issued and outstanding Common Shares has the right to requisition the directors of the Company to call a meeting of Shareholders, and if the directors of the Company fail to do so, such Shareholder has the right to call the meeting. Shareholders are entitled to receive not less than 21 days nor more than 60 days notice of a meeting of Shareholders. The directors of the Company may establish a record date for receiving notice of and voting at a meeting which shall be not less than 21 days nor more than 60 days before the date of the meeting, and where no such record date for notice is fixed by the directors of the Company, the record date shall be the close of business on the day immediately preceding the day on which notice is given. The By-Laws set out the procedures for conducting meetings of Shareholders. Ann I (21.2.5) Quorum A quorum for the transaction of business at any meeting of Shareholders shall be two persons present in person, each being a Shareholder entitled to vote at the meeting or a duly appointed proxyholder or 289
representative for a Shareholder so entitled, who hold or represent by proxy not less than 5 per cent. of the total number of shares entitled to vote at the meeting. If a quorum is present at the opening of any meeting of Shareholders, the Shareholders present or represented may proceed with the business of the meeting notwithstanding that a quorum is not present throughout the meeting. If a quorum is not present at the opening of the meeting of Shareholders, the Shareholders present or represented may adjourn the meeting to a fixed time and place but may not transact any other business. Notwithstanding the foregoing quorum requirements, at such adjourned meeting, the Shareholder or Shareholders entitled to vote then present or represented shall constitute a quorum. Votes of Shareholders Subject to the Articles, on a show of hands every Shareholder who being an individual is present in person or represented by proxy or, being a corporation is present by a duly authorised representative or proxy, has one vote, and on a poll every member has one vote for every Common Share of which he is the holder. Ann III (4.5) Fundamental Changes The Shareholders must approve by Special Resolution, among other matters, any proposed amalgamation of the Company with another company, the disposition of substantially all of the Company s assets, or any changes to the Articles of the Company. Rights of Dissent Under the CBCA, a Shareholder is entitled to dissent in respect of certain proposed fundamental actions by the Company to be voted upon by the Shareholders, including the following: (a) (b) (c) (d) a resolution to adopt an amalgamation agreement; a resolution to authorise the continuance of the Company; a resolution to authorise or ratify the sale, lease or exchange of all or substantially all of the Company s property; or a resolution to authorise a going private transaction or an arrangement. In order to exercise a dissent right, a Shareholder must comply with the notice requirements and time periods set out in the CBCA. Upon dissent, the Shareholder will be entitled to be paid the fair value of his or her Common Shares immediately before the passing of the resolution in respect of which the Shareholder dissented, provided that the action in question is implemented. The CBCA also provides remedies to a complainant (which includes a registered or beneficial shareholder) in respect of an act or omission of the Company or the conduct of the business of the Company, or the exercise of the powers of the directors in a manner that is oppressive, or unfairly prejudicial to, or that unfairly disregards the interests of the complainant. The Canadian courts have broad powers to make interim or final orders in respect of such oppressive conduct or exercise of powers. Pre-emption The CBCA does not confer rights of pre-emption upon the issue or sale of any shares in the Company. However, the Articles provide that if the Company is proposing to issue equity securities: Ann I (21.2.3) (a) it shall not issue any of them on any terms to a person unless it has made an offer to each holder of relevant shares or relevant employee shares to issue to him on the same or more favourable terms a proportion of those securities which is as nearly as practicable equal to the proportion in nominal value held by him of the aggregate of relevant shares and relevant employee shares; and 290
(b) it shall not issue any of those securities to a person unless the period during which any such offer may be accepted has expired or the Company has received notice of the acceptance or refusal of every offer so made. Notwithstanding that the Articles provide the pre-emptive rights referred to above, Shareholders have no pre-emptive right in respect of shares in the capital of the Company to be issued: (i) for consideration other than money; (ii) as a share dividend; or (iii) pursuant to the exercise of conversion privileges, options or rights previously granted by the Company. Securities which the Company has offered to issue to a holder of relevant shares or relevant employee shares may be issued to him or anyone in whose favour he has renounced his right to their issuance, without contravening sub-paragraph (b) above. These pre-emptive provisions do not apply to the issuance of securities which would, apart from a renunciation or assignment of the right to their issuance, be held under an employees share scheme. The pre-emption rights summarised above may be disapplied, provided that the directors are given power to do so by Special Resolution. Takeovers The management and control of the Company is situated outside the UK. For this reason the Takeover Code does not apply to the Company. It is emphasised that, although the Common Shares will trade on the Official List, the Company will not be subject to takeover regulation in the UK. In certain circumstances the takeover provisions in other jurisdictions where Shareholders are residents may also not apply. To cater for this circumstance, certain protections have been incorporated into the Articles which, to an extent, mirror provisions of the Takeover Code (the Relevant Code Provisions ). Consequently, the Articles provide that if an acquisition of Common Shares were to increase the aggregate holding of the acquirer and its concert parties to shares carrying 30 per cent. or more of the voting rights in the Company, the acquirer (other than an Existing Substantial Shareholder) and, depending on the circumstances, its concert parties, would be required (except with the agreement of the Company in general meeting by Special Resolution) to make a cash offer for the outstanding shares in the Company at a price not less than the highest price paid for the Common Shares by the acquirer or its concert parties during the previous 12 months. This requirement would also be triggered by any acquisition of shares by a person (other than an Existing Substantial Shareholder) holding (together with its concert parties) shares carrying not less than 30 per cent. but not more than 50 per cent. of the voting rights in the Company if the effect of such acquisition were to increase that person s percentage of the voting rights. The main difference between these provisions and the Relevant Code Provisions is that the Panel on Takeovers and Mergers does not have any jurisdiction to exercise its discretion in waiving any of the provisions of the Articles. These provisions are subject to applicable Securities laws. Ann III (4.9) 6.4 Preferred Variable Voting Shareholders Agreement The Company issued 100 Preferred Variable Voting Shares to the Company s Chief Executive Officer, Darren Throop, who entered into a Preferred Variable Voting Shareholders Agreement dated 17 June 2010 with the Company pursuant to which Mr. Throop (a) agreed not to transfer Preferred Variable Voting Shares, in whole or in part, except with the prior written approval of the Board, (b) granted the Company the unilateral right to compel the transfer of the Preferred Variable Voting Shares, at any time and from time to time, in whole or in part, to a person designated by the Board who is a current officer of the Company and a Resident Canadian if it is determined by the Board to be in the best interests of the Company in order to enable the Company to be eligible for tax credits or government incentives and (c) granted the Company a power of attorney to effect any transfers contemplated by the Preferred Variable Voting Shareholders Agreement. 6.5 In determining whether to approve or compel a transfer, the Board will act in the best interest of the Company in order to enable the Company to be eligible for tax credits or government incentives. Pursuant to the Preferred Variable Voting Shareholders Agreement, the consideration received as a result of the transfer of the Preferred Variable Voting Shares cannot exceed one Canadian cent per share. Under the terms of the Preferred Variable Voting Shares, transfer of the shares will be restricted to Resident Canadians. 291
7. OTHER RELEVANT LAWS AND REGULATIONS 7.1 A shareholder in a company whose shares are admitted to trading on the main market of the London Stock Exchange is required pursuant to Rule 5 of the Disclosure and Transparency Rules to notify the Company of the percentage of their voting rights if the percentage of voting rights which they hold as a shareholder or through their direct or indirect holding of financial instruments (or a combination of such holdings) reaches, exceeds or falls below 5 per cent., 10 per cent., 15 per cent., 20 per cent., 25 per cent., 30 per cent., 50 per cent. and 70 per cent. as a result of an acquisition or disposal of shares. 7.2 The Company is existing under the laws of Canada with its head office and place of central management in Ontario, Canada. Accordingly, transactions in the Company s Common Shares will not be subject to the provisions of the Takeover Code, however takeover provisions are included in the Articles. Additionally, depending upon the location and number of shareholders in each jurisdiction at the time of any bid, further takeover requirements may be triggered under the securities laws applicable in the jurisdictions in which such shareholders are resident. Ann III (4.5) Ann I (21.2.7) Ann I (21.2.6) Ann III (4.9) Under the CBCA, if within 120 days of the date of an offer to acquire the shares of the Company at least 90 per cent. of the outstanding shares of the Company not owned by the offeror and its affiliates and associates are tendered to the bid, the offeror may, after taking up and paying for such shares, send written notice to any shareholder who did not accept the offer compelling them to sell their shares on the same terms as contained in the original offer, subject to the right of such shareholder to demand payment of the fair value of the shares. If a shareholder has elected to demand payment of the fair value of its shares, a court will fix the fair value of such shares. 7.3 Under the CBCA, a person or company who is in an insider of the Company who purchases or sells a security of the Company with the knowledge of confidential information that, if generally known, might reasonably be expected to affect materially the value of any of the securities of the Company is liable to compensate the seller or purchaser of the security, as the case may be, for any damages suffered by the seller or purchaser as a result of the purchase or sale, unless the insider can rely on any available defences under the CBCA. The insider is also accountable to the Company for any benefit or advantage received or receivable by the insider as a result of such a purchase or sale. In addition, a tipper, being an insider of the Company who discloses to another person confidential information with respect to the Company that has not been generally disclosed and that, if generally known, might reasonably be expected to affect materially the value of any of the securities of the Company, is liable to compensate any person for damages who thereafter sells securities of the Company to, or purchases securities of the Company from, any person that received the information, unless the tipper can rely on one of the available defences. 7.4 The Company is not required under Canadian law to offer Common Shares to existing shareholders on a pre-emptive basis as is required of companies incorporated in the UK, however pre-emption provisions are included in the Articles. Ann III (4.5) 8. CANADIAN REGULATION OF THE FILM BUSINESS Department of Canadian Heritage Under the Investment Canada Act, transactions exceeding certain financial thresholds, and which involve the direct acquisition of control of a Canadian business by a non-canadian, are subject to review and cannot be implemented unless the applicable Minister is satisfied that the transaction is likely to be of net benefit to Canada. The Minister of Canadian Heritage is responsible for investments involving the acquisition of Canadian businesses that are considered cultural businesses. A Canadian cultural business is defined in the Investment Canada Act as a business activity relating to Canada s cultural heritage or national identity, and includes a business engaged in the production, distribution, sale or exhibition of film or video products. 292
In assessing whether to approve an investment by a non-canadian, the Minister of Canadian Heritage is required to determine whether the investment is likely to be of net benefit to Canada taking into account, among other things, certain factors specified in the Investment Canada Act and any written undertakings that may be given by the applicant. The determination by the Minister of Canadian Heritage of whether a proposed investment is likely to be of net benefit to Canada also includes consideration of sector specific policies of the Canadian federal government, some of which restrict or prohibit investments by non-canadians in certain types of Canadian cultural businesses. These include a policy governing foreign investments in the Canadian film distribution sector ( Film Policy ). The Film Policy provides, amongst other things, that takeovers of Canadian-owned and controlled film distribution businesses will not be permitted. Ann III (4.9) In most Canadian provinces and territories, a licence to engage in the motion picture distribution business must be obtained from applicable provincial regulatory authorities. In all of these jurisdictions, other than Québec, there are limited requirements associated with the issue or renewal of such licences. Pursuant to the Cinema Act (Québec), only companies whose principal place of business is located in Québec can hold a general distribution licence in Québec. Seville Pictures was granted a general distribution licence in October 1988. Canadian Assistance to the Film and Television Business Canadian Feature Film Fund The Canadian federal government s financing support to the Canadian film industry is provided by Telefilm Canada, a federal cultural agency dedicated primarily to the development and promotion, both domestically and internationally, of Canada s film, television and new media industries, through the Canada Feature Film Fund. Financing is available to motion picture distributors for Canadian theatrical release costs ranging from test marketing and campaign creation to prints and advertising. Financing provided by Telefilm Canada pursuant to the Canada Feature Film Fund is in the form of a non-interest bearing advance of up to 75 per cent. of the eligible Canadian marketing costs for the release of the film. Canada Media Fund The Canada Media Fund, administered by Telefilm Canada, is a not-for-profit corporation created and funded by certain Canadian cable and satellite television distributors and the Government of Canada. The Canada Media Fund launched on 1 April 2010, to combine, reform and rebrand the predecessor Canadian Television Fund and Canadian New Media Fund. The Canada Media Fund s mandate is to deliver C$350 million annually through two streams of funding, an Experimental Stream, which encourages the creation of leading-edge, interactive, digital media content and software applications; and a Convergent Stream, which supports multi-platform Canadian projects. The fund s revenues are received from interest and recoupment on equity investments. Canada Media Fund funding for a project takes the form of licence-fee top-ups, equity investments and recoupable advances paid directly to the applicant producers. Refundable Tax Credits In Canada, a refundable tax credit is available under the Tax Act for eligible television and film productions undertaken by qualified Canadian corporations. The tax credit is equal to 25 per cent. of the qualified labour expenditure, limited to 60 per cent. of the amount (the threshold amount ) by which the total production costs of a given project exceed any other government assistance, including any provincial refundable tax credit. The credit is calculated on the basis of each individual production and is available only to taxable Canadian corporations, subject to certain eligibility criteria. The Company s film and television production operations currently qualify for this tax credit and the Company intends to maintain this eligibility. In addition, certain provinces within Canada have implemented programmes that provide similar tax credits based on similar provincial qualification criteria. The foregoing discussion of the tax credits available under the Tax Act is of a general nature only and is not intended to address all of the applicable legislative requirements. For more details readers should consult the Tax Act. 293
