SuperGroup Regulatory News (SGP)

26 Jan 2007 07:01

Sanctuary Group PLC26 January 2007 26 January 2007: For immediate release THE SANCTUARY GROUP Results for the year ended 30 September 2006 The Sanctuary Group, ('Sanctuary' or 'Group'), the international music group,today announces audited results for the year ended 30 September 2006. These results are stated in accordance with International Financial ReportingStandards ("IFRS"). Year Year to 30/09/06 to 30/09/05* £m £m Revenue 133.2 148.1Gross profit/(loss) 36.1 (3.5)Operating loss (56.7) (136.0)Loss after taxation (70.1) (146.5) Basic EPS (Loss per share) (£0.59) (£82.3)Diluted EPS (Loss per share) (£0.59) (£82.3) Net debt (57.5) (131.0) Dividend Nil Nil * Restated for UK GAAP prior period adjustments and transition to adopted IFRS Summary • Operating loss of £56.7m includes £8.0m of non-recurring costs all of which relate to the refinancing and restructuring and non-cash items. • Placing and Open Offer concluded on 20 March 2006 from which the Group received £110.0m before expenses. This fundraising restored the Group's balance sheet and created a stronger foundation for the business going forward. There has also been a progressive improvement in cash management during 2006. • The following directors were appointed during the year: Frank Presland as CEO, Bob Ayling as Chairman, Paul Wallace as Finance Director, and James Wallace and John Preston as non-executive directors. Tina Sharp, non-executive director, is the sole continuing board member from the previous year. • Merchandising division performed in line with management expectations. New signings include V2 Festival, Dirty Pretty Things; ongoing relationships with Iron Maiden and The Who. • Artist Management now has a smaller but profitable roster and managers focusing on clearly agreed financial targets. • Recorded Product is focused on reducing its returns rate, increasing the digitisation of its catalogue, boosting digital revenues and so improving margins. • The Board is currently considering a number of opportunities that may enable it to realise value from the disposal of parts of the Group. At the same time, opportunities for acquisitions or business combinations, which would improve profitability and enhance shareholder value, will be considered. • Frank Presland was appointed to the Board to be Chief Executive for the remainder of 2006, at which point the position was to be reviewed. The Company is now pleased to announce that Mr Presland has entered into a directors service contract with a 12 notice period which replaces the fixed term contract to 31 December 2006 he entered into on his appointment. Frank Presland, Chief Executive, said: "These results highlight the difficultposition that the Group was in. I have been Chief Executive for just overeight months and we now have a new business strategy, with the Group dividedinto three autonomous divisions, each focused on its own profit and cashgeneration. These will be supported by more cost efficient Group services. Underthis new structure, and following a significant cost reduction programme, webelieve that all three divisions will demonstrate improved performance in 2007,although it will be 2008 or later before there is a return to overallprofitability. Management is working hard to establish the appropriate controlsand systems to put the business on a proper footing." Enquiries: The Sanctuary Group plc Frank Presland Chief Executive Officer (020 7300 6515)Paul Wallace Finance Director (020 7300 6515) BrunswickJames Hogan / Craig Breheny / Ash Spiegelberg (020 7404 5959) Note to Editors:Sanctuary is a UK listed international music group, encompassing recordedproduct, merchandising, artist management and arranging and negotiating liveperformances. It has three main operating divisions: Recorded Product;Merchandising and Artist Services, which incorporates both Artist Management andLive Agency. CHAIRMAN'S STATEMENT This has been a turbulent year for Sanctuary and a very disappointing one forits shareholders, but I believe the Company is in a better position now than itwas when the new board was appointed in April 2006. I joined the Board ofSanctuary because I believed the Group had a viable business, with valuableassets, a strong roster of artists and a committed and talented staff. Thisremains my belief but the situation I found on my arrival was not all that I hadexpected. My remit was to establish a new culture of compliance within a proper frameworkof corporate governance as well as to lead the board in its oversight ofmanagement performance. In carrying out this remit, a number of difficultdecisions and announcements had to be made by the Board, both about compliancein the past and the state of current business. I know that these announcementshave disappointed shareholders, but they have been necessary. Since March 2006, we have established a new board of highly qualified people;appointed one of the industry's leading and most successful executives in artistmanagement as chief executive; appointed new auditors; engaged with theFinancial Reporting Review Panel to resolve serious issues identified by themfrom previous years' financial statements; settled a number of the outstandingissues disclosed in the Company's February 2006 prospectus; conducted a reviewof the Company's management and businesses and concluded on what should be doneby the new management to maximise the value of the company for the benefit ofshareholders and employees. Under Frank Presland, the Group's activities have now been structured into threeautonomous divisions, each with profit and loss accountability: RecordedProduct, Merchandising and Artist Services. Each division is now focused on itsown profit and cash generation, supported by more cost-efficient Group services. Against this background, I have been very impressed with the hard work anddedication of our staff and, on behalf of the Board, I would like to thank themsincerely for all their efforts. Group resultsThe Group loss from operating activities for the year ended 30 September 2006was £56.7m (2005: £136.0m loss), which includes £8.0m of non-recurring costs ofwhich £5.5m relate to the refinancing and restructuring. Revenues were £133.2m(2005: £148.1m). The Group loss after taxation for the period under review was £70.1m (2005:£146.5m loss). Net debt at 30 September 2006 was £57.5m (2005: £131.0m). DividendIn view of the current financial position of the Group, the Board is precludedfrom proposing a dividend. International Financial Reporting StandardsThese results are the first that the company has reported having adopted IFRS.The comparative figures for last year have been adjusted on a consistent basis.IFRS does not affect the underlying business performance of the Group and has noimpact on cash generated from operations. RefinancingThe Group completed a refinancing on 20 March 2006. This raised £110m gross and,together with a £35m debt release, was used to repay debt. This fundraisingrestored the Group's balance sheet, reduced net borrowings and created astronger financial foundation for the business. Unsolicited ApproachIn July 2006, we announced that we had rejected an unsolicited approach fromMAMA Group PLC ("MAMA"), having concluded that it was without merit and not inthe interests of shareholders. Sanctuary terminated discussions and the Boardhas had no further contact with MAMA. Financial Reporting Review Panel (FRRP)The Group's audited financial statements for the year ended 30 September 2005were the subject of an adverse opinion by the Group's then auditors whodisagreed with certain changes to the Group's accounting policies. Thesepolicies were also the subject of enquiries by the Financial Reporting ReviewPanel (FRRP). These enquiries, which also related to previous years' financialstatements, were