SuperGroup Regulatory News (SGP)

30 Jan 2006 07:00

Sanctuary Group PLC27 January 2006 27 January 2006 The Sanctuary Group plc (the "Company" or the "Group") Unaudited Results for Year Ended 30 September 2005 The Company today announces its unaudited preliminary results for the year ended30 September 2005. Summary of Preliminary Results Financial position • The Group is close to implementing a significant equity fund raising through Evolution Securities Limited who have agreed to become broker to the Company and who have received indications of support for an equity fundraising of £110m from institutional investors. • The Group has also reached an in-principle agreement with its principal lender and convertible bondholder which, inter alia, involves the cancellation of £35m of the Group's outstanding indebtedness and covers the provision of future committed facilities to the Group which in the event of an equity fund raising is successful. • The Group has put in place further facilities of £3m to meet its immediate working capital requirements. • Shareholders should be aware that the equity fund raising is likely to occur at a substantial discount to the current market price of the ordinary shares. Due to the amount being raised relative to the market capitalisation of the Company, existing shareholders will also suffer significant dilution. To mitigate the effects of this the Board intend to make an element of the equity fund raising available to the existing shareholders and to allow excess applications under any pro rata element of the fundraising. The equity fund raising would be subject inter alia to the approval of existing shareholders. The Board expect to recommend the proposed equity fund raising to existing shareholders. Financial results • Group Turnover was down from £166.7 m for 2004 (as restated) and £221.0m for 2004 (as previously reported) to £156.1m for the year ended 30 September 2005, reflecting poor trading performance and some key operational issues particularly in the Recorded Product Division. • Group EBITDA loss reported for the year ended 30 September 2005 was £76.2m (2004 restated: £0.1m loss; 2004 as previously reported: £24.8m profit). The EBITDA loss for the year ended 30 September 2005 includes exceptional items of £43.7m and also one-off write-offs and non-recurring costs management estimate total £26.4m. • Group operating loss for the year ended 30 September 2005 was £111.7m (2004 restated: £9.7m loss; 2004 as previously reported: £15.2m profit). • Group loss on ordinary activities before tax for the year ended 30 September 2005 was £142.6m (2004 restated: £26.7m loss; 2004 as previously reported: £1.8m loss). Exceptional items in the year ended 30 September 2005 totalled £89.1m, resulting from provisions, asset impairments and restructuring costs. • The Group's net borrowings at 30 September 2005 were £140.4m (£73.9m at 30 September 2004). As at 31 December 2005 the Group's net borrowings were £149.7m and have further increased. • The Balance Sheet as at 30 September 2005 shows net liabilities of £ 55.0m (2004 restated: £ 76.1m net assets; 2004 as previously reported: £ 122.8m net assets) reflecting the losses in the year. Accounting policy changes • These results reflect changes in certain accounting policies, which give rise to prior year adjustments, and alterations in methods of estimation in certain areas, which give rise to exceptional items as previously announced. • The Board has been in discussions with its auditors and the Board expect that the auditors will qualify their audit opinion in respect of certain changes to accounting policies. The auditors have indicated that they will issue an adverse audit opinion in this respect. In addition the auditors will highlight the fundamental uncertainty surrounding the Group's adoption of the going concern basis of preparation of the financial statements, pending the outcome of the proposed equity fund raising. • The Board is confident that the changes it has made to the accounting policies and its methods of estimation are appropriate. Current Trading • Since 30 September 2005, the underlying trading of the Group has been, at a consolidated level, in line with the Directors' expectations. • Within this the performance of the Record, Agency and Merchandising divisions has been ahead of budget whilst the Management division has been slightly behind mainly due to delays in commissions to be received. • Additional one off costs have been incurred across the Group including those as a result of the proposed equity financing. Andy Taylor, Executive Chairman, commented: "The past 12 months have been the most difficult and challenging period thatSanctuary has ever had. As a result, we have had to make some fundamentalchanges and difficult decisions, but it was essential to make them and we haveacted quickly to do so. The financial consequences are clear to see in these accounts, in thepresentation of which we have sought to ensure that the most appropriatestatement of figures and accounting policies have been adopted as the basis onwhich the Group's finances will be managed and reported in future. Despite the awful year that we have had, we are looking to the future withconfidence. In doing so, it is worth remembering that we have built Sanctuary'sbusiness up over a 30 year period and I am confident that we have a business,presence and support throughout the music industry that will help us to emergesuccessfully from this restructuring. Sanctuary's underlying business model isa good one and the Board is confident that the business can now be returned tofinancial health." For further information please contact: The Sanctuary Group plc Paul Wallace, Group Finance Director 020 7300 6505 Philip Ranger, Director, Corporate & Investor Relations 07768 534641 020 7300 1323MerlinPaul Downes / Rebecca Penney 020 7653 6620 OPERATING REVIEW Financial position In December 2005, the Board announced that it would explore a number of optionsfor the medium and long term financing of the Group. The Board has madesignificant progress and is close to reaching definitive agreement involving: • A significant equity raising through Evolution Securities Limited of £110m; • Cancellation of £35m of indebtedness; and • New committed facilities. Shareholders should be aware that the equity fund raising is likely to occur ata substantial discount to the current market price of the ordinary shares. Dueto the amount being raised relative to the market capitalisation of the Company,existing shareholders will also suffer significant dilution. To mitigate theeffects of this the Board intend to make an element of the equity fund raisingavailable to the existing shareholders and to allow excess applications underany pro rata element of the fundraising. The equity fund raising would besubject inter alia to the approval of existing shareholders. The Board expectsto be in a position to recommend the proposed equity fund raising to existingshareholders. The proposed fund raising is expected to repair the Group's balance sheet andcreate a stronger foundation for the business going forward. Evolution Securities Limited have agreed to become broker to the Company. The Board has received an indication from Evolution Securities Limited that itexpects to be in a position to successfully underwrite the proposed fund raisingin the near future subject to all the relevant documentation being signed. The Group has also reached an in-principle agreement with its principal lenderand its convertible bondholder under which, inter alia, £35m of the Group'soutstanding indebtedness will be cancelled and covers the provision of a futurecommitted facility to the Group which in the event of an equity fund raising issuccessful. The equity fund raising and the agreement with the Group'screditors are interconditional. In the meantime, the Group's principal lender and convertible bondholder remainsupportive. The Group's principal lender has agreed to extend furtherfacilities of £3m to the Group, to ensure sufficient funding for immediateworking capital purposes. The Company has also amended the terms of its existingbanking facilities and outstanding £30m Convertible Loan Notes to allow thisadditional facility and to extend the deadline for issuing a prospectus for theequity fund raising from 31 January 2006 to 14 February 2006. Further changesare included in Appendix 2. Accordingly the Directors consider it appropriate to prepare the Group'saccounts on a going concern basis, taking into account the uncertaintiesmentioned above in relation to the equity fund raising and they believe thatthere will be no material adverse impact arising from litigation. Summary of unaudited trading results For the year to 30 September 2005, the Group recorded an EBITDA loss (before theimpact of exceptional items) of £32.5m compared with a restated EBITDA loss of£0.1m in 2004 (EBITDA profit of £24.8m as previously reported in 2004). The results reflect a difficult year for the Group, with adverse changes in thetrading environment experienced in 2005 and some key operational issues thathave arisen which have caused a substantial underperformance againstexpectations. The Recorded Product division, which accounted for approximately half of theCompany's turnover in 2004 has experienced difficult trading conditions sinceApril 2005, particularly in its