Canadian Audio-Visual Certification Office CAVCO is the government agency responsible for certifying audio and video content to qualify as Canadian content. CAVCO certification benefits the Company s productions because Canadian licensees must fulfil regulatory requirements and/or conditions of licence that require them to broadcast a certain percentage of Canadian content. The CRTC monitors compliance by requiring licensees to maintain programme logs in which all Canadian content programming they have broadcast is identified by a certification number for independent programmes or a key figure for their own productions. The Company s productions require a certification number if the broadcaster wants the programme to be recognised as Canadian for the purpose of CAVCO s Canadian content requirements. CAVCO certification is also required to qualify for certain of the funding sources discussed above. Co-production Treaties The Company can benefit from the co-production treaties entered into between Canada and a number of other countries, including the United Kingdom. Co-production treaties enable Canadian and foreign producers to pool their resources in order to co-produce audiovisual works that enjoy national production status in their respective countries, and are certified as Canadian content for CAVCO purposes. As such, they are eligible for all funding programs and benefits offered to national audiovisual productions by the governments of the co-producing countries. Canadian Content Requirements Canadian conventional, specialty, pay and pay-per-view television services are typically required to devote a certain amount of their programming schedules and investment budget, including prime-time, to Canadian productions. Compliance with these requirements is enforced by the CRTC and failure to comply can result in fines or the loss of a license. These requirements provide support for Canadian programs such as those produced by the Company, as long as they qualify as Canadian programs for CRTC purposes. The CRTC determines the criteria for qualification of a programme as Canadian. According to CRTC regulations, a programme will qualify if it is produced by an individual Canadian producer with the involvement of individual Canadians in principal functions, and where a substantial portion of the budget is spent on Canadian elements. A programme may still qualify as Canadian in certain circumstances, even though some of the producer functions are performed by non-canadian individuals, if the production company is a Canadian production company and certain other requirements are met. Substantially all of the Company s television programs are commissioned by Canadian broadcasters and are contractually required to be certified as Canadian. In the event a production does not qualify for certification, the production would not qualify for the government incentives and the broadcast licenses for that production. In the event of such default, the broadcaster could refuse acceptance of the Company s productions. Maintaining Canadian Control It is in the Company s interest that its productions continue to be eligible for Canadian federal and provincial government tax credits and incentives and to qualify as Canadian content productions. One of the criteria for eligibility is that a majority of the Company s voting shares be controlled by Canadians, as defined in the Investment Canada Act. In order to ensure that a majority of the Company s voting shares are owned by Canadians, the Company maintains a class of Preferred Variable Voting Shares as further described in paragraphs 6.3 and 6.4 of Part VI (Additional Information). As noted above the votes attached to the Preferred Variable Voting Shares as a class are automatically adjusted so that they, together with the votes attached to the Common Shares that are owned by Canadians (as determined based on inquiries the Company has made of holders of Common Shares and Depository Interests), equal 51 per cent. of the votes attached to all shares in the capital of the Company. The votes attached to the Preferred Variable Voting Shares as a class are, in aggregate, not less than 1 per cent. of the votes attached to all shares in the capital of the Company. The votes attached to the Preferred Variable Voting Shares as a class are determined based on the level of Canadian ownership of Common Shares ascertained through the Company s monitoring process. If no response to these inquiries is received from a particular broker or market intermediary, the Common Shares 294
or Depository Interests held by that broker or market intermediary will be deemed to be owned by non-canadians. The votes attached to the Preferred Variable Voting Shares as a class are determined once the level of Canadian ownership of Common Shares has been established through this monitoring process. 9. DIRECTORS OF THE COMPANY 9.1 Details of the Directors, their business addresses and their functions in the Company are set out at paragraph 1 of Part II (Directors and Corporate Governance) of this document. Each of the Directors can be contacted at the registered office and principal place of business of the Company at 175 Bloor Street East, Suite 1400, North Tower, Toronto, Ontario, Canada M4W 3R8. Ann I (1.1 and 14.1) 9.2 In addition to being directors of the Company and Group subsidiary companies, the Directors hold or have held the directorships of the companies and/or are or were partners of the partnership specified opposite their respective names below within the five years prior to the date of this document: Director Current Directorships/Partnerships Previous Directorships/Partnerships James Corsellis Darren Throop Entertainment One Ltd. E-One UK Limited Marwyn Capital LLP Marwyn Capital I LLP Marwyn Capital Investments 1 Limited Marwyn (Catalina) LLP Marwyn General Partner LLP Marwyn General Partner II Limited Marwyn Investment Management LLP Marwyn Investment Partners LLP Marwyn Management Investors LP Marwyn Management Partners LP Marwyn Management Partners II LP Marwyn Materials Limited Marwyn Opportunities I Limited Marwyn 10 Buckingham Street LLP Marwyn 11 Buckingham Street LLP Marwyn Value Investors Limited Marwyn Value Investors (Unlisted Feeder) Limited Orpheus Capital Limited Entertainment One Ltd. 1505028 Ontario Limited 1505029 Ontario Limited 297241 Ontario Limited 2125882 Ontario Inc. 4414586 Canada Inc. 4384768 Canada Inc. 6972501 Canada Inc. Entertainment One Canada Holdings Inc. Entertainment One GP Limited Gaylord Productions Company E1 Entertainment GP LLC Vidéoglobe 1 Inc. E1 Films Canada Inc. 3229813 Nova Scotia Company Limited Advanced Computer Software plc Baydonhill plc Catalina Holdings Limited Co-Investment Capital LLP Concateno plc Earl Street Asset Management LLC Marwyn Alternative Capital Limited Marwyn Alternative Capital (Pte) Limited Marwyn Capital Limited Marwyn General Partner II Limited Marwyn General Partner Limited Marwyn Investments Group Limited Marwyn Investment Management Limited Marwyn Management General Partner Limited Marwyn Partners Limited Marwyn Trust Melorio plc Orpheus Capital Partners LLP Praesepe plc Reco Insurance Capital Limited Silverdell plc Entertainment One Content GP Limited 297241 Ontario Limited 295
Director Current Directorships/Partnerships Previous Directorships/Partnerships Darren Throop (continued) E1 Television BAP Ltd. E1 Television Productions Inc. E1 Television International Ltd. Giles Willits Contender Online Limited E1 Entertainment UK Limited E1 Entertainment UK Rights Limited E-One UK Limited Film Resources Limited Medusa Communications and Marketing Limited Rubber Duck Entertainment Limited Entertainment One Ltd. Earl Street Capital Inc. E1 Entertainment GP LLC Cosmos Home Entertainment B.V. RCV 2001 Nederland B.V. E1 Entertainment Benelux B.V. R.C.V. Film Distribution B.V. R.C.V. Support B.V. Saga Hollandia B.V. Still Visual Investments B.V. E1 Entertainment Holding Holland B.V. Earl Street Finance Kft Active Kids Limited Ballyowan Limited Bridge Street Limited Chad Valley Limited Corn Holdings Limited Disc Distribution Limited Drury House Investments Limited East Walls Nominees No. 1 Limited East Walls Nominees No. 2 Limited Entertainment Europe Limited Entertainment Express Limited Entertainment UK Limited Entertainment USA Limited euk Direct Limited Flogistics Limited Furnishing World Limited Gladstone Limited GM Gift Vouchers Limited GM Group Limited Hemingdale Properties Limited Hey Holdings Limited Holborn Funding Limited Infront Limited Ings Road (Wakefield) (No.1) Limited Ings Road (Wakefield) (No.2) Limited J S Developments (Jersey) Limited J S Developments (Roman) Co. Limited J S Developments Cardiff Co. Limited J S Developments Portsmouth Co. Limited J Sainsbury (International) Limited J Sainsbury (Jersey) Limited J Sainsbury (Overseas) Limited J Sainsbury Distribution Limited J Sainsbury Finance LLC J Sainsbury Holdings JS Finance Corporation JS Information Systems Limited JSD (London) Limited JSD Farnborough Site 1 Limited JSD Farnborough Site 2 Limited JSD Farnborough Site 3 Limited JSD Farnborough Site 4 Limited Kidstore Leisure & Gaming plc Meymott Street 1 Limited Meymott Street 2 Limited MVC Entertainment Limited 296
Director Current Directorships/Partnerships Previous Directorships/Partnerships Giles Willits (continued) Nash Court (Kenton) Limited Oxford Road Land Limited Pentheus Limited Ramheath Properties Limited Reef Investments Limited Romford Developments Limited Sabana Holdings Limited Sainsbury Bridgeco Propco Limited Sainsbury Propco A Limited Sainsbury Propco B Limited Sainsbury Propco C Limited Sainsbury Propco D Limited Sainsbury Property Investments Limited Sainsbury's Card Services Limited Sandelcroft Limited Savacentre Limited Stamford House Holdings Limited Stamford House Investments Limited Stamford House Trustees Limited Stamford Properties (Dorking) Limited Stamford Properties Four Limited Stamford Properties One Limited Stamford Properties Three Limited Stamford Properties Two Limited Starvision Enterprises Limited Stores Investments Limited Stores Overseas Limited Strand Services (Watford) Limited Strand UK Limited Streets Online Limited TCI Limited Technic Limited Thorndale Developments Limited Titles Leisure Limited Vauxhall Storage Limited Wheat Limited WMS Card Services Limited WMS Jersey Limited Woolco Limited Woolworths Entertainment Group Limited Woolworths Group Finance Limited Woolworths Group Pension Trust Limited Woolworths Holdings Limited Woolworths Insurance (Guernsey) Limited Woolworths Marketing Limited Woolworths Media plc Woolworths Nominees Limited Woolworths Properties Limited Woolworths Publishing Limited 297
Director Current Directorships/Partnerships Previous Directorships/Partnerships Patrice Theroux Bob Allan Entertainment One Ltd. 4414586 Canada Inc. 4384768 Canada Inc. Entertainment One GP Limited Seville Pictures Inc. Seville Productions Inc. Seville Productions (Dallaire) Inc. E1 Films Canada Inc. Christal Films Inc. 679538 Ontario Inc. Entertainment One Ltd. Dr Tom Pashby Sports Safety Fund Momentum Media Inc. History Television Inc. Odeon Films Inc. 2855461 Canada Inc. None. Sir George Bain Clare Copeland Garth Girvan Mark Opzoomer Entertainment One Ltd. Canada Life Group (UK) Ltd. Canada Life Capital Corporation Lyric Players Theatre, Belfast Canada Life Limited Canada Life Asset Management Ltd. Great-West Lifeco Inc. Great-West Life Assurance Company Great-West Financial (Canada) Inc. Great-West Financial (Nova Scotia) Co. London Insurance Group Inc. London Life Insurance Company Canada Life Financial Corporation Canada Life Assurance Company Canada Life Insurance Company of Canada Crown Life Insurance Company Entertainment One Ltd. Toronto Hydro Corporation Danier Leather Inc. RioCan Real Estate Investment Trust Chesswood Income Trust MDC Corporation Telesat Canada Entertainment One Ltd. Imax Corporation McCarthy Tetrault LLP Bond Capital Partners (UK) Limited Blinkx plc Newbay Software Limited Web Reservations International Ltd. Entertainment One Ltd. Expedite 5 Inc. Bond Capital Partners Limited Hilvern Management Inc. Zattikka Limited Bombardier Aerospace Shorts Brother Plc Electra Private Equity Plc Iain More Associates Avenue Financial Corporation Mark's Work Warehouse Ltd. Custom Direct Income Fund Corby Distillers Limited Rambler Media Limited WRI Holdings Limited MIVA Inc Web Reservations International Limited 298