initiated before the appointment of the new board. The Boardset up a special committee (which was chaired by myself and included PaulWallace, Group Finance Director, and James Wallace, non-executive Director)which instigated a detailed review of the accounting policy changes assisted bythe Group's newly appointed auditors, KPMG Audit Plc. The findings of thisreview were submitted to the FRRP on 13 June 2006. In summary, the Boardconcluded that, while the accounting policy changes were all appropriate,certain of the prior year adjustments made in the financial statements for theyear ended 30 September 2005 should have been presented as the correction offundamental errors and not as changes in accounting policy. The Company entered into full discussions with the FRRP about its enquiries andthe subsequent corrective disclosure in the published interim financialstatements for the six months ended 31 March 2006. On 26 July 2006, the FRRPsaid, "The Panel welcomes the actions taken by the Directors and considers itsenquiry, started on 6 March 2006, as complete." Prior Year AdjustmentsDuring the remainder of the year, a number of fundamental errors were also foundto have been made in earlier years' financial statements. Details of theseerrors, which have been corrected by way of UK GAAP prior year adjustments, andtheir impact on the financial statements are set out in Note 1. Board changesIn May 2006, Group Chief Executive Andy Taylor was removed as a director of theCompany and was replaced as CEO by Frank Presland. Mr. Presland, is ChiefExecutive of Twenty-First Artists Management Limited, a music management companyproviding management services to acts including Elton John and James Blunt.Twenty-First Artists was acquired by Sanctuary in 2005. The Board's decision to remove Mr Taylor followed their conclusion that certainof the prior year adjustments made in the 2005 accounts should have beenpresented as a correction of fundamental errors and not as changes in accountingpolicy. The Board reached this conclusion in the context of its review of the2005 financial statements in order to respond to questions raised by the FRRP. In November, the Group announced that Rod Smallwood (who co-founded Sanctuarywith Mr Taylor in 1976) had left the Group. Mr Smallwood continues to manageIron Maiden. However, the Group continues its long association with the bandthrough the issue of its latest album in the US and in the fields ofmerchandising and live agency. Johnny Greenall resigned as a non-executive director in July 2006. The Sanctuary Group plc Board is now structured as follows: • Robert Ayling - Chairman • Tina Sharp - Non executive• Frank Presland - CEO • John Preston - Non executive• Paul Wallace - Finance Director • James Wallace - Non executive As Chairman, my job remains to ensure proper standards of corporate governanceand financial transparency and that the Group, under Frank Presland, delivers aperformance of which we believe the Group is capable. With the new Board and theexecutive management changes, I am optimistic that we can achieve these goals,though, as I have previously stated, it will take some time. Outlook for 2007After all the hard work in the year, we have some optimism about our prospectsfor the future. Under the new Group structure, and following a significant costreduction programme, management believes that all three divisions willdemonstrate improved performance in 2007, although it will be 2008 or laterbefore there is a return to overall profitability. Robert AylingChairman Chief Executive's Review Introduction 2006 was an extremely difficult year for the Group and, during the first half ofthe year, it faced considerable financial uncertainty. Business became verydifficult in all divisions as creditors, trading partners and artists werefearful for the company's future. Following the successful re-financing in March2006, the focus of our efforts has been on preparing the business to move aheadand a substantial start has been made on this task, although much more remainsto be done. The emphasis now is on profitability, but not, at this stage, growthacross all divisions. Restructuring the Group Prior to 2006, the Sanctuary business model was based on an integrated approachto the music industry. This model proved unable to deliver the expectedperformance and, in particular, did not demonstrate sufficient synergy benefitsto outweigh the large central overhead structure. Therefore, the Board hasagreed that we should now proceed under a different structure that requires thateach of the three divisions be managed autonomously, with decisions being madefor the benefit of their own profitability. With this greater clarity anddevolved management structure, we have been able to start reducing the coreadministrative structure, and this process will continue. The three businesses of Recorded Product, Merchandising, and Artist Services(which incorporates Management and Live Agency) are now responsible for theirown profitability and management structure and the Board believes that thisapproach will optimise the results for the Group and the value of the individualdivisions. Divisional Summary Recorded Product The financial performance of the Recorded Product division in 2006 wasdisappointing, with revenues at £35.1m (2005: £59.0m). This underperformance wascaused partly by internal issues and partly by external issues, namely thenumerous difficulties facing even the major record companies because of thechanging structure of the recorded music industry. This situation has beencompounded by the Group's financial situation and, in particular, the difficultyof signing new artists. Your Board has already taken steps to address thehistorical internal issues which have impacted this division's financialperformance in 2006. We have invested in a new finance team to support thedivisional management and are determined that this division will operate with aneffective control structure thereby ensuring its value is enhanced. The Board believes that the Recorded Product business is now in a more robustposition than it has been for some years and we will be looking in particular tosee the returns rate reduced. This is an issue requiring attention as the highrate of product returns has, in the past, substantially impacted onprofitability. We have now set targets for return rates of much closer toindustry norms. In addition, we are seeing a marked increase in the speed at which tracks arebeing digitised, with approximately 20,000 tracks digitised by September 2006and a target of some 45,000 to be digitised by the middle of 2007. Theadditional key performance indicator ("KPI") for this division is the percentageof revenues from digital sales: this target has been set at 14% by 2008. Giventhe value of the Recorded Product catalogue, and the variety and quality of thetracks within it, this process of digitisation is essential and is likely toincrease margins in future trading periods. Other favourable signs include an increase in the number of acts who have signedto, or are in discussions to sign to, Sanctuary Records for frontline productreleases. A well-planned schedule of such releases gives further grounds foroptimism. Acts with releases planned for 2007 include The Cooper Temple Clause,Idlewild and Dolores O' Riordan, formerly with The Cranberries. In the past few months, the Board has become aware of a number of opportunities,which may enable us to realise value from the disposal of parts of the RecordedProduct division, and opportunities for acquisitions or business combinations,which would improve profitability and enhance shareholder value. These possibledisposals include our 49% interest in Rough Trade Records Limited. Merchandising With revenues reaching £68.8m in 2006 (2005: £55.7m), the Merchandising divisioncontinues to perform