Urban Records operation and, on 17 June 2005,the Company announced that its interim results would be significantly lower thanin the same period in the prior year, principally due to significant delays inrecord releases. A number of releases in the Urban Records operation werecancelled, and, while some of those that were rescheduled were released in theearly part of the second half of 2005, most of the remainder have now beencancelled and the Group will make no further releases under its Urban Recordsoperation. The Directors believe that, as a result of the problems with theRecorded Product Division, cash receipts were significantly lower than budgeted.During 2005, overheads that reflected the expectation of higher revenuecontinued to be incurred as budgeted, resulting in an increased working capitalrequirement. The Directors believe that the effect of its various announcements during theyear and the circumstances referred to were particularly damaging to theCompany's standing in the industry due to the uncertainty it created over thefinancial viability of the Company. The Directors believe that this led tohigher levels of recorded product returns from retailers which led to a declinein advances from its distributors and also led to difficulties in signing up newartists. The uncertainty surrounding the Group's financial position was notresolved and was exacerbated as the Group incurred further debt and theCompany's share price declined. Artist Services Division has also had a difficult year with increased overheadsnot being offset by the expected increased performance. The £43.7m exceptional items include: • provisions arising from changes in methods of estimation of the amounts receivable of royalty income and costs arising from royalty audits; • provisions arising from changes in methods of estimation of the likely level of recompense of artist and licensor advances; • write-offs of certain unrecouped artist manager balances; • provision arising from changes in methods of estimation of debtors, returns and stock provisions. The £26.4m of one-off write-offs and non-recurring items estimated by managementincludes: • £15.9m of adjustments to provisions and other operating costs; and • £10.5m relating to operating inefficiencies in the US Recorded Product Division prior to the restructuring of this division. Business restructuring As a result of the poor trading performance and the increased debt taken on bythe Group, the Directors have undertaken a review of the Group's globaloperations. Cost reduction has been a key focus for the Company in recent months andnon-core and under-performing businesses have all been reviewed. Following this review the board has concluded: • a strategy to focus on core businesses of Recorded Product, Artist Management, Merchandising and Live Agency. • a worldwide headcount reduction of some 25% of personnel, the majority of these having left the Company by the end of October 2005. • within the Recorded Product Division, to reduce the cost base significantly; two offices in North America will be closed; the Urban Records division has already been closed. • non-core businesses are to be sold. The book publishing and mobile recording businesses have been sold; other non-core assets will be disposed of including the music publishing and studio businesses. Overall, the Directors believe that focus in core areas and a much strongeremphasis on cash generation will help to provide a solid base from which todeliver improved performance in this financial year and beyond. Changes to the Board As previously announced, during the year Sir Christopher Meyer and DouglasMcArthur stepped down from the Board and a new Group Finance Director, PaulWallace, has been appointed. As part of the Group's business restructuring it is intended to revise the Boardstructure and to make a number of new appointments. These revised arrangements envisage that Andy Taylor will retain his position asChief Executive but will step down as Executive Chairman, and a newnon-executive Chairman will be appointed. Mike Miller, Merck Mercuriadis, Rod Smallwood, Aky Najeeb and Joe Cokell willform an Operational Board, which will also include Andy Taylor and Paul Wallaceand will thereafter resign from the parent Company Board. Mr Taylor, Mr Wallaceand the Group's non-executive directors will thereafter form a newly-constitutedboard under the direction of the new non-executive Chairman. The process ofidentifying new non-executive Directors is underway. Change in accounting policies As set out above, Sanctuary has undertaken a fundamental review of its businesswhich has involved, inter alia, addressing worldwide cost structures, theperformance of revenue generating assets and premises. It has also undertaken acomprehensive review of the accounting principles applied by the Group to assesstheir appropriateness in accurately representing the Group's financialperformance. As previously announced, the Group has in particular, reviewed a number of itsaccounting policies and certain of its accounting estimates in order to increasethe relevance, understandability and comparability of the Group's financialreporting. The Directors' principal conclusions following this review were thatthe Group's accounting policy for recognition of management commission income nolonger appropriately reflected the Group's current arrangements with managedartists; and that the Group's accounting policies relating to revenue andexpense recognition in its Recorded Product business were not comparable withthose of its industry peers, and could no longer be considered to support theaccurate and consistent reporting of that business's financial performance. The changes in accounting policies have been applied to the results for the yearended 30 September 2005 and the Group's results for the year ended 30 September2004 have been restated to show the effects of the new accounting policies. Thechanges in accounting estimates have been applied to all individual assets andliabilities, and their financial impact classified as an exceptional item in2005. As previously announced, the Board expected that substantial provisions andwrite downs were likely to be in the region of £130m to £170m. The provisionsand write downs reported here are within this range. The practical effect ofthe Directors' changes in accounting policies is to move previously recognisedincome of £86m and profits of £54m out of earlier years and into future years,as and when earnt. The Board has been in discussions with its auditors and the Board expect thatthe auditors will qualify their audit opinion in respect of certain changes toaccounting policies. The auditors have indicated that they will issue anadverse audit opinion in this respect. In addition the auditors will highlight the fundamental uncertainty surroundingthe Group's adoption of the going concern basis of preparation of the financialstatements, pending the outcome of the proposed equity fund raising. The Board is confident that the changes it has made to the accounting policiesand its methods of estimation are appropriate. Current trading Since 30 September 2005, the underlying trading of the Group has been, at aconsolidated level, in line with the Directors' expectations. Within this theperformance of the Record, Agency and Merchandising divisions has been ahead ofbudget whilst Management has been slightly behind mainly due to delays incommissions to be received. Additional one off costs have been incurred acrossthe Group as a result of the proposed equity financing. The cost cutting exercise referred to above has been largely completed and theDirectors expect a reduction in overheads in the year to 30 September 2006 of£14.6million. The Group incurred exceptional restructuring costs of £7.1millionin the year ended 30 September 2005 in connection with its cost-cuttingprogramme, which has continued in the first quarter of 2006. Approximately £3.2million of the cash impact of the restructuring will fall in the year ended 30September 2006 but, to the extent that the anticipated costs relating to theseheadcount reductions, related office closures and contract terminations were notincurred prior to 30 September 2005, they were provided for at that date. The Directors believe that the cost savings that have been made have not, andwill not, affect the ability of the Group to generate revenue. As announced on 28 October 2005, Elton John is continuing his sold outworld-wide tour, Joss Stone has recently completed her debut film role and hertour dates with the Rolling Stones. Within the records division there are strongsales from artists such as Status Quo, Ray J, Simple Minds, The Strokes andBabyshambles. In addition, Morrissey has now completed his new album which isscheduled for release in Spring 2006. Within the Merchandising division saleshave been ahead of budget and the Directors remain confident that this divisionwill continue to perform well, particularly when additional financing can bemade available to it and it is able to better penetrate the retail market. TheDirectors are also optimistic that a tour by The Who and Elton John's 60thbirthday events will provide good revenue opportunities in the future. The completion of the anticipated equity fund raising and the significantreduction in debt are expected to remove the doubts over the future funding ofthe Group. The