Director Current Directorships/Partnerships Previous Directorships/Partnerships Robert Lantos 131170 Ontario Inc. 1424427 Ontario Inc. 1536098 Ont Inc. 1813519 Ont Inc. Gigi III Productions Inc. Eastern Promises Film Productions Inc. Entertainment One Ltd. First Born Films Inc. Fugitive Pieces Productions Inc. Gigi II Productions Inc. Jewish Television Networks Mutt Productions Inc. MWB Productions Inc. Peel Wright Productions Inc. Serendipity Point Films Inc. Three Amigos Productions Inc. 6060421 Canada Inc. Gigi Productions Inc. Slu Productions Inc. Statement Productions Inc. Mark Watts Advanced Computer Software plc Business Systems Group Holdings plc Diana Award Entertainment One Ltd. Marwyn 10 Buckingham Street LLP Marwyn 11 Buckingham Street LLP Marwyn Asset Management SPC Marwyn (Catalina) LLP Marwyn Capital II Limited Marwyn Capital Investments II Ltd. Marwyn Capital LLP Marwyn General Partner LLP Marwyn Investment Management LLP Marwyn Investment Partners LLP Marwyn Management Partners LP Melorio plc Orpheus Capital Limited Praesepe plc Silverdell plc Concateno plc Co-Investment Capital LLP Environmental Contamination Sciences Limited Environmental Services Group Limited Inspicio Environmental Services Group Limited Inspicio Holdings Limited Inspicio Limited Marwyn Alternative Capital Ltd. Marwyn Alternative Capital (PTE) Limited Marwyn Capital Limited Marwyn Investments Group- Limited Marwyn Investment Management Limited Marwyn Management General Partner Limited Marwyn Partners Limited Marwyn Trust Orpheus Capital Partners LLP Panlok Limited Pleasant People Ltd. Talarius Limited Zetar plc 9.3 Save as disclosed at paragraph 9.4 below, as at the date of this document, no Director has: Ann I (14.1) (a) (b) (c) any unspent convictions in relation to indictable offences; been declared bankrupt or been subject to any individual voluntary arrangement; been a director of any company which has been placed in receivership, compulsory liquidation, creditors voluntary liquidation, administration, company voluntary arrangement or any composition or arrangement with its creditors generally or any class of its creditors whilst he 299
was a director of that company or within 12 months after he ceased to be a director of that company; (d) (e) (f) been a partner in any partnership which has been placed in compulsory liquidation, administration or partnership voluntary arrangement whilst he was a partner of that partnership or within 12 months after he ceased to be a partner in that partnership; been the owner of any asset or been a partner in any partnership which had an asset placed in receivership whilst he was a partner of that partnership or within the 12 months after he ceased to be a partner of that partnership; or been subject to any public criticisms by any statutory or regulatory authorities (including recognised professional bodies) or been disqualified by a court from acting as a director of a company or from acting in the management or conduct of the affairs of any company. 9.4 In respect of the declaration at paragraph 9.3 above: (a) Mark Watts was: (i) (ii) appointed as a director of Pleasant People Limited on 20 December 1999. On 21 April 2005 Pleasant People Limited went into creditors voluntary liquidation and was dissolved on 9 July 2007; and appointed as a director of Panlok Limited on 13 June 2000. On 29 June 2001 Panlok Limited went into creditors voluntary liquidation and was dissolved on 22 January 2008; (b) Darren Throop was a director of 3044150 Nova Scotia Limited when on 28 November 2001 3044150 Nova Scotia Limited filed an assignment of bankruptcy with PricewaterhouseCoopers appointed as trustee. The receiver sold the assets of the company and the matter is now closed; and (c) Giles Willits resigned as a director of MVC Entertainment Limited on 29 July 2005 when the business was sold. On 21 December 2005 the new owners of MVC appointed administrators. 9.5 There are no family relationships between any of the Directors. 10. DIRECTORS SERVICE AGREEMENTS AND LETTERS OF APPOINTMENT 10.1 Details of the date of the Executive Directors service agreements and the period of notice required to terminate each of them are set out in paragraph 1 of Part II (Directors and Corporate Governance). Details of the Executive Directors compensation and benefits in kind for the financial year ended 31 March 2010 and as at the date of this document are set out in paragraph 2 of Part II (Directors and Corporate Governance). In connection with the Restructuring, each Executive Director has entered into a service contract and each Non-executive Director has entered into a letter of appointment, with the Company, which on Admission will replace their respective existing agreements with Entertainment One (Cayman). Ann I (14.1 and 16.2) Darren Throop Darren Throop is employed by the Group and his terms and conditions are set out in an agreement dated 1 September 2008. His employment commenced on 28 March 2007 and is continuing until it is terminated by either party as further described in paragraph 1 of Part II (Directors and Corporate Governance). He is entitled to a contribution from the Group into his Registered Retirement Savings Plan up to the maximum permitted limit (currently being equal to 18 per cent. of salary up to a maximum of (C$22,000)) and is additionally entitled to participate in certain of the Company s share option schemes, the bonus scheme, life insurance, medical insurance arrangements and is provided with a car. 300
Patrice Theroux Patrice Theroux is employed by the Group and his terms and conditions are set out in an agreement dated 31 March 2010. His employment commenced on 28 August 2007 and is continuing until it is terminated by either party as further described in paragraph 1 of Part II (Directors and Corporate Governance). He is entitled to a contribution from the Group into his Registered Retirement Savings Plan up to the maximum permitted limit (currently being equal to 18 per cent. of salary up to a maximum of (C$22,000)) and is additionally entitled to participate in certain of the Company s share options schemes, the bonus scheme, life insurance, medical insurance arrangements and receives a car allowance. Giles Willits Giles Willits is employed by the Group and his terms and conditions are set out in an agreement dated 31 March 2010 which was effective from 31 March 2010. His employment commenced on 18 May 2007 and is continuing until it is terminated by either party as further described in paragraph 1 of Part II (Directors and Corporate Governance). He operates his own personal pension scheme into which the Company will make a contribution of 17.5 per cent. of basic salary and is additionally entitled to participate in certain of the Company s share options schemes, the bonus scheme, life insurance and medical insurance arrangements. 10.2 Details of the date of appointment, term of appointment, date of expiry of the appointment of each of the Non-Executive Directors are set out in paragraph 1 of Part II (Directors and Corporate Governance). Details of the remuneration paid and benefits in kind granted to the Non-executive Directors (including the Chairman) in the financial year ended 31 March 2010 and as at the date of this document are set out in paragraph 2 of Part II (Directors and Corporate Governance). James Corsellis James Corsellis services as Non-Executive Chairman to the Company are procured by a letter of appointment dated 21 May 2010. His initial appointment as non-executive director of the Group commenced on 29 March 2007 and he succeeded David Williams as non-executive Chairman of the Group on 22 June 2009. Pursuant to his letter of appointment, he is required to devote an appropriate amount of time to his role, which is currently agreed to be equivalent to at least one day per month which includes attending at least six Board meetings per annum. In addition Mr. Corsellis duties include attending general meetings of the Shareholders of the Company as and when they are held, attending meetings with major Shareholders on request and being available for consultation with the other directors of the Company from time to time. Mr. Corsellis is also chairman of the Nomination Committee. Bob Allan Bob Allan s services as an independent Non-Executive Director to the Company are procured by a letter of appointment dated 21 May 2010. His initial appointment as a non-executive director of the Group commenced on 29 March 2007. Pursuant to his letter of appointment, he is required to devote an appropriate amount of time to his role, which is currently agreed to be equivalent to at least one day per month which includes attending at least six Board meetings per annum. In addition Mr. Allan s duties include attending general meetings of the Shareholders of the Company as and when they are held, attending meetings with major Shareholders on request and being available for consultation with the other directors of the Company from time to time. Mr. Allan is also chairman of the Audit Committee. Sir George Bain Sir George Bain s services as an independent Non-Executive Director to the Company are procured by a letter of appointment dated 21 May 2010. His initial appointment as a non-executive director of 301
the Group commenced on 29 March 2007. Pursuant to his letter of appointment, he is required to devote an appropriate amount of time to his role, which is currently agreed to be equivalent to at least one day per month which includes attending at least six Board meetings per annum. In addition Sir George s duties include attending general meetings of the Shareholders of the Company as and when they are held, attending meetings with major Shareholders on request and being available for consultation with the other directors of the Company from time to time. Clare Copeland Clare Copeland s services as an independent Non-Executive Director to the Company are procured by a letter of appointment dated 21 May 2010. His initial appointment as a non-executive director of the Group commenced on 29 March 2007. Pursuant to his letter of appointment, he is required to devote an appropriate amount of time to his role, which is currently agreed to be equivalent to at least one day per month which includes attending at least six Board meetings per annum. In addition Mr. Copeland s duties include attending general meetings of the Shareholders of the Company as and when they are held, attending meetings with major Shareholders on request and being available for consultation with the other directors of the Company from time to time. Clare Copeland is also chairman of the Remuneration Committee. Garth Girvan Garth Girvan s services as an independent Non-executive Director to the Company are procured by a letter of appointment dated 21 May 2010. His initial appointment as a Non-executive Director of the Group commenced on 29 March 2007. Pursuant to his letter of appointment, he is required to devote an appropriate amount of time to his role, which is currently agreed to be equivalent to at least one day per month which includes attending at least six Board meetings per annum. In addition Mr. Girvan s duties include attending general meetings of the Shareholders of the Company as and when they are held, attending meetings with major Shareholders on request and being available for consultation with the other directors of the Company from time to time. Mark Opzoomer Mark Opzoomer s services as an independent Non-Executive Director to the Company are procured by a letter of appointment dated 21 May 2010. His initial appointment as a non-executive director of the Group commenced on 29 March 2007. Pursuant to his letter of appointment, he is required to devote an appropriate amount of time to his role, which is currently agreed to be equivalent to at least one day per month which includes attending at least six Board meetings per annum. In addition Mr. Opzoomer s duties include attending general meetings of the Shareholders of the Company as and when they are held, attending meetings with major Shareholders on request and being available for consultation with the other directors of the Company from time to time. Robert Lantos Robert Lantos services as an independent Non-Executive Director to the Company are procured by a letter of appointment dated 21 May 2010. His initial appointment as a non-executive director of the Group commenced on 24 September 2008 following the acquisitions of Barna-Alper Productions, Blueprint Entertainment and Maximum. Pursuant to his letter of appointment, he is required to devote an appropriate amount of time to his role, which is currently agreed to be equivalent to at least one day per month which includes attending at least six Board meetings per annum. In addition Mr. Lantos duties include attending general meetings of the Shareholders of the Company as and when they are held, attending meetings with major Shareholders on request and being available for consultation with the other directors of the Company from time to time. Mark Watts Mark Watts services as an independent Non-Executive Director to the Company are procured by a letter of appointment dated 21 May 2010. His initial appointment as a non-executive director of the Group commenced on 23 June 2009. Pursuant to his letter of appointment, he is required to devote an 302
appropriate amount of time to his role, which is currently agreed to be equivalent to at least one day per month which includes attending at least six Board meetings per annum. In addition Mr. Watts duties include attending general meetings of the Shareholders of the Company as and when they are held, attending meetings with major Shareholders on request and being available for consultation with the other directors of the Company from time to time. 10.3 Each of the Non-Executive Directors services are terminable in certain circumstances, including by either party giving notice to terminate (as described in paragraph 1 of Part II (Directors and Corporate Governance)) and failure to be re-elected by Shareholders. In addition to their fees (details of which are set out at paragraph 2 of Part II (Directors and Corporate Governance)), each of the Non-Executive Directors are entitled to be reimbursed their reasonable out of pocket expenses but are not entitled to participate in any Company pension, incentive or other share schemes. The Company provides each of the Non-Executive Directors with directors and officers liability insurance at its expense. 10.4 Save as specified in this paragraph or paragraph 2 of Part II (Directors and Corporate Governance), there are no existing or proposed service agreements, consultancy agreements or letters of appointment between any of the Directors and any member of the Group which provide benefits upon termination of employment or otherwise. Ann I (16.2) 11. DIRECTORS SHAREHOLDINGS AND OTHER INTERESTS 11.1 On completion of the Restructuring and Admission, the number of shares held by the Directors (all of which are held beneficially except as shown below) in the existing share capital of the Company and (so far as is known to the Directors having made appropriate enquiries) persons connected with them (which expression shall be construed in accordance with s252 of the 2006 Act) will be as follows: Ann I (17.2) Percentage of Company s Issued Number of Common and outstanding Name Shares on Admission Share Capital 2 James Corsellis nil nil Darren Throop 1 4,786,818 2.9 Patrice Theroux 430,457 0.3 Giles Willits 320,000 0.2 Bob Allan nil nil Sir George Bain 28,182 0.02 Clare Copeland nil nil Garth Girvan nil nil Mark Opzoomer nil nil Robert Lantos 3,126,828 1.9 Mark Watts 1,000 0.001 1 Darren Throop, in his capacity as Chief Executive Officer of the Company, has an interest in 100 Preferred Variable Voting Shares as further described in paragraph 5 of Part I (Information of Entertainment One) and paragraph 6 of this Part VI (Additional Information). 2 Assuming that no further Common Shares are issued as a result of the exercise of any option under the Entertainment One Share Schemes, the Marwyn Warrant, the Summit Option and the Exchangeable Notes between the date of this document and Admission). 11.2 On Admission, assuming that no further Common Shares are issued as a result of the exercise of any option under the Entertainment One Share Schemes between the date of this document and Admission, the Directors will hold, in aggregate, 8,693,285 Common Shares, representing 5.2 per cent. of the issued and outstanding share capital. 303
