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TABLE OF CONTENTS
Item 18. Financial Statements
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2002
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 0-15252
CARLTON COMMUNICATIONS PLC
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organization)
25 Knightsbridge
London SW1X 7RZ
England
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
|---|---|---|
| Exchangeable Capital Securities ("X-CAPs") ($25 Principal Amount per X-CAP) | New York Stock Exchange, Inc. | |
Cumulative Dollar-denominated Redeemable Preference shares of $0.01 each par value ("Cumulative Dollar-denominated Preference shares") | New York Stock Exchange, Inc.* | |
American Depositary Shares, each representing rights to receive one Cumulative Dollar-denominated Preference share | New York Stock Exchange, Inc.* |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary shares of 5p each ("Ordinary shares")
represented by American Depositary Shares (ADSs)
quoted on the NASDAQ National Market System,
each ADS representing five Ordinary shares
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the Annual Report:
Ordinary shares: 671,951,686 shares
6.5p Preference shares of 5p each: 163,564,861 shares
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 ý.
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Item 11. | Quantitative and Qualitative Disclosures about Market Risk | |||||
Item 12. | Description of Securities Other than Equity Securities | |||||
Part II. | Item 13. | Defaults, Dividend Arrearages and Delinquencies | ||||
Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | |||||
Item 15. | Controls and Procedures | |||||
Item 16. | Reserved | |||||
Part III. | Item 17. | Financial Statements | ||||
Item 18. | Financial Statements | |||||
Item 19. | Exhibits | |||||
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NOTE ON ITV DIGITAL HOLDINGS LIMITED FINANCIAL STATEMENTS
Pursuant to Rule 3-09 of Regulation S-X, under the Securities Exchange Act of 1934, the Company is required to include in this Annual Report, the consolidated financial statements of ITV Digital Holdings Limited ("ITV Digital Holdings") for the three fiscal years ended September 30, 2002. ITV Digital Holdings was the 50/50 joint venture with Granada plc ("Granada") to develop digital terrestrial television ("DTT") in the UK.
On March 27, 2002, ITV Digital plc and ITV Digital (Services) Limited, wholly-owned subsidiaries of ITV Digital Holdings, were placed into administration by their respective directors. On April 30, 2002 the administrators announced the closure of the businesses. On October 17, 2002, ITV Digital plc and ITV Digital (Services) Limited changed their names to ONdigital 1998 plc and ONdigital 1998 (Services) Limited respectively (collectively "ONdigital"). A liquidator for these two companies was appointed on October 18, 2002. As a result, executive control of both companies was assumed firstly by a court appointed independent administrator on March 27, 2002 and then by the liquidator on October 18, 2002.
ONdigital 1998 plc and ONdigital 1998 (Services) Limited represent substantially all of the consolidated businesses of ITV Digital Holdings. The financial statements for ITV Digital Holdings, ONdigital 1998 plc and ONdigital 1998 (Services) Limited for the periods ended September 30, 2001 and 2002 had not been prepared prior to ONdigital 1998 plc and ONdigital 1998 (Services) Limited entering administration. In accordance with usual practice in the UK, no financial statements have been drawn up for these companies since they went into administration. Consequently consolidated financial statements of ITV Digital Holdings can no longer be prepared.
The Company has attached the consolidated financial statements of ITV Digital Holdings, under its former name of ONdigital Holdings Limited, for latest periods possible being the fiscal years up to September 30, 2000.
In October 2002, the Company announced a proposed merger with Granada to progress further consolidation of the ITV network. See "Item 3—Risk Factors", "Item 4—Information on the Company—C. Recent Developments" and "Item 10—Additional Information—B. Material Contracts (3)". The merger is conditional upon clearance by regulatory and competition authorities and shareholder approval. Following the merger announcement, the Company and Granada made a detailed submission to the Office of Fair Trading ("OFT") for UK regulatory consideration. On March 11, 2003, the UK's Trade and Industry Secretary referred the proposed merger to the Competition Commission. This decision was in accordance with the advice of the Director General of Fair Trading ("DGFT"). The Competition Commission will examine concerns principally relating to the sale of TV advertising, as well as secondary competition questions in relation to potential competition for ITV licences and the supply of studio facilities in Northern England. It is expected that the Competition Commission will report its findings to the Trade and Industry Secretary by the end of June 2003 and that the Trade and Industry Secretary will rule on the proposed merger approximately one month later.
In order to utilize the "Safe Harbor" provisions of the United States Private Securities Litigation Reform Act of 1995, the Company is providing the following cautionary statement. This document contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company and certain of the plans and objectives of the Company with respect to these items. In particular, among other statements, certain statements in "Item 4—Information on the Company" and "Item 5—Operating and Financial Review and Prospects" with regard to the proposed merger, management strategy and objectives, dividend policy, planned expansion, investment or other projects, introduction of new products and services or assumptions regarding overall market trends as well as certain statements in "Item 11—Quantitative and Qualitative Disclosures About Market Risk" are forward-looking in nature.
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By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. The Company operates in a highly competitive and regulated environment, and there are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. In addition to factors set forth elsewhere in this report, such factors include, but are not limited to: Competition Commission ruling on the proposed merger; changes in regulation affecting the Company's activities, including adverse changes in tax laws and regulations; the risks associated with the proposed introduction of new products or services; pricing, product and program initiatives of competitors, including increased competition for programs such as major sporting events; changes in technology or consumer demand; the termination or delay of key contracts and fluctuations in currency exchange rates.
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Item 1—Identity of Directors, Senior Management and Advisors
Not Applicable.
Item 2—Offer Statistics and Expected Timetable
Not Applicable.
Item 3—Key Information
The following information has been extracted or derived from the audited consolidated financial statements of the Company presented elsewhere herein or included within the Company's earlier Annual Reports on Form 20-F which have been filed with the Securities and Exchange Commission.
| | Year ended September 30,(1)(2) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| INCOME STATEMENT DATA: | 2002 | 2001 | 2000 | 1999 | 1998 | |||||||
| | (in millions, except per share, share and ADS data) | |||||||||||
| UK GAAP(2)(4)(5)(6) | ||||||||||||
| Net sales | £964.6 | £1,601.5 | £2,062.8 | £1,943.1 | £1,834.8 | |||||||
| Net sales from continuing operations | 964.6 | 1,040.1 | 987.7 | 883.7 | 852.2 | |||||||
| Operating income | 58.0 | 47.4 | 222.1 | 274.3 | 304.7 | |||||||
| Net income/(loss) from continuing operations | 23.7 | (43.5 | ) | 66.5 | 99.2 | 103.0 | ||||||
| Net income/(loss) | (156.0 | ) | (390.0 | ) | (277.4 | ) | 97.5 | 209.3 | ||||
| Preference share dividends | (10.5 | ) | (10.5 | ) | (11.0 | ) | (14.2 | ) | (15.1 | ) | ||
| Net income/(loss) after Preference share dividends | (166.5 | ) | (400.5 | ) | (288.4 | ) | 83.3 | 194.2 | ||||
| Per Ordinary share data (pence) | ||||||||||||
| Net income/(loss) from continuing operations | 2.0 | (8.1 | ) | 8.6 | 13.9 | 14.4 | ||||||
| Net income/(loss) | (24.8 | ) | (59.7 | ) | (44.5 | ) | 13.6 | 31.9 | ||||
| Diluted net income/(loss) | (24.8 | ) | (59.7 | ) | (42.6 | ) | 12.5 | 27.2 | ||||
| Dividend(2) | 8.3 | 8.3 | 16.6 | 15.1 | 13.7 | |||||||
| Basic weighted average shares issued (millions) | 670.7 | 670.0 | 647.5 | 612.8 | 609.4 | |||||||
| Diluted weighted average shares outstanding (millions) | 670.9 | 671.8 | 676.3 | 666.9 | 713.2 | |||||||
US GAAP(3)(4)(5)(6) | ||||||||||||
| Net income/(loss) from continuing operations | (72.7 | ) | (98.8 | ) | 39.4 | 72.0 | 53.2 | |||||
| Net income/(loss) | (269.4 | ) | (288.9 | ) | (119.7 | ) | (132.2 | ) | 137.8 | |||
| Net income/(loss) after Preference share dividends | (279.9 | ) | (299.4 | ) | (130.7 | ) | (146.4 | ) | 122.7 | |||
| Per Ordinary share data (pence) | ||||||||||||
| Net income/(loss) from continuing operations | (12.4 | ) | (16.3 | ) | 4.4 | 9.4 | 6.3 | |||||
| Net income/(loss) | (41.7 | ) | (44.7 | ) | (20.2 | ) | (23.9 | ) | 20.1 | |||
| Diluted net income/(loss) | (41.7 | ) | (44.7 | ) | (19.3 | ) | (22.0 | ) | 18.3 | |||
| Per ADS data (pence) | ||||||||||||
| Net income/(loss) from continuing operations | (62.0 | ) | (81.6 | ) | 21.9 | 47.2 | 31.3 | |||||
| Net income/(loss) | (208.7 | ) | (223.4 | ) | (100.9 | ) | (119.5 | ) | 100.7 | |||
| Basic weighted average shares issued (millions) | 670.7 | 670.0 | 647.5 | 612.8 | 609.4 | |||||||
| Diluted weighted average shares outstanding (millions) | 670.9 | 671.8 | 676.3 | 666.9 | 670.6 | |||||||
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| | At September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| BALANCE SHEET DATA: | 2002 | 2001 (as restated) | 2000 (as restated) | 1999 (as restated) | 1998 (as restated) | |||||
| | (in millions) | |||||||||
| UK GAAP | ||||||||||
| Total assets(7) | £1,891.5 | £1,872.0 | £2,006.2 | £1,795.0 | £1,467.5 | |||||
| Net assets | 433.5 | 663.7 | 447.7 | 510.9 | 499.7 | |||||
| Shareholders' equity | 433.5 | 663.7 | 446.8 | 510.5 | 499.7 | |||||
US GAAP | ||||||||||
| Total assets(7) | 2,196.4 | 2,284.6 | 3,077.6 | 2,984.2 | 2,892.4 | |||||
| Net assets(8) | £580.6 | £1,004.2 | £1,487.9 | £1,443.4 | £1,637.3 | |||||
| Long-term debt | £977.8 | £685.7 | £607.8 | £577.7 | £328.0 | |||||
| Ordinary share capital | 33.6 | 33.6 | 33.6 | 30.9 | 30.6 | |||||
| Redeemable Preference share capital | 8.2 | 8.2 | 8.2 | 17.0 | 17.8 | |||||
| Shareholders' equity | £580.6 | £1,004.2 | £1,487.0 | £1,443.0 | £1,636.5 | |||||
Dividends
The Company has paid cash dividends on its Ordinary shares in respect of every fiscal year since it obtained a full listing on the London Stock Exchange in February 1983.
An interim dividend has generally been declared by the Board of Directors in May or June and paid in late July or August. A final dividend has generally been recommended by the Board of Directors following the end of the fiscal year to which it related and, after approval by the holders of Ordinary shares at the Company's Annual General Meeting, has been paid between late February and early April of the following year.
The final dividend for fiscal year 2002 was proposed in the context of the merger announcement with Granada. The level of dividends for fiscal year 2003 and in the future will be considered by the Board taking into account the prospects for the business, an appropriate level of dividend cover (expressed as a
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ratio of dividends to net income before Ordinary share dividends) and the merger agreement with Granada which specifies that until termination of that agreement the level of the interim dividend and of the final dividend will not exceed those paid for the fiscal year 2002.
The following table sets forth the amounts of the interim, final and total dividends paid in respect of each fiscal year indicated and translated, solely for convenience, into US dollars per American Depositary Share ("ADS") at the Noon Buying Rate on each of the respective payment dates for such interim and final dividends. The amounts shown are net of the tax credit relating to the dividend, for details of which please refer to the detailed explanation under "Item 10—Additional Information—D. Taxation".
| | | | | Translated into US dollars per ADS(4) | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Pence per Ordinary Share(4) | |||||||||||
| Year ended September 30, | ||||||||||||
| Interim | Final | Total | Interim | Final | Total | |||||||
| 1998 | 5.4 | 8.3 | 13.7 | 0.44 | 0.66 | 1.10 | ||||||
| 1999 | 6.0 | 9.1 | (1) | 15.1 | 0.49 | 0.72 | 1.21 | |||||
| 2000 | 6.6 | 10.0 | 16.6 | 0.49 | 0.71 | 1.20 | ||||||
| 2001 | 3.3 | 5.0 | 8.3 | 0.23 | 0.36 | 0.59 | ||||||
| 2002 | 3.3 | 5.0 | (2) | 8.3 | 0.26 | 0.40 | (3) | 0.66 | ||||
The Company pays dividends on its Ordinary shares and its 6.5p Preference shares. See Notes 11 and 28 of Notes to Consolidated Financial Statements.
Holders of ADSs are entitled to receive dividends paid on the Company's Ordinary shares. In the past, holders of ADSs who were residents of the US would normally receive the sum of the dividend paid plus the related tax credit, less UK withholding tax. This tax credit is no longer available to US holders in respect of dividends paid on or after April 6, 1999. See "Item 10—Additional Information—D. Taxation".
The Company is not currently subject to any laws or agreements that materially restrict its ability to pay dividends, apart from the merger agreement with Granada as detailed above. There are currently no UK foreign exchange control restrictions on remittances of dividends on the Ordinary shares or on the conduct of the Company's activities. See "Item 10—Additional Information—C. Exchange Controls".
Exchange Rates
The Consolidated Financial Statements of Carlton Communications Plc ("Carlton") which form part of this Annual Report are presented in English pounds sterling ("£" or "pounds") and are prepared in accordance with UK GAAP, which differ in certain significant respects from US GAAP. The differences between UK GAAP and US GAAP relevant to the Company are explained in Note 36 of Notes to Consolidated Financial Statements.
The following table sets forth, for the fiscal years and dates indicated, certain information concerning the Noon Buying Rate in New York City for pounds expressed in US dollars ("$" or "dollars") per £1.00 as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate").
| Month | Month's Highest Exchange Rate | Month's Lowest Exchange Rate | ||
|---|---|---|---|---|
| March 2003 (through March 14, 2003) | 1.61 | 1.58 | ||
| February 2003 | 1.65 | 1.57 | ||
| January 2003 | 1.65 | 1.58 | ||
| December 2002 | 1.61 | 1.56 | ||
| November 2002 | 1.59 | 1.54 | ||
| October 2002 | 1.57 | 1.54 | ||
| September 2002 | 1.57 | 1.53 |
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| Fiscal year ended September 30, | Period End | Average(1) | High | Low | ||||
|---|---|---|---|---|---|---|---|---|
| 1998 | 1.70 | 1.66 | 1.71 | 1.61 | ||||
| 1999 | 1.65 | 1.63 | 1.72 | 1.55 | ||||
| 2000 | 1.48 | 1.55 | 1.68 | 1.40 | ||||
| 2001 | 1.47 | 1.44 | 1.50 | 1.37 | ||||
| 2002 | 1.57 | 1.53 | 1.58 | 1.41 |
Fluctuations of the pound relative to the dollar have previously been significant to Carlton. However, since the sale of Technicolor in March 2001 the effect has been substantially reduced.
Fluctuations in the exchange rate between the pound and the dollar will affect the dollar equivalent of the pound price of the Company's Ordinary shares on the London Stock Exchange and, as a result, are likely to affect the price of the ADSs representing Ordinary shares on the NASDAQ National Market System. Such fluctuations would also affect the dollar amounts received by holders of American Depositary Receipts ("ADRs") evidencing ADSs in respect of cash dividends paid on the underlying Ordinary shares. The Company's Exchangeable Capital Securities ("X-CAPs") and the interest payments thereon are dollar-denominated and are therefore not subject to dollar translation effects, save for the translation of the principal and interest for inclusion in the Company's financial statements which are presented in pounds. See "Item 3—Key Information—Dividends".
This section describes some of the risks that could affect Carlton's operations. The factors below should be considered in connection with any forward-looking statements in the Form 20-F, particularly in "Item 4—Information on the Company" and "Item 5—Operating and Financial Review and Prospects" and the cautionary statements contained in "Forward Looking Statements" at the beginning of this document.
The risks below are not the only ones that Carlton faces—some risks are not yet known to Carlton and some that Carlton does not currently believe to be material could later turn out to be material. All of these risks could materially affect Carlton's business, its revenues, operating income, net income, net assets and liquidity and capital resources.
Advertising income currently accounts for the majority of Carlton's revenues. Total advertising revenues are impacted by conditions within the UK and global economy over which Carlton has no control.
International companies increasingly plan their advertising campaigns and prepare their advertising budgets on a global basis and the level of funds directed to the UK advertising market is impacted by those decisions. Given this, total UK advertising expenditure is highly dependent upon the general economic and corporate environment, globally as well as in the UK. This environment is influenced by a number of factors and uncertainties over which Carlton has no control. Deterioration in or uncertainty around the condition of the global economy may lead to a decrease in the total level of global advertising expenditure and this may negatively impact upon Carlton's revenues.
The market for UK television airtime is increasingly competitive.
The sale of UK television airtime is highly competitive. Carlton competes for advertising revenue with free-to-air television channels such as Channel 4 and five (formerly Channel 5). The increasing penetration and viewing of multi-channel television (satellite, cable and DTT), such as the channels operated by British
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Sky Broadcasting ("BSkyB"), have further increased the competitive nature of this business. Television also competes with other media for advertising revenue.
Continuing increase in the penetration and viewing of multi-channel television within the UK will increase the level of competition for UK television advertising. Increased competition may result in Carlton's overall share of UK television advertising declining and this may negatively impact upon the level of Carlton's net income.
The completion of Carlton's proposed merger with Granada under its agreed terms is subject to clearance by competition and regulatory authorities and shareholder approval.
UK broadcasting regulation is the subject of a Communications Bill, which is to be considered by the UK Parliament in 2003. The terms of the Bill relax current restrictions in relation to the ownership of ITV, and its enactment in its proposed form will allow for the consolidation of ITV as anticipated by the terms of Carlton and Granada's proposed merger.
Following the announcement by Carlton and Granada of the agreed terms of their proposed merger, a submission was made to the OFT in the UK for regulatory consideration. The proposed merger has subsequently been referred upon the recommendation of the OFT to the UK Competition Commission. Following completion of the Competition Commission's investigation, Carlton and Granada will be informed whether their proposed merger will be cleared, or cleared subject to undertakings, or blocked.
Carlton is currently unable to predict the final outcome of the Competition Commission investigation nor the exact form or timing of the final Communications Act. Ultimately, the merger terms need to be approved by Carlton's and Granada's shareholders. Consequently, the timing, structure and ultimate completion of Carlton's proposed merger with Granada cannot be predicted with certainty. Delays in the merger process will postpone the achievement of the full expected benefits of the merger. If regulatory clearance is given subject to undertakings, such as disposal of parts of Carlton's or Granada's businesses, this could limit the potential benefits from the merger or prevent the completion of the merger altogether.
Carlton and Granada may be unable to fully realize the expected benefits from their proposed merger.
Carlton's ability to realize the expected benefits from its merger with Granada, including anticipated cost savings, depends in large part on the ability of the two companies to integrate their operations in a timely and effective manner. Amongst other things, the merged entity will seek to ensure continuity of relationships with key advertisers, other customers and suppliers, retain key employees, combine and integrate operations, systems and technologies, and effectively manage integration costs and liabilities. There can be no assurance that Carlton and Granada will be able to successfully combine their businesses as described and this may undermine the achievement of anticipated merger benefits.
Carlton is subject to detailed UK broadcasting regulation.
Carlton's and other regional ITV1 licences are subject to a number of conditions. Regulatory and monitoring compliance with these conditions is currently the responsibility of the Independent Television Commission ("ITC"). The ITC has the power to levy fines or terminate a licence for persistent breach of licence obligations. Under the terms of the Communications Bill, responsibility for the regulation of ITV1 licences is to be transferred to a newly established body, the Office of Communications ("OFCOM").
Under the terms of current broadcasting legislation, the Company is able to renew its current licences for a further period up to ten years on terms proposed by the regulatory authority. Should the Company choose not to accept these terms, the licences will be put out to tender and the Company will be able to participate in this process. Any change in licence terms may impact upon the level of Carlton's net income.
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Carlton does not control the operations, strategies and financial decisions of the ITV Network Centre.
Each of the regional ITV1 licencees is a member of ITV Network Limited ("ITV Network"), a central body which provides for the independent scheduling, commissioning and purchasing of programs across the nationwide network. The ITV Network Council is responsible for making all decisions in relation to the operation of ITV Network, including determining program strategy and setting the annual network program budget. Most decisions of Council can be passed by a simple majority of the members in attendance, although a certain number of reserved matters can only be approved where 60% of the votes cast are in favor. The number of votes which each licensee has in respect of these reserved matters is calculated from a pre-determined formula which is applied to the licensee's share of qualifying revenues in the previous year. Carlton's voting share is currently just over 40%, but can fluctuate year on year. Given this, other members of the ITV Network may be able to control its operations, strategies and financial decisions, which may impact upon the level of Carlton's net income.
Carlton has exposure to risk arising from its treasury activities.
The most significant treasury exposures faced by Carlton are raising finance, managing interest rate and currency positions and investing surplus cash in high quality assets. A detailed summary of treasury risk is provided in "Item 11—Quantitative and Qualitative Disclosures about Market Risk".
Carlton is exposed to fluctuation in the value of its investment in Thomson S.A. ("Thomson").
Carlton's net income and net assets are exposed to any permanent diminution in the value of its fixed asset investments, the most significant of which is its equity investment in Thomson. The Thomson shares are carried at €41.2 compared with a year-end price of €15.9. The shares have traded between €15.7 and €36.7 in the 2002 fiscal year and the closing price on March 14, 2003 (the last practical date before signing these accounts) was €11.8. See "Item 5E(i)—Critical Accounting Policies" for further details. Although Carlton has a representative on the Thomson board, it has no significant influence in controlling Thomson's operations, strategies and financial decisions.
Carlton has some reliance on third party technology for the operation of key activities.
Carlton is reliant on a number of third parties to provide important aspects of its transmission, telecommunications and information technology services to enable it to run its business. A serious failure of third party systems may have a material adverse effect on its business.
Carlton is dependent upon recruiting and retaining key personnel in an industry where competition for employees can be intense.
Carlton is dependent on key members of its management team, the loss of whom could limit Carlton in the achievement of its business objectives. In addition, recruiting and retaining on and off screen talent and qualified technical staff for its content creation business are important to its success. Competition for employees in Carlton's industry can be intense and Carlton may not be able to attract and retain skilled and experienced personnel on terms that are acceptable to it.
Carlton is exposed to liabilities arising as a result of the liquidation of ONdigital.
Carlton has guaranteed liabilities of ONdigital which, as a result of the liquidation of ONdigital, have become liabilities of Carlton. Although management has made provision in respect of all anticipated liabilities, there can be no guarantee that further unanticipated liabilities will not arise during the course of the liquidation.
Up to half of the tax losses of ONdigital for the periods up to March 27, 2002 have been surrendered by ONdigital to Carlton, prior to ONdigital being placed into liquidation, for relief against Carlton's own
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profits. Carlton's financial statements have been prepared on the basis that relief for these losses cannot be withdrawn.
Contractually, no payment is due by Carlton to ONdigital for losses surrendered for periods up to and including the year ended September 30, 2000. For subsequent periods, payment is only due when and to the extent that ONdigital would have been able to use the losses itself to set against its own profits. Carlton's financial statements have been prepared on the basis that no payment to ONdigital will be necessary for losses surrendered to Carlton for all periods up to March 27, 2002.
Carlton is exposed to indemnities and warranties given.
Carlton issued indemnities and warranties on the disposal of Technicolor in 2001. Provision has been made in respect of known claims.
Carlton is exposed to risks related to the management of intellectual property.
Carlton's ability to compete successfully depends, in part, on its ability to protect the intellectual property contained in its content and, to a lesser extent, the software it has developed which supports its systems. Any failure to adequately protect proprietary information and content could harm Carlton's business.
Like any other media company, Carlton relies on obtaining assignments or licences of copyrights or other rights clearances from its employees, performers, contractors or other bodies before it can use the content it generates or uses. There can be no absolute guarantee that Carlton has obtained or will continue to be able to obtain such clearances, or that the content produced will not infringe the intellectual property of third parties. The secondary exploitation of the library of original programming may also depend on the prior consent of, and payment of fees to, third parties.
Item 4—Information on the Company
Carlton Communications Plc, an English public limited company incorporated in 1939, is principally involved in free-to-air television broadcasting and advertising sales, cinema screen advertising and content production and distribution. The business is carried out primarily by the Company's wholly-owned UK subsidiaries and by joint ventures and associate companies in the UK, US and Europe. In fiscal 2002, the Company's consolidated net sales were £964.6 million and operating income was £58.0 million.
The Company employed 2,787 people at September 30, 2002.
The Company's principal executive offices are located at 25 Knightsbridge, London SW1X 7RZ, England. Its telephone number is 44-20-7663 6363. As used herein the "Company", "Carlton" or the "Group" means Carlton Communications Plc and its subsidiaries, except where the context otherwise requires.
Overview
There are three main free-to-air commercial television channels in the UK, ITV1, Channel 4 and five. These channels are funded principally by advertising. The independent Channel 3 network consists of 15 separate regional licences that together make up ITV1 and one national licence which broadcasts at breakfast time (GMTV).
The Company owns the second largest advertising-supported commercial television broadcasting enterprise in the UK, as measured by overall share of television advertising revenue. The Company operates four regional Channel 3 ("ITV1") licences: (1) London Weekday ("Carlton—London region"),
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(2) East, West and South Midlands ("Carlton—Central region"), (3) South-West England ("Carlton—West Country region") and (4) Wales and West of England ("HTV").
Carlton Media Sales sells advertising for the Company's own ITV1 licences and for Scottish TV and Grampian TV, the ITV1 licences owned by SMG plc ("SMG"). Carlton Screen Advertising is a cinema screen advertising business operating in the UK and the Republic of Ireland. The Company's facilities operations include The Moving Picture Company ("MPC") and Carlton 021. MPC provides digital visual effects and computer animation to the advertising, music, TV and feature film industries, while Carlton 021 provides outside broadcast facilities for broadcasters both in the UK and overseas as well as for independent production companies.
The Company produces television programs for the ITV network and for other channels in the UK and overseas and markets domestically and internationally the Company's own-produced and acquired content across a range of formats, including television, packaged media (video and DVD) and books.
The Company's principal joint venture and associate company holdings include the national Channel 3 breakfast licence holder GMTV Limited ("GMTV") (25% interest), Independent Television News Limited ("ITN") (20% interest), a national and international news network, London News Network Limited ("LNN") (50% interest), a local news and transmission services provider, ITV2 Limited ("ITV2") (44.1% interest), a free-to-air general entertainment channel, and ITV News Channel Limited ("ITV News Channel") (32.5% interest), a 24-hour news service, as well as in Screenvision Holdings (Europe) Limited ("Screenvision Europe") (50% interest) and Technicolor Cinema Advertising LLC ("Screenvision US") (50% interest), the cinema screen advertising businesses operating in continental Europe and the US respectively.
The following is a summary by fiscal year of important developments in the Company's history since its initial public offering.
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the UK. In July 1998, Carlton acquired the whole of the share capital of Nimbus CD International Inc ("Nimbus"), an optical disc replicator. The Company subsequently consolidated Nimbus into Technicolor.
In December 1998, Carlton accepted the terms offered by the ITC for new ten year ITV1 licences for Carlton Broadcasting ("Carlton—London region") and Westcountry ("Carlton—West Country region") with effect from January 1, 1999. The licence payments under the terms of these new licences have been and are expected to remain lower than under the previous terms. See "Item 4—Information on the Company—I. UK Television Regulation—Channel 3". In April 1999, the Company acquired 100% of Planet 24 Limited ("Planet 24"), which produces television programs, for £14.6 million and in July 1999 the Company acquired part of PolyGram Filmed Entertainment's television and film library, known as the ITC Library, from Seagram Co for £89.7 million in cash. The Company also acquired during the 1999 fiscal year 100% of VTR Video, a Canadian video duplicator, and the 50% of Central de Video in Mexico which the Company did not already own, both of which were consolidated into Technicolor.
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On March 27, 2002, ITV Digital plc and ITV Digital (Services) were placed into administration. On April 30, 2002 the administrators announced the closure of the businesses. The ONdigital pay DTT service ceased to be broadcast on May 1, 2002 and the ITV Sport Channel ceased broadcasting on May 11, 2002. ITV Digital plc and ITV Digital (Services) were renamed ONdigital 1998 plc and ONdigital 1998 (Services) Limited respectively and a liquidator for the two companies was appointed on October 18, 2002. The liquidators are now in the process of realising the assets and establishing creditors' claims, with a view to distributing the liquidation proceeds to creditors, including the Company, in due course. The liquidators have indicated that due to the size, nature and complexity of the claims involved, it is unlikely that any distribution will be made to creditors before the end of 2003.
In June 2002, the Company formed Screenvision Europe, a 50% joint venture with Thomson, to acquire cinema advertising interests across continental Europe, including in France, Belgium and Spain for £62.0 million of which the Company's share was £31.0 million. In June 2002, the Company and Granada acquired ITN's 65% interest in the ITN News Channel, the 24-hour television news service, which has since been renamed ITV News Channel. The Company and Granada each hold 32.5% of ITV News Channel and NTL the remaining 35%.
In August 2002, the High Court ruled that the Company and Granada were not liable for the £131.8 million claimed by the Football League from ONdigital. Subsequently, ITV and the Football League agreed a broadcasting contract for certain rights during the 2002/03 and 2003/04 football seasons. The Company sold its 7.5% shareholding in Quiero Television S.A. ("Quiero"), the Spanish DTT platform, in September 2002.
In October 2002, the Company announced a proposed merger with Granada to progress further the consolidation of the ITV network. Granada operates seven regional ITV1 licences that broadcast to approximately 63% of UK television homes (including London). Through its ITV1 franchises, Granada has a total UK television audience share of approximately 12% and in calendar 2002, accounted for approximately 52% of ITV1's NAR and 28% of total television NAR. Granada owns 55.9% of ITV2 and 32.5% of ITV News Channel, as well as 45% of the commercial broadcaster TV3 which operates in the Republic of Ireland. Granada's content business makes programs for ITV, as well as for other television channels in the UK and overseas, and sells programming, including library product, and formats to broadcasters both in the UK and internationally. In 2002, Granada's net sales (excluding discontinued operations and its share of joint ventures' net sales) amounted to £1,427 million. Operating loss for the same period was £139 million.
The merger is conditional upon clearance by regulatory and competition authorities and shareholder approval. Following the merger announcement, the Company and Granada made a detailed submission to the OFT for regulatory consideration. On March 11, 2003, the UK's Trade and Industry Secretary referred
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the proposed merger to the Competition Commission. This decision was in accordance with the advice of DGFT. The Competition Commission will examine concerns principally relating to the sale of TV advertising, as well as secondary competition questions in relation to potential competition for ITV licences and the supply of studio facilities in Northern England. It is expected that the Competition Commission will report its findings to the Trade and Industry Secretary by the end of June 2003 and that the Trade and Industry Secretary will rule on the proposed merger approximately one month later.
If clearances for the merger are obtained sufficiently in advance of the Communications Act coming into force in the UK, it is intended that the merger would be effected in two stages to ensure compliance with the restrictions imposed by the current Broadcasting Act (see "Item 4—Information on the Company—I. UK Television Regulation"). For additional information on the proposed merger, see "Item 10—Additional Information—B. Material Contracts(3)".
The Company announced in December 2002 the closure of Carlton Cinema, a film channel, which is currently available on certain UK cable platforms, as of March 31, 2003.
The Company believes that the consolidation of the ITV network will result in improved operating efficiency. In 1999, the Company initiated the consolidation of ITV into two main groups, Carlton and Granada. In October 2002, the Company and Granada announced a proposed merger. The Company intends to work towards completing the proposed merger with Granada during 2003.
The proposed merger is subject to clearance by regulatory and competition authorities and shareholder approval. Should the merger not proceed, the Company and Granada will continue to work together to enhance the efficiency of the ITV network without a formal merger of the two companies.
E. Overview of the Broadcast Television Market in the United Kingdom
1. Free-to-air Television
In the UK there are five main television channels, traditionally analogue terrestrial channels, which are available without charge ("free-to-air") to the majority of the UK population. Four of the five channels, BBC1, BBC2, ITV1 and Channel 4, are available to over 98% of UK television homes, while the fifth, five, is available to around 86% of UK television homes. BBC1 and BBC2 are operated by the British Broadcasting Corporation ("BBC"), a broadcasting corporation established by Parliament under a Royal Charter. This charter is renewed periodically, with the current charter running until the end of 2006. These channels carry no advertising other than for the BBC's own services and programming and are financed mainly by mandatory annual television licence fees paid by the majority of UK television homes. In addition to these two non-commercial channels, there are three main commercial television channels, ITV1, Channel 4 and five, which rely on advertising and, to a much lesser extent, program sponsorship revenue for their funding. The independent Channel 3 network consists of 15 separate regional licences that together make up ITV1 and one national licence which broadcasts at breakfast time (GMTV).
There has been significant consolidation within ITV in the last decade, including the Company's acquisitions of Central in 1994, Westcountry in December 1996 and HTV in 2000. The Company announced a proposed merger with Granada in October 2002 which, subject to clearance by regulatory and competition authorities, will very substantially consolidate ITV. Consolidation within ITV is currently restricted by sector specific legislation and general competition law. A new Communications Bill, which is expected to remove such legislative impediments, is currently being debated in the UK Parliament and could receive Royal Assent during summer 2003. General competition law, in any event, will continue to apply. See "Item 4—Information on the Company—I. UK Television Regulation". Through its ITV1 licences, the Company accounted in calendar 2002 for approximately 40% of ITV1's NAR, 21% of total television NAR and had a total UK television audience share of approximately 8%.
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The Channel Four Television Corporation is a statutory corporation provided for under the UK Broadcasting Act 1990. It operates a national commercial channel, Channel 4, that is licensed by the ITC. Channel 4 is accountable to Parliament through the ITC and provides a single schedule of programming throughout the UK (except in Wales, where a separate broadcaster, S4C, which is funded by a combination of advertising and Government grants, broadcasts Welsh language programming).
Channel 5 Broadcasting Limited ("Channel 5"), licensed by the ITC, began broadcasting in March 1997. Channel 5 broadcasts under the brand name five and is 65% owned by RTL Group ("RTL") and 35% by United. The channel is currently available to approximately 86% of UK television homes, which is expected to rise slowly in the future.
In addition to analogue terrestrial transmission, the five main television channels in the UK are all available via DTT, DSAT and analogue and digital cable (see "Item 4—Information on the Company—E. Overview of the Broadcast Television Market in the United Kingdom—2. Multi-channel Television"). To receive digital television and related services via DTT, DSAT and digital cable, an appropriate set top box ("STB") or integrated digital TV ("idTV") is required to decode the digital signals. To receive DSAT services a satellite dish is also required. Further free-to-air television channels are available to multi-channel viewers, including ITV2 and ITV News Channel (see below).
2. Multi-channel Television
Multi-channel television is currently widely available to most UK households through three principal delivery methods: DSAT, cable and DTT. Approximately 10.5 million households in the UK currently subscribe or have access to multi-channel television services, representing some 43% of UK television homes and 51% of individuals.
Digital Satellite Television
The leading provider of digital satellite pay television services in the UK is BSkyB. BSkyB's analogue satellite television service was launched in 1989 and in October 1998, the company launched a digital satellite television service ("Sky digital"). BSkyB completed the migration of by far the majority of its analogue customer base to its Sky digital service and ceased transmission of its analogue satellite television service in September 2001. As of the end of December 2002, BSkyB reported that it had 6.6 million subscribers to Sky digital, equivalent to approximately 27% of UK television homes.
In addition, there are an estimated 1 million UK television homes with DSAT receiver equipment that currently receive only the free-to-air channels available via satellite.
As of the end of June 2002, BSkyB operated and distributed 11 wholly-owned Sky television channels (excluding time-shifted versions) and held significant equity interests in ventures that own 14 channels and operate 2 audio services, which it also distributed. The company currently sells its channels retail via digital satellite, wholesale to other pay television services and has secured distribution of versions of three of its channels on DTT. In addition, BSkyB undertakes the marketing and distribution of numerous other subscription channels owned by third parties.
Over 300 channels are potentially available to subscribers to Sky digital, depending on the type of channel package taken. The total channels available include basic and premium channel offerings, as well as pay-per-view ("PPV") services, time shifted channel options and audio channels. Sky digital carries BSkyB's wholly- and partly-owned channels plus a range of third party pay channels. A number of encrypted and unencrypted free-to-air channels are also available, including eight BBC channels, ITV1 and ITV2 (with effect from November 2001), Channel 4 and five. In addition, BSkyB offers interactive television services under the brand name Sky Active, including e-mail, games, e-commerce and additional betting services.
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Cable Television
There are two principal cable television operators in the UK, NTL and Telewest Communications plc ("Telewest"), following the acquisition by NTL of the cable television assets of Cable & Wireless Communications plc ("CWC") in May 2000. Substantial finance has been raised to build cable networks in most major UK conurbations and to acquire subscribers. As of September 30, 2002, around 12.4 million UK homes had been passed by NTL and Telewest, representing around 50% of UK television homes. Of the homes passed and marketed, some 3.4 million homes in total were connected to cable television, representing a penetration rate of 27%. NTL and Telewest launched the roll out of digital cable television services during 2000 and at the end of September 2002, NTL reported 1.2 million digital television subscribers and Telewest 829,000 digital television subscribers, representing 58% and 64% respectively of their total television subscribers in the UK.
Digital Terrestrial Television
DTT technology permits digital television transmission to be received by a conventional terrestrial roof-top aerial.
The ITC has allocated capacity for six DTT multiplexes (known as 1, 2, A, B, C and D). The term multiplex refers to a single block of spectrum able to transmit a number of television channels. Each multiplex, which is broadcast alongside the five existing analogue terrestrial television services (BBC1, BBC2, ITV1, Channel 4 and five), is currently capable of carrying approximately four to seven television channels, depending on a number of factors including broadcast quality, the transmission mode used and the quantity of additional services offered, such as interactivity.
Two transmission modes are currently in use. Multiplexes 1, B, C and D broadcast in 16-QAM (which provides improved signal reliability and coverage at the expense of decreased channel capacity) and multiplexes 2 and A are broadcast in 64-QAM (which allows for increased capacity at the expense of signal reliability and coverage). Total channel capacity of each multiplex in the future will depend upon the type of services offered and transmission mode used to be decided upon by the DTT multiplex operators in compliance with their licence commitments. Future improvements in compression technology and statistical multiplexing may increase channel capacity.
DTT reception is currently estimated at approximately 55%-60% of UK households. An estimated further 20% could potentially receive DTT with a new terrestrial roof-top aerial. In October 2002, the UK Government re-iterated a number of targets that must be met before the switch-off of analogue television services could occur, including 95% of consumers having access to at least one type of digital television equipment. The Government expects these targets to be met between 2006 and 2010.
The existing analogue terrestrial broadcasters were allocated or "gifted" all or part of a multiplex as detailed below. The BBC, ITV, Channel 4 and five are required to use part of this allocated capacity to simulcast their existing analogue services. The BBC was allocated by the UK Government Multiplex 1 and Digital 3 and 4 Limited (a joint venture between ITV and Channel 4) was granted by the ITC the licence to operate Multiplex 2. Five and S4C were allocated capacity on Multiplex A. For S4C this is in Wales only and this multiplex is also required to carry Gaelic programming in Scotland.
On the rest of the allocated capacity, the BBC is allowed to broadcast additional free-to-air channels and interactive services subject to Government approval. ITV, Channel 4 and five are allowed to broadcast free-to-air, subscription or PPV channels as well as interactive and multimedia services (subject to limits on the amount of capacity which can be dedicated to these latter services). See "Item 4—Information on the Company—H. Competition—1. Broadcasting". SDN Ltd. ("SDN"), equally owned by S4C, United and NTL, has been awarded the licence to operate the remaining capacity on Multiplex A nationally.
In December 1997, the ITC granted ONdigital (then called British Digital Broadcasting Plc) the licences for DTT multiplexes B, C and D. Following the announcement of the cessation of ONdigital's
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service in April 2002, the ITC revoked these licences. The ITC subsequently awarded the licences to operate Multiplex B to the BBC and multiplexes C and D to Crown Castle International ("Crown Castle").
The BBC, Crown Castle and BSkyB are equal partners in DTV Services Limited ("DTV Services"), a company formed to provide consumer, retailer and marketing support for the new free-to-air multi- channel DTT service launched in October 2002 under the generic brand Freeview. Including services transmitted on multiplexes 1, 2 and A, some 30 television channels and text services are available on DTT, including ITV1, ITV2 and ITV News Channel, and 12 radio stations, together with additional interactive services. Following the launch of Freeview the DTT platform no longer offers a pay television option. Former ONdigital subscribers can continue to view DTT services through their ONdigital set top box.
3. Television Advertising
Total TV NAR was estimated at just over £3.1 billion in calendar 2002, of which ITV1 had a 54% share, Channel 4—20%, five—8%, GMTV—2% and the combined total of all satellite, cable and DTT channels—17%. ITV1's large share results principally from its share of commercial viewing of approximately 52% in peak time (19:00-22:30). ITV1 regularly has over 10 million viewers at peak time compared with between 3 million and 4 million for Channel 4, ITV1's nearest commercial competitor. During 2002, ITV1's average audience in peak time was 7 million viewers compared to an average of 2 million viewers for Channel 4 and 1 million viewers for five.
4. Television Viewing
The viewing shares of the five main free-to-air channels shown below are the combined viewing through all platforms: analogue and digital terrestrial, digital satellite and analogue and digital cable. During the period December 30, 2002 and March 2, 2003, broadcasters had the following shares of UK television viewing as calculated by the Broadcasters Audience Research Board ("BARB"):
All Time (06:00-29:59)
ITV1 (including GMTV)—24%, BBC1—26%, BBC 2—12%, Channel 4—9%, five—6% and the remaining satellite, cable and DTT channels combined—23%.
Peak Time (19:00-22:30)
ITV1—33%, BBC1—27%, BBC2—10%, Channel 4—8%, five—6% and the remaining satellite, cable and DTT channels combined—16%.
During the 2002 fiscal year the Company divided its activities for management purposes into three main operating divisions: Broadcasting, Screen Advertising and Content. On March 16, 2001, the Company sold the Technicolor division and the results of these businesses are shown as discontinued operations in 2001 and all prior periods presented. During the 2000 fiscal year the Company sold the companies which comprised its Products division, Quantel and SSL, and the results of these businesses are shown as discontinued operations in 2000 and all prior periods presented.
The following table summarizes the Company's net sales from each operating division for each of the last three fiscal years. Results for the fiscal years ended September 30, 2000 and 2001 have been restated
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where appropriate to reflect the disposal of the Technicolor and Products divisions. The net sales figures below are stated before share of joint ventures' net sales.
| | Year ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||||||||
| | (in millions) | |||||||||||||||
| Broadcasting | £739.4 | 77 | % | £772.7 | 48 | % | £742.1 | 36 | % | |||||||
| Screen Advertising | 60.1 | 6 | % | 57.4 | 4 | % | 47.3 | 2 | % | |||||||
| Content | 165.1 | 17 | % | 181.7 | 11 | % | 176.7 | 9 | % | |||||||
| Other | — | — | 28.3 | 2 | % | 21.6 | 1 | % | ||||||||
| 964.6 | 100 | % | 1,040.1 | 65 | % | 987.7 | 48 | % | ||||||||
| Discontinued operations | — | — | 561.4 | 35 | % | 1,075.1 | 52 | % | ||||||||
| Total | £ | 964.6 | 100 | % | £ | 1,601.5 | 100 | % | £ | 2,062.8 | 100 | % | ||||
The following table contains a geographical analysis of the Company's net sales, by destination of sale, for each of the last three fiscal years.
| | Year ended September 30, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||||||||
| | (in millions) | |||||||||||||||
| United Kingdom | £918.3 | 95.2 | % | £962.1 | 60.1 | % | £925.5 | 44.9 | % | |||||||
| United States | 17.0 | 1.8 | % | 43.2 | 2.7 | % | 29.4 | 1.4 | % | |||||||
| Continental Europe | 18.8 | 1.9 | % | 22.7 | 1.4 | % | 21.1 | 1.0 | % | |||||||
| Japan and other | 10.5 | 1.1 | % | 12.1 | 0.8 | % | 11.7 | 0.6 | % | |||||||
| 964.6 | 100.0 | % | 1,040.1 | 65.0 | % | 987.7 | 47.9 | % | ||||||||
| Discontinued operations | — | — | 561.4 | 35.1 | % | 1,075.1 | 52.1 | % | ||||||||
| Total | £ | 964.6 | 100.0 | % | £ | 1,601.5 | 100.0 | % | £ | 2,062.8 | 100.0 | % | ||||
Broadcasting
The Broadcasting division encompasses the Company's broadcasting, advertising sales and facilities businesses.
The Company operates four ITV1 licences through its subsidiaries Carlton Broadcasting, Central, Westcountry and HTV (together "Carlton Television") that broadcast to approximately 45% of UK television homes (including London).
Carlton Broadcasting. Carlton Broadcasting holds the London Weekday ITV1 licence ("Carlton—London region") which broadcasts from 09:25 to 06:00 Mondays to Thursdays and 09:25 to 17:15 on Fridays. Carlton Broadcasting's licence expires on December 31, 2008, following its renewal on January 1, 1999 (see "Item 4—Information on the Company—I. UK Television Regulation—Channel 3"), but can be renewed before then. The Carlton—London region offers the largest regional audience in UK commercial television with some 4.9 million homes and 11.1 million viewers, accounting for approximately 20% of all television homes in the UK. The Carlton—London region has one of the highest shares of ITV1 NAR with an estimated share of 15.1% of such revenue in calendar 2002.
Central. Central holds the regional ITV1 licence for the East, West and South Midlands of the UK ("Carlton—Central region") and renewed its licence with effect from April 1, 2001 for a further ten year period. Based in Birmingham, Nottingham and Abingdon, the Carlton—Central region broadcasts seven days a week from 09:25 to 06:00 to approximately 3.9 million homes and 8.8 million viewers. Carlton—
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Central region's share of ITV1 NAR in calendar 2002 was approximately 16.3%, the highest of all the ITV1 licences.
HTV. HTV is the ITV1 licence holder for Wales and West of England broadcasting to 2 million homes and 4.5 million viewers and accounting for 6.1% of ITV1 NAR in calendar 2002. HTV broadcasts seven days a week from 09:25 to 06:00. The Company acquired HTV in October 2000. HTV's licence was renewed in 1999 and expires at the same time as the Carlton—London region licence.
Westcountry. Westcountry is the ITV1 licence holder for South-West England ("Carlton—West Country region"), which broadcasts to 742,000 homes and 1.6 million viewers and accounted for 2% of ITV1 NAR in 2002. Carlton—West Country region broadcasts seven days a week from 09:25 to 06:00. Carlton—West Country region's licence was renewed in 1999 and expires at the same time as Carlton—London region's licence.
Carlton Media Sales. Carlton Media Sales undertakes the Company's television advertising airtime sales activities. Carlton Media Sales sells the advertising airtime for the Carlton—London region, Carlton—Central region, Carlton—West Country region and HTV (since January 2001), as well as for SMG's ITV1 licences Scottish TV and Grampian TV (also since January 2001) and for ITV2 in conjunction with Granada.
MPC. MPC provides digital visual effects and computer animation to the advertising, music, TV and feature film industries.
Carlton 021. Carlton 021 provides outside broadcast facilities for broadcasters both in the UK and overseas, as well as for independent production companies.
Screen Advertising
Carlton Screen Advertising. Carlton Screen Advertising is the market leader in cinema advertising sales in the UK and the Republic of Ireland. In the UK, Carlton Screen Advertising has exclusive rights to sell advertising on over 2,200 cinema screens which account for 63% of UK cinema admissions. The contracts with cinema owners vary in length from 1 to 7 years typically. In return for granting exclusive rights to Carlton Screen Advertising, the cinema owner receives a share of the revenues, and in some cases this may be underpinned by a minimum guarantee.
Advertising on cinema screens allows advertisers to target an elusive audience (generally more youthful and of a higher social class than other media) in an environment that generates high levels of brand awareness.
In addition to selling advertising on the cinema screen, Carlton Screen Advertising has also developed supplementary revenue streams for cinema owners. Revenues are now generated from promotional activity in cinema foyers and poster units have been installed in many cinemas allowing advertisers further opportunities to target the valuable cinema-going audiences.