well and in line with the Board's expectations. The Boardbelieves that the performance of Merchandising was adversely affected bypublicity surrounding the Group itself. However, despite this, the division hasshown robustness and a strength that provides considerable optimism for 2007. A key issue for Merchandising in 2007 and onwards will be the increasingcompetitive nature of the industry, with a number of new entrants seeking toacquire market share in the short term. To counter this threat, the divisionwill be examining its mix of businesses and ensuring that any opportunities todiversify its operating base will be taken. The principal KPI for this divisionis growth in gross margin, which can be achieved with an increase in salesthrough retail outlets. Highlights during the year have been the winning of the concessionary rights tothe V2 Festival and the signing of acts such as Dirty Pretty Things, Nickelbackand Cradle of Filth, as well as retaining relationships with Iron Maiden and TheWho. Despite the increasing competitiveness, your Board believes that Merchandisingis well positioned to deliver shareholder value. Our Merchandising business is amarket leader and has an ambitious and highly competent management team who arecapable of taking the business to higher levels. Artist Services Artist Management is conducted through Twenty-First Artists and Trinifold andthrough Sanctuary Artist Management both in the US and UK. Twenty-First Artistsand Trinifold contributed 72% of total revenues to this division in 2006, anddespite the negative publicity both companies have enjoyed a strong year.Twenty-First Artists have, in addition to the continuing successful managementof Elton John, now seen the fruits of their work over a number of years with thehugely successful James Blunt. Trinifold has already experienced great successwith the start of The Who's global tour in September 2006, which continues into2007. Sanctuary Artist Management's performance was very disappointing, with anoperational loss of over £11m, and is the subject of continuing re-structuringbased upon the essential need to achieve profitability. We have already seen thedeparture of a number of managers and high profile artists and this process iscontinuing without any loss of profitability. Sanctuary Artist Management isalready considerably leaner with a lower cost base and a smaller, but moreprofitable, roster of artists. Live Agency, (conducted through the two agencies: Helter Skelter and K2), hasexperienced a number of departures amongst the staff and this is likely tocontinue. The Live Agency business is in a state of flux caused largely by thearrival in the UK of the established and successful US agencies Creative ArtistsAgency and William Morris and several strong performing agents have joined thesenew entrants in recent months. Conclusion I have stated in this report that 2006 has been a very difficult year and theresults clearly reflect that fact. I believe that the under- performing RecordedProduct and Artist Services divisions have turned the corner, and I amoptimistic that all three divisions will demonstrate improved performance in2007, although it will be 2008 or later before there is a return to overallprofitability. I would like to thank all the staff throughout the Group for their hard work andloyalty during such difficult times and I look forward to the next 12 monthswith considerable optimism. Frank PreslandChief Executive Officer Business Review Overview Sanctuary is an international music group which is listed on the London StockExchange (SGP) and consists of three main operating divisions: Recorded Product;Merchandising and Artist Services (incorporating Artist Management and LiveAgency). This Business Review explains the Group's operational divisions withtheir respective performances and business objectives. It also containsforward-looking statements that are subject to risk factors that can adverselyaffect the outcome of the financial performance of the businesses. The Group creates revenue through: • The exploitation of existing (catalogue) and newly recorded intellectual property rights ("IPR") through retail sales of CDs and digital distribution (Recorded Product); • The sale, through retail outlets and at live events, of apparel and other items which exploit the image of artists (Merchandising) ; and • Earning commissions on the activities of musicians (Artist Services). The Group operates in most parts of the world, but principally in Western Europeand North America. It has offices in the UK, where the Head Office is located,and in the USA. Summary Results 2006 2005(1) £000s £000sRevenueRecorded Product 35,055 59,035Merchandising 68,754 55,679Artist Services 22,525 25,161Other 6,846 8,219 ---------- ----------Total Revenue 133,180 148,094 ---------- ----------(Loss)/profit before corporate overheads, depreciation,amortisation of intangibles, impairment of goodwill andnon-recurring itemsRecorded Product (20,611) (60,207)Merchandising 3,174 826Artist Services (3,714) (6,168)Other (1,494) (7,174) ---------- ----------Total Loss (22,645) (72,723) ---------- ---------- Corporate overheads (7,735) (9,566)Depreciation (3,605) (5,854)Amortisation (4,048) (4,937)Impairment of goodwill (10,658) (21,190)Non-recurring items:-Provision against loan notes (2,500) (14,600)Restructuring costs (1,842) (7,080)Refinancing professional fees (3,622) -Profit on disposal of subsidiary 1,728 - ---------- ----------Loss before net finance expenses and taxation (54,927) (135,950) ---------- ---------- Net finance expenses (14,689) (10,184)Tax (532) (319) ---------- ----------Loss for the year (70,148) (146,453) ---------- ---------- (1)Restated for UK GAAP prior period adjustments and transition to adopted IFRS The Group experienced a number of problems which came to light during 2005 and,for much of 2006, the management team has focused on repairing damage caused tothe business, restructuring where necessary and creating a new platform forrecovery. The Recorded Product division in particular has been allocatedadditional resources to address a number of historical issues but also to enablemanagement to adopt business processes which will be more in line with highindustry standards and which are designed to ensure that the value of thisdivision is enhanced. The results for the year under review reflect the natureof the significant task undertaken by the Board. Group revenue for the year ended 30 September 2006 was broadly in line with theBoard's expectations at £133.2m (2005: £148.1m). As stated in the November 2006announcement to shareholders, and as a result of the continuing restructuringprogramme, the Group has experienced significant non-recurring costs of £8m, anon-recurring profit of £1.8m on the disposal of a subsidiary, adverse tradingresults from an associated company and significant additional provisioningrelated to the Recorded Product division. Therefore, the loss before financeexpenses and tax for the year is £54.9m (2005 loss: £136.0m) and there is a lossof £70.1m after tax (2005 loss: £146.5m). Divisional Results and Review Recorded Product 2006 2005(1) £000s £000sRevenueProduct sales - physical 26,692 52,201Product sales - digital 2,592 1,315Licensing income 5,771 5,519 -------- --------Total Revenue 35,055 59,035 -------- -------- Gross marginProduct sales - physical (5,605)(2) (37,622)(2)Product sales - digital 956 480Licensing income 3,579 2,620 -------- --------Total Gross margin (1,070) (34,522) -------- -------- Overheads (19,541) (25,685) -------- -------- (20,611) (60,207) -------- -------- Depreciation (389) (1,124)Amortisation (1,559) (1,536)Impairment of goodwill - (48)Non-recurring items 204 (4,680) -------- --------Loss before net finance expenses and taxation (22,355) (67,595) -------- -------- (1)Restated for UK GAAP prior