11.3 On Admission under the Executive Share Plan and Employee Benefit Trust Share Incentive Arrangements, the Directors will have the following options and other rights to acquire Common Shares 1 : Number Exercise Date of of Shares Price per Exercise Name Grant under award share (pence) Period Darren Throop 29/03/2007 1,453,744 C$0.01 3 years 05/07/2007 330,000 C$0.01 3 years 01/04/2008 495,000 C$0.01 3 years 2,278,744 Patrice Theroux 29/03/2007 1,453,744 C$0.01 3 years 05/07/2007 330,000 C$0.01 3 years 01/04/2008 495,000 C$0.01 3 years 2,278,744 Giles Willits 29/03/2007 1,453,744 nil 3 years 05/07/2007 375,000 nil 2 years 01/04/2008 297,000 nil 3 years 2,125,744 Ann I (17.2) Under the Management Participation Scheme, participants subscribed at fair market value for shares of a subsidiary that are exchangeable for Common Shares of an equivalent value upon satisfaction of certain conditions. A total of 10,000 management participation shares in that subsidiary were issued on 31 March 2010. Of these Darren Throop, Patrice Theroux and Giles Willits respectively subscribed for 4,125, 3,625 and 2,250 management participation shares. These shares are exchangeable upon the satisfaction of certain conditions for a maximum of 4,423,250, 3,887,099 and 2,412,682 Common Shares respectively (being 10,723,031 Common Shares in aggregate). The exchange for Common Shares under the Management Participation Scheme is conditional, amongst other things, on the performance of the Company s share price exceeding a compound annual growth rate of at least 12.5 per cent. For the maximum number of Common Shares to be issued under the Management Participation Scheme, the Company s share price would need to perform materially above the 12.5 per cent. hurdle rate and at significant multiples to the current prevailing price. 1 As at the date of this document the options set out above were over shares in the capital of Entertainment One (Cayman) but will exchange for options over shares in the capital of the Company as part of the Restructuring. Neither James Corsellis, Bob Allan, Sir George Bain, Clare Copeland, Garth Girvan, Mark Opzoomer, Robert Lantos nor Mark Watts have options or any further rights to acquire Common Shares. Ann I (17.3) 11.4 Further details of the Entertainment One Share Schemes are set out in paragraph 13 of this Part VI (Additional Information). 11.5 Save as disclosed in this document, none of the Directors have any interests, whether beneficial or non-beneficial, in the issued share capital or loan capital of any member of the Group and nor does (so far as is known to the Directors having made appropriate enquiries) persons connected with them (which expression shall be construed in accordance with s252 of the 2006 Act). 11.6 Other than as set out below, there are no potential conflicts of interest between any duties to the Company of the Directors and their private interests and other duties: Ann I (14.2) (a) Marwyn Capital Management Limited is the fund manager of Marwyn Value Investors LP, a 41.3 per cent. Shareholder of the Company. Marwyn Capital Management Limited has subcontracted the investment management of Marwyn Value Investors LP to Marwyn Investment Management LLP. The Company has a corporate finance advisory services agreement with Marwyn Capital LLP. James Corsellis and Mark Watts are partners of Marwyn Capital LLP and Marwyn Investment Management LLP, and shareholders in Marwyn Capital Management Limited. Accordingly there may be occasions when either or both of James Corsellis and Mark 304
Watts have potential conflicts of interest between their duties to the Company and their respective private interests and other duties, arising as a result of their connection to Marwyn, and Marwyn s contractual and other relationships with the Group; and (b) Robert Lantos, a Director, is the owner of Serendipity Point Films Inc. ( Serendipity ). Upon the acquisition by the Group of Maximum (also indirectly owned by Robert Lantos) on 24 September 2008 the Group entered into an output agreement with Serendipity covering the distribution of all Serendipity titles within the Canadian market. Serendipity also co-produces a number of television productions with the Group. Accordingly, there may be occasions when Robert Lantos has potential conflicts of interest between his duties to the Company and his private interests and other duties, in particular arising should the output agreement be renegotiated, or in the event of a dispute as to the terms of the output agreement. Further details of the payments made pursuant to the relationships above are set out in paragraph 14 of Part VI (Additional Information). 11.7 There are no outstanding loans granted by any member of the Group to any of the Directors and there are no guarantees provided by any member of the Group for the benefit of any of the Directors. 11.8 Further details relating to the Directors remuneration, benefits and pension arrangements are set out in Part II (Directors and Corporate Governance). Ann I (15.2) 12. EMPLOYEES 12.1 The table below sets out the number of full-time persons employed by the Group during each of the financial years referred to below each ended 31 March. Ann I (17.1) Average number of persons including Executive Financial year Geographic location Directors employed 2008 Canada 1,152 United States 227 United Kingdom 43 Rest of Europe 45 Total 1,467 2009 Canada 1,264 United States 217 United Kingdom 56 Rest of Europe 44 Total 1,581 2010 Canada 1,151 United States 197 United Kingdom 71 Rest of Europe 42 Total 1,461 12.2 On Admission, the Group will have approximately 1,500 employees (including the Executive Directors). 305
13. SHARE INCENTIVE ARRANGEMENTS 13.1 The following share incentive arrangements will be in place following Admission subject to technical amendments required pursuant to the Restructuring: Ann I (17.3) (a) (b) (c) (d) Management Participation Scheme; Executive Share Plan; Employee Benefit Trust; and Deferred Share Unit Plan. A summary of the principal terms of each of these arrangements is set out in the following paragraphs. These summaries do not form part of any of the arrangements and should not be taken as affecting the interpretation of their detailed terms and conditions. On Admission, options and awards granted under the above schemes will be outstanding over a total of 21,446,390 Common Shares. This includes a maximum of 10,723,031 Common Shares relating to the Management Participation Scheme. Under the Management Participation Scheme, participants subscribed at fair market value for shares of a subsidiary that are exchangeable for Common Shares of an equivalent value upon satisfaction of certain conditions. The exchange for Common Shares under the Management Participation Scheme is conditional, amongst other things, on the performance of the Company s share price exceeding a compound annual growth rate of at least 12.5 per cent. For the maximum number of common shares to be issued under the Management Participation Scheme, the Company s share price would need to perform materially above the 12.5 per cent. hurdle rate and at significant multiples to the current prevailing price. 13.2 Management Participation Scheme (a) Introduction The Management Participation Scheme ( MPS ) was approved by the Board as of 31 March 2010. It provides for the Executive Directors of Entertainment One to subscribe for shares ( Participation Shares ) in a subsidiary of Entertainment One (Entertainment One (Delaware) LLC). The Participation Shares accrue value subject to the satisfaction of the Growth Condition. (b) (c) The Growth Condition The Growth Condition is that the compound annual growth of Entertainment One s share price from 31 March 2010 must be at least 12.5 per cent. The Growth Condition will be measured on the earlier of, 31 March 2013 or a change of control of Entertainment One. If the Growth Condition has not been satisfied on 31 March 2013, it shall be measured at any point up to and including 31 March 2015. If the Growth Condition has not been satisfied by this date, the holders of the Participation Shares must sell those shares to Entertainment One for a nominal amount. Value of the Participation Shares Once the Growth Condition has been satisfied, the Executive Directors will have the right to put the Participation Shares to Entertainment One for a value equivalent to the sum of (i) 6.4 per cent. of the increase in Shareholder value based on the shares in issue on 31 March 2010; and (ii) 10 per cent. of the increase in Shareholder value on any additional Ordinary Shares issued subsequent to 31 March 2010 (together the Aggregate Share of Value Created ) reflecting an increase in Entertainment One s market capitalisation following any adjustments deemed necessary by the Board. 306
(d) Cessation of Employment In the event of a participant ceasing employment with Entertainment One as a result of conviction for criminal acts relating to their employment or fraud, they shall be considered a Bad Leaver. For all other reasons they shall be considered a Good Leaver. If the cessation of employment occurs before 31 March 2013: (i) if they are a Good Leaver, they shall continue to be entitled to hold their Participation Shares for the period to and including the third anniversary of the date of subscription, upon which date: if the Growth Condition has been met, they shall be required to: (a) put a proportion of their Participation Shares (such proportion representing the number of whole days from and including 31 March 2010 to but not including the cessation of employment out of the three year period commencing from 31 March 2010) to Entertainment One for Aggregate Share of Value Created; and (b) sell the remainder of any Participation Shares they hold to Entertainment One for a price equal to the lower of the subscription price and market value; or if the Growth Condition has not been met, they shall be required to sell all of their Participation Shares to Entertainment One for a price equal to the lower of the subscription price and market value; (ii) if they are a Bad Leaver, they will be required to sell all of their Participation Shares to Entertainment One for a price per Participation Share equal to the lower of the subscription price and a market value determined by the Remuneration Committee. If the cessation of employment occurs after 1 April 2013: (iii) (iv) whether or not they are a Good Leaver or a Bad Leaver, if the Growth Condition has been met they shall remain entitled to sell Participation Shares to Entertainment One or another authorised buyer for the Aggregate Share of Value Created; or if the Growth Condition has not been met, they shall be required to sell all of their Participation Shares to Entertainment One or another authorised buyer for a price equal to the lower of their subscription price and market value. (e) (f) (g) (h) (i) Alteration of Capital of Entertainment One The Growth Condition takes into account the issue price of any subsequent issue of ordinary shares, the date on which they are issued, any dividends paid on the ordinary shares and any capital returned to shareholders. Change of control Upon a change of control, the Growth Condition shall be measured and if satisfied the Participation Shares may be put to Entertainment One for the Aggregate Share of Value Created. Termination The MPS is not subject to termination. Administration The MPS is administered by the Board. Alterations Alterations to the MPS may only be made with the approval of the holder of the Participation Shares. 307
13.3 Executive Share Plan (Canadian, US, Dutch participants) (a) Introduction The Executive Share Plan was approved by the Board on 17 June 2010. It provides for share based awards to be made to selected employees of Entertainment One. Awards will take the form of options to acquire a certain number of Common Shares at a particular time in the future, subject to certain conditions, including performance targets. (b) (c) Making of Awards The Board determines which individuals are granted options. The Executive Share Option Plan is available to all Canadian, US, UK and Dutch employees of the Group. Vesting Criteria Other than for US employees, initial awards granted to date, certain of which have already vested, are subject to the following Vesting Criteria: (i) (ii) (iii) thirty three per cent. of each award is subject to time based vesting; thirty three per cent. of each award is subject to an annual EBITDA target; and thirty four per cent. of each award is subject to a share price target which will vest in two equal tranches when the Bloomberg 90 day volume weighted average price of Entertainment One s shares reaches 1.50 and 2.00 per share. All the above Vesting Criteria apply to US participants, except for tranche (iii). For US participants, the share price target award will vest in one equal tranche should the Bloomberg 90 day volume weighted average price reach 2.00 per share in the three year period commencing on the date of grant. If the Bloomberg 90 day volume weighted average price does not reach 2.00 per share, then 50 per cent. of the share price award will vest after three years following the date of grant should the Bloomberg 90 volume weighted average price have reached 1.50 during the three years from the date of grant. Vesting Criteria applying to future awards made under the Executive Share Option Plan are at the sole discretion of the Board. (d) Cessation of Employment In the event of an individual ceasing employment as a result of death, illness, injury, disability, redundancy or sale of the business for which the individual works, all unvested awards will vest early but will be pro-rated for time and performance (except in the case of death where it will only be pro-rated in relation to time). In the event of an individual ceasing employment as a result of a criminal conviction, dishonesty, fraud, misrepresentation, and/or a regulatory body enforcement order issuance ( Cause ) all awards will lapse whether vested or not. Where an individual ceases employment neither as a result of death, illness, injury, disability, redundancy or sale of the business for which the individual works, or for Cause, all unvested awards will lapse, unless otherwise determined by the Board. (e) Change of control On a change of control, awards will vest early but will be pro-rated for time and performance. However, if the consideration per share paid by the acquirer represents at least 2.25, all awards will vest. Awards may be rolled over with the agreement of the acquirer. In addition, in the event that Entertainment One is sold for a price per share in excess of 125 per cent. of the value of Entertainment One shares at the date of grant of a participant s option all of those options will vest and become fully exercisable for a limited period. 308
