DQE.L Regulatory News (DQE)

9 December 2014

DQ Entertainment plc

("DQE", the "Company" or together with its subsidiaries, the "Group")

Issue of up to US$50 million of bonds by DQE Mauritius

DQ Entertainment plc (AIM:DQE), a global entertainment production and distribution company focused on children's and family animation content, is pleased to announce that its wholly owned subsidiary, DQ Entertainment (Mauritius) Limited ("DQE Mauritius"), has issued up to US$50 million of senior secured convertible bonds (the "Bonds") to OL Master Limited, a private credit fund managed by OCP Asia (Hong Kong) Limited (the "Investor").

Highlights

· Funding for more than 20 owned-IP and co-production projects over the next two years

· Up to US$50 million raised (minimum US$35 million) with a coupon of 13 per cent. per annum (payable in cash and bonds)

· 5 years maturity with early redemption option after 3 years or, inter alia, in the absence of a liquidity event or shareholder approval for conversion

· Liquidity event (trade sale or IPO of DQE Mauritius) to take place within 3 years

· DQE to be cancelled from trading on AIM and merged with DQE Mauritius as soon as possible prior to or as part of a liquidity event (trade sale or IPO of DQE Mauritius)

· Convertible upon a liquidity event, 30 days before maturity or in event of default

· The principal amount is convertible into up to 56.5 per cent. of DQE Mauritius

· Warrants over 24 per cent. of DQE Mauritius become exercisable in the absence of a liquidity event or shareholder approval for conversion

The Bonds can be drawndown in two tranches, the first of which is for US$35 million and will be drawndown on or before 8 January 2015. The second tranche of US$15 million can be drawndown at the option of the Investor within 12 months thereof.

The net proceeds from the issue of the Bonds will be used to fund the development of more than 20 owned-IP and co-production projects currently in the pipeline for production over the next two years, for the repayment of certain debts amounting to approximately US$7.21 million (INR 445.1 million) and for general working capital purposes.

Tapaas Chakravarti, Chairman and CEO of DQ Entertainment plc, said: "We are delighted to partner with OCP Asia and confident that this association will help us to realise our vision for DQE. The validation of our business model by the high acumen OCP team further strengthens our commitment to produce and distribute world class content across territories and grow our audiences with high quality IP creation."

Teall Edds, co-founding partner of OCP Asia (Hong Kong) Ltd., added: "We have been impressed with DQE's exciting pipeline and its capabilities in producing world class content, its ability to work with broadcasters from around the world in bringing ideas to the screen, and its "360-degree" monetisation approach to generating returns on IP. We look forward to our close partnership with DQE."

Background to, and reasons for, the Bonds issue

As noted in the announcements of 2 June and 18 August 2014, the board of directors of DQE (the "Board") has been exploring various options to secure the necessary funding for the Group's pipeline of new projects, the bulk of which are children-/family-oriented animation series for TV and digital distribution. This has included discussions with a number of investors and, after considerable deliberation and effort, DQE has concluded that the issue of the Bonds is the best option available to the Group to secure the finance it needs and is in the best interests of shareholders as a whole. The Board believes there is an opportunity to grow DQE's business through the development and exploitation of its own IP and the issue of the Bonds provides the finance to capitalise on this.

The production and development of owned-IP into an animated TV series is a labour, time and capital intensive process. Although the Company typically secures pre-sale contracts before putting owned-IP projects into production, payments due from these contracts are typically made only once the series is delivered to the customer. While some production costs may be defrayed by co-production partners, a large portion of the working capital necessary for the production of a project is usually the responsibility of the Group, and the total production cycle can typically span 18-24 months. Until now, the Group has been funding its projects through bank financing against the escrow of receivables for up to 50 per cent to 60 per cent of the total budget. However this process is protracted and time consuming and does not match well with the timing requirements of DQE's productions. While this funding arrangement may be adequate on a one-off project-by-project basis, it is an insufficient means to fund a larger slate of productions simultaneously and has constrained the Group. Currently, the Group has over 20 pipeline projects, with nine ready to move into immediate production (some of the work on these projects having already commenced). The only solution to enable the Group to pursue its growth strategy and exploit its current opportunities is to secure long-term funds so it can fast track productions as soon as pre-sales are in place, which the proceeds from the Bonds will enable. If the Group were not able to proceed with the issuance of the Bonds, it would continue to be constrained, may not be able to grow at an accelerated pace, may be more subject to cyclical industry fluctuations and would have difficulty sustaining current business levels, and could even have to eventually scale down its operations.