Content
The Content division comprises the Company's television program production and distribution activities.
Carlton Productions. Carlton Productions conducts the Company's program production operations. Carlton Productions' programming, a mix of in-house productions and co-productions with other independent producers, is supplied primarily to ITV and other UK broadcasters. Carlton Productions has also established international production and development ventures, including with Newsweek Magazine and PBS in the United States and MediaPro in Spain. In 2002, Carlton Productions LLC was established as
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a small US-based production unit specialising in documentary and factual commissions for US broadcasters.
Action Time. Action Time produces or licences game shows and other original entertainment and lifestyle formats, both in the UK and internationally.
Planet 24. Planet 24 produces entertainment and magazine programming.
Carlton International. Carlton International is an international distributor of films and television programs. Carlton International distributes programs from Carlton's libraries, other UK broadcasters and independent producers. The libraries are continually supplemented by the Company's own production of new programs. The Company has also acquired film collections, including the Rank Film Library, the UK rights to the Rohauer Collection and the ITC Library. In total Carlton International's library contains over 2,000 films, the largest English language film library outside of Hollywood, and 18,000 hours of television programs. Carlton International's US operation comprises US program sales and distribution activities together with the wholly-owned television movie production and acquisition business, Carlton America, including Hamdon Entertainment. Carlton International is also responsible for supervising a full range of merchandise licensing rights for the Company's library assets, including video, DVD, toys, clothing, publishing and electronic games for the UK and international markets. The Carlton Publishing Group, including Carlton Books and Andre Deutsch, publishes entertainment, sports and lifestyle books and Carlton Visual Entertainment (formerly Carlton Video) is a supplier of full and mid-priced video and DVD home entertainment products in the UK.
G. Associated Companies, Joint Ventures and Investments
France Télé Film. The Company has a 33% interest in France Télé Film S.A., which operates the cable and satellite channel, Festival, in France.
GMTV. The Company has a 25% interest in GMTV which holds the national Channel 3 Breakfast Licence and broadcasts daily from 06:00 to 09:25. GMTV renewed its licence with effect from January 1, 1999 until December 31, 2008.
ITN. Carlton owns a 20% interest in ITN, a supplier of national and international news programming for ITV, Channel 4 and five, as well as for various radio and international television channels. In November 2001, ITV1 signed a new six year contract with ITN effective January 1, 2003.
ITV2. The Company has a 44.1% interest in ITV2, a free-to-air general entertainment channel, which launched in December 1998. The channel is available on DTT, DSAT and the main UK cable television networks.
ITV News Channel. The Company owns a 32.5% interest in ITV News Channel, the 24-hour news service. ITV News Channel is available on DTT, DSAT and the main UK cable television networks.
LNN. The Company owns a 50% interest in LNN, a joint venture with LWT (Holdings) Limited ("LWT"), owned by Granada, which provides seven day local news and transmission services for the Carlton—London region, LWT, GMTV and other ITV1 licences.
Screenvision Europe. The Company has a 50% interest in Screenvision Europe a joint venture which was formed in June 2002 with Thomson to acquire cinema screen advertising interests across continental Europe.
Screenvision US. The Company has a 50% interest in Screenvision US, the cinema screen advertising joint venture with Thomson based in the United States.
The Company is represented on the boards of all of the above companies.
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Broadcasting
The UK's main commercial television networks—ITV1, Channel 4 and five—compete with each other, the BBC and satellite, cable and DTT channels for viewing audiences.
In February 2000, the Government announced that the BBC would receive an extra £200 million a year on average in licence fee funding between 2000 and 2006 and be required to make cumulative efficiency savings of over £1 billion over the same period.
The BBC is also expanding its wholly-owned commercial activities, including BBC Worldwide, BBC Technology, BBC Resources and BBC Broadcast. The BBC has established channel and programming-related joint ventures in the UK and internationally with, amongst others, Telewest, Alliance Atlantis Broadcasting, Discovery Communications, Foxtel and Fremantle Media. Some of the profits from these activities has been, and is likely to continue to be, directed towards funding the BBC's television activities.
During the period December 30, 2002 and March 2, 2003, BBC1 and BBC2 had an audience share of 26% and 12% respectively and a combined broadcasting spend in 2001/02 of £1.4 billion.
Over the same period, Channel 4 had an audience share of 9% and in 2001 invested approximately £426 million in its schedule. Five had an audience share of 6% and invested around £150 million in its schedule in 2002.
In homes with access to multi-channel television, the Company faces further competition for viewers from additional channels and services from the BBC and Channel 4, as well as channels only available on satellite, cable or DTT.
The BBC broadcasts six free-to-air channels which are available only on satellite, cable and DTT: BBC Three (formerly BBC Choice), BBC Four (formerly BBC Knowledge), BBC News 24, CBBC, Cbeebies and BBC Parliament.
UKTV, a joint venture between the BBC and Flextech, the content division of Telewest, owns and operates six subscription channel brands: UK Gold, UK Gold 2, UK Drama, UK Style, UK Horizons and Play. In addition Flextech owns and operates Bravo, LivingTV, Trouble and Challenge and in January 2003 launched a new entertainment channel FTN.
Channel 4 launched a premium subscription film channel, FilmFour, in November 1998 and a new general entertainment pay channel, E4, in January 2001.
BSkyB owns and operates 11 channels (excluding time-shifted versions), including the entertainment channel Sky One, which had an audience share of 1.8% between December 30, 2002 and March 2, 2003, and premium sports and movies channels. BSkyB holds significant equity interests in ventures that own 14 further channels and operate 2 audio channels, including Nickelodeon, the Paramount Comedy Channel and the National Geographic Channel.
The Company expects that the penetration of these and other channels will continue to increase, thereby reducing the overall viewing of BBC1, BBC2, ITV1, Channel 4 and five. Despite this erosion of conventional analogue terrestrial television viewing, the Company expects ITV1 to remain the only commercial channel in the UK capable of regularly achieving audiences of over 10 million people at any one time. Increasing multi-channel penetration is expected to help grow ITV2's total audience share.
ITV competes with the BBC, Channel 4, five and satellite, cable and DTT channels, including channels owned by BSkyB, for commissioned and acquired programs and sports rights necessary to construct an attractive schedule for viewers. However, ITV1's major program requirement is still for high quality domestically produced drama and light entertainment, which is substantially produced by the companies operating ITV1 licences.
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The Company's four regional ITV1 licences compete for advertising sales principally with Channel 4, five, S4C (in the case of HTV Wales) and satellite, cable and DTT channels.
Channel 4's share of total TV NAR during calendar 2002 was 20%, five's was 8% and BSkyB's share was approximately 8%. The advertising revenues received by five since launch have contributed to the reduction in the share of television advertising revenues received by the Company's ITV1 licences.
The Company recognizes that the likely increase in penetration and viewing of multi-channel television will have a potentially negative impact on ITV1's share of advertising revenues. However, the Company believes that ITV1 will retain the largest share of UK television advertising revenues and that the future development of ITV2 and the efficiencies achieved through the merger with Granada could help partially to mitigate the decline in viewing share and thus share of advertising.
Screen Advertising
In the UK, Carlton Screen Advertising competes with Pearl & Dean, owned by SMG, for advertising sales contracts with cinema owners and for cinema advertising monies. In certain territories, including the US, the Company's cinema screen advertising businesses compete with similar sales operations controlled by cinema owners.
Content
Carlton Productions competes with Granada, SMG and Ulster Television plc ("Ulster"), which also own and operate ITV1 licences, and with independently owned and managed production companies and other broadcasters' own production operations, for commissions to produce original programming and for the required personnel and resources to produce such commissions. Carlton International competes with other television and film libraries based in the UK, including the BBC, the US and elsewhere for programming and film rights sales to broadcasters, as well as with packaged media distributors and merchandising franchisees.
The commercial television system in the UK was created in 1954. The ITC was established under the Broadcasting Act 1990 to regulate UK commercial television and, among other duties, to grant licences for the various regions within the independent Channel 3 network. The Broadcasting Act 1990 was amended by the Broadcasting Act 1996. UK commercial television is also regulated by the Department for Culture, Media and Sport ("DCMS"), the Government department responsible for broadcasting and media policy, the Broadcasting Standards Commission ("BSC") and the Radiocommunications Agency. A new Communications Bill is currently being debated in the UK Parliament and could receive Royal Assent during summer 2003 (seeFuture Regulation below).
Channel 3. Under the Broadcasting Act 1990, the ITC awarded ITV1 licences in 1991 with effect from 1993 to the highest bidder, provided that the program proposals of such a bidder met certain quality thresholds. After granting an ITV1 licence, the ITC monitors the performance of the licence holder to ensure that they meet their licence conditions including, for example, the quality, range and diversity of their programming, regional commitments and the extent and nature of their advertising. ITV1 is subject to a Program Code (the "Code") which sets out the requirements for its broadcast content. Compliance with the Code is monitored by the ITC. If a licence holder does not comply with its licence conditions, the ITC can warn the licensee, impose financial penalties and ultimately revoke the licence.
The Company's subsidiaries Carlton Broadcasting, Central, HTV and Westcountry were awarded their respective regional ITV1 licences for an initial ten year period ending December 31, 2002. Under the terms of the Broadcasting Act 1990 incumbent licence holders can renew on an uncontested basis their licence for a new ten year period before the end of those licences. ITV1 licensees must make annual
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payments to the ITC to maintain their licences. In calendar 1998 Carlton Broadcasting and Central paid 11% of their annual terrestrial television advertising, sponsorship and other qualifying revenue (the "Qualifying Revenue Charge" or "PQR") to the ITC, but for the smaller HTV the percentage was 2% and for Westcountry the percentage was nil. Licensees were also required to pay an annual licence fee based on the original cash bid for the relevant licence.
In January 1998, following a period of consultation, the ITC published a document setting out the methodology and procedure for renewing on an uncontested basis the ITV1 licences. Carlton Broadcasting, Central and Westcountry each submitted ten year business plans to the ITC in May 1998 in their requests for new ten year licences to be effective from January 1, 1999. So did HTV which was not at the time owned by the Company. When offering the new ten year licences, the ITC set new financial terms based on its own financial modelling and taking into account the licensee's views. The financial terms were then set to give a 10% real pre-tax return estimated by the ITC from the analogue transmissions over the ten years of the licence period. This was calculated for each licence on a stand-alone basis, excluding the cost benefits of common ownership and after allowing for the initial investment and subsequent net investment in fixed assets and working capital. The apportionment of the net cash flows to the digital (simulcast) transmissions was made as a function of the estimated penetration of homes in the licensee's region of the digital simulcast service of the channel whether by DTT, digital cable or DSAT as a proxy for the channel's digital viewing share. Pursuant to the financial terms, the ITC based the licence payments on the total estimated cash flows in excess of the 10% real pre-tax return on analogue transmissions and aimed to set the financial terms at such a level that, over the course of the licence, 25% of the net present value of the total payments would be in the form of cash bids and 75% in the form of PQR.
The Company renewed its Carlton—London region and Carlton—West Country region licences for ten years with effect from January 1, 1999, as did HTV. Under the new licences Carlton Broadcasting, HTV and Westcountry pay PQR rates of 20%, 7% and 13% respectively. In fiscal 2002 the PQR cost on the analogue revenues was £34.4 million for Carlton Broadcasting, £3.5 million for Westcountry and £4.9 million for HTV. No PQR is payable on the proportion of revenues attributed to the viewing of ITV1 via digital broadcasts. In 2002 the annual licence fee was £16.9 million for Carlton Broadcasting, £1.2 million for Westcountry and £2.2 million for HTV. The annual licence fees are adjusted each year in accordance with the change in the RPI, which increased by 3.2% in 2000, 0.7% in 2001 and 2.9% in 2002.
In 1999, the Company rejected the terms offered to Central for the Carlton—Central region principally because they would have resulted in higher licence payments in fiscal years 1999-2002. Central re-applied for, was offered and accepted a new licence from April 1, 2001 (the latest date to renew on an uncontested basis), the financial terms of which are an annual licence fee of £7.6 million which became effective from January 2002, and a PQR rate of 17% which was effective from April 2001. In fiscal 2002 the annual licence fee for Central was £5.7 million and the PQR cost was £32.0 million. Carlton Broadcasting, HTV and Westcountry will be able to apply for licence renewals as from January 2005 and Central as from April 2007.
In November 1998, ITV1 began broadcasting its service on DTT, in addition to its existing analogue terrestrial service. Shortly after ITV1 launched on the main cable networks and then on DSAT in November 2001. No PQR is payable on the proportion of revenues attributed to the viewing of ITV1 via digital broadcasts which includes DTT, DSAT, digital cable and any other digital technology. Therefore as digital penetration increases in the future, the proportion of the total advertising and sponsorship revenues attracting PQR is expected to fall.
The Communications Bill proposes that within a year of receiving Royal Assent, ITV1 licensees will be required to take up new digital licences on terms which will be "equivalent in all material respects" to those provided for by the existing analogue licences. Licence holders will not be able to apply for new financial terms at the same time. The financial terms for the new digital licences will be carried over from
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the current analogue licences and renewed on the timetable that would have applied under the current licensing regime.
Each of the regional ITV1 licensees is a member of a federal structure which provides for the independent scheduling, commissioning and purchasing of programs across the nationwide network (save for certain regional variations). As required by the Broadcasting Act 1990, this federal structure is set out in the network supply contract which was entered into among the various ITV1 licensees and the Independent Television Association Limited, now renamed ITV Network, on May 11, 1992. It has since been amended through a series of supplemental agreements entered into on June 30 and September 24, 1993 and on March 6, 1995.
The network supply contract provides for the establishment of a central council, the ITV Network Council, which is responsible for making all decisions in relation to the operation of ITV Network, including determining program strategy and setting the annual ITV1 network program budget. Most decisions of Council can be passed by a simple majority of the members in attendance (on the basis of one vote per member), however certain reserved matters require 60% of the votes cast to be approved (e.g. the ITV1 network program budget). The number of votes which each licensee has in respect of these reserved matters is calculated from a pre-determined formula which is applied to the licensee's share of qualifying revenues in the previous year. The Company currently has 40.261% of the voting rights on this basis.
The funding of the annual ITV1 network program budget is undertaken by the regional licensees. Each licensees' funding share is determined by reference to ITV1 NAR share, adjusted to take account of small company allowances and certain regional opt-outs. ITV1 NAR share is confirmed and approved by the ITC. ITV Network may suspend a regional licensee's membership in the event of failure to pay any amount due under the network supply contract within 5 business days of the due date. In calendar year 2002, £775 million was spent by ITV1 on network programming, the Company's share being approximately 42%.
Under the Broadcasting Act 1990, the majority of an ITV1 licensee's programming must be of EU origin and at least 25% of all programming (excluding news, repeats and certain other categories) must be commissioned from independent production companies. This 25% requirement also applies to all the analogue terrestrial broadcasters. The Communications Bill proposes that this quota could also be measured by value.
The Broadcasting Act 1996 permits common ownership of any number of ITV1 regional licences (except the two London area licences held by Carlton Broadcasting and LWT, owned by Granada, which may not be held under common ownership), provided that the combined share of the total UK television audience is no more than 15% as measured by analysis of BARB data for the ITC. Under the Broadcasting Act 1996, the ITV1 companies are also permitted to control or have an interest in any number of cable, satellite and DTT channels, provided that such ownership (when combined with the existing terrestrial audience share) would not exceed the 15% audience share ceiling. These media ownership rules are set to change when the Communications Bill that is currently being debated by the UK Parliament is passed.
Channel 4. The Channel 4 Television Corporation is a statutory corporation established under the Broadcasting Act 1990. It operates Channel 4, a national commercial channel that is licensed by the ITC and funded by advertising. Channel 4 was granted a new 10 year national broadcasting licence in 2003, which is renewable for additional 10 year terms. Channel 4 is accountable to Parliament through the ITC. Under its licence, Channel 4 is required to provide a public service for disseminating information, education and entertainment. Its programs must maintain a wide range in their subject matter, having regard both to the programs as a whole and also to the day of the week and the times of the day at which they are broadcast and reflect interests and tastes not normally catered to by the other terestrial channels. A suitable proportion of programs must be of an educational nature.
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Channel 5. In April 1996, the ITC granted a ten year licence to Channel 5, with an annual licence fee of £22 million to be adjusted each year for the change in the RPI. The Channel 5 licence requires that current programming consists of at least 55% originally produced or commissioned programs and includes news, current affairs, children's and religious programs, with programs of high quality which appeal to a variety of tastes and interests. Channel 5 applied for a renewal of its licence for a ten year period beginning April 1, 2003, the terms for which were announced by the ITC in February 2003 and which were accepted by Channel 5 in March 2003. In the event of a change in control of Channel 5, the Communications Bill proposes to institute a review of its effects or likely effects on the service and allows for the variation of the licence.
BBC Channels. The BBC was established by Royal Charter in 1927. The seventh Royal Charter, which came into effect on May 1, 1996, runs until December 31, 2006. The BBC's major source of funding is the licence fee, which is levied on television households in the UK. In 1999 the Government announced a review of the BBC's funding. That review concluded that the licence fee should continue to be the BBC's main source of income until at least the end of the year 2006. In February 2000, the Government announced that the BBC would receive an additional £200 million extra per year in licence fee funding up to and including 2006-07 in return for efficiency savings.
DTT. The ITC awarded licences to operate DTT multiplexes based on specified matters including the timetable for the commencement of broadcasting; proposals and timetable for implementing and improving coverage; the proposals for promoting STB take-up; the capacity of the program services proposed to appeal to a variety of tastes and interests and the applicant's ability to establish and maintain the proposed service. These licences were awarded originally in December 1997 to ONdigital (then called British Digital Broadcasting Plc).
Following the cessation of ONdigital's service in May 2002, its licences were revoked and re-tendered by the ITC. The ITC subsequently awarded the licences to the BBC and Crown Castle. A new free-to-air DTT service was launched in October 2002 marketed under the generic brand Freeview. Consumer, retail and marketing support is provided to Freeview by DTV Services, a company formed by the BBC, Crown Castle and BSkyB.
Media Ownership. Media ownership rules have been subject to recent consultation by the UK Government and are in the process of being revised in the Communications Bill currently being considered by the UK Parliament.
Under the Broadcasting Act 1996, proprietors of newspapers with a share of more than 20% of the national market are prevented from holding over 20% of any terrestrial television licence. In its current form the Communications Bill proposes to remove this rule for Channel 5 but retain it for Channel 3. The Broadcasting Act 1996 also restricts the Channel 3 or Channel 5 licence-holders from controlling a national newspaper with more than a 20% of UK national circulation. This restriction is lifted for Channel 5 in the Communications Bill in its current form and remains in force for Channel 3 licencees.
Non-EEA ("European Economic Area") companies are currently prohibited from owning a Channel 3 licence. In its current form the Communications Bill proposes to remove this rule.
Future Regulation. The UK Government reviewed the regulation of both the telecommunications and broadcasting industries and published a White Paper in December 2000 setting out its proposals for reforming the communications sector. These included: amalgamating the Office of Telecommunications ("OFTEL"), the ITC, the BSC, Radiocommunications Agency and the Radio Authority to create a single regulator, OFCOM, to oversee the broadcasting and telecommunications industries.
A small Bill to establish the office of OFCOM received Royal Assent in March 2002. The Communications Bill, which covers, amongst other areas, the functions of OFCOM and media ownership rules, was subsequently introduced to the UK Parliament in November 2002. The Communications Bill is
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currently being debated in Parliament and could receive Royal Asset during summer 2003. The functions of the existing regulators will then, over a period, transfer to OFCOM and commencement orders will be introduced to activate parts of the new Communications Act.
The Communications Bill contains a range of measures that, if implemented, will affect future regulation of ITV1 including: proposals to abolish the "15% audience share limit" and the "London ITV1 split"; proposals to oblige the ITV licensees to replace their existing analogue licences with new digital licences (which will be on the same terms as the current analogue licences and which will require simulcasting in analogue form as OFCOM consider appropriate); and proposals to update the current system of content regulation.
Buildings
At September 30, 2002, the Company leased office, studio and warehouse space in the following principal locations: London, Birmingham, Nottingham, Abingdon, Plymouth, Cardiff and Bristol in the UK.
Leased properties cover an aggregate of approximately 1,247,358 square feet and expire at various dates through to 2123. As of September 30, 2002, annual aggregate lease payments relating to the Company's leases totaled approximately £10.4 million.
In addition, at September 30, 2002, the Company owned freehold properties covering an aggregate of approximately 223,956 square feet. These properties, which include office and warehouse space, are principally located in London and Newbury in the UK.
Intellectual property
The Company owns a significant program library, which is distributed internationally by Carlton International. The Company believes that Carlton International is the second largest UK-based international program distributor after the BBC measured in terms of sales revenues, and its catalogue contains over 18,000 hours of programming and 2,000 films, including over 300 made for television movies.
Action Time owns over 60 program formats and is active in 40 territories around the world. Carlton's program production division produced 757 hours of programming in 2002 for ITV, Channel 4 and the BBC.
The Company has trademark rights for "CARLTON", which has been registered in the UK and registered or applied for in another 24 countries.
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The Company primarily carries out its business through wholly-owned operating companies. Set out in the table below are the principal operating companies as at September 30, 2002. All the companies are wholly owned and are incorporated and operating in the United Kingdom except as noted.
| (a) Subsidiary undertakings | Country of incorporation/establishment | |
|---|---|---|
| Action Time (UK) Limited* | ||
| Andre Deutsch Limited | ||
| Carlton Active Limited ** | ||
| Carlton Books Limited | ||
| Carlton Broadcasting Limited* | ||
| Carlton Film Distributors Limited | ||
| Carlton Interactive Media Limited | ||
| Carlton International Media, Inc. (trading as Carlton America)* | USA | |
| Carlton International Media Limited* | ||
| Carlton Productions Limited** | ||
| Carlton Media Sales Limited** | ||
| Carlton Screen Advertising Limited* | ||
| Carlton Television Limited* | ||
| Carlton 021 Limited** | ||
| Carlton Visual Entertainment Limited* | ||
| Central Independent Television Limited * | ||
| Hamdon Entertainment* | USA | |
| HTV Group Limited* | ||
| ITC Distribution LLC (also trading as Carlton Productions LLC)* | USA | |
| ITC Entertainment Group Limited* | ||
| The Moving Picture Company Limited* | ||
| Planet 24 Productions Limited* | ||
| SelecTV Cable Limited* | ||
| Superhire Limited | ||
| Westcountry Television Limited* |
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(b) Joint ventures and associated undertakings
| | Country of registration/ incorporation | Nominal value of ordinary shares | Number of ordinary shares in issue | Proportion of shares held by group | |||||
|---|---|---|---|---|---|---|---|---|---|
| GMTV Limited | England and Wales | £1 | 2,000,000 | 25 | % | ||||
| Independent Television News Limited | England and Wales | £1 | 400,000 | 20 | % | ||||
| ITV2 Limited | England and Wales | £1 | 915,610 | 44.1 | % | ||||
| ITV News Channel Limited(1) | England and Wales | 1 | p | 1,000 | 32.5 | % | |||
| London News Network Limited(2) | England and Wales | £1 | 100 | 50 | % | ||||
| Screenvision Holdings (Europe) Limited(3) | England and Wales | £1 | 40,208,404 | 50 | % | ||||
| Technicolor Cinema Advertising LLC(4) | USA | US$1 | 122,000 | 50 | % |
Notes
As at September 30, 2002, the Group also held a 33% interest in France Télé Film, operating in France. This is held as a fixed asset investment as the Company does not have a significant influence under the FRS 9 definition. The carrying values of this investment is not material.
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Item 5—Operating and Financial Review and Prospects
The review of operations is based on the financial position and performance of the Company as reported under UK GAAP.
The Company has shown separately in Note 2 of Notes to the Consolidated Financial Statements the net income/(loss) before and after the financial effects of discontinued operations and exceptional operating items. A summary of the Company's results for 2002, 2001 and 2000 is shown below:
| | Year ended September 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||
| | (in millions) | ||||||
| Total net sales | £1,072.8 | £1,702.6 | £2,126.5 | ||||
| Less: share of joint ventures | (108.2 | ) | (101.1 | ) | (63.7 | ) | |
| Net sales | 964.6 | 1,601.5 | 2,062.8 | ||||
| Analyzed as: | |||||||
| Continuing operations | 964.6 | 1,040.1 | 987.7 | ||||
| Discontinued operations | — | 561.4 | 1,075.1 | ||||
| 964.6 | 1,601.5 | 2,062.8 | |||||
| Operating costs | 911.4 | 1,495.5 | 1,801.7 | ||||
| Exceptional operating items | (4.8 | ) | 58.6 | 39.0 | |||
| Operating income | 58.0 | 47.4 | 222.1 | ||||
| Analyzed as: | |||||||
| Continuing operations | 58.0 | 4.4 | 131.1 | ||||
| Discontinued operations | — | 43.0 | 91.0 | ||||
| 58.0 | 47.4 | 222.1 | |||||
| Share of operating results of joint ventures and associates | (107.2 | ) | (194.0 | ) | (141.1 | ) | |
| (49.2 | ) | (146.6 | ) | 81.0 | |||
| Profit/(loss) on sale and termination of businesses | (86.8 | ) | (227.0 | ) | (304.3 | ) | |
| Income/(loss) on ordinary activities before interest | (136.0 | ) | (373.6 | ) | (223.3 | ) | |
| Amounts written off investments | (8.2 | ) | — | — | |||
| Net interest receivable/(payable) | (12.0 | ) | (35.6 | ) | (28.4 | ) | |
| Income/(loss) before taxes | (156.2 | ) | (409.2 | ) | (251.7 | ) | |
| Taxation on income | 0.2 | 19.2 | (25.7 | ) | |||
| Net income/(loss) | £(156.0 | ) | £(390.0 | ) | £(277.4 | ) | |
In the 2002 fiscal year, the Company's consolidated net sales fell 39.8% to £964.6 million (2001: £1,601.5 million, 2000: £2,062.8 million) and operating income increased 22.4% to £58.0 million (2001: £47.4 million, 2000: £222.1 million). Net sales decreased in 2002 and 2001 due to the sale of the Technicolor businesses in March 2001 and the Products division in 2000.
In the 2002 fiscal year, the Company's continuing operations net sales fell 7.3% to £964.6 million (2001: £1,040.1 million, 2000: £987.7 million) and operating income from continuing operations increased by £53.6 million to £58.0 million (2001: £4.4 million, 2000: £131.1 million).
Operating income is stated after exceptional operating items/(charges) of £4.8 million in 2002 (2001 £58.6 million charges, 2000: £39.0 million charges). Exceptional operating items in 2002 were in respect of reorganization and restructuring costs, asset write-downs and a goodwill impairment more than offset by litigation net income
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Share of operating losses from joint ventures and associates in 2002 fell to £107.2 million (2001: £194.0 million, £141.1 million) due to the closure of ONdigital and ITV Sport Channel and the other digital media businesses.
Net loss before taxes in 2002 was £156.2 million (2001: £409.2 million, 2000: £251.7 million). Loss before taxes included a loss resulting from discontinued operations of £188.5 million (2001: £369.6 million, 2000: £355.8 million), £86.8 million of which was in respect of a net loss on sale and termination of businesses (2001: £227.0 million, 2000: £304.3 million) and £101.7 million of which was in respect of the Company's share of results of discontinued joint ventures and associates (2001: £185.6 million, 2000: £142.5 million). Net income before taxes from continuing operations in 2002 increased by £71.9 million to £32.3 million (2001: £39.6 million loss, 2000: £104.1 million income).
The loss per Ordinary share was 24.8p (2001: 59.7p, 2000: 44.5p) inclusive of 26.8p in respect of the cost of discontinued operations (2001: 51.6p, 2000: 53.1p). Dividends per Ordinary share were 8.275p (2001: 8.275p, 2000: 16.55p).
Fiscal Year Ended September 30, 2002 Compared to Fiscal Year Ended September 30, 2001
In the 2002 fiscal year, consolidated net sales were £964.6 million, a decrease of £636.9 million or 39.8% over the 2001 fiscal year. The decline was principally due to the sale of Technicolor on March 16, 2001.
As a result of the sale of Technicolor, the UK is now the Company's only significant geographic segment. UK net sales by destination accounted for 95.2% of continuing operations net sales in 2002 or £918.3 million (2001: £962.1 million) and accounted for 91.2% of continuing operations operating income before exceptional operating items or £48.5 million (2001: 87.7%—£49.8 million).
The decrease in UK operating income resulted from the slowdown of advertising revenues and the increased network schedule costs (resulting from both higher investment in the ITV1 schedule and stock adjustments). These were largely offset by a series of cost saving initiatives and the scaling down of loss-making internet and digital channel activities. Net sales from continuing operations outside the UK in 2002 totaled £46.3 million (2001: £78.0 million) and operating income from continuing operations outside the UK accounted for £4.7 million (2001: £7.0 million).
Operating costs in 2002 were £911.4 million (2001: £1,495.5 million, of which £983.3 million were from continuing operations). Operating costs from continuing operations as a percentage of net sales were 94.5% in both 2002 and 2001.
In 2002 there were exceptional operating items consisting of reorganization and restructuring costs of £2.8 million, asset write-downs of £7.1 million and a goodwill impairment of £3.9 million offset by £18.6 million of litigation net income. A tax credit of £2.0 million arises on these items. In 2001 there were exceptional operating charges of £58.6 million, mainly relating to digital business closures and downsizing.
Operating income in 2002 was £58.0 million (2001: £47.4 million), an increase of 22.4%. Excluding income from discontinued operations (2002: nil, 2001: £43.0 million), exceptional operating income of £4.8 million (2001: charges of £52.4 million), operating income decreased to £53.2 million (2001: £56.8 million). The operating margins of the Company excluding discontinued operations and exceptional operating items in 2002 were 5.5% (2001: 5.5%). The components of these results are discussed in the divisional commentary below.
Broadcasting
Net sales in 2002 decreased by 4.3% to £739.4 million (2001: £772.7 million) and operating income decreased by 26.7% to £49.2 million (2001: £67.1 million). The decline was mainly due to a weaker ITV1 advertising market in the first half (down 12%), partially offset by recovery in the second half (up 2%).
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Total NAR for the Carlton licences decreased 5.1% to £659.5 million (2001: £695.3 million), including a full year of HTV which was acquired at the end of October 2000. On a like-for-like basis the decline in NAR was 6.2% for the year. Growth in advertising revenues from the motor, cosmetics and home entertainment sectors in 2002 was more than offset by the decline in revenues from other sectors such as Financial, Government and Media/Internet.
The Company's ITV1 network program costs increased by 9.8% to £332.5 million (2001: £302.9 million), an increase of 8.8% on a like-for-like basis. The 2002 figure includes a £6.5 million stock provision.
Operating income is calculated net of payments to the ITC for the Company's wholly owned broadcasting licences, which in 2002 totaled £100.8 million before digital satellite costs (2001: £119.5 million) and were made up of annual licence fees of £26.0 million (2001: £19.9 million) and PQR payments of £74.8 million (2001: £99.6 million). The increase in licence fees in 2002 was due to the renewal of the Carlton—Central licence. The decrease in PQR payments in 2002 was mainly due to the decline in NAR and the increase in viewing of digital ITV services. In November 1998 ITV began broadcasting its service in digital, in addition to its existing analogue service. Under both the new and the existing licences, no PQR is payable on the proportion of revenues attributed to the viewing of the Company's ITV channels via digital broadcasts. Therefore as digital penetration increases in the future, the proportion of the advertising and sponsorship revenues attracting PQR is expected to fall. The effect of this was to reduce PQR payments by £35.0 million (2001: £10.0 million). This benefit was partly offset by digital satellite transmission costs that commenced in November 2001 at a cost of £10.3 million (2001: nil).
Under the current licences which were renewed for ten years from January 1, 1999, Carlton—London, HTV and Carlton—West Country pay PQR rates of 20%, 7% and 13% resulting in PQR costs in fiscal year 2002 of £34.4 million, £4.9 million and £3.5 million respectively. The 1999 terms offered to Central for the Carlton—Central region were rejected principally because they would have resulted in higher licence payments in fiscal years 1999, 2000, 2001 and 2002. Central re-applied for, was offered and accepted a new licence from April 1, 2001 (the latest date that the licence could be renewed without competitive tender), the financial terms of which are an annual licence fee of £7.6 million which became effective from January 2002, and a PQR rate of 17% which became effective in April 2001. In 2002 the annual licence fee for Central was £5.7 million (2001: £2,600) and the PQR cost was £32.0 million (2001: £36.5 million).
Screen Advertising
Net sales increased by 4.7% to £60.1 million (2001: £57.4 million) and operating income increased 18.6% to £7.0 million (2001: £5.9 million). The improvement in results was due to the continued rise in cinema audiences and advertising revenue in the UK, supported by a strong slate of blockbuster films. Carlton Screen Advertising retained its UCI Cinema advertising contract accounting for 386 screens across the UK and Ireland. Its contract with UGC ended in January 2002, which impacted second half growth. However, Carlton Screen Advertising won National Amusements/Showcase just after the year end.
The Screenvision joint venture with Thomson in the US expanded its coverage through the acquisition of Val Morgan in September and now accounts for 54% of all US cinema advertising screens. Screenvision Europe was formed with Thomson in June to acquire cinema advertising interests across continental Europe including France, Belgium and Spain for £62 million, of which Carlton's share was £31 million. The financial impact of these ventures, which are in the early stages of development, was small.
Content
Net sales decreased by 9.1% to £165.1 million (2001: £181.7 million) and operating income increased by £8.7 million to £5.8 million (2001: £2.9 million loss). The improved profits have been achieved mainly through cost savings and the scaling down of loss-making internet businesses. Content consists of Carlton
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Productions and Carlton International (incorporating Carlton Visual Entertainment and Carlton Publishing Group).
Carlton Productions' net sales, principally to the ITV1 network and other UK broadcasters, decreased by 25.0% to £75.5 million (2001: £100.6 million) due to delays in ITV commissioning and the ending of the Big Breakfast contract for Channel 4 (previously held by Planet 24).
Carlton International, the Company's international distributor of television programs, films and books, achieved net sales growth of 10.4% to £89.5 million (2001: £81.1 million). Carlton International's sales have risen due to increased exploitation of rights and DVD sales expansion, despite difficult conditions in the international television market.
Other
Central overheads net of rental income and group foreign exchange differences amounted to a net cost of £8.8 million (2001: £13.3 million).
Discontinued Operations
Discontinued operations in 2002 comprise the pre-closure results and closure cost provisions for ONdigital and ITV Sport Channel, pre-sale results and loss on disposal of other digital media businesses and further post-acquisition receipts from the disposal of Technicolor. The 2001 results have been restated to include ONdigital and ITV Sport Channel and other digital media businesses in discontinued operations.
The Company's share of ONdigital and ITV Sport Channel's pre-closure operating losses in 2002 was £99.1 million (2001: £175.7 million) from joint ventures' turnover of £64.1 million (2001: £90.2 million). The £98.6 million of closure costs recognized as a loss on termination of businesses in 2002 comprise £34.6 million of balances written-off and a provision for closure cost of £64.0 million.
There were £2.6 million of losses from other discontinued digital media businesses in 2002 (2001: £16.1 million) and £6.1 million loss on sale of investments (2001: nil).
Further post-acquisition receipts in 2002 from the disposal of Technicolor were £17.9 million. Profit on net assets sold in 2001 was £403.2 million prior to the goodwill write-back of £630.2 million. Pre-sale profits from Technicolor before disposal in March 16, 2001 were £49.2 million.
Joint Ventures and Associated Companies
The Company's share of losses from continuing operations joint ventures and associated companies was £5.5 million (2001: £8.4 million). The decrease in the share of their operating losses was principally due to improved performance from ITV2, GMTV and ITN, partially offset by full year losses from Screenvision US.
Amounts Written Off Investments
A provision of £8.2 million was made against the Company's shares held by the Company in various employee share schemes, reducing the carrying value to the year end share price.
Net Interest
Net interest payable was £12.0 million in 2002 compared with £35.6 million in 2001. Interest receivable on funding to joint ventures and associates and the Company's share of joint ventures' and associates' net interest expense was £2.5 million (2001: £3.0 million). £14.4 million of interest in 2002 relating to ONdigital and ITV Sport Channel has not been shown in group interest receivable or joint ventures' payable due to the closure of these businesses. The 2001 comparatives, for interest receivable and interest payable have been restated by £22.1 million accordingly.
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The main reason for the lower net interest charge in 2002 was the benefit gained from swapping fixed rate sterling debt into floating rate dollar cost of finance (without currency risk) prior to September 2001, before short-term US interest rates were cut to historically low levels. The low financing cost of the exchangeable bond and lower net interest bearing balances were the other primary reasons.
Taxation on Income
The tax rate on net income before taxes, discontinued operations, exceptional operating credits and amortization of £45.1 million in 2002 was 23.9% (2001: 42.4%). Exceptional operating credits in continuing operations include net income from litigation, to which no tax has been attributed, and exceptional costs on some of which tax relief is recognized, giving rise to a tax credit of £2.0 million. This results in tax on continuing operations of £8.6 million, the UK corporation tax element of which is offset by consortium and other tax relief from discontinued operations including exceptional charges and by foreign exchange differences that are debited to reserves. Tax of £0.2 million has been attributed to the profit on sale of businesses included in discontinued operations.
In the US, federal tax has been provided at 35% and state taxes have been provided at rates of between 5% and 10%.
In total, this results in a net tax credit in the profit and loss account of £0.2 million on total losses of £156.2 million compared to a 2001 credit of £19.2 million on total losses of £409.2 million.
Net Loss
The loss after tax attributable to shareholders in 2002 was £156.0 million (2001: £390.0 million). This loss is stated before £10.5 million (2001: £10.5 million) of the annual fixed net dividends on non-equity shares (i.e. 6.5p Preference shares).
Earnings per Ordinary Share
The reported loss per share after discontinued operations and exceptional items in 2002 was 24.8p (2001: 59.7p). Earnings per Ordinary share before discontinued operations and exceptional items after taxes was 1.0p (2001: loss of 0.6p). Earnings per share from continuing operations was 2.0p (2001: loss of 8.1p). As there is a loss from continuing operations in both 2002 and 2001, the preference shares and share options are not deemed to be dilutive and hence the diluted loss per share is the same as the basic reported loss per share for these two years.
Set out in the table below is the reconciliation between earnings per Ordinary share before discontinued operations and exceptional items after taxes and reported earnings per Ordinary share. The numbers of shares used in the calculation of earnings per share and diluted earnings per share are set out in Note 12 of Notes to the Consolidated Financial Statements.
| | Year ended September 30, | ||||
|---|---|---|---|---|---|
| | 2002 | 2001 | |||
| | (pence) | ||||
| Basic and diluted earnings per share | |||||
| Reported earnings per Ordinary Share | (24.8 | ) | (59.7 | ) | |
| Discontinued operations | 26.8 | 51.6 | |||
| Continuing operations income/(loss) post-exceptional items | 2.0 | (8.1 | ) | ||
| Exceptional items | (1.0 | ) | 7.5 | ||
| Continuing operations income/(loss) pre-exceptional items | 1.0 | (0.6 | ) | ||
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Ordinary share dividends totaled £55.5 million in 2002 (2001: £55.6 million). This comprised the 3.275p per share interim dividend paid in August 2002 and 5.0p per share final dividend that will become payable in April 2003, making a total for the year of 8.275p per share (2001: 8.275p).
Fiscal Year Ended September 30, 2001 Compared to Fiscal Year Ended September 30, 2000
In the 2001 fiscal year, consolidated net sales were £1,601.5 million, a decrease of £461.3 million or 22.4% over the 2000 fiscal year. This was principally due to the sale of Technicolor on March 16, 2001, partially offset by 11 months of trading from HTV.
UK net sales by destination accounted for 92.5% of total net sales (exclusive of sales by discontinued operations) in 2001 or £962.1 million (2000: £925.5 million) and accounted for 87.7% of operating income (before discontinued operations and exceptional operating charges) or £49.8 million (2000: 94.1%—£133.8 million). The decrease in UK operating income resulted from the slowdown of advertising revenues and the effect of licence renewal. Net sales outside the UK (excluding discontinued operations) in 2001 totaled £78.0 million (2000: £62.2 million) and operating income outside the UK (exclusive of discontinued operations and exceptional costs) accounted for £7.0 million (2000: £8.4 million).
In 2001 operating costs were £1,495.5 million, of which £983.3 million were from continuing operations (2001: £1,801.7, of which £845.5 million were from continuing operations). Operating costs from continuing operations as a percentage of continuing operations net sales were 94.5% in 2001 compared to 85.6% in 2000.
In 2001 there were exceptional operating charges consisting of reorganization and restructuring costs of £7.6 million and £51.0 million of exceptional operating charges relating to digital business closures and downsizing. In 2000 there were exceptional operating costs of £11.1 million relating to the costs of an abortive merger, and £27.9 million that related primarily to restructuring costs of discontinued operations.
Operating income in 2001 was £47.4 million (2000: £222.1 million), a reduction of 78.7%. Excluding income from discontinued operations (2001: £43.0 million, 2000: £91.0 million), and exceptional operating charges of £52.4 million (2000: £11.1 million), operating income decreased to £56.8 million (2000: £142.2 million). The operating margins of the Company excluding discontinued operations and exceptional operating items in 2001 were 5.5% (2000: 14.4%). The components of these results are discussed in the divisional commentary below.
Broadcasting
Net sales in 2001 increased by 4.1% to £772.7 million (2000: £742.1 million) and operating income decreased by 57.9% to £67.1 million (2000: £159.5 million). The 2001 figures include 11 months of contribution from HTV. Operating margins decreased due to the slowdown in advertising revenues and the effect of licence renewal.
Total NAR for Carlton—London region, Carlton—Central region and Carlton—West Country region decreased by 12.7% to £603.7 million (2000: £691.5 million). HTV's NAR for 11 months of the 2001 fiscal year was £91.6 million resulting in a total Group NAR for 2001 of £695.3 million (2000: £691.5 million). The Company's ITV1 network program costs increased by 20.2% to £302.9 million (2000: £252.1 million), principally due to first time contribution of HTV in 2001 fiscal year.
Operating income is calculated net of payments to the ITC for the Company's wholly owned broadcasting licences, which in 2001 totaled £119.5 million (2000: £122.0 million) made up of annual licence fees of £19.9 million (2000: £17.4 million) and the PQR payments of £99.6 million (2000: £104.6 million).
The Company renewed its Carlton—London region and Carlton—West Country region licences for ten years with effect from January 1, 1999, as did HTV (which was not at the time owned by the Company). Under the new licences Carlton—London, HTV and Carlton—West Country pay PQR rates of 20%, 7%
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and 13% respectively. In 2001 the PQR cost was £52.6 million for Carlton—London, £4.2 million for Carlton—West Country and £6.2 million for HTV (for 11 months). In 2001 the annual licence fee was £16.7 million for Carlton—London, £1.2 million for Carlton—West Country and £2.0 million for HTV (for 11 months). The 1999 terms offered to Central for the Carlton—Central region were rejected principally because they would have resulted in higher licence payments in fiscal years 1999, 2000, 2001 and 2002. Central re-applied for, was offered and accepted a new licence from April 1, 2001 (the latest date that the licence could be renewed without competitive tender), the financial terms of which are an annual licence fee of £7.6 million which becomes effective from January 2002, and a PQR rate of 17% which became effective in April 2001. In 2001 the annual licence fee for Central was £2,600 and the PQR cost was £36.5 million.
Screen Advertising
Net sales increased by 21.4% to £57.4 million (2000: £47.3 million) and operating income decreased by 6.3% to £5.9 million (2000: £6.3 million). The net sales growth was due to strong movie releases, cinema's attractive young demographics and promotion of the medium to potential advertisers.
In July 2001, the Company established Screenvision US, a 50% joint venture with Thomson (which includes 100% of Screenvision) which is engaged in the business of cinema screen advertising in the US.
Content
Net sales decreased by 2.8% to £181.7 million (2000: £176.7 million) and operating loss decreased by 79.9% to £2.9 million (2000: £14.4 million loss). The improved profits have been achieved mainly through cost savings and the scaling down of loss-making internet businesses. Content consists of Carlton Productions and Carlton International (incorporating Carlton Visual Entertainment and Carlton Publishing Group).
Carlton Productions' net sales, principally to the ITV1 network, were £100.6 million in 2001 (2000: £107.0 million). A number of structural changes were implemented in 2001 to streamline its operations, including the integration of Carlton's interactive content production arm.
Carlton International, the Company's international distributor of television programs, films and books achieved net sales growth of 16.4% to £81.1 million (2000: £69.7 million). Carlton International's sales have risen due to increased exploitation of rights, video sales expansion and the acquisition of Andre Deutsch in the books division.
Other
Central overheads net of rental income and group foreign exchange differences and the contribution from Screenvision prior to the joint venture formation in July 2001 amounted to a net cost of £13.3 million (2000: £9.2 million).
Discontinued Operations
Discontinued operations in 2001 include results of ONdigital and ITV Sport Channel and other digital media businesses closed in 2002 and the pre-sale results and disposal of Technicolor that was sold on March 16, 2001. The 2000 comparatives also include the Quantel and SSL operations that were sold in 2000.
The Company's share of ONdigital and ITV Sport Channel's losses in 2001 was £175.7 million (2000: £143.2 million) from joint ventures' turnover of £90.2 million (2000: £53.3 million).
Technicolor's net sales in the period to disposal were £561.4 million (2000 full year: £1,046.5 million) and divisional operating income (before exceptional operating charges) was £49.2 million (2000 full year: £142.7 million). Technicolor's video and disc duplication and replication services and distribution
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businesses had sales of £393.5 million (2000 full year: £684.0 million) and operating income of £38.0 million (2000 full year: £102.0 million). Technicolor's film processing and distribution businesses had net sales of £167.9 million (2000 full year: £372.0 million) and operating income of £14.7 million (2000 full year: £48.0 million).
There were no exceptional operating charges relating to Technicolor in the period to disposal. Profit on net assets sold was £403.2 million prior to the goodwill write-back of £630.2 million.
Joint Ventures and Associated Companies
The Company's share of losses from continuing operations joint ventures and associated companies was £8.4 million (2000: profits of £1.4 million). The decrease in the share of operating profits in 2001 resulted principally from losses from ITV2.
Net Interest
Net interest payable was £35.6 million in 2001 compared with £28.4 million in 2000. Interest receivable on funding to joint ventures and associates was £3.0 million (2000: £0.2 million). The Company's share of joint ventures' and associates' net interest expense was £3.0 million (2000: £1.0 million). £22.1 million of interest in 2001 relating to ONdigital and ITV Sport Channel has not been shown in group interest receivable or joint ventures' payable due to the closure of these businesses in 2002. The 2000 comparatives for interest receivable and interest payable have been restated by £8.8 million accordingly.
Taxation on Income
The tax rate on net income before taxes, discontinued operations, exceptional operating charges and amortization of £30.2 million in 2001 is 42.4% (2000: 31.7%). The tax rate on discontinued operations before goodwill amortization and the exceptional losses on sale/closure of businesses is 17.0% The tax relief in relation to discontinued operations losses includes the group's share of consortium relief available from ONdigital and other digital businesses. The rate of tax relief for discontinued losses reflects unused losses which are carried forward and which, together with timing differences principally in respect of ONdigital fixed assets, give rise to deferred tax assets which have not been recognized.
No tax relief has been attributed to the exceptional loss on the sale of Technicolor. Effect has been given to the relief of the gain on the sale of Meridian by available losses resulting in a £22.0 million charge to the statement of total recognized gains and losses.
In the US, federal tax has been provided at 35% and state taxes have been provided at rates between 5% and 10%.
In total, this results in a net tax credit in the profit and loss account of £19.2 million on total losses of £409.2 million after goodwill of £630.2 million written back on the sale of Technicolor on which there is no tax relief.
Net Loss
The loss after tax attributable to shareholders in 2001 was £390.0 million (2000: £277.4 million). This loss is stated before £10.5 million (2000: £11.0 million) of the annual fixed net dividends on non-equity shares (i.e. 6.5p Preference shares). The 5.5p Preference shares were fully converted to Ordinary shares or redeemed at £1 per share during 2000 hence there is no amortization of the issue premium over the redemption price in 2001: (2000: £2.7 million).
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Earnings per Ordinary Share
Loss per Ordinary share before discontinued operations and exceptional items after taxes was 0.6p (2000: earnings of 10.3p). Loss per Ordinary share from continuing operations was 8.1p (2000: earnings of 8.6p) and the reported loss per share after discontinued operations and exceptional items in 2001 was 59.7p (2000: 44.5p).