Board anticipate that the removal of this doubt will benefit thebusiness across all of its divisions and lead to improved financial performancein the future. The Board also anticipate that the Group will also have thefinancial flexibility to attract some of the bigger artists to the Merchandisingdivision. The Directors are mindful that whilst the first few months of the year have beenin line with expectations, the performance of the Group is dependent upon albumreleases and activity by artists over the summer months when the majority ofrevenue is earned. However on the basis of trading since 30 September 2005, thecost-cutting that has been implemented and current expectations of revenue forthe year, the Directors view the prospects of the Group following completion ofan equity fundraising with confidence. Extract from Executive Chairman's Review • In Recorded Product, Robert Plant's album "Mighty Rearranger" sold impressively and The Libertines self-titled second album on the Rough Trade label was the Group's first UK Number One album. In addition, albums were released in the year by a range of established artists including Alison Moyet, Blue Nile, St Etienne, Billy Idol and Antony & The Johnsons. • The Recorded Product Catalogue continued to produce strong results with albums such as "Reggae Love Songs 2", " Teenage Kicks" and "Shake, Rattle & Roll", whilst Sanctuary Visual Entertainment had a Number One selling music DVD with T-Rex and Marc Bolan's "Born to Boogie". • In Artist Management, highlights included additions to the roster of Elton John, James Blunt, Joss Stone, Scott Stapp, Fightstar and Alanis Morrisette. Elton John continued his series of shows at Caesar's Palace in Las Vegas and signed up for another 50 shows a year for 2006, 2007 and 2008. He was the 6th highest grossing live touring artists in the US in 2005 and "Billy Elliott - The Musical", for which he wrote the music, opened to great success in London. James Blunt's debut album has now sold over 2.4m copies worldwide and was the UK's best selling album during the year. • Joss Stone's most recent album, "Mind, Body & Soul" has now sold over 2.8m copies worldwide and she has supported the Rolling Stones on their current tour as well as being a solo act. She is currently appearing in Gap's autumn /winter 2005/6 worldwide advertising campaign. Morrissey has spent much of the year writing and recording his new album "Ringleader of the Tormentors" which will be released in March (on the Attack label of Sanctuary Records). • Merchandising added a number of high profile acts to its client list including Slipknot, Kurt Cobain, Kelly Clarkson and Anastacia as well as continuing to grow its retail merchandising business with products from acts such as Iron Maiden, H.I.M and Guns N' Roses. • Live Agency also experienced a busy year with major acts touring in the year including System of a Down, Avril Lavigne, Iron Maiden, The Darkness, Destiny's Child, Franz Ferdinand and Slipknot. FINANCIAL REVIEW Unaudited operating results Turnover for the year was £156.1m (2004 restated: £166.7m; 2004 as previouslyreported £221.0m). Of this reduction, £14.4m is a result of problemsencountered in the Recorded Products Division. This reduction was partiallyoffset by increased Merchandising turnover of £5.5m. The operating loss, for the year was £111.7m (2004 restated: £9.7m loss; 2004 aspreviously reported:£15.2m profit). This reflects a significant deteriorationyear on year principally in Recorded Products Division and high levels ofexceptional items is discussed in more detail below. The Directors believe that the effect of its various announcements during theyear and the circumstances referred to were particularly damaging to the Group'sstanding in the industry due to the uncertainty it created over the financialviability of the Group. The Board believe that this led to higher levels ofrecorded product returns from retailers which led to a decline in advances fromits distributors and also led to difficulties in signing up new artists. Exceptional items and goodwill amortisation Total net exceptional items in the year were £89.1m (2004 restated: £11.4m; 2004as previously reported: £11.4m). £14.6 m was incurred in 2005 as a result ofour decision to write down the Cloud 9 loan notes. Further details are includedin Note 2 to the financial information. Goodwill amortisation costs in the year were £26.2m (2004 restated: £4.8m; 2004as previously reported: £4.8m). This includes £19.7m impairments costs in 2005and reflects the reduction in the carrying value of certain goodwill as a resultof the balance sheet review. Finance charges Net finance charges before exceptional items in the year were £9.2m (2004restated: £5.6m; 2004 as previously reported: £5.6m). The increase in net finance charges largely reflects the cost of additionalfunding in place during the year and increased costs of finance. Taxation The tax charge in the period on the loss on ordinary activities amounted to£0.3m (2004 restated: £2.5m; 2004 as previously reported: £5.0m). The chargereflects taxation in certain businesses which cannot be relieved against UK taxlosses. Loss per share and dividends Basic and diluted loss per share was 40.14p (2004 restated: 8.80p loss pershare; 2004 as previously reported 2.08p loss per share). The Board recommends that no final dividend should be paid. No dividend will bepaid in respect of the year to 30 September 2005. As a result, the totaldividend for the period will be nil (12 months to September 2004: 0.45p). Segmental review of unaudited operating results Recorded Products Division Turnover in the Recorded Products Division was £67.7m (2004 restated: £82.1m;2004 as previously reported £127.3m). A large proportion of this reduction isattributable to due to slippage and cancellation of Urban releases. The loss on ordinary activities before taxation for the year was £60.2m (2004restated: £5.0m loss; 2004 as previously reported £13.9m profit), adeterioration year on year. The Recorded Product division, which accounted for approximately half of theGroup's turnover in 2004, has experienced difficult trading conditions sinceApril 2005, particularly in its Urban Records operation and, on 17 June 2005,the Group announced that its interim results would be significantly lower thanin the same period in the prior year, principally due to significant delays inrecord releases. A number of releases in the Urban Records operation werecancelled, and, while some of those that were rescheduled were released in theearly part of the second half of 2005, most of the remainder have now beencancelled and the Group will make no further releases under its Urban Recordsoperation. The Directors believe that, as a result of the problems with theRecorded Products Division, cash receipts were significantly lower thanbudgeted. During 2005, overheads that reflected the expectation of higherrevenue continued to be incurred as budgeted, resulting in an increased workingcapital requirement. Artist Services Division Turnover in the Artist Services Division was £85.2m (2004 restated: £78.6m; 2004as previously reported £87.6m). The loss on ordinary activities before taxation for the year was £14.4m (2004restated: £2.6m loss; 2004 as previously reported £3.5m profit), a deteriorationyear on year. Balance sheet Net liabilities at 30 September 2005 were £55.0m compared with £76.1m net assetsin the restated balance sheet at 30 September 2004 and £122.8m net assets in thereported balance sheet at 30 September 2004. The significant deterioration isas a result of the net losses recorded in the year. Net borrowings and cash flow Net debt at 30 September 2005 was £140.4m compared with £73.9m at 30 September2004. This includes the Convertible Bonds of £30m as at 30 September (2004:£21.5m). The operating loss has contributed to a significant cash outflow from operatingactivities in the period of £42.5m (2004 restated: £2.7m inflow; 2004 aspreviously reported £7.2m inflow). International Financial Reporting Standards The Group intends to adopt International Financial Reporting Standards (IFRS) inits accounts for the financial year ending 30 September 2006 and will announcemore details as to the financial impact in due course. CONSOLIDATED GROUP PROFIT AND LOSS ACCOUNT 2005 2004 Unaudited Results before Year ended 30 September the impact of exceptional Exceptional items items Total Restated £'000 £'000 £'000 £'000 Turnover Existing operations 152,782 (1,774) 151,008 166,687Acquisitions 5,136 - 5,136 - Turnover - continuing operations 157,918 (1,774) 156,144 166,687 Cost of sales (116,542) (36,640) (153,182) (110,887) Gross profit 41,376 (38,414) 2,962 55,800 Total administrative expensesAmortisation (8,390) (21,242) (29,632) (6,476)Depreciation (3,342) (2,512) (5,854) (3,154)Other administrative expenses (73,865) (5,286) (79,151) (55,908) Total administrative expenses (85,597) (29,040) (114,637) (65,538) Group operating (loss)/profit: Existing operations (48,081) (67,454) (115,535) (9,738) Acquisitions 3,860 - 3,860 - Group operating loss (44,221) (67,454) (111,675) (9,738) Interest receivable and similar income 575 - 575 93 Exceptional items - (21,680) (21,680) (11,400) Interest payable and other charges (9,779) - (9,779) (5,689) Loss on ordinary activities before taxation (53,425) (89,134) (142,559) (26,734) Taxation on loss on ordinary