period adjustments and transition to adopted IFRS(2)Includes provision for recoupable advances of £3.6m (2005: £35.7m). The Recorded Product division creates revenues through sales of existingrecorded IPR, collectively known as catalogue, of which the division owns one ofthe largest collections outside of the major record companies, and the creationand sale of new recorded product, known as frontline product. These sales areaffected primarily through the sale of CDs via traditional retail networks andonline retailers and through the sale of digital product via onlinedistributors. The difficulties faced by the Group in the recent past have affected all partsof the business but the performance of Recorded Product has been particularlybadly hit, with harsh general trading conditions adding to the complicationswithin the division arising from historical accounting issues and the need tomake significant provisions in the year against working capital items.Particular issues faced by Recorded Product have included a change of a keydistributor for territories outside of the UK and North America and amodification in the returns policy of the main distributor in the US, which hadthe effect of allowing wholesalers to return goods at a much earlier date. Thesedisruptions, coupled with the poor sales performance of a key release, resultedin unacceptably high returns during the year. In addition, we have allocatedadditional resources to this division to address a number of historical issueswhose impact has been reflected in the current year's results and therestatement of the prior year's UK GAAP numbers. Divisional revenue at £35.1m (2005: £59.0m) reflects the difficulties statedabove, while the loss before net finance expenses and taxation for the year was£22.4m (2005: £67.6m). Your Board believes that the process of recovery is continuing within thisdivision, which is focusing on improving its internal processes to strengthenits competitiveness and enhance the value of its key assets such as thecatalogue. Costs have again been reduced with the recent closure of an office inGermany and a reduction in headcount in the UK. The objectives for this division are the growth of revenues arising from digitaldistribution and a long-term reduction in the levels of returns. There are anumber of strategic options for this division and the Board is reviewing theseoptions. Key performance indicator 2006 2005 £000s £000s Digital revenue 2,592 1,315Percentage of total revenue 7.4% 2.2% Key performance indicator 2006 2005 Sales returns percentage 28.1% 23.2%(1) (1)Indicative only, data was not recorded for 2005. For 2007, we are expecting both gross margins and overheads to reach a level inline with industry norms. Merchandising 2006 2005(1) £000s £000sRevenueMerchandising 65,272 52,233Concessions 3,482 3,446 -------- --------Total Revenue 68,754 55,679 -------- -------- Gross marginMerchandising 11,166 8,210Concessions 727 580 -------- --------Total Gross margin 11,893 8,790 -------- -------- Overheads (8,719) (7,964) -------- -------- 3,174 826 -------- -------- Depreciation (266) (244)Amortisation - (55) -------- --------Profit before net finance expenses and taxation 2,908 527 -------- -------- (1)Restated for UK GAAP prior period adjustments and transition to adopted IFRS The Merchandising division operates internationally under the brand name"Bravado". Acquired by Sanctuary in 2002, it exploits the image and brandassociated with artists through the sales of apparel and other branded goods atlive performances and, increasingly, through retail outlets world-wide. Theconcession business deals with on-site tour sales for all merchandisers andartists where we have the concession rights. Bravado itself has been adversely affected by sentiment towards Sanctuary andhas, therefore, under-performed against its own high expectations. Nonetheless,revenue at Bravado was £68.8m (2005: £55.7m) while profit before net financecosts and taxation was £2.9m (2005: £0.5m). Bravado has a strong market position and is generally seen as one of the topthree companies in this sector. It has been expanding in the more profitableretail merchandising sector, particularly in the US. However, it is facinggrowing competition and pressure on margins and will need to maintain its focuson being the merchandiser of choice for artists. The objective for this division is increase in gross margin percentage. Key performance indicator 2006 2005 Gross margin (percentage) 17.3% 15.8% Artist Services (incorporating Artist Management and Live Agency) This division consists of two main operating activities, both of which createrevenues through commissioning various activities of musicians. ArtistManagement operates on the basis of managing an artist's career over a period ofyears, for which the manager receives a percentage commission on the income thatthe artist generates. With Live Agency, the agents negotiate and arrange liveperformances and tours on behalf of artists, for which they receive commissionon the income that the artist receives from the tours. The division's revenue was £22.5m (2005:£25.2m). This result was below theBoard's expectations. Artist Management This business consists of three distinctly branded management companies:Twenty-First Artists; Trinifold and Sanctuary Artist Management. Twenty-First Artists ("TFA") 2006 2005(1)(2) £000s £000s Revenue 9,032 5,136 Cost of sales and overheads (2,937) (1,271) -------- -------- 6,095 3,865 -------- -------- Depreciation (11) (5)Amortisation (2,320) (1,160) -------- --------Profit before net finance expenses and taxation 3,764 2,700 -------- -------- (1) 2005 figures are for the period from date of acquisition(2) Restated for UK GAAP prior period adjustments and transition to adopted IFRS TFA has a separate, independent management team and was a business thatSanctuary acquired in 2005. It is principally involved with the management ofElton John and, more recently, James Blunt. TFA is a well-managed company withgood cash conversion rates and made a contribution to the division's revenues ofover £9m in the year under review. As at 30 September 2006, there is an £8.1mintangible asset which represents the contract with Elton John being amortisedon a straight-line basis over a five-year period from acquisition in April 2005,and, in addition, there is some £5.9m of goodwill related to the Group'sinvestment in TFA. The Board has assessed that the appropriate KPI for TFA is staff costs(including salaries, benefits, travel and entertainment costs) as a percentageof revenue. A key risk at TFA is a dependency on one artist and the growth focusis on looking to build up the portfolio of artists under management so that lessthan 50% of the revenues for TFA arise from the activities of Elton John by2010. Key performance indicator 2006 2005 Staff costs as a percentage of revenue 24.9% 16.6% These KPI's are in line with the budgeted percentages for the relevant periods. The future for TFA is positive, with steps being taken to expand its businesswhilst its key artist, Elton John, continues to be in high demand. Shareholdersshould expect TFA to continue to make contributions to profit, certainly untilElton John's contract expires in 2010. Trinifold 2006 2005(1) £000s £000s Revenue 2,725 2,496 Cost of sales and overheads (2,293) (1,217) -------- -------- 432 1,279 -------- -------- Depreciation (11) (15)Impairment of goodwill (3,693) - -------- --------(Loss)/profit before net finance expenses and taxation (3,272) 1,264 -------- -------- (1)Restated for UK GAAP prior period adjustments and transition to adopted IFRS Trinifold has a similar structure to TFA in that it is separately managed. Itwas acquired by Sanctuary in 2002 for a total consideration of £6.5m and isprincipally involved with the management of The Who and Robert Plant. WhileTrinifold