(f) (g) (h) (i) Termination The Plan shall terminate upon the tenth anniversary of its approval by Entertainment One or any earlier at the passing of a resolution by the Board or an ordinary resolution of Entertainment One at a general meeting. Alteration of the Capital of Entertainment One The number of shares awarded and/or price of an option issued under the plan may be adjusted in such manner as the Board shall determine following any capitalisation issue, demerger, any offer or invitation made by way of rights issue, subdivision, consolidation, reduction, other variation in the share capital of Entertainment One or any other exceptional event which in the reasonable opinion of the Board justifies such an adjustment. Alteration to Plan Alterations to the benefit of Plan participants will be at the discretion of the Board. Alterations to the disadvantage of Plan participants will require the agreement of a majority of the relevant Plan participants. Alterations, amendments and additions to the Plan may be made for the purposes of complying with local laws, to ease administration or to prevent adverse tax consequences for the employer or any company in the Group. Administration The plan is administered by the Board. Decisions of the Board shall be final and binding on all parties. Awards made to date have been issued under the terms and conditions documented. Any new awards can be issued under new terms and conditions as determined and approved by the Board. 13.4 Employee Benefit Trust (a) Introduction The Employee Benefit Trust EBT was initially implemented by Entertainment One on 28 March 2007. It provides for share awards to be made for the benefit of selected UK employees of Entertainment One and their family members, subject to certain performance conditions. (b) (c) Making of Awards Awards under the EBT are made at the sole discretion of the trustee. However, the Board will make non-binding recommendations to the Trustees as to who should receive awards and the performance criteria attaching to those awards. Vesting Criteria Awards granted to date, certain of which have already vested, are subject to the following Vesting Criteria: (i) (ii) (iii) thirty three per cent. of each award is subject to time based vesting; thirty three per cent. of each award is subject to an annual EBITDA target; and thirty four per cent. of each award is subject to a share price target which will vest in two equal tranches when the Bloomberg 90 day volume weighted average price of Entertainment One s shares reaches 1.50 and 2.00 per share. Vesting Criteria applying to future awards made under the EBT are at the sole discretion of the Trustees, whom shall receive non-binding recommendations from the Board. 309
(d) Cessation of Employment In the event of an individual ceasing employment as a good leaver, awards may (at the sole discretion of the Trustee) vest early but will likely be pro-rated for time and performance (except in the case of death where it will only be pro-rated in relation to time). Good leavers means those who cease employment by reason of death, disability, redundancy, sale of the business for which they work out of the Entertainment One group and any other reason that the Trustees may determine. In the event of an individual ceasing employment as a result of a criminal conviction, dishonesty, fraud, misrepresentation, and/or a regulatory body enforcement order issuance ( Cause ) all awards will be revoked out of the individual s sub-fund whether vested or not. In the event of an individual ceasing employment as neither a good leaver nor for Cause, all unvested awards will be revoked out of the individual s sub-fund. (e) Change of control On a change of control, the proportion of the employees beneficial trust assets that shall vest shall be determined by the Trustee taking into account the extent to which the Vesting Criteria have been satisfied, including the time which has elapsed since the award date. In the event that Entertainment One is sold for a price per share in excess of 2.25 per share all of the employees beneficial trust assets will vest. (f) (g) (h) (i) Termination Each award will be forfeitable for a maximum term of three years. Alteration of the Capital of Entertainment One The Board may recommend to the Trustees that the number of shares awarded under the plan may be adjusted following any capitalisation issue, demerger, any offer or invitation made by way of rights issue, subdivision, consolidation, reduction, other variation in the share capital of Entertainment One or any other exceptional event which in the reasonable opinion of the Board justifies such an adjustment. Alteration to Plan The Trustees may consider retrospectively amending performance conditions on the recommendation of the Board. The Board will only make such recommendation if it is felt appropriate and in the best interests of the Group. Administration The plan is administered by the Trustees. Decisions of the Trustees shall be final and binding on all parties. Awards made to date have been issued under the terms and conditions documented. Any new awards can be issued under new terms and conditions as recommended by the Board and approved by the Trustees. 13.5 Deferred Share Unit Plan (a) Introduction The Deferred Share Unit Plan ( DSU ) was approved by the board of Entertainment One (Cayman) on 28 March 2007 and amended and restated by the Board conditional on Admission, on 17 June 2010. The plan is a deferred bonus scheme. Awards take the form of deferred share units, which entitle the participant to receive a cash payment equivalent to a specified number of Common Shares three years after date of grant, subject to attainment of performance targets and satisfaction of time vesting criteria. 310
(b) (c) Making of Awards The Remuneration Committee of Entertainment One determines which individuals are granted awards under the plan. The Deferred Share Unit Plan is available to all Canadian employees of the Group. Vesting Criteria Awards granted to date, certain of which have already vested, are subject to the following Vesting Criteria: (i) (ii) (iii) thirty three per cent. of each award is subject to time based vesting; thirty three per cent. of each award is subject to an annual EBITDA target; and thirty four per cent. of each award is subject to a share price target which will vest in two equal tranches when the Bloomberg 90 day volume weighted average price of Entertainment One s shares reaches 1.50 and 2.00 per share. Vesting Criteria applying to future awards made under the DSU are at the sole discretion of the Remuneration Committee. (d) Cessation of Employment If, prior to the payment of award, a participant s employment ceases for any reason other than death, disability, redundancy or sale of the business for which the participant works, all vested and unvested Deferred Share Units will be forfeited, unless the Remuneration Committee otherwise determines. If, prior to the payment of award, a participant s employment ceases by reason of death, disability, redundancy, or the sale of the business for which the participant works, the participant or his or her legal representative shall be entitled to received the vested portion of his or her award and, as well, a pro-rated amount of the portion that was unvested, as determined by the Remuneration Committee taking into account the time since the grant date and the extent to which the award would have vested in due course. (e) Change of control On a change of control, unless the Remuneration Committee determines otherwise, all unvested Deferred Share Units will vest immediately but will be pro-rated taking into account the time that has elapsed since the award of those Deferred Share Units and the extent to which conditions attaching to the award have been met. In addition, in the event that Entertainment One is sold for a price per share in excess of 125 per cent. of the value of Entertainment One shares at the date of grant of a participant s Deferred Share Units all of those Deferred Share Units will vest and become fully exercisable for a limited period. Furthermore, if there is a sale of all or substantially all of the Common Shares for an amount representing per share value of greater than 2.25, all Deferred Share Units will vest immediately. Alternatively the acquirer may agree to assume the obligations of the plan and if this is the case, the awards will not vest automatically, but instead will continue to vest and be paid on the terms of the plan. (f) Termination 4384768 Canada Inc. and its successors may at any time terminate the Plan in whole or in part, provided that such termination shall not reduce or adversely affect the number of Deferred 311
Share Units credited to a participants account at the time of the termination without the participants consent. (g) (h) (i) Alteration of the Capital of Entertainment One The number of Deferred Share Units awarded under the plan may be adjusted in such manner as the Remuneration Committee shall determine following any capitalisation issue, demerger, any offer or invitation made by way of rights issue, subdivision, consolidation, reduction, other variation in the share capital of Entertainment One or any other exceptional event which in the reasonable opinion of the Remuneration Committee justifies such an adjustment. Alteration to Plan Alterations to the benefit of Plan participants will be at the discretion of the Remuneration Committee. Alterations to the disadvantage of Plan participants will require the agreement of the affected Plan participants. Administration The plan is administered by the Remuneration Committee. Decisions of the Remuneration Committee shall be final and binding on all parties. Awards made to date have been issued under the terms and conditions documented. Any new awards can be issued under new terms and conditions as determined and approved by the Remuneration Committee. 14. RELATED PARTY TRANSACTIONS 14.1 All related party information is set out in note 32 to the financial statements for the year ended 31 March 2010, note 33 to the financial statements for the year ended 31 March 2009, note 35 to the financial statements for the year ended 31 March 2008, set out in Part IV (Historical Financial Information). Ann I (19) Details of all transactions that have been entered into with related parties for the period from 1 April 2010 and up to the date of this document are as follows: (a) Pursuant to its corporate finance advisory services agreement, Marwyn has received 15,000 from the Company each month as financial advisor; and (b) Pursuant to an agreement with the Company, Marwyn will receive a 310,000 transaction fee following Admission, in connection with its role co-ordinating the Admission. 15. SIGNIFICANT SHAREHOLDINGS 15.1 As at 18 June 2010 (being the latest practicable date prior to the publication of this document), save as set out below, the Company is not aware of any persons who directly or indirectly have, or will have immediately following Admission, an interest of 3 per cent. or more of the Company s capital or voting rights: Ann I (18.1) Ann III (3.3) Percentage of issued Number of share capital Name of Shareholder Common Shares (per cent.) Marwyn Value Investors 69,141,393 41.3% Vesuvius Limited 12,000,000 7.2% SG Private Banking 7,820,286 4.7% Killik & Co 6,294,346 3.8% Abbey National Treasury Services 5,569,660 3.3% 312
15.2 As at 18 June 2010 (being the latest practicable date prior to the publication of this document), other than the Preferred Variable Voting Shares as further described in paragraph 5 of Part I (Information on Entertainment One) and paragraph 6 of Part VI (Additional Information), the Company was not aware of any person, who following Admission could directly, indirectly, jointly or severally exercise control over the Company. Ann I (18.3, 18.4 and 21.2.6) 15.3 As at 18 June 2010 (being the latest practicable date prior to the publication of this document), other than the Preferred Variable Voting Shares as further described in paragraph 5 of Part I (Information on Entertainment One) and paragraph 6 of Part VI (Additional Information), the Company is not aware of any arrangements the operation of which may at a subsequent date result in a change in control of the Company. 15.4 None of the major shareholders of the Company set out above has different voting rights from any other holder of Common Shares in respect of any Common Shares held by them. Ann I (18.2) 16. PRINCIPAL INVESTMENTS 16.1 Details of the Group s principal investments, which are all located in Canada, UK, US and Benelux for the period covered by the historical financial information set out in Part IV (Historical Financial Information) of this document are as follows: Ann I (5.2, 6.1.1 and 8) March 2007 Acquisition of the operating business of the formerly Toronto Stock Exchange listed Entertainment One Income Fund. July 2007 Aug 2007 Jan 2008 Sept 2008 Acquisition of Contender Entertainment (independent distributor of filmed entertainment in the UK)) for a total consideration of 45.2 million. Acquisition of Seville Pictures (independent distributor of filmed entertainment in Canada) for a total consideration of C$6 million (approximately 2.5 million). Acquisition of RCV Entertainment (independent distributor of filmed entertainment in Benelux) for a total consideration of 41.5 million (approximately 31.4 million). Acquisitions of Barna-Alper Productions for a total consideration of C$13.9 million (approximately 7.3 million), Blueprint Entertainment including Oasis International (television distribution) for C$39 million (approximately 20.4 million; and Maximum (Canadian television and film distribution) for C$8 million (approximately 4.2 million). 16.2 There are no material environmental issues that may affect the Group s utilisation of the Group s properties or other tangible fixed assets. 16.3 The Company does not have any material items of plant or equipment. 17. PROPERTY, PLANT AND EQUIPMENT The Group has two principal locations, details of which are set out below: Ann I (8.1) Tenure Unexpired Term Property address Country Leasehold Lease expires in 22 Harbor Park Drive US June 2015 Port Washington New York 11050 Leasehold Lease expires in December 2012 270 Driver Road Brampton Ontario L6T 5VT Canada 18. MATERIAL CONTRACTS 18.1 The following contracts (not being contracts entered into in the ordinary course of business): Ann I (22) 313