activities (311) - (311) (2,450) Loss on ordinary activities after taxation (53,736) (89,134) (142,870) (29,184) Minority interests 35 - 35 (129) Loss on ordinary activities for the financialyear (53,701) (89,134) (142,835) (29,313) Dividends 15 - 15 (1,528) Retained loss for the financial year (53,686) (89,134) (142,820) (30,841) Earnings per share: Basic (40.14)p (8.80)p Diluted (40.14)p (8.80)p CONSOLIDATED GROUP BALANCE SHEETUnaudited 2005 2004Year ended 30 September Restated £'000 £'000Fixed assets Intangible assets 14,896 22,653Goodwill 78,287 84,185Tangible assets 8,957 13,652Investments 72 17,907Investments in joint venturesShare of gross assets 1,862 2,135Share of gross liabilities (1,862) (2,135) 102,212 138,397 Current assets Stocks 5,296 10,524Debtors - amounts falling due within one year 57,253 56,346 - amounts falling due after one year 4,869 22,329Investments 2,500 -Cash at bank and in hand 9,739 20,046 79,657 109,245 Creditors: amounts falling due within one year (110,515) (92,631) Net current (liabilities)/assets (30,858) 16,614 Total assets less current liabilities 71,354 155,011 Creditors: amounts falling due after one year (includingconvertible debt) (115,113) (78,876) Provisions for liabilities and charges (11,255) - Net (liabilities)/assets (55,014) 76,135 Capital and reserves Called up share capital 46,388 41,997 Shares to be issued 250 250Share premium account 91,079 81,493Profit and loss account (193,039) (47,948) Equity shareholders' funds (55,322) 75,792 Minority interests 308 343 Total capital employed (55,014) 76,135 CONSOLIDATED GROUP CASHFLOW STATEMENTUnaudited 2005 2004Year ended 30 September Restated £'000 £'000 Net cash flow from operating activities (42,473) 2,687Returns on investment and servicing of finance (8,631) (5,596)Taxation (3,128) (168)Capital expenditure and financial investment (5,520) (8,616)Acquisitions and disposals (4,520) (9,288)Equity dividends paid (1,535) (1,328) Cash outflow before financing (65,807) (22,309)Financing 37,602 21,482 Decrease in cash in the year (28,205) (827) Reconciliation of net cash flow to movement in net debtDecrease in cash in the year (28,205) (827)Cash flow from movement in debt and lease financing (37,595) (20,882) Change in net debt resulting from cash flows (65,800) (21,709)New finance leases (750) (500) Movement in net debt in year (66,550) (22,209)Net debt at 1 October 2004 (73,852) (51,643) Net debt at 30 September 2005 (140,402) (73,852) CONSOLIDATED GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSESUnaudited 2005 2004Year ended 30 September Restated £'000 £'000 Loss for the financial year (142,835) (29,313)(Loss)/profit on retranslation of foreign currency subsidiaries (2,530) 1,151Profit/(loss) on retranslation of long term funding of overseas 259 (1,825)subsidiaries Total recognised gains and losses relating to the financial year (145,106) (29,987) Prior Year Adjustment (46,713) Total recognised gains and losses since last annual report (191,819) RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS Unaudited 2005 2004Year ended 30 September Restated £'000 £'000 Opening Shareholders' funds 122,505 129,534Prior Year Adjustment (46,713) (25,155) Opening Shareholders' funds - as restated 75,792 104,379Loss for the financial year (142,835) (29,313)Dividends 15 (1,528)Exchange difference on retranslation of net assets of subsidiary (2,530) 1,151undertakingsProfit/(loss) on retranslation of long term funding of overseas 259 (1,825)subsidiariesIssue of share capital 13,977 3,428Movements in shares to be issued (note 23) - (500) Net reduction to shareholders' funds (131,114) (28,587) Closing shareholders' funds (55,322) 75,792 Notes to the financial information 1. Basis of preparation The unaudited financial information has been prepared under the historical costconvention and in accordance with applicable accounting standards. The principal accounting policies applied are summarised below. They have beenapplied consistently in dealing with items which are considered material inrelation to the accounts except for the changes in accounting policies referredto below. In 2005 the Directors have also made certain changes to accountingestimates, the effects of which are set out below. Going concern The Group incurred substantial losses in the year ended 30 September 2005 andthe balance sheet shows net liabilities as at that date. The Group has initiated a reduction in its administrative costs in the yearended 30 September 2005 and plans to dispose of certain non-core assets. Theexpected impacts of these measure have been reflected in the Group's most recenttrading and cash flow forecasts, which have been carefully reviewed by theBoard. The directors have also considered the legal proceedings in which the Group iscurrently involved. The Group has taken extensive external legal advice onmaterial claims. On the basis of this advice, the directors believe the outcomeof these proceedings will not materially affect the Group's financial positionor result in a material amendment to the Group's forecasts. In December 2005, the Board announced that it would explore a number of optionsfor the medium and long term financing of the Group. The Board has madesignificant progress and is close to reaching definitive agreement involving: • A significant equity raising through Evolution Securities of £110m; • Cancellation of £35m of indebtedness; and • New committed facilities. Shareholders should be aware that the equity fund raising is likely to occur ata significant to the current market price of the ordinary shares. Due to theamount being raised relative to the market capitalisation of the Group, existingshareholders will also suffer significant dilution. To mitigate the effects ofthis the Board intend to make an element of the equity fund raising available tothe existing shareholders and to allow excess applications under any pro rataelement of the fundraising. The equity fund raising would be subject inter aliato the approval of existing shareholders. The Board expect to recommend theproposed equity fund raising to existing shareholders. The proposed fund raising is expected to repair the Group's balance sheet andcreate a stronger foundation for the business going forward. The Board has received an indication from Evolution Securities Limited that itexpects to be in a position to successfully underwrite the proposed fund raisingin the near future subject to all the relevant documentation being signed. The Group has also reached an in-principle agreement with its principal lenderand its convertible bondholder under which, subject to a successful fundraising, inter alia, £35m of the Group's outstanding indebtedness will becancelled and covers the provision of a future committed facility to the Group.The equity fund raising and the agreement with the Group's creditors areinterconditional. The Group has also entered into discussions to put in place new facilitieswithout an additional capital raising to meet the Group's working capitalrequirements in the event that the capital raising was not to proceed, and theGroup's principal lender has stated that based on the information currentlyavailable it remains the banks current intention to support the Group for the 12months to 31 January 2007. Such alternative arrangements would require theapproval of the bondholder. The Directors consider it appropriate to prepare the Group's accounts on a goingconcern basis , taking into account the uncertainties mentioned above inrelation to the consensual capital raising. The accounts do not, therefore,include any adjustments which may be necessary if the Group was unable tooperate. Basis of consolidation The Group's unaudited financial information includes the assets and liabilitiesand results of the Group and its subsidiary companies. Transactions and balancesbetween Group companies have been eliminated. Subsidiary companies have been identified as being those where the Companyexercises dominant influence, which may be evidenced by the fact that theCompany's appointed Directors dominate the Board, and the Company setscommercial policy. Investments in associated undertakings, which are material, are accounted for onthe basis of the equity accounting method and the Group's share of theassociated undertakings' losses and profits included in the consolidatedfinancial information accordingly. Joint ventures are accounted for using the gross equity method. Accounting policies The Directors have decided to change certain of the Group's accounting policiesand also certain of its accounting estimates in order to increase the relevance,understandability and comparability of the Group's financial reporting. Thechanges to accounting policies are described below, all other accountingpolicies are as stated in the Group's report and accounts for the year ended 30September 2004. Recorded Product - catalogue exploitation contracts (CECs) The Group previously recognised income from such contracts when they becamecontractually binding and the Group considered that it had substantiallycompleted all of its obligations under such agreements. Where such contractswere of a long term nature the income and associated costs were discounted overtheir term. The policy was followed, in part, because the contracts includedterms which provided for a guaranteed minimum amount of income. Having re-assessed these contracts