As there is a loss from continuing operations in 2001, the preference shares and share options are not deemed to be dilutive and hence the diluted loss per share is the same as the basic reported loss per share for this year. 2000 diluted earnings per Ordinary share before discontinued operations and exceptional items after taxes was 9.8p and the reported diluted loss per share after discontinued operations and exceptional items in 2001 was 42.6p.
Set out in the table below is the reconciliation between earnings per Ordinary share before discontinued operations and exceptional items after taxes and reported earnings per Ordinary share. The numbers of shares used in the calculation of earnings per share and diluted earnings per share are set out in Note 12 of Notes to the Consolidated Financial Statements.
| | Year ended September 30, | ||||
|---|---|---|---|---|---|
| | 2001 | 2000 | |||
| | (pence) | ||||
| Basic earnings per share | |||||
Reported earnings per Ordinary Share | (59.7 | ) | (44.5 | ) | |
| Discontinued operations | 51.6 | 53.1 | |||
| Continuing operations income/(loss) post-exceptional items | (8.1 | ) | 8.6 | ||
| Exceptional items | 7.5 | 1.7 | |||
| Continuing operations income/(loss) pre-exceptional items | (0.6 | ) | 10.3 | ||
| | Year ended September 30, | ||||
|---|---|---|---|---|---|
| | 2001 | 2000 | |||
| | (pence) | ||||
| Diluted earnings per share | |||||
Reported earnings per Ordinary Share | (59.7 | ) | (42.6 | ) | |
| Discontinued operations | 51.6 | 50.9 | |||
| Continuing operations income/(loss) post-exceptional items | (8.1 | ) | 8.3 | ||
| Exceptional items | 7.5 | 1.6 | |||
| Continuing operations income/(loss) pre-exceptional items | (0.6 | ) | 9.9 | ||
Ordinary share dividends totaled £55.6 million in 2001 (2000: £112.5 million). This comprised the 3.275p per share interim dividend paid in August 2001 and 5.0p per share final dividend that will become paid in April 2002, making a total for the year of 8.275p per share (2000: 16.55p), a decrease of 50%.
B. Liquidity and Capital Resources
Financing
As at September 30, 2002 the Company had cash and other liquid funds of £552.9 million, increased from £256.5 million at September 30, 2001 due to the monetisation of assets received from Thomson as consideration for the sale of Technicolor. The Company's net debt at September 30, 2002 was £459.9 million, decreased from net debt of £506.6 million at September 30, 2001. As at January 31, 2003 the Company had cash and other liquid financial investments of £544.8 million and net debt of £481.4 million.
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In this context, net debt is calculated as the aggregate of cash at bank and in hand, liquid financial instruments, bank loans and overdrafts, current portion of long term debt, loan notes, convertible debt and finance leases. Net interest expense in the 2002 fiscal year was £12.0 million and the interest cover ratio was nil as the Company reported a loss.
On March 16, 2001 the Company sold Technicolor to Thomson. Thomson paid US$750 million (£524 million) net cash on completion of the sale. In addition it issued to the Company loan notes with a nominal value of US$600 million (£420 million) which were payable in four equal installments, together with accrued interest, on the first four anniversaries of completion. In March 2001 the Company sold loan notes with a nominal value of US$300 million (£210 million) for cash. In March 2002, the Company completed the sale of US$175 million nominal amount of the loan notes issued by Thomson to the Company in connection with the sale of Technicolor for a small discount to nominal value. In addition, US$75 million of the loan notes matured in March 2002. The remaining $50 million nominal value of loans notes matured in March 2003.
Also, Thomson issued to the Company bonds carrying entitlement to 15.5 million new Thomson shares. Following maturity of the bonds in March 2002 the Company became a 5.52% shareholder of Thomson and is now able to retain or sell part or all of its holding. On the basis of the closing price of Thomson shares and euro exchange rate on March 14, 2003, this shareholding had a value of £124.3 million.
In November 2001 the Company announced the issue of €638.6 million (£397.6 million) exchangeable bonds which, at the latest, will mature in 2007. The issue completed on January 4, 2002. The bonds carry a coupon of 2.25% per annum and have a fixed exchange price of €41.2. The exchangeable bond can be exchanged at any time at the option of investors into the Company's 15.5 million shares in Thomson at an exchange price of €41.2 per share. The investors also hold the right to put the bonds back to the Company in January 2005. The Company has the right to redeem the bonds at par on or after July 4, 2003 if the underlying shares in Thomson have traded at a 30% premium to the exchange price of €41.2 on 20 consecutive trading days in any period of 30 trading days.
A description of the Company's treasury operations and financial instruments is set forth in Note 26 of Notes to Consolidated Financial Statements. As at September 30, 2002, the Company's borrowings were comprised of five principal instruments:
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of €41.2. The bonds are exchangeable into 15.5 million Ordinary shares in Thomson representing the Company's underlying total equity interest in Thomson.
The various facilities in place at March 14, 2003 along with their principal features are as follows:
| —Revolving facility: | Allows draw down of unsecured committed multi-currency advances totaling £100 million. The facility matures in April 2006. As at March 14, 2003 the facility was undrawn. Availability of the facility is subject to an interest cover covenant. | |
—EMTN program: | The program size is £1,000 million. At March 14, 2003 £11.5 million was held by third party investors. | |
—Euro-Commercial Paper program: | The program size is up to US$150 million equivalent, with a 364 day maximum term. At March 14, 2003, £nil had been issued. |
Any movement in the Company's credit rating will not affect the debt already issued under any of the above facilities.
Dividends paid in the fiscal year 2002 were £66.0 million, a decrease of £33.7 million compared with those paid in the 2001 fiscal year due to the effect of the 50% decrease in the dividend payable per Ordinary share.
The final dividend for fiscal year 2002 was proposed in the context of the merger announcement with Granada. The level of dividends for fiscal year 2003 and in the future will be considered by the Board taking into account the prospects for the business, an appropriate level of dividend cover (expressed as a ratio of dividends to net income before Ordinary share dividends) and the merger agreement with Granada which specifies that until termination of that agreement the level of the interim dividend and of the final dividend will not exceed those paid for the fiscal year 2002.
Dividends on 6.5p Preference shares are payable in January and July of each year.
Contractual Obligations
The table below of contractual obligations as at September 30, 2002 excludes derivatives and hedging obligations which are disclosed in detail in "Item 11—Qualitative and Quantitative Disclosures about Market Risk".
| | | | Payment by period | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual obligation | Note(*) | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | |||||||||||
| | | (in millions) | |||||||||||||||
| Long term debt | 23 | £ | 889.8 | £ | 35.0 | £ | — | £ | 605.8 | £ | 249.0 | ||||||
| Finance lease obligations | 25 | 31.7 | 1.1 | 3.7 | 2.1 | 24.8 | |||||||||||
| Capital expenditure | 32 | (a) | 3.1 | 3.1 | — | — | — | ||||||||||
| Operating leases | 32 | (b) | 75.2 | 8.5 | 13.3 | 10.4 | 43.0 | ||||||||||
| Other commitments | 324.9 | 90.9 | 115.3 | 66.9 | 51.8 | ||||||||||||
*See note numbers in "Item 18—Notes to Consolidated Financial Statements" for further details.
Other commitments include the Company's estimated share of payments in respect of ITV Network's sports and film rights. The ITV Network's program budget for fiscal 2003 was initially set at £815 million of which £560 million related to programs other than sport and films. The Company expects to fund
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approximately 41% of the ITV1 program budget in fiscal 2003. Payments are made on a monthly basis. See "Item 4—Information on the Company—I. UK Regulation,Channel 3" for further details.
Other commitments also include the cash bid element of ITV1 licence commitments. In addition to the cash bid commitments, under the terms of the ITV1 licences, the Company is also required to make PQR payments based on advertising and sponsorship revenues. The rates are 20% for Carlton-London region, 17% for Carlton-Central region, 13% for Carlton-West Country region and 7% for HTV.
Cash Flow
Carlton generated £269.4 million of cash from operations (2001: £103.3 million). The increase was primarily due to the sale of loan notes in the year (£179.0 million). Working capital increased by £11.6 million (2001: £7.3 million) primarily due to reductions in creditors as result of the scaling down of loss-making digital ventures.
Net interest paid was £18.0 million (2001: £32.5 million). The decrease in financing costs was due to interest rate swap benefits as a result of lower interest rates offset by the purchase of a euro currency call option. The cash cost of preference dividends was £10.5 million (2001: £10.5 million).
Tax repaid in 2002 was £4.2 million (2001: £3.1 million). Capital expenditure of £11.7 million (2001: £43.1 million) was significantly reduced following the sale of Technicolor in March 2001.
Loan funding and closure cost payments relating to the ONdigital and ITV Sport Channel businesses amounted to £96.8 million (2001: £190.3 million).
Net outflows from acquisitions and disposals totaled £7.8 million (2001: £273.5 million inflow). In 2002 this related to the purchase of Screenvision Europe (£31.0 million), partly offset by further consideration following the sale of Technicolor (£23.2 million). Equity dividends, primarily the final dividend for 2001, were £55.5 million (2001: £89.2 million).
Overall there was a net cash inflow of £322.7 million, a negative exchange movement on the sterling value of net debt of £6.4 million and an increase in long-term funding of £269.6 million, resulting in net borrowings at the year end of £459.9 million (2001: £506.6 million).
Shareholders' Equity
At September 30, 2002, the Company's shareholders' equity, under UK GAAP, totaled £433.5 million, as compared to £663.7 million at September 30, 2001. The components of this net decrease are shown in the table entitled "Reconciliation of Movements in Shareholders' Equity" in the Consolidated Financial Statements. The cumulative goodwill written off to equity at September 30, 2002 amounted to £937.6 million (2001: £937.6 million). If shareholders' equity had been determined in accordance with US GAAP, shareholders' equity attributable to the holders of Ordinary shares would have totaled £580.6 million at September 30, 2002 as compared with £1,004.2 million at September 30, 2001. See Note 36 of Notes to the Consolidated Financial Statements for the differences between UK and US GAAP.
Capital Expenditure
In fiscal year 2003, the Company has budgeted for capital expenditure primarily relating to plant and equipment at locations across the Company. The total capital expenditure in the 2002 fiscal year was £11.7 million (2001: £43.1 million, 2001: £112.0 million). The higher level of expenditure in 2000 principally related to the expansion of the now disposed Technicolor's DVD and distribution capacity. See Note 32 of Notes to the Consolidated Financial Statements.
The Company's management anticipates that future capital expenditure will be financed principally from cash generated from operations and it believes that such cash flow will be sufficient to meet such
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requirements. At September 30, 2002, the Company had contracted for capital expenditure totaling approximately £3.1 million.
European Monetary Union
Pursuant to the Treaty on European Union (the "Treaty"), a single European currency was introduced on January 1, 1999 in 11 European states. The Company's preparations for the introduction of a single European currency have included the upgrading of information systems, where necessary, and the training of staff to handle euro-denominated transactions, including dual currency transactions in the transition period between commencement of European Monetary Union in 1999 and the first issue of notes and coins in January 1, 2002.
The decision as to when to adopt the euro as the Company's functional currency will principally depend on the timing of the UK joining the. In February 1999, the UK Government outlined a proposed timetable for the changeover of the UK's currency, which contemplated the abolition of sterling as legal tender by 2004. The Company does not currently expect significant project costs to be incurred as a result of the introduction of the euro.
Following the disposal of the Technicolor group of companies in March 2001, the Company no longer incurs research and development expenditure. Total expenditure on research and development activities by the Company amounted to £0.2 million in the 2001 fiscal year compared to £4.9 million in the 2000 fiscal year. All such expenditure related to the employment and material costs of activities within Quantel and Technicolor, which were sold in July 2000 and March 2001 respectively.
The following trends, uncertainties, and events could have a material impact on the Company's net revenues, income from continuing operations, net income, and liquidity and capital resources.
E. Accounting Principles and US GAAP Reconciliations
(i) Critical accounting policies
In December 2001, the SEC issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR60"), suggesting companies provide additional disclosures and commentary on those accounting policies considered most critical. FRR60 considers an accounting policy to be critical if it is important to the Company's financial condition and results of operations, and requires significant judgment and estimates in its application.
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The application of UK GAAP often requires judgment in the formulation of accounting policies and when presenting a true and fair view of the Company's financial position and results in its consolidated financial statements. Often, judgment is required in respect of items where the choice of specific policy to be followed can materially affect the Company's results or net asset position, in particular through estimating the lives of recoverability of particular assets, the timing of when a transaction is recognized or the carrying value of fixed asset investments.
The Company considers that the following accounting policies are critical:
Revenue
Net sales, which exclude value added tax and sales between Group companies, represents the value of products and services sold. More particularly, key classes of revenue are recognized as follows:
Fixed asset investments
Fixed asset investments are stated at cost less amounts written off in respect of any permanent diminution in value. Fixed asset investments as at September 30, 2002 include 15.5 million of shares in Thomson received in the transaction relating to the sale of Technicolor in March 2001. These shares are carried at book value at September 30, 2002 of £401.4 million (2001: £400.4 million) and represented 21.2% of the Company's total assets (2001: 21.4%). As a result, any impairment would significantly affect the Company's profits and total assets.
The market value at September 30, 2002 was £155.3 million (2001: £207.4 million). The Thomson shares are carried at €41.2 compared with a year-end price of €15.9. The shares have traded between €15.7 and €36.7 in the 2002 fiscal year and the closing price on March 14, 2003 (the last practical date before signing these accounts) was €11.8.
Under FRS 11, "Impairment of Fixed Assets and Goodwill", if an investment's fair value declines below cost, the investor must determine whether there is adequate evidence to overcome the presumption that the decline is other than temporary. This required judgement in assessment of the future share price based on a variety of indicators such as the current share price, analysts forecasts and Black-Scholes option modelling. From the information available as at November 26, 2002 the Company concluded that there was no evidence of a permanent impairment.
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The treatment of equity securities under US GAAP differs significantly from that under UK GAAP (see Note 36(c) of Notes to Consolidated Financial Statements).
Goodwill
Goodwill arises where the acquisition cost exceeds the fair values attributable to the net assets acquired and is capitalized as an intangible asset. Determining the fair value of assets acquired and liabilities assumed requires judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives, amongst other items.
FRS 10, "Goodwill and Intangible Assets", provides that the cost is amortized on a straight-line basis over the estimated life, of up to 20 years. All goodwill currently held on the Company's balance sheet is being amortized over lives ranging between 10 and 20 years. The choice of amortization period is subject to judgment, being based upon consideration of factors such as licence periods, licence renewal assumptions and program format lives. These factors have a significant impact on the annual amortization charge.
At September 30, 2002, the carrying value of subsidiaries' goodwill amounted to £204.6 million (2001: £224.7 million). Applying the lives referred to in the previous paragraph resulted in an amortization charge for 2002 of £16.6 million (2001: £15.0 million).
Goodwill impairment reviews are also an area requiring judgment, requiring assessment as to whether the carrying value of goodwill can be supported by the net present value of future cashflows derived from income generating units using cashflow projections and discounting using an appropriate discount rate.
Impairment reviews were undertaken at September 2002 on the carrying value of Planet 24 due to the loss of a major program commission and HTV goodwill due to the requirement to undertake a review at the end of the first full year following acquisition. The Planet 24 review resulted in a £3.9 million goodwill impairment write-down. The remaining carrying value for Planet 24 is supported by assumptions of future revenues from the sale of programs that are anticipated but have not been contractually agreed and therefore are subject to a degree of uncertainty.
The HTV impairment review showed that no impairment was identified, although the assumptions underlying the cashflows such as growth in NAR, digital dividend and licence payments are uncertain, particularly over longer time horizons.
The treatment of goodwill under US GAAP differs significantly from that under UK GAAP (see Note 36(a) of Notes to Consolidated Financial Statements for further details).
Amortization of film libraries
Film libraries acquired are valued at fair value on acquisition on the basis of projected cash flows and written off in equal annual installments over the estimated economic life of the assets over a period of up to forty years. At September 30, 2002 the carrying value of film libraries was £114.5 million (2001: £118.4 million). The annual amortization charge for 2002 was £2.8 million (2001: £2.7 million).
The useful economic life has been adopted in view of the classical and ongoing appeal of the library titles. This view is subject to a degree of judgement. The treatment of film library amortization under US GAAP differs significantly from that under UK GAAP (see Note 36(h) of Notes to Consolidated Financial Statements for further details).
The annual impairment reviews of the carrying value of film libraries are also an area involving judgement, requiring assessment of future cashflows, growth assumptions and discounting using an applicable discount rate.
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Financial instruments
The fair value of underlying financial instruments (including forward exchange contracts) is not recorded in the Company's financial statements to the extent that the financial instruments meet the condition to be accounted for as hedges. If the hedging conditions are not met, there is a potential for significant impact on the Company's results due to the requirement to record the fair value of the instrument in the Company's financial statements. The financial effect of recording the financial instruments at fair value at September 30, 2002 is indicated in Note 26 of Notes to the Consolidated Financial Statements.
The ability to continue to apply hedge accounting once the conditions have been met at the outset, depends on various factors, which include maintaining the ownership of the original financial instruments used in the hedge and a clear demonstration of the reasonable intention to use the hedging transaction to hedge an underlying exposure. Circumstances in the future could impact on the Company's ability and willingness to continue to hold the original financial instrument.
Program rights
The Company's international rights subsidiary invests in program productions in the UK and the US in return for program rights. The carrying value of these rights are classified as program and film rights on the balance sheet and totaled £30.1 million as at September 30, 2002 (2001: £33.1 million).
The carrying value of the rights is assessed using the income forecasting method. This involves making assumptions on the level of future rights income generated from the program. The level of judgement required is increased in the situation when the program has not yet been made.
Pensions
The Company maintains a number of defined benefit and defined contribution pension schemes in the UK. The costs of defined benefit schemes are determined by external actuaries and charged against profits each year under the UK GAAP accounting standard, SSAP24, "Accounting for pension costs". The costs of defined contribution schemes are charged against profits in the year in which they are incurred. These totaled £7.6 million in 2002 (2001: £2.3 million).
The external actuaries determine the costs of the defined benefit schemes by using assumptions such as investment rate of return and salary increases that are based on judgment. The market value of assets at the time of the actuarial valuatio n is also a key factor in determining the level of defined benefit scheme pension contributions and costs. As there is usually a three-year gap between actuarial valuations, there is a risk that pension contributions will change significantly from current levels. The latest actuarial valuation of the Carlton Group scheme was July 2001, the Central scheme, March 2002 and the HTV scheme, August 2000.
Full adoption of FRS 17, "Retirement benefits", is not required until the Company's fiscal year 2006. FRS 17 calculates pension costs and asset and liabilities based on different actuarial methods compared to SSAP 24. Net pension assets or liabilities are recognised on the balance sheet under FRS 17, unlike under SSAP 24 where only the accrued pension costs or funding prepayment is recognised on the balance sheet.
If the Company had chosen to adopt FRS 17 early, the effect in 2002 would be to charge an additional £2.2 million of pension costs against profits, an additional £104.1 million actuarial loss recorded in the statement of recognised gains and losses and a £89.4 million post-tax net pension liability recorded on the balance sheet (see Note 7(ii) of Notes to Consolidated Financial Statements for further details). FRS17 uses similar actuarial assumptions and net pension liability recognition criteria as US GAAP.
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(ii) UK pronouncements not yet applied
The Company has not yet fully applied the provisions of FRS 17 "Retirement Benefits", which will progressively impact the Company's disclosures and ultimately the reported results. Disclosure of the FRS 17 pension assets/liabilities has been made in the 2002 and 2001 financial statements. FRS 17 will require pension surpluses or deficits to be carried on the Company's balance sheet and therefore it is likely to increase the volatility of reported results. In November 2002 the Accounting Standards Board ("ASB") issued an Exposure Draft of an amendment to FRS 17 that would extend the transitional arrangements in the standard and defer the mandatory requirement for its full adoption until accounting periods beginning on or after January 1, 2005.
(iii) US GAAP reconciliations
The Company's financial statements are prepared in accordance with UK GAAP, which differ in certain significant respects from US GAAP. The principal differences between UK GAAP and US GAAP affecting the Company relate to the different methods of accounting for goodwill (the excess of consideration paid over the fair market value of assets acquired), financial instruments, accounting for equity securities and accounting for defined benefit schemes.
Goodwill
Prior to the Company's 1999 fiscal year, goodwill arising on acquisitions under UK GAAP was written off to reserves whilst it was capitalised on the balance sheet and amortized over its useful economic life under US GAAP. Since the introduction of FRS10 "Goodwill and Intangible Assets", which became applicable in the Company's 1999 fiscal year, the GAAP differences relating to goodwill were substantially reduced as FRS10 required goodwill to be capitalised and amortized in similar way to US GAAP.
Net assets at September 30, 2002 are £473.4 million higher under US GAAP due to goodwill on pre-October 1, 1998 acquisitions. Operating income is lower under US GAAP due to the amortization charge on this additional US GAAP goodwill. The amortization divergence in 2002 was £38.7 million (2001: £62.2 million, 2000: £78.3 million). In 2002 there was also a £23.8 million impairment charge under US GAAP to fully write-off the remaining goodwill held on the US balance sheet relating the 1997 formation of British Digital Broadcasting (the forerunner to ONdigital). Under UK GAAP this goodwill was written off directly to reserves on acquisition. In 2001 there was a £163.3 million goodwill adjustment relating to the sale of Technicolor and in 2000 there was a £228.7 million adjustment relating to the sale of the Products division.
Financial instruments
The fair value of financial instruments are only recorded on the balance sheet under UK GAAP if they do not meet the hedging criteria. Under US GAAP, all financial instruments are carried at their fair value with any changes charged to net income. There was a £14.4 million net gain in the fair value of financial instruments at September 30, 2002 (2001: £4.8 million loss, 2000: £7.0 million gain).
Derivative financial instruments embedded within host contracts are recorded separately in the financial statements at their fair value under US GAAP. The exchangeable bond issued in January 2002 includes embedded put and call options relating to the conversion of the bond into Thomson shares. The movement between the fair value of these embedded options at the date of bond issue and the year end totaled £88.8 million which is charged against net income under US GAAP. The movement in the fair value of the option was caused by the decline in the Thomson share price.
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Accounting for equity securities
Under UK GAAP, decreases in the market value of fixed asset investments (such as listed shares) only need to be recorded if the decrease is considered permanent. The Company believes that there was no evidence of permanent impairment of the Thomson share price in 2002. Under US GAAP, the Thomson shares are recorded as financial instruments available-for-sale, and are reviewed for other than temporary impairment in the event of a prolonged price reduction.
Under US GAAP, equity securities are required to be adjusted to reflect their underlying market values (i.e. their year end share prices), with the change in respect of temporary differences in value being reflected in reserves and the remaining other than temporary difference in net income.
As at September 30, 2002, the cumulative temporary element charged through US GAAP reserves was £118.5 million and the other than temporary movement charged against net income (all in fiscal year 2002) was £127.6 million. US GAAP net assets are therefore £246.1 million lower than under UK GAAP due to the fair valuing of the Thomson shares. In 2001, all of the movement between the year end share price and book value (£135.0 million) was deemed to be temporary due to the relatively short period of time that the shares had been held (nine months).
Accounting for defined benefit schemes
Under UK GAAP, the pension charge for defined benefit schemes is accounted using actuarial methodologies prescribed under SSAP24. The value of scheme assets and liabilities are not recorded on the balance sheet.
Differences between the UK and US GAAP pension charges arise from the requirement to use different actuarial methods and assumptions and the method of amortising surpluses or deficits. In 2002 the US GAAP profit and loss divergence is £1.8 million lower than the UK GAAP charge (2001: £0.1 million higher, 2000: £0.3 million lower).
The value of scheme assets and liabilities are not recorded on the balance sheet under UK GAAP (SSAP24). Under US GAAP, where the scheme liabilities (defined as the accumulated benefit obligation) exceeds the fair value of scheme assets a minimum pension liability has to be recorded on the balance sheet. 2002 is the first year end that the scheme liabilities exceed the fair value of the scheme assets. This has resulted in a £140.1 million movement through reserves as shown in "Accumulated Other Comprehensive Income". The recognition of the minimum pension liability has resulted in the cumulative pension equity GAAP divergence switching from a net asset to a net liability position (£70.6 million liability as at September 30, 2002, £71.3 million asset as at September 30, 2001 and £55.6 million asset as at September 30, 2000).
(iv) Recent US Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standard No.142 ("FAS 142"), "Goodwill and Other Intangible Assets." FAS 142 supersedes APB 17, Intangible Assets. The most significant changes made by FAS 142 are: (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually at the reporting unit level, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. In addition, FAS 142 contains certain transitional provisions, which may effect the classification of intangible assets as well as the balance of goodwill. The provisions of FAS 142 are effective for fiscal years beginning after December 15, 2001.
In July 2001, the FASB approved the issuance of FAS 143, "Accounting for Asset Retirement Obligations." FAS 143 prescribes the accounting for retirement obligations associated with tangible long-lived assets, including the timing of liability recognition and initial measurement of the liability.
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FAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. FAS 143 is effective for fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal periods beginning after December 15, 2001 and interim periods within those years. FAS 144 establishes an accounting model for impairment or disposal of long-lived assets to be disposed of by sale.
In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. FAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45" or the "Interpretation"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a liability to be recognized at the time a company issues a guarantee for the fair value of the obligations assumed under certain guarantee agreements. Additional disclosures about guarantee agreements are also required in the interim and annual financial statements. This Interpretation will be effective for fiscal years ending after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46" or the "Interpretation"), Consolidation of Variable Interest Entities, an interpretation of ARB 51. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. For any variable interest entities created after January 31, 2003, FIN 46 is effective immediately. This Interpretation will be effective for fiscal years beginning after June 15, 2003.
New US pronouncements FAS 142, FAS 143, FAS 144, FAS 146 and FIN 45 are effective for the Company's September 30, 2003 financial statements. The Company is currently evaluating the potential effects that the adoption of these standards may have on its consolidated financial statements.
(v) Inflation
In the opinion of the Company's management, inflation has had a minimal effect on the Company's results of operations and financial condition during the three-year period ended September 30, 2002.
Item 6—Directors, Senior Management and Employees
A. Directors and Senior Management
The Memorandum and Articles of Association of the Company provide that unless and until otherwise determined by the Company in a General Meeting, the number of directors shall not be more than 12 nor less than two.
At the Company's Annual General Meeting held on February 23, 2000, shareholders approved a change to the Articles of Association to provide that each director must retire every three years in addition to the existing requirement that at least one third of the directors must retire at every Annual General Meeting. Any directors appointed to the Board since the previous Annual General Meeting must also retire, but may seek re-election. All vacancies on the Board may be filled at that meeting. A director may be appointed by the Board at any time but at the next Annual General Meeting that director must retire and seek re-election. In addition, any director can also either be removed by a vote of the holders of a
49
majority of the Ordinary shares outstanding or, if a director has failed to attend Board meetings for six successive months without due cause, by a vote of a majority of the directors.
As of March 14, 2003 the directors and officers of the Company are as follows:
| Name | Position | Age | Initially elected or appointed to position | Date last re-elected to Board | ||||
|---|---|---|---|---|---|---|---|---|
| Michael P Green | Chairman | 55 | February 1983 | March 2003 | ||||
| Paul Murray | Group Finance Director | 41 | January 2002 | February 2002 | ||||
| David Green | Director | 57 | February 1983 | February 2002 | ||||
| Leslie Hill | Director | 66 | April 1994 | March 2003 | ||||
| Sir Sydney Lipworth, QC | Director | 71 | November 1993 | February 2002 | ||||
| Sir Brian Pitman | Director | 71 | March 1998 | March 2003 | ||||
| Etienne de Villiers | Director | 53 | September 2001 | February 2002 | ||||
| David Abdoo | Secretary | 42 | January 1991 | — | ||||
| Martin Bowley | Chief Executive Officer, Carlton Sales | 47 | January 1998 | — | ||||
| Piers Caldecote | Planning | 55 | February 1990 | — | ||||
| Debbie Chalet | Chief Executive Officer, Carlton Screen Advertising | 44 | June 2002 | — | ||||
| Richard Cross | Chief Technology Officer | 39 | January 2002 | — | ||||
| Rupert Dilnott-Cooper | Executive Officer, Carlton International | 49 | November 1997 | — | ||||
| Mike A Green | Chief Accounting Officer | 46 | November 2001 | — | ||||
| Steve Hewlett | Executive Officer, Carlton Productions | 44 | September 1998 | — | ||||
| Clive Jones | Chief Executive Officer, Carlton Channels | 54 | November 2000 | — | ||||
| Nick Markham | Strategy | 35 | November 1999 | — | ||||
| Peter Rushton | Corporate Affairs | 51 | January 2003 | — | ||||
| Tony Williams | Human Resources | 45 | August 2001 | — |
All of the directors of the Company are executive directors, other than David Green, Leslie Hill, Sir Sydney Lipworth, Sir Brian Pitman and Etienne de Villiers, who are non-executive directors.
Biographical information with respect to the directors and Officers of the Company is as follows:
Michael P Green has been Chairman of the Company since February 1983. He is a non-executive director of Independent Television News Limited and Thomson S.A.. He is Chairman of The Media Trust and a trustee of Sainsbury Centre for Mental Health.
Paul Murray joined the Company in December 2001 and was appointed Group Finance Director in January 2002. He was previously Group Finance Director of LASMO plc.
David Green became a non-executive director in November 1990. He is Chairman of Colefax Group PLC.
Leslie Hill became a non-executive director in January 1996. He was Chairman of ITV Network Limited until June 2002.
Sir Sydney Lipworth joined the Company as a non-executive director in November 1993. He was a non-executive director of Centrica plc until May 2002. He is a trustee of the International Accounting Standards Committee Foundation and a non-executive director of Goldfish Holdings Limited.
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Sir Brian Pitman became a non-executive director of the Company in March 1998 and was appointed as the Company's Senior Non-Executive Director on March 25, 2003. He is a non-executive director of Tomkins PLC and The Carphone Warehouse PLC. He was non-executive Chairman of NEXT PLC until May 2002.
Etienne de Villiers joined the Company as a non-executive director in September 2001. He was previously President and Managing Director of Walt Disney International Europe. He is also a founder partner of Englefield Capital, a European mid-market private equity firm.
David Abdoo joined the Company in 1988 and was appointed Company Secretary in 1991.
Martin Bowley joined the Company in February 1992. He is Chief Executive Officer of Carlton Sales.
Piers Caldecote joined the Company in 1989. He is Senior Executive—Planning.
Debbie Chalet joined the Company in March 1992. She is Chief Executive Officer of Carlton Screen Advertising.
Richard Cross joined the Company in January 2002. He is Chief Technology Officer.
Rupert Dilnott-Cooper joined the Company in September 1979. He is Executive Officer of Carlton International.
Mike A Green joined the Company in May 1992 and was appointed Chief Accounting Officer in 2001.
Steve Hewlett joined the Company in September 1998. He is Executive Officer, Carlton Productions.
Clive Jones joined the Company in 1994 and was appointed Chief Executive Officer, Carlton Channels in November 2000. He has been Chairman of London News Network since 1997 and joint Managing Director of ITV Network Limited since May 2002.
Nick Markham joined the Company in November 1999. He is a Senior Executive—Strategy.
Peter Rushton joined the Company in February 1994. He is Head of Corporate Affairs.
Tony Williams joined the Company in August 2001. He is Group HR Director.
James Kidwell left the Company on November 30, 2001. He was the Chief Accounting Officer.
Bernard Cragg left the Company on December 31, 2001. He was the Finance Director and Chief Financial Officer.
Nigel Walmsley left the Company on December 31, 2001. He was Deputy Chief Executive.
Anthony Forbes retired as a non-executive director of the Company on February 28, 2002.
Matthew Kearney left the Company on March 31, 2002. He was Senior Executive—Business Development.
Shaun Williams left the Company on May 31, 2002. He was Director of Corporate Affairs.
John Rudofsky left the Company on December 31, 2002, having joined in June 2002 as Director of Corporate Affairs.
Gerry Murphy left the Company on January 31, 2003. He was Chief Executive Officer.
Michael P Green and David Green are brothers.
Service Contracts
Paul Murray is the only director who has a service contract. His service agreement is terminable on one year's notice by either party, save on a change of control whereupon for one year thereafter the contract is terminable by the Company on two years' notice.
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For the fiscal year ended September 30, 2002, the aggregate compensation of all directors and officers of the Company as a group (comprising the current 19 directors and officers listed in Item 6A, together with Gerry Murphy) paid or accrued totaled £5.5 million. The aggregate amount paid or accrued by the Company for the fiscal year ended September 30, 2002 to provide pension, retirement or similar benefits for all directors and officers of the Company as a group was £0.6 million.
The remuneration of each of the directors for the fiscal year ended September 30, 2002 is set out below:
| | Salary 2002 | Benefits 2002 | Annual bonus 2002 | Total remuneration 2002 | Total remuneration 2001 | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | |||||||||
| Executive | ||||||||||
| M P Green | £670 | £37 | £— | £707 | £713 | |||||
| G M Murphy(1) | 500 | 98 | — | 598 | 849 | |||||
| P C Murray(2) | 206 | 12 | — | 218 | — | |||||
Non-executive | ||||||||||
| E M de Villiers | 35 | — | — | 35 | — | |||||
| DB Green | 35 | — | — | 35 | 35 | |||||
| L F Hill | 35 | — | — | 35 | 35 | |||||
| Sir Sydney Lipworth | 35 | — | — | 35 | 35 | |||||
| Sir Brian Pitman | 35 | — | — | 35 | 35 | |||||
Current directors' total | 1,551 | 147 | — | 1,698 | 1,702 | |||||
Previous directors | ||||||||||
| B A Cragg(3) | 84 | 11 | — | 95 | 384 | |||||
| N N Walmsley(4) | 78 | 5 | — | 83 | 329 | |||||
| A D A W Forbes(5) | 18 | — | — | 18 | 35 | |||||
| £1,731 | £163 | £— | £1,894 | £2,450 | ||||||
Notes
Pensions
All executive directors are eligible to participate in a directors' contributory defined benefit pension scheme, within the main Carlton Communications Plc Group pension scheme. The directors' pension scheme enables members to retire at age 60 with a maximum pension after 30 years' pensionable service equivalent to two thirds of final pensionable salary. Pensionable salary is basic salary, excluding bonuses. Final pensionable salary is the average of pensionable salary over the last three years before retirement. On death before retirement, a lump sum equal to four times pensionable salary is paid, together with a
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spouse's pension of four ninths of pensionable salary. Pensions in payment are guaranteed to increase in line with inflation up to 5% a year.
The following information relates to the three directors (2001: two directors) who participated during the fiscal year ended September 30, 2002 in the directors' pension scheme.(1)
| Director | Age at September 30, 2002 | Directors' contributions in the year(2) | Increase in accrued pension during the year(3) | Accumulated total accrued pension at September 30, 2002 | ||||
|---|---|---|---|---|---|---|---|---|
| | (in thousands, except age data) | |||||||
| M P Green | 54 | £40 | £18 | £134 | ||||
| G M Murphy(4) | 46 | 6 | 2 | 3 | ||||
| P C Murray | 40 | 12 | 5 | 5 | ||||
Notes
Annual cash bonus
The directors' annual performance-related cash bonus scheme provides executive directors with an incentive to achieve demanding, short-term performance targets. The bonus earned, which is not pensionable, depends principally upon the Company's performance as measured against a specific target or targets set by the Remuneration Committee each year.
For the fiscal year ended September 30, 2002, the scheme provided for a bonus of up to 100% of basic salary, and the targets related to operating performance and individual objectives. M P Green, G M Murphy and P C Murray waived any bonuses they earned under the scheme.
Options to purchase securities from registrant or subsidiaries
As at March 14, 2003, the Company's directors, officers and employees held options under the Company's 1983 Share Option Scheme, the Carlton Executive Share Option Scheme 1999, the 1987 Incentive and Non-qualified Stock Option Plan, Carlton's Equity Participation Plan (EPP) and the Carlton Sharesave (SAYE) Scheme, exercisable between 2003 and 2013, over 48,996,706 new Ordinary shares at prices ranging from 110.0p to 772.0p per share.
The directors and officers listed in Item 6A held options under the Company's 1983 Share Option Scheme, the Carlton Executive Share Option Scheme 1999, Carlton's Deferred Annual Bonus Share Plan ("DABS") and Long Term Incentive Share Plan ("LTIS"), Carlton's Equity Participation Plan ("EPP"), the Carlton Sharesave ("SAYE") Scheme over 31,882,200 of the Company's Ordinary shares as at March 14, 2003. The options held by the executive directors over the Company's Ordinary shares under
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such schemes (other than under the EPP which are listed separately below) as at March 14, 2003 were as follows:
| | Options over Ordinary Shares at March 14, 2003 | Exercise Price | Expiry Date | |||
|---|---|---|---|---|---|---|
| M P Green | 40,000 | † | 358.4 | January 2, 2005 | ||
| 230,188 | † | 530.0 | December 13, 2008 | |||
| 202,657 | † | 602.0 | January 10, 2010 | |||
| 158,031 | † | 772.0 | May 24, 2010 | |||
| 238,859 | † | 561.0 | January 15, 2011 | |||
| 315,047 | † | 319.0 | June 24, 2011 | |||
| 755,639 | † | 133.0 | December 18, 2012 | |||
| 5,164 | (SAYE) | 334.0 | May 31, 2004 | |||
| 20,331 | (DABS) | Nominal | February 5, 2007 | |||
| 1,953 | (DABS) | Nominal | December 3, 2007 | |||
| 5,411 | (DABS) | Nominal | December 13, 2008 | |||
| 6,258 | (DABS) | Nominal | January 10, 2010 | |||
| 19,910 | (DABS) | Nominal | December 20, 2010 | |||
| 28,590 | (LTIS) | Nominal | February 5, 2007 | |||
| 79,075 | (LTIS) | Nominal | December 3, 2007 | |||
P C Murray | 488,888 | † | 225.0 | December 12, 2011 | ||
| 366,541 | † | 133.0 | December 18, 2012 | |||
| 14,931 | (SAYE) | 110.0 | September 30, 2008 |
The Carlton Equity Participation Plan (EPP)
The Carlton Equity Participation Plan (EPP) received shareholder approval at the Annual General Meeting on March 1, 2001. A summary of the main features of the plan is set out below.
Participation in the EPP applies to executive directors and selected senior executives. Participants invited to take part in the EPP are required to commit to have acquired Carlton shares (EPP shares) by a specified date to qualify for a matching award. Normally a participant is entitled to commit to have acquired EPP shares to a value of up to 100% of basic salary (save for the first award where the maximum EPP share commitment was to a value of up to 200% of basic salary). A matching award comprises both an award of free shares (in the form of a nil-price option)—otherwise known as an allocation—and an option grant over shares at market value. The extent to which a matching award will vest will depend on the participant retaining his/her EPP shares and the performance conditions relating to the matching award being satisfied. The maximum matching award will be free shares equal in number to three times the EPP shares and options (at market value) over an equal number of shares. The principal performance conditions applicable to both sets of awards made to date will be measured on the basis of the Company's total shareholder return ("TSR") performance against that of other major UK media companies and the FTSE-100 companies. None of the matching award will vest if the Company's TSR is below median for the
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media comparator group. As of March 14, 2003 the following awards have been made to executive directors:
| | | Awards over Ordinary Shares At March 14, 2003 | Exercise Price | Vesting Date | ||||
|---|---|---|---|---|---|---|---|---|
| M P Green | Allocation | 1,786,665 | Nominal | Up to 50% in April 2005 | ||||
| Option | 1,786,665 | 225.0 | p | and the balance in April 2006 | ||||
Allocation | 1,440,858 | Nominal | Up to 50% in April 2006 | |||||
| Option | 1,440,858 | 139.5 | p | and the balance in April 2007 | ||||
P C Murray | Allocation | 733,332 | Nominal | Up to 50% in April 2005 | ||||
| Option | 733,332 | 225.0 | p | and the balance in April 2006 | ||||
Allocation | 698,922 | Nominal | Up to 50% in April 2006 | |||||
| Option | 698,922 | 139.5 | p | and the balance in April 2007 |
DABS and LTIS Plans
The following share plans were introduced in 1996:
(i) Deferred Annual Bonus Share Plan ("DABS")
The plan, which operates on a annual basis, provides that a participant may choose to invest up to 50% of his/her net (ie. after tax) annual cash bonus to purchase Carlton Ordinary shares (bonus shares). The investing participant is then conditionally awarded a number of Carlton Ordinary shares (restricted shares) with a value that is the gross (ie. pre-tax) equivalent of the annual cash bonus so invested. Provided the bonus shares are retained for three years and the participant remains employed by the Group for four years, the restricted shares will thereafter become available to the participant. These options are exercisable at a nominal price.
As at March 14, 2003, 244,328 Ordinary shares had been conditionally awarded and remained outstanding to the directors and Officers listed in Item 6A under DABS.
(ii) Long Term Incentive Share Plan ("LTIS")
During the period, no awards were made under the LTIS plan. It is intended that no further awards will be made in future under the plan. The LTIS plan provided for a participant to be conditionally awarded a number of Carlton Ordinary shares with a value equating to a percentage of his base salary. The percentage was determined by the Remuneration Committee. Provided the participant remains employed by the Group for four years, the Company's performance, measured on the basis of TSR performance against the FTSE-100 companies over a three year performance period, determined what proportion (if any) of the award would vest at the end of four years. The proportion and targets were determined by the Remuneration Committee. These options are exercisable at a nominal price.
As at March 14, 2003, 107,665 Ordinary shares had been conditionally awarded and remained outstanding to the directors and Officers listed in Item 6A under LTIS.
The Company ensures that it recruits to the Board only individuals of sufficient calibre, knowledge and experience to fulfil the duties of a director appropriately. All directors are given appropriate briefing on appointment and individual training needs are met as required. The Carlton Board currently comprises the Chairman and the Group Finance director, along with five non-executive directors.
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The Board meets regularly, normally eight times throughout the year. It retains full and effective control over the Company and monitors the executive management. The Board is supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties. Board meetings follow a formal agenda and the Board has a formal schedule of matters specifically reserved to it for decision. The Company Secretary and Group Finance Director are responsible for ensuring that applicable rules and regulations are complied with and that Board procedures are followed. All directors have access to the advice and services of the Company Secretary and, if required, external professional advice at the Company's expense.
The Company is continually reviewing its corporate governance standards and procedures in light of the relevant debates and rulemaking projects in the United Kingdom and the United States, in order to ensure that its corporate governance systems remain in line with international best practices.
All directors are subject to re-election by shareholders at the first opportunity after their appointment. Pursuant to the Company's Articles, all directors are required to retire by rotation and offer themselves for re-election at least every three years.
Remuneration Committee
The Remuneration Committee is comprised solely of the following non-executive directors: Sir Brian Pitman (Chairman of the committee), E M de Villiers, L F Hill and Sir Sydney Lipworth. The Remuneration Committee deals with the remuneration of the executive directors on behalf of the Board. The Company's Chairman assists the committee, except in relation to matters specifically concerning his own remuneration. The committee does not retain a firm of remuneration consultants, but seeks professional advice on an ad hoc basis.
Audit Committee
The Audit Committee is comprised solely of non-executive directors: Sir Sydney Lipworth (Chairman of the committee), E M de Villiers and L F Hill. The Company's Audit Committee meets at least three times a year to monitor the accounting policies, internal controls and financial reporting of the Group. The duties of the Audit Committee also include keeping under review the scope and costs of audit and the nature and extent of non-audit services provided by the auditors. The external auditor attends all the meetings and has direct access to the committee Chairman.
Nomination Committee
A Nomination Committee, consisting of two non-executive directors and the Company's Chairman, is responsible for reviewing and making recommendations to the Board on the appointment of directors. The members of the Nomination Committee are: M P Green (Chairman of the committee), Sir Sydney Lipworth and Sir Brian Pitman.
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The number of persons employed by the Group, including directors as at the year end were as follows:
(a) Activity analysis
| | Year ended September 30, | |||||
|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||
| Production | 1,710 | 1,756 | 1,541 | |||
| Selling and distribution | 591 | 597 | 569 | |||
| Administration | 486 | 904 | 670 | |||
| Continuing operations | 2,787 | 3,257 | 2,780 | |||
| Discontinued operations | — | — | 11,792 | |||
| Total | 2,787 | 3,257 | 14,572 | |||
(b) Geographical analysis
| | Year ended September 30, | |||||
|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||
| United Kingdom | 2,769 | 3,240 | 2,663 | |||
| United States | 18 | 17 | 117 | |||
| Continuing operations | 2,787 | 3,257 | 2,780 | |||
| Discontinued operations | — | — | 11,792 | |||
| Total | 2,787 | 3,257 | 14,572 | |||
The reduction in employees as at September 30, 2002 is due to the effect of restructuring redundancies.
Management considers its relationship with employees to be generally good.
Share ownership
As at March 14, 2003 details of the directors' interests in the Company's Ordinary shares were as follows:
| | Number of Ordinary Shares | Percentage of issued and outstanding Ordinary Share capital | |||
|---|---|---|---|---|---|
| M P Green | 10,270,717 | 1.53 | % | ||
| E M de Villiers | 5,000 | * | |||
| D B Green | 9,375,299 | 1.40 | % | ||
| L F Hill | 79,889 | * | |||
| Sir Sydney Lipworth | 34,572 | * | |||
| P C Murray | 109,821 | * | |||
| Sir Brian Pitman | 1,082 | * |
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of the ESOP and the Quest. These interests have not been included in the above figures. The number of Ordinary shares held for the purposes of the ESOP was 1,643,673 on March 14, 2003. The number of shares held for the purposes of the Quest was 696,177 on March 14, 2003.
Item 7—Major Shareholders and Related Party Transactions
Fidelity International Limited/FMR Corp held 87,646,398 (13.04%) as at September 30, 2002, 68,105,404 (10.14%) as at September 30, 2001 and 38,156,324 (5.68%) as at September 30, 2000.
As at March 14, 2003, the Company had been notified of the following interests held, directly or indirectly, in 5% or more of the Company's issued Ordinary share capital:
| Artisan Partners Limited Partnership (Notified December 6, 2002) | 33,975,014 shares | 5.06 | % | ||
Fidelity International Limited/FMR Corp (Notified February 5, 2003) | 72,226,796 shares | 10.75 | % | ||
Putnam Investment Management, LLC/The Putnam Advisory Company, LLC (Notified March 4, 2003) | 47,004,833 shares | 6.995 | % |
As at March 14, 2003, the Company had also ascertained through public announcements the following additional interests held, directly or indirectly, in 5% or more of the Company's issued Ordinary share capital:
| Aviva plc (Announced February 28, 2003) | 35,068,711 shares | 5.22 | % | ||
Fidelity International Limited/FMR Corp (Announced February 13, 2003) | 71,632,396 shares | 10.66 | % | ||
Putnam Investments (Announced March 7, 2003) | 48,582,559 shares | 7.23 | % | ||
UBS Global Asset Management (UK) Limited (Announced March 11, 2003) | 65,798,324 shares | 9.79 | % |
None of the Company's major shareholders have any special voting rights.
There have been no material transactions during the last fiscal year to which any director or officer, or 5% shareholder, or any other relative or spouse thereof, was a party.
In fiscal year 2002, the Company made loans to ITV Digital Holdings and ITV Sport Channel of £82.7 million (2001: £190.3 million, 2000: £163.5 million, 1999: £31 million loan and £62 million equity investment). Full provision has been made against all loans held at September 30, 2002. See also Note 33—Related Party Transactions—of Notes to the Consolidated Financial Statements.
In February 2002, the Company loaned an officer, Richard Cross, £160,000 to assist him to participate in the EPP. The loan bears interest at the "official rate" (as set out in Section 160 of the Income and Corporation Tax Acts, 1988) which is rolled up and added to the principal amount. The official rate as at September 30, 2002 was 5%. The loan is to be repaid on June 30, 2006 or earlier on the occurrence of certain events.
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Item 8—Financial Information
A. Consolidation Statements and Other Financial Information
See the consolidated financial statements, including the notes thereto, and exhibits in Part III hereof and incorporated herein by this reference.
The final dividend for fiscal year 2002 was proposed in the context of the merger announcement with Granada. The level of dividends for fiscal year 2003 and in the future will be considered by the Board taking into account the prospects for the business, an appropriate level of dividend cover (expressed as a ratio of dividends to net income before Ordinary share dividends) and the merger agreement with Granada which specifies that until termination of that agreement the level of the interim dividend and of the final dividend will not exceed those paid for the fiscal year 2002.