(a) (b) have been entered into by any member of the Group during the two years immediately preceding the date of this document and which are or may be material; or have been entered into by a member of the Group and contain provisions under which any member of the Group has any obligation or entitlement which is or may be material to any member of the Group at the date of this document. 18.2 Entertainment One Credit and Guaranty Agreement E-One UK Limited, Earl Street Capital Inc. and 4384768 Canada Inc. (collectively, the Borrowers ), subsidiaries of Entertainment One (Cayman), entered into a credit and guaranty agreement on 19 September 2008 pursuant to which a syndicate of lenders, including JPMorgan Chase Bank, N.A., Barclays Bank PLC, Bank of America, N.A., Royal Bank of Canada, Alliance & Leicester Commercial Finance PLC and The Toronto Dominion Bank, agreed to provide a senior secured revolving credit facility in the aggregate principal amount of $150 million, which amount may be increased by up to $25 million in certain circumstances, subject to a borrowing base limit. The credit facility was made available to refinance existing indebtedness, to finance the acquisition of film, television and music libraries (directly or by way of corporate acquisition) and for general working capital purposes. Advances under the credit facility may be made in US dollars, Canadian dollars, Euro or pounds sterling and bear interest at the prevailing Prime Rate, Alternative Base Rate, Eurodollar, Euribor and Bankers Acceptances as applicable, plus, in each case, the applicable margin and the applicable cost factor to those base rates. Letters of credit and guarantees are also available under the credit facility. The credit facility is guaranteed by Entertainment One (Cayman) and its subsidiaries (other than certain excluded subsidiaries including non-material subsidiaries) and is secured against substantially all of the assets of Entertainment One (Cayman) and such subsidiaries. Ann I (10.3) On 22 June 2009 the Group re-denominated its $ senior credit facility into local currencies and also expanded its facility by $7.5 million. In October 2009 the Group further expanded its facility by $15 million. Concurrently with the expansion of the facility, First California Bank and US Bank joined the syndicate. The credit facility matures on 18 September 2012 with no scheduled repayments of principal required prior to maturity. On 30 December 2010, the total Canadian Dollar commitment shall be reduced by C$11.5 million. On 29 December 2011, the total US Dollar commitment shall be reduced by $1 million, the total sterling commitment shall be reduced by 0.6 million, the total Euro commitment shall be reduced by 0.7 million and the total Canadian dollar commitment shall be reduced by C$13.9 million. The Borrowers may repay loans at any time without penalty, subject to certain minimum amounts. The Borrowers are required to make mandatory repayments of the loans outstanding upon receipt of the net cash proceeds of certain dispositions and certain issuances of equity interests by a borrower or guarantor and net insurance proceeds. In the event that the aggregate principal amount of outstanding loans exceeds the total commitments of the lenders or the borrowing base, the Borrowers shall prepay outstanding loans and bankers acceptances to eliminate such excess. The Borrowers have agreed to pay a quarterly commitment fee to each lender based on the average amount by which such lender s commitment exceeded its share of the letters of credit, bankers acceptances and loans outstanding during the preceding quarter. The credit facility is subject to customary terms and conditions, including restrictions on incurring indebtedness, granting liens or guarantees, making investments, selling assets, and making capital expenditures without the prior consent of the lenders. The credit facility is also subject to the maintenance of certain financial covenants (excluding the TV production businesses), including minimum consolidation net worth, minimum fixed charges coverage ratio, a maximum ratio of net debt under the credit facility to consolidated EBITDA and restrictions on capital expenditure and overheads. In addition the Facility also includes a borrowing base, which restricts the funds available to draw down under the Facility to a sum calculated based on the level of certain cash, inventory and receivables balances and a proportion of the Group s independent annual library valuation. 314
Pursuant to an amendment dated 2 June 2010 Entertainment One (Cayman) obtained the consent of the lenders under the credit facility to complete the Restructuring. 18.3 Barna-Alper Productions Share Purchase Agreement Pursuant to a share purchase agreement dated 4 July 2008 between Barna-Alper Investments (2005) Limited, Blue Ice Group Capital, Margaret O Brien, 1424427 Ontario Inc., Mark Musselman Family Trust, Serendipity Point Films Inc., 2125882 Ontario Inc., 6972501 and Entertainment One (Cayman), as amended, 6972501 purchased the entire issued and outstanding share capital of Barna-Alper Productions on 24 September 2008. The total consideration was C$13.9 million, paid as to C$6.0 million in cash and C$7.9 million in Exchangeable Shares. The agreement contains representations and warranties, covenants and indemnification provisions that are customary for transactions of this type. The time limit for any indemnification claims in respect of a breach of covenant, representation or warranty under the agreements is 24 September 2011, subject to certain exceptions. In connection with the completion of the Restructuring, the Exchangeable Shares will be exchanged for Common Shares. 18.4 Blueprint Entertainment Share Purchase Agreement Pursuant to a share purchase agreement dated 4 July 2008 between Sierra Entertainment Corp., GS Holdings Inc., Noreen Halpern, John Morayniss, Jeff Lynas, 1424427 Ontario Inc., Mark Musselman Family Trust, Serendipity Point Films Inc., 2125882 Ontario Inc., 6972501 and Entertainment One (Cayman), as amended, 6972501 purchased the entire issued and outstanding share capital of Blueprint Entertainment and Oasis International on 24 September 2008. The total consideration was C$39 million, paid as to C$20.4 million in cash and C$18.6 million in Exchangeable Shares. The agreement contains representations and warranties, covenants and indemnification provisions that are customary for transactions of this type. The time limit for any indemnification claims in respect of a breach of covenant, representation or warranty under the agreements is 24 September 2011, subject to certain exceptions. In connection with the completion of the Restructuring, the Exchangeable Shares will be exchanged for Common Shares. 18.5 Maximum Share Purchase Agreement Pursuant to a share purchase agreement dated 4 July 2008 between Distant Horizon Ltd, Charlotte Mickie, 1424427 Ontario Inc., Mark Musselman Family Trust, Serendipity Point Films Inc., 2125882 Ontario Inc., 6972501 and Entertainment One (Cayman), as amended, 6972501 purchased the entire issued and outstanding share capital of Maximum on 24 September 2008. The total consideration was C$8.0 million, paid as to C$7.1 million in cash and C$0.9 million in Exchangeable Shares. The agreement contains representations and warranties, covenants and indemnification provisions that are customary for transactions of this type. The time limit for any indemnification claims in respect of a breach of covenant, representation or warranty under the agreements is 24 September 2011, subject to certain exceptions. In connection with the completion of the Restructuring, the Exchangeable Shares will be exchanged for Common Shares. 18.6 Marwyn Warrants Pursuant to a warrant instrument dated 29 March 2007, Entertainment One (Cayman) granted Marwyn Value Investors, which will on completion of the Restructuring and Admission directly and indirectly own 69,141,393 of the Common Shares, warrants to subscribe for 4,000,000 ordinary shares in the capital of Entertainment One (Cayman), for 1.00 per share (the Marwyn Warrants ). Marwyn Value Investors may exercise its right in respect of 2,000,000 ordinary shares in the capital of Entertainment One (Cayman) once the share price has reached at least 1.25 and in respect of the remaining 2,000,000 ordinary shares in the capital of Entertainment One (Cayman), once the share price reaches at least 1.50. The Marwyn Warrants expire 29 March 2014. So long as any subscription rights remain exercisable, shall, among other things, not modify the rights attaching to the existing ordinary shares in the capital of Entertainment One (Cayman) and keep available for issue sufficient authorised but unissued shares to satisfy in full at all times all subscription rights remaining Ann I (21.1.6) 315
exercisable. Pursuant to an agreement dated 17 June 2010 between the Company, Entertainment One (Cayman) and Marwyn Value Investors, in connection with the Restructuring, Marwyn Value Investors and Entertainment One (Cayman) have consented to and agreed that, the scheme of arrangement of Entertainment One (Cayman) shall not constitute an offer for purposes of the 29 March 2007 warrant instrument, and the Company will amend and restate the warrant instrument to give effect to the consequences of the amalgamation of Entertainment One (Cayman) with the Company, such that references to the ordinary shares in the capital of Entertainment One (Cayman) are references to Common Shares. The number of Marwyn Warrants and conditions for exercise are unchanged. If at any time an offer is made to acquire the whole or part of the share capital of the Company under which the consideration consists solely of shares of the offeror, and the offeror makes available to Marwyn Value Investors an offer of warrants to subscribe for share of the offeror in exchange for the Marwyn Value Investors warrants (the Warrant Offer ), the Company shall give notice to Marwyn Value Investors of the offer and Marwyn shall be entitled, at any time within 30 days after receipt of the notice, to exercise its subscription rights on the basis application on the date immediately preceding the date of such offer as if such were a subscription date. Subscription rights which are not exercised within that 30 day period will lapse. If the financial advisors to the Company consider in their opinion that the Warrant Offer is fair, then any director of the Company shall be authorised as attorney for Marwyn Value Investors to exercise a transfer of the Marwyn Warrants in favour of the offeror in consideration of the issue of warrants to subscribe for shares of the offeror in consideration of the issue of warrants to subscribe for shares of the offeror, where upon all the Marwyn Warrants shall lapse, subject to the offer by the offeror becoming unconditional and the offeror being in a position to compulsorily acquire all of the Company s Common Shares and all the warrants being issued. 18.7 Summit Option Agreement An option agreement, dated 24 May 2010 between (1) Entertainment One (Cayman) and (2) Summit Entertainment, LLC ( Summit ) pursuant to which Entertainment One (Cayman) granted Summit the right to acquire 2,500,000 ordinary shares in the capital of Entertainment One (Cayman) at an exercise price of 0.50 per ordinary share. The option lapses on 13 September 2012. Additionally the option lapses, if not previously exercised, on a sale of the Company or the termination of certain commercial agreements between the Group and Summit in accordance with their terms prior to 13 June 2011. Following the exercise of the option agreement, Summit has agreed not to dispose of those ordinary shares issued to it (subject to certain standard exceptions) until the earlier of (a) the expiry of the option period; (b) termination of the certain commercial agreements referred to above; and (c) the date falling six months after the date of exercise. On completion of the scheme of arrangement the Company and Entertainment One (Cayman) are entitled to convert the option into an option to acquire Common Shares in place of the ordinary shares of Entertainment One (Cayman). 18.8 E-One UK Ltd Exchangeable Notes On 9 January 2008 E-One UK Ltd, a UK subsidiary of Entertainment One (Cayman), issued 19,600,000 aggregated principal guaranteed senior subordinated Exchangeable Notes maturing September 2013. The Exchangeable Notes attract an accrued interest of 10 per cent. per annum payable on maturity. Pursuant to a noteholder consent dated 17 June 2010, the 5,100,000 Exchangeable Notes that are not held intra-group are exchangeable for 7.5 million Common Shares at 0.68 per Common Share, rather than ordinary shares of Entertainment One (Cayman). 18.9 Marwyn Corporate Finance Agreement Marwyn Capital is party to an agreement with Entertainment One pursuant to which Marwyn Capital has been appointed as a financial adviser to Entertainment One in relation to the provision of general strategic and corporate financial advice. For its services, Marwyn Capital receives a monthly fee of 15,000. 316
18.10 Preferred Variable Voting Shareholders Agreement In order to ensure that a majority of the Company s voting shares are owned by Canadians, on 17 June 2010, the Company entered into a shareholders agreement (the Preferred Variable Voting Shareholders Agreement ) with the sole holder of the Preferred Variable Voting Shares (being the Company s Chief Executive Officer, Darren Throop). The votes attached to the Preferred Variable Voting Shares as a class will be automatically adjusted so that they, together with the votes attached to the Common Shares that are owned by Canadians (as defined in the Investment Canada Act) (as determined based on enquiries the Company has made of the holders of Common Shares and Depository Interests) equal 51 per cent. of the votes attached to all shares in the capital of the Company. The votes attached to the Preferred Variable Voting Shares as a class will, in aggregate, not be less than 1 per cent. of the votes attached to all shares in the capital of the Company. The Preferred Variable Voting Shareholders Agreement provides for the following: (a) Mr. Throop may not transfer Preferred Variable Voting Shares, in whole or in part, except with the prior written approval of the Board; (b) the Company has the unilateral right to compel the transfer of the Preferred Variable Voting Shares, at any time and from time to time, in whole or in part, to a person designated by the Board who is a current officer of the Company and a Resident Canadian; and (c) the Company has a power of attorney to effect any transfers contemplated by the Preferred Variable Voting Shareholders Agreement. In determining whether to approve to compel a transfer, the Board will act in the best interest of the Company in order to enable the Company to be eligible for tax credits or government incentives. Pursuant to the Preferred Variable Voting Shareholders Agreement, the consideration received as a result of the transfer of the Preferred Variable Voting Shares cannot exceed one/one millionth of a Canadian cent per share. 18.11 Placing Agreement An agreement (the Placing Agreement ) dated 21 January 2010 was entered into between (1) Entertainment One (Cayman) and (2) Cenkos Securities plc ( Cenkos ) whereby Cenkos agreed conditionally to use its reasonable endeavours to procure subscribers for up to 19,499,400 Ordinary Shares (the Placing Shares ) as agent for Entertainment One (Cayman) at 53p (the Placing Price ) upon and subject to the Placing Agreement and the Placing Documents. The placing was not underwritten and neither Cenkos nor any member of the Cenkos Group had any obligation to subscribe for any Placing Shares as principal. The Placing Agreement provided for Entertainment One (Cayman) to pay Cenkos a commission equal to 4 per cent. of the aggregate value at the Placing Price of the Placing Shares on all monies raised (other than in respect of ordinary shares subscribed for by Marwyn Value Investors L.P and any of the directors of Entertainment One (Cayman)) and to pay to Cenkos an additional amount equal to 0.5 per cent. of the aggregate value at the Placing Price of the Placing Shares on all monies raised in respect of ordinary shares subscribed for by Marwyn Value Investors L.P and any of the directors of Entertainment One (Cayman). Entertainment One (Cayman) also paid all reasonable costs, charges and expenses of, or incidental to the placing. The Placing Agreement includes representations, warranties and indemnities given by Entertainment One (Cayman) in favour of Cenkos. Cenkos may terminate its obligations under the Placing Agreement if at any time prior to admission any of the warranties is or becomes untrue, inaccurate or misleading or Entertainment One (Cayman) otherwise fails to comply with its obligations under the Placing Agreement, the relevant laws, FSMA or the AIM Rules, in any respect which is in any such case material in the context of the placing and in circumstances where a matter has arisen which would, if the placing documents were issued at that time, constitute an omission therefrom of a material matter required to be included therein. 317