and the Group's performance obligations underthe terms of these contracts in the current trading environment, the Directorsnow consider that the Recorded Product business will have significant ongoingobligations to perform for the life of each contract, and, therefore, that thisaccounting policy is no longer relevant. In addition, the Directors have concluded that, as a result of changes in theGroup's circumstances and in the recorded music market, this accounting policyhas ceased to be reliable. This conclusion recognised, inter alia, thedifficulty of objectively re-assessing the net present value of CECs to reflectthe impact of changes in circumstances on their future performance in thecurrent trading environment. The Directors have, therefore, adopted a more prudent policy which does notdepend on assessment of future contract performance, but which recognises incomein the profit and loss account as the underlying sales are made. This policyprovides a more objective and reliable measure of the performance of thebusiness. The Group anticipates that, in the future, CECs may be entered into oneither an advance or a guarantee basis. The new policy will treat both types ofcontract in a similar way, aiding comparability of similar transactions. It willalso be more in line with industry practice and will aid comparability andunderstanding of the Group's financial statements. Recorded Product - other rights exploitation contracts The Group previously recognised income from such contracts when signed heads ofagreement or similar documentation had been obtained and the Group consideredthat it had substantially completed all of its obligations under suchagreements. This policy was derived from the nature of contracts under which advances arereceived in consideration for an ongoing distribution or license right, and arerecoupable but not refundable. Hence the Group would take such advances to theprofit and loss account as income as and when they were received in cash,together with an estimate of associated costs, as if the advance representedsales made as an agent for the reporting unit. The revised policy recognises all such advances received on the balance sheet.Income is recognised in the profit and loss account as the underlying sales aremade and the advance recouped. The Directors consider that the revised policy will provide a more reliablelong-term measure of the performance of the business in its currentcircumstances. In addition, it is more in line with industry practice, aidingcomparability and understanding of the Group's financial statements. Recognition of management commission income Under the Group's previous policy, management commission income was recognisedwhen agreement had been obtained, there was a high degree of certainty that suchincome would be received, and the Group considered it did not need to performany further significant work to realise such income. This policy was considered appropriate because of the longevity of therelationship between the Group's artist managers and the acts from whom a highproportion of the Group's management commissions were derived, and reflected thefact that managers' efforts were expended in advance to secure the deals whichgenerated income. As a result of the growth in the Group's Artist Management business, its rosternow encompasses a wider and larger range of artists and managers. In addition,artists now generally require a more comprehensive and ongoing level ofinvolvement from their managers, with correspondingly less emphasis onnegotiating deals up front. The new policy recognises income on an accruals basis when it becomescontractually due, which is in accordance with the requirements of UITF Abstract40. The Directors consider this policy more appropriately reflects the Group'scurrent arrangements. Recognition of origination costs The Group's previous policy was to capitalise and amortise origination coststhrough cost of sales over a period of between three and five years. This policyhas been compared with those of other music companies, and the Directors havedecided to adopt a more prudent policy of immediate write off of all originationcosts. Accounting for fee-based revenue Under the previous policy, certain of the Group's peripheral activities,particularly those of its in-house travel agency, were reported on a grossbasis. In current market conditions the travel agency is earning income on a feebasis. Accordingly, the new policy requires sales invoiced by the Group to bedisclosed on a 'net fee' basis. 'Net fees' represent gross sales to customersless the amount remitted to the third party. This change in accounting policyresults in a change in the amount of recorded income but does not affect profit. Impact of changes in accounting policies The overall effect of the changes in accounting policy on the Group is to reduceshareholders' funds brought forward by £46,713,000. Further details are included in Appendix 1. 2. Exceptional items The Group initiated a fundamental restructuring in 2005 across all its operatinglocations and, in particular, of its US Recorded Product business. The costs ofthis restructuring have been reported as an exceptional item. Against this background, the Board of Directors comprehensively reviewed theestimation techniques used by the Group in applying its accounting policies. Asresult of this review, the Directors have changed certain of the Group'sestimation techniques and, consequently, certain of its accounting estimates.The effect of these changes in accounting estimates was material and has beenreported as an exceptional item. The Group made a further provision in 2005 of £14,600,000 (2004: £11,400,000)against Loan Notes issued on the disposal of Cloud 9 to write them down to theirexpected net realisable value. Exceptional items £'000 £'000 Deferred recognition of royalty income 382Provision for sales returns 1,392 -----------Turnover 1,774 Provisions for:Recoupable advances 29,524Returns (446)Debts 4,043Stock 5,209Royalties 512Other costs 1,769Onerous leases 800 Asset impairment:Investment 515Tangible assets 2,512Intangible assets 1,524Goodwill 19,718 ----------- 65,680 -----------Group operating loss 67,454 Restructuring costs 7,080Provision against Loan Notes on disposal of Cloud 9 14,600 -----------Non-operating exceptional items 21,680 -----------Exceptional loss for the financial year 89,134 =========== In addition certain one-off and non recurring items are included in 2005 EBITDA.These include: Royalty income and provisions Changes in estimate have bee made based on revised assessments of the certaintyof receipt of certain amounts of royalty income and of costs arising fromroyalty audits. Recoupable advances During the year, the Group changed its method of estimating the likely level ofrecoupment shortfall on artist and licensor advances to take greater account ofsales performance to date and to place correspondingly reduced reliance onfuture sales projections. The recoupable element of costs previously capitalisedas 'recording artist shared copyright costs' under profit share arrangementswith artists were re-classified as recoupable advances and provided against inthe same way as other advances. Advance payments to developing artists continuedto be fully provided for in the profit and loss account as incurred. The Groupalso wrote off certain unrecouped artist manager balances. Debtors, returns and stock provisions During the year, the Group changed its methods for estimating the levels ofprovision required in these areas and adopted a systematic approach to theirapplication. Asset impairment The Group undertook a review of all its income-generating assets during 2005,which resulted in an assessment that certain of the Group's goodwill assets wereimpaired. In the course of the review, certain other assets, including certain musiccatalogue and tangible fixed assets, were also identified as impaired. Historically, recording artist shared copyright costs have been capitalised asintangible fixed assets in the consolidated balance sheet and amortised throughcost of sales over a period not exceeding 5 years, in line with actual revenuesearned from the sale of product which first utilises such rights. The Directorshave reviewed their estimation of the value of assets that will earn revenuesover the periods previously anticipated and these assets have been fullyimpaired in the current year. 3. Analysis of operations and EBITDA (a) Analysis of continuing operations: Unaudited 2005 2004 Year ended 30 September Restated £'000 £'000 Cost of sales (153,182) (110,887) Gross profit 2,962 55,800 Total administrative expenses (114,637) (65,538) The following amounts are included in the totals for the year ended 30 September2005 in respect of acquisitions: Cost of sales £0.1m, Gross profit £5.1m andTotal administrative expenses £1.2m. (b) Reconciliation of Group operating loss to earnings before interest,taxation, depreciation and amortisation charged after gross profit (EBITDA): Unaudited Year ended 30 September 2005 2004 Results before the impact of exceptional Exceptional items items Restated £'000 £'000 £'000 £'000 Group operating loss (44,221) (67,454) (111,675) (9,738) Add Depreciation 3,342 2,512 5,854 3,154 Add Amortisation 8,390 21,242 29,632 6,476 EBITDA (loss) (32,489) (43,700) (76,189) (108) 4. Segmental analysis Unaudited Year ended 30 September