produced a contribution to the division's revenues of £2.7m (2005:£2.5m), a goodwill impairment charge adversely affected its net contribution tothe division. The Group's investment in this company includes, as at 30September 2006, goodwill of some £6m, which will be subject to an annualimpairment review in each of the remaining four years of the managementcontract. It is anticipated that a significant percentage of this amount will beimpaired in 2007. We believe that 2007 will be a good year for Trinifold as itwill include the commission from The Who's extensive tour. However, after theimpairment of goodwill, it is unlikely to make a significant contribution toprofit. Although not expected to be a significant factor in 2007, the financialperformance in 2008 and later years will be affected by the managementparticipation scheme, which entitles management to 50% of any profits. The Board has assessed that the appropriate objective for Trinifold is staffcosts (including salaries, benefits, travel and entertainment costs) as apercentage of revenue. Key performance indicator 2006 2005 Staff costs as a percentage of revenue 53.4% 34.4% Sanctuary Artist Management - UK and US 2006 2005(1) £000s £000s Revenue 4,489 11,339 Cost of sales and overheads (15,766) (23,703) -------- -------- (11,277) (12,364) -------- -------- Depreciation (33) (261)Amortisation (44) (1,759)Impairment of goodwill (3,829) (19,515)Non-recurring items (190) (1,092) -------- -------- -------- --------Loss before net finance expenses and taxation (15,373) (34,991) -------- -------- (1)Restated for UK GAAP prior period adjustments and transition to adopted IFRS This business has been the focus of considerable restructuring during the year,with the result that it now has fewer managers and artists. A combination of high costs, significant impairment of goodwill anddisappointing levels of cash generation mean that this business has onlycontributed £4.5m (2005 £11.3m) in revenues to the division and a loss beforenet finance expenses and taxation of £15.4m (2005 loss £35.0m). However, the Board believes that following a radical reorganisation the nextperiod will be one of consolidation driven by activities in the US and with theUK unlikely to make a significant contribution. Key performance indicator 2006 2005 Staff costs as a percentage of revenue 199.8% 92.8% Live Agency 2006 2005(1) £000s £000s Revenue 6,279 6,190 Cost of sales and overheads (5,243) (5,138) -------- -------- 1,036 1,052 -------- -------- Depreciation (55) (7)Impairment of goodwill (2,482) (134) -------- --------(Loss)/profit before net finance expenses and taxation (1,501) 911 -------- -------- (1)Restated for UK GAAP prior period adjustments and transition to adopted IFRS Sanctuary operates two agency businesses: Helter Skelter, which is a whollyowned subsidiary, and K2, in which the Group has a 60% interest. The businesses'consolidated revenues for the year were £6.3m (2005: £6.2m), with positive cashgeneration and a net contribution of £1m (2005: £1m) (which was adverselyimpacted by an impairment charge against Helter Skelter). Key performance indicator 2006 2005 Staff costs as a percentage of revenue 45.6% 39.2% The future of our live agency businesses is likely to be adversely affected bythe entrance of new US-based competitors into the UK market. Group Overheads 2006 2005 £000s £000s Personnel (6,297) (9,683)Premises (2,349) (2,707)Professional fees (2,820) (1,974)Computer and technology costs (665) (1,039)Other (1,139) (3,508) -------- --------Total (13,270) (18,911) -------- -------- Of which recharged for shared servicesRecorded Product 2,640 4,464Merchandising 550 235Artist Services 2,096 4,256Other 249 390 -------- --------Recharges total 5,535 9,345 -------- -------- -------- --------Group overheads after recharges (7,735) (9,566) -------- -------- Depreciation (1,257) (1,992)Amortisation (108) (358)Impairment of goodwill (114) (196)Non-recurring items (4,202) (1,274) -------- -------- (13,416) (13,386) -------- -------- Corporate overhead cost was £7.7m (2005: £9.6m) after recharging the cost ofshared services to the beneficiary divisions. The net finance expense of £14.7m (2005: £10.2m) was attributable to bank loan,convertible loan, finance lease and overdraft interest, costs of financing andexchange losses of £0.8m (2005 gains £0.7m). Major Currency Exchange Rates Average rate Closing rate 2006 2005 % Change 2006 2005 % Change USD 1.80 1.85 2.8 1.87 1.77 (5.3)Euro 1.46 1.46 - 1.48 1.47 (0.7) Cash Flow Management Improvement in the overall cash generation and treasury functions remains a keyarea of focus for the Group. Your Board has adopted a KPI for the Group of theabsolute amount of interest and fee related expenses. The Board believes thatthis is a good indicator of the cash management achievements of the managementteam. Cash and net indebtedness At 30 September 2006, the net debt of the Group was £57.5m, an improvement of£73.5m compared to the opening position of £131.0m at 1 October 2005. A Placingand Open Offer was concluded on 20 March 2006 from which the Group receivedfunding of £110.0m together with a £35m debt release, which improved the netdebt position by £135.9m net of expenses. Net cash flow used by operations was£36.1m, and the effect of changes in working capital was £12m. As the fixed rate debt comprises convertible loan notes, £340,000 has beenclassified as equity for financial reporting requirements in accordance with IAS32. 2006 2005 £000s Average £'000s Average interest interest rate % rate % Floating interest borrowings:Bank of Scotland - Group (51,900) 8.4 (106,978) 7.0Bank of Scotland - Music Publishing (2,287) 7.5 (2,582) 6.6 Fixed interest borrowings:Convertible loan notes (7,300) 5.3 (30,000) 4.6Finance leases (398) 11.2 (1,189) 11.3 Other cash 1,951 - 6,998 - -------- -------- (59,934) (133,751)Client accounts 2,472 - 2,765 - -------- --------Net indebtedness (57,462) (130,986) ======== ======== This is shown in the Group balancesheet as follows: Cash and cash equivalents 23,692 9,763Current liabilities:Obligations under finance leases (293) (654)Bank overdraft and loans (14,479) (25,197)Non-current liabilities:Convertible loan notes (6,960) (30,000)Obligations under finance leases (105) (535)Bank overdraft and loans (58,977) (84,363)Equity reserve (340) - -------- --------Net indebtedness (57,462) (130,986) ======== ======== Risks Assessment The Group is subject to a number of risk areas which are detailed below. Interest rate risk management Group debt consists of both fixed rate and floating rate interest-bearing debt.The Group does not currently hedge its exposure to floating rate debt. Liquidity risk The Group has a £65m facility with the Bank of Scotland, which expires in March2008, and convertible loan notes which are repayable in November 2008. TheGroup's ability to refinance these debts will be dependent on a number offactors, including the Group's operating profits and cash flows and any disposalproceeds. Foreign currency risk management All the Group's debt is denominated in pounds sterling. However, a majority ofthe Group's income relates to contracts which are US dollar-based. The Groupalso has an exposure to Euro-denominated contracts. The Group does not currentlyhedge against foreign currency movements. Litigation risk The Group continues to be the subject of a number of legal claims and has eitherprovided for these claims or believes them to be of no merit or immaterial evenif successful. Pension risk The Group does not operate any defined benefit pension schemes, although it doescontribute to defined contribution schemes offered by the Group and third partyplans. Dependency on key managers The success of the divisions (in particular in Artist Management andMerchandising) is largely dependent of the contribution of key operatingpersonnel who work closely with artists and/or their management. While there isa succession plan in place in most businesses, loss of key employees may affectadversely the Group's ability to generate revenue until suitable replacementscan be found. Declining recorded music sales The value of the worldwide recorded music market has contracted considerably(20% since 2001), whilst the physical sales market declined by 5.2% within theUK and the US market by 8.9% between 2004 and 2005(1). While it is believedwithin the recorded music industry that rapid growth of digital sales willre-establish a growth pattern, the timing of the recovery cannot be establishedwith accuracy nor can the impact of how these changes will affect individualmarkets. Piracy and counterfeit products Organised piracy affects both physical and digital products, primarily inrecords and merchandising, which indirectly has an impact on management income. In the recorded music industry, where the value of pirate CDs sold wasapproximately $4.5bn(2) (22% of total) in 2005, music majors and independentshave been lobbying together against the sales of unauthorised products andillegal downloads, primarily via legislative and law enforcement initiatives. The cooperation among market leading merchandisers is somewhat less than in therecorded music business, but the estimated level of piracy is lower too. Whilein the US actions against illegal merchandisers are limited to an agentcommissioned on tracking down illegal printers and distributors, merchandisersin the UK have been acting together against counterfeit products via a dedicatedorganisation(3) since 1998. Despite the success of many of these initiatives, piracy is expected to affectthe Group's results adversely on a continuing basis. Consolidating industry In recent years, recorded music companies, and to a degree merchandisingbusinesses, have been through considerable consolidation. The rationale behindthis consolidation was to sustain margins against the declining market andchanging consumption patterns (i.e. demand for individual tracks versus a wholealbum). The merger of major record companies has resulted in four very powerfulmajors with a diminishing number of independent record companies ("Indies"). While Indie labels can attract both upcoming and mature artists that do not fitinto the majors' commercial strategy, their negotiating position with suppliersand distributors is weaker than that of the majors. Sanctuary Records, one of the largest independent labels, is therefore exposedto less preferential trading terms than its major competitors, which can affectboth sales and profitability adversely. --------------------------(1) Source : IFPI 2005(2) Source: IFPI(3) TRAP = Trade Marks and Rights Holders Against Piracy Limited Wholesaler concentration In most major markets, mass market retailers (notably supermarket chains) havebeen taking increased market share in physical sales. The declining number ofspecialist (music) retail stores is not only putting pressure on profit margins,but also could jeopardise catalogue sales as supermarkets sell top chart albumsonly, with a limited range of back catalogue items. In the future, the concentration of mass retailers may adversely affect theMerchandising division too, especially in the US where 9.2% of retail income isgenerated from non-specialist retailers. Summary of the outlook for 2007 We have good visibility on the contribution of Merchandising, TFA and Trinifoldin 2007 and we expect a return to profitability in the Recorded Productdivision. However, there will be significant impairment of goodwill andintangibles related to both TFA and Trinifold. Although Group costs have beenreduced, and efforts will be made to reduce these costs further, they will stillbe in the order of £9 million. Great strides have been taken in turning aroundthe fortunes of the Group and the Group is likely to be cash flow positive orbreakeven after interest charges. However, the Board anticipates that it will be2008 or later before there is a return to overall profitability. Consolidated Income StatementFor the year ended 30 September 2006 Note 2006 2006 2005(1) 2005(1) £000s £000s £000s £000s Revenue 3 133,180 148,094Total cost of sales (97,070) (151,575) --------- --------Gross profit/(loss) 36,110 (3,481) -------------------------------------------------------------------|General administration ||expenses (64,902) (78,014)||Impairment of loan notes (2,500) (14,600)||Goodwill impairment (10,658) (21,190)||Depreciation and ||amortisation (7,653) (10,791)||Restructuring costs (1,842) (7,080)||Refinancing professional ||fees (3,622) - | -------------------------------------------------------------------Total administrative expenses (91,177) (131,675)Share of results from associates (1,588) (794) --------- --------Operating loss 3 (56,655) (135,950) Profit on disposal of subsidiary 1,728 - Financial income 996 1,319Financial expenses (15,685) (11,503) --------- --------Net financing expenses (14,689) (10,184) --------- --------Loss before taxation (69,616) (146,134) --------- -------- Taxation 4 (532) (319) --------- --------Loss for the year (70,148) (146,453) ========= ======== Attributable to: Equity holders of the parent (70,328) (146,418)Minority interest 180 (35) --------- --------Loss for the year (70,148) (146,453) ========= ======== Loss per share:Basic loss per share (£) 5 (0.59) (82.3)Diluted loss per share (£) 5 (0.59) (82.3) (1)The UK GAAP financial statements that formed part of the transition toadopted IFRS have been restated Consolidated Statement of Recognised Income and ExpenseFor the year ended 30 September 2006 2006 2005 (1) £000s £000s Foreign exchange translation differences recogniseddirectly in equity 4,210 (2,332) ---------- ---------Net income/(expense) recognised directly in equity 4,210 (2,332) Loss for the year (70,148) (146,453) ---------- ---------Total recognised income and expense (65,938) (148,785) ---------- --------- Effect of change in accounting policy Effect of adoption of IAS 32 and 39, net of tax, on 1 October 2005 on:Equity reserve 1,575 - ---------- --------- (64,363) (148,785) ========== ========= Attributable to: Equity shareholders of the Company (66,118) (148,750) Minority interest 180 (35) ---------- ---------Total recognised income and expense (65,938) (148,785) ========== ========= (1)The UK GAAP financial statements that formed part of the transition toadopted IFRS have been restated Consolidated Balance SheetAt 30 September 2006 2006 2005(1) £000s £000sNon-current assetsGoodwill 62,449 74,123Other intangible assets 20,114 24,172Property, plant and equipment 4,700 8,957Other investments 70 72Loan notes - 2,500Other receivables 944 893 --------- ----------Total non-current assets 88,277 110,717 --------- ---------- Current assetsInventories 4,986 5,105Trade and other receivables 43,767 51,726Cash and cash equivalents 23,692 9,763 --------- ----------Total current assets 72,445 66,594 --------- ---------- --------- ----------Total assets 160,722 177,311 --------- ---------- Current liabilitiesTrade and other payables (55,681) (79,461)Tax payable (2,330) (3,374)Obligations under finance leases (293) (654)Bank overdraft and loans (14,479) (25,197)Provisions (4,306) (7,795) --------- ----------Total current liabilities (77,089) (116,481) ========= ========== Non-current liabilitiesBank loans (58,977) (84,363)Convertible loan notes (6,960) (30,000)Trade and other payables (879) (2,828)Obligations under finance leases (105) (535)Deferred tax liabilities (963) (304)Provisions (3,980) (3,460) --------- ----------Total non-current liabilities (71,864) (121,490) --------- ---------- --------- ----------Total liabilities (148,953) (237,971) --------- ----------Net assets/(liabilities) 11,769 (60,660) ========= ========== Equity attributable to equity holders of the parentcompanyShare capital 50,794 46,388Share premium 224,665 91,079Translation reserve 1,878 (2,332)Equity reserve 340 -Retained earnings (266,396) (196,103) --------- ---------- 11,281 (60,968) --------- ---------- Minority interest 488 308 --------- ----------Total equity 11,769 (60,660) ========= ========== (1)The UK GAAP financial statements that formed part of the transition toadopted IFRS have been restated. Consolidated cashflow statementFor the year ended 30 September 2006 2006 2005(1) £000s £000sCash flows from operating activitiesLoss for the year (70,148) (146,453)Adjusted for:Depreciation and impairment of property, plant andequipment 3,605 5,854Amortisation and impairment intangible assets 4,048 4,937Impairment of goodwill 10,658 21,190Impairment of loan notes 2,500 14,600Financial income (996) (1,319)Financial expenses 15,685 11,503Equity settled share based payment expenses 35 82Profit on disposal of subsidiary (1,728) -(Profit)/ loss on disposal of fixed assets (300) 1,466Taxation 532 319 ---------- ----------Operating cash flows before movements in working capital (36,109) (87,821) Decrease in inventories 119 5,160Decrease in trade and other receivables 9,782 36,767(Decrease)/increase in trade and other payables (21,914) 10,170 ---------- ----------Cash used by operations (48,122) (35,724) Income taxes paid (915) (3,128)Interest paid (15,427) (11,252) ---------- ----------Net cash flow from operating activities (64,464) (50,104) ---------- ---------- Cash flows from investing activities--------------------------------------Interest received 996 575Proceeds from sale of property, plant and equipment 1,216 -Proceeds from disposal of subsidiary 1,852 -Acquisition of property, plant and equipment (301) (905)Acquisition of intangibles - (4,586)Acquisition of subsidiary, net of cash acquired (2,984) (4,520) ---------- ----------Net cash from investing activities 779 (9,436) ---------- ----------Cash flows from financing activities-------------------------------------- Equity dividends paid - (1,535)Repayment of borrowings (65,295) -Repayment of obligations under finance leases (799) (905)(Repayment)/proceeds on issue of convertible loan notes (4,700) 8,500Proceeds from issue of share capital 102,992 8Proceeds from new bank loan 57,000 30,161 ---------- ----------Net cash from financing activities 89,198 36,229 ---------- ----------Net increase/(decrease) in cash and cash equivalents 25,513 (23,311)Cash and cash equivalents at beginning of year (15,215) 7,352Effect of foreign exchange rate changes (775) 744 ---------- ----------Cash and cash equivalents at end of year 9,523 (15,215) ---------- ---------- (1)The UK GAAP financial statements that formed part of the transition toadopted IFRS have been restated Notes 1 UK GAAP prior period adjustments The Board have also concluded that the following fundamental errors should becorrected by way of prior period adjustments to the 2005 UK GAAP financialstatements contained in these consolidated financial statements. (i) The Group's 49% equity shareholding in Rough Trade Records Limited represents an investment in an associate and should be accounted for as an equity investment and not consolidated as it had been in previous periods. (The impact on the income statement for 2005 is £nil.)(ii) The Group's 50% equity shareholdings in Sanctuary Kobalt (UB40) Limited and Sanctuary Kobalt (WAR) Limited represent investments in subsidiaries and should be consolidated and not accounted for as joint venture investments as they have been in previous periods. (The impact on the income statement in 2005 is £nil.)(iii) Provisions against Recording Artist recoupable advances identified in the current year that should have been recorded in the previous year. (The impact on the income statement for 2005 is a loss of £7,219,000.)(iv) Amortisation of Recorded Product Catalogue at the correct rate since acquisition. (The impact on the income statement for 2005 is a loss of £281,000.) 2 Revenue recognition accounting policy RevenueRevenue is recognised to the extent that it is probable that the economicbenefits will flow to the Group and the revenue can be reliably measured.Specific recognition criteria must also be met before revenue is recognised asoutlined below. Sale of goodsRevenue is measured at fair value after making provision in respect of expectedfuture returns of goods supplied by the Group prior to the balance sheet date.Where goods are sold on the Group's behalf by third party distributors, revenueis recognised when the distributor reports sales to the Group. Where the Groupreceives advances from distributors which are recoupable from future sales (netof the distributors' fees), these are recorded as liabilities; revenue isrecognised as each distributor reports sales. Royalty incomeRoyalty income from license contracts is recognised, together with theassociated artist royalty cost, when it has been earned and can be reliablymeasured, based on consideration of each contract. Under most license contracts, revenue is considered to have been earned when thelicensee reports sales to the Group. Where the Group receives advances fromlicensees which are recoupable from future royalties, these advances areinitially recorded as liabilities; revenue is recognised subsequently as thelicensee reports royalties on their sales. Where a license agreement is, in substance, an outright sale, license income isrecognised as revenue immediately. For an outright sale to have occurred, thelicensee must have signed a non-cancellable contract, paid a fixed fee ornon-refundable guarantee, been provided with the means to freely exploit theircontractual rights, and have no significant ongoing reliance on the Group (asthe licensor) to perform any other delivery obligations. In addition, the artistroyalty cost associated with the income must have been accurately quantified. Management commissionManagement commission income is recognised when a right to consideration hasbeen established, the commissions can be reliably quantified and receipt of suchcommissions is first considered certain. In normal circumstances, this resultsin revenue being recognised in the period in which the managed artist realisesincome from their contractual arrangements with third parties, thus triggeringthe manager's right to commission. Commission on recording, publishing, merchandising and similar artist incomeWhere an artist has contracted with a third party to receive staged payments ofadvances, commission income is recognised when the artist receives, or becomescontractually due to receive, these payments. For example, where a managedartist's contract with a record company stipulates that the artist will receiveseparate advances on signature, commencement of recording and album delivery,management commission income is recognised on each of these, when the artist hasfulfilled their obligations to the record company under the contract and,therefore, has become contractually due to receive them from the record company.Commission on the artist's income in excess of advances already received by theartist is accrued based on the best sales information available from the thirdparties (record companies, distributors, publishers, merchandisers, sponsors)from which the artist derives this income, after taking account of potentialreturns and retentions, and other factors (e.g. exchange rate exposures) thatmay affect the amount ultimately received. Commission on tour incomeCommission is recognised on concerts played in the period. Where a tourstraddles the end of the period, commission income is recognised only in respectof those concerts played before the period end. Where final accountings forconcerts played in the period are not available, the amount of commissionableincome to be recognised is assessed based on the contractual terms and the bestinformation available as to concert attendances and takings. In the absence ofbetter information, this estimate is based on the minimum level of incomeguaranteed to the managed artist by the promoter. Agency commissionAgency commission income is recognised when a right to consideration has beenestablished, the commissions can be reliably quantified and receipt of suchcommissions is first considered certain. Income accrues on concerts played inthe period. 3 Segment informationSegment information is presented in respect of the Group's business andgeographical segments. The primary format, business segments, is based on theGroup's management and internal reporting structure. Segment results, assets and liabilities include items directly attributable to asegment as well as those that can be allocated on a reasonable basis.Unallocated items comprise mainly corporate overheads, depreciation,amortisation, cash and cash equivalents, deferred tax, interest bearing loansand borrowings and net cash from financing activities, segment capitalexpenditure is the total cost incurred during the period to acquire segmentassets that are expected to be used for more than one period. Business segmentsAt 30 September 2006, the Group comprised of the following main businesssegments: • Recorded Product • Merchandising • Artist Services Segment Revenue Segment Result ------------- -------------For the year ended 30 September 2006 2006 2005 2006 2005 £000s £000s £000s £000s ------- ------- ------- -------Business segmentRecorded Product 35,055 59,035 (22,355) (67,595)Merchandising 68,754 55,679 2,908 527Artist Services 22,525 25,161 (16,382) (30,116)Other 6,846 8,219 (4,910) (10,780) ------- ------- ------- ------- 133,180 148,094 (40,739) (107,964) ------- ------- Unallocated expenses (13,416) (13,386)Provision against Loan Notes (2,500) (14,600) ------- -------Loss from operating activities (56,655) (135,950) Profit on sale of subsidiary 1,728 - Net financing expenses (14,689) (10,184) ------- -------Loss before taxation (69,616) (146,134) Income tax expense (532) (319) ------- -------Loss for the period after taxation (70,148) (146,453) ------- ------- Recorded Product Merchandising Artist Services Other Group 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 £000s £000s £000s £000s £000s £000s £000s £000s £000s £000s Segment Assets 29,425 87,345 35,017 28,569 26,857 15,738 5,937 29,127 97,236 160,779 ------ ------- ------ ------- ------ ------- ------ ------UnallocatedAssets 63,486 16,532 ------- -------Total assets 160,722 177,311 ======= =======SegmentLiabilities (42,645) (105,508) (29,988) (22,823) (7,672) (33,502) (5,108) (28,397) (85,413) (190,230) ------ ------- ------ ------- ------ ------- ------ ------UnallocatedLiabilities (63,540) (47,741) ------- -------TotalLiabilities (148,953) (237,971) ======= =======CapitalExpenditure 76 124 97 171 20 45 147 1,315 340 1,655 ====== ======= ====== ======= ====== ======= ====== ====== ======= ======= Geographical segments In presenting information on the basis of geographical segments, segment revenueis based on the geographical locations from which servers are defined and ordersfulfilled. Segment assets are based on the geographical location of the asset. Year ended 30 September 2006 2005 £000s £000sRevenue from External Customers:UK 54,904 58,087US 56,087 62,307Rest of Europe 19,574 22,414Rest of world 2,615 5,286 ------- ------- 133,180 148,094 ======= ======= 2006 2005 £000s £000sSegment assetsUK 134,230 146,802US 25,675 29,298Rest of Europe 817 1,211 ------- ------- 160,722 177,311 ======= ======= 4 Tax 2006 2005 £000s £000s Current Tax: UK Corporation tax at 30% - 233 Adjustment in respect of prior years (1,016) 1,001 Foreign tax: Current year state taxes 334 516 Adjustment in respect of prior years 555 - Deferred tax: Current year originating temporary differences 659 (1,431) ------- ------- Tax charge for the year 532 319 ======= ======= Corporation tax is calculated at 30% of the estimated assessable profit the year.Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions. Current taxCurrent tax expense for the periods presented is the expected tax payable on thetaxable income for the period. Current tax for current and prior periods is classified as a current liabilityto the extent that it is unpaid. Amounts paid in excess of amounts owed areclassified as a current asset. Deferred taxThe amount of deferred tax provided is based on the expected manner ofrealisation or settlement of the carrying amount of assets and liabilities,using the estimated average annual effective income tax rate for the periodspresented. The primary component of the entity's recognised deferred tax asset includestemporary differences relating to trading losses available for offset againstfuture profits. Deferred tax expense arises from the origination and reversal of temporarydifferences, the effects of changes in tax rates and the benefit of tax lossesrecognised. 5 Loss per shareBasic loss and diluted loss per shareBasic loss per share is calculated by dividing the loss for the periodattributable to ordinary shareholders by the weighted average number of ordinaryshares outstanding during the period. 2006 2005 £000s £000s --------- ----------Loss for the year attributable to ordinary shareholders (70,328) (146,418) --------- ---------- 2006 2005 Shares Restated(1) Shares Weighted average number of shares in issue 118,963,009 1,779,152Dilutive effect of shares to be issued - 3,556Dilutive effect of BMG warrants - 69Dilutive effects of convertible loan 2,067,771 234,091Dilutive effects of convertible warrants 288,526 -Dilutive effect of share options - 2,189 --------- ----------Diluted weighted average number of ordinary shares 121,319,306 2,019,057 --------- ---------- £ £Basic loss per share (0.59) (82.3)Diluted loss per share (0.59) (82.3) Diluted loss per share is equivalent to basic loss per share as the effect ofdilutive potential ordinary shares would decrease the net loss per share and sothe potential ordinary shares cannot be treated as dilutive in accordance withIAS 33 'Earnings per share'. The number of potential dilutive options that are currently non diluting is300,477 (2005: 452,126). (1)On 20 March 2006 each authorised and issued existing ordinary share of 12.5pin the capital of the Company was subdivided and converted into one ordinaryshare of 0.01p and one deferred share of 12.49p. Immediately following thissubdivision the issued and the authorised but unissued ordinary shares of 0.01peach were consolidated into ordinary shares of 2p each on the basis of oneordinary share for every 200 subdivided shares. In accordance with IAS 33, thecomparative weighted average number of ordinary shares has been adjusted forthis event for the purposes of calculating the basic and diluted loss per share. 6 Non-statutory audit The financial information set out above does not constitute the Company'sstatutory accounts or the years ended 30 September 2006 or 2005, but is derivedfrom these accounts. Statutory accounts for 2005 which were qualified by thethen auditors, have been delivered to the Registrar of Companies. The 2006statutory accounts will be delivered to the Registrar of Companies following theCompany's Annual General Meeting. The auditors have reported on the 2006accounts; their opinion is qualified arising from the limitation in auditevidence about comparatives for the year ended 30 September 2005. Whilst the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRS), this announcement in itself does not contain sufficient information tocomply with IFRS. The Company expects to publish its first full financial statements that complywith IFRS in February 2007. This information is provided by RNS The company news service from the London Stock Exchange