18.12 Put and call agreement An agreement dated 21 May 2010 was entered into between the Company and Mark Trachuk, a partner of Osler, Hoskin & Harcourt LLP, the Company s Canadian lawyers, pursuant to which the Company has granted Mr Trachuk a put right and Mr Trachuk has granted the Company a call right in respect of the 10 Common Shares issued to Mr Trachuk on 21 May 2010, in each case exercisable on the effective date of the Restructuring. Immediately prior to the effective time of the Restructuring, the Company intends to exercise its call right and require Mr Trachuk to sell his 10 Common Shares to the Company for C$10. 19. DEALING ARRANGEMENTS AND CREST 19.1 CREST and Depository Interests (a) The Common Shares are in registered form and are in certificated form. However, it is proposed that, with effect from Admission, interests in Common Shares may be delivered, held and settled in CREST by means of the creation of dematerialised Depository interests representing such Common Shares. Euroclear is unable to take responsibility for electronic settlement of shares issued by companies in certain non-uk jurisdictions. Pursuant to a method proposed by Euroclear under which transactions in international securities may be settled through the CREST system, the Depository will issue dematerialised Depository interests representing entitlements to Common Shares, known as Depository Interests. The Depository Interests will be independent securities constituted under English law which may be held and transferred through the CREST system. Investors should note that it is the Depository Interests which will be admitted to and settled through CREST and not Common Shares. Ann III (4.3) (b) (c) (d) (e) (f) (g) The Articles are consistent with CREST membership in respect of Common Shares, and amongst other things allow for the holding and transfer of Depository Interests in uncertified form. Under the CBCA, companies are not prohibited from issuing shares in book-entry form but shareholders have the right to require the companies to issue physical certificates. The Board has passed a resolution authorising the issuance of shares in book-entry form. The Depository Agreement under which the Company has appointed the Depository to provide the Depository Interest arrangements is summarised in paragraph 19.3 of this Part VI (Additional Information) below. The Depository Interests will be created pursuant to and issued on the terms of a deed poll executed by the Depository in favour of the holders of the Depository Interests from time to time (the Deed Poll ). Prospective holders of Depository Interests should note that they will have no rights in respect of the underlying Common Shares or the Depository Interests representing them against Euroclear or its subsidiaries. Common Shares will be transferred to an account of the Depository or their nominated custodian ( Custodian ) and the Depository will issue Depository Interests to participating CREST members. Each Depository Interest will be treated as one Common Share for the purposes of determining, for example, eligibility for any dividends. The Depository will pass on to holders of Depository Interests any stock or cash benefits received by it as holder of Common Shares on trust for such Depository Interest holder. Depository Interest holders, through the Depository, will also be able to receive notices of meetings of holders of Common Shares and other notices issued by the Company to its Shareholders. The Depository Interests will have the same security code (ISIN) as the underlying Common Shares and will not require a separate admission to the London Stock Exchange s main market for listed securities. Conversion into and transfers of Depository Interests are subject to stamp duty or stamp duty reserve tax, as appropriate. Ann I (21.2.1) 318
(h) CREST is a voluntary system and holders of Common Shares who wish to receive and retain share certificates will be able to do so. Share certificates will be dispatched to Shareholders by first-class post within 14 days of the date of Admission. No temporary certificates of title will be issued. 19.2 Depository Interests Terms of the Deed Poll (a) In summary, the Deed Poll contains, inter alia, provisions to the following effect: (i) (ii) (iii) (iv) (v) (vi) The Depository will hold (itself or through the Custodian), as bare trustee, the underlying securities issued by the Company and all and any rights and other securities, property and cash attributable to the underlying securities for the time being held by the Depository or Custodian pertaining to the Depository Interests for the benefit of the holders of the Depository Interests as tenants in common. The Depository will re-allocate securities or Depository Interests distributions allocated to the Depository or Custodian pro rata to the Common Shares held for the respective accounts of the holders of Depository Interests but will not be required to account for fractional entitlements arising from such re-allocation. Holders of Depository Interests agree to give such warranties and certifications to the Depository as the Depository may reasonably require. In particular, holders of Depository Interests warrant, inter alia, that the securities in the Company transferred or issued to the Depository or Custodian on behalf of the Depository for the account of the Depository Interest holder are free and clear of all liens, charges, encumbrances or third party interests and that such transfers or issues are not in contravention of the Company s constitutional documents or any contractual obligation, or applicable law or regulation binding or affecting such holder, and holders of Depository Interests agree to indemnify the Depository against any liability incurred as a result of any breach of such warranty. The Depository and any Custodian shall pass on to Depository Interest holders, and so far as reasonably able exercise on their behalf, all rights and entitlements received by the Depository or the Custodian or to which they are entitled in respect of the underlying securities which are capable of being passed or exercised. Rights and entitlements to cash Depository Interests distributions, to information, to make choices and elections and to attend and vote at meetings shall, subject to the Deed Poll, be passed on in the form which they are received, together with amendments and additional documentation necessary to effect such passing-on, or exercised in accordance with the Deed Poll. If arrangements are made which allow a holder to take up rights in the Company s securities requiring further payment, the holder must put the Depository in cleared funds before the relevant payment date or other date notified by the Depository if it wishes the Depository to exercise such rights. The Depository will be entitled to cancel Depository Interests and treat the holders as having requested a withdrawal of the underlying securities in certain circumstances including where a Depository Interest holder fails to furnish to the Depository such certificates or representations as to material matters of fact, including his identity, as the Depository deems appropriate. The Depository warrants that it is an authorised person under the FSMA and is duly authorised to carry out custodial and other activities under the Deed Poll. It also undertakes to maintain that status and authorisation. The Deed Poll contains provisions excluding and limiting the Depository s liability. For example, the Depository shall not be liable to any Depository Interest holder or any other person for liabilities in connection with the performance or non-performance of obligations under the Deed Poll or otherwise except as may result from its negligence or 319
wilful default or fraud or that of any person for whom it is vicariously liable, provided that the Depository shall not be liable for the negligence, wilful default or fraud of the Custodian or agent which is not a member of its group unless it has failed to exercise reasonable care in the appointment and continued use and supervision of any Custodian or agent. Furthermore, the Depository s liability to a holder of Depository Interests will be limited to the lesser of: (A) (B) the value of the Common Shares and other deposited property properly attributable to the Depository Interests to which the liability relates; and that proportion of 10 million which corresponds to the portion which the amount the Depository would otherwise be liable to pay to the Depository Interest holder bears to the aggregate of the amounts the Depository would otherwise be liable to pay to all such holders in respect of the same act, omission, or event or, if there are no such amounts, 10 million. (vii) The Depository is entitled to charge holders of Depository Interests fees and expenses for the provision of its services under the Deed Poll. In the case of any fees and expenses to be charged in connection with the formalities of receiving and transferring company securities, the Depository may ask to be put in funds in advance by the holder of Depository Interests or prospective holder of Depository Interests. (viii) Each holder of Depository Interests is liable to indemnify the Depository and any Custodian (and their agents, officers and employees) against all liabilities arising from or incurred in connection with, or arising from any act performed in accordance with or for the purposes of or otherwise related to, the Deed Poll so far as they relate to the Depository Interests (and any property or rights held by the Depository or Custodian in connection with the Depository Interests) held by that holder, other than those resulting from the wilful default, negligence or fraud of the Depository, or the Custodian or any agent if such Custodian or agent is a member of the Depository s group or if, not being a member of the same group, the Depository shall have failed to exercise reasonable care in the appointment and continued use and supervision of such Custodian or agent. (ix) (x) (xi) The Depository is entitled to make deductions from any income or capital arising from the underlying securities, or to sell such underlying securities and make deductions from the sale proceeds therefrom, in order to discharge the indemnification obligations of Depository Interest holders. The Depository may terminate the Deed Poll by giving not less than 30 days notice. During such notice period holders may cancel their Depository Interests and withdraw their deposited property and, if any Depository Interests remain outstanding after termination, the Depository must, among other things, deliver the deposited property in respect of the Depository Interests to the relevant Depository Interest holders or, at its discretion, sell all or part of such deposited property. It shall, as soon as reasonably practicable, deliver the net proceeds of any such sale, after deducting any sums due to the Depository, together with any other cash held by it under the Deed Poll pro rata to holders of Depository Interests in respect of their Depository Interests. The Depository or the Custodian may require from any holder information as to the capacity in which Depository Interests are or were owned and the identity of any other person with or previously having any interest in such Depository Interests and the nature of such interest and evidence or declarations of nationality or residence of the legal or beneficial owners of Depository Interests and such information as is required for the purposes of the Deed Poll. Holders agree to provide such information requested and consent to the disclosure of such information by the Depository or Custodian to the extent necessary or desirable to comply with their legal or regulatory obligations. Furthermore, to the extent that the Company s constitutional documentation require Ann III (3.4) 320
disclosure to the Company of, or limitations in relation to, beneficial or other ownership of the Company s securities, the holders of Depository Interests are to comply with such constitutional documentation and the Company s instructions with respect thereto. (b) It should also be noted that holders of Depository Interests may not have the opportunity to exercise all of the rights and entitlements available to holders of Common Shares including, for example, the ability to vote on a show of hands. In relation to voting, it will be important for holders of Depository Interests to give prompt instructions to the Registrar or its nominated Custodian, in accordance with any voting arrangements made available to them, to vote the underlying Common Shares on their behalf or, to the extent possible, to take advantage of any arrangements enabling holders of Depository Interests to vote such Common Shares as a proxy of the Registrar or its nominated Custodian. Prospective subscribers for and purchasers of the Common Shares are referred to the Deed Poll available for inspection at the offices of Mayer Brown International LLP as described in paragraph 26 of this Part VI (Additional Information). Ann I (24) 19.3 Depository Interests Terms of Depository Agreement (a) The terms of the Depository agreement between the Company and the Depository (the Depository Agreement ), under which the Company appoints the Depository to constitute and issue from time to time, upon the terms of the Deed Poll (summarised in paragraph 19.2 of this Part VI (Additional Information)), series of Depository Interests representing securities issued by the Company and to provide certain other services in connection with such Depository Interests, are summarised below. (b) The Depository Agreement contains, inter alia, provisions to the following effect: (i) (ii) (iii) (iv) The Depository agrees that it will comply, and will procure certain other persons comply, with the terms of the Deed Poll and that it and they will perform their obligations with reasonable skill and care. The Depository assumes certain specific obligations including, for example, to arrange for the Depository Interests to be admitted to CREST as participating securities and provide copies of, and access to, the Depository Interest Register. The Company gives various warranties and undertakings including, inter alia, a warranty that the Depository does not require any permission, authorisation or licence from any authority in any country (other than the United Kingdom) in which the Company carries on business in order to hold the underlying securities in the Company, and that there are no special arrangements, exclusions, restrictions, national declarations or similar matters which attach to or apply in connection with the Common Shares and which would restrict the transfer of those Common Shares by any holder of Depository Interests (including the Depository and/or any Custodian). The Company agrees to indemnify the Depository against any losses, damages, claims, costs and expenses or other liabilities incurred as a result of any breach of such warranties and undertakings. The Depository will not be obliged to accept transfers of Depository Interests where it is not obliged to do so under the Deed Poll, or if the transfer would place the Depository in breach of any law or regulation. The Company warrants that it is not aware of any such breach. If such circumstances were to occur the Depository will discuss this with the Company as soon as is reasonably practicable in order to review how to proceed. The Company agrees to provide such assistance, information and documentation to the Depository as may be reasonably required by the Depository for the purposes of performing its duties, responsibilities and obligations under the Deed Poll and Depository Agreement. In particular, the Company will supply the Depository with enough copies of each document it intends to send to its shareholders in advance of 321