Current prospects and pipeline

DQE has a production order book worth approximately US$63 million (INR 3,820 million) in terms of revenue to the Group. Some of the projects currently in production include Robin Hood, Peter Pan season 2, Lassie, Miles from Tomorrow Land, Popples and Seven Dwarfs & Me. Production of many new IPs such as 5 & IT, Yonagunis and Leo Galilei will commence soon. DQE has recently also signed on a co-production project called "Pio the Chick" with Rai, Italy. The Group is engaged in discussions for more such projects, further details of which will be announced at the appropriate time.

DQE's distribution and licensing division has concluded 24 deals in the current financial year totaling US$12 million (INR 720 million) in terms of revenue to the Group. In addition, a number of broadcast deals for the Group's IP, including Jungle Book, Peter Pan, Iron Man and Robin Hood, have been concluded with global broadcasters such as Rai Cinema (Italy), DEA (Italy), Viacom 18 (India) and Univision (USA & Puerto Rico). DQE expects to be able to grow its licensing and merchandising revenue through its 360-degree monetisation strategy for all its existing and new IPs going forward.

The dispute with SMC Group International Inc. (which was appointed as DQE's licensing agent for the Jungle Book season 1 TV series in North America) has been settled and DQE now has a directly executed contract with fast food giant Burger King, which has acquired the QSR (quick service restaurant) promotional rights for Jungle Book for its outlets across the world.

DQE has also sought a valuation of its IP and pipeline of IP it plans to develop over the next four to five years from CONSOR Intellectual Asset Management ("CONSOR") in the United States. CONSOR is a global industry leader in intellectual property valuation, expert witness services, monetisation assistance, licensing strategies and more and has been for the last 25 years. As per their report, dated 6 January 2014, the total valuation of the IP of DQE was US$218 million.

Terms of the Bonds

DQE Mauritius is obliged to issue up to US$50 million of senior secured convertible bonds to raise gross proceeds of up to US$50 million (the "Issue"). The Bonds will be issued in two tranches, the first of which will be for US$35 million to be completed within one month from the date of the Bonds, being 9 December 2014 (the "Closing Date"). The second tranche of US$15 million can be drawndown at the option of the investor within 12 months of the Closing Date.

The Bonds carry a cash coupon rate of 6.5 per cent per annum (the "Cash Interest") and a PIK (payment in kind) interest rate of 6.5 per cent per annum (the "PIK Interest"), payable semi-annually from the Closing Date up to the Maturity Date. The PIK Interest will be paid by the issue of additional bonds to the Investor on the same terms and conditions as the Bonds (save in event of default or redemption of the Bonds, in which case the PIK Interest will be payable in cash). A default interest rate of an additional 2 per cent per annum will apply on any payable amounts if not paid when due.

The Bonds will have a maturity period of five years from the Closing Date (the "Maturity Date"). Outstanding Bonds will be redeemed on the Maturity Date at a redemption price equivalent to an amount which would yield the Bondholders an internal rate of return ("IRR") equal to 15 per cent per annum (the "Redemption Price"). In addition, the Bondholders can redeem the Bonds at the Redemption Price:

(i) after a period of 36 months after the Closing Date;

(ii) after an event of default;

(iii) if Conversion (as defined below) is not approved by DQE shareholders;

(iv) if Conversion would trigger a mandatory offer under the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations 2011; or

(v) if best endeavours are not made to effect an AIM Cancellation (as defined below).

The Bondholders can also redeem the Bonds at a price that would yield a 25 per cent per annum IRR (the "Increased Redemption Price") on the occurrence of a change of control event of either DQE or DQE Mauritius or if a Qualified Liquidity Event (as defined below) has not taken place within three years of the Closing Date.