Turnover Loss on ordinary Net assets/(liabilities) activities before taxation 2005 2004 2005 2004 2005 2004 Restated Restated Restated £'000 £'000 £'000 £'000 £'000 £'000 Analysis by class of business Recorded product 67,743 82,143 (60,162) (4,952) 23,045 77,601 Artist services 85,200 78,598 (14,366) (2,590) 30,697 40,330 Group services 4,686 5,946 (37,147) (2,196) 31,646 32,056 Less: Intra group (1,485) - - - - - 156,144 166,687 (111,675) (9,738) 85,388 149,987 Other income and interest - - (9,204) (5,596) - - costs Net interest bearing - - - - (140,402) (73,852) liabilities Exceptional item (see note 1) - - (21,680) (11,400) - - 156,144 166,687 (142,559) (26,734) (55,014) 76,135 The amounts attributable to acquisitions in the year as set out in the profitand loss account for turnover and Group operating profit are not material forsegmental analysis. The Group Services loss for 2005 includes goodwill impairment losses of£19,718,000. The geographical turnover of the Group was as follows: Unaudited Year ended 30 September Turnover Turnover Restated 2005 2004 £'000 £'000 Analysis by geographical region: UK 66,137 64,198 US 62,307 59,999 Rest of Europe 22,414 27,716 Rest of world 5,286 14,774 156,144 166,687 In the opinion of the Directors, a geographical analysis of profits and lossesand net (liabilities)/assets would be seriously prejudicial to the commercialinterests of the Group and therefore is not presented. 5. Reconciliation of operating loss to net cash flow from operatingactivities Unaudited Year ended 30 September 2005 2004 Restated £'000 £'000 (a) Operating loss (111,675) (9,738) Depreciation of tangible assets 5,854 3,154 Amortisation of goodwill and intangible assets 29,632 6,476 Amortisation of intangible assets in cost of sales - 1,077 Loss on disposal of tangible assets 523 411 Loss on disposal of intangible assets 208 74 Loss on disposal of investments 735 - Decrease/(increase) in stocks 5,228 (869) Decrease/(increase) in debtors 30,802 (5,845) (Decrease)/increase in creditors (3,780) 7,947 Net cash flow from operating activities (42,473) 2,687 (b) Analysis of cash flows for headings netted in the cash flow Returns on investments and servicing of finance: Interest received 575 93 Interest paid (9,065) (5,538) Interest element of finance lease rental payments (141) (151) Net cash outflow for returns on investments and (8,631) (5,596) servicing of finance Capital expenditure and financial investment: Purchase of tangible fixed assets (905) (3,846) Purchase of intangible fixed assets (4,615) (4,729) Sale of tangible fixed assets - 124 Purchase of investments - (165) Net cash outflow for capital expenditure and (5,520) (8,616) financial investment Acquisitions and disposals: Purchase of subsidiary undertakings (4,388) (10,061) Net cash acquired with subsidiaries (132) 773 Net cash outflow for acquisitions and disposals (4,520) (9,288) Financing: Issue of Ordinary Share capital (net of related expenses) 7 600 Issue of Convertible Loan Notes 8,500 21,500 Capital element of finance lease rental payments (905) (618) New secured loans: 30,000 - repayable within one to two years Net cash inflow from financing 37,602 21,482 At 30 September Cash flow Other non-cash At 30 September 2004 changes 2005 £'000 £'000 £'000 £'000(c) Analysis of net debt Cash in hand and at bank 20,046 (10,307) - 9,739 Overdrafts (16,054) (17,898) - (33,952) 3,992 (28,205) - (24,213) Debt due within one year (3,000) - - (3,000) Debt due after one year (52,000) (30,000) - (82,000) Finance leases (1,344) 905 (750) (1,189) Total before Convertible Loan (52,352) (57,300) (750) (110,402) Notes Convertible Loan Notes (21,500) (8,500) - (30,000) Total (73,852) (65,800) (750) (140,402) (d) Major non-cash transactions: During the year the Group entered into finance lease arrangements in respect ofassets with a total capital value at the inception of the leases of £750,000(2004: £500,000). (e) Purchases of subsidiary undertakings: During the year, the Group acquired 100% of the share capital of Twenty-FirstArtists Limited for a consideration of £16 million funded through a mixture ofcash and shares. Unaudited Year ended 30 September 2005 2004 £'000 £'000 The net assets acquired were as follows (book value and fair value) Fixed assets 27 178 Stock - 457 Debtors 3,199 779 Cash - 773 Bank overdrafts (132) - Creditors and provisions for liabilities and (532) (1,451) charges 2,562 736 Goodwill 13,976 11,980 16,538 12,716 The consideration was satisfied as follows: Shares issued 12,150 1,216 Deferred consideration - 1,439 Cash 4,388 10,061 16,538 12,716 6. Litigation Save as set out below, there are no and there have not been any legal,governmental or arbitration proceedings (including any such proceedings whichare pending or threatened of which the Group is aware) which may have or havehad in the recent past a significant effect on the Company and/or the Group'sfinancial position or profitability. Sugar Hill Records Sanctuary Records Group Limited and Sanctuary Copyrights Limited are engaged inan action brought by Sylvia Robinson, Sylvia Inc. and others in the courts ofNew York, alleging that these companies failed to account and pay royalties tothe plaintiffs pursuant to certain contracts entered into between the plaintiffsand Sugar Hill Records (which were acquired by Sanctuary Copyrights Limited in1995) and seeking damages and rescission of those contracts or, in thealternative, an accounting of royalties. A default judgment was entered for theplaintiffs in May 2004 partially rescinding the contracts and awarding theplaintiffs the proceeds derived by the defendant companies from 15 May 1995 fromthe exploitation of the recordings which were the subject of those contracts. Aninquest was directed to determine the amounts derived by the defendant companiesto be awarded to the plaintiffs. In June 2004, the Group moved to vacate thedefault judgment but was unsuccessful. On 15 June 2005, the plaintiffs submitteda claim to the inquest referred to above in the sum of $232,272,626 plusinterest. On 22nd August 2005, the defendant companies submitted their ownassessment of damages to the inquest in various amounts according to differentheads of and bases for damages. The Group has been advised by US legal counsel that, in its opinion, the defaultjudgment is not consistent with prevailing law. On 10 November 2005, themagistrate conducting the inquest requested the parties to brief him on whetherthe rescission of the contracts was authorized by either New York State contractlaw or the United States Copyright Act and a brief was submitted on behalf ofthe Group accordingly. The Group will continue to seek to have the defaultjudgment vacated as unauthorised and/or to appeal in the event damages areassessed. Should the default judgment not be vacated or overturned, the Group isuncertain as to what the outcome of the claim might be and can offer noassurances on its prospects for successfully defending the claim. Shouldjudgment be awarded for the plaintiffs (either on the default judgment or in anysubsequent proceedings), the Company is not yet in a position to assess whetherthe damages to be awarded will have a significant effect on the Group'sfinancial position or profitability. However, the Company, having taken US legaladvice, believes that, based upon its estimates of actual sales of the offendingrecordings, associated costs incurred in connection with those recordings andthe royalty rates payable to the plaintiffs pursuant to the subject contracts,that damages are likely to be in the region of $300,000 to $5,000,000 (plusinterest) depending upon what basis a court may eventually determine thatdamages may be payable in respect of the claims made. 5.1 Label Group In January 2002, Sanctuary Records Group Inc ("SRGI") entered into an agreementwith 5.1 Label Group LLC ("5.1") pursuant to which SRGI was to license certainrecordings to 5.1. In July 2005, 5.1 made a claim against SRGI (and isattempting to join the Company to the action as a defendant) contending wrongfulbreach of that agreement as amended by a subsequent agreement dated 29 September2003, breach of warranty, fraud and conspiracy in an amount in excess of $50million plus the possibility of punitive damages. The Group, having taken USlegal advice, believes the claim for damages for these amounts to be withoutmerit and will not be awarded. The Group is contesting the claim and has filed across-complaint against 5.1. In particular, the Group will vigorously defend theclaims of fraud made against it. Reggae The Group has a substantial business in reggae music. In connection with itsexploitation of certain reggae recordings, the Group is the subject of a numberof claims in French courts (or has indemnified other parties who are the subjectof such claims), and expects to become subject to other claims, alleging thatcertain artists whose performances are contained on those recordings did notgive written consent for their performances to be exploited on records and, inparticular, on compilations. The amounts claimed or to be claimed are not yetfully known but are expected to amount to at least Euros 9.4 million. The Groupbelieves, having been advised by French legal counsel that, whilst the claimsmay or may not be substantiated, the damages to be awarded are likely to be lessthan the amounts claimed. Urban Managers On 10 November 2005, Music