The Company is not currently involved in any legal or arbitration proceedings, which the Company believes may have a significant adverse effect on the Company's financial position or profitability.
In October 2002, the Company announced a proposed merger with Granada to progress further consolidation of the ITV network. The merger is conditional upon clearance by regulatory and competition authorities and shareholder approval. Following the merger announcement, the Company and Granada made a detailed submission to the OFT for regulatory consideration. On March 11, 2003, the UK's Trade and Industry Secretary referred the proposed merger to the Competition Commission. This decision was in accordance with the advice of the DGFT. The Competition Commission will examine concerns principally relating to the sale of TV advertising, as well as secondary competition questions in relation to potential competition for ITV licences and the supply of studio facilities in Northern England. It is expected that the Competition Commission will report its findings to the Trade and Industry Secretary by the end of June 2003 and that the Trade and Industry Secretary will rule on the proposed merger approximately one month later.
The Company announced in December 2002 the closure of Carlton Cinema, a film channel, which is currently available on certain UK cable platforms, as of March 31, 2003.
Item 9—The Offer and Listing
Trading Market for Ordinary Shares and ADSs.
The principal trading market for the Ordinary shares is the London Stock Exchange. ADSs representing Ordinary shares, for which JPMorgan Chase Bank is the Depositary, are quoted on the NASDAQ National Market System. Each ADS represents five Ordinary shares.
The following table sets forth for the periods indicated the high and low closing prices for the Ordinary shares and the high and low sales prices of the ADSs, as reported by the London Stock Exchange and NASDAQ respectively.
| | Ordinary Shares | American Depositary Shares | ||||||
|---|---|---|---|---|---|---|---|---|
| Fiscal years ending September 30, | ||||||||
| High | Low | High | Low | |||||
| | (Pence) | (US Dollars) | ||||||
| 1998 | 585.00 | 380.00 | 47.75 | 32.38 | ||||
| 1999 | 656.50 | 353.25 | 53.63 | 29.75 | ||||
| 2000 | 900.50 | 421.25 | 69.25 | 35.13 | ||||
| 2001 | 670.00 | 132.50 | 47.13 | 10.25 | ||||
| 2002 | 286.00 | 106.00 | 20.78 | 8.29 | ||||
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| | Ordinary Shares | American Depositary Shares | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Financial quarters for fiscal years ending September 30, | |||||||||
| High | Low | High | Low | ||||||
| | (Pence) | (US Dollars) | |||||||
| 2001 | |||||||||
| First quarter | 670.00 | 468.00 | 47.06 | 33.75 | |||||
| Second quarter | 611.00 | 392.00 | 47.13 | 28.25 | |||||
| Third quarter | 439.00 | 319.00 | 31.25 | 22.85 | |||||
| Fourth quarter | 363.00 | 132.50 | 25.76 | 10.25 | |||||
| 2002 | |||||||||
| First quarter | 259.00 | 129.00 | 18.60 | 9.35 | |||||
| Second quarter | 286.00 | 183.50 | 20.78 | 12.85 | |||||
| Third quarter | 273.25 | 210.00 | 20.00 | 16.01 | |||||
| Fourth quarter | 218.25 | 106.00 | 17.40 | 8.29 | |||||
| 2003 | |||||||||
| First quarter | 170.50 | 104.00 | 13.20 | 8.06 | |||||
| Second quarter (through March 14, 2003) | 140.75 | 68.25 | 11.60 | 5.55 | |||||
| | Ordinary Shares | American Depositary Shares | ||||||
|---|---|---|---|---|---|---|---|---|
| End of the month | ||||||||
| High | Low | High | Low | |||||
| | (Pence) | (US Dollars) | ||||||
| October 2002 | 134.00 | 104.00 | 10.60 | 8.06 | ||||
| November 2002 | 170.50 | 122.00 | 13.20 | 9.68 | ||||
| December 2002 | 170.50 | 129.00 | 13.20 | 10.45 | ||||
| January 2003 | 140.75 | 105.50 | 11.60 | 8.70 | ||||
| February 2003 | 115.75 | 80.00 | 9.59 | 6.28 | ||||
| March (through March 14, 2003) | 87.50 | 68.25 | 6.99 | 5.55 | ||||
On March 14, 2003, 8,932,949 Ordinary shares (including 8,837,600 Ordinary shares represented by ADSs) were held by approximately 62 registered holders (including nominees) in the US. At such date their holdings represented approximately 1.33% of the total number of Ordinary shares outstanding. The above numbers are not representative of the actual number of US beneficial holders or number of Ordinary shares beneficially held by US persons.
Trading Market for the X-CAPs
The principal trading market for the X-CAPs is the New York Stock Exchange. The following table sets forth for the periods indicated the high and low middle market quotations for the X-CAPs, reported by the New York Stock Exchange.
| | Exchangeable Capital Securities | |||
|---|---|---|---|---|
| Fiscal years ending September 30, | ||||
| High | Low | |||
| | (US Dollars) | |||
| 1998 | 25.75 | 24.44 | ||
| 1999 | 25.75 | 23.13 | ||
| 2000 | 24.00 | 19.00 | ||
| 2001 | 25.15 | 21.56 | ||
| 2002 | 24.40 | 13.00 | ||
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| | Exchangeable Capital Securities | ||||
|---|---|---|---|---|---|
| Financial quarters for fiscal years ending September 30, | |||||
| High | Low | ||||
| | (US Dollars) | ||||
| 2001 | |||||
| First quarter | 23.19 | 21.56 | |||
| Second quarter | 25.00 | 22.50 | |||
| Third quarter | 24.85 | 24.05 | |||
| Fourth quarter | 25.15 | 23.00 | |||
| 2002 | |||||
| First quarter | 24.40 | 15.50 | |||
| Second quarter | 20.60 | 16.82 | |||
| Third quarter | 21.25 | 16.65 | |||
| Fourth quarter | 20.10 | 13.00 | |||
| 2003 | |||||
| First quarter | 19.90 | 12.40 | |||
| Second quarter (through March 14, 2003) | 20.00 | 16.40 | |||
| | Exchangeable Capital Securities | |||
|---|---|---|---|---|
| End of the month | ||||
| High | Low | |||
| | �� | (US Dollars) | ||
| October 2002 | 18.60 | 12.40 | ||
| November 2002 | 19.65 | 17.50 | ||
| December 2002 | 19.90 | 17.60 | ||
| January 2003 | 20.00 | 17.50 | ||
| February 2003 | 18.30 | 16.60 | ||
| March (through March 14, 2003) | 17.20 | 16.40 | ||
On March 14, 2003, all of the X-CAPs then outstanding were held by one registered holder in the US. Such registered holding is not representative of the actual number of US beneficial holders or number of X-CAPs held beneficially by US persons.
Item 10—Additional Information
A. Memorandum and Articles of Association
Summary of certain provisions of the Memorandum and Articles of Association of Carlton
(1) Memorandum of Association
The Memorandum of Association of Carlton provides that its principal object is to carry on the business of a holding company.
(2) Articles of Association
The Articles of Association of Carlton contain, amongst other things, provisions to the following effect:
A member may transfer all or any of his certificated shares by instrument of transfer in writing in the usual common form or in such other form as the directors may approve, and the transferor shall be deemed to remain the holder of such share(s) until the name of the transferee is entered in the Register in respect thereof. A member may transfer all or any of his uncertificated shares in accordance with the
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Uncertificated Securities 1995 Regulations (the "Regulations") and in the manner provided for in the rules and procedures of the relevant system.
The directors may, in their absolute discretion, refuse to register any transfer of title to any certificated share unless:
The Board may nevertheless refuse to register any share transfer executed by a member who is prohibited from voting unless the transferee is an unconnected purchaser (as defined in Article 77).
If the Board refuses to register a transfer of a certificated share it shall, within two months after the date on which the transfer was lodged with the Company, send notice of such refusal to the transferee.
Subject to the requirements of the London Stock Exchange and in accordance with the Regulations, the directors may refuse to register a transfer of title for any uncertificated shares in favour of more than four persons jointly or in any other circumstances where the directors are so permitted by the Regulations.
Annual general meetings are held at such times and place as determined by the directors of the Company. The directors may also, when they think fit, convene an extraordinary general meeting of the Company. Extraordinary general meetings may also be convened on requisition as provided by the Companies Act 1985.
An Annual General Meeting and an extraordinary general meeting called for the passing of a special resolution need to be called by not less than twenty-one days' notice in writing, and all other extraordinary general meetings by not less than fourteen days' notice in writing. The notice is given to the shareholders, subject to any special terms of issues of the shares they hold, the directors and the auditors of the Company. The directors may determine that persons entitled to receive notices of meetings are those persons entered on the register at the close of business on a day determined by the directors but not later than 21 days before the date the relevant notice is sent. The notice may also specify the record date, which shall not be more than 48 hours before the time fixed for the meeting.
Matters are transacted in shareholders' meetings by the proposing and passing of resolutions, of which there are three types:
An ordinary resolution requires the affirmative vote of a majority of the votes of those persons voting at a meeting at which there is a quorum. Special and extraordinary resolutions require the affirmative vote of not less than three-fourths of the persons voting at a meeting at which there is a quorum. Two persons constitute a quorum for all general meetings of shareholders.
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The Articles of Association of the Company provide that voting on resolutions at a shareholders' meeting will be decided on a show of hands unless a poll is demanded by:
Subject to any special terms as to voting upon which any shares may have been issued, or may for the time being be held, every member present in person shall upon a show of hands have one vote, and every member present in person or by proxy shall upon a poll have one vote for every 5p in nominal amount of the shares held by him.
Holders of record of ordinary shares may appoint a proxy to vote on their behalf at any shareholders' meeting upon any resolution whether substantive or procedural.
The Company may by ordinary resolution:
The Company may from time to time by special resolution reduce its share capital, any capital redemption reserve fund and any share premium account in any manner authorised by law.
In respect of fully paid shares, the Company may issue share warrants stating that the bearer is entitled to the shares specified, and providing for the payment of future dividends or other monies on or in respect of the shares.
Whenever the capital of the Company is divided into different classes of shares, all or any rights or privileges attached to any class of shares may be varied or abrogated (i) in such manner as may be provided by such rights, or (ii) in the absence of any such provision, either with the consent in writing of the holders of at least three-fourths of the nominal amount of the issued shares of that class or with the sanction of an extraordinary resolution passed at a separate meeting of the holders of the issued shares of that class, but not otherwise. If, and for so long as any class of shares has any preferential right to dividend or return of capital, the conferring on other shares of rights to either dividend or return of capital ranking in point of priority either before orpari passu with that class shall, unless otherwise expressly provided by the terms on which shares of that class are held, not be deemed a variation or abrogation of the rights attached to that
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class of shares. The creation or issues of shares rankingpari passu with or subsequent to the shares of any class shall not (unless otherwise expressly provided by the Articles of Association or the rights attached to such last mentioned shares as a class) be deemed to be a variation or abrogation of the rights of such shares.
The Articles of Association place a general prohibition on a director voting in respect of any contract, arrangement, transaction or any other proposal whatsoever, in which such director has any material interest otherwise by virtue of his interests in shares or debentures or other securities in the Company. A director shall not be counted in the quorum at a board of directors' meeting in relation to any matter on which he is debarred from voting. However, in the absence of some other material interest than indicated below, a director is entitled to vote and be counted in the quorum, in respect of any resolution concerning any of the following matters:
The directors may exercise all their powers to give or award pensions, annuities, gratuities and superannuation or other allowances and benefits to any persons who are or have at any time been directors of or employed by the company. The directors may also procure payments for their insurance as well as the establishment and subsidy or subscription to and support of any institutions, association clubs, funds or trusts which they consider to be for their benefit. A director may also provide services in his professional capacity either individually or through his firm to the Company under financial terms to be set by the directors.
At every Annual General Meeting a minimum of one-third of directors shall retire from office, except that if their number is not three or any multiple of three then the minimum number required to retire shall
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be the nearest to and less than one-third. If there are fewer than three directors they shall all retire. The directors to retire by rotation on each occasion shall be those directors who held office at the time of the two proceeding Annual General Meetings and did not retire by rotation at either of them. If the number of directors so retiring is less than the minimum number of directors required to retire, then the additional directors that will retire will be those of the directors who have been the longest in the office since their last appointment or reappointment. No director shall retire on account of age. Retiring directors shall be eligible for re-election.
The directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital, or any part thereof and, subject to the Articles of Association, to issue debentures and other securities.
The directors shall restrict the borrowings of the Company so that at any one time the aggregate amount owing by the Company and its subsidiaries shall not at any time, without the previous sanction of an ordinary resolution of the Company in general meeting, exceed a sum equal to two and half times the aggregate of the adjusted share capital and reserves.
The Company in general meeting may declare a dividend to be paid in accordance with the respective rights and interests of the members, provided that no larger dividend shall be declared than is recommended by the directors. The directors may from time to time declare and pay an interim dividend and pay or declare and set aside for payment any dividend payable at a fixed rate on any shares.
Except insofar as the rights attaching to, or the terms of issue of, any share provide otherwise:
No dividend or other moneys payable by the Company shall bear interest as against the Company.
All dividends, interest or other sums payable unclaimed for one year after having been declared may be invested or otherwise made use of by the directors for the benefit of the Company until claimed. All dividends unclaimed for a period of 12 years from the date they became due for payment shall be forfeited and shall revert to the Company.
Upon the recommendation of the directors, any general meeting declaring a dividend may direct payment of such dividend to be made wholly or in part by the distribution of assets, including fully paid-up shares or debentures of any other company.
Subject to the Company's Articles of Association, the directors may, if authorised by the Company in general meeting, offer the holders of Ordinary shares the right to elect to receive Ordinary shares, credited as fully paid, instead of cash in respect of all or part of such dividend as may be declared by the Company or, in the case of an interim dividend, the directors.
Carlton's share capital is divided into:
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(i) Special rights of the 6.5p (net) Cumulative Convertible Redeemable Preference Shares
The 6.5p Preference shares have the following rights:
The right in priority to receive a fixed cumulative preferential dividend (the "CRP Convertible Dividend") of 6.5p per share (net of any associated tax credit), per annum payable half yearly in equal installments on 1 January and 1 July. Holders of 6.5p Preference shares do not enjoy any further right to participate in the profits of the Company available for distribution.
In the event of a winding up of the Company or on a return of capital (except on conversion, redemption or purchase of the 6.5p Preference shares), the assets of the Company shall be applied in the following order of priority:
Subject to the provisions of the Companies Act 1985 (the "Act"), the Company may at any time purchase 6.5p Preference shares in the market or by tender or private treaty at a price not in excess of the average of the middle market quotations during the period of the ten business days immediately prior to the date of such purchase or, in the case of a purchase on the London Stock Exchange, at the market price thereof (provided that such market price is not more than five % above such average) but not otherwise.
Subject to the provisions of the Act, the Company shall redeem on 30 April 2010 all 6.5p Preference shares (if any) in issue on that date and the Company may redeem on 30 April 2005 and on 30 April in each of the years 2006 to 2010 all or part of the 6.5p Preference shares (if any) then in issue, and the amount payable on redemption thereof in any such case shall be the amount paid up (or credited as paid
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up), together with a premium of 95p per share and an amount equal to any arrears or accruals of the CRP Convertible Dividend (whether or not earned or declared).
On March 31 in each year up to and including 2005 (a "Conversion Date"), each 6.5p Preference shareholder shall be entitled to convert all or any of their 6.5p Preference shares into fully paid Ordinary shares of 5p each on the basis of 10.3359 (following the capitalization issue on February 26, 1996, this figure changed to 25.83975) Ordinary shares for every 100 6.5p Preference shares (the "Conversion Rate"). The allotment of Ordinary shares shall be made within 28 days after conversion. Whether the 6.5p Preference shares are in certificated or uncertificated form, the right to convert shall be exercisable by the prescribed method at any time during the 28 day period ending on the Conversion Date (the "Conversion Period").
The CRP Convertible Dividend on any 6.5p Preference shares converted shall cease to accrue with effect from January 1 last preceding the relevant Conversion Date. The Ordinary shares arising on such conversion shall be credited as fully paid and shall rankpari passu in all respects with the Ordinary shares then in issue and shall entitle the holder to all dividends and other distributions payable on the Ordinary shares in or in respect of the accounting period in which the Conversion Date falls (not being dividends in respect of any earlier accounting period).
In the event that immediately after the expiry of any Conversion Period 75% or more of the 6.5p Preference shares shall have been converted or purchased by the Company, the Company shall be entitled to give notice in writing to require all holders of 6.5p Preference shares either to convert all of their 6.5p Preference shares into Ordinary shares or to agree to early redemption of such shares on the expiry of such notice and requiring holders to elect whether to convert or agree to redeem.
Conversion of such 6.5p Preference shares as from time to time are due to be converted may be effected in such manner as the directors shall determine (subject to the provisions of the Act), including by the redemption of 6.5p Preference shares involving the repayment of the amount paid up together with a premium of 95p per share or by means of consolidation and sub-division, in which case the consolidation and sub-division shall be effected in the manner prescribed by the Articles of Association.
6.5p Preference shares shall confer on the holders the right to receive notice of and to attend all general meetings of the Company but shall only confer the right to speak or vote at any such meeting if:
On any resolution upon which the 6.5p Preference shareholders are entitled to vote, each such holder present in person shall on a show of hands have one vote and on a poll each such holder present in person or by proxy shall have one vote in respect of each Ordinary share which the 6.5p Preference shares registered in the name of such holder would have been converted into had conversion taken place at the Conversion Rate.
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So long as any 6.5p Preference shares remain capable of being converted into Ordinary share capital, certain restrictions shall apply unless the Company shall have obtained the consent of three fourths (in nominal value) of the holders of the 6.5p Preference shares whether in writing or by extraordinary resolution at a separate meeting of the 6.5p Preference shareholders.
No further share capital of the Company ranking as regards participation in the profits or assets of the Company in priority to the 6.5p Preference shares shall be created or issued without the consent of three-fourths (in nominal value) of the holders of the 6.5p Preference shares.
Subject to the provisions of the Articles of Association, the Company may create and issue further shares ranking as regards participation in the profits and assets of the Companypari passu with the 6.5p Preference shares.
The Dollar Preference shares rank pari passu with all shares expressed to rank pari passu therewith as to dividends and otherwise in priority to any other share capital of the Company to receive a preferential dividend (the "CP Dividend") at such rate and on such dates, terms and conditions as the directors may determine. In particular, the directors may determine whether the rights of such shares as regards participation in profits are cumulative or non-cumulative.
On a return of capital (except on redemption or purchase of shares in the Company) the assets of the Company available for distribution among the members shall be applied in priority to any payment to the holders of any other class of share ranking junior to the Dollar Preference shares upon such a return of capital and pari passu with the rights of any holder of any class of preference shares expressed to rank as to such return of capital pari passu with the holders of the Dollar Preference shares in repaying to the holders of the Dollar Preference shares a sum equal to the liquidation preference in respect thereof, together with all arrears and accruals (if any) of the CP Dividend.
Where the assets of the Company available for distribution are insufficient to cover the amounts payable in full on the Dollar Preference shares and any other shares expressed to rank pari passu therewith, then Dollar Preference shareholders and such other shares will share rateably in the distribution of surplus assets in proportion to the full respective preferential amounts to which they are entitled. Dollar Preference shares shall not otherwise participate in the surplus assets of the Company.
Unless otherwise determined by the directors prior to their allotment, the Dollar Preference shares shall be redeemable at the option of the Company. Subject to the provisions of the Act and the rights of other shareholders, the Company has the right to redeem the Dollar Preference shares in issue and fully paid on any Redemption Date. However, the Company shall not be entitled to redeem any Dollar Preference share unless on or before the relevant Redemption Date the special dividend (see below) has been paid. Out of the profits available for distribution there shall be paid on each Dollar Preference share to be redeemed a special dividend equal to the aggregate of, where a cumulative dividend is payable or where arrears or accruals of dividends are payable, a sum equal to the aggregate of all arrears and accruals of the CP Dividend, and, in any case, a sum in US dollars equal to the amount paid up or credited as paid up on such Dollar Preference share together with any premium paid or credited on issue of the preference share in question in respect of the Redemption Date notified to the Dollar Preference shareholder.
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The expression "Redemption Date" means in relation to any series of Dollar Preference shares any date which falls at least 5 years after the date on which such Dollar Preference shares of that series were first issued or where such Dollar Preference shares are issued in exchange for any class of securities of the Company, the date on which such securities of that class were first issued.
Upon the redemption or purchase of any Dollar Preference shares, the directors may consolidate and divide the authorised Dollar Preference share capital existing as a consequence of such redemption or purchase into shares of a larger or smaller amount and/or may convert such authorised Dollar Preference share capital into any other class of share capital into which the authorised share capital of the company is or may be divided of a like aggregate nominal amount in the same currency as the Dollar Preference shares.
The holders of Dollar Preference shares shall only be entitled to receive notice of and attend and vote upon any resolution proposed at a general meeting of the Company in the following circumstances: in respect of a resolution for winding up the Company or for varying or abrogating any of the rights attached to the Dollar Preference shares; where the CP Dividend has not been declared and paid in full; or in such other circumstances as the directors may determine prior to allotment, but not otherwise.
Whenever holders of Dollar Preference shares are entitled to vote on a resolution to be proposed at a general meeting of the Company, on a show of hands every such holder who is present in person or is present by a duly authorized representative shall have one vote and, on a poll, every such holder who is present in person or by a duly authorized representative or proxy shall have such number of votes as the directors shall prior to allotment determine.
Save with the written consent of the holders of three-fourths (in nominal value) of the issued Dollar Preference shares of each series, or with the sanction of an extraordinary resolution passed at a separate meeting of that series, the directors shall not authorise or create, or increase the amount of any shares of any class or any security convertible into shares of any class ranking as regards participation in the profits or assets of the Company in priority to the Dollar Preference shares.
Subject to the above, the Company may from time to time create and issue further shares ranking as regards participation in the profits and assets of the Company pari passu with the Dollar Preference shares.
For the avoidance of doubt, the rights attached to the Dollar Preference shares shall not be deemed to be varied by or abrogated by the purchase or redemption of any of the Company's shares ranking as regards participation in the profits or assets of the Companypari passu with or after such shares.
A reduction of capital paid up on a series of the Dollar Preference shares shall constitute a variation of the rights of the holders of the Dollar Preference shares of that series.
The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the Company (i) within the two years immediately preceding the date of this document and are or may be material to the Company or (ii) at any time which contain an obligation or entitlement which is material to the Company as at the date of this document:
(1) The Sale Agreement for the disposal of Technicolor:
Carlton, together with certain Carlton subsidiaries (the "Carlton Subs"), entered into an agreement to sell Technicolor, which completed on March 16, 2001, the principal terms and conditions of which are summarised below.
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At Completion, the consideration paid by Thomson to Carlton was US$750 million (£524 million) in cash and an aggregate amount of US$600 million (£420 million), payable in four equal instalments of US$150 million (£105 million) each plus accrued interest on the first, second, third and fourth year anniversaries of completion. Thomson's obligations in this respect were evidenced by promissory notes, which were issued on completion.
Additionally Thomson at Completion paid Carlton further consideration of €761.4 million (£477.3 million) in cash. At Completion, Carlton was obliged to subscribe €761.4 million (£477.3 million) for bonds issued by Thomson which carried an entitlement on the first year anniversary of the date of Completion to 15.5 million new Thomson shares. Following maturity of the bonds one year after Completion (i.e. March 2002), Carlton became a 5.52% shareholder in Thomson.
In total the Company received consideration of £1,321.5 million, after closing adjustments. Cash disposed of totaled £94.1 million and expenses and other costs were £54.3 million. Net consideration arising from the disposal was therefore £1,173.1 million.
Carlton and the Carlton Subs and Thomson have given to each other representations, warranties and indemnities (including, in the case of Carlton and the Carlton Subs, an indemnity relating to environmental matters) which are customary in a disposal of a business of this kind under a contract governed by New York law.
Thomson and Carlton agreed to negotiate in good faith to establish, after Completion, a 50/50 joint venture for the development of a screen advertising business in North America. Under the joint venture agreement Carlton and Thomson each holds 50% of Technicolor Cinema Advertising, LLC, the holding company for a cinema screen advertising venture in the United States.
Subject to certain exceptions, Carlton and the Carlton Subs have agreed not to compete with the Technicolor business, as it is carried on at Completion, or to solicit any of the employees of Technicolor or to induce any customer or business relation from ceasing to do business with Technicolor for a period of thirty-six months from the date of Completion.
(2) The joint venture with Granada in respect of ONdigital
A joint venture agreement dated December 18, 1997 and made between Carlton and Granada relating to their respective holdings of 50% of ITV Digital Holdings Limited ("ITV Digital Holdings"), formerly ONdigital Holdings Limited, which holds 100% of ONdigital. The purpose of the joint venture was to set up a pay DTT operator. Granada's shareholding in ITV Digital Holdings was transferred to Granada Media plc ("Granada Media") in accordance with the permitted transfer provisions on May 10, 2000. The joint venture agreement contains provisions relating, inter alia, to the financing and management of ITV Digital Holdings and ONdigital and the relationship between the shareholders, including the appointment of directors, prohibitions on certain actions of ITV Digital Holdings and/or ONdigital without the prior written consent of Carlton and Granada Media, deadlock resolution (including a procedure for either shareholder to serve a buy/sell notice specifying a cash price for the purchase of its interest in ITV Digital Holdings), non-compete obligations, events of default and restrictions on transfers of shares to third parties.
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ONdigital 1998 plc and ONdigital (Services) Limited were placed into administration on March 27, 2002 and are currently in the process of liquidation as more fully described under "Item 4—Information on the Company—B. Historical Background".
(3) The merger agreement with Granada
A merger agreement dated October 16, 2002 and made between Carlton and Granada whereby the two companies proposed a merger of their respective groups of companies to form one group of companies ("Merged Group").
The merger is subject to a number of pre-conditions including clearance by the UK competition authorities and the ITC and will be effected once those clearances have been obtained. If regulatory clearances for the merger are obtained sufficiently in advance of the new Communications Act coming into force, it is intended that the merger would be effected in two stages, the first being an interim structure that would comply with current broadcasting regulation (see "Item 4—Information on the Company—I. UK Television Regulation"). The second stage would involve the combination of the merged group and this separate Company's businesses when the Communications Act comes into force. Carlton and Granada will also be discussing with the regulators appropriate arrangements for the sale of airtime by the merged group which, to the extent necessary, may extend to a separate sales organization.
The merger is expected to be effected by way of inter-conditional court approved schemes of arrangement of both Carlton and Granada under Section 425 of the Companies Act 1985, as amended. The schemes will operate in a similar way to each other and will become effective on the same day. The Carlton scheme will require approval by special resolution of Carlton holders of Ordinary shares at an extraordinary general meeting of Carlton. The Carlton scheme will also require approval separately by a majority in number representing 75% in value of the holders of Carlton Ordinary shares who vote at a meeting convened by the High Court of Justice in England and Wales. The Granada scheme will require similar approvals by holders of Granada Ordinary shares. In addition, each scheme is required to be sanctioned by the High Court. The schemes can only become effective when all conditions to the merger have been satisfied or waived. The merger is conditional upon both schemes becoming unconditionally effective by March 31, 2004 or such later date as Carlton, Granada and the High Court may agree.
The merger is also conditional on the listing of the new entity's Ordinary shares and convertible shares on the London Stock Exchange and on obtaining other necessary regulatory approvals and authorizations. The pre-conditions and conditions to the merger are set forth in Appendix II to Schedule 1 of the merger agreement between Granada plc and Carlton Communications Plc filed as an exhibit to this Form 20-F. Appendix II is hereby incorporated by reference.
On completion of the merger, Granada shareholders will receive 68% of the Ordinary share capital of the Merged Group and £200 million in cash. Carlton Ordinary shareholders will receive 32% of the Ordinary share capital of the Merged Group, potentially increasing to 34% through the conversion of convertible shares in the merged group to be issued to Carlton shareholders in 2006 depending on the achievement of a share price of Ordinary shares of the Merged Group equivalent to 140 pence per Granada share (implying the achievement of a Carlton Ordinary share price of 271 pence) and on achievement of an agreed earnings target for the year ending September 2005. For additional information on the terms of the convertible shares see below under (c).
Granada shareholders will receive one Ordinary share in the Merged Group and 7.225 pence in cash for every Granada share currently held. Carlton Ordinary shareholders will receive 1.9386 Ordinary shares in the Merged Group and 0.1835 convertible shares for every Carlton Ordinary share currently held.
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Appropriate proposals will be made to existing Carlton preference shareholders on posting of the formal documentation to all Carlton shareholders following the satisfaction or waiver of all the preconditions.
The convertible shares will be issued credited as fully paid up on the effective date of the merger. The convertible shares will not carry any voting rights or any right to receive notice of or to attend general meetings of the merged group (save in relation to any variation of their rights as a class), any right to receive dividends or other distributions or any right to capital rights as a class, any right to receive dividends or other distributions or any right to capital save for a right to the return of the nominal value of the convertible shares on a winding up of the merged group.
The convertible shares will automatically convert into Ordinary shares in the merged group on January 1, 2006 provided that the following conditions have been satisfied:
On conversion, each convertible share will convert into one Ordinary share in the merged group. The terms of the convertible shares will be adjusted to take account of certain events, including: the consolidation, sub-division, cancellation or re-classification of the Ordinary share capital of the merged group; capitalization and bonus issues; offers of shares to existing shareholders by way of rights; payment of special or abnormal dividends by the merged group; and any de-merger of part of the business of the merged group.
In the event that, prior to January 1, 2006, an offer is made to acquire the whole or any part of the Ordinary share capital of the merged group or if any person proposes a scheme of arrangement with regard to such acquisition and, in either case, the right to cast more than 50% of the votes which may ordinarily be cast on a poll at a general meeting of the merged group vests in a third party (whether before or after January 1, 2006), the following will apply:
A × (B-70)/70
Where:
A = the number of Ordinary shares in the merged group into which a convertible share converts at that time
B = the Offer Price; and
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No fractions of Ordinary shares in the merged group will be issued on conversion of any convertible shares and any fractional entitlements arising on conversion will be disposed of by the merged group and the net proceeds of sale paid to those entitled thereto. If conversion does not take place on January 1, 2006, the conversion rights attaching to the convertible shares will lapse and the convertible shares will be automatically re-designated into deferred shares which will be subject to compulsory transfer to a custodian. It is intended that the convertible shares will be admitted to the Official List of the London Stock Exchange.
The merger agreement contains representations, warranties and undertakings by each of the parties in connection with the merger. For additional information on the terms of the convertible shares see above under (c). In addition, Carlton and Granada have agreed that one party will make a payment of £8.5 million to the other in certain circumstances including where the merger lapses or is withdrawn following certain specified events.
For additional information regarding the terms of the merger see Exhibit 4.4 "Merger Agreement between Granada plc and Carlton Communications Plc".
There are currently no UK foreign exchange control restrictions on remittances of dividends on the Ordinary shares or Dollar Preference shares or on the conduct of the Company's operations.
There are no limitations under English law or in the Memorandum and Articles of Association of the Company that are applicable only to non-UK shareholders relating to the right to hold or exercise voting rights attaching to the Ordinary shares or Dollar Preference shares of the Company.
The following is a summary of the principal US federal income and UK tax consequences of the purchase, ownership and disposition of X-CAPs, Ordinary shares, Dollar Preference shares or ADSs by a US holder. For the purposes of this summary, a "US holder" is a beneficial owner of X-CAPs, Ordinary shares, Dollar Preference shares or ADSs that is (i) a citizen or resident of the United States, (ii) a corporation organized under the laws of the United States or any State, (iii) an estate the income of which is subject to United States federal income tax without regard to its source or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. In general, for US federal income tax purposes, holders of ADSs will be treated as the owners of the Ordinary shares or Dollar Preference shares represented by those ADSs. As used in this summary, the term "ADSs" refers to ADSs representing either Ordinary shares or Dollar Preference shares.
The summary is not a comprehensive description of all of the tax considerations that may be relevant with respect to X-CAPs, Ordinary shares, Dollar Preference shares or ADSs. The discussion deals only with US holders that hold X-CAPs, Ordinary shares, Dollar Preference shares or ADSs as capital assets and that own, together with certain related parties, less than 10% of the voting shares of the Company or of the X-CAPs, Ordinary shares or Dollar Preference shares. This summary does not take into account the specific circumstances of any particular investors (such as tax-exempt entities, certain insurance companies, broker-dealers, traders in securities that elect to mark to market, investors liable for alternative minimum tax, investors that hold shares or ADSs as part of a straddle or a hedging or conversion transaction or investors whose functional currency is not the US dollar), some of which may be subject to special rules.
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The summary is based on the current tax laws of the US and the UK and also in part on representations of Morgan Guaranty Trust Company of New York, as depositary (the "Depositary") for Ordinary shares and/or Dollar Preference shares on behalf of holders of ADSs. The summary assumes that each obligation in the deposit agreements among Carlton, the Depositary and the holders from time to time of ADRs and any related agreement will be performed in accordance with its terms. This summary is also based on the current double income taxation convention between the UK and the US (the "Income Tax Treaty"). On July 24, 2001 a new double tax convention between the US and the UK was signed (the "New Treaty"). The provisions of the New Treaty will not enter into force until the New Treaty has completed its passage through the UK parliament and the US Senate and has been ratified by both governments. The provisions of the New Treaty will then take effect at various appointed times following ratification. The New Treaty contains,inter alia, a number of anti-avoidance provisions not contained in the current Income Tax Treaty, however, US holders who are individuals and who are beneficial owners of their X-CAPs, Ordinary shares, Dollar Preference shares or ADSs and hold the same as investments are unlikely to be in a worse position regarding their UK tax position under the New Treaty than under the current Income Tax Treaty discussed below; however, US holders who are in any doubt should consult their own advisers.
Investors in X-CAPs, Ordinary shares, Dollar Preference shares or ADSs are advised to consult their own tax advisers as to the UK, US or other tax consequences of the purchase, ownership and disposition of such X-CAPs, Ordinary shares, Dollar Preference shares or ADSs, including the effect of any state or local laws.
UK Income Tax on Payments on the X-CAPs
Payments of interest on the X-CAPs will not be treated as distributions for UK tax purposes, provided that the X-CAPs are not, at the time of payment, held by a US holder which is a company not resident in the UK for UK tax purposes and which is either a subsidiary of the Company or is put in funds (directly or indirectly) by the Company or such a subsidiary.
Payments of interest made on or after April 1, 2001 will be exempt from withholding or deduction for or on account of UK tax under the provisions of UK tax law relating to "quoted eurobonds" provided that they carry a right to interest and are and continue to be listed on the New York Stock Exchange or on the London Stock Exchange (or other recognised "stock exchange" within the meaning of section 841 of the Income and Corporation Taxes Act 1988). Whilst the X-CAPs are and continue to be quoted eurobonds (within the definition applicable from that date) payments of interest made on or after that date may be made without withholding or deduction for or on account of United Kingdom income tax.
In all cases falling outside the quoted eurobond exemption, UK interest on the X-CAPs paid on or after April 1, 2001 may be paid under deduction of United Kingdom income tax at the lower rate (currently 20%), subject to such relief as may be available under the provisions of any applicable double taxation treaty or other possible exemptions.
Payments of interest on the X-CAPs will constitute UK source income, and, as such, remain subject to UK income tax by direct assessment even though paid gross, except in the hands of (a) a US holder who is entitled to receive payments free of withholding or deduction under the Income Tax Treaty, and (b) a holder who is not resident in the UK for tax purposes and does not have, in relation to such interest, a "UK representative" for the purposes of section 126 of, and Schedule 23 to, the Finance Act 1995.
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US Federal Income Taxation of Payments on the X-CAPs
Because the X-CAPs have no stated maturity, can be exchanged for Dollar Preference shares at the option of the Company and would be treated as if they were Dollar Preference shares in a winding-up of the Company and because payments of interest on the X-CAPs will be made only at the election of the Company, the X-CAPs will be treated as equity for US federal income tax purposes.
Payments of interest on the X-CAPs will constitute dividends for US federal income tax purposes to the extent paid out of current or accumulated earnings and profits of the Company, as determined for US federal income tax purposes. US holders will include in gross income the gross amount of any dividend paid (before reduction for UK withholding tax) as Ordinary income when the dividend is actually or constructively received by the US holder. Such payments will not be eligible for the dividends received deduction generally allowed to US corporations. Distributions in excess of current and accumulated earnings and profits, as determined for US federal income tax purposes, will be treated as a return of capital to the extent of the holder's adjusted tax basis in the X-CAPs and thereafter as capital gain.
UK Income Tax on Payments of Dividends
An individual shareholder who is the beneficial owner of Ordinary shares or Dollar Preference shares and resident in the UK will generally be entitled to a tax credit in respect of any dividend received equal to1/9 th of the amount of the dividend. Such an individual shareholder's liability to UK income tax is calculated on the sum of the dividend and the tax credit ("the gross dividend"). The tax credit therefore equals 10% of the gross dividend. The UK tax credit is available to be set against the individual's UK income tax liability on the dividend but will generally not be available to be refunded to him if it exceeds his overall liability to income tax.
Under the Income Tax Treaty, subject to certain exceptions, a US holder who is a resident of the US for purposes of the Income Tax Treaty is entitled to receive, in addition to any dividend paid by Carlton, the UK tax credit in respect of such dividend to which a UK resident individual would have been entitled, but reduced by a UK withholding tax equal to 15% of the sum of the dividend paid and the UK tax credit. However, as a result of the reduction in the tax credit rate to 10% from April 6, 1999 a US holder will not be able to claim repayment of any part of the UK tax credit.
US Federal Income Taxation on Payments of Dividends
Distributions received in respect of Ordinary shares, Dollar Preference shares or ADSs will constitute dividends for US federal income tax purposes to the extent paid out of current or accumulated earnings and profits of the Company, as determined for US federal income tax purposes. US holders will include in gross income the gross amount of any dividend paid (before reduction for UK withholding tax) as Ordinary income when the dividend is actually or constructively received by such holders, or, in the case of ADSs, the Depositary. Such dividend income will not be eligible for the dividends received deduction generally allowed to US corporations. Subject to certain limitations, the UK withholding tax deemed paid if the US holder claims the benefits of the Income Tax Treaty will be treated as a foreign income tax that may be claimed as a credit or alternatively taken as a deduction in computing any US federal income tax liability. The dividend income will, for purposes of computing the foreign tax credit, constitute income from sources outside the US and, with certain exceptions, will be treated together with other items of "passive" or, for certain holders, "financial services" income. The rules relating to the determination of the foreign tax credit are complex and US holders should consult their own tax advisors to determine whether and to what extent a credit will be available.
UK Taxation on Capital Gains
Under the Income Tax Treaty, each country may in general tax capital gains in accordance with the provisions of its domestic law. Under present UK law, a US holder that is not resident (and, in the case of
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an individual, not ordinarily resident) in the UK for UK tax purposes and who does not carry on a trade, profession or vocation in the UK through a branch or agency to which the X-CAPs or Ordinary shares or Dollar Preference shares or ADSs are attributable will not be liable for UK taxation on capital gains or eligible for relief from UK taxation for allowable losses, realized on the sale or other disposal (including redemption) of such X-CAPs or Ordinary shares or Dollar Preference shares or ADSs.
US Federal Income Taxation on Capital Gains
A US holder generally will recognize a capital gain or loss for US federal income tax purposes on the sale or exchange of X-CAPs, Ordinary shares. Dollar-denominated Preference shares or ADSs in the amount of the difference between the amount realized and the holder's adjusted tax basis in the X-CAPs, Ordinary shares, Dollar Preference shares or ADSs. Generally, such gain or loss will be capital gain or loss. In the case of a US holder who is an individual, such gain will generally be subject to US federal income tax at a maximum rate of 20% if attributable to the sale of property held for more than 12 months. Such gain or loss will be income or loss from sources within the US for foreign tax credit limitation purposes. US holders should consult their own tax advisors concerning various state and local tax consequences of a sale or exchange of X-CAPs, Ordinary shares, Dollar Preference shares or ADSs.
UK Inheritance Tax
Under the current UK/US convention relating to estates and gift taxation, X-CAPs, Ordinary shares, Dollar Preference shares or ADSs beneficially held by an individual US holder who is domiciled for the purposes of such convention in the US and is not for the purposes of such convention a national of the UK will not, provided any tax chargeable in the US is paid, be subject to UK inheritance tax on the disposal of the X-CAPs, Ordinary shares, Dollar Preference shares or ADSs by way of gift or upon the individual's death unless they are part of the business property of a permanent establishment of the individual in the UK or, in the case of a US holder who performs independent personal services, pertain to a fixed base situated in the UK. In the exceptional case where the X-CAPs, Ordinary shares, Dollar Preference shares or ADSs are subject both to UK inheritance tax and to US federal gift or estate tax, the convention generally provides for double taxation to be relieved by means of a credit.
UK Stamp Duty and Stamp Duty Reserve Tax
Provided that any instrument of transfer is not executed in the UK, remains at all subsequent times outside the UK and the Global Security remains in bearer form, no stamp duty will be payable on the acquisition or transfer through The Depository Trust Company of a beneficial interest in the Global Security.
Generally, an agreement to transfer (a) through The Depository Trust Company a beneficial interest in the Global Security, or (b) Dollar Preference shares in bearer form will not give rise to a liability to stamp duty reserve tax ("SDRT").
A deposit of Dollar Preference shares in registered form with the Depositary or its nominee by a holder will normally give rise to a charge to stamp duty or SDRT at the rate of 1.5% of the value of the shares. Such stamp duty or SDRT will be payable by the holder as a condition precedent to the issue of ADRs against the deposit of such Dollar Preference shares.
Provided that the instrument of transfer is not executed in the UK and remains at all subsequent times outside the UK, no stamp duty will be payable on the acquisition or transfer of ADSs. An agreement to transfer ADSs will not give rise to an SDRT liability. Transfers of X-CAPs, Ordinary shares or Dollar Preference shares, as opposed to ADSs, in registered form will normally give rise to a charge to stamp duty or SDRT at the rate of 0.5% of the price paid (rounded up, in the case of stamp duty, to the nearest multiple of £5).
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PFIC Rules
X-CAPs, Ordinary shares, Dollar Preference shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If Carlton were to be treated as a PFIC, unless a US holder elects to be taxed annually on a mark-to-market basis with respect to the X-CAPs, Ordinary shares, Dollar Preference shares or ADSs, a gain realized on the sale or other disposition of a US holder's X-CAPs, Ordinary shares, Dollar Preference shares or ADSs would in general not be treated as capital gain. Instead, a US holder would be treated as if the US holder had realized such gain and certain "excess distributions" rateably over the holding period for the X-CAPs, Ordinary shares, Dollar Preference shares or ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year.
If a US holder makes a mark-to-market election, the holder will not be subject to the PFIC rules described above. Instead, in general, the holder will include as ordinary income each year the excess, if any, of the fair market value of the holder's X-CAPs, Ordinary shares, Dollar Preference shares or ADSs at the end of the taxable year over the holder's adjusted basis in the X-CAPs, Ordinary shares, Dollar Preference shares or ADSs. The holder will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of the holder's X-CAPs, Ordinary shares, Dollar Preference shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The holder's basis in the X-CAPs, Ordinary shares, Dollar Preference shares or ADSs will be adjusted to reflect any such income or loss amounts.
A US holder of X-CAPs, Ordinary shares, Dollar Preference shares or ADSs during any year that Carlton is a PFIC, must file Internal Revenue Form 8621.
E. Documents on Display
It is possible to read and copy documents referred to in this Annual Report on Form 20-F that have been filed with the SEC at the SEC's public reference room located at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms and their copy charges.
The SEC filings are also available to the public from commercial document retrieval services and, as of November 2002, at the Internet world wide web site maintained by the SEC at www.sec.gov.
Item 11—Quantitative and Qualitative Disclosures About Market Risk
Objectives, policies and strategies
The most significant treasury exposures faced by the Company are in relation to the ability to raise finance to support its activities, the management of interest rate and currency positions and the investment of surplus cash in high quality assets. Clear parameters have been established, including levels of authority, on the type and use of financial instruments to manage these exposures. Transactions are only undertaken if they relate to underlying exposures. Regular reports are provided to senior management, and treasury operations are subject to periodic independent reviews and internal audits.
Financing
The Company's policy is to finance its operations long term with a mixture of equity and debt instruments with a range of maturities. The Company has traditionally raised fixed rate debt from the US and European capital markets and obtained bank facilities from the UK syndicated market. At September 30, 2002 the Company had a committed £100 million syndicated bank facility with a maturity of April 2006 provided by a group of high quality international banks. The purpose of the facility is to maintain the focus on the Company of a core group of relationship banks.
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In connection with the sale of Technicolor to Thomson on March 16, 2001 the Company received bonds carrying entitlement to 15.5 million new Thomson shares. Following maturity of these bonds in March 2002 the Company became a 5.52% shareholder in Thomson. Thomson shares are publicly traded on the French stock exchange. In November 2001 the Company announced the issue of €638.6 million (£397.6 million) exchangeable bonds which at the latest will mature in 2007. The issue completed on January 4, 2002. The bonds carry a coupon of 2.25% per annum and have a fixed exchange price of €41.2. The bonds are exchangeable into 15.5 million Ordinary shares in Thomson representing the Company's underlying total equity interest in Thomson. The bonds are callable by the Company from July 2003 under certain conditions and are puttable by investors at their option on January 4, 2005 at par.
Market Risk Sensitivity
The Company uses financial instruments including fixed and variable rate debt as well as swap, forward and option contracts to finance its operations and to hedge interest rate and currency exposures. The Company only enters into derivative financial instruments to manage its underlying exposure. The information below summarises the Company's market risks associated with debt obligations and other significant financial instruments outstanding as of September 30, 2002. The information presented below should be read in conjunction with Note 23, Note 24 and Note 26 of Notes to Consolidated Financial Statements.
The following table presents principal cash flows, presented in pound sterling equivalents, and related interest rates of interest rate sensitive financial instruments, including interest rate swaps and debt obligations, by fiscal year of maturity. For interest rate swaps, the table presents notional amounts and related interest rates by fiscal year of maturity. For these swaps, the weighted average variable rates presented are based on rates set at the balance sheet date.
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Tabular presentation of interest rate sensitive financial instruments, in sterling equivalents, at September 30, 2002:
| | | | Expected to mature before September 30, | | | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Total 2001 | Fair Value 2001 | 2003 | 2004 | 2005 | 2006 | 2007 | There- after | Total 2002 | Fair Value 2002 | ||||||||||||
| | (in millions) | |||||||||||||||||||||
| Cash(floating rates) | £458.5 | £458.5 | £552.9 | £552.9 | £552.9 | |||||||||||||||||
| 4.79 | % | 3.66 | % | 3.66 | % | |||||||||||||||||
| Loan Notes(floating rates) | 206.5 | 206.5 | 32.8 | 32.8 | 32.8 | |||||||||||||||||
| 3.58 | % | 1.98 | % | 1.98 | % | |||||||||||||||||
| Long-Term Debt | ||||||||||||||||||||||
| Fixed Rate (£) | 446.5 | 442.1 | 198.9 | 248.1 | 447.0 | 375.1 | ||||||||||||||||
| Average interest rate | 6.51 | % | 7.63 | % | 5.63 | % | 6.51 | % | ||||||||||||||
| Fixed Rate (US$) | 101.3 | 101.4 | 91.3 | 91.3 | 49.6 | |||||||||||||||||
| Average interest rate | 7.90 | % | 8.00 | % | 8.00 | % | ||||||||||||||||
| Fixed Rate (€) | 5.7 | 5.6 | 5.7 | 395.3 | 401.0 | 342.3 | ||||||||||||||||
| Average interest rate | 4.23 | % | 4.23 | % | 2.25 | % | 2.28 | % | ||||||||||||||
| Fixed Rate (Yen) | 34.3 | 34.6 | — | — | ||||||||||||||||||
| Average interest rate | 0.20 | % | — | |||||||||||||||||||
| Floating Rate (€) | 95.3 | 92.4 | 29.3 | 29.3 | 28.2 | |||||||||||||||||
| Average interest rate | 4.48 | % | 3.55 | % | 3.55 | % | ||||||||||||||||
| Floating Rate (Yen) | 29.0 | 28.7 | 11.5 | 11.5 | 8.7 | |||||||||||||||||
| Average interest rate | 0.25 | % | 0.37 | % | 0.37 | % | ||||||||||||||||
| Other (floating rates) | 253.0 | 253.0 | 1.1 | 1.4 | 1.4 | 1.5 | 1.5 | 25.7 | 32.6 | 32.6 | ||||||||||||
Interest Rate Swaps(1) | ||||||||||||||||||||||
| Principal (£) | 446.5 | 6.8 | 198.9 | 248.1 | 447.0 | 10.9 | ||||||||||||||||
| Variable rate payable(2) | 4.43 | % | 3.22 | % | 2.89 | % | 3.04 | % | ||||||||||||||
| Fixed rate receivable | 6.51 | % | 7.63 | % | 5.63 | % | 6.51 | % | ||||||||||||||
| Principal (Yen) | 34.3 | (0.5 | ) | 11.5 | 11.5 | (1.1 | ) | |||||||||||||||
| Variable rate payable(3) | 5.34 | % | 4.43 | % | 4.43 | % | ||||||||||||||||
| Variable rate receivable | 0.20 | % | 0.37 | % | 0.37 | % | ||||||||||||||||
| Principal (Yen) | 29.0 | (0.6 | ) | — | — | |||||||||||||||||
| Variable rate payable | 5.24 | % | — | |||||||||||||||||||
| Variable rate receivable | 0.25 | % | — | |||||||||||||||||||
| Principal (€) | 95.3 | (2.5 | ) | 29.3 | 29.3 | (1.1 | ) | |||||||||||||||
| Variable rate payable(4) | 5.24 | % | 4.47 | % | 4.47 | % | ||||||||||||||||
| Variable rate receivable | 4.48 | % | 3.55 | % | 3.55 | % | ||||||||||||||||
| Principal (€) | 5.7 | (0.1 | ) | 5.7 | 395.3 | 401.0 | 11.9 | |||||||||||||||
| Variable rate payable(5) | 5.19 | % | 4.24 | % | 1.19 | % | 1.23 | % | ||||||||||||||
| Fixed rate receivable | 4.23 | % | 4.23 | % | 2.25 | % | 2.28 | % | ||||||||||||||
| Principal (US$) | 101.3 | (7.0 | ) | 91.3 | 91.3 | (7.2 | ) | |||||||||||||||
| Variable rate payable(6) | 7.18 | % | 4.48 | % | 4.48 | % | ||||||||||||||||
| Fixed rate receivable | 7.90 | % | 8.00 | % | 8.00 | % | ||||||||||||||||
79
Interest rate contracts entered into which are matched against the £200 million eurobond maturing in 2007 and the £250 million eurobond maturing in 2009 are described as follows. In June 2001 both bonds were swapped from their fixed rates of 7.625% and 5.625% respectively (commencing June 2001 for the £200 million bond and September 2001 for the £250 million bond) into 6 month dollar Libor plus 0.75% (but payable in sterling) subject to the knock-in, commencing from the bond coupon dates of June 2002 and March 2002 respectively, that if the 6 month dollar rate fixing is at or below 3.75% there is no net swap payment or receipt relating to that 6 month period only. In August 2001 both bonds were swapped for a period of 3 years commencing December 2001 and September 2001 respectively from 6 month dollar Libor plus 0.75% to 6 month dollar Libor plus 0.415% and 0.42% respectively set in arrears. In November 2001 the swap contracts were amended such that the 3.75% knock-ins were delayed by 6 months until December 2002 and September 2002 respectively. In exchange for this the bank was given the option (commencing from December 2004 and September 2004 respectively) to choose the floating rate cost to the Company of 6 month dollar Libor plus 0.75% or 6 month sterling Libor minus 0.1% either being set in advance or in arrears. In addition, with effect from June 2002 and March 2002 respectively, for any dollar rate settings in advance above 6.5% the Company will pay an additional 1% on the swap margin for that 6 month period only. In July 2002 the £250 million bond was swapped with effect from September 2002 from 5.625% if the 6 month dollar Libor rate fixing is at or below 3.75% or 6 month dollar Libor plus 0.75% (payable in sterling) if the 6 month dollar Libor rate fixing is above 3.75% to 6 month dollar Libor plus 1.075% plus a further potential additional margin (payable in sterling). Further potential additional margin arises to the extent that on a one for one basis the 1 year dollar swap rate observed on November 5, 2003 exceeds each of the strike levels of 4.0%, 4.5% and 5.0% on £125 million notional and to the extent that on a one for one basis the 1 year dollar swap rate observed on December 17, 2003 exceeds each of the strike levels of 3.8%, 4.05% and 4.25% on £125 million notional.
The Company has issued loan notes totaling £46.5 million under its EMTN program that were held by third party investors at September 30, 2002. The notes have been issued in euros and Japanese yen and swapped back to sterling to give a financing cost ranging between 6 month sterling Libor plus 0.19% and 0.48%.
In February 1999 the Company entered into a $150 million interest rate swap with a potential maturity of October 7, 2028. The principal terms of the swap were as follows. The Company receives a fixed rate of 8% to match the coupon payments on the $150 million X-CAPs. For the period up to October 7, 2003 the Company pays the greater of 7.25% or 3 month dollar Libor plus 0.25% (set in arrears or advance) or at the bank's option the greater of 7.25% or 3 month sterling Libor plus 0.25% (set in arrears or advance) on £91.9 million. For the period from October 7, 2003 to October 7, 2028 the Company pays the greater of 7.25% or 3 month dollar Libor plus 0.25% (set in arrears or advance). The bank has the option to terminate the swap at any time commencing October 7, 2003. In August 2002 the payment basis of the swap was amended (with effect from September 2002) to 3 month dollar Libor plus 2.65% set in arrears or in advance at the bank's option. In addition if the bank exercises it's option to terminate the swap it must pay the Company $6 million.
In April 2002 the Company swapped (commencing with effect from May 2002) from its fixed rate cost of 2.25% under the €638.6 million exchangeable bond into a floating rate cost of 1 month sterling Libor minus 2.81% on a notional amount of £394.9 million until January 2005.
The majority of the remaining floating rate borrowings relate to sale and leaseback of rights associated with program production bearing a blended interest rate of 5.83%.
Post September 30, 2002 significant transaction
In January 2003 Carlton sold the interest rate swaps totalling £250 million that it had entered into in July 2002 for £21.0 million. Carlton retained the risk to potential additional margin which could arise under the swap. The amount of this potential liability (if anything) will be known with certainty on
80
November 5, 2003 and December 17, 2003 and will be settled with cash two days later. The benefit of the proceeds is being recognised in the profit and loss account over the life of the contract based upon the gain which would have been expected to arise under the swap at the date of sale if it had not been sold. Provision against the potential additional liability will be assessed at reporting period ends based upon implied forward interest rates.
Currencies
The Company's operations are conducted in a number of different currencies. As a result, there is exposure to future cash flows due to changes in foreign currency exchange rates when transactions are denominated in currencies other than pounds sterling, which is the primary currency in which the Company conducts business. The decision to hedge is influenced by the size of the exposure, the certainty of it arising, the trading and market position of the subsidiary in the country in which the exposure arises and the current exchange rate. The table below presents the contractual amount and the related weighted average contract exchange rates for significant forward currency contracts outstanding as of September 30, 2002 and 2001. The Swiss franc contracts match known contractual commitments related to the Champions League Football contract. In addition, the Company's non-sterling denominated long-term debt obligations indicated in the table above are subject to foreign currency exchange rate movements.
| | 2002 Contract Amount (GBP £ equivalents in millions) | 2002 Average Contractural Exchange Rate | 2001 Contract Amount (GBP £ equivalents in millions) | 2001 Average Contractural Exchange Rate | ||||
|---|---|---|---|---|---|---|---|---|
| Receive USD/Pay GBP | £2.0 | 1.52 | £2.8 | 1.54 | ||||
| Receive GBP/Pay USD | £3.6 | 1.40 | £24.5 | 1.46 | ||||
| Receive CHF/Pay GBP | £28.6 | 2.09 | £51.4 | 2.09 | ||||
| Receive USD/Pay EUR | £57.3 | 1.61 | £0.8 | 0.99 |
In addition to the forward contracts detailed in the table above the Company purchased at a cost of £11 million in May 2002 a currency call option giving it the right to purchase €425 million at a £/euro exchange rate of 1.5947 for value January 4, 2005. The contract locks in a known worst exchange rate for the purchase of euros to cover about two thirds of the Company's requirement for euros on that date should investors in the €638.6 million exchangeable bonds exercise their right under the bonds to be repaid at par. The cost of the call option is being written off on a straight line basis over its life (32 months) and to the extent that the written down value exceeds the fair market value further provision will be made. In 2002 £1.7 million of premium cost was written off.
Investment in cash
The Company operates strict investment guidelines with respect to cash, with an emphasis on preservation of capital. Consequently, discretionary investments with a maturity greater than one year must be rated AA or better and discretionary investments with maturities of less than one year must be rated A1 or P1 by the major credit rating agencies. There are also conservative limits for individual counter-parties. During the 2002 fiscal year and at September 30, 2002, all cash was invested with maturities of less than one year mainly in Sterling.
Item 12—Description of Securities Other than Equity Securities
Not applicable.
Item 13—Defaults, Dividend Arrearages and Delinquencies
Not applicable.
Item 14—Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable.
81
Item 15—Controls and Procedures
Under the supervision and with the participation of the Company's management, including the Company's Chairman and Group Finance Director, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(C) within 90 days of the filing date of this Annual Report. Based on that evaluation, the Chairman and Group Finance Director have concluded that these disclosure controls and procedures are effective.
There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent of the date of their evaluation.
Item 16—Reserved
Item 17—Financial Statements
Not applicable.
The following financial statements and financial statement schedules together with the report of PricewaterhouseCoopers thereon are filed as part of this Annual Report. The financial statements have been prepared in accordance with UK GAAP. The financial statements include in Note 36 a summary of the differences arising in preparing the financial statements of the Company in UK and US GAAP. The financial statements' disclosures are based on those required in the UK, with additional disclosures required in the US given as required.
Note on ITV Digital Holdings Limited Financial Statements
Pursuant to Rule 3-09 of Regulation S-X, under the Securities Exchange Act of 1934, the Company is required to include in this Annual Report, the consolidated financial statements of ITV Digital Holdings Limited ("ITV Digital Holdings") for the three fiscal years ended September 30, 2002. ITV Digital Holdings was the 50/50 joint venture with Granada plc ("Granada") to develop DTT in the UK.
On March 27, 2002, ITV Digital plc and ITV Digital (Services) Limited, wholly-owned subsidiaries of ITV Digital Holdings, were placed into administration by their respective directors. On April 30, 2002 the administrators announced the closure of the businesses. On October 17, 2002, ITV Digital plc and ITV Digital (Services) Limited changed their names to ONdigital 1998 plc and ONdigital 1998 (Services) Limited respectively (collectively "ONdigital"). A liquidator for these two companies was appointed on October 18, 2002. As a result, executive control of both companies was assumed firstly by a court appointed independent administrator on March 27, 2002 and then by the liquidator on October 18, 2002.
82
ONdigital 1998 plc and ONdigital 1998 (Services) Limited represent substantially all of the consolidated businesses of ITV Digital Holdings. The financial statements for ITV Digital Holdings, ONdigital 1998 plc and ONdigital 1998 (Services) Limited for the periods ended September 30, 2001 and 2002 had not been prepared prior to ONdigital 1998 plc and ONdigital 1998 (Services) Limited entering administration. In accordance with usual practice in the UK, no financial statements have been drawn up for these companies since they went into administration. Consequently consolidated financial statements of ITV Digital Holdings can no longer be prepared.
The Company has attached the consolidated financial statements of ITV Digital Holdings, under its former name of ONdigital Holdings Limited, for latest periods possible being the fiscal years up to September 30, 2000.
Item 19—Exhibits
The following exhibits are filed as part of, or furnished with, this annual report:
| *1 | The Memorandum and Articles of Association | |
**2.1 | First supplemental Trust Deed constituting £250,000,000 5.625% Bonds due 2009 | |
**2.2 | Trust Deed constituting €638,600,000 2.25% Exchangeable Bonds due 2007 | |
**2.3 | First Supplemental Trust Deed modifying and restating the provisions of the Trust Deed dated March 2, 2001 relating to the £1,000,000,000 Euro Medium Term Note Program | |
*4.1 | The agreement for the sale and purchase of Technicolor | |
*4.2 | The sale and purchase agreement for HTV and 20% of Meridian | |
*4.3 | ONdigital joint venture agreement | |
***4.4 | Merger Agreement between Granada plc and Carlton Communications Plc | |
*4.5 | Carlton Equity Participation Plan | |
*4.6 | Carlton Long Term Incentive Share Plan | |
*4.7 | Carlton Deferred Annual Bonus Share Plan | |
**4.8 | Service Contract—G M Murphy | |
**4.9 | Service Contract—P C Murray | |
8 | Subsidiaries |
The total amount of long-term debt securities of the registrant and its subsidiaries under any instrument other than those listed above does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company agrees to furnish copies of any or all such instruments to the Securities and Exchange Commission on request.
83
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CARLTON COMMUNICATIONS PLC (Registrant) | ||||
By: Name: Title: | /s/ PAUL MURRAY Paul Murray Group Finance Director | |||
Date: March 27, 2003 | ||||
84
I, Michael Green, certify that:
| By: Name: Title: | /s/ MICHAEL GREEN Michael Green Chairman | |||
Date: March 27, 2003 |
85
I, Paul Murray, certify that:
| By: Name: Title: | /s/ PAUL MURRAY Paul Murray Group Finance Director | |||
Date: March 27, 2003 |
86
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Carlton Communications Plc
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, total recognized gains and losses, cash flows and changes in shareholders' equity present fairly, in all material respects, the financial position of Carlton Communications Plc and its subsidiaries at September 30, 2002, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2002 in conformity with accounting principles generally accepted in the United Kingdom. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of consolidated net income, in British pounds, for each of the three years in the period ended September 30, 2002 and the determination of consolidated shareholders' equity, as restated, and consolidated financial position, also expressed in British pounds, at September 30, 2002, 2001 and 2000 to the extent summarized in Note 36 to the consolidated financial statements.
PRICEWATERHOUSECOOPERS
Chartered Accountants and Registered Auditors
London, England
November 26, 2002
F-1
CARLTON COMMUNICATIONS PLC AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
| | | Year ended September 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Notes | 2002 | 2001 | 2000 | ||||||||
| | | (in millions, except per share data) | ||||||||||
| Total net sales | £ | 1,072.8 | £ | 1,702.6 | £ | 2,126.5 | ||||||
| Less: share of joint ventures | (108.2 | ) | (101.1 | ) | (63.7 | ) | ||||||
| Net sales | 4 | 964.6 | 1,601.5 | 2,062.8 | ||||||||
| Analyzed as: | ||||||||||||
| Continuing operations | 964.6 | 1,040.1 | 987.7 | |||||||||
| Discontinued operations | — | 561.4 | 1,075.1 | |||||||||
| 964.6 | 1,601.5 | 2,062.8 | ||||||||||
| Operating costs | 5 | 911.4 | 1,495.5 | 1,801.7 | ||||||||
| Exceptional operating items | 8 | (4.8 | ) | 58.6 | 39.0 | |||||||
| Operating income | 58.0 | 47.4 | 222.1 | |||||||||
| Analyzed as: | ||||||||||||
| Continuing operations | 58.0 | 4.4 | 131.1 | |||||||||
| Discontinued operations | — | 43.0 | 91.0 | |||||||||
| 58.0 | 47.4 | 222.1 | ||||||||||
| Share of operating results of joint ventures and associates | (107.2 | ) | (194.0 | ) | (141.1 | ) | ||||||
| (49.2 | ) | (146.6 | ) | 81.0 | ||||||||
| Profit/(loss) on sale of businesses | 11.8 | (227.0 | ) | (304.3 | ) | |||||||
| Loss on termination of businesses | (98.6 | ) | — | — | ||||||||
| Income/(loss) on ordinary activities before interest | (136.0 | ) | (373.6 | ) | (223.3 | ) | ||||||
| Amounts written off investments | 15 | (8.2 | ) | — | — | |||||||
| Net interest receivable/(payable) | 9 | (12.0 | ) | (35.6 | ) | (28.4 | ) | |||||
| Income/(loss) before taxes | (156.2 | ) | (409.2 | ) | (251.7 | ) | ||||||
| Taxation on income | 10 | 0.2 | 19.2 | (25.7 | ) | |||||||
| Net income/(loss) | £ | (156.0 | ) | £ | (390.0 | ) | £ | (277.4 | ) | |||
| Per Ordinary Share: | 12 | |||||||||||
| Basic net income/(loss) attributable to holders of Ordinary Shares | (24.8) | p | (59.7) | p | (44.5) | p | ||||||
| Discontinued operations (income)/losses | 26.8 | p | 51.6 | p | 53.1 | p | ||||||
| Continuing operations pre-exceptional items | 2.0 | p | (8.1) | p | 8.6 | p | ||||||
| Exceptional items (income)/charges | (1.0) | p | 7.5 | p | 1.7 | p | ||||||
| Continuing operations post-exceptional items | 1.0 | p | (0.6) | p | 10.3 | p | ||||||
| Diluted net income/(loss) attributable to holders of Ordinary Shares | (24.8) | p | (59.7) | p | (42.6) | p | ||||||
| Discontinued operations (income)/losses | 26.8 | p | 51.6 | p | 50.9 | p | ||||||
| Continuing operations pre-exceptional items | 2.0 | p | (8.1) | p | 8.3 | p | ||||||
| Exceptional items (income)/charges | (1.0) | p | 7.5 | p | 1.6 | p | ||||||
| Diluted continuing operations post-exceptional items | 1.0 | p | (0.6) | p | 9.9 | p | ||||||
See Notes to Consolidated Financial Statements.
F-2
CARLTON COMMUNICATIONS PLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | At September 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Notes | 2002 | 2001 (as restated) | 2000 (as restated) | ||||||||||
| | | (in milllions) | ||||||||||||
| FIXED ASSETS | ||||||||||||||
| Intangible assets | 13 | £ | 319.5 | £ | 343.9 | £ | 233.2 | |||||||
| Property, plant and equipment | 14 | 110.3 | 120.6 | 418.4 | ||||||||||
| Investments in joint ventures | ||||||||||||||
| Share of gross assets | 46.3 | 174.7 | 126.9 | |||||||||||
| Share of gross liabilities | (43.9 | ) | (534.4 | ) | (287.9 | ) | ||||||||
| Loan to joint venture | 18.9 | 418.4 | 194.5 | |||||||||||
| Goodwill | 58.2 | 36.6 | — | |||||||||||
| 15 | 79.5 | 95.3 | 33.5 | |||||||||||
| Investments in associated undertakings | 15 | 6.1 | 0.4 | 19.8 | ||||||||||
| Other investments | 15 | 409.9 | 429.4 | 61.3 | ||||||||||
| 495.5 | 525.1 | 114.6 | ||||||||||||
| 925.3 | 989.6 | 766.2 | ||||||||||||
| CURRENT ASSETS | ||||||||||||||
| Inventory | 16 | 6.3 | 7.1 | 47.7 | ||||||||||
| Program and film rights | 17 | 178.5 | 187.4 | 171.6 | ||||||||||
| Debtors: amounts falling due within one year | 18 | 170.3 | 196.7 | 575.3 | ||||||||||
| Debtors: amounts falling due after more than one year | 18 | 17.6 | 19.9 | 95.2 | ||||||||||
| Investments | 19 | 40.6 | 214.8 | 8.4 | ||||||||||
| Cash and other liquid funds | 20 | 552.9 | 256.5 | 341.8 | ||||||||||
| 966.2 | 882.4 | 1,240.0 | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||||
| Creditors: amounts falling due within one year | 21 | 401.6 | 486.9 | 893.3 | ||||||||||
| NET CURRENT ASSETS | 564.6 | 395.5 | 346.7 | |||||||||||
| TOTAL ASSETS LESS CURRENT LIABILITIES | 1,489.9 | 1,385.1 | 1,112.9 | |||||||||||
| Loan | 23 | 854.8 | 559.0 | 499.2 | ||||||||||
| Convertible debt | 24 | 91.3 | 97.8 | 97.2 | ||||||||||
| Finance lease creditors | 25 | 31.7 | 28.9 | 11.4 | ||||||||||
| Other liabilities | 30.5 | 33.3 | 45.5 | |||||||||||
| PROVISIONS FOR LIABILITIES AND CHARGES | 27 | 48.1 | 2.4 | 11.9 | ||||||||||
| 1,056.4 | 721.4 | 665.2 | ||||||||||||
| NET ASSETS | £ | 433.5 | £ | 663.7 | £ | 447.7 | ||||||||
| CAPITAL AND RESERVES | ||||||||||||||
| Called up share capital | 28 | £ | 41.8 | £ | 41.8 | £ | 41.8 | |||||||
| Share premium account | 151.4 | 150.7 | 148.8 | |||||||||||
| Other reserves | 17.1 | 21.6 | 12.5 | |||||||||||
| Profit and loss account | 223.2 | 449.6 | 243.7 | |||||||||||
| SHAREHOLDERS' FUNDS | 433.5 | 663.7 | 446.8 | |||||||||||
| MINORITY INTERESTS-EQUITY | — | — | 0.9 | |||||||||||
| £ | 433.5 | £ | 663.7 | £ | 447.7 | |||||||||
| Shareholders' funds attributable to: | ||||||||||||||
| Equity shareholders' funds (before goodwill) | £ | 1,207.5 | £ | 1,437.7 | £ | 1,850.6 | ||||||||
| Cumulative goodwill written off directly to reserves | (937.6 | ) | (937.6 | ) | (1,567.6 | ) | ||||||||
| Equity shareholders' funds | 269.9 | 500.1 | 283.0 | |||||||||||
| Non-equity shareholders' funds | 163.6 | 163.6 | 163.8 | |||||||||||
| Total shareholders' funds | £ | 433.5 | £ | 663.7 | £ | 446.8 | ||||||||
See Notes to Consolidated Financial Statements.
F-3
CARLTON COMMUNICATIONS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Notes | 2002 | 2001 | 2000 | |||||||||
| | | (in millions) | |||||||||||
| CASHFLOW FROM OPERATING ACTIVITIES | 30 | (a) | £ | 269.4 | £ | 103.3 | £ | 353.5 | |||||
| Dividends received from associated undertakings | 0.8 | 1.6 | 4.8 | ||||||||||
| Returns on investments and servicing of finance | 30 | (b) | (28.5 | ) | (43.0 | ) | (47.6 | ) | |||||
| Taxation | 4.2 | 3.1 | (40.6 | ) | |||||||||
| CASHFLOW AFTER RETURNS ON INVESTMENTS, SERVICING OF FINANCE AND TAXATION | 245.9 | 65.0 | 270.1 | ||||||||||
| Capital expenditure and financial investment | 30 | (c) | (126.2 | ) | (250.4 | ) | (341.6 | ) | |||||
| Acquisitions | 31 | (7.8 | ) | 273.5 | (90.1 | ) | |||||||
| Equity dividends paid | (55.5 | ) | (89.2 | ) | (101.6 | ) | |||||||
| CASH OUTFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES AND FINANCING | 56.4 | (1.1 | ) | (263.2 | ) | ||||||||
| Management of liquid resources | 30 | (e) | — | — | 30.5 | ||||||||
| Financing | 30 | (d) | 266.3 | 58.7 | 73.8 | ||||||||
| INCREASE/(DECREASE) IN CASH IN YEAR | £ | 322.7 | £ | 57.6 | £ | (158.9 | ) | ||||||
| RECONCILIATION OF NET CASH TO MOVEMENTS IN NET FUNDS/(DEBT) | |||||||||||||
INCREASE/(DECREASE) IN CASH IN THE YEAR | £ | 322.7 | £ | 57.6 | £ | (158.9 | ) | ||||||
| Cash (inflow)/outflow from (increase)/decrease in debt | (269.6 | ) | (56.6 | ) | (60.6 | ) | |||||||
| Cash inflow from increase in liquid resources | — | — | (30.5 | ) | |||||||||
| Change in net debt resulting from cash flows | 53.1 | 1.0 | (250.0 | ) | |||||||||
| Debt acquired | — | — | (0.7 | ) | |||||||||
| Translation difference | (6.4 | ) | 2.6 | (6.2 | ) | ||||||||
| Movement in net debt in the year | 46.7 | 3.6 | (256.9 | ) | |||||||||
| Opening net debt | (506.6 | ) | (510.2 | ) | (253.3 | ) | |||||||
| CLOSING NET DEBT | 30 | (e) | £ | (459.9 | ) | £ | (506.6 | ) | £ | (510.2 | ) | ||
See Notes to Consolidated Financial Statements.
F-4
CARLTON COMMUNICATIONS PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
| | Ordinary shares of 5p each | 6.5p Preference shares of 5p each | 5.5p Preference shares of 5p each | Ordinary shares of 5p each | 6.5p Preference shares of 5p each | 5.5p Preference shares of 5p each | Share Premium Account | Other Reserves | Profit and Loss Account | Total | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions, except Share data) | |||||||||||||||||||||||||||
| Balance at September 30, 1999 | 617,677,201 | 164,603,838 | 176,636,934 | £ | £30.9 | £ | 8.2 | £ | 8.8 | £ | 129.5 | £ | 7.5 | £ | 325.6 | £ | 510.5 | |||||||||||
| Net loss | — | — | — | — | — | — | — | — | (277.4 | ) | (277.4 | ) | ||||||||||||||||
| Dividends | — | — | — | — | — | — | — | — | (123.5 | ) | (123.5 | ) | ||||||||||||||||
| Issuance of Ordinary shares:—Under share option plans (Note 29) | 4,629,787 | — | — | 0.2 | — | — | 17.9 | — | — | 18.1 | ||||||||||||||||||
| Conversion of 5.5p Preference shares | 48,916,313 | — | (176,636,934 | ) | 2.5 | — | (8.8 | ) | — | 6.4 | — | 0.1 | ||||||||||||||||
| Conversion of 6.5p Preference shares | 241,997 | (936,686 | ) | — | — | — | — | — | — | — | — | |||||||||||||||||
| Contribution to Carlton Qualifying Employee Share Trust | — | — | — | — | — | — | — | — | (1.3 | ) | (1.3 | ) | ||||||||||||||||
| Amortization of 5.5p Preference share premium over redemption price | — | — | — | — | — | — | — | — | (2.7 | ) | (2.7 | ) | ||||||||||||||||
| Currency translation | — | — | — | — | — | — | — | — | 23.0 | 23.0 | ||||||||||||||||||
Goodwill reinstated on sale of business | — | — | — | — | — | — | — | — | 300.0 | 300.0 | ||||||||||||||||||
| Contingent future share issues | — | — | — | — | — | — | 1.4 | (1.4 | ) | — | — | |||||||||||||||||
| Balance at September 30, 2000 | 671,465,298 | 163,667,152 | — | £ | 33.6 | £ | 8.2 | £ | — | £ | 148.8 | £ | 12.5 | £ | 243.7 | £ | 446.8 | |||||||||||
| Net loss | — | — | — | — | — | — | — | — | (390.0 | ) | (390.0 | ) | ||||||||||||||||
| Dividends | — | — | — | — | — | — | — | — | (66.1 | ) | (66.1 | ) | ||||||||||||||||
| Issuance of Ordinary shares:—Under share option plans (Note 29) | 243,693 | — | — | — | — | — | 1.6 | — | — | 1.6 | ||||||||||||||||||
| Conversion of 6.5p Preference shares | 15,845 | (61,378 | ) | — | — | — | — | — | — | — | — | |||||||||||||||||
| Currency translation | — | — | — | — | — | — | — | — | 14.7 | 14.7 | ||||||||||||||||||
Goodwill reinstated on sale of business | — | — | — | — | — | — | — | — | 647.3 | 647.3 | ||||||||||||||||||
| Contingent future share issues | 49,603 | — | — | — | — | — | 0.3 | (0.3 | ) | — | — | |||||||||||||||||
| Other reserve adjustments | — | — | — | — | — | — | — | 9.4 | — | 9.4 | ||||||||||||||||||
| Balance at September 30, 2001 | 671,774,439 | 163,605,774 | — | £ | 33.6 | £ | 8.2 | £ | — | £ | 150.7 | £ | 21.6 | £ | 449.6 | £ | 663.7 | |||||||||||
| Net loss | — | — | — | — | — | — | — | — | (156.0 | ) | (156.0 | ) | ||||||||||||||||
| Dividends | — | — | — | — | — | — | — | — | (66.0 | ) | (66.0 | ) | ||||||||||||||||
| Conversion of 6.5p Preference shares | 10,564 | (40,913 | ) | — | — | — | — | — | — | — | — | |||||||||||||||||
| Currency translation | — | — | — | — | — | — | — | — | (7.3 | ) | (7.3 | ) | ||||||||||||||||
| Contingent future share issues | 166,683 | — | — | — | — | — | 0.7 | (1.6 | ) | — | (0.9 | ) | ||||||||||||||||
| Other reserve adjustments | — | — | — | — | — | — | — | (2.9 | ) | 2.9 | — | |||||||||||||||||
| Balance at September 30, 2002 | 671,951,686 | 163,564,861 | — | £ | 33.6 | £ | 8.2 | £ | — | £ | 151.4 | £ | 17.1 | £ | 223.2 | £ | 433.5 | |||||||||||
See Notes to Consolidated Financial Statements.
F-5
CARLTON COMMUNICATIONS PLC AND SUBSIDIARIES
STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Net income | £ | (156.0 | ) | £ | (390.0 | ) | £ | (277.4 | ) | |
| Exchange differences on foreign currency net investments | (7.3 | ) | 14.7 | 23.0 | ||||||
| Gain on sale of Meridian | — | 9.2 | — | |||||||
| Total recognized gains and losses in the year | £ | (163.3 | ) | £ | (366.1 | ) | £ | (254.4 | ) | |
The exchange differences on foreign currency net investments in 2002 are shown after a £0.5 million tax credit (2001: £4.4 million charge, 2000: £6.9 million charge).
The gain on sale of Meridian is shown after a £22.0 million tax charge.
Historical cost profits were not materially different from those reported on F-2.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' EQUITY
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Net income | £ | (156.0 | ) | £ | (390.0 | ) | £ | (277.4 | ) | |
| Dividends | (66.0 | ) | (66.1 | ) | (123.5 | ) | ||||
| (222.0 | ) | (456.1 | ) | (400.9 | ) | |||||
| Amortization of 5.5p Preference share premium over redemption price | — | — | (2.7 | ) | ||||||
| Exchange differences on foreign currency net investments | (7.3 | ) | 14.7 | 23.0 | ||||||
| New share capital issued | 0.7 | 1.6 | 13.2 | |||||||
| Other reserve adjustments | (1.6 | ) | 9.4 | 3.7 | ||||||
| Goodwill reinstated in respect of the disposal of businesses | — | 647.3 | 300.0 | |||||||
| Net addition to shareholders' equity for the year | (230.2 | ) | 216.9 | (63.7 | ) | |||||
| Shareholders' equity at beginning of year | 663.7 | 446.8 | 510.5 | |||||||
| Shareholders' equity at end of year | £ | 433.5 | £ | 663.7 | £ | 446.8 | ||||
The cumulative foreign exchange adjustment, which decreased shareholders' equity at September 30, 2002, was £10.1 million (2001: £2.8 million, 2000: £17.5 million). Exchange differences on foreign currency net investment in 2002 are net of the movement on foreign currency borrowings and balance sheet hedging of £1.9 million loss (2001: £4.8 million gain, 2000: £14.5 million gain) and also net of the taxation effects on balance sheet hedging instruments. Net income in 2002 is stated after a foreign exchange gain of £5.4 million.
See Notes to Consolidated Financial Statements.
F-6
CARLTON COMMUNICATIONS PLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant accounting policies used in the preparation in accordance with UK GAAP of the consolidated financial statements of Carlton Communications Plc and subsidiaries (the "Company") are set forth below.
a) Basis of Preparation
The accounts are prepared under the historical cost convention, modified to include the revaluation of certain investments, and in accordance with the applicable financial reporting and accounting standards.
The Group has re-assessed the appropriateness of its accounting policies as prescribed in FRS18.
Since the previous year end FRS19—Deferred Taxation has been adopted. This standard addresses the recognition, on a full provision basis, of deferred tax assets and liabilities arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in tax computations. The change in accounting policy has not given rise to any prior year adjustment.
b) Consolidation and Goodwill
The consolidated financial statements incorporate the accounts of the Company's subsidiary undertakings prepared to September 30, 2002. Subsidiaries are consolidated where the Company is able to exert control over the operations of the subsidiary company.
Goodwill arising on acquisitions is capitalized as an intangible asset and is amortized on a straight line basis over estimated useful economic lives ranging between 10 and 20 years. Companies acquired have been accounted for as acquisitions. Prior to September 30, 1998 goodwill, whether purchased or arising on consolidation, was written off against reserves in the year it arose.
(c) Impairment
Impairment reviews are carried out to ensure that goodwill is not carried above its recoverable amount. Any amortization or impairment write-downs are charged to the profit and loss account.
Goodwill is reviewed for impairment on the occurrence of any event or change in circumstances indicating that there has been a decline in the carrying value or change in useful life.
(d) Investments
Associates and joint ventures are accounted for in the Group's accounts under the equity method of accounting, as adjusted, where material to conform to the Group's accounting policies. Other fixed asset investments are stated at cost less amounts written off in respect of any permanent diminution in value.
Current asset investments are held at the lower of cost or net realizable value, or where appropriate, under the alternative accounting rules, at a directors' valuation.
F-7
(e) Foreign Currencies
Foreign currency debtors and creditors covered by forward currency contracts are translated at the contract rates of exchange; other foreign currency denominated assets and liabilities are translated at closing rates of exchange. Gains and losses are taken to the profit and loss account, except that exchange differences on foreign currency net borrowings to finance foreign currency net investments are taken to reserves.
Trading results of overseas subsidiaries are translated at weighted average rates of exchange. Differences resulting from the re-translation of opening net assets and results for the year at closing rates are taken to reserves.
(f) Borrowings and Finance Lease Creditors
Borrowings are carried at their nominal value with any premium or discount on issue, any pre-issue hedging costs, and any other associated fees offset against the carrying value of the borrowing. Such costs are written off to profit and loss account over the life of the borrowing if it is dated. The capital element of finance lease creditors is recorded as a liability, with lease rentals split between capital and interest elements. The capital element is applied to reduce the outstanding liability and the interest element is charged against profit.
(g) Net Sales
Net sales, which excludes value added tax and sales between Group companies, represents the value of products and services sold. More particularly, key classes of revenue are recognized as follows:
Advertising—on transmission.
Program production—on delivery.
Production and film rights—the point that the right sold is available for exploitation.
Facilities—on provision of the service.
Product merchandising—on product delivery.
(h) Intangible Assets
Libraries acquired are valued at fair value on acquisition on the basis of projected cash flows and written off in equal annual installments over the estimated economic life of the assets over a period of up to 40 years. The useful economic life has been adopted in view of the classical and ongoing appeal of the library titles. All other research, development and marketing expenditure is written off as incurred, with the exception of certain program development expenditure (see point (k) below).
(i) Property, Plant and Equipment
Tangible fixed assets are stated at historical cost less accumulated depreciation and any provision for impairment. Depreciation is generally provided by equal annual installments at the following rates:
| Freehold property excluding land | 2%-4 | % | |
| Leasehold property | period of lease | ||
| Plant and equipment | 10%-33 | % |
F-8
Depreciation is not charged on freehold land.
(j) Inventory
Inventory and work in progress are valued at the lower of cost or net realizable value.
(k) Program Production and Development
Programs in production and acquired programs are stated at the lower of cost and net realizable value. Program material is written off fully on first transmission, except for certain film rights, which are written off over a number of transmissions.
(l) Liquid Financial Instruments
Liquid financial instruments are stated at the lower of cost or market value. Interest and other income is recorded in the period in which it arises.
(m) Pensions
The Group maintains a number of defined benefit and defined contribution pension schemes in the UK. The costs of defined benefit schemes are determined by external actuaries and charged against profits each year under SSAP24. The costs of defined contribution schemes are charged against profits in the year in which they are incurred.
(n) Deferred Taxation
Full provision is made for deferred tax liabilities arising from timing differences in respect of transactions or events that result in an obligation to pay tax in the future, that have originated but not reversed by the balance sheet date. A deferred tax asset is not recognized to the extent that recoverability is uncertain. Deferred tax liabilities and assets which are recognized are not discounted.
To the extent that, at the balance sheet date, dividends from overseas undertakings have been accrued as receivable or an overseas undertaking has entered into a binding agreement for the future distribution of its past earnings, appropriate amounts are provided.
(o) Operating Leases
The rental costs arising from operating leases are charged to the profit and loss account in the year in which they are incurred.
(p) Derivatives and other Financial Instruments
The Group uses a limited number of derivative financial instruments to hedge its exposure to fluctuations in interest and foreign exchange rates.
The Group does not hold or issue derivative instruments for speculative purposes.
Interest rate swap and option agreements are used to manage the interest basis of borrowings. Interest receipts and payments under these agreements are accrued so as to match the net income or cost with the related finance expense. No amounts are recognized in respect of future periods. Gains and losses on early
F-9
termination of interest rate swaps or on repayment of the borrowing are spread over the life of the original contract or borrowing.
(q) Advertising costs
The Company incurs advertising costs in relation to the ITV Network schedule. All advertising expenses are written off as incurred.
Note 2—Analysis of Net Income
| | Year ended September 30, 2002 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Continuing Operations | Discontinued Operations | Total | |||||||
| | (in millions) | |||||||||
| Total net sales | £ | 1,008.7 | £ | 64.1 | £ | 1,072.8 | ||||
| Less: share of joint ventures | (44.1 | ) | (64.1 | ) | (108.2 | ) | ||||
| Net sales | 964.6 | — | 964.6 | |||||||
| Operating costs | (911.4 | ) | — | (911.4 | ) | |||||
| Exceptional operating items | 4.8 | — | 4.8 | |||||||
| Operating income/(loss) | 58.0 | — | 58.0 | |||||||
| Share of operating results from joint ventures | (0.4 | ) | (99.1 | ) | (99.5 | ) | ||||
| Joint ventures' amortization | (2.1 | ) | — | (2.1 | ) | |||||
| Share of operating results from associates | (3.0 | ) | (2.6 | ) | (5.6 | ) | ||||
| 52.5 | (101.7 | ) | (49.2 | ) | ||||||
| Loss on sale of businesses | — | (86.8 | ) | (86.8 | ) | |||||
| Income/(loss) on ordinary activites before interest | 52.5 | (188.5 | ) | (136.0 | ) | |||||
| Amounts written-off investments | (8.2 | ) | — | (8.2 | ) | |||||
| Net interest receivable/(payable) | (12.0 | ) | — | (12.0 | ) | |||||
| Income/(loss) on ordinary activities before taxes | 32.3 | (188.5 | ) | (156.2 | ) | |||||
| Taxation on income | (8.6 | ) | 8.8 | 0.2 | ||||||
| Net income/(loss) | £ | 23.7 | £ | (179.7 | ) | £ | (156.0 | ) | ||
F-10
Year ended September 30, 2001 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Continuing Operations | Discontinued Operations | Total | |||||||
| | (in millions) | |||||||||
| Total net sales | £ | 1,051.0 | £ | 651.6 | £ | 1,702.6 | ||||
| Less: share of joint ventures | (10.9 | ) | (90.2 | ) | (101.1 | ) | ||||
| Net sales | 1,040.1 | 561.4 | 1,601.5 | |||||||
| Operating costs | (983.3 | ) | (512.2 | ) | (1,495.5 | ) | ||||
| Exceptional operating charges | (52.4 | ) | (6.2 | ) | (58.6 | ) | ||||
| Operating income/(loss) | 4.4 | 43.0 | 47.4 | |||||||
| Share of operating results from joint ventures | 0.4 | (175.7 | ) | (175.3 | ) | |||||
| Share of operating results from associates | (8.8 | ) | (9.9 | ) | (18.7 | ) | ||||
| (4.0 | ) | (142.6 | ) | (146.6 | ) | |||||
| Loss on sale of businesses | — | (227.0 | ) | (227.0 | ) | |||||
| Income/(loss) on ordinary activites before interest | (4.0 | ) | (369.6 | ) | (373.6 | ) | ||||
| Net interest receivable/(payable) | (35.6 | ) | — | (35.6 | ) | |||||
| Income/(loss) on ordinary activities before taxes | (39.6 | ) | (369.6 | ) | (409.2 | ) | ||||
| Taxation on income | (3.9 | ) | 23.1 | 19.2 | ||||||
| Net income/(loss) | £ | (43.5 | ) | £ | (346.5 | ) | £ | (390.0 | ) | |
Year ended September 30, 2000 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Continuing Operations | Discontinued Operations | Total | |||||||
| | (in millions) | |||||||||
| Total net sales | £ | 995.3 | £ | 1,131.2 | £ | 2,126.5 | ||||
| Less: share of joint ventures | (7.6 | ) | (56.1 | ) | (63.7 | ) | ||||
| Net sales | 987.7 | 1,075.1 | 2,062.8 | |||||||
| Operating costs | (845.5 | ) | (956.2 | ) | (1,801.7 | ) | ||||
| Exceptional operating charges | (11.1 | ) | (27.9 | ) | (39.0 | ) | ||||
| Operating income/(loss) | 131.1 | 91.0 | 222.1 | |||||||
| Share of operating results from joint ventures | 1.4 | (142.5 | ) | (141.1 | ) | |||||
| Share of operating results from associates | — | — | — | |||||||
| 132.5 | (51.5 | ) | 81.0 | |||||||
| Loss on sale of businesses | — | (304.3 | ) | (304.3 | ) | |||||
| Income/(loss) on ordinary activites before interest | 132.5 | (355.8 | ) | (223.3 | ) | |||||
| Net interest receivable/(payable) | (28.4 | ) | — | (28.4 | ) | |||||
| Income/(loss) on ordinary activities before taxes | 104.1 | (355.8 | ) | (251.7 | ) | |||||
| Taxation on income | (37.6 | ) | 11.9 | (25.7 | ) | |||||
| Net income/(loss) | £ | 66.5 | £ | (343.9 | ) | £ | (277.4 | ) | ||
F-11
Note 3—Discontinued Operations
| | Year ended September 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||||
| | (in millions) | ||||||||||
| ONdigital and ITV Sport Channel—discontinued trading | £ | (99.1 | ) | £ | (175.7 | ) | £ | (143.2 | ) | ||
| Other digital media businesses: | |||||||||||
| Discontinued trading | (2.6 | ) | (16.1 | ) | — | ||||||
| Loss on sale of investments | (6.1 | ) | — | — | |||||||
| Profit on sale of Technicolor | 17.9 | 403.2 | — | ||||||||
| ONdigital and ITV Sport Channel—exceptional closure costs | (98.6 | ) | — | — | |||||||
| Technicolor—discontinued trading | — | 49.2 | 115.5 | ||||||||
| Quantel and SSL—discontinued trading | — | — | (23.8 | ) | |||||||
| Loss on sale of Quantel and SSL | — | — | (4.3 | ) | |||||||
| Goodwill written back on sale | — | (630.2 | ) | (300.0 | ) | ||||||
| Loss before tax | (188.5 | ) | (369.6 | ) | (355.8 | ) | |||||
| Tax credit | 8.8 | 23.1 | 11.9 | ||||||||
| Loss after tax | £ | (179.7 | ) | £ | (346.5 | ) | £ | (343.9 | ) | ||
Discontinued operations in 2002 include pre-closure results and closure cost provisions for ONdigital and ITV Sport Channel, pre-sale results and loss on disposal of other digital media businesses and further post-acquisition receipts from the disposal of Technicolor that was sold on March 16, 2001. In addition, discontinued operations in 2001 include the pre-sale results and disposal of Technicolor. The 2000 comparatives also include the Quantel and SSL operations that were sold in 2000.
Note 4—Divisional and Geographical Information
(i) Divisional analysis
In the view of the directors, following the disposal of Technicolor in 2001, Carlton has only one continuing business segment in accordance with UK GAAP, which includes interests in broadcasting, content and cinema screen advertising.
F-12
(ii) Geographical analysis by destination
| | Net Sales | Operating Income | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year ended September 30, | Year ended September 30, | |||||||||||||||||
| | 2002 | 2001 | 2000 | 2002 | 2001 | 2000 | |||||||||||||
| | (in millions) | (in millions) | |||||||||||||||||
| United Kingdom | £ | 918.3 | £ | 962.1 | £ | 925.5 | £ | 48.5 | £ | 49.8 | £ | 133.8 | |||||||
| United States | 17.0 | 43.2 | 29.4 | 0.2 | 4.0 | 4.1 | |||||||||||||
| Europe | 18.8 | 22.7 | 21.1 | 3.4 | 1.3 | 2.4 | |||||||||||||
| Japan and other | 10.5 | 12.1 | 11.7 | 1.1 | 1.7 | 1.9 | |||||||||||||
| 964.6 | 1,040.1 | 987.7 | 53.2 | 56.8 | 142.2 | ||||||||||||||
| Exceptional items—UK | — | — | — | 4.8 | (52.4 | ) | (11.1 | ) | |||||||||||
| Discontinued operations | — | 561.4 | 1,075.1 | — | 43.0 | 91.0 | |||||||||||||
| Total | £ | 964.6 | £ | 1,601.5 | £ | 2,062.8 | £ | 58.0 | £ | 47.4 | £ | 222.1 | |||||||
(iii) Geographical analysis by origin
| | Net Sales | Operating Income | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year ended September 30, | Year ended September 30, | |||||||||||||||||
| | 2002 | 2001 | 2000 | 2002 | 2001 | 2000 | |||||||||||||
| | (in millions) | (in millions) | |||||||||||||||||
| United Kingdom and Europe | £ | 956.1 | £ | 1,007.0 | £ | 958.8 | £ | 54.9 | £ | 57.0 | £ | 137.8 | |||||||
| United States | 8.5 | 33.1 | 28.9 | (1.7 | ) | (0.2 | ) | 4.4 | |||||||||||
| 964.6 | 1,040.1 | 987.7 | 53.2 | 56.8 | 142.2 | ||||||||||||||
| Exceptional items—UK | — | — | — | 4.8 | (52.4 | ) | (11.1 | ) | |||||||||||
| Discontinued operations | — | 561.4 | 1,075.1 | — | 43.0 | 91.0 | |||||||||||||
| Total | £ | 964.6 | £ | 1,601.5 | £ | 2,062.8 | £ | 58.0 | £ | 47.4 | £ | 222.1 | |||||||
Operating Net assets | Long-lived Assets | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Year ended September 30, | Year ended September 30, | ||||||||||||||||
| | 2002 | 2001 | 2000 | 2002 | 2001 | 2000 | ||||||||||||
| | (in millions) | (in millions) | ||||||||||||||||
| United Kingdom and Europe | £ | 480.8 | £ | 529.3 | £ | 347.9 | £ | 473.6 | £ | 521.6 | £ | 353.3 | ||||||
| United States | (0.1 | ) | 20.9 | 76.5 | 41.8 | 38.6 | 1.6 | |||||||||||
| 480.7 | 550.2 | 424.4 | 515.4 | 560.2 | 354.9 | |||||||||||||
| Discontinued operations | — | — | 544.6 | — | — | 350.0 | ||||||||||||
| Total | £ | 480.7 | £ | 550.2 | £ | 969.0 | £ | 515.4 | £ | 560.2 | £ | 704.9 | ||||||
F-13
Reconciliation of operating net assets to net assets
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Operating net assets | £ | 480.7 | £ | 550.2 | £ | 969.0 | ||||
| Investments | 536.1 | 739.6 | 127.4 | |||||||
| Corporation tax | (88.5 | ) | (83.5 | ) | (59.5 | ) | ||||
| Deferred tax | (1.4 | ) | (2.4 | ) | (11.9 | ) | ||||
| Net borrowings | (459.9 | ) | (506.6 | ) | (510.2 | ) | ||||
| Proposed dividend | (33.5 | ) | (33.6 | ) | (67.1 | ) | ||||
| Net assets | £ | 433.5 | £ | 663.7 | £ | 447.7 | ||||
Note 5—Operating Costs
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Operating costs comprise: | ||||||||||
| Cost of sales | £ | 697.9 | £ | 1,210.5 | £ | 1,479.2 | ||||
| Selling, general and administrative expenses | 213.5 | 285.0 | 322.5 | |||||||
| £ | 911.4 | £ | 1,495.5 | £ | 1,801.7 | |||||
| Selling, General and Administrative Expenses: | ||||||||||
| Auditors' remuneration | £ | 0.6 | £ | 0.6 | £ | 1.0 | ||||
| Depreciation of property, plant and equipment | 23.0 | 20.3 | 20.2 | |||||||
| Distribution costs | 77.7 | 92.0 | 101.7 | |||||||
| Operating lease rentals | 8.5 | 15.8 | 26.9 | |||||||
| Finance lease charge | 0.2 | 0.7 | 0.2 | |||||||
| Annual television licence fees | 26.0 | 19.9 | 17.4 | |||||||
| Other selling, general and administrative expenses | 77.5 | 135.7 | 155.1 | |||||||
| £ | 213.5 | £ | 285.0 | £ | 322.5 | |||||
The Group employs PricewaterhouseCoopers on assignments additional to their statutory audit duties where their expertise and experience with the Group are important, principally for due diligence reporting on acquisitions and disposals. During the year PricewaterhouseCoopers earned fees for UK non-audit services totaling £1.2 million (2001: £0.9 million, 2000: £3.5 million).
F-14
Note 6—Employee Numbers and Remuneration
The average number of persons employed by the Company during the year, including executive directors, was as follows:
| | Year ended September 30, | |||||
|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||
| | (in millions) | |||||
| Production | 1,818 | 5,887 | 9,488 | |||
| Selling and distribution | 589 | 1,877 | 3,271 | |||
| Administration | 593 | 1,301 | 1,313 | |||
| 3,000 | 9,065 | 14,072 | ||||
| The number of employees at year end | 2,787 | 3,257 | 14,572 | |||
Gross employee costs—all employees including executive directors:
| | Year ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||
| | (in millions) | ||||||||
| Aggregate gross wages and salaries paid to the Group's employees | £ | 92.9 | £ | 222.5 | £ | 324.7 | |||
| Employers' national insurance contributions | 7.9 | 19.1 | 27.1 | ||||||
| Employers' pension contributions | 8.0 | 2.8 | 7.3 | ||||||
| Total direct costs of employment | £ | 108.8 | £ | 244.4 | £ | 359.1 | |||
Note 7—Pension Costs
(i) Pension costs under SSAP 24
The Company operates a number of defined benefit and defined contribution pension schemes in its principal locations. Pension costs for the defined benefit schemes are assessed in accordance with actuarial advice and are charged to the profit and loss account so as to recognize the cost over the working lifetime of the employees. Actuarial valuations of these schemes have been carried out by independent actuaries in accordance with local legislative requirements. The accounting and funding policies differ to the extent that funding valuations may be based on more conservative assumptions and surpluses and deficits may be recognized more quickly for funding purposes. Details of the assumptions and methods used, for accounting purposes, for the main schemes are set out below.
| | | Valuation of Assets | | Value of Fund Assets/ Accrued Benefits | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pension Fund | Latest Full Actuarial Valuation | Spreading Method | |||||||||||
| Actuarial | Market | ||||||||||||
| | | (in millions) | | | |||||||||
| Carlton Group | 1 July 2001 | £ | 105.7 | £ | 105.7 | Level % pay | 93.5 | % | |||||
| Central | 31 March 2002 | * | £ | 247.5 | £ | 247.5 | Straight line | 96.0 | % | ||||
| HTV | 1 August 2000 | £ | 108.6 | £ | 108.6 | Level % pay | 109.0 | % | |||||
F-15
Pension Fund | Valuation Method Adopted | Average Investment Rate of Return | Average Salary Increases | Average Pension Increases | |||||
|---|---|---|---|---|---|---|---|---|---|
| Carlton Group | Projected Unit | 6.0 | % | 4.0 | % | 2.5-3 | % | ||
| Central | Attained age | 5.7-6.7 | % | 3.8 | % | 3.6 | % | ||
| HTV | Attained age | 5.5%-6.5 | % | 4.8 | % | 2.8 | % |
The net pension cost of the defined benefit schemes was £7.6 million (2001: £2.3 million, 2000: £2.5 million). The net pension cost of the defined contribution schemes was £0.4 million (2001: £0.5 million, 2000: £4.8 million). At September 30, 2002 accrued pension costs were £4.6 million (2001: £1.4 million, 2000: £4.4 million).
(ii) Pension costs under FRS 17 transitional arrangements
Under the transitional requirements of FRS 17, "Retirement Benefits", the impact that the new accounting standard would have had on the accounts, had it been adopted in the year is disclosed below. The full actuarial valuations as shown in Note 7(i) have been updated to September 30, 2002 by qualified independent actuaries in accordance with FRS 17.
The major assumptions used by these actuaries were:
| | At September 30, | ||||
|---|---|---|---|---|---|
| | 2002 | 2001 | |||
| Discount rate | 5.5 | % | 6.0 | % | |
| Retail price index | 2.25 | % | 2.5 | % | |
| Salary increases | 3.75 | % | 4.0 | % | |
| Pension increases | 2.25%-3.0 | % | 2.5%-3.0 | % | |
The following amounts at September 30, 2002 and 2001 were measured in accordance with the requirements of FRS 17:
| | At September 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | |||||
| | (in millions) | ||||||
| Total market value of assets | £ | 357.1 | £ | 394.9 | |||
| Present value of scheme liabilities | (480.6 | ) | (414.7 | ) | |||
| Deficit in the schemes | (123.5 | ) | (19.8 | ) | |||
| Related deferred tax asset | 37.1 | 5.9 | |||||
| Net pension liability | £ | (86.4 | ) | £ | (13.9 | ) | |
F-16
The assets in the scheme and expected rate of return as at September 30, 2002 and 2001 were:
| | At September 30, 2002 | At September 30, 2001 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Long-term rate of return | Total | Long-term rate of return | Total | ||||||
| | (in millions) | (in millions) | ||||||||
| Equity | 8.5 | % | £ | 200.2 | 8.0 | % | £ | 248.6 | ||
| Corporate bonds | 5.2 | % | 40.3 | 6.0 | % | 30.6 | ||||
| Gilts | 4.5 | % | 105.4 | 5.0 | % | 100.3 | ||||
| Property | 8.5 | % | 4.3 | 8.0 | % | 4.4 | ||||
| Other | 4.0 | % | 6.9 | 5.0 | % | 11.0 | ||||
| £ | 357.1 | £ | 394.9 | |||||||
If these amounts had been recognized in the financial statements, the Group's net assets and profit and loss account at September 30, 2002 and 2001 would have been as follows:
| | At September 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | |||||
| | (in millions) | ||||||
| Net assets excluding SSAP 24 pension liability | £ | 438.1 | £ | 665.1 | |||
| FRS 17 pension liability | (86.4 | ) | (13.9 | ) | |||
| Net assets including FRS 17 pension liability | £ | 351.7 | £ | 651.2 | |||
| Profit and loss account excluding SSAP 24 pension liability | £ | 227.8 | £ | 451.0 | |||
| FRS 17 pension reserve | (86.4 | ) | (13.9 | ) | |||
| Profit and loss account including FRS 17 pension reserve | £ | 141.4 | £ | 437.1 | |||
Movement in surplus/(deficit) during the year:
| | Year ended September 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | |||||
| | (in millions) | ||||||
| Surplus/(deficit) in schemes at beginning of year | £ | (19.8 | ) | £ | 72.4 | ||
| Acquisition of HTV | — | 14.0 | |||||
| Total charge to operating profit | (7.2 | ) | (10.0 | ) | |||
| Contributions | 4.9 | 4.6 | |||||
| Other finance income | 2.7 | 12.8 | |||||
| Actuarial loss | (104.1 | ) | (113.6 | ) | |||
| Deficit in schemes at end of year (pre-tax) | £ | (123.5 | ) | £ | (19.8 | ) | |
F-17
Note 8—Exceptional items
In 2002 there were exceptional reorganization and restructuring costs of £2.8 million, asset write-downs of £7.1 million and a goodwill impairment of £3.9 million offset by £18.6 million of litigation net income. A tax credit of £2.0 million arises on these items.
In 2001 there were exceptional reorganization and restructuring costs of £58.6 million, mainly relating to digital business closures and downsizing. A tax credit of £2.1 million arose on these items.
In 2000 there were exceptional costs of £11.1 million relating to an abortive merger and exceptional costs shown in discontinued operations of £27.9 million, which primarily related to restructuring.
Note 9—Net Interest (Payable)/Receivable
| | Year ended September 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 (as restated) | 2000 (as restated) | ||||||||
| | (in millions) | ||||||||||
| Interest receivable and similar income: | |||||||||||
| Bank deposits | £ | 18.7 | £ | 5.1 | £ | 15.3 | |||||
| Loan notes | 4.0 | 5.8 | — | ||||||||
| Interest receivable on funding to joint ventures and associates | 2.5 | 3.0 | 0.2 | ||||||||
| 25.2 | 13.9 | 15.5 | |||||||||
| Interest payable and similar charges: | |||||||||||
| Bank loans and overdrafts | (2.7 | ) | (6.9 | ) | (7.0 | ) | |||||
| Loan notes | (6.0 | ) | (3.7 | ) | (0.1 | ) | |||||
| Other loans | (24.9 | ) | (33.9 | ) | (34.7 | ) | |||||
| Interest payable on finance leases | (0.2 | ) | (0.7 | ) | (0.2 | ) | |||||
| Amortization of fees and foreign exchange | (0.7 | ) | (1.6 | ) | (1.1 | ) | |||||
| Other | (0.2 | ) | 0.3 | 0.2 | |||||||
| Share of joint ventures' and associates' interest payable | (2.5 | ) | (3.0 | ) | (1.0 | ) | |||||
| (37.2 | ) | (49.5 | ) | (43.9 | ) | ||||||
| Net interest payable | £ | (12.0 | ) | £ | (35.6 | ) | £ | (28.4 | ) | ||
£14.4 million of interest in 2002 relating to ONdigital and ITV Sport Channel has not been shown in joint ventures' payable or group interest receivable due to the closure of these businesses. The 2001 and 2000 comparatives, for interest receivable and interest payable have been restated by £22.1 million and £8.8 million accordingly.
F-18
Note 10—Taxes on Income
| | Year ended September 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||||
| | (in millions) | ||||||||||
| UK corporation tax (based on income before taxes and minority interests for the fiscal year at the applicable statutory rate of 30.0% in 2002, 30.0% in 2001 and 30.0% in 2000). | £ | (0.6 | ) | £ | 10.8 | £ | (7.6 | ) | |||
| Overseas taxes: | |||||||||||
| US federal | — | 4.0 | (4.3 | ) | |||||||
| US state | (0.1 | ) | (0.7 | ) | (1.9 | ) | |||||
| Other countries | (0.7 | ) | (1.1 | ) | (8.8 | ) | |||||
| Deferred taxes: | |||||||||||
| UK | 1.0 | 3.9 | 1.0 | ||||||||
| US federal | — | 1.2 | — | ||||||||
| US state | — | 0.4 | (0.7 | ) | |||||||
| Other countries | — | 1.0 | (0.9 | ) | |||||||
| Share of associated companies' taxation | 0.6 | (0.3 | ) | (2.5 | ) | ||||||
| Tax (charge)/credit for the fiscal year | £ | 0.2 | £ | 19.2 | £ | (25.7 | ) | ||||
The above charges reconcile as follows with the applicable statutory UK corporation tax rates:
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Tax on income before taxes and minority interests at applicable UK statutory rates | £ | (46.8 | ) | £ | (122.8 | ) | £ | (72.6 | ) | |
| Tax (charge)/credit in financial statements | 0.2 | 19.2 | (25.7 | ) | ||||||
| Difference | £ | (46.6 | ) | £ | (103.6 | ) | £ | (98.3 | ) | |
| Permanent differences | £ | (43.6 | ) | £ | (71.9 | ) | £ | (96.3 | ) | |
| Differences between UK and overseas standard tax rates | 0.6 | — | (3.1 | ) | ||||||
| Other | (3.6 | ) | (31.7 | ) | 1.1 | |||||
| £ | (46.6 | ) | £ | (103.6 | ) | £ | (98.3 | ) | ||
F-19
Sources of deferred tax are as follows:
| | Year ended September 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||||
| | (in millions) | ||||||||||
| Short term timing differences: | |||||||||||
| Estimated costs | £ | (0.7 | ) | £ | 1.0 | £ | (7.9 | ) | |||
| Other | — | — | 2.8 | ||||||||
| Depreciation | 1.1 | 8.0 | 7.0 | ||||||||
| Other timing differences: | |||||||||||
| Pension contributions | 0.5 | — | 0.3 | ||||||||
| Intangibles | 0.1 | 0.4 | — | ||||||||
| Other | — | 0.1 | (1.3 | ) | |||||||
| £ | 1.0 | £ | 9.5 | £ | 0.9 | ||||||
The geographic distribution of income before taxes is as follows:
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| United Kingdom | £ | 37.8 | £ | (39.4 | ) | £ | 99.7 | |||
| Overseas | (5.5 | ) | (0.2 | ) | 4.4 | |||||
| Discontinued operations | (188.5 | ) | (369.6 | ) | (355.8 | ) | ||||
| £ | (156.2 | ) | £ | (409.2 | ) | £ | (251.7 | ) | ||
Note 11—Dividends
| | Year ended September 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||||
| | (in millions) | ||||||||||
| Interim dividend | £ | 22.0 | £ | 22.0 | £ | 45.4 | |||||
| Final dividend | 33.5 | 33.6 | 67.1 | ||||||||
| Ordinary share dividends | 55.5 | 55.6 | 112.5 | ||||||||
| Dividend paid on 6.5p Preference shares | 10.5 | 10.5 | 10.7 | ||||||||
| Dividends paid and payable on 5.5p Preference shares | — | — | 3.0 | ||||||||
| Amortization of the 5.5p Preference share premium over redemption price | — | — | (2.7 | ) | |||||||
| Preference dividends | 10.5 | 10.5 | 11.0 | ||||||||
| £ | 66.0 | £ | 66.1 | £ | 123.5 | ||||||
| Per Ordinary share: | |||||||||||
| Interim dividend | 3.275 | p | 3.275 | p | 6.55 | p | |||||
| Final dividend | 5.00 | p | 5.00 | p | 10.00 | p | |||||
| 8.275 | p | 8.275 | p | 16.55 | p | ||||||
F-20
Note 12—Earnings per Share
| | Year ended September 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||
| | (in pence) | ||||||
| Per American Depositary Share: | |||||||
| Net loss attributable to holders of ADS | (124.0 | ) | (298.5 | ) | (222.7 | ) | |
| Discontinued operations | 134.0 | 258.0 | 265.6 | ||||
| Continuing operations pre-exceptional items | 10.0 | (40.5 | ) | 42.9 | |||
| Exceptional items | (5.0 | ) | 37.5 | 8.6 | |||
| Continuing operations income/(loss) pre-exceptional items | 5.0 | (3.0 | ) | 51.5 | |||
Diluted net income attributable to holders of ADS | (124.0 | ) | (298.5 | ) | (213.0 | ) | |
| Discontinued operations | 134.0 | 258.0 | 254.5 | ||||
| Continuing operations pre-exceptional items | 10.0 | (40.5 | ) | 41.5 | |||
| Exceptional items | (5.0 | ) | 37.5 | 8.0 | |||
| Diluted continuing operations income/(loss) pre-exceptional items | 5.0 | (3.0 | ) | 49.5 | |||
Earnings per ADS information presented has been derived by multiplying the respective earnings per Ordinary share figure by five to reflect the adjusted basis of issuance of ADSs (one ADS representing five Ordinary shares).
Continuing operations pre-exceptionals earnings per share has been provided to illustrate the underlying performance of the Company before exceptional items.
The reconciliation of basic earnings per share to diluted earnings per share for each of the years ended September 30, 2002, 2001 and 2000 is set out in the tables below. There is no difference between basic and diluted earnings per share under UK GAAP in 2002 and 2001 due to the loss from continuing operations in these years.
F-21
| | Earnings | Weighted Average Number of Shares | Per Share Amount | |||||
|---|---|---|---|---|---|---|---|---|
| | (millions) | (millions) | (pence) | |||||
| Year ended September 30, 2002 | ||||||||
| Loss attributable to Ordinary shareholders | £ | (156.0 | ) | |||||
| Preference dividends net of amortization | (10.5 | ) | ||||||
| Net loss attributable to Ordinary shareholders | (166.5 | ) | 670.7 | (24.8 | ) | |||
| Effect of dilutive securities | ||||||||
| Options | — | — | ||||||
| Other | — | 0.2 | ||||||
| Diluted net loss | £ | (166.5 | ) | 670.9 | (24.8 | ) | ||
Net loss attributable to Ordinary shareholders | £ | (166.5 | ) | 670.7 | (24.8 | ) | ||
| Discontinued operations | 179.7 | 26.8 | ||||||
| Continuing operations post-exceptional items | 13.2 | 2.0 | ||||||
| Exceptional items | (6.8 | ) | (1.0 | ) | ||||
| Continuing operations pre-exceptional items | £ | 6.4 | 670.7 | 1.0 | ||||
| | Earnings | Weighted Average Number of Shares | Per Share Amount | |||||
|---|---|---|---|---|---|---|---|---|
| | (millions) | (millions) | (pence) | |||||
| Year ended September 30, 2001 | ||||||||
| Loss attributable to Ordinary shareholders | £ | (390.0 | ) | |||||
| Preference dividends net of amortization | (10.5 | ) | ||||||
| Net loss attributable to Ordinary shareholders | (400.5 | ) | 670.0 | (59.7 | ) | |||
Effect of dilutive securities | ||||||||
| Options | — | 0.8 | ||||||
| Other | — | 1.0 | ||||||
| Diluted net loss | £ | (400.5 | ) | 671.8 | (59.7 | ) | ||
Net loss attributable to Ordinary shareholders | £ | (400.5 | ) | 670.0 | (59.7 | ) | ||
| Discontinued operations | 346.5 | 51.6 | ||||||
| Continuing operations post-exceptional items | (54.0 | ) | (8.1 | ) | ||||
| Exceptional items | 50.3 | 7.5 | ||||||
| Continuing operations pre-exceptional items | £ | (3.7 | ) | 670.0 | (0.6 | ) | ||
F-22
| | Earnings | Weighted Average Number of Shares | Per Share Amount | |||||
|---|---|---|---|---|---|---|---|---|
| | (millions) | (millions) | (pence) | |||||
| Year ended September 30, 2000 | ||||||||
| Loss attributable to Ordinary shareholders | £ | (277.4 | ) | |||||
| Preference dividends net of amortization | (11.0 | ) | ||||||
| Net loss attributable to Ordinary shareholders | (288.4 | ) | 647.5 | (44.5 | ) | |||
Effect of dilutive securities | ||||||||
| Options | — | 5.5 | ||||||
| 5.5p Convertible Preference shares | 0.3 | 22.3 | ||||||
| Other | — | 1.0 | ||||||
| Diluted net loss | £ | (288.1 | ) | 676.3 | (42.6 | ) | ||
Basic net loss attributable to Ordinary shareholders | £ | (288.4 | ) | 647.5 | (44.5 | ) | ||
| Discontinued operations | 343.9 | 53.1 | ||||||
| Continuing operations post-exceptional items | 55.5 | 8.6 | ||||||
| Exceptional items | 11.0 | 1.7 | ||||||
| Continuing operations pre-exceptional items | £ | 66.5 | 647.5 | 10.3 | ||||
Diluted net loss attributable to Ordinary shareholders | £ | (288.1 | ) | 676.3 | (42.6 | ) | ||
| Discontinued operations | 343.9 | 50.9 | ||||||
| Continuing operations post-exceptional items | 55.8 | 8.3 | ||||||
| Exceptional items | 11.0 | 1.6 | ||||||
| Continuing operations pre-exceptional items | £ | 66.8 | 676.3 | 9.9 | ||||
F-23
Note 13—Intangible Assets
| | Goodwill | Film libraries and other | Digital cinema development costs | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||
| Cost | |||||||||||||
| At October 1, 2000 | £ | 106.5 | £ | 128.3 | £ | 10.0 | £ | 244.8 | |||||
| Expenditure | 238.9 | 1.4 | 5.2 | 245.5 | |||||||||
| Retirements and disposals | (108.3 | ) | (2.8 | ) | (15.5 | ) | (126.6 | ) | |||||
| Exchange differences | 1.3 | — | 0.3 | 1.6 | |||||||||
| At September 30, 2001 | 238.4 | 126.9 | — | 365.3 | |||||||||
| Expenditure | — | 0.2 | — | 0.2 | |||||||||
| Adjustment in respect of deferred consideration | (3.5 | ) | — | — | (3.5 | ) | |||||||
| Transfers to tangible fixed assets | — | (1.8 | ) | — | (1.8 | ) | |||||||
| At September 30, 2002 | £ | 234.9 | £ | 125.3 | £ | — | £ | 360.2 | |||||
Amortization | |||||||||||||
| At October 1, 2000 | £ | 4.5 | £ | 7.1 | £ | — | £ | 11.6 | |||||
| Charge for the year | 15.0 | 2.8 | — | 17.8 | |||||||||
| Retirements and disposals | (5.8 | ) | (2.2 | ) | — | (8.0 | ) | ||||||
| At September 30, 2001 | 13.7 | 7.7 | — | 21.4 | |||||||||
| Charge for the year | 16.6 | 2.8 | — | 19.4 | |||||||||
| Transfers to tangible fixed assets | — | (0.1 | ) | — | (0.1 | ) | |||||||
| At September 30, 2002 | £ | 30.3 | £ | 10.4 | £ | — | £ | 40.7 | |||||
Net book value | |||||||||||||
| At October 1, 2000 | £ | 102.0 | £ | 121.2 | £ | 10.0 | £ | 233.2 | |||||
| At September 30, 2001 | £ | 224.7 | £ | 119.2 | £ | — | £ | 343.9 | |||||
| At September 30, 2002 | £ | 204.6 | £ | 114.9 | £ | — | £ | 319.5 | |||||
Goodwill expenditure in 2000 primarily related to the acquisitions of Consolidated Film Industries LLC, Astral Media and Screenvision Cinema Network LLC. In 2000 the Group disposed of Quantel Group Limited and Solid State Logic Holdings Limited.
Expenditure in 2001 on goodwill primarily related to the acquisition of HTV, which is being amortized over 20 years. The retirements and disposals during 2001 were due the sale to the Technicolor businesses acquired after October 1, 1998, the date that the Company applied FRS 10, "Goodwill and Intangible Assets".
The amortization charge in 2002 includes £3.9 million impairment included in exceptional operating items (see Note 8).
F-24
Note 14—Property, Plant and Equipment
| | Freehold Properties | Leasehold Properties | Plant and Equipment | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||
| Cost | |||||||||||||
| At October 1, 2000 | £ | 115.8 | £ | 54.6 | £ | 605.4 | £ | 775.8 | |||||
| Expenditure | 0.5 | 0.8 | 41.8 | 43.1 | |||||||||
| Businesses acquired | 10.4 | 5.9 | 6.5 | 22.8 | |||||||||
| Businesses disposed | (97.8 | ) | (23.5 | ) | (572.5 | ) | (693.8 | ) | |||||
| Disposals | (4.2 | ) | (4.1 | ) | (12.4 | ) | (20.7 | ) | |||||
| Exchange differences | 2.7 | 0.5 | 15.5 | 18.7 | |||||||||
| At September 30, 2001 | 27.4 | 34.2 | 84.3 | 145.9 | |||||||||
| Expenditure | 0.2 | 0.1 | 11.4 | 11.7 | |||||||||
| Businesses acquired | — | — | — | — | |||||||||
| Transfers | — | — | 1.8 | 1.8 | |||||||||
| Disposals | (0.1 | ) | (0.8 | ) | (2.6 | ) | (3.5 | ) | |||||
| At September 30, 2002 | £ | 27.5 | £ | 33.5 | £ | 94.9 | £ | 155.9 | |||||
Depreciation | |||||||||||||
| At October 1, 2000 | £ | 16.4 | £ | 15.2 | £ | 325.8 | £ | 357.4 | |||||
| Charge for the year | 1.5 | 3.1 | 40.8 | 45.4 | |||||||||
| Businesses disposed | (17.2 | ) | (13.3 | ) | (347.1 | ) | (377.6 | ) | |||||
| Disposals | (0.1 | ) | (0.1 | ) | (10.0 | ) | (10.2 | ) | |||||
| Exchange differences | 0.5 | 0.3 | 9.5 | 10.3 | |||||||||
| At September 30, 2001 | 1.1 | 5.2 | 19.0 | 25.3 | |||||||||
| Charge for the year | 0.4 | 4.7 | 17.9 | 23.0 | |||||||||
| Transfers | — | — | 0.1 | 0.1 | |||||||||
| Disposals | — | (0.7 | ) | (2.1 | ) | (2.8 | ) | ||||||
| At September 30, 2002 | £ | 1.5 | £ | 9.2 | £ | 34.9 | £ | 45.6 | |||||
Net book value | |||||||||||||
| At October 1, 2000 | £ | 99.4 | £ | 39.4 | £ | 279.6 | £ | 418.4 | |||||
| At September 30, 2001 | £ | 26.3 | £ | 29.0 | £ | 65.3 | £ | 120.6 | |||||
| At September 30, 2002 | £ | 26.0 | £ | 24.3 | £ | 60.0 | £ | 110.3 | |||||
The net book value of short leasehold property is £9.9 million (2001: £11.7 million, 2000: £11.8 million) and is included above in leasehold land and buildings.
F-25
Note 15—Investments
| | Joint ventures | Associated undertakings | Other investments | Own shares Held | Total | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||
| Cost and funding | ||||||||||||||||
| At October 1, 2000 | £ | 33.5 | £ | 19.8 | £ | 48.1 | £ | 13.2 | £ | 114.6 | ||||||
Additions | 1.1 | — | 409.2 | 410.3 | ||||||||||||
| Disposals and conversion to subsidiary | (2.2 | ) | (15.7 | ) | (13.8 | ) | (0.6 | ) | (32.3 | ) | ||||||
| Liabilities assumed | — | (0.3 | ) | — | — | (0.3 | ) | |||||||||
| Loans advanced | 223.7 | 13.4 | — | — | 237.1 | |||||||||||
| Loans repaid or discharged | — | (1.6 | ) | — | — | (1.6 | ) | |||||||||
| Share of retained loss | (197.5 | ) | (23.5 | ) | — | — | (221.0 | ) | ||||||||
| Amounts written off | — | (6.2 | ) | (11.0 | ) | — | (17.2 | ) | ||||||||
| Reclassifications | — | 14.5 | (14.5 | ) | — | — | ||||||||||
| Exchange differences and other | 0.1 | — | 0.4 | (1.6 | ) | (1.1 | ) | |||||||||
| At September 30, 2001 | 58.7 | 0.4 | 418.4 | 11.0 | 488.5 | |||||||||||
Additions | 8.7 | 44.6 | 0.5 | — | 53.8 | |||||||||||
| Disposals | — | — | (12.5 | ) | — | (12.5 | ) | |||||||||
| Loans advanced | 108.3 | 13.7 | 0.1 | — | 122.1 | |||||||||||
| Loans repaid or discharged | (2.6 | ) | (44.8 | ) | — | — | (47.4 | ) | ||||||||
| Share of retained loss | (121.5 | ) | (7.8 | ) | — | — | (129.3 | ) | ||||||||
| Exchange differences and other | 0.3 | — | 0.9 | (0.3 | ) | 0.9 | ||||||||||
| At September 30, 2002 | 51.9 | 6.1 | 407.4 | 10.7 | 476.1 | |||||||||||
Goodwill | ||||||||||||||||
| At October 1, 2000 | — | — | — | — | — | |||||||||||
| Additions | 36.7 | — | — | — | 36.7 | |||||||||||
| Amortization | (0.1 | ) | — | — | — | (0.1 | ) | |||||||||
| At September 30, 2001 | 36.6 | — | — | — | 36.6 | |||||||||||
Additions | 27.1 | — | — | — | 27.1 | |||||||||||
| Amortization | (2.1 | ) | (2.1 | ) | ||||||||||||
| Exchange differences and other | (3.4 | ) | — | — | — | (3.4 | ) | |||||||||
| At September 30, 2002 | 58.2 | — | — | — | 58.2 | |||||||||||
Provision | ||||||||||||||||
| At October 1, 2001 and 2000 | — | — | — | — | — | |||||||||||
| Provision for impairment | (30.6 | ) | — | — | (8.2 | ) | (38.8 | ) | ||||||||
| At September 30, 2002 | (30.6 | ) | — | — | (8.2 | ) | (38.8 | ) | ||||||||
Net book value | ||||||||||||||||
| At October 1, 2000 | £ | 33.5 | £ | 19.8 | £ | 48.1 | £ | 13.2 | £ | 114.6 | ||||||
| At September 30, 2001 | £ | 95.3 | £ | 0.4 | £ | 418.4 | £ | 11.0 | £ | 525.1 | ||||||
| At September 30, 2002 | £ | 79.5 | £ | 6.1 | £ | 407.4 | £ | 2.5 | £ | 495.5 | ||||||
F-26
(i) Joint ventures and associated undertakings
Included within joint ventures is the Group's 50% share of the consolidated results and balance sheet of ITV Digital Holdings Limited and ITV Sport Channel Limited.
Following the appointment of the liquidators to ONdigital 1998 plc (formerly ITV Digital plc, the principal operating subsidiary of ITV Digital Holdings Limited) and the decision to close ITV Sport Channel, full provision has been made against the Group's share of their net assets. A summary of the results and net assets is set out below:
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 (as restated) | 2000 (as restated) | |||||||
| | (in millions) | |||||||||
| Turnover | £ | 64.1 | £ | 90.2 | £ | 53.3 | ||||
| Loss before interest | (99.1 | ) | (175.7 | ) | (144.8 | ) | ||||
| Interest payable | — | — | — | |||||||
| Loss on ordinary activities before taxation | £ | (99.1 | ) | £ | (175.7 | ) | £ | (144.8 | ) | |
Tangible fixed assets | — | 51.9 | 51.5 | |||||||
| Current assets | — | 102.4 | 62.9 | |||||||
| Liabilities due within one year (excluding shareholder loans) | — | (100.2 | ) | (84.9 | ) | |||||
| Shareholder loans | — | (416.9 | ) | (194.5 | ) | |||||
| Net liabilities | £ | — | £ | (362.8 | ) | £ | (165.0 | ) | ||
£14.4 million of interest payable in 2002 relating to ONdigital and ITV Sport Channel has not been shown in the analysis above due to the closure of these businesses. The 2001 and 2000 comparatives have been restated by £22.1million and £8.8 million accordingly.
The following information relates to the Company's joint ventures and associated undertakings as at September 30, 2002, none of which were publicly quoted:
| | Country of registration/ incorporation | Nominal value of ordinary shares | Number of ordinary shares in issue | Proportion of shares held by group | |||||
|---|---|---|---|---|---|---|---|---|---|
| GMTV Limited | England and Wales | £1 | 2,000,000 | 25 | % | ||||
| Independent Television News Limited | England and Wales | £1 | 400,000 | 20 | % | ||||
| ITV2 Limited | England and Wales | £1 | 915,610 | 44.1 | % | ||||
| ITV News Channel Limited(1) | England and Wales | 1 | p | 1,000 | 32.5 | % | |||
| London News Network Limited(2) | England and Wales | £1 | 100 | 50 | % | ||||
| Screenvision Holdings (Europe) Limited(3) | England and Wales | £1 | 40,208,404 | 50 | % | ||||
| Technicolor Cinema Advertising LLC(4) | USA | US$1 | 122,000 | 50 | % |
Notes
F-27
(ii) Other investments
The increase in other investments in 2001 is principally due to the Thomson equity investment received in the transaction relating to the sale of Technicolor.
Other investments include 15.5 million of shares in Thomson received in the transaction relating to the sale of Technicolor in March 2001. These shares are carried at book value at September 30, 2002 of £401.4 million (2001: £400.4 million). The market value at September 30, 2002 was £155.3 million (2001: £207.4 million). The Thomson shares are carried at €41.2 compared with a year-end price of €15.9. The shares traded between €15.7 and €36.7 in the 2002 fiscal year.
(iii) Own shares held
Own shares held comprise listed Carlton Ordinary shares held within an Employee Share Ownership Trust and a Qualifying Employee Share Ownership Trust. The shares are held to cover awards under employee share plans. Nil-price share options are allocated to shares held in the Employee Share Ownership Trust and the market price at date of grant of these options is amortized over the vesting period.
The value of own shares held has been assessed against the year end share price of £1.09 and a provision for impairment of £8.2 million has been made. The impairment excludes certain nil-price DABS and LTIS options already amortized below £1.09.
The year end market values and book values of the shares held by the Group are as follows:
| | At September 30, 2002 | At September 30, 2001 | At September 30, 2000 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Number of Ordinary shares held | Market value | Book value | Number of Ordinary shares held | Market value | Book value | Number of Ordinary shares held | Market value | Book value | |||||||||||||||
| | | (in millions) | | (in millions) | | (in millions) | ||||||||||||||||||
| Employee Share Ownership Trust | 1,822,172 | £ | 1.9 | £ | 1.7 | 2,016,126 | £ | 2.7 | £ | 7.9 | 2,022,762 | £ | 10.7 | £ | 9.5 | |||||||||
| Qualifying Employee Share Ownership Trust | 696,177 | 0.8 | 0.8 | 696,177 | 0.9 | 3.1 | 998,801 | 5.3 | 3.7 | |||||||||||||||
| 2,518,349 | £ | 2.7 | £ | 2.5 | 2,712,303 | £ | 3.6 | £ | 11.0 | 3,021,563 | £ | 16.0 | £ | 13.2 | ||||||||||
Note 16—Inventory
| | At September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||
| | (in millions) | ||||||||
| Raw materials and consumables | £ | — | £ | — | £ | 36.8 | |||
| Work in progress | 1.7 | 1.8 | 5.2 | ||||||
| Finished products | 4.6 | 5.3 | 5.7 | ||||||
| £ | 6.3 | £ | 7.1 | £ | 47.7 | ||||
There is no material difference between the replacement cost of stocks and their carrying value.
F-28
Note 17—Program and Film Rights
| | At September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||
| | (in millions) | ||||||||
| Programs in production | £ | 24.7 | £ | 27.0 | £ | 19.5 | |||
| Completed programs and film rights | 153.8 | 160.4 | 152.1 | ||||||
| £ | 178.5 | £ | 187.4 | £ | 171.6 | ||||
Acquired and completed programs and film rights principally comprise payments in respect of the Company's proportionate share of the cost of completed programs purchased by the ITV Network for future transmission.
Note 18—Debtors
| | At September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 (as restated) | 2000 (as restated) | |||||||
| | (in millions) | |||||||||
| Amounts falling due within one year: | ||||||||||
| Trade debtors | £ | 121.9 | £ | 135.5 | £ | 417.6 | ||||
| UK and overseas taxes recoverable | — | — | 4.4 | |||||||
| Prepayments and accrued income | 24.4 | 28.5 | 33.8 | |||||||
| Contract payments | — | — | 74.5 | |||||||
| Other | 24.0 | 32.7 | 45.0 | |||||||
| £ | 170.3 | £ | 196.7 | £ | 575.3 | |||||
| Amounts falling due after more than one year: | ||||||||||
| Contract payments | £ | — | £ | — | £ | 46.4 | ||||
| Other | 17.6 | 19.9 | 48.8 | |||||||
| £ | 17.6 | £ | 19.9 | £ | 95.2 | |||||
Trade debtors for 2001 and 2000 have been reduced by £18.0 million and £12.3 million respectively, to reflect when amounts become receivable. The corresponding amount has been added to accrued income falling due after more than one year.
Note 19—Current Asset Investments
| | At September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||
| | (in millions) | ||||||||
| Loan notes | £ | 32.8 | £ | 206.5 | £ | — | |||
| Certificates of tax deposit | 7.5 | 7.5 | 7.5 | ||||||
| Other | 0.3 | 0.8 | 0.9 | ||||||
| £ | 40.6 | £ | 214.8 | £ | 8.4 | ||||
The loan notes were issued to the Group in 2001 by Thomson as part of the Technicolor sale. The notes have a nominal value of $50 million and mature in March 2003 and are supported by bank guarantee.
F-29
The notes accrue interest at 6 month $ LIBOR plus 0.15% with all interest being compounded and cash settled at the maturity date of the notes. These non-quoted loan notes are held at directors' valuation.
Note 20—Cash and Other Liquid Funds
| | At September 30, | |||||
|---|---|---|---|---|---|---|
| | 2002 | 2001 (as restated) | 2000 | |||
| | (in millions) | |||||
| Cash at bank and in hand | £552.9 | £256.5 | £341.8 | |||
Cash at bank and in hand comprises bank deposits which have a maximum maturity of twenty-four hours and interest earned is based on that available in the overnight money market.
£202.0 million of 2001 overdrafts have been offset, where permitted under FRS 13, against cash balances in order to be consistent with the 2002 and 2000 treatment.
Note 21—Creditors
| | At September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 (as restated) | 2000 (as restated) | ||||||
| | (in millions) | ||||||||
| Trade accounts payable | £ | 56.8 | £ | 120.2 | £ | 279.3 | |||
| Accrued expenses and deferred income | 146.6 | 133.8 | 203.2 | ||||||
| Overdrafts and short term borrowings (Note 22) | 35.0 | 77.4 | 244.2 | ||||||
| Corporation tax | 88.5 | 83.5 | 59.5 | ||||||
| Other tax and social security | 17.1 | 11.4 | 18.2 | ||||||
| Other creditors | 24.1 | 27.0 | 21.8 | ||||||
| Dividends payable | 33.5 | 33.6 | 67.1 | ||||||
| £ | 401.6 | £ | 486.9 | £ | 893.3 | ||||
Accruals and deferred income falling due within one year for 2001 and 2000 have been reduced by £22.7 million and £18.3 million respectively, to reflect when amounts become payable. The corresponding amount has been added to other creditors falling due after more than one year.
Trade accounts receivable and trade accounts payable in 2000 include amounts not due to the Company but for which the Company is subject to limited recourse of £60.9 million. There are no such amounts as at September 30, 2001 and 2002.
£202.0 million of 2001 overdrafts have been offset, where permitted under FRS 13, against cash balances in order to be consistent with the 2002 and 2000 treatment.
F-30
Note 22—Overdrafts and Short-Term Borrowings
| | At September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 (as restated) | 2000 | ||||||
| | (in millions) | ||||||||
| Overdrafts | £ | — | £ | 20.1 | £ | 168.6 | |||
| Loans due within one year | 35.0 | 55.2 | 45.5 | ||||||
| Loan notes and other short-term borrowings | — | 2.1 | 30.1 | ||||||
| £ | 35.0 | £ | 77.4 | £ | 244.2 | ||||
The majority of overdrafts are sterling denominated and reside in interest offset arrangements with UK clearing banks. Consequently they are netted off against cash for the purposes of interest calculation. The remaining overdrafts bear interest rates up the UK base rate plus 1%. The average annual UK base rate in 2002 was 4.00% (2001: 5.57%, 2000: 5.33%).
£202.0 million of 2001 overdrafts have been offset, where permitted under FRS13, against cash balances in order to be consistent with the 2002 and 2000 treatment.
The loans repayable within one year as at September 30, 2002 and September 30, 2001 comprise loan notes issued under the Company's £1,000 million Euro Medium Term Note program at weighted average interest rates of 4.43% and 5.35% respectively. Loans repayable within one year as at September 30, 2000 principally include unsecured dollar borrowings bearing a fixed interest rate of 9.55%.
Note 23—Loans
| | At September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||
| | (in millions) | ||||||||
| Repayable: | |||||||||
| Between one and two years | £ | — | £ | 101.0 | £ | 52.2 | |||
| Between two and five years | 605.8 | 11.5 | 0.6 | ||||||
| Over five years | 249.0 | 446.5 | 446.4 | ||||||
| £ | 854.8 | £ | 559.0 | £ | 499.2 | ||||
Loans repayable between two and five years comprise an unsecured £200 million eurobond stated net of the costs of issue which has a coupon of 7.625% and matures in June 2007, loan notes totaling £11.5 million issued under the Company's £1,000 million Euro Medium Term Note program and an unsecured €638.6 million exchangeable bond stated net of the costs of issue which has a coupon of 2.25% and matures in January 2007. The exchangeable bond can be exchanged at any time at the option of investors into the Company's 15.5 million shares in Thomson at an exchange price of €41.2 per share. The investors also hold the right to put the bonds back to the Company in January 2005. The Company has the right to redeem the bonds at par on or after July 4, 2003 if the underlying shares in Thomson have traded at a 30% premium to the exchange price of €41.2 on 20 consecutive trading days in any period of 30 trading days.
F-31
Loans repayable between one and two years as at 30 September 2001 comprise loan notes issued under the Company's £1,000 million Euro Medium Term Note program.
During the year the Company repurchased €105 million of the €150 million March 2003 loan notes issued under the Company's Euro Medium Term Note program for a total consideration (excluding accrued interest purchased) of €104.2 million.
Loans repayable after five years comprise an unsecured £250 million eurobond stated net of the costs of issue which has a coupon of 5.625% and matures in March 2009 and unsecured loan notes totaling £0.9 million.
All loans are repayable other than by installment.
Each of the bonds, the private placement and the bank borrowings are unsecured obligations of the Company. They would rankpari passu both amongst themselves and with all other outstanding and unsubordinated obligations of the Company in the event of insolvency.
Aggregate principal installments in respect of the Company's long-term debt (exclusive of overdrafts) for each of the five years ending September 30, 2007 are payable as follows:
| | (in millions) | ||
|---|---|---|---|
| 2003 | £ | 35.0 | |
| 2004 | 0.0 | ||
| 2005 | 0.0 | ||
| 2006 | 11.5 | ||
| 2007 | 594.3 | ||
| Thereafter | 249.0 | ||
| £ | 889.8 | ||
The Company has total committed bank facilities of £100 million under a syndicated facility which matures in April 2006. The facility was undrawn at September 30, 2002.
Note 24—Convertible Debt
| | At September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||
| | (in millions) | ||||||||
| X-CAPs | £ | 91.3 | £ | 97.8 | £ | 97.2 | |||
The US$150 million undated Exchangeable Capital Securities are divided into 6,000,000 Exchangeable Capital Securities of US$25 per security with a coupon of 8% per annum, and were redeemable at the option of the Company from October 7, 1998 at US$26 per security reducing each year until October 7, 2003 from which time the redemption price will be US$25 per security. The Exchangeable Capital Securities rank senior to the Preference shares of the Company in the event of a winding up. The Exchangeable Capital Securities are exchangeable at the option of the Company at any time into Cumulative US Dollar-denominated Redeemable Preference shares of US$0.01 each in the Company on a one-for-one basis.
F-32
The purchase agreement governing the issuance of the X-CAPs describes certain events of default, the principal covenant of which is to ensure that interest payments are made.
Note 25—Finance Lease Creditors
| | At September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||
| | (in millions) | ||||||||
| Repayable: | |||||||||
| 2001 | £ | — | £ | — | £ | 1.0 | |||
| 2002 | — | 1.2 | 0.6 | ||||||
| 2003 | 1.2 | 0.9 | 0.7 | ||||||
| 2004 | 1.1 | 1.1 | 0.7 | ||||||
| 2005 | 1.8 | 1.2 | 0.8 | ||||||
| 2006 | 1.9 | 1.4 | — | ||||||
| 2007 | 2.1 | — | — | ||||||
| Thereafter | 24.8 | 24.3 | 8.6 | ||||||
| £ | 32.9 | £ | 30.1 | £ | 12.4 | ||||
| Classified in the balance sheet: | |||||||||
| Creditors: amounts falling due within one year | £ | 1.2 | £ | 1.2 | £ | 1.0 | |||
| Creditors: amounts falling after more than one year | 31.7 | 28.9 | 11.4 | ||||||
| £ | 32.9 | £ | 30.1 | £ | 12.4 | ||||
Finance lease arrangements primarily relate to sale and leaseback agreements in respect of program rights and have formal contracts determining the lease rental payments and other applicable key terms. The sale and leaseback of rights associated with program rights included within finance leases due after one year at September 30, 2001, 2000 and 2000 was £30.2 million, £27.4 million and £9.5 million respectively.
The book value of land and building assets held under finance lease at September 30, 2002, 2001 and 2000 was £1.5 million, £1.5 million and £1.9 million respectively.
Note 26—Financial Instruments
The most significant treasury exposures faced by the Company are in relation to the management of interest rate and currency positions, the investment of surplus cash in high quality assets and the ability to raise finance to support its activities. Clear parameters have been established, including levels of authority, on the type and use of financial instruments to manage these exposures. Transactions are only undertaken if they relate to underlying exposures. Regular reports are provided to senior management, and treasury operations are subject to periodic independent reviews and internal audits.
The Company is exposed to credit risk in the event of non-performance by counterparties to interest rate swap agreements and forward currency contracts. However, because the Company deals only with
F-33
major commercial banks with high-quality credit ratings, it does not anticipate non-performance by any of these counterparties. The Company operates investment guidelines with respect to cash, with an emphasis on preservation of capital. Consequently, discretionary investments with a maturity greater than one year must be rated AA or better and discretionary investments with maturities of less than one year must be rated A1 or P1 by the major credit rating agencies. There are also conservative limits for individual counterparties. The maturity profile of investments is managed according to the forecast cash needs of the Company. During the 2002 fiscal year and at September 30, 2002, all cash was invested with maturities of less than one year. The Company has deposited its cash equivalents with reputable financial institutions and believes the risk of loss to be remote.
The Company is exposed to market risk in the form of foreign exchange rates and interest rate risks. The Company has several debt instruments denominated in sterling, dollars and other currencies which are hedged through interest rate swaps and options. In addition, the Company is subject to foreign currency risk on future cash flows which are hedged through a variety of foreign exchange contracts.
Set out below is a comparison by category of book values and fair values of the Company's financial assets and financial liabilities as at September 30, 2002, 2001 and 2000:
| | 2002 | 2001 | 2000 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Book value | Fair value | Book value | Fair value | Book value | Fair value | |||||||||||||
| | (in millions) | (in millions) | (in millions) | ||||||||||||||||
| Overdrafts and short-term borrowings (Note 22) | £ | (35.0 | ) | £ | (33.8 | ) | £ | (77.4 | ) | £ | (77.4 | ) | £ | (244.2 | ) | £ | (245.1 | ) | |
| Loans (Notes 23 and 25) | (886.5 | ) | (753.0 | ) | (587.9 | ) | (580.4 | ) | (510.6 | ) | (497.3 | ) | |||||||
| Convertible debt (Note 24) | (91.3 | ) | (49.6 | ) | (97.8 | ) | (98.0 | ) | (97.2 | ) | (90.8 | ) | |||||||
| Preference shares (Note 28) | (163.6 | ) | (139.5 | ) | (163.6 | ) | (157.1 | ) | (163.8 | ) | (233.8 | ) | |||||||
| (1,176.4 | ) | (975.9 | ) | (926.7 | ) | (912.9 | ) | (1,015.8 | ) | (1,067.0 | ) | ||||||||
| Cash and other liquid funds (Note 20) | 552.9 | 552.9 | 256.5 | 256.5 | 341.8 | 341.8 | |||||||||||||
| Equity interest in Thomson (Note 15) | 401.4 | 155.3 | 400.4 | 207.4 | — | — | |||||||||||||
| Loan notes held in Thomson (Note 19) | 32.8 | 32.8 | 206.5 | 206.5 | — | — | |||||||||||||
Derivative financial instruments held to manage the interest rate profile: | |||||||||||||||||||
Interest rate swaps, swaptions and caps | 3.5 | 13.4 | — | (3.9 | ) | — | (0.2 | ) | |||||||||||
Derivative financial instruments held or issued to hedge the currency exposure on expected future sales and purchases: | |||||||||||||||||||
Forward foreign exchange contracts | 9.3 | 7.8 | — | (5.9 | ) | — | (13.8 | ) | |||||||||||
The carrying amount of short-term financial instruments including cash and cash equivalents, accounts receivable, accounts payable, and all other short-term financial assets and liabilities, including bank debt, approximates fair value due to the short maturity of those instruments.