If DQE Mauritius fails to repay or refinance the Bonds as a result of any redemption notice pursuant to a failure to achieve a Qualified Liquidity Event (as defined below) or a Cancellation (as defined below) or obtain the necessary approvals for Conversion (as defined below), or the Group materially fails to achieve its business plan to service the Bonds, there is a very real risk that DQE Mauritius will find itself in Default (as defined below) and that the Bondholders may enforce its security or exercise the Conversion and/or take ownership and control of materially all of the assets of the Group or may likely result in the Company being insolvent and unable to continue to trade.

The Bonds will be issued to the Investor and are freely transferrable, in whole or in part, to any person (with the holders of the Bonds from time to time being collectively, the "Bondholders").

Conversion

The Bonds can be converted into ordinary shares of DQE Mauritius ("Shares") at a price of US$0.5543 per Share ("Conversion"). Conversion of the full US$50 million of Bonds (excluding any new bonds issued as payment for PIK Interest) would currently equate to 56.5 per cent of DQE Mauritius on a fully diluted basis.

Whilst DQE is admitted to trading on AIM, Conversion can take place:

(i) as part of a Qualified Liquidity Event (as defined below);

(ii) within 30 days of the Maturity Date; or

(iii) after the occurrence of an event of default.

Conversion is subject to compliance with the AIM Rules for Companies ("AIM Rules") (including DQE obtaining any necessary approval of its shareholders) and the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations 2011, as amended from time to time (the "Takeover Regulations"). In particular, Conversion will require the approval of DQE shareholders in a general meeting where Conversion is deemed to be a disposal resulting in a fundamental change of business by DQE under rule 15 of the AIM Rules. If shareholder approval for Conversion is not obtained, then the Bondholders can redeem the Bonds at the Redemption Price ("Redemption") and exercise their warrants over Shares ("Warrants") which will be granted to the Investor on the Closing Date. The Warrants will represent 24 per cent. of the fully diluted share capital of DQE Mauritius on issue, will have a zero strike price, be immediately exercisable and will expire at the end of five years from the date the holder of the Warrant is entitled to exercise its Warrants. The Warrants are freely transferrable.

Conversion is also subject to the Takeover Regulations as DQE Mauritius owns 75 per cent of DQ Entertainment (International) Limited ("DQE India"), the main operating company of the Group, which is listed on the National Stock Exchange of India and the Bombay Stock Exchange and which is subject to the Takeover Regulations. Conversion of the Bonds might trigger the mandatory offer provisions of the Takeover Regulations. If this occurs, the parties will then need to discuss with the Securities Exchange Board of India ("SEBI") as to how to proceed given the interplay with the current Indian regulatory requirements. If SEBI determines that a mandatory offer is required, the Bondholders may seek Redemption and exercise their Warrants.

Qualified liquidity event

Within 36 months of the Closing Date, DQE Mauritius must use best endeavours to undertake a liquidity event, such as a trade sale of DQE Mauritius or the listing/IPO of DQE Mauritius on the NASDAQ, or other similar stock exchange acceptable to the Majority Bondholders (being those holding 66 ⅔ per cent. or more of the aggregate principal amount outstanding under the Bonds) ("Liquidity Event"). In either case, the Liquidity Event, whether a listing/IPO or trade sale, must yield a 25 per cent. per annum IRR should the Bondholders convert the Bonds into Shares and sell them through the Liquidity Event (together, a "Qualified Liquidity Event").

If a Qualified Liquidity Event does not take place within 36 months of the Closing Date and DQE Mauritius has not exercised its best endeavours to achieve one, then the Bondholders may redeem any or all of its Bonds at the Increased Redemption Price and exercise the Warrants. The Board will use its best endeavours to achieve a Qualified Liquidity Event within the timeframe required and has already started discussions in this regard. Further announcements on this will be made when appropriate.