World/Sanctuary Urban Group Inc ("Sanctuary Urban")terminated the employment of Troy Carter, Julius Erving III and Tony Davis forcause, specifically alleging that Mr Carter and Mr Erving were in materialbreach of their employment agreements with Sanctuary Urban and also in materialbreach of a stock purchase agreement dated 1 March 2004 relating to the sale oftheir business to Sanctuary Urban and that Mr Davis was in material breach ofhis employment agreement with Sanctuary Urban and also in material breach of astock purchase agreement dated 9 September 2004 pursuant to which the Companypurchased his business. In particular, Sanctuary Urban and the Company havealleged that Mr Carter, Mr Erving and Mr Davis made material misrepresentationsand omissions of material facts in connection with the execution of thoseagreements and in connection with their subsequent performance there under, noneof which, in the good faith judgment of Sanctuary Urban and the Company, isreasonably susceptible to cure. Since issuing those letters of termination andbreach, Sanctuary Urban and the Company have filed a Demand for Arbitration,seeking the return to it of the purchase price paid for the businesses under thestock purchase agreements referred to in the previous paragraph (being$3,898,333 in the case of Mr Davis and $4,000,000 in the case of Mr Carter andMr Erving) and the various salaries and other benefits paid to Mr Carter, MrErving and Mr Davis under their employment agreements, plus interest. SanctuaryUrban and the Company have been advised by US counsel that they have areasonable prospect of success in this action. However, the Company believesthat Mr Carter, Mr Davis and Mr Erving may make counter-claims against theCompany and Sanctuary Urban and possibly other members of the Group, whichcounter-claims may be material in amount and which may make allegationsconcerning the motives for the termination of the employment of Mr Carter, MrErving and Mr Davis with Sanctuary Urban, all of which Sanctuary Urban and theCompany will vigorously deny, having been advised by US counsel that such claimswould be contrary to what would be allowed under the employment contracts andpurchase agreements as well as inconsistent with the law and facts as theCompany knows them. 7. Statutory information and audit review The financial information in this preliminary announcement does not constitutestatutory accounts within the meaning of Section 240 (5) of the Companies Act1985. These results reflect changes in certain accounting policies, which giverise to prior year adjustments, and alterations in methods of estimation incertain areas, which give rise to exceptional items as previously announced. The Board has been in discussions with its auditors and the Board expect thatthe auditors will qualify their audit opinion in respect of certain changes toaccounting policies. The auditors have indicated that they will issue anadverse audit opinion in this respect. In addition the auditors will highlight the fundamental uncertainty surroundingthe Group's adoption of the going concern basis of preparation of the financialstatements, pending the outcome of the proposed equity fund raising. The Board is confident that the changes it has made to the accounting policiesand its methods of estimation are appropriate. The audited financial statements of The Sanctuary Group plc for the year ended30 September 2004 have been reported on with an unqualified audit report inaccordance with Section 235 of the Companies Act 1985 and have been delivered tothe Registrar of Companies. APPENDIX 1 Effect of changes in accounting policies on prior year results Effect on turnover Effect on operating profit Increase / (decrease) Increase / (decrease) 2004 2004 £000s £000sRecognition of income from catalogue and other (45,198) (16,594)rights exploitation contractsRecognition of Artist Management commission income (6,711) (6,124)Accounting for origination costs - (2,214)Accounting for fee-based income (2,369) - ------------- -------------Effect on turnover of the year (54,278) -------------Effect on Group operating (loss) / profit for the year (24,932)Taxation on ordinary activities 2,531 -------------Effect on retained loss for the year (22,401)Exchange differences 843 -------------Effect on profit and loss account reserve (21,558) -------------Accumulated effect on profit and loss account reserve (46,713) =============Accumulated reduction in net assets (46,713) ============= Reconciliation of profit and loss account as originally reported and as restatedfor changes in accounting policies Revenue recognition As CECs & other Artist Accounting Accounting Tax on As originally rights for for adjustments restated exploitation Management origination fee-based reported contracts income costs income £000s £000s £000s £000s £000s £000s £000s YEAR ENDED SEPTEMBER 2004 Total turnover 220,965 (45,198) (6,711) - (2,369) 166,687 Cost of sales (140,233) 28,604 587 (2,214) 2,369 (110,887) Gross profit 80,732 (16,594) (6,124) (2,214) - 55,800 Amortisation (6,476) - - - - (6,476) Depreciation (3,154) - - - - (3,154) Other administrative (55,908) - - - - (55,908) expenses Total administrative (65,538) - - - - (65,538) expenses Total Group operating 15,194 (16,594) (6,124) (2,214) - (9,738) (loss) / profit Taxation on ordinary (4,981) 2,531 (2,450) activities Retained (loss) / (8,440) (16,594) (6,124) (2,214) - 2,531 (30,841) profit for the year Reconciliation of Balance Sheet as originally reported and as restated forchanges in accounting policies FY04 CECs & other Management Origination Tax on FY04 Diff rights commission costs ordinary exploitation income activities contracts Restated ReportedFixed assetsIntangible assets 22,653 (8,900) 31,553 (8,900)Goodwill 84,185 84,185 0Tangible assets 13,652 13,652 0Investments 17,907 17,907 0Share of gross assets 2,135 2,135 0Share of gross liabilities (2,135) (2,135) 0 138,397 0 0 (8,900) 0 147,297 (8,900) Current assetsStocks 10,524 10,524 0Debtors- amounts falling due within one year 56,346 (14,426) (12,150) 82,922 (26,576)- amounts falling due after one year 22,329 (19,256) 41,585 (19,256)Cash at bank and in hand 20,046 20,046 0 109,245 (33,682) (12,150) 0 0 155,077 (45,832)Creditors: amounts falling due withinone year (92,631) 408 600 (93,639) 1,008Net current liabilities assets 16,614 (33,274) (11,550) 0 0 61,438 (44,824) Total assets less current liabilities 155,011 (33,274) (11,550) (8,900) 0 208,735 (53,724) Creditors: amounts falling due afterone year (78,876) (78,876) 0Provisions for liabilities andcharges 0 7,011 (7,011) 7,011 76,135 (33,274) (11,550) (8,900) 7,011 122,848 (46,713) Capital andreservesCalled up share 41,997 41,997capitalShares to be issued 250 250Share premium account 81,493 81,493Profit and loss account (47,948) (33,274) (11,550) (8,900) 7,011 (1,235)Equity shareholders' funds 75,792 (33,274) (11,550) (8,900) 7,011 122,505 0Minority interests 343 343Total capital employed 76,135 76,135 76,135 76,135 76,135 76,135 76,135 APPENDIX 2 By agreements dated 27 January 2006, the Company, Highbridge International LLC("Highbridge") and the Governor and Company of the Bank of Scotland ("BoS") haveagreed to make certain amendments to: (A) the facilities made available by BoSto the Company and certain of its subsidiaries pursuant to (a) a 7thsupplemental agreement dated 22 August 2005, amending and restating a facilityagreement dated 26 October 1998 as amended and restated from time to time; (b)the Multi-option Facility Agreement dated 19 August 2005; (c) the AdditionalRevolving Credit facility dated 28 November 2005 by BoS as amended and restated(the "Facilities"); and (B) the £30 million convertible Loan Notes due 2008 (theConvertible Loan Notes") issued pursuant to subscription agreement dated 6November 2003 between (1) the Company and (2) Highbridge and Merrill LynchInternational (the "Subscription Agreement"), as amended by a supplementalsubscription agreement dated 31 March 2005 between (1) the Company and (2)Highbridge (the "Supplemental Subscription Agreement"); and (ii) a ConvertibleLoan Note Instrument dated 28 November 2003 entered into by the Company, asamended by a supplemental instrument dated 27 October 2004 between (1) theCompany and (2) Highbridge, by the Supplemental Subscription Agreement and byfurther supplemental instruments dated 22 August 2005, 9 January 2006 and asfurther amended from time to time between (1) the Company and (2) Highbridge(the "Instruments") and (C) the Warrants to subscribe for up to 8,919,722ordinary shares in the Company issued to Highbridge in connection with theConvertible Loan Notes (the "Warrants"); all to take account of the fact thatImpact Day (being the day on which, the prospectus for the proposed fundraisingon behalf of the Company by Evolution Securities Limited referred to above (the"Evolution Placing") having been approved by the UK Listing Authority, thefundraising is announced and the prospectus is filed at Companies House andposted to shareholders) is now scheduled to take place on or before 14 February,rather than 31 January 2006. To ensure sufficient funding to continue to meet some of the exceptional costsassociated with the Company's restructuring and for working capital purposes upto Impact Day, it has been agreed with BoS to increase its facilities from£134.125m to £137.125m. In addition, as previously