F-34
The estimated fair value of the X-CAPs, the sterling eurobonds, the euro exchangeable, loan notes issued under the EMTN program, the Preference shares and the equity interest in Thomson are based on a market quotation. All other valuations are based on discounted future cash flows. The table below details gains/(losses) on interest rate and currency hedging contracts at September 30, 2002:
| | Deferred | Unrecognized | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Gains | Losses | Total net gains/(losses) | Gains | Losses | Total net gains/(losses) | |||||||||||||
| | (in millions) | (in millions) | |||||||||||||||||
| Gains/(losses) on hedges at October 1, 2001 | £ | — | £ | (2.1 | ) | £ | (2.1 | ) | £ | 12.2 | £ | (22.0 | ) | £ | (9.8 | ) | |||
| Gains/(losses) arising in previous years that were recognized in 2002 | — | 0.3 | 0.3 | (8.2 | ) | 3.9 | (4.3 | ) | |||||||||||
| — | (1.8 | ) | (1.8 | ) | 4.0 | (18.1 | ) | (14.1 | |||||||||||
| Gains/(losses) arising in 2002 that were not recognized in 2002 | — | (9.3 | ) | (9.3 | ) | 26.6 | (2.3 | ) | 24.3 | ||||||||||
| Gains/(losses) on hedges at September 30, 2002 | £ | — | £ | (11.1 | ) | £ | (11.1 | ) | £ | 30.6 | £ | (20.4 | ) | £ | 10.2 | ||||
Of which: | |||||||||||||||||||
| Gains/(losses) expected to be recognized in 2003 | £ | — | £ | (4.5 | ) | £ | (4.5 | ) | £ | 16.1 | £ | (4.1 | ) | £ | 12.0 | ||||
| Gains/(losses) expected to be recognized in 2004 or later | £ | — | £ | (6.6 | ) | £ | (6.6 | ) | £ | 14.5 | £ | (16.3 | ) | £ | (1.8 | ) | |||
Interest rate contracts entered into which are matched against the £200 million eurobond maturing in 2007 and the £250 million eurobond maturing in 2009 are described as follows:
In June 2001 both bonds were swapped from their fixed rates of 7.625% and 5.625% respectively (commencing June 2001 for the £200 million bond and September 2001 for the £250 million bond) into 6 month dollar Libor plus 0.75% (but payable in sterling) subject to the knock-in, commencing from the bond coupon dates of June 2002 and March 2002 respectively, that if the 6 month dollar rate fixing is at or below 3.75% there is no net swap payment or receipt relating to that 6 month period only.
In August 2001 both bonds were swapped for a period of 3 years commencing December 2001 and September 2001 respectively from 6 month dollar Libor plus 0.75% to 6 month dollar Libor plus 0.415% and 0.42% respectively set in arrears.
In November 2001 the swap contracts were amended such that the 3.75% knock-ins were delayed by 6 months until December 2002 and September 2002 respectively. In exchange for this the bank was given the option (commencing from December 2004 and September 2004 respectively) to choose the floating rate cost to the Company of 6 month dollar Libor plus 0.75% or 6 month sterling Libor minus 0.1% either being set in advance or in arrears. In addition, with effect from June 2002 and March 2002 respectively, for any dollar rate settings in advance above 6.5% the Company will pay an additional 1% on the swap margin for that 6 month period only.
In July 2002 the £250 million bond was swapped with effect from September 2002 from 5.625% if the 6 month dollar Libor rate fixing is at or below 3.75% or 6 month dollar Libor plus 0.75% (payable in sterling) if the 6 month dollar Libor rate fixing is above 3.75% to 6 month dollar Libor plus 1.075% plus a further potential additional margin (payable in sterling). Further potential additional margin arises to the
F-35
extent that on a one for one basis the 1 year dollar swap rate observed on November 5, 2003 exceeds each of the strike levels of 4.0%, 4.5% and 5.0% on £125 million notional and to the extent that on a one for one basis the 1 year dollar swap rate observed on December 17, 2003 exceeds each of the strike levels of 3.8%, 4.05% and 4.25% on £125 million notional.
The Company has issued loan notes totaling £46.5 million under its EMTN program that were held by third party investors at September 30, 2002. The notes have been issued in euros and Japanese yen and swapped back to sterling to give a financing cost ranging between 6 month sterling Libor plus 0.19% and 0.48%.
In February 1999 the Company entered into a $150 million interest rate swap with a potential maturity of October 7, 2028. The principal terms of the swap were as follows. The Company receives a fixed rate of 8% to match the coupon payments on the $150 million X-CAPs. For the period up to October 7, 2003 the Company pays the greater of 7.25% or 3 month dollar Libor plus 0.25% (set in arrears or advance) or at the bank's option the greater of 7.25% or 3 month sterling Libor plus 0.25% (set in arrears or advance) on £91.9 million. For the period from October 7, 2003 to October 7, 2028 the Company pays the greater of 7.25% or 3 month dollar Libor plus 0.25% (set in arrears or advance). The bank has the option to terminate the swap at any time commencing October 7, 2003. In August 2002 the payment basis of the swap was amended (with effect from September 2002) to 3 month dollar Libor plus 2.65% set in arrears or in advance at the bank's option. In addition if the bank exercises its option to terminate the swap it must pay the Company $6 million.
In April 2002 the Company swapped (commencing with effect from May 2002) from its fixed rate cost of 2.25% under the €638.6 million exchangeable bond into a floating rate cost of 1 month sterling Libor minus 2.81% on a notional amount of £394.9 million until January 2005.
At September 30, 2002 the Company had a number of forward foreign exchange contracts to purchase or sell various currencies, principally US and European, totaling a net currency sale of £30.3 million (2001: £29.7 million net currency purchase, 2000: £66.6 million net currency purchase). The fair value of these contracts resulted in an unrealized loss of £3.0 million (2001: £5.9 million loss, 2000: £13.8 million loss), which is calculated assuming a notional close-out of these contracts using exchange rates at the respective year ends. In addition at September 30, 2002 the Company holds a currency option contract entitling it to purchase euros and sell sterling at a rate of £/euro 1.5947 on January 4, 2005. The fair value of the contract at September 30, 2002 was £10.8 million.
The principal facilities in place as at September 30, 2002 along with their key features are as follows:
Revolving facility
Allows draw down of unsecured committed multi-currency advances totaling £100 million. The facility matures in April 2006. As at September 30, 2002 the facility was undrawn. Availability of the facility is subject to an interest cover covenant.
EMTN program
The program size is £1,000 million. At September 30, 2002 £46.5 million was held by third party investors.
F-36
Euro-Commercial Paper Program
The program size is up to US$150 million equivalent, with a 364 day maximum term. At September 30, 2002, £nil had been issued.
Any movement in the Company's credit rating will not affect the debt already issued under any of the above facilities.
As at September 30, 2002 loan origination fees held on the balance sheet totaled £13.0 million.
Note 27—Provisions for liabilities and charges
| | Closure of businesses | Deferred taxation | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||
| At September 30, 2000 | £ | — | £ | 11.9 | £ | 11.9 | ||||
| Profit and loss account—current | — | (6.6 | ) | (6.6 | ) | |||||
| Other | — | (2.9 | ) | (2.9 | ) | |||||
| At September 30, 2001 | — | 2.4 | 2.4 | |||||||
| Profit and loss account—current | 64.0 | (1.4 | ) | 62.6 | ||||||
| Profit and loss account—prior | — | 0.4 | 0.4 | |||||||
| Utilized | (17.3 | ) | — | (17.3 | ) | |||||
| At September 30, 2002 | £ | 46.7 | £ | 1.4 | £ | 48.1 | ||||
The provision for closure of businesses relates to the closure of ONdigital and ITV Sport Channel as disclosed in Note 15. The majority of the provision is expected to be utilized within one year from September 30, 2002.
F-37
Deferred taxation
| | At September 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||||
| | (in millions) | ||||||||||
| Deferred taxes comprise: | |||||||||||
| Accelerated capital allowances | £ | 0.2 | £ | 1.3 | £ | 9.3 | |||||
| Short term timing differences, principally estimated costs | (0.5 | ) | (1.3 | ) | (0.3 | ) | |||||
| Deferred gains | — | — | — | ||||||||
| Intangibles | 1.7 | 2.4 | 2.8 | ||||||||
| Other | — | — | 0.1 | ||||||||
| £ | 1.4 | £ | 2.4 | £ | 11.9 | ||||||
| Analyzed as: | |||||||||||
| Provision for UK deferred taxes | £ | 1.4 | £ | 2.4 | £ | 6.6 | |||||
| Provision for overseas deferred taxes | — | — | 5.3 | ||||||||
| £ | 1.4 | £ | 2.4 | £ | 11.9 | ||||||
Note 28—Shareholders' Equity
| | At September 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||
| | (number) | ||||||
| Ordinary shares of 5p each nominal value ("Ordinary shares") | |||||||
| Authorized | 1,221,285,011 | 1,208,461,346 | 1,208,399,968 | ||||
| Issued and outstanding | 671,951,686 | 671,774,439 | 671,465,298 | ||||
| 6.5p (net) Cumulative Convertible Redeemable Preference shares of 5p each nominal value ("6.5p Preference shares") | |||||||
| Authorized | 168,714,989 | 168,755,902 | 168,817,280 | ||||
| Issued and outstanding | 163,564,861 | 163,605,774 | 163,667,152 | ||||
| 5.5p (net) Cumulative Convertible Redeemable Preference shares of 5p each nominal value ("5.5p Preference shares") | |||||||
| Authorized | — | 12,782,752 | 12,782,752 | ||||
| Issued and outstanding | — | — | — | ||||
| Cumulative Dollar-denominated Preference shares | |||||||
| Authorized | 15,000,000 | 15,000,000 | 15,000,000 | ||||
| Issued and outstanding | — | — | — | ||||
F-38
The following changes have taken place in the issued share capital of the Company during the year to September 30, 2002:
On October 7, 1993, 6,000,000 Exchangeable Capital Securities of US$25 per security were issued by the Company which are exchangeable at the option of the Company at any time into Cumulative US Dollar-denominated Redeemable Preference shares of US$0.01 each in the Company ("Dollar Preference shares"). No Dollar Preference shares had been issued as at September 30, 2002. The Dollar Preference shares carry a dividend entitlement of US$2.25 per share per annum and are redeemable at the option of the Company from October 7, 1998 at a price of US$26.125 per share, reducing each year until October 7, 2003 from which time the redemption price will be US$25 per share.
Each of the two classes of Preference shares rankspari passu for dividends or other returns of capital, in priority to any other class of shares. None of the Preference shares has voting rights except in the event of winding up or following dividend arrears of greater than six months. In the event of a winding up the 6.5p Preference shares have a liquidation preference of £1 per share and the Dollar Preference shares have a liquidation preference of US$25 per share.
Non-equity shareholders' funds comprise £163.6 million (2001: £163.6 million, 2000: £163.8 million) in respect of the 6.5p Preference shares.
F-39
Note 29—Options on Ordinary Shares
At September 30, 2002, 44,235,636 options and awards had been granted and remained outstanding as follows:
| | Date of Grant | Options outstanding | Exercise price | Exercise period | ||||
|---|---|---|---|---|---|---|---|---|
| Executive share option grants(a) | 2002 | 7,826,361 | 225.0p - 245.0 | p | 2005 - 2012 | |||
| 2001 | 5,205,137 | 215.0p - 561.0 | p | 2004 - 2011 | ||||
| 2000 | 3,502,266 | 464.0p - 800.0 | p | 2003 - 2010 | ||||
| 1999 | 933,426 | 500.0p - 530.0 | p | 2002 - 2009 | ||||
| 1998 | 3,455,917 | 451.0p - 515.0 | p | 2001 - 2008 | ||||
| 1997 | 413,881 | 494.5p - 508.0 | p | 2000 - 2007 | ||||
| 1996 | 81,397 | 378.0 | p | 1999 - 2006 | ||||
| 1995 | 88,750 | 339.2p - 358.4 | p | 1998 - 2005 | ||||
| 1994 | 33,002 | 213.2p - 384.0 | p | 1997 - 2004 | ||||
| 1993 | 66,212 | 282.0p - 305.6 | p | 1996 - 2003 | ||||
| 21,606,349 | ||||||||
DABS and LTIS awards(b) | 2002 | 9,955 | Nominal | 2005 - 2012 | ||||
| 2001 | 40,020 | Nominal | 2004 - 2011 | |||||
| 2000 | 13,028 | Nominal | 2003 - 2010 | |||||
| 1999 | 11,553 | Nominal | 2002 - 2009 | |||||
| 1998 | 163,288 | Nominal | 2001 - 2008 | |||||
| 1997 | 80,089 | Nominal | 2000 - 2007 | |||||
| 1996 | 93,410 | Nominal | 1999 - 2006 | |||||
| 411,343 | ||||||||
Equity participation plan(c) | 2002 | 9,338,892 | 225.0 | p | 2005 - 2011 | |||
| 2002 | 9,338,892 | Nominal | 2005 - 2011 | |||||
| 18,677,784 | ||||||||
Carlton Sharesave scheme(d) | 2002 | 2,850,449 | 209.0 | p | 2005 - 2007 | |||
| 2001 | 179,216 | 475.0 | p | 2004 - 2006 | ||||
| 2000 | 178,073 | 464.0 | p | 2003 - 2005 | ||||
| 1999 | 332,422 | 334.0 | p | 2001 - 2004 | ||||
| 3,540,160 | ||||||||
F-40
The number of Ordinary shares that may be issued in any ten year period under all of the employee schemes of the Company may not exceed more than 10% of the Ordinary share capital of the Company.
A summary of the status of the Company's share option plans as of September 30, 2002, September 30, 2001 and September 30, 2000 and changes during the years ending on those dates is presented below:
| Ordinary Shares | Options Outstanding | Weighted average Exercise Price | |||
|---|---|---|---|---|---|
| Options outstanding at September 30, 1999 | 20,403,847 | 453.0 | p | ||
| Options exercised/lapsed | (5,697,641 | ) | 410.6 | p | |
| Options granted | 5,677,055 | 580.0 | p | ||
| Options outstanding at September 30, 2000 | 20,383,261 | 500.2 | p | ||
| Options exercised/lapsed | (4,318,967 | ) | 458.7 | p | |
| Options granted | 5,952,297 | 501.8 | p | ||
| Options outstanding at September 30, 2001 | 22,016,591 | 508.8 | p | ||
| Options exercised/lapsed | (7,145,504 | ) | 512.7 | p | |
| Options granted | 29,364,549 | 152.0 | p | ||
| Options outstanding at September 30, 2002 | 44,235,636 | 271.3 | p | ||
| Exercisable at September 30, 2000 | 3,168,605 | 445.6 | p | ||
| Exercisable at September 30, 2001 | 10,572,037 | 501.4 | p | ||
| Exercisable at September 30, 2002 | 5,138,206 | 462.4 | p | ||
A summary of the status of the Company's share option plans as of September 30, 2002 analyzed according to exercise price ranges is presented below:
| | Options outstanding | Options currently exercisable | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Weighted average remaining contractual life | | ||||||||
| Range of exercise prices | Number | Weighted average exercise price | Number | Weighted average exercise price | |||||||
| Nominal | 9,750,235 | 9.01 years | — | 336,787 | — | ||||||
| 200.0p - 300.0p | 20,362,591 | 8.49 years | 223.1 | p | 49,214 | 276.3 | p | ||||
| 300.0p - 400.0p | 1,406,016 | 6.04 years | 328.0 | p | 526,357 | 333.7 | p | ||||
| 400.0p - 500.0p | 1,355,321 | 2.74 years | 468.0 | p | 721,267 | 457.6 | p | ||||
| 500.0p - 600.0p | 10,208,144 | 7.12 years | 542.2 | p | 3,169,025 | 514.3 | p | ||||
| 600.0p - 700.0p | 391,194 | 7.28 years | 602.0 | p | 188,537 | 602.0 | p | ||||
| 700.0p - 800.0p | 512,135 | 7.65 years | 770.4 | p | 147,019 | 772.0 | p | ||||
| 800.0p - 900.0p | 250,000 | 7.83 years | 800.0 | p | — | — | |||||
| 44,235,636 | 8.01 years | 271.3 | p | 5,138,206 | 462.4 | p | |||||
F-41
Details regarding the directors' awards and options relating to the executive share option, DABS, LTIS and EPP plans as at September 30, 2002 and October 1, 2001 are set out below:
| | Scheme | Options held on September 30, 2002 | Options held on October 1, 2001 | |||
|---|---|---|---|---|---|---|
| M P Green | EXEC | 28,712 | 28,712 | |||
| EXEC | 40,000 | 40,000 | ||||
| EXEC | 230,188 | 230,188 | ||||
| EXEC | 202,657 | 202,657 | ||||
| EXEC | 158,031 | 158,031 | ||||
| EXEC | 238,859 | 238,859 | ||||
| EXEC | 315,047 | 315,047 | ||||
| Sharesave | 5,164 | 5,164 | ||||
| DABS | 23,718 | 23,718 | ||||
| DABS | 20,331 | 20,331 | ||||
| DABS | 1,953 | 1,953 | ||||
| DABS | 5,411 | 5,411 | ||||
| DABS | 6,258 | 6,258 | ||||
| DABS | 19,910 | 19,910 | ||||
| LTIS | 38,675 | 38,675 | ||||
| LTIS | 28,590 | 28,590 | ||||
| LTIS | 79,075 | 79,075 | ||||
| EPP | 3,573,330 | — | ||||
G M Murphy | EXEC | 250,000 | 250,000 | |||
| EXEC | 178,253 | 178,253 | ||||
| EXEC | 235,109 | 235,109 | ||||
| Sharesave | — | 3,552 | ||||
| Sharesave | 4,545 | — | ||||
| DABS | 3,138 | 3,138 | ||||
| EPP | 2,666,664 | — | ||||
P C Murray | EXEC | 488,888 | — | |||
| Sharesave | 4,545 | — | ||||
| EPP | 1,466,664 | — |
Notes
F-42
Long-Term Incentive Share Plan ("LTIS")
The LTIS plan provided for a participant to be conditionally awarded a number of Carlton Ordinary shares with a value equating to a percentage of his base salary. The percentage was determined by the Remuneration Committee. Provided the participant remains employed by the Group for four years, the Company's performance, measured on the basis of total shareholder return (i.e. share price movement and dividends paid) against the FTSE-100 companies (TSR) over a three year performance period determines what proportion (if any) of the award will vest at the end of four years. The proportion and targets were determined by the Committee. During the period, no awards were made under the LTIS plan. It is intended that no further awards will be made in future under this plan.
Deferred Annual Bonus Share Plan ("DABS")
The plan, which operates on an annual basis, provides that a participant may choose to invest up to 50% of his/her net (i.e. after tax) annual cash bonus to purchase Carlton Ordinary shares (bonus shares). The investing participant is then conditionally awarded a number of Carlton Ordinary shares (restricted shares) with a value that is the gross (i.e. pre-tax) equivalent of the annual cash bonus so invested. Provided the bonus shares are retained for three years and the participant remains employed by the Group for four years, the restricted shares will thereafter become available to the participant.
Carlton Equity Participation Plan ("EPP")
Participation in the EPP applies to executive directors and selected senior executives. Participants invited to take part in the EPP will be required to commit Carlton shares (EPP shares) by a specified date to qualify for a matching award. Normally a participant will be entitled to commit EPP shares to a value of up to 100% of basic salary (save for the first award where the maximum EPP share commitment will be to a value of up to 200% of basic salary). A matching award will comprise both an award of free shares (in the form of a nil-price option) and an option grant over shares at market value. The extent to which a matching award will vest will depend on the participant retaining his/her EPP shares and the performance conditions relating to the matching award being satisfied. The maximum matching award will be free shares equal in number to three times the EPP shares and options (at market value) over an equal number of shares. The principal performance conditions applicable to the first awards will be measured on the basis of the Company's TSR performance against that of other major UK media companies and the FTSE-100 companies. None of the matching award will vest if the Company's TSR is below median for the media comparator group
ESOP and Quest
The Company established an employee share ownership plan (ESOP) in 1991 and a Qualifying Employee Share Ownership Trust ("Quest") in 1998. Pursuant to the requirements of the Companies Act 1985, each executive director is deemed to be interested in the shares held for the purposes of the ESOP and the Quest. The number of Ordinary shares held for the purposes of the ESOP was 1,822,172 at September 30, 2002 and 2,016,126 Ordinary shares at October 1, 2001.
The number of Ordinary shares held for the purposes of the Quest was 696,177 at September 30, 2002 and 696,177 Ordinary shares at October 1, 2001.
F-43
Note 30—Cash Flow Information
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Operating profit | £ | 58.0 | £ | 47.4 | £ | 222.1 | ||||
| Depreciation | 23.0 | 45.4 | 70.4 | |||||||
| Amortization of intangible assets | 2.8 | 2.8 | 3.2 | |||||||
| Amortization of goodwill | 16.6 | 15.0 | 3.5 | |||||||
| Inventory | 0.8 | (8.8 | ) | (10.1 | ) | |||||
| Program and film rights | 8.9 | 9.6 | (1.9 | ) | ||||||
| Accounts receivable | 12.2 | (28.6 | ) | 27.3 | ||||||
| Accounts payable | (33.5 | ) | 20.5 | 39.0 | ||||||
| Sale of current asset investments | 179.0 | 0.0 | 0.0 | |||||||
| Non-cash fixed asset impairment | 1.8 | 0.0 | 0.0 | |||||||
| Profit on sale fixed assets | (0.2 | ) | 0.0 | 0.0 | ||||||
| Net cash flow from operating activities | £ | 269.4 | £ | 103.3 | £ | 353.5 | ||||
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Interest received | £ | 43.4 | £ | 15.5 | £ | 16.3 | ||||
| Interest paid | (59.8 | ) | (47.3 | ) | (45.2 | ) | ||||
| Preference Share dividends paid | (10.5 | ) | (10.5 | ) | (18.5 | ) | ||||
| Finance lease interest | (1.6 | ) | (0.7 | ) | (0.20 | ) | ||||
| £ | (28.5 | ) | £ | (43.0 | ) | £ | (47.6 | ) | ||
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Purchase of tangible fixed assets | £ | (11.7 | ) | £ | (43.1 | ) | £ | (112.0 | ) | |
| Purchase of intangible assets, principally development | (0.2 | ) | (6.6 | ) | (9.6 | ) | ||||
| Disposal of intangible and tangible fixed assets | 0.9 | 10.5 | 7.3 | |||||||
| Loans to ONdigital/ITV Sport Channel | (96.8 | ) | (190.3 | ) | (163.5 | ) | ||||
| Other investments | (18.4 | ) | (20.9 | ) | (63.8 | ) | ||||
| £ | (126.2 | ) | £ | (250.4 | ) | £ | (341.6 | ) | ||
| | Year ended September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||||
| | (in millions) | ||||||||
| Issue of shares | £ | — | £ | 2.1 | £ | 13.2 | |||
| Issue/(repayment) of debt | 266.3 | 56.6 | 60.6 | ||||||
| £ | 266.3 | £ | 58.7 | £ | 73.8 | ||||
F-44
| | At October 1, 2000 | Cash flow (as restated) | Exchange and non-cash Movements | At September 30, 2001 (as restated) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||
| Net Funds/(Debt) | |||||||||||||
| Cash at bank and in hand | £ | 341.8 | £ | (90.9 | ) | £ | 5.6 | £ | 256.5 | ||||
| Overdrafts | (168.6 | ) | 148.5 | — | (20.1 | ) | |||||||
| 57.6 | |||||||||||||
| Loan notes and short-term borrowings | (30.1 | ) | 28.0 | — | (2.1 | ) | |||||||
| Loans due within one year | (45.5 | ) | (7.3 | ) | (2.4 | ) | (55.2 | ) | |||||
| 20.7 | |||||||||||||
| Loans due after more than one year | (499.2 | ) | (59.8 | ) | — | (559.0 | ) | ||||||
| Convertible debt | (97.2 | ) | — | (0.6 | ) | (97.8 | ) | ||||||
| Finance lease creditors | (11.4 | ) | (17.5 | ) | — | (28.9 | ) | ||||||
| (77.3 | ) | ||||||||||||
| Net Funds/(Debt) | £ | (510.2 | ) | £ | 1.0 | £ | 2.6 | £ | (506.6 | ) | |||
| | At October 1, 2001 (as restated) | Cash flow | Exchange and non-cash Movements | At September 30, 2002 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||||||
| Net Funds/(Debt) | |||||||||||||
| Cash at bank and in hand | £ | 256.5 | £ | 302.6 | £ | (6.2 | ) | £ | 552.9 | ||||
| Overdrafts | (20.1 | ) | 20.1 | — | — | ||||||||
| 322.7 | |||||||||||||
| Loan notes and short-term borrowings | (2.1 | ) | 1.2 | 0.9 | — | ||||||||
| Loans due within one year | (55.2 | ) | 55.2 | (35.0 | ) | (35.0 | ) | ||||||
| 56.4 | |||||||||||||
| Loans due after more than one year | (559.0 | ) | (323.2 | ) | 27.4 | (854.8 | ) | ||||||
| Convertible debt | (97.8 | ) | — | 6.5 | (91.3 | ) | |||||||
| Finance lease creditors | (28.9 | ) | (2.8 | ) | — | (31.7 | ) | ||||||
| (326.0 | ) | ||||||||||||
| Net Funds/(Debt) | £ | (506.6 | ) | £ | 53.1 | £ | (6.4 | ) | £ | (459.9 | ) | ||
Non-cash movements principally comprise loan reclassifications.
F-45
Note 31—Acquisition and Disposal of Businesses
| | Cash inflow/(outflow) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Purchase of subsidiary undertakings | £ | — | £ | (217.5 | ) | £ | (112.0 | ) | ||
| Cash less overdrafts acquired with subsidiaries | — | (8.6 | ) | 0.6 | ||||||
| Investment in joint ventures and associates | (31.0 | ) | — | (14.0 | ) | |||||
| Disposal of subsidiaries | 23.2 | 499.6 | 35.3 | |||||||
| £ | (7.8 | ) | £ | 273.5 | £ | (90.1 | ) | |||
Net cash outflow in 2002 of £7.8 million from acquisitions and disposals comprises £31.0 million for the acquisition of Screenvision Holdings (Europe) Limited and £23.2 million further post-acquisition receipts from the disposal of Technicolor in 2001.The Group acquired a 50% interest in Screenvision Holdings (Europe) Limited in June 2002. The goodwill held in this joint venture entity is stated after provisional fair value adjustments.
In 2001 the Group acquired subsidiary undertakings for a total net consideration of £158.0 million, comprising cash consideration, the Group's 20% interest in Meridian Broadcasting Limited and acquisition expenses offset by a purchase price adjustment. In 2001 the Group disposed of Technicolor. In the transaction the Group received $1.35 billion in net cash and loan notes and received 15.5 million Thomson shares on March 16, 2002 representing 5.5% of Thomson's issued share capital.
Note 32—Commitments
At September 30, 2002, the Company had contracted for capital expenditure totaling approximately £3.1 million (2001: £2.8 million, 2000: £22.7 million).
The Company leases certain properties under operating leases. The minimum payments for operating leases having initial or remaining non-cancelable terms in excess of one year are as follows:
| | (in millions) | ||
|---|---|---|---|
| 2003 | £ | 8.5 | |
| 2004 | 7.4 | ||
| 2005 | 5.9 | ||
| 2006 | 5.3 | ||
| 2007 | 5.1 | ||
| Thereafter | 43.0 | ||
| £ | 75.2 | ||
The Company and certain of its UK subsidiaries have entered into cross-guarantees in connection with the Company's UK banking arrangements. At September 30, 2002 subsidiary overdrafts amounting to £16.6 million (2001: £38.1 million, 2000: £25.8 million) were covered by guarantees given by the Company.
F-46
Contingent liabilities exist in respect of warranties and indemnities given to Thomson pursuant to the Technicolor disposal agreement. Provision has been made against any anticipated payments.
The Company has pending claims incurred in the normal course of business which, in the opinion of management, can be disposed of without material effect on the accompanying consolidated financial statements.
Note 33—Related party transactions
The Group entered into the following material transactions with related parties during the year:
| | 2002 | 2001 | 2000 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | ||||||||
| Sales to joint ventures | £ | 3.9 | £ | 13.1 | £ | 16.0 | |||
| Sales to associated companies | 2.8 | — | — | ||||||
| Purchases from joint ventures | 8.2 | 7.3 | 10.6 | ||||||
| Purchases from associates | 19.4 | 20.6 | 17.7 | ||||||
Amounts owed by joint ventures | — | 0.9 | 3.0 | ||||||
| Loans owed by joint ventures | 19.7 | — | — | ||||||
| Amounts owed by associated undertakings | 0.7 | — | — | ||||||
| Loans owed by associated undertakings | 0.2 | 30.9 | 19.1 | ||||||
| Amounts owed to joint ventures | 1.8 | 1.1 | 0.7 | ||||||
| Amounts owed to associated undertakings | 1.6 | 1.8 | 1.5 | ||||||
All transactions arose in the normal course of business. They include sale of television advertising time, advertising commission, program sales and the purchase of news programs and transmission.
In 2002 the Group made loans to ONdigital (including ITV Sport Channel) totaling £82.7 million (2001: £190.3 million, 2000: £163.5 million). Full provision has been made against all ONdigital (including ITV Sport Channel) loans held at September 30, 2002.
F-47
Note 34—Principal Operating Subsidiaries
Set out in the table below are the principal operating companies as at September 30, 2002. All the companies are wholly owned and are incorporated and operating in the United Kingdom except as noted.
| Subsidiary undertakings | Country of incorporation/establishment | |
|---|---|---|
| Action Time (UK) Limited* | ||
| Andre Deutsch Limited | ||
| Carlton Active Limited** | ||
| Carlton Books Limited | ||
| Carlton Broadcasting Limited* | ||
| Carlton Film Distributors Limited | ||
| Carlton Interactive Media Limited | ||
| Carlton International Media, Inc. (trading as Carlton America)* | USA | |
| Carlton International Media Limited* | ||
| Carlton Productions Limited** | ||
| Carlton Media Sales Limited** | ||
| Carlton Screen Advertising Limited* | ||
| Carlton Television Limited* | ||
| Carlton 021 Limited** | ||
| Carlton Visual Entertainment Limited* | ||
| Central Independent Television Limited* | ||
| Hamdon Entertainment* | USA | |
| HTV Group Limited* | ||
| ITC Distribution LLC (also trading as Carlton Productions LLC)* | USA | |
| ITC Entertainment Group Limited* | ||
| The Moving Picture Company Limited* | ||
| Planet 24 Productions Limited* | ||
| SelecTV Cable Limited* | ||
| Superhire Limited | ||
| Westcountry Television Limited* |
*Indirect holdings.
**Trading as divisions of subsidiary companies.
Note 35—Subsequent Events
In October 2002, the Company announced a proposed merger with Granada to progress further consolidation of the ITV network. The merger is conditional upon clearance by regulatory and competition authorities. Following the merger announcement, the Company and Granada made a detailed submission to the OFT for regulatory consideration.
Note 36—Summary of Differences between UK and US Generally Accepted Accounting Principles
(i) Differences giving rise to accounting adjustments
The Company's financial statements are prepared in accordance with UK GAAP, which differ in certain significant respects from US GAAP. The material differences relate principally to the following items and the effect of the necessary adjustments is shown in the tables below.
F-48
EFFECT ON NET INCOME OF DIFFERENCES BETWEEN UK GAAP AND US GAAP
| | | | Year ended September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | 2002 | 2001 | 2000 | |||||||||
| | | | (in millions) | |||||||||||
| Net income/(loss) under UK GAAP (profit after tax) | £ | (156.0 | ) | £ | (390.0 | ) | £ | (277.4 | ) | |||||
| Less: Preference Share dividends | (10.5 | ) | (10.5 | ) | (11.0 | ) | ||||||||
| Net income/(loss) from operations attributable to holders of | ||||||||||||||
| Ordinary shares under UK GAAP | (166.5 | ) | (400.5 | ) | (288.4 | ) | ||||||||
| Effect on net income of US GAAP adjustments: | ||||||||||||||
| (a) | Goodwill and purchase accounting in respect of acquisitions | (38.7 | ) | (62.2 | ) | (78.3 | ) | |||||||
| (a) | Goodwill and other adjustments on sale or termination of businesses | (23.8 | ) | 163.3 | 228.7 | |||||||||
| (b) | Financial instruments | 91.8 | (4.8 | ) | 7.0 | |||||||||
| (c) | Investments in equity securities | (127.6 | ) | — | — | |||||||||
| (d) | Impairment of investment in own shares | 8.2 | — | — | ||||||||||
| (e) | Stock compensation | (7.8 | ) | (9.3 | ) | (11.6 | ) | |||||||
| (f) | Pensions | (1.8 | ) | 0.1 | (0.3 | ) | ||||||||
| (g) | Program production and development | (3.5 | ) | (3.2 | ) | 9.5 | ||||||||
| (h) | Acquired film libraries | (1.4 | ) | — | — | |||||||||
| (i) | Lease provision | 3.4 | — | — | ||||||||||
| (j) | Subscriber acquisition costs | 9.9 | (1.7 | ) | 3.0 | |||||||||
| (k) | Intangible assets | — | 3.3 | (2.5 | ) | |||||||||
| (l) | Disposal of Meridian | — | 9.2 | — | ||||||||||
| (m) | Amortization of the 5.5p Preference share premium over redemption price | — | — | (2.7 | ) | |||||||||
| (n) | Taxation effects on the foregoing adjustments | (2.0 | ) | 6.4 | 4.9 | |||||||||
| Net income/(loss) before cumulative effect of change in accounting principle | (259.8 | ) | (299.4 | ) | (130.7 | ) | ||||||||
| Cumulative effect of change in accounting principle (g)(h) | (20.1 | ) | — | — | ||||||||||
| Net income/(loss) attributable to holders of Ordinary shares in accordance with US GAAP | (279.9 | ) | (299.4 | ) | (130.7 | ) | ||||||||
| Other comprehensive income/(loss): | ||||||||||||||
| (c) | Unrealized gains or losses on equity securities | (53.2 | ) | (192.9 | ) | — | ||||||||
| (c) | Reclassification adjustment for other than temporary loss on investments in equity securities | 127.6 | — | — | ||||||||||
| (f) | Minimum pension liability | (140.1 | ) | — | — | |||||||||
| Foreign currency translation adjustments | (7.8 | ) | 19.1 | 29.9 | ||||||||||
| (n) | Taxation effects on the foregoing adjustments | (15.4 | ) | 53.5 | (6.9 | ) | ||||||||
| (88.9 | ) | (120.3 | ) | 23.0 | ||||||||||
| Comprehensive income/(loss) | £ | (368.8 | ) | £ | (419.7 | ) | £ | (107.7 | ) | |||||
| Net income/(loss) is comprised of: | ||||||||||||||
| Continuing operations | £ | (83.2 | ) | £ | (109.3 | ) | £ | 28.4 | ||||||
| Discontinued operations | ||||||||||||||
| Income/(loss) from discontinued operations | (86.1 | ) | (126.4 | ) | (83.5 | ) | ||||||||
| Loss from disposal of discontinued operations | (110.6 | ) | (63.7 | ) | (75.6 | ) | ||||||||
| (196.7 | ) | (190.1 | ) | (159.1 | ) | |||||||||
| Net income/(loss) attributable to holders of Ordinary shares in accordance with US GAAP | £ | (279.9 | ) | £ | (299.4 | ) | £ | (130.7 | ) | |||||
F-49
| | Year ended September 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||
| | (in pence) | ||||||
| Basic earnings/(loss) per share (pence): | |||||||
| Continuing operations | (12.4 | ) | (16.3 | ) | 4.4 | ||
| Discontinued operations | (29.3 | ) | (28.4 | ) | (24.6 | ) | |
| Basic earnings/(loss) per Ordinary share | (41.7 | ) | (44.7 | ) | (20.2 | ) | |
| Diluted earnings/(loss) per share (pence): | |||||||
| Continuing operations | (12.4 | ) | (16.3 | ) | 4.2 | ||
| Discontinued operations | (29.3 | ) | (28.4 | ) | (23.5 | ) | |
| Dilutive earnings/(loss) per Ordinary share | (41.7 | ) | (44.7 | ) | (19.3 | ) | |
| Basic weighted average number of Ordinary shares in issue | 670.7 | 670.0 | 647.5 | ||||
| Diluted weighted average number of Ordinary shares outstanding | 670.9 | 671.8 | 676.3 | ||||
The earnings per Ordinary share figures have been computed by dividing net income after deducting Preference share dividends, by the weighted average number of Ordinary shares outstanding in the fiscal year.
Share options totaling 44,235,636 and 22,016,591were not included in the US GAAP calculation of diluted earnings per share in 2002 and 2001 respectively, because their inclusion is anti-dilutive. See Note 12-Earnings per share for the reconciliation between basic weighted average number of Ordinary shares in issue and diluted weighted average number of Ordinary shares outstanding for 2000.
F-50
CUMULATIVE EFFECT ON SHAREHOLDERS' EQUITY
OF DIFFERENCES BETWEEN UK GAAP AND US GAAP
| | | At September 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2002 | 2001 (as restated) | 2000 (as restated) | |||||||||
| | | (in millions) | |||||||||||
| Shareholders' equity under UK GAAP | £ | 433.5 | £ | 663.7 | £ | 446.8 | |||||||
| Effect on shareholders' equity of US GAAP adjustments: | |||||||||||||
| (a) | Goodwill and US purchase accounting in respect of acquisitions | 473.4 | 535.9 | 1,084.6 | |||||||||
| (b) | Financial instruments | 85.9 | (6.0 | ) | (1.1 | ) | |||||||
| (c) | Investments in equity securities | (246.1 | ) | (135.0 | ) | — | |||||||
| (d) | Investment in own shares | (2.5 | ) | (7.0 | ) | (8.7 | ) | ||||||
| (f) | Pensions | (70.6 | ) | 71.3 | 55.6 | ||||||||
| (g) | Program production and development | — | 14.4 | 17.6 | |||||||||
| (h) | Acquired film libraries | (10.6 | ) | — | — | ||||||||
| (i) | Lease provision | 3.4 | — | — | |||||||||
| (j) | Subscriber acquisition costs | — | (9.9 | ) | (8.2 | ) | |||||||
| (o) | Dividends payable | 33.5 | 33.6 | 67.1 | |||||||||
| (p) | 6.5p Preference shareholders' equity | (163.6 | ) | (163.6 | ) | (163.8 | ) | ||||||
| Other | — | — | (3.4 | ) | |||||||||
| (n) | Taxation effects on the foregoing adjustments (as restated) | 44.4 | 6.8 | 0.5 | |||||||||
| Shareholders' equity in accordance with US GAAP (as restated) | £ | 580.6 | £ | 1,004.2 | £ | 1,487.0 | |||||||
| Accumulated other comprehensive income: | |||||||||||||
| (c) | Unrealized losses on equity securities (net of related tax) | £ | (118.5 | ) | £ | (135.0 | ) | £ | — | ||||
| (f) | Minimum pension liability (net of related tax) | (98.1 | ) | — | — | ||||||||
| Foreign currency translation adjustments (net of related tax) | (10.1 | ) | (2.8 | ) | (17.5 | ) | |||||||
| £ | (226.7 | ) | £ | (137.8 | ) | £ | (17.5 | ) | |||||
Recently adopted US pronouncements
Statement of Position 00-2, "Accounting by Producers or Distributors of Films", was issued on June 12, 2000. Adopted by the Company during 2002, this Statement of Position ("SoP") provides detailed revenue recognition guidance for all kinds of films, except where specifically noted, and is applicable to all producers or distributors that own or hold rights to distribute or exploit films. See Note 36(h) for the impact of the adoption of this SoP in 2002.
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In April 2002, the FASB issued FAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Adopted by the Company during 2002, FAS No. 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and classified as an extraordinary item, net of tax, and makes certain other technical corrections. Accordingly, the Company recorded the gains and losses from the extinguishment of debt in income from continuing operations.
Notes
Under UK GAAP, for acquisitions arising before September 30, 1998 the Group charged goodwill arising on such business combinations treated as purchases directly to reserves. If an acquired business were subsequently sold, the full amount of the original purchased goodwill was charged to income in determining the gain or loss on disposal. From October 1, 1998 goodwill arising on acquisitions under UK GAAP has been capitalized as an intangible asset and is written off over periods of up to 20 years. Under US GAAP, intangibles, including goodwill, in respect of business combinations treated as purchases would be charged against income over their estimated lives. Any intangible relating to a business sold in the year is written off in determining the profit or loss on disposal. In determining the differences between UK GAAP and US GAAP set forth below, US GAAP has been applied using amortization periods in respect of goodwill of up to 40 years. Goodwill useful lives and carrying values are reviewed for impairment on the occurrence of any event or change in circumstances indicating that there has been a decline in the carrying value or change in the useful life of goodwill.
During 2000 the Company's Products division was sold, resulting in a write off of goodwill in accordance with UK GAAP of £300.0 million as compared to £71.0 million under US GAAP. The UK GAAP charge exceeds the US GAAP amount due primarily to the amortization of goodwill as required by US GAAP, and the impairment charge booked in 1999.
In 2001 the Technicolor division was sold and a UK GAAP goodwill charge of £630.2 million was made against net income, a further £17.1 million related to the disposal of Meridian and was made against other recognized gains. Under US GAAP, the goodwill written off on disposal was £484.0 million.
ONdigital ceased operations in 2002 resulting in a write off of goodwill in accordance with US GAAP of £23.8million.
Under UK GAAP the value of underlying financial instruments (including forward exchange contracts) is not recorded in the financial statements to the extent that the financial instruments are considered hedges. Under US GAAP, all financial instruments (such as derivatives) must be recorded on the balance sheet and carried at their fair value.
The Company applies Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133, and Statement of
F-52
Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133 (referred to hereafter as "FAS 133"). FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to hereafter as derivatives) and for hedging. FAS 133 became effective for the Company on October 1, 2000.
FAS 133 requires recognition of all derivatives on the balance sheet at fair value, regardless of the hedging relationship designation. Derivative instruments must be classified as non-hedging transactions or hedging transactions (either fair value hedges, cash flow hedges, foreign currency fair value hedges, foreign currency cash flow hedges or hedges of the net investment in a foreign operation). The accounting treatment of derivatives instruments and hedged items depends on this classification.
Changes in the fair value of derivatives that are designated in qualifying, highly effective, fair-value hedging relationships are recognized in current period earnings along with fair value changes of the hedged item attributable to the hedged risk. Changes in the fair value of derivatives designated in qualifying, highly effective, cash-flow hedging relationships are recorded in other comprehensive income (outside earnings) and are recognized in earnings when the hedged item affects earnings. Any hedge ineffectiveness is recorded in current period earnings. Changes in the fair value of a derivative that is designated as a foreign-currency hedge is recorded in either current-period earnings or other comprehensive income, depending on whether the hedging relationship satisfies the criteria for a fair-value or cash-flow hedge. If a derivative is used as a hedge of a net investment in a foreign operation, the changes in the derivative's fair value, to the extent that the derivative is effective as a hedge, are recorded in other comprehensive income as part of the cumulative translation adjustment. Changes in the fair value of derivative instruments that are not designated and do not qualify as hedging instruments are recognized in earnings when they occur.
Certain derivative transaction, while providing economic hedges under the Company's risk management policies, do not qualify for hedge accounting under FAS 133. Under US GAAP, the Company recognizes the change in fair value for all derivatives immediately in earnings because hedge accounting is not permissible for such hedging relationships. This resulted in an additional £14.4 million net gain in the fair value of financial instruments under US GAAP at September 30, 2002 (2001: £4.8 million loss, 2000: £7.0 million gain). See Note 26(b)-Financial Instruments.
Derivative financial instruments embedded within host contracts are recorded separately in the financial statements at their fair value under US GAAP. The exchangeable bond issued in January 2002 includes embedded put and call options relating to the conversion of the bond into Thomson shares. The movement between the fair value of these embedded options at the date of bond issue and the year end totaled £88.8 million which is charged against net income under US GAAP. The movement in the fair value of the option was caused by the decline in the Thomson share price
Under UK GAAP, the Company accounts for fixed asset investments other than associated companies at cost less any amounts written off to reflect a permanent diminution in value. Under US GAAP, SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities" requires such investments to be held at fair value. Temporary gains or losses from instruments classified as available for sale are excluded from earnings and recorded within other comprehensive income or loss, which is presented as a
F-53
separate component of shareholders' equity. Other than temporary gains or losses are recorded in earnings. Realised gains will not be recovered until the investment is sold.
Under UK GAAP, the Company's shares held by the ESOP and QUEST are recorded at cost less provision for permanent diminution in value and reflected as fixed asset investments in the balance sheet. Under US GAAP, the Company's shares held by the ESOP and QUEST are recorded at cost and are reflected as a reduction of shareholders' equity.
In 2002, these shares were assessed against the year end share price in accordance with UK GAAP and a provision for impairment of £8.2 million was made. Under US GAAP, these shares are held at cost and recorded as a reduction in shareholders' equity. There is no requirement under US GAAP to review these shares for impairment.
Under UK GAAP, the cost of stock options is only recognized in net income to the extent the options were granted at a value beneath the market value on the date of grant. Under US GAAP, in accordance with Financial Accounting Standards Board Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), a fair value-based method of accounting for employee stock-based awards is applied. Under SFAS 123, compensation cost is measured at the date awards are granted and is recognized through charges to expense over the employees' service period. In applying SFAS 123, the Company has estimated the fair value of options granted, using the Black-Scholes option pricing model with the following assumptions:
For grants made during 2002:
| Option plan | Weighted Average Exercise Price | Weighted Average Fair Value | |||
|---|---|---|---|---|---|
| Sharesave Plans (options granted at a premium to market price) | 209 | p | 55 | p | |
| Executive Plans (options granted at market price) | 229 | p | 61 | p | |
| DABS and EPP (awards granted at a discount to market price) | Nominal | 106 | p |
There is no equity divergence for stock compensation as under US GAAP stock compensation is shown as deferred compensation in shareholders' equity and therefore offsets the stock compensation net income divergence.
F-54
Differences between the UK and US GAAP charges arise from the requirement to use different actuarial methods and the method of amortizing surpluses or deficits. A minimum pension liability is recognized under US GAAP when the scheme liabilities (measured as the accumulated benefit obligation) exceed the fair value of scheme assets. This occurred in 2002, resulting in a £140.1 million movement through comprehensive income. A minimum pension liability is not required to be recognized under current UK GAAP requirements.
Prior to the adoption of Statement of Position 00-2 ("SOP"), "Accounting by Producers or Distributors of Films in 2002", there was a GAAP difference relating to the revenue recognition of film rights. The adoption of SOP 00-2 in 2002 resulted in a £10.9 million cumulative adjustment for change in accounting policy. The £3.5 million net income GAAP difference for 2002 relates to the final unwinding of an acquired films amortization divergence no longer required due to the change in policy under UK GAAP which now brings the amortization policy in line with US GAAP.
Libraries acquired are valued at fair value on acquisition on the basis of projected cash flows and written off, under UK GAAP, over a period of up to 40 years. Under US GAAP (SOP 00-2), the maximum amortization period permitted is 20 years. The adoption of SOP 00-2 resulted in a £9.2 million cumulative adjustment for change in accounting policy relating to the period up to October 1, 2002 and a £1.4 million charge for fiscal year 2002.
Onerous lease provisions can only be made under US GAAP if the property has ceased to be used and is available to be marketed where the market value is lower than the value of the Company's lease obligation.
Under UK GAAP certain subscriber acquisition costs within ONdigital have been carried forward as prepayments and are expensed over periods of up to one year. Under US GAAP such costs are written off as incurred. ONdigital was closed during 2002 resulting in the unwinding of this GAAP divergence.
Certain assets capitalized under UK GAAP were written-off under US GAAP. The entity in which the UK GAAP intangible assets were held has been disposed of in 2001. As a result no further divergences in respect of this item are expected.
The Company disposed of its equity holding in Meridian during 2001. The gain on disposal was recorded through reserves under UK GAAP and through income under US GAAP.
F-55
The 5.5p Preference shares were issued in 1994 at £1.225 per share at a premium over the redemption price of £1.00, resulting in a total premium of £47 million. Under UK GAAP, the amortization of this premium was credited against the annual cash cost of the 5.5p Preference share dividends over the period to the first redemption date in July 2000 when redemption is entirely at the Company's discretion. Under US GAAP, amortization of the premium to redemption would not be dealt with as an adjustment to dividends on Preference shares; rather it would be treated as a movement in retained earnings. The remaining 5.5p Preference shares were either fully converted or redeemed at £1 during the 2000 fiscal year. Under UK GAAP, the preference shares are included in shareholders' equity. Because the preference shares are manditorily redeemable by the Company at the end of the term for cash, under US GAAP the preference shares are not considered part of shareholders' equity.
The differences between UK and US GAAP are tax-effected where applicable at the Company's relevant tax rate.
During the year ended September 30, 2002 the Company determined that deferred tax arising on US GAAP differences in connection with the acquisition of a business prior to September 30, 2000 had been incorrectly calculated. Accordingly, the Company has restated "Taxation effects on the foregoing adjustments" resulting in shareholders' equity in accordance with US GAAP being restated from £1,454.3 million, £971.5 million and £547.9 million to £1,487.0 million, £1,004.2 million and £580.6 million as at September 30, 2000, 2001 and 2002, respectively. There is no effect on net income/(loss) in accordance with US GAAP for all periods presented.
Under US GAAP, at September 30, 2002, there is a gross deferred tax asset of £5.6 million offset by a valuation allowance of £5.1 million.
Under UK GAAP, final Ordinary share dividends are provided for in the fiscal year in respect of which they are recommended by the Board of Directors for approval by the shareholders. Under US GAAP, such dividends are not provided for until the fiscal year in which they have been declared and notice given to the shareholders.
Under UK GAAP, the 6.5p Preference shares are classified as shareholders' equity. Under US GAAP, they are classified as debt.
Current assets under UK GAAP include amounts which fall due after more than one year. Under US GAAP, such assets would be reclassified as non-current assets. See Note 18 of Notes to Consolidated Financial Statements.
F-56
Under US GAAP, exceptional items identified in the Company's UK GAAP Income Statement would be treated as part of income from continuing operations.
F-57
Other comprehensive income is reported by the Company in the reconciliation table of net income to US GAAP and in the components of shareholders' equity for US GAAP purposes.
(ii) Additional US GAAP disclosures
Following the sale of Technicolor in March 2001 and the disposal of digital media businesses in 2002, the Company restructured its reportable segments to reflect the importance of the remaining businesses. As a result the Company changed its reportable segments from Carlton Media, Digital Media, Other and Discontinued operations to Broadcasting, Screen Advertising, Content, Other and Discontinued operations.
Set out in the table below is UK GAAP information for the Company's US GAAP reportable segments.
| Year ended September 30, 2002 | ||||||||||||||||||||||
| | Broadcasting | Screen Advertising | Content | Other | Discontinued Operations | Exceptional Items | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||||||||
| Sales including intra-group | £ | 746.7 | £ | 60.1 | £ | 185.0 | £ | — | £ | — | £ | — | £ | 991.8 | ||||||||
| Intra-group sales | (7.3 | ) | — | (19.9 | ) | — | — | — | (27.2 | ) | ||||||||||||
| Net sales | 739.4 | 60.1 | 165.1 | — | — | — | 964.6 | |||||||||||||||
Operating income | 49.2 | 7.0 | 5.8 | (8.8 | ) | — | 4.8 | 58.0 | ||||||||||||||
| Share of operating results of joint ventures and associates | (2.1 | ) | (3.4 | ) | — | — | (101.7 | ) | — | (107.2 | ) | |||||||||||
Total assets | 694.7 | 168.9 | 150.2 | 877.7 | — | — | 1,891.5 | |||||||||||||||
| Year ended September 30, 2001 | ||||||||||||||||||||||
| | Broadcasting | Screen Advertising | Content | Other | Discontinued Operations | Exceptional Items | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||||||||
| Sales including intra-group | £ | 788.0 | £ | 57.4 | £ | 215.8 | £ | 28.3 | £ | 561.4 | £ | — | £ | 1,650.9 | ||||||||
| Intra-group sales | (15.3 | ) | — | (34.1 | ) | — | — | — | (49.4 | ) | ||||||||||||
| Net sales | 772.7 | 57.4 | 181.7 | 28.3 | 561.4 | — | 1,601.5 | |||||||||||||||
Operating income | 67.1 | 5.9 | (2.9 | ) | (13.3 | ) | 43.0 | (52.4 | ) | 47.4 | ||||||||||||
Share of operating results of joint ventures and associates | (8.0 | ) | (0.4 | ) | — | — | (185.6 | ) | — | (194.0 | ) | |||||||||||
Total assets | 678.9 | 142.8 | 198.7 | 786.2 | 65.4 | — | 1,872.0 | |||||||||||||||
F-58
| Year ended September 30, 2000 | ||||||||||||||||||||||
| | Broadcasting | Screen Advertising | Content | Other | Discontinued Operations | Exceptional Items | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | |||||||||||||||||||||
| Sales including intra-group | £ | 764.7 | £ | 47.3 | £ | 208.9 | £ | 21.6 | £ | 1,075.1 | £ | — | £ | 2,117.6 | ||||||||
| Intra-group sales | (22.6 | ) | — | (32.2 | ) | — | — | — | (54.8 | ) | ||||||||||||
| Net sales | 742.1 | 47.3 | 176.7 | 21.6 | 1,075.1 | — | 2,062.8 | |||||||||||||||
Operating income | 159.5 | 6.3 | (14.4 | ) | (9.2 | ) | 91.0 | (11.1 | ) | 222.1 | ||||||||||||
Share of operating results of joint ventures and associates | 1.4 | — | — | — | (142.5 | ) | — | (141.1 | ) | |||||||||||||
Total assets | 367.8 | 95.3 | 173.2 | 989.4 | 380.6 | — | 2,006.3 | |||||||||||||||
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Net sales: | ||||||||||
| Products | £ | 13.6 | £ | 363.3 | £ | 623.0 | ||||
| Services | 933.0 | 1,238.2 | 1,439.8 | |||||||
| £ | 946.6 | £ | 1,601.5 | £ | 2,062.8 | |||||
Cost of sales: | ||||||||||
| Products | £ | 10.5 | £ | 282.0 | £ | 477.3 | ||||
| Services | 687.4 | 928.5 | 1,001.9 | |||||||
| £ | 697.9 | £ | 1,210.5 | £ | 1,479.2 | |||||
The decrease in the above figures in 2002 and 2001 is due to sale of the Technicolor businesses in 2001.
In common with other UK broadcasters, the Company enters into barter transactions. Television airtime is exchanged for radio airtime or barter credits. Revenues and expenses from barter transactions are recorded on the same basis as other airtime sales, except for the utilization of barter credits which can be over a number of years.
Barter transactions totaled no more than 0.5% of revenues or operating expenses in 2002, 2001 or 2000.
F-59
An allowance for doubtful accounts is provided when accounts are determined to be uncollectable. A summary of the changes in the Company's allowance for doubtful accounts for the years ended 2000, 2001 and 2002 follows:
Valuation and Qualifying Accounts
| | | Additions/Disposals | | | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Description | Balance at beginning of year | Charged to costs and expenses | Charged to other accounts(i) | Deduc- tions(ii) | Balance at end of year | |||||||||||
| | (in millions) | |||||||||||||||
| Year ended September 30, 2000: | ||||||||||||||||
| Allowance for doubtful accounts (deducted from accounts receivable) | £ | 10.3 | £ | 3.5 | £ | (1.3 | ) | £ | (1.0 | ) | £ | 11.5 | ||||
| Year ended September 30, 2001: | ||||||||||||||||
| Allowance for doubtful accounts (deducted from accounts receivable) | £ | 11.5 | £ | 1.1 | £ | (10.2 | ) | £ | (0.2 | ) | £ | 2.2 | ||||
| Year ended September 30, 2002: | ||||||||||||||||
| Allowance for doubtful accounts (deducted from accounts receivable) | £ | 2.2 | £ | 3.4 | £ | — | £ | (0.3 | ) | £ | 5.3 | |||||
The funded status and reconciliation to the balance sheet of the three principal UK benefit-based plans per US GAAP are as follows:
| | At September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Accumulated benefit obligation | £ | 434.6 | £ | 85.4 | £ | 297.5 | ||||
| Fair value of plan assets | £ | 357.1 | £ | 394.9 | £ | 403.6 | ||||
| Projected benefit obligation | (481.5 | ) | (422.9 | ) | (337.5 | ) | ||||
| Funded status | (124.4 | ) | (28.0 | ) | 66.1 | |||||
| Unrecognized prior service costs | 2.8 | 3.1 | 2.9 | |||||||
| Unrecognized gain/(loss) | 187.0 | 94.8 | (14.3 | ) | ||||||
| Net pension asset | £ | 65.4 | £ | 69.9 | £ | 54.7 | ||||
F-60
The pension cost for the three principal UK benefit-based plans have been computed as follows:
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | |||||||
| | (in millions) | |||||||||
| Service cost | £ | 7.1 | £ | 8.5 | £ | 9.2 | ||||
| Interest cost | 25.0 | 25.1 | 20.0 | |||||||
| Expected return on assets | (27.2 | ) | (37.4 | ) | (29.1 | ) | ||||
| Amortization of prior service cost | 0.3 | 0.3 | 0.3 | |||||||
| Recognized net actuarial (gain)/loss | 4.1 | — | — | |||||||
| SFAS88 (gain)/loss | 0.1 | 5.7 | (0.3 | ) | ||||||
| Pension charge/(credit) | £ | 9.4 | £ | 2.2 | £ | 0.1 | ||||
The change during the period in the projected benefit obligation of the three principal UK benefit based plans is as follows:
| | (in millions) | |||
|---|---|---|---|---|
| Benefit obligation as at October 1, 2000 | £ | 337.5 | ||
| Effect of acquisitions | 93.8 | |||
| Service cost | 8.5 | |||
| Interest cost | 25.1 | |||
| Plan participants' contributions | 3.2 | |||
| Actuarial (gain)/loss | (4.7 | ) | ||
| Benefits paid | (19.2 | ) | ||
| Scheme amendments | 0.6 | |||
| Curtailments | (3.3 | ) | ||
| Settlements | (22.3 | ) | ||
| Special termination benefits | 3.7 | |||
| Benefit obligation as at September 30, 2001 | £ | 422.9 | ||
| Effect of acquisitions | £ | — | ||
| Service cost | 7.1 | |||
| Interest cost | 25.0 | |||
| Plan participants' contributions | 3.0 | |||
| Actuarial (gain)/loss | 42.5 | |||
| Benefits paid | (19.1 | ) | ||
| Special termination benefits | 0.1 | |||
| Benefit obligation as at September 30, 2002 | £ | 481.5 | ||
F-61
The change during the period in the plan assets of the three principal UK benefit-based plans is as follows:
| | (in millions) | |||
|---|---|---|---|---|
| Fair value of plan assets as at October 1, 2000 | £ | 403.6 | ||
| Effect of acquisitions | 106.7 | |||
| Actual return on plan assets | (81.7 | ) | ||
| Employer contribution | 4.6 | |||
| Plan participants' contributions | 3.2 | |||
| Benefits paid | (19.2 | ) | ||
| Settlements | (22.3 | ) | ||
| Fair value of plan assets as at September 30, 2001 | £ | 394.9 | ||
| Actual return on plan assets | £ | (26.6 | ) | |
| Employer contribution | 4.9 | |||
| Plan participants' contributions | 3.0 | |||
| Benefits paid | (19.1 | ) | ||
| Fair value of plan assets as at September 30, 2002 | £ | 357.1 | ||
The principal assumptions made in determining the fair value of plan assets and the projected benefit obligations are as follows:
| | At September 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2002 | 2001 | 2000 | ||||
| Weighted average discount rate | 5.50 | % | 6.00 | % | 6.25 | % | |
| Rate of compensation increase | 3.75 | % | 4.00 | % | 5.50 | % | |
| Pension increases on benefits accrued post April 5, 1997 | 2.50 | % | 2.67 | % | 3.00 | % | |
| Weighted average long-term rate of return on plan assets | 6.42 | % | 7.20 | % | 8.00 | % | |
The pension cost under SFAS 87, "Employers' Accounting for Pensions", for the three fiscal years ended September 30, 2002 would have been:
| Fiscal year | (in millions) | ||
|---|---|---|---|
| 2000 | £ | 3.1 | |
| 2001 | £ | 8.1 | |
| 2002 | £ | 9.4 | |
The totals above for 2000 and 2001 include pension costs of £0.3 million and £5.9 million respectively, from the Technicolor US based defined benefit plan. The Technicolor group of companies was sold in March 2001.
Under UK GAAP, the Company presents its cash flows under the following classifications: (a) operating activities; (b) returns on investments and servicing of finance; (c) taxation; (d) capital
F-62
expenditure and financial investment; (e) acquisitions and disposals; (f) equity dividends paid; (g) management of liquid resources; and (h) financing. US GAAP requires only three categories of cash flow activity: (a) operating; (b) investing; and (c) financing.
Cash flows arising from taxation and returns on investments and servicing of finance under UK GAAP would, with the exception of dividends paid, be included as operating activities under SFAS 95; dividend payments would be included as a financing activity. Cash and cash equivalents under US GAAP include liquid financial instruments with original maturities of three months or less, which are not included in the UK GAAP definition of cash.
The summary consolidated statements of cash flows prepared under US GAAP are set out below:
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2002 | 2001 (as restated) | 2000 | |||||||
| | (in millions) | |||||||||
| Net cash provided by operating activities | £ | 77.4 | £ | 73.9 | £ | 283.8 | ||||
| Net cash by investing activities | 45.0 | 24.7 | (399.4 | ) | ||||||
| Net cash provided by financing activities | 180.2 | (189.5 | ) | 39.7 | ||||||
| Effect of exchange rates changes on cash | (6.2 | ) | 5.6 | 8.1 | ||||||
| Net increase/(decrease) in cash and cash equivalents | 296.4 | (85.3 | ) | (67.8 | ) | |||||
| Cash and cash equivalents at beginning of year | 256.5 | 341.8 | 409.6 | |||||||
| Cash and cash equivalents at end of year | £ | 552.9 | £ | 256.5 | £ | 341.8 | ||||
(g) Recent US Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standard No.142 (FAS 142), Goodwill and Other Intangible Assets FAS 142 supersedes APB 17, Intangible Assets. The most significant changes made by FAS 142 are: (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually at the reporting unit level, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. In addition, FAS142 contains certain transitional provisions, which may effect the classification of intangible assets as well as the balance of goodwill. The provisions of FAS 142 are effective for fiscal years beginning after December 15, 2001.
In July 2001, the FASB approved the issuance of FAS 143, "Accounting for Asset Retirement Obligations." FAS 143 prescribes the accounting for retirement obligations associated with tangible long-lived assets, including the timing of liability recognition and initial measurement of the liability. FAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. FAS 143 is effective for fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal periods beginning after December 15, 2001 and interim periods within
F-63
those years. FAS 144 establishes an accounting model for impairment or disposal of long-lived assets to be disposed of by sale.
In July 2002, the FASB issued FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. FAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45" or the "Interpretation"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a liability to be recognized at the time a company issues a guarantee for the fair value of the obligations assumed under certain guarantee agreements. Additional disclosures about guarantee agreements are also required in the interim and annual financial statements. This Interpretation will be effective for fiscal years ending after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46" or the "Interpretation"), Consolidation of Variable Interest Entities, an interpretation of ARB 51. The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights ("variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. For any variable interest entities created after January 31, 2003, FIN 46 is effective immediately. This Interpretation will be effective for fiscal years beginning after June 15, 2003.
New US pronouncements FAS 142, FAS 143, FAS 144, FAS 146 and FIN 45 are effective for the Company's September 30, 2003 financial statements. The Company is currently evaluating the potential effects that the adoption of these standards may have on its consolidated financial statements.
Set out on pages F-64 to F-82 are the consolidated financial statements of ITV Digital Holdings Limited under its former name of ONdigital Holdings Limited for years to September 30, 2000 which are required under S-X Rule 3-09 relating to significant affiliates.
F-64
ONdigital Holdings Limited
(Formerly British Digital Broadcasting Holdings Limited)
DIRECTORS' REPORT FOR THE YEAR ENDED SEPTEMBER 30, 2000
The directors present their report and the audited financial statements of the Group for the year ended September 30, 2000.
Principal Activity
The Company's principal activity is as a holding company for the ONdigital Group, whose principal activity is the provision of pay television and interactive services via the medium of digital terrestrial broadcasting and will continue to be so for the foreseeable future.
Review of Business
On May 11, 2000 the Company changed it's name from British Digital Broadcasting Holdings Limited to ONdigital Holdings Limited. The Group now provides internet access through a television set.
Results and Dividends
The Group's loss for the financial year is £307,186,000 (1999 £148,244,000; 1998: £30,751,000).
Directors and their Interests
The directors who held office during this year, are as follows:
| Charles L Allen | ||
| Gerard M Murphy | (appointed September 4, 2000) | |
| Henry E Staunton | ||
| Michael P Green | ||
| Nigel N Walmsley | ||
| Steven A Cain | (resigned January 31, 2000) | |
| Stephen R Morrison | ||
| Viscount Caldecote | (appointed January 31, 2000, resigned September 4, 2000) |
Details of the interests of Michael P Green, Nigel N Walmsley and Gerard M Murphy in the shares of Carlton Communications Plc, which owns 50% of the ONdigital Group, are disclosed in the Carlton Communications Plc Annual Report and Accounts, copies of which can be obtained from the Company Secretary, Carlton Communications Plc, 25 Knightsbridge, London SW1X 7RZ.
Details of the interests of Charles L Allen, Stephen R Morrison and Henry E Staunton in the shares of Granada Media plc, which owns 50% of the ONdigital Group and Granada Compass plc, are disclosed in the Granada Media plc Annual Report and Accounts, copies of which can be obtained from the Company Secretary, Granada Media plc, Stornaway House, 13 Cleveland Row, London SW1A 1GG.
Creditor Payment Policy
It is Group policy to settle the terms of payment when agreeing the terms of transaction and to abide by those terms provided that it is satisfied that the supplier has provided the goods or services in accordance with the agreed terms and conditions.
Trade creditor days of the Group for the year ended September 30, 2000 were 30 days (1999: 30 days), based on the ratio of Group trade creditors at the year-end to the amounts invoiced by suppliers.
F-65
Donations
The group has made charitable donations in the year of £3,514 (1999: £nil; 1998: £nil).
Post Balance Sheet Events
Full details of post balance sheet events are set out in note 19 to the accounts.
Statement of Directors' Responsibilities
Company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to:
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Auditors
A resolution to reappoint PricewaterhouseCoopers as auditors will be proposed at the Annual General Meeting.
25 Knightsbridge
London SW1X 7RZ
By order of the Board
D Abdoo
Secretary
March 27, 2001
F-66
ONdigital Holdings Limited
(Formerly British Digital Broadcasting Holdings Limited)
AUDITORS' REPORT
We have audited the financial statements on pages F-67 to F-82 which have been prepared under the historical cost convention and the accounting policies set out on pages F-71 and F-72.
Respective Responsibilities of Directors and Auditors
The directors are responsible for preparing the Annual Report. As described on page F-65, this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom accounting standards. Our responsibilities, as independent auditors, are established by statute, the Auditing Practices Board and our profession's ethical guidance.
We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the United Kingdom Companies Act. We also report to you if, in our opinion, the directors' report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and transactions is not disclosed.
We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.
Basis of Audit Opinion
We conducted our audit in accordance with Auditing Standards generally accepted in the United Kingdom and in the United States. 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 judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company'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.
Opinion
In our opinion the financial statements:
PRICEWATERHOUSECOOPERS
Chartered Accountants and Registered Auditors
1 Embankment Place
London
WC2N 6RH
March 27, 2001
F-67
ONdigital Holdings Limited
(Formerly British Digital Broadcasting Holdings Limited)
CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED SEPTEMBER 30, 2000
| | Note | 2000 | 1999 | 1998 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||||||||
| Turnover (Including share of joint venture) | 1(d) & 3 | £ | 107,920 | £ | 22,293 | £ | — | ||||||
| Less: Share of turnover of joint venture | (225 | ) | — | — | |||||||||
| Turnover | 107,695 | 22,293 | — | ||||||||||
| Cost of sales | (71,772 | ) | (15,651 | ) | — | ||||||||
| 35,923 | 6,642 | — | |||||||||||
Administrative expenses | (318,581 | ) | (154,785 | ) | (30,991 | ) | |||||||
| Group operating loss | 4 | (282,658 | ) | (148,143 | ) | (30,991 | ) | ||||||
| Share of operating loss in joint venture | (7,142 | ) | — | — | |||||||||
| Total operating loss: | |||||||||||||
| Group and share of joint venture | (289,800 | ) | (148,143 | ) | (30,991 | ) | |||||||
Net Interest (payable)/receivable | 6 | ||||||||||||
| By Group | (17,420 | ) | (92 | ) | 331 | ||||||||
| Joint Venture | 34 | — | — | ||||||||||
| Loss on ordinary activities before taxation | (307,186 | ) | (148,235 | ) | (30,660 | ) | |||||||
| Tax on loss on ordinary activities | 7 | — | (9 | ) | (91 | ) | |||||||
| Retained loss for the financial year | 14 | £ | (307,186 | ) | £ | (148,244 | ) | £ | (30,751 | ) | |||
All activities relate to continuing operations.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED
SEPTEMBER 30, 2000
The Group had no recognised gains or losses during either year other than those reflected in the profit and loss account above.
The notes on pages F-71 to F-82 form part of these financial statements.
F-68
ONdigital Holdings Limited
(Formerly British Digital Broadcasting Holdings Limited)
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2000
| | Note | 2000 | 1999 | 1998 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | |||||||||||
| Fixed assets | ||||||||||||
| Tangible assets | 8 | £ | 107,728 | £ | 72,443 | £ | 14,270 | |||||
| Interests in Joint Venture | 9 | |||||||||||
| Share of gross assets | 1,492 | — | — | |||||||||
| Share of gross liabilities | (6,248 | ) | — | — | ||||||||
| (4,756 | ) | — | — | |||||||||
Current assets | ||||||||||||
| Stock | 10 | 15,169 | 288 | 391 | ||||||||
| Debtors due within one year | 11 | 93,004 | 40,735 | 2,778 | ||||||||
| Cash at bank and in hand | 17,551 | 13,179 | 2,136 | |||||||||
| 125,724 | 54,202 | 5,035 | ||||||||||
Creditors—amounts falling due within one year | 12 | (558,711 | ) | (149,474 | ) | (18,160 | ) | |||||
| Net current liabilities | (432,987 | ) | (95,272 | ) | (12,855 | ) | ||||||
| Total assets less current liabilities | (330,015 | ) | (22,829 | ) | 1,415 | |||||||
| Capital and reserves | ||||||||||||
| Called up share capital | 13 | 20,700 | 20,700 | 8,300 | ||||||||
| Share premium account | 14 | 186,300 | 186,300 | 74,700 | ||||||||
| Other reserves | 14 | 25,000 | 25,000 | 25,000 | ||||||||
| Profit and loss account | 14 | (562,015 | ) | (254,829 | ) | (106,585 | ) | |||||
| Equity shareholders' funds | 15 | £ | (330,015 | ) | £ | (22,829 | ) | £ | 1,415 | |||
Approved by the Board on March 27, 2001
Nigel Walmsley
Director
The notes on pages F-71 to F-82 form part of these financial statements.
F-69
ONdigital Holdings Limited
(Formerly British Digital Broadcasting Holdings Limited)
COMPANY BALANCE SHEET AT SEPTEMBER 30, 2000
| | Note | 2000 | 1999 | 1998 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||||||
| Fixed assets | |||||||||||
| Investments | 9 | £ | 232,000 | £ | 232,000 | £ | 108,000 | ||||
| Current assets | |||||||||||
| Debtors due within one year | 11 | 408,146 | 62,632 | — | |||||||
| Cash at bank and in hand | 1 | 1 | — | ||||||||
| 408,147 | 62,633 | — | |||||||||
Creditors—amounts falling due within one year | 12 | (408,147 | ) | (62,633 | ) | — | |||||
| Net current assets | — | — | — | ||||||||
| Total assets less current liabilities | 232,000 | 232,000 | 108,000 | ||||||||
| Capital and reserves | |||||||||||
| Called up share capital | 13 | 20,700 | 20,700 | 8,300 | |||||||
| Share premium account | 14 | 186,300 | 186,300 | 74,700 | |||||||
| Other reserves | 14 | 25,000 | 25,000 | 25,000 | |||||||
| Profit and loss account | 14 | — | — | — | |||||||
| Equity shareholders' funds | 15 | £ | 232,000 | £ | 232,000 | £ | 108,000 | ||||
Approved by the Board on March 27, 2001
Nigel Walmsley
Director
The notes on pages F-71 to F-82 form part of these financial statements.
F-70
ONdigital Holdings Limited
(Formerly British Digital Broadcasting Holdings Limited)
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30, 2000
| | Note | 2000 | 1999 | 1998 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | |||||||||||
| Cash flow from operating activities | 16 | £ | (214,223 | ) | £ | (108,772 | ) | £ | (79,228 | ) | ||
| Returns on investment and servicing of finance | ||||||||||||
| Net interest received | 1,094 | 541 | 331 | |||||||||
Taxation—corporation tax paid | (36 | ) | (91 | ) | — | |||||||
Capital expenditure and financial investment | ||||||||||||
| Purchase of tangible fixed assets | (102,918 | ) | (67,430 | ) | (14,380 | ) | ||||||
Acquisitions and disposals | ||||||||||||
| Capital contribution to joint venture | (2,900 | ) | — | — | ||||||||
| Cash outflow before management of liquid resources and financing | (318,983 | ) | (175,752 | ) | (93,277 | ) | ||||||
Financing | ||||||||||||
| Issue of share capital | — | 124,000 | 66,000 | |||||||||
| Increase in shareholder loan | 327,000 | 62,000 | — | |||||||||
| Capital contribution | — | — | 25,000 | |||||||||
| 327,000 | 186,000 | 91,000 | ||||||||||
| Increase in cash in the year | 17 | £ | 8,017 | £ | 10,248 | £ | (2,277 | ) | ||||
| Reconciliation of net cash flow to movement in net cash | ||||||||||||
| Increase/(Decrease) in cash in the year | 8,017 | 10,248 | (2,277 | ) | ||||||||
| Changes in net cash resulting from cash flows | 8,017 | 10,248 | (2,277 | ) | ||||||||
| Opening net cash/(debt) | 9,492 | (756 | ) | 1,521 | ||||||||
| Closing net cash/(debt) | 17 | £ | 17,509 | £ | 9,492 | £ | (756 | ) | ||||
F-71
ONdigital Holdings Limited
(Formerly British Digital Broadcasting Holdings Limited)
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2000
Note 1—Accounting policies
(a) Going Concern
The financial statements have been prepared on a going concern basis. The Company is dependent on continuing financial support being made available by its ultimate shareholders to enable it to continue its activity and meet its liabilities as they fall due. The ultimate shareholders have confirmed their intention to continue to fund or procure the funding of the Company on a basis consistent with the present operation of its business so as to maintain the Company as a going concern and to enable the Company to meet its debts as and when they fall due. The directors believe that it is therefore appropriate to prepare the accounts on a going concern basis.
(b) Basis of Accounting
The group financial statements have been prepared under the historical cost convention and in accordance with applicable accounting standards.
(c) Basis of Consolidation
The financial statements consolidate the accounts of the Company and all its subsidiary undertakings. Joint ventures are consolidated using gross equity accounting.
The Company has taken advantage of the exemption in section 230 of the Companies Act 1985 not to present its own profit and loss account.
(d) Turnover
Turnover, which excludes value added tax, represents digital terrestrial pay channel subscriptions and other revenues derived from continuing activities. Subscription revenue is recognised over the period to which it relates.
(e) Tangible Fixed Assets
Depreciation is provided to write off the cost less the estimated residual value of tangible fixed assets by equal instalments over their useful economic life as follows:
| Leasehold improvements | Over the period of the lease | |
| Fixtures and fittings | 2-4 years | |
| Technical equipment | 5-15 years | |
| Set top boxes | 2 years | |
| Smart cards | 5 years |
(f) Stocks
Stocks are stated at the lower of cost and net realisable value.
(g) Programming Costs
Programming costs are amortised over the period of transmission. Payments made in advance of transmission are included in prepayments until transmission commences, at which point they are transferred to stocks and amortised over the period of transmission.
F-72
(h) Retailer Commissions and Aerial Enhancements
Cost such as retailer commissions and aerial enhancements are carried forward as prepayments and amortised over one year representing the period of subscription to which the customer is contractually committed.
(i) Taxation
Corporation tax payable is provided at current rates on all taxable profits.
(j) Foreign Currency
Foreign currency assets and liabilities are translated into sterling at closing rates of exchange or at contract rates of exchange where appropriate.
(k) Pensions
The Group maintains a defined contribution based pension scheme. The costs are charged against profits in the year in which they are incurred.
(l) Deferred Taxation
Provision is made for taxation on timing differences between profits stated in the financial statements and profits or losses computed for taxation purposes if there is a reasonable probability that such taxation will become payable in the foreseeable future.
(m) Operating Leases
Operating lease rentals are charged to the profit and loss account on a straight line basis over the period of the lease.
Note 2—Summary of differences between UK and US Generally Accepted Accounting Principles ("GAAP")
The Group's financial statements are prepared in accordance with UK GAAP which differs in certain significant respects from US GAAP. The material differences relate principally to the following items and the effect of the necessary adjustments is shown in the tables below.
(a) Subscriber acquisition costs
Under UK GAAP certain subscriber acquisition costs have been carried forward as prepayments and expensed over twelve months. Under US GAAP such costs are written off as incurred.
(b) Deferred taxes
Under UK GAAP, deferred taxes are only accounted for to the extent that liabilities or benefits are expected to crystallise within the foreseeable future. Under US GAAP, in accordance with SFAS 109,
F-73
deferred taxes are accounted for on all temporary differences and a valuation adjustment is established in respect of those deferred tax assets where it is more likely than not that some portion will not be realised. The Group has established a full valuation allowance.
(c) Cash flows
Under UK GAAP, the Group presents its cash flows under the following classifications: (a) operating activities; (b) returns on investments and servicing of finance; (c) taxation; (d) capital expenditure and financial investment; (e) acquisitions and disposals; (f) management of liquid resources; and (g) financing. US GAAP requires only three categories of cash flow activity: (a) operating; (b) investing; (c) financing.
Cash flows arising from taxation and returns on investments and servicing of finance under UK GAAP would be included as operating activities under SFAS 95. Cash and cash equivalents under US GAAP include liquid financial instruments with original maturities of under three months, which are not included in the UK GAAP definition of cash.
The summary consolidated statements of cash flows prepared under US GAAP are set out below:
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | |||||||
| | (in thousands) | |||||||||
| Net cash provided by operating activities | £ | (213,129 | ) | £ | (108,322 | ) | £ | (78,897 | ) | |
| Net cash used by investing activities | (105,818 | ) | (67,430 | ) | (14,380 | ) | ||||
| Net cash provided by financing activities | 327,000 | 186,000 | 91,000 | |||||||
| Net increase/(decrease) in cash and cash equivalents | 8,017 | 10,248 | (2,277 | ) | ||||||
| Cash and cash equivalents at beginning of year | 9,492 | (756 | ) | 1,521 | ||||||
| £ | 17,509 | £ | 9,492 | £ | (756 | ) | ||||
Effect on net loss of differences between UK GAAP and US GAAP
| | Year ended September 30, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | |||||||
| | (in thousands) | |||||||||
| Net loss attributable to holders of Ordinary Shares under UK GAAP | £ | (307,186 | ) | £ | (148,244 | ) | £ | (30,751 | ) | |
| Effect on net loss of US GAAP adjustments | ||||||||||
| —Expense subscriber acquisition costs as incurred | 6,100 | (22,400 | ) | — | ||||||
| £ | (301,086 | ) | £ | (170,644 | ) | £ | (30,751 | ) | ||
F-74
Cumulative effect on shareholders' equity of differences between UK GAAP and US GAAP
| | At September 30, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 1999 | 1998 | ||||||
| | (in thousands) | ||||||||
| Shareholders' equity under UK GAAP | £ | (330,015 | ) | £ | (22,829 | ) | £ | 1,415 | |
| Effect on shareholders' equity of US GAAP adjustment | |||||||||
| —Expense subscriber acquisition costs as incurred | (16,300 | ) | (22,400 | ) | — | ||||
| £ | (346,315 | ) | £ | (45,229 | ) | £ | 1,415 | ||
Note 3—Turnover
Turnover is derived from the provision of pay television and interactive services via the medium of digital terrestrial broadcasting and other associated services. All turnover arises within the United Kingdom from activities conducted from the United Kingdom.
Note 4—Operating loss
| Group | 2000 | 1999 | 1998 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | |||||||||
| Operating loss is stated after charging: | ||||||||||
| Auditors' remuneration | ||||||||||
| —Audit services | £ | 55 | £ | 40 | £ | 15 | ||||
| —Non-audit services | 108 | 134 | 112 | |||||||
| Staff costs (see note 5) | 24,134 | 8,651 | 2,165 | |||||||
| Operating lease rental | ||||||||||
| —Plant and machinery | 49 | 16 | 3 | |||||||
| —Other | 772 | 667 | — | |||||||
| Depreciation of tangible fixed assets | 67,633 | 9,648 | 197 | |||||||
The audit fee for the Company was borne by a fellow group undertaking.
F-75
Note 5—Staff costs
| | 2000 | 1999 | 1998 | |||
|---|---|---|---|---|---|---|
| | (in thousands) | |||||
| Wages and salaries | £22,049 | £7,851 | £1,949 | |||
| Social security costs | 1,639 | 617 | 177 | |||
| Other pension costs | 446 | 183 | 39 | |||
| £24,134 | £8,651 | £2,165 | ||||
None of the directors of the Company received any remuneration from the Company.
The average monthly number of persons employed by the Group during the year was as follows:
| | 2000 Number | 1999 Number | 1998 Number | |||
|---|---|---|---|---|---|---|
| Administration and management | 61 | — | — | |||
| Transmission and related activities | 213 | 163 | 18 | |||
| Sales and distribution | 896 | 47 | 12 | |||
| 1,170 | 210 | 30 | ||||
Note 6—Interest and similar items
| | 2000 | 1999 | 1998 | |||
|---|---|---|---|---|---|---|
| | (in thousands) | |||||
| Interest payable on shareholder loans | £(18,514 | ) | £(633 | ) | £— | |
| Total interest payable and similar charges | (18,514 | ) | (633 | ) | — | |
| Interest receivable by Group | 1,094 | 541 | 331 | |||
| Share of joint venture interest receivable | 34 | — | — | |||
| Total interest receivable | 1,128 | 541 | 331 | |||
| Net interest (payable) | £(17,386 | ) | £(92 | ) | £331 | |
Note 7—Tax on loss on ordinary activities
| | 2000 | 1999 | 1998 | |||
|---|---|---|---|---|---|---|
| | (in thousands) | |||||
| UK Corporation tax at 30% (1999: 30.5%; 1998: 27%) | £— | £9 | £91 | |||
F-76
Note 8—Tangible Fixed Assets
| Group | Leasehold improvements | Fixtures and fittings | Technical equipment, set top boxes and smartcards | Total | |||||
|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||||
| Cost: | |||||||||
| At October 1, 1998 | £8,326 | £996 | £5,145 | £14,467 | |||||
| Additions | 935 | 2,895 | 63,600 | 67,430 | |||||
| Transfer | — | — | 391 | 391 | |||||
| At October 1, 1999 | 9,261 | 3,891 | 69,136 | 82,288 | |||||
| Additions | 2,161 | 3,264 | 97,493 | 102,918 | |||||
| At September 30, 2000 | £11,422 | £7,155 | £166,629 | £185,206 | |||||
| Accumulated depreciation: | |||||||||
| At October 1, 1998 | £— | £197 | £— | £197 | |||||
| Change for the year | 568 | 1,393 | 7,687 | 9,648 | |||||
| At October 1, 1999 | 568 | 1,590 | 7,687 | 9,845 | |||||
| Charge for the year | 648 | 2,693 | 64,292 | 67,633 | |||||
| At September 30, 2000 | £1,216 | £4,283 | £71,979 | £77,478 | |||||
| Net book amount at September 30, 2000 | £10,206 | £2,872 | £94,650 | £107,728 | |||||
| Net book amount at September 30, 1999 | £8,693 | £2,301 | £61,449 | £72,443 | |||||
| Net book amount at September 30, 1998 | £8,326 | £799 | £5,145 | £14,270 | |||||
All of the amounts included within leasehold improvements are with respect to short leasehold.
Company
The Company holds no tangible fixed assets.
F-77
Note 9—Investments
| Group | (in thousands) | ||
|---|---|---|---|
| At October 1, 1999 and October 1, 1998 | £— | ||
| Share of net liabilities of joint venture | (4,756 | ) | |
| At September 30, 2000 | £(4,756 | ) | |
| Company | (in thousands) | |
|---|---|---|
| At September 30, 1998 | £108,000 | |
| Additions | 124,000 | |
| At September 30, 1999 | 232,000 | |
| Additions | — | |
| At September 30, 2000 | £232,000 | |
Investments relate to the investment held in two subsidiary companies and a joint venture partnership comprising:
ONdigital plc—232 million ordinary shares with a nominal value of 10p each
ONdigital (Services) Limited—2 ordinary shares with a nominal value of £1 each
ONrequest—£2,900,000 capital contribution
Both subsidiaries are wholly owned, incorporated in the United Kingdom and registered in England and Wales.
| Investment | Activity | Principal place of business | Shareholding | |||
|---|---|---|---|---|---|---|
| ONdigital plc | Pay television | 346 Queenstown Road London SW8 4NE | 100% of equity shares | |||
ONdigital (Services) Limited | Human resources | 346 Queenstown Road London SW8 4NE | 100% of equity shares | |||
ONrequest | Pay-per-view television | 346 Queenstown Road London SW8 4NE | 50% of capital |
Note 10—Stock
| | Group | Company | Group | Company | Group | Company | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 2000 | 1999 | 1999 | 1998 | 1998 | ||||||
| | (in thousands) | |||||||||||
| Raw materials and consumables | £— | £— | £288 | £— | £391 | £— | ||||||
| Programming costs | 15,169 | — | — | — | — | — | ||||||
| £15,169 | £— | £288 | £— | £391 | £— | |||||||
F-78
Note 11—Debtors
| | Group | Company | Group | Company | Group | Company | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 2000 | 1999 | 1999 | 1998 | 1998 | ||||||
| | (in thousands) | |||||||||||
| Trade debtors | £10,705 | £— | £1,935 | £— | £— | £— | ||||||
| Prepayments and accrued income | 65,844 | — | 29,701 | — | 771 | — | ||||||
| Amounts owed by subsidiary undertakings | — | 408,146 | — | 62,632 | — | — | ||||||
| Amounts owed by associate undertakings | 5,298 | — | — | — | — | — | ||||||
| Other debtors | 11,157 | — | 9,099 | — | 2,007 | — | ||||||
| £93,004 | £408,146 | £40,735 | £62,632 | £2,778 | £— | |||||||
Note 12—Creditors—amounts falling due within one year
| | Group | Company | Group | Company | Group | Company | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 2000 | 1999 | 1999 | 1998 | 1998 | ||||||
| | (in thousands) | |||||||||||
| Bank loans and overdrafts | £42 | £— | £3,687 | £— | £2,892 | £— | ||||||
| Short term shareholder loan | 389,000 | 389,000 | 62,000 | 62,000 | — | — | ||||||
| Trade creditors | 36,191 | — | 9,337 | — | 3,163 | — | ||||||
| Corporation tax | — | — | 36 | — | 118 | — | ||||||
| Social security and PAYE | 723 | — | 285 | — | — | — | ||||||
| Accruals and deferred income | 132,755 | 19,147 | 74,129 | 633 | 11,987 | — | ||||||
| £558,711 | £408,147 | £149,474 | £62,633 | £18,160 | £— | |||||||
During the year the Company was funded by a £450,000,000 short term loan facility from its shareholders which bears interest at 2% above Barclays base rate. Subsequent to year end this facility was increased to £700,000,000.
F-79
Note 13—Called up equity share capital
| | 2000 | 1999 | 1998 | |||
|---|---|---|---|---|---|---|
| | (in thousands) | |||||
| Authorised equity share capital | ||||||
| 172,500,000 ordinary C shares of 10p each | £17,250 | £17,250 | £17,250 | |||
| 172,500,000 ordinary G shares of 10p each | 17,250 | 17,250 | 17,250 | |||
| £34,500 | £34,500 | £34,500 | ||||
| Allotted and fully paid | ||||||
| 103,500,500 ordinary C shares of 10p each | 10,350 | 10,350 | 4,150 | |||
| 103,500,500 ordinary G shares of 10p each | 10,350 | 10,350 | 4,150 | |||
| £20,700 | £20,700 | £8,300 | ||||
All C and G class shares are identical and rankpari passu in all respects as the same class of share.
During the year to September 30, 1999, 124,000 Ordinary Shares were issued for cash. The nominal value of these shares was £12,400,000 and the consideration received was £124,000.
Note 14—Reserves
| Group | Share premium | Other reserves | Profit and loss account | ||||
|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||
| At October 1, 1998 | £74,700 | £25,000 | £(106,585 | ) | |||
| Premium on shares issued | 111,600 | — | — | ||||
| Loss transferred to reserves | — | — | (148,244 | ) | |||
| At September 30, 1999 | 186,300 | 25,000 | (254,829 | ) | |||
| Loss transferred to reserves | — | — | (307,186 | ) | |||
| At September 30. 2000 | £186,300 | £25,000 | £(562,015 | ) | |||
| Company | Share premium | Other reserves | Profit and loss account | |||
|---|---|---|---|---|---|---|
| | (in thousands) | |||||
| At October 1, 1998 | £74,700 | £25,000 | £— | |||
| Premium on shares issued | 111,600 | — | — | |||
| Loss transferred to reserves | — | — | — | |||
| At September 30, 1999 | 186,300 | 25,000 | — | |||
| Loss transferred to reserves | — | — | — | |||
| At September 30, 2000 | £186,300 | £25,000 | £— | |||
F-80
Note 15—Reconciliation of movements in shareholders' funds
| | Group | Company | Group | Company | Group | Company | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2000 | 2000 | 1999 | 1999 | 1998 | 1998 | ||||||
| | (in thousands) | |||||||||||
| Retained loss for the financial year | £(307,186 | ) | £— | £(148,244 | ) | £— | £(30,751 | ) | £— | |||
| Net proceeds of issue of ordinary share capital | — | — | 124,000 | 124,000 | 66,000 | 66,000 | ||||||
| Capital contribution | — | — | — | — | 25,000 | 25,000 | ||||||
| Net (reduction in)/addition to shareholders' funds | (307,186 | ) | — | (24,244 | ) | 124,000 | 60,249 | 91,000 | ||||
| Shareholders' funds as at the beginning of the year | (22,829 | ) | 232,000 | 1,415 | 108,000 | (58,834 | ) | 17,000 | ||||
| Shareholders' funds as at the end of the year | £(330,015 | ) | £232,000 | £(22,829 | ) | £232,000 | £1,415 | £108,000 | ||||
Note 16—Reconciliation of operating loss to cash flow from operating activities
| | 2000 | 1999 | 1998 | |||||
|---|---|---|---|---|---|---|---|---|
| | (in thousands) | |||||||
| Operating loss | £(282,658 | ) | £(148,143 | ) | £(30,991 | ) | ||
| Depreciation | 67,633 | 9,648 | 197 | |||||
| Movements in working capital: | ||||||||
| Debtors | (52,269 | ) | (37,957 | ) | (152 | ) | ||
| Creditors | 67,952 | 67,577 | (47,891 | ) | ||||
| Stock | (14,881 | ) | 103 | (391 | ) | |||
| Net Cash Outflow from Operating Activities | £(214,223 | ) | £(108,772 | ) | £(79,228 | ) | ||
Note 17—Movement in cash in the year
| | September 30, 1998 | Cash flow | September 30, 1999 | Cash flow | September 30, 2000 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||||||
| Cash at bank and in hand | £2,136 | £11,043 | £13,179 | £4,372 | £17,551 | ||||||
| Overdrafts | (2,892 | ) | (795 | ) | (3,687 | ) | 3,645 | (42 | ) | ||
| Net Funds | £(756 | ) | £10,248 | £9,492 | £8,017 | £17,509 | |||||
F-81
Note 18—Shareholders
The Company is jointly owned by Carlton Communications Plc and Granada Media plc each holding a stake of 50%. Copies of Carlton Communications Plc accounts can be obtained from the Company Secretary at 25 Knightsbridge, London SW1X 7RZ. Copies of the Granada Media plc accounts can be obtained from the Company Secretary at Stornoway House, 13 Cleveland Row, London SW1A 1GG.
Note 19—Subsequent events
On October 12, 2000, the Company's loan facility from its shareholders was increased from £450,000,000 to £700,000,000.
On December 18, 2000 1,000,000 ordinary shares of 10 pence each in ONdigital plc were issued by way of a rights issue to ONdigital Holdings Limited for cash consideration of £483,100,000, which was financed by way of the repayment of an intercompany loan to ONdigital plc.
Note 20—Contingent Liability
Claims for additional payments have been received in respect of certain programme suppliers. The directors consider that the appropriate provision has been made in the financial statements for amounts due to programme suppliers.
Note 21—Capital commitments
| | 2000 | 1999 | 1998 | |||
|---|---|---|---|---|---|---|
| | (in thousands) | |||||
| Expenditure on tangible assets | £27,014 | £2,600 | £4,039 | |||
Note 22—Operating lease commitments
At September 30, 2000, the Group had minimum annual commitments under non-cancellable operating leases as follows:
| | Land and buildings | Other | 2000 Total | Land and buildings | Other | 1999 and 1998 Total | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||||||||
| Operating leases which expire: | |||||||||||||
| After one year but within five years | £252 | £16 | £268 | £— | £16 | £16 | |||||||
| After five years | 529 | — | 529 | 507 | — | 507 | |||||||
Company
The Company has no operating leases.
F-82
Note 23—Related party transactions
The Group has entered into the following trading agreements with subsidiary and associated undertakings of its shareholders on an arms length basis:
| | | 2000 | 1999 | 1998 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Purchases | Amounts owed at Sep 30, | Purchases | Amounts owed at Sep 30, | Purchases | Amounts owed at Sep 30, | |||||||
| | | (in thousands) | ||||||||||||
| Television programming | Carlton Group | £4,441 | £355 | £1,014 | £179 | £— | £— | |||||||
| Granada Group | 5,348 | 2,614 | 719 | 305 | — | — | ||||||||
| £9,789 | £2,969 | £1,732 | £485 | £— | £— | |||||||||
| Call centre service staff | Granada Group | £5,765 | £5,765 | £5,100 | £— | £— | £— | |||||||
| Set top box purchases | Granada Group | £6,454 | £1 | £5,085 | £190 | £— | £— | |||||||
The Group is exempt under the terms of Financial Reporting Standard 8 and from disclosing related party transactions with entities that are part of the ONdigital Group.
F-83
GLOSSARY OF TERMS
| ACT | Advance Corporation Tax | |
| ADR | American Depositary Receipt | |
| ADS | American Depositary Share | |
| Annual licence fee | The annual cash bid paid by a Channel 3 licence holder | |
| ASB | Accounting Standards Board (UK) | |
| BARB | Broadcasters Audience Research Board | |
| BBC | British Broadcasting Corporation | |
| BSC | Broadcasting Standards Council | |
| DABS | Deferred Annual Bonus Plan | |
| DCMS | Department for Culture, Media and Sport | |
| DSAT | Digital satellite television | |
| DTT | Digital terrestrial television | |
| EMTN | Euro Medium Term Note | |
| EPP | Equity Participation Plan | |
| EU | European Union | |
| FASB | Financial Accounting Standards Board (US) | |
| idTV | Integrated digital television | |
| ITC | Independent Television Commission | |
| ITV 1 | Independent Television—Channel 3 licences collectively | |
| LTIS | Long-Term Incentive Share Plan | |
| Multiplex | A single block of spectrum able to transmit a number of television channels | |
| NAR | Net advertising revenue | |
| OFCOM | Office of Communications | |
| OFT | Office of Fair Trading | |
| OFTEL | Office of Telecommunications | |
| ONdigital | ONdigital 1998 plc (formerly ITV Digital plc) and ONdigital 1998 (Services) Limited (formerly ITV Digital (Services) Limited | |
| PPV | Pay-per-view | |
| PQR | Percentage of qualifying revenue—revenue charge paid by a Channel 3 licence holder | |
| Qualifying Revenue Charge | See PQR above | |
| RPI | Retail Price Index—a UK economic price index | |
| SAYE | Save As You Earn | |
| SDRT | Stamp Duty Reserve Tax | |
| STB | Set top box | |
| TSR | Total shareholder return | |
| UK | United Kingdom | |
| UK GAAP | United Kingdom generally accepted accounting principles | |
| US | United States of America | |
| US GAAP | United States generally accepted accounting principles | |
| White Paper | A document issued by the UK Government ahead of draft legislation | |
| X-CAPS | US$150 million Exchangeable Capital Securities of the Company |
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-14877, 333-10392 and 333-10394) of Carlton Communications Plc of our reports dated November 26, 2002 and March 27, 2001 relating to the financial statements of Carlton Communications Plc and ONdigital Holdings Limited respectively, which appear in this Form 20-F.
PRICEWATERHOUSECOOPERS
Chartered Accountants
London, England
March 27, 2003