(v) (vi) (vii) sending each document to its shareholders for the Depository to distribute to all holders of Depository Interests. The Depository Agreement sets out the procedures to be followed where the Company is to pay or make a dividend or other distribution. The Depository is to indemnify the Company against each loss, liability, cost and expense reasonably incurred as a result of any claim made against the Company by any holder of Depository Interests, or any person having any direct or indirect interest in any such Depository Interests or the underlying securities represented thereby which arises out of alleged breach of the terms of the Deed Poll or any trust declared or arising thereunder, save where such liability arises as a result of the fraud, negligence or wilful default of the Company. The aggregate liability of the Depository under the Depository Agreement is limited to the lesser of (a) 1,000,000 and (b) an amount equal to 10 times the total annual fee payable to the Depository under the Depository Agreement. The Company is to indemnify the Depository against all liabilities reasonably incurred as a result of any claim made against the Depository by any holder of the Depository Interests or any person having any direct or indirect interest in any such Depository Interests or the underlying securities which arises out of the performance by the Depository of its obligations under the Depository Agreement and the Deed Poll, save where such liability arises as a result of the fraud, negligence or wilful default of the Depository. Ann III (4.5) (viii) The Depository Agreement is to remain in force for a period of three years (the Initial Period ). At the expiry of the Initial Period, this Agreement shall automatically renew for successive periods of 12 months, unless or until terminated by either party. Both the Company and the Depository may terminate the Depository Agreement on 30 days notice in the event of a material breach by the other party and otherwise on 45 days notice. (ix) The Depository may subcontract or delegate its obligations under the Depository Agreement or the Deed Poll to any person which is a member of the Group, provided that such arrangements shall not affect the liability of the Depository to the Company. 20. LITIGATION There are no, and have been no, governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened against it of which the Company is aware) during the period of 12 months prior to the date of this document which may have, or may have had in the recent past, a significant effect on the Group s financial position or profitability. Ann I (20.8) 21. WORKING CAPITAL The Directors are of the opinion that taking into account the existing banking and other facilities available to the Group, the working capital available to the Group is sufficient for its present requirements, that is for at least 12 months from the date of this document. Ann III (3.1) 22. SIGNIFICANT CHANGE There has been no significant change in the financial or trading position of the Group which has occurred since 31 March 2010, the date to which the last audited financial information relating to the Group (as set out in Part IV (Historical Financial Information)) was prepared. Ann I (20.9) 23. EXPENSES The total costs, charges and expenses payable by the Company in connection with the Restructuring and Admission are estimated to be 2.0 million (exclusive of VAT). Ann III (8.1) 322
24. CONSENTS 24.1 Deloitte LLP has given and not withdrawn its written consent to the inclusion in this document of its accountants report on the Company set out in Part IV (Historical Financial Information) of this document in the form and context in which it appears and has authorised the contents of that part of this document for the purposes of Rule 5.5.3(2)(f) of the Prospectus Rules; and Ann I (23.1) Ann III (10.3) 24.2 Marwyn Capital LLP, Singer Capital Markets Limited and Cenkos Securities plc have given and not withdrawn their written consent to the inclusion in this document of their names in the form and context in which they are included. 25. GENERAL The current auditors of the Company and the Group are Deloitte LLP, whose address is 2 New Street Square, London EC4A 3BZ, which is a member of the Institute of Chartered Accountants of England and Wales and which was responsible for the audit of the statutory financial statements of the Company for the financial years ended 31 March 2008, 2009 and 2010. Ann I (2.1 and 20.4.1) Ann III (10.3) 26. DOCUMENTS AVAILABLE FOR INSPECTION Copies of the following documents will be available for inspection during normal business hours on any weekday (Saturdays, Sundays and public holidays excepted) at the offices of Mayer Brown International LLP, 201 Bishopsgate, London EC2M 3AF up to and including the date of Admission: Ann I (24) (a) (b) (c) (d) (e) (f) the Articles; the audited consolidated financial statements of the Group for the financial years ended 31 March 2010, 2009 and 2008 respectively; the accountants report at Part A of Part IV (Historical Financial Information) of this document; the letters of consent referred to in paragraph 24 of Part VI (Additional Information); the Deed Poll and Depository Agreement referred to in paragraph 19 of this Part VI (Additional Information); and this document. Dated: 21 June 2010 323
PART VII DEFINITIONS The following definitions apply throughout this document, unless the context requires otherwise: 2006 Act United Kingdom Companies Act 2006 Admission AIM AIM Rules Articles Barna-Alper Productions Blueprint Entertainment Board Business Day By-Laws CAVCO CBCA Common Shares Combined Code Company Contender Entertainment CRTC Custodian Deed Poll Depository admission to listing of the Common Shares on the Official List and admission to trading of the Common Shares on the main market of the London Stock Exchange and a reference to Admission becoming effective is to be construed in accordance with the Listing Rules or the Standards (as applicable) the AIM market operated by the London Stock Exchange the rules for AIM company and their nominated advisers published by the London Stock Exchange from time to time the Articles of the Company details of which are set out in paragraph 6 of Part VI (Additional Information) Barna-Alper Productions Inc., now E1 Television BAP Ltd. Blueprint Entertainment Corporation, now E1 Television Productions Inc. the board of directors of the Company any day on which banks are generally open in England and Wales for the transaction of business, other than a Saturday or Sunday or a public holiday by-law number 1, a by law relating generally to the transaction of the business and affairs of the Company Canadian Audio-Visual Certification Office Canada Business Corporations Act, and the regulations promulgated thereunder, as amended common shares of no par value in the capital of the Company the principles of good governance and code of best practice published in June 2008 by the Financial Reporting Council applicable to companies with accounting periods beginning on or after 29 June 2008 Entertainment One Ltd., a company incorporated under the laws of Canada prior to, and following, its amalgamation with Entertainment One (Cayman) Contender Entertainment Group Canadian Radio-television and Telecommunications Commission as defined in paragraph 19 of Part VI (Additional Information) as defined in paragraph 19 of Part VI (Additional Information) Capita IRG Trustees Limited 324
Depository Agreement Depository Interest Depository Interest Holders Depository Interest Registrar Depository Interest Register Directors Disclosure and Transparency Rules EEA Entertainment One Entertainment One (Cayman) Entertainment One Share Schemes Exchangeable Notes Exchangeable Shares Executive Directors Existing Substantial Shareholder EU Euroclear FSA as defined in paragraph 19 of Part VI (Additional Information) Depository Interests of a particular series issued in uncertificated form from time to time by the Depository on the terms and conditions of this Deed and in accordance with the Regulations, title to which is evidenced by entry on the Depository Interest Register and which represent a particular Class of Company Securities holders of Depository Interests Caspita Registrars Limited or such other CREST Registrar who for the time being maintains the Depository Interest Register In relation to a particular series of Depository Interests, the register of Holders maintained in the United Kingdom on behalf of the Depository by the Depository Interest Registrar the directors of the Company, whose names are set out in paragraph 1 of Part II (Directors and Corporate Governance) and Director shall mean any one of them the disclosure and transparency rules issued by the FSA acting in its capacity as the competent authority pursuant to s73a of FSMA the European Economic Area comprising EU member states and three of the European Free Trade Area States before completion of the Restructuring, Entertainment One (Cayman) and following completion of the Restructuring, the Company Entertainment One Ltd., a company registered in the Cayman Islands with registered number 180279 the share schemes described in paragraph 13 of Part VI (Additional Information) the E-One UK Ltd exchangeable notes (as amended) described at paragraph 18.8 of Part VI (Additional Information) the Maximum Deferred Exchangeable Shares and those exchangeable shares in the capital of 6972501 Canada Inc. held by the vendors of Barna-Alper Productions, Blueprint Entertainment and Maximum, pursuant to those share purchase agreements described in paragraphs 18.3 and 18.4 of Part VI (Additional Information) Darren Throop, Giles Willits and Patrice Theroux any shareholder of the Company or affiliates thereof who owned, directly or indirectly as a registered or beneficial owner, Common Shares in the capital of the Company amounting to 30 per cent. or more of the outstanding Common Shares in the capital of the Company as of Admission the European Union Euroclear UK & Ireland Limited, a company registered in England and Wales with registered number 2878738, the operator of CREST the Financial Services Authority of the United Kingdom 325
FSMA Group HMRC IAS IFRS Investment Canada Act ISIN Issued Share Capital LIBOR Listing Rules London Stock Exchange Marwyn Marwyn Capital Marwyn Investment Management Marwyn Investments Group Marwyn Value Investors Marwyn Partners Marwyn Warrant Maximum Maximum Deferred Exchangeable Shares Financial Services and Markets Act 2000, as amended before completion of the Restructuring, Entertainment One (Cayman) and its subsidiaries and subsidiary undertakings, and following completion of the Restructuring, the Company and its subsidiaries and subsidiary undertakings as described in paragraph 3 of Part VI (Additional Information) and member of the Group shall be construed accordingly HM Revenue & Customs International Accounting Standards International Financial Reporting Standards as adopted for use in the EU Investment Canada Act (Canada), and the regulations promulgated thereunder, as amended International Securities Identification Number the 167,547,358 Common Shares which will be in issue on Admission (assuming that no further shares are issued as a result of the exercise of any options under the Entertainment One Share Schemes, the Marwyn Warrant, the Summit Option and the Exchangeable Notes between 18 June 2010 (being the latest practicable date prior to the publication of this document) and Admission) the London Inter-Bank Offer Rate the listing rules and regulations made by the FSA under s73a of FSMA, as amended from time to time London Stock Exchange plc Marwyn Investments Group and its subsidiary undertakings and affiliates from time to time including Marwyn Capital and Marwyn Investment Management Marwyn Capital LLP Marwyn Investment Management LLP Marwyn Investments Group Limited Marwyn Value Investors LP (formerly known as Marwyn Neptune Fund LP) Marwyn Partners Limited the warrant instrument described at paragraph 18.6 of Part VI (Additional Information) Maximum Film Distribution Inc. (now E1 Films Canada Inc.) and Maximum Film International Inc. (now Seville Pictures Inc.) those exchangeable shares in the capital of 6972501 Canada Inc. held by the vendors of Maximum pursuant to the share purchase 326
agreement described in paragraph 18.5 of Part VI (Additional Information) Non-Executive Directors Oasis International Official List Ordinary Resolution Preferred Variable Voting Shares Preferred Variable Voting Shareholders Agreement Prospectus Rules RCV Entertainment Registrar Resident Canadian Restructuring Securities Act Seville Pictures Shareholders Special Resolution Standards Statutes Summit Option Takeover Code Tax Act UK or United Kingdom James Corsellis, Bob Allan, Sir George Bain, Clare Copeland, Garth Girvan, Mark Opzoomer, Robert Lantos and Mark Watts Oasis Pictures Inc., now E1 Television International Ltd. the Official List of the UK Listing Authority a resolution passed by a majority of the votes cast by the Shareholders who voted in respect of that resolution preferred variable voting shares in the capital of the Company the preferred variable voting shareholders agreement described at paragraph 18.10 of Part VI (Additional Information) prospectus rules made by the FSA under s73a of FSMA RCV Entertainment B.V. Capita Registrars (Jersey) Limited of 12 Castle Street, St. Helier, Jersey JE2 3RT has the meaning given in the CBCA the Cayman Islands scheme of arrangement pursuant to which shareholders will exchange their ordinary shares in Entertainment One (Cayman) for Common Shares the United States Securities Act of 1933 (as amended) Seville Pictures Inc. holders of Common Shares and holders of Preferred Variable Voting Shares, each individually being a Shareholder a resolution passed by a majority of not less than two-thirds of the votes cast by the Shareholders who voted in respect of that resolution or signed by all the Shareholders entitled to vote on that resolution the Admission and Disclosure Standards of the London Stock Exchange the CBCA and every other statute (and any subordinate legislation, order or regulations made under any of them) concerning companies and affecting the Company, in each case, as they are for the time being in force the option agreement described at paragraph 18.7 of Part VI (Additional Information) The City Code on Takeovers and Mergers, as amended from time to time Income Tax Act (Canada) and the regulations promulgated thereunder, as amended the United Kingdom of Great Britain and Northern Ireland 327
UK Listing Authority uncertificated or in uncertificated form United States or US the FSA acting in its capacity as competent authority for the purposes of Part VI of FSMA Shares recorded on the register as being held in uncertificated form in CREST, entitlement which may be transferred by means of CREST the United States of America, its territories and possessions, any State of the United States and the District of Columbia In this document all references to times and dates are a reference to those observed in London, UK. 328 sterling 133297