announced, the Company has afurther £5.25m of current bank facilities. Such additional facilities (for up toa further £3 million) will be made available pursuant to a Further SupplementalFacility Agreement amending the Additional Revolving Credit Facility dated 29November 2005 (as amended and restated by the Supplemental Facility Agreementdated 9 January 2006 between BoS and the Company) referred to above. It has alsobeen agreed between the Company and Highbridge that the terms of theInstruments, and thus the Convertible Loan Notes, will, as a consequence, beamended as set out below. The following definition will replace the existing definition of "AdditionalRevolving Credit Facility Agreement" in Section 1.1 of the Loan Note Instrument:"the additional revolving credit facility agreement dated 29 November 2005between BoS and the Company (a copy of which has been delivered to the MajorityHolder) as amended and restated by the "Supplemental Facility Agreement" beingan agreement dated 9 January 2006 between BoS and the Company, as amended by a "Further Supplemental Facility Agreement" to be dated the same date as thisSupplemental Instrument, which together amend and restate the foregoingadditional revolving credit agreement in the form and terms of the draft annexedhereto as Exhibit A (but for the avoidance of doubt excluding any amendment oraddition to the foregoing documents which may at any time be agreed between BoSand the Company without the prior written consent of the Majority Holder savethat any waiver which BoS may grant in respect of any obligations of the Companyunder the Additional Revolving Credit Facility shall not constitute an amendmentor addition for this purpose);". The definition of "Permitted Senior and PariPassu Indebtedness" in Section 1.1 of the Loan Note Instrument shall be amendedby inserting at the beginning of such definition the words "up to £12,000,000 ofIndebtedness owing to BoS incurred pursuant to the Additional Revolving CreditFacility Agreement". It has also been agreed between the Company, BoS andHighbridge, subject to Impact Day occurring, to allow any increase inIndebtedness (as defined in the Instruments) of £5 million as may be required bythe Company as from Impact Day up to the date being 10 days following Completion(being the date on which, following allotment, the new shares issued pursuant tothe Evolution Placing are admitted to trading on the London Stock Exchange) or,if earlier, the date being the second business day after the Company receivesthe proceeds of its issue of new shares pursuant to the Transaction (the "Receipt Date") even if such additional Indebtedness causes the Company to exceedthe limits set out in the definition of Permitted Senior and Pari PassuIndebtedness in the Instruments. A similar change will be made to theFacilities to allow for such increased indebtedness (subject to BoS's usualcredit approval procedures). It was announced on 9 January 2006 that the holder (including for the avoidanceof doubt the Majority Holder as defined in the Instruments (and being, in eachcase, at the date of this announcement Highbridge)) shall not seek to declareall or any portion of the Convertible Loan Notes to be due and payable pursuantto Section 16.2 of the Instruments on the grounds that an Event of Default hasarisen or shall have arisen as set out in Section 16.1(j)(v) by virtue of thefact that at any time on or prior to 29 September 2006 (i) the value of theassets of the Company or any Material Subsidiaries (as defined in theInstruments) may fall, or may have fallen, to less than the amount of itsliabilities (taking into account its contingent and prospective liabilities) or(ii) that the Company or any Material Subsidiary has become or is deemed unableto pay its debts within the meaning of section 123(1)(a) of the Insolvency Act1986 save that this provision shall cease to have effect if Impact Day has notoccurred by 31 January 2006. It has now been agreed that the reference to 31January 2006 shall be deemed to be a reference to 14 February 2006. With effect from Completion. (i) the holder of the Convertible Loan Notes agreesto the cancellation of the Initial Loan Notes (as defined in the Instruments andbeing the initial tranche of the Convertible Loan Notes issued on 28 November2003 and bearing interest at the rate of 4.75% per annum) (in the principalamount of £18 million) but the Company shall remain liable for the interestaccrued thereon up to Completion; and (ii) BoS agrees to the cancellation of£17 million of the principal amount outstanding of the Facilities, cancellationagainst the Facilities as BoS in its sole discretion sees fit. BoS andHighbridge have agreed that they shall do all such things reasonably necessaryor desirable for giving full effect to the arrangements effected or to beeffected pursuant to the terms of the Compromise. On the Receipt Date £4.7 million of the proceeds of the Transaction will be paidby the Company to the holder of the Convertible Loan Notes in payment of anequal principal amount of the Subsequent Loan Notes (bearing interest at therate of 4.75% per annum) and the Additional Loan Notes (bearing interest at therate of 5.75% per annum) (each as defined in the Instruments) to be allocatedbetween them pro-rata to the proportion which the principal amount of SubsequentLoan Notes and Additional Loan Notes respectively bears to the aggregateprincipal amount of both sets of Loan Notes - this will leave a total of £7.3million outstanding Convertible Loan Notes after the compromise referred toabove. Following Completion, the net proceeds of the Transaction, less £4.7 million,will be used to repay outstanding amounts under the Facilities (includingoutstanding fees, interest and principal). No early prepayment or redemption fees will be payable on any repayments of sumsdue pursuant to the Instruments other than accrued interest on the £4.7m ofConvertible Loan Notes repaid. Such accrued interest on the repaid ConvertibleLoan Notes prepaid will be paid, within 14 days of the Receipt Date, togetherwith accrued interest on the cancelled Initial Loan Notes. In the event that Completion takes place, in consideration of the compromisereferred to in the previous paragraph, the Company shall undertake to issue toBoS warrants to subscribe for ordinary shares in the Company (the "FurtherWarrants"), which shall have an exercise price per share equal to that applyingto the Warrants (held by Highbridge), subject to the number of such FurtherWarrants and the terms therein being agreed between the Board of the Company(acting reasonably and recognising BoS's economic interest), Evolution and BoS.It has previously been announced that the exercise price in respect of theWarrants, which is currently 55 pence per ordinary share, shall, conditionalupon Completion occurring, be reset at four (4) times the issue price of theshares issued in the Evolution Placing. Highbridge is sole holder of all of the Convertible Loan Notes issued pursuantto the Instruments and the Warrants and has agreed that it will not sell ortransfer any Convertible Loan Notes or Warrants unless the purchaser ortransferee also agrees to be bound by the matters dealt with in thisannouncement and vote in favour of the Evolution Placing. The Holder of theConvertible Loan Notes and the lender under the Facilities, will only sellWarrants or Convertible Loan Notes or assign or otherwise dispose of interestsin the Facilities on the basis that such Warrants, Convertible Loan Notes andinterests are bound by the matters dealt with in this announcement and are votedin favour of the Evolution Placing. The holder of the Convertible Loan Notes (including for the avoidance of doubtthe Majority Holder) will agree that notwithstanding any existing provision ofthe Instruments and/or the Warrants: (a) the raising of the funds by Evolution through (i) a sub-division and reclassification of existing ordinary shares, (ii) an underwritten placing and open offer of new ordinary shares in Sanctuary and (iii) dependent on the nominal value of the shares, a possible subsequent share consolidation (the "Transaction") does not constitute or give rise to a Major Transaction, Organic Change, Liquidity Event and/or Event of Default within the meaning of the Instruments and/or the Warrants; (b) they will not prior to or following Completion claim that any matter constituting a Major Transaction, Organic Change, Liquidity Event or Event of Default has occurred prior to Completion; (c) they shall not declare all or any portion of the Convertible Loan Notes to be due and payable or redeemable on the grounds of an Event of Default or pursuant to any other provision of the Instruments by virtue of: the implementation of the Transaction; or the Company having, pending Completion, insufficient authorised and unissued share capital to satisfy its obligations to issue shares on conversion of the Convertible Loan Notes and/or exercise of the Warrants. If Impact Day does not occur on or before 14th February 2006 or Completion doesnot occur on or before 14th March 2006, the arrangements set out herein shallterminate and be of no further effect. Save as referred to in this announcement, the Instruments shall continue in fullforce and effect in accordance with their terms. This information is provided by RNS The company news service from the London Stock Exchange