AIM cancellation and Group re-organisation

In order to align the interests of shareholders in DQE with that of the Bondholders, such that those shareholders also get the benefit of a Qualified Liquidity Event, and notwithstanding that DQE Mauritius must use its best endeavours to undertake a Qualified Liquidity Event within 36 months of the Closing Date under the terms of the Bonds, DQE Mauritius has undertaken to the Investor that it will use its best endeavours to procure a cancellation of trading on AIM of DQE together with a merger between DQE and DQE Mauritius as soon as possible ("Cancellation"), before or concurrent with a Qualified Liquidity Event. Best endeavours in this case includes procuring the issue of a circular and convening a meeting of shareholders, procuring a recommendation for Cancellation from the Board (subject to their fiduciary duties and applicable law) and taking such action necessary to enable the merger between DQE and DQE Mauritius. Failure to use best endeavours would amount to an event of default under the Bonds with the result that the Bonds would be redeemable at the Redemption Price. A Cancellation would be subject to compliance with the AIM Rules for Companies and the UK Takeover Code. Further announcements in this regard will be made when appropriate.

Security

DQE Mauritius owns 75 per cent. of DQ Entertainment (International) Limited ("DQE India"), the main operating company of the Group and which is listed on the National Stock Exchange of India and the Bombay Stock Exchange. DQE India owns 100 per cent of DQ Entertainment (Ireland) Limited ("DQE Ireland") which holds the Group's IP. DQE Mauritius will subscribe to senior secured convertible bonds issued by DQE Ireland in amounts and tranches that mirror the Bonds.

The Bonds are secured by a share pledge over DQE Mauritius' shareholding in DQE India (the "Pledge"), the current and future intellectual property rights owned by DQE Ireland (the "Debenture"), a corporate guarantee by DQE Ireland, and a charge over the blocked account holding the Bonds proceeds (which must also maintain a minimum account balance) (together, the "Security").

The Pledge is over present and future shares in DQE India held by DQE Mauritius and is given against all actual/contingent present and future liabilities and obligations of DQE Mauritius arising in connection to the Bonds issued by DQE Mauritius and DQE Ireland, the Security and the Warrants. If the approvals for the Pledge against any future shares in DQE India issued to DQE Mauritius from the Reserve Bank of India are either not obtained or declined, DQE Mauritius shall place an amount into an escrow account equal to the value of such future shares.

Events of default

The Bond contains common events of defaults such as non-payment, repayment of certain outstanding loans, cessation of business, breach of the terms of the Bonds, Warrants or security, misrepresentation, cross default with any financial indebtedness or the DQE Ireland Bonds, insolvency, breach of material contracts, material adverse litigation and use of intellectual property. While DQE is admitted to trading on AIM, the Investor may only exercise its rights of enforcement under the Pledge if there is an event of default in relation to the non-payment of the Bonds, insolvency or an insolvency type event. Otherwise, the Bondholders can exercise their rights under the Security at any time following an event of default if not remedied as per the terms and conditions of the Bonds (a "Default"). The Bondholders may declare the Bonds are repayable if an event of default occurs at the Redemption Price or, where the event of default is a change of control, the Increased Redemption Price.

The terms of the Bonds contain a number of covenants regarding the operational, financial, corporate and legal status of the Group, as well as terms relating to the payment of interest and capital sums due under the Bonds. In the event of a Default, then the Investor and Bondholders will have the right to exercise their various security interests, which if exercised would likely result in the Company becoming insolvent and unable to continue to trade.

If DQE Mauritius fails to repay or refinance the Bonds as a result of any redemption notice pursuant to a failure to achieve a Qualified Liquidity Event or Cancellation or obtain the necessary approvals for Conversion, or the Group materially fails to achieve its business plan to service the Bonds, there is a very real risk that DQE Mauritius will find itself in Default and that the Bondholders may enforce its security or exercise the Conversion and/or take ownership and control of materially all of the assets of the Group or may likely result in the Company being insolvent and unable to continue to trade.

Other terms

The terms and conditions of the Bonds impose certain other customary obligations on DQE Mauritius, including that it will not, and procure that no other company within the DQE group, disposes, transfers or leases any IP or any other asset, save in certain circumstances. The Bond also places restrictions on mergers, acquisitions and joint ventures, save in certain circumstances.

DQE Mauritius cannot declare a dividend without the consent of the Bondholders. Furthermore, the Group's IP must be of a value which is at least three times that of the amount of Bonds outstanding.

DQE Mauritius also intends to create a management share option pool upon a Qualified Liquidity Event which will represent 25 per cent. of the fully diluted share capital of DQE Mauritius.

For further information, please contact: