THE SANCTUARY GROUP PLC
ANNUAL REPORT 2005
Sanctuary is a diversified international
music group, operating in recorded product,
artist management, merchandising and
live agency.
We aim to help develop long-term careers for
artists and we share their passion for music.
Recorded Product
Artist Services
Owner of one of the world’s largest
independent recorded music catalogues
covering all musical genres as well
as a growing catalogue of music
audio-visual product.
Artist Management, Live Agency and
Merchandising offer essential services
to an artist at all stages of a career.
Artist Management represents over
40 acts and is one of the largest global
music management companies.
Maximises the value of our music and
audio-visual catalogues on a worldwide
basis, records established acts, and,
on a low risk approach, new artists.
Markets recorded product globally
via traditional and digital means and
licenses to third parties.
Live Agency represents over 220 acts for
live performance and is the largest agency
outside North America.
Bravado is one of the world’s premier
merchandising operations and represents
visual intellectual property rights for over
100 artists and brands.
CONTENTS
1 Executive Chairman’s Review
18 Directors’ Report
29 Consolidated Balance Sheet
5 Financial Review
20 Corporate Governance
30 Company Balance Sheet
9 Operational Highlights
23 Independent Auditors’ Report
31 Consolidated Cash Flow Statement
25 Directors’ Remuneration Report
31 Reconciliation of Movements in
16 Board Members
28 Consolidated Profit and Loss Account
28 Statement of Total Recognised Gains
and Losses
Shareholders’ Funds
32 Statement of Accounting Policies
35 Notes to the Financial Statements
Executive Chairman’s Review
2005 was a disappointing
year for us.
Here is what we are doing
to get us back on track:
The past year has been the most difficult and
challenging period that Sanctuary has ever had. As a
result, we have had to make some fundamental changes
and difficult decisions, but it was essential to make
them and we have acted quickly to do so.
The financial consequences are clear to see in these
accounts, in the presentation of which we have sought
to ensure that the most appropriate statement of figures
and accounting policies have been adopted as the basis
on which the Group’s finances will be managed and
reported in future.
Despite the events of 2005, we are looking to the future
with confidence that we have a business, presence and
support throughout the music industry that will help us
to emerge successfully from this restructuring.
Sanctuary’s underlying business model is a good one
and the Board is confident that the business can now be
returned to financial health.
Accounting policy changes
The results outlined in this report reflect changes in
certain of the Group’s accounting policies and
accounting estimates. The former gave rise to prior year
adjustments, which have been reflected in the
restatement of the financial statements for the year
ended 30 September 2004, and the latter to exceptional
items in the year ended 30 September 2005.
The practical effect of the Directors’ changes in
accounting policies was to de-recognise previously
reported turnover of £89m and operating profit of
£55m (at historic exchange rates; £86m turnover, £54m
operating profit at 2005 rates), which have been rerecognised in part in 2005, and will continue to be rerecognised in future years as and when they are
considered, by reference to the new accounting policies,
to have been earned.
The effect of these changes on the accounts for the
years ended 30 September 2004 and 2005 is
comprehensively outlined in Note 28 to the
financial statements.
The Sanctuary Group plc . Annual Report 2005
The Board is confident that the changes it has made to
the accounting policies and its methods of estimation
are appropriate. However, the Group’s auditors have
qualified their audit opinion in respect of certain of the
changes to accounting policies and have issued an
adverse audit opinion in this respect, the details of
which are outlined in the Independent Auditors’ Report
(see pages 23 and 24).
Financial situation
Group turnover was down from £166.7m for 2004
(as restated; £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 Recorded Product.
The Group reported an EBITDA loss for the year ended
30 September 2005 of £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 which 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.
Key Issues in 2005
The results reflect a difficult year for the Group, with
adverse changes in the trading environment experienced
in 2005 and some key operational issues that have
arisen which have caused a substantial
underperformance against expectations.
Recorded Product, which accounted for approximately
half of the Group’s turnover in 2004, has experienced
1
Executive Chairman’s Review
difficult trading conditions since April 2005,
particularly in its Urban Records operation and, on
17 June 2005, the Company announced that its interim
results would be significantly lower than in the same
period in the prior year, principally due to significant
delays in record releases. A number of releases in the
Urban Records operation were cancelled, and, while
some of those that were rescheduled were released in
the early part of the second half of 2005, most of the
remainder have now been cancelled and the Group will
make no further releases under its Urban Records
operation. The Directors believe that, as a result of the
problems with Recorded Product, cash receipts were
significantly lower than budgeted. During 2005,
overheads that reflected the expectation of higher
revenue continued to be incurred as budgeted, resulting
in an increased working capital requirement. In
addition, Artist Services has also had a difficult year
with increased overheads not being offset by the
expected increased performance.
The Directors believe that the effect of its various
announcements during the year and the circumstances
referred to were particularly damaging to the Group’s
standing in the industry due to the uncertainty it
created over the financial viability of the Group. The
Directors believe that this led to higher levels of
recorded product returns from retailers which led to a
decline in advances from its distributors and also led to
difficulties in signing up new artists. The uncertainty
surrounding the Group’s financial position was not
resolved and was exacerbated as the Group incurred
further debt and the Company’s share price declined.
Acquisition
In April, we announced the acquisition of Elton John’s
management company, Twenty-First Artists, for an
initial consideration of £16m funded through a mixture
of cash and shares. Since this transaction, we have been
very encouraged by the news that Elton John has
extended his Las Vegas ‘Red Piano’ residency for a
further 3 years and we have seen the Elton John scored musical Billy Elliott open to full houses and
excellent reviews. In addition, and also managed by
Twenty-First Artists, James Blunt has had a
breakthrough year with the top selling album in
the UK as well as a number one single.
Debt situation and Balance Sheet
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 since that date.
2
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.
Placing and Open Offer
Our debt position has been of some concern to market
commentators and shareholders and indeed I have
stated in the past that it is higher than I am
comfortable with going forward. A significant part of
the cost cutting and review process discussed below has
been to assist with maintaining and, in the longer term,
reducing our levels of debt. To assist further, your Board
was pleased that it was able to announce on 3 February
2006 that Evolution Securities had conditionally agreed
to underwrite a proposed Placing and Open Offer to
raise approximately £110m.
In addition, we concluded new arrangements with
Bank of Scotland, which are conditional on the
completion of the Placing and Open Offer. As part
of the new arrangements, Bank of Scotland has
agreed to the release of £17.0m of indebtedness and
the holder of the Convertible Loan Notes has agreed
to the release of £18.0m of indebtedness, in each
case conditional upon completion of the Placing
and Open Offer.
The purpose of the Placing and Open Offer is to make
a repayment of £4.7m of the principal amount of the
Convertible Loan Notes with the balance of
approximately £96.2m to be applied to the repayment
of some of the indebtedness to the Bank of Scotland,
following which Bank of Scotland will make available
to the Group new facilities totalling £65.0m. The New
Bank Facility will consist of a term loan facility of
£20m and a revolving credit facility of £45m. On
completion of the Placing and Open Offer, £7.3m
of the Convertible Loan Notes will remain in issue.
Progress on Restructuring
As a result of the poor trading performance and the
increased debt taken on by the Group, the Directors
undertook a review of the Group’s global operations.
Cost reduction has been a key focus for the Group in
recent months and non-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. Worldwide headcount has been reduced by some
25%, the majority having left the Group by the end of
October 2005. Within Recorded Product, where the cost
The Sanctuary Group plc . Annual Report 2005
Financial Results
2004
2005
Results before
the impact of
exceptional items
£m
Group Turnover: including acquisitions – continuing
Cost of sales
Exceptional
items
£m
Total
£m
Total
£m
157.9
(1.8)
156.1
166.7
(116.5)
(36.6)
(153.1)
(110.9)
Gross profit
Administrative expenses excluding depreciation and amortisation
Restated
41.4
(38.4)
55.8
3.0
(73.9)
(5.3)
(79.2)
(55.9)
Depreciation
(3.4)
(2.5)
(5.9)
(3.1)
Amortisation
(8.4)
(21.2)
(29.6)
(6.5)
Total administrative expenses
(85.7)
(29.0)
(114.7)
(65.5)
Group operating loss: including acquisitions – continuing
(44.3)
(67.4)
(111.7)
(9.7)
-
(21.7)
(21.7)
(11.4)
(9.2)
-
(9.2)
(5.6)
(53.5)
(89.1)
(142.6)
(26.7)
Exceptional items
Net interest
Group loss on ordinary activities before tax
The Sanctuary Group plc . Annual Report 2005
3
Executive Chairman’s Review
base has been reduced significantly, two offices in North
America will be closed and Urban Records has been
closed. In addition, the book publishing and mobile
recording businesses have been sold and other non-core
assets will be disposed of including the music publishing
and studio businesses.
Trading Update
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
Recorded Product, Live Agency and Merchandising
have been ahead of budget whilst Artist Management
has been slightly behind mainly due to delays in
commission receipts to be received. Additional one off
costs have been incurred across the Group as a result
of the fund raising.
As announced on 28 October 2005, Elton John is
continuing his sold out world-wide tour, Joss Stone has
recently completed her debut film role and her tour
dates with the Rolling Stones. Within Recorded Product
there are strong sales from artists such as Status Quo,
Ray J, Simple Minds, The Strokes and Babyshambles.
In addition, Morrissey has now completed his new
album which is scheduled for release in Spring 2006.
Within Merchandising sales have been ahead of budget
and the Directors remain confident that this area will
continue to perform well, particularly when additional
financing can be made available to it and it is able to
better penetrate the retail market. The Directors are
also optimistic that a tour by The Who and Elton John’s
60th birthday events will provide good revenue
opportunities in the future.
The completion of the anticipated equity fund raising
and the significant reduction in debt are expected to
remove the doubts over the future funding of the Group.
The Board anticipate that the removal of this doubt will
benefit the business across all of its operations and lead
to improved financial performance in the future. The
Board also anticipate that the Group will also have the
financial flexibility to attract some of the bigger artists
to Merchandising.
The Directors are mindful that whilst the first few
months of the year have been in line with expectations,
the performance of the Group is dependent upon album
releases and activity by artists over the summer months
when the majority of revenue is earned. However on the
basis of trading since 30 September 2005, the costcutting that has been implemented and current
expectations of revenue for the year, the Directors view
4
the prospects of the Group following completion of an
equity fundraising with confidence.
Changes to the Board
As previously announced, during 2005 non-executive
Directors Sir Christopher Meyer and Douglas McArthur
stepped down from the Board and in December 2005
a new Group Finance Director, Paul Wallace, was
appointed. His biography appears on page 16. As part
of the Group’s business restructuring the Board
structure has been revised and we intend to make
a number of new appointments. These revised
arrangements envisage that I will retain my position
as Chief Executive but will step down as Executive
Chairman, and a new non-executive Chairman will
be appointed.
Mike Miller, Merck Mercuriadis, Rod Smallwood,
Aky Najeeb and Joe Cokell will form an Operational
Board (with myself and Paul Wallace) and will
therefore resign from the main Board. Paul Wallace,
the Group’s non-executive Directors and myself will
form a newly constituted main board which will be
under the direction of the new non-executive
Chairman on appointment.
The Future
On pages 9 to 15, we outline some of the Operational
Highlights in our businesses over the past year but also,
where appropriate, we explain what we have done to
ensure that there will be no repetition of the poor
performance experienced in 2005.
It has been a difficult and challenging year for everyone
at Sanctuary and I would like to thank my colleagues
worldwide for their continued efforts and support.
Despite our difficulties this year, we have built a robust
business that is well placed to benefit from the vibrancy
and growth of the whole music industry. We have been
building the Sanctuary model for nearly 30 years and
I am confident that, although the past year has been
disappointing, we will continue to develop and grow
the business in future years.
Andy Taylor
Executive Chairman
14 February 2006
The Sanctuary Group plc . Annual Report 2005
Financial Review
Sanctuary’s financial performance in 2005
Change in accounting policies
As indicated in the Executive Chairman’s review, the
Group undertook a fundamental review of its business
in the year ended 30 September 2005 which involved
addressing worldwide cost structures, the performance
of all the Group’s revenue generating assets, and its
premises.
Against this background, the Group also undertook
a comprehensive review of the accounting principles
applied by the Group to assess their appropriateness
in accurately representing the Group’s financial
performance. The Directors’ principal conclusions
following this review were that the Group’s accounting
policy for recognition of management commission
income no longer appropriately reflected the Group’s
current arrangements with managed artists; and that
the Group’s accounting policies relating to revenue and
expense recognition in its Recorded Product business
were not comparable with those of its industry peers,
and could no longer be considered to support the
accurate and consistent reporting of that business’s
financial performance. As a result the Group changed
a number of its accounting policies and certain of
its accounting estimates in order to increase the
relevance, understandability and comparability of
the Group’s financial reporting.
The changes in the Group’s accounting policies have
been applied to the results for the year ended
30 September 2005, and the Group’s results for the
year ended 30 September 2004 have been restated to
show the effects of the new accounting policies. The
restatements have affected turnover, cost of sales
and gross profit in the Recorded Product, Artist
Management, and central Group divisions, and
the Group tax charge.
The changes in accounting estimates have been applied
to all individual assets and liabilities, and their financial
impact classified as an exceptional item in 2005.
The practical effect of the Directors’ changes in
accounting policies was to de-recognise previously
reported turnover of £89m and operating profit of
£55m (at historic exchange rates; £86m turnover,
£54m operating profit at 2005 rates), which have
been re-recognised in part in 2005, and will continue
The Sanctuary Group plc . Annual Report 2005
to be re-recognised in future years as and when they
are considered, by reference to the new accounting
policies, to have been earned.
The effect of these changes on the accounts for
the years ended 30 September 2004 and 2005
is comprehensively outlined in Note 28 to the
financial statements.
The specific effects of the changes in policies
on previous years were as follows:
1) To de-recognise previously reported Artist
Management and Recorded Product income
totaling £89.2m (£51.9m previously reported in
2004, £37.3m prior to 2004) and related operating
profit totaling £46.2m (£22.7m previously reported
in 2004; £23.5m prior to 2004).
2) To recognise costs incurred in originating product
for sale as an expense in the profit and loss account
in previous years, instead of as an intangible asset
amortised over three to five years as previously
reported. The adverse impact of this change on
the profit and loss account for previous years was
£8.9m (£2.2m in 2004; £6.7m prior to 2004).
3) To reduce the tax charge for previous years by
£7.0m (£2.5m in 2004, £4.5m prior to 2004).
4) To increase the Group’s retained losses at
30 September 2004 from £1.2m as previously
reported to £47.9m as restated, reflecting the
cumulative £48.1m adverse effect of the
restatements above less £1.4m of favourable
translation exchange differences, as shown in Notes
28(a) and 28(c), to the financial statements.
The changes in accounting policies will mean that,
in the future, Artist Management income will be
recognised on an accruals basis when it becomes
contractually due, and Recorded Product income will
be recognised when the underlying sales are made to
customers, whether by the Group itself or by its
distributors and licensees. In addition, the costs
of originating products for sale will be recognised
as an expense in the profit and loss account as
they are incurred.
The Board is confident that the changes it has made to
the accounting policies and its methods of estimation
are appropriate. However, the Group’s auditors have
5
Financial Review continued
qualified their audit opinion in respect of certain of
the changes to accounting policies and have issued
an adverse audit opinion in this respect, the details
of which are outlined in the Independent Auditors’
Report.
Operating results
Turnover for the year was £156.1m (2004 restated:
£166.7m; 2004 as previously reported £221.0m).
Recorded Product turnover reduced by £14.4m
compared with 2004 (as restated). This reduction was
partially offset by a £5.5m increase in Merchandising
turnover. Turnover in the Artist Management and
Agency businesses was closely in line with 2004 (as
restated in Artist Management).
The Group’s £111.7m operating loss for the year
(2004 restated: £9.7m loss; 2004 as previously
reported: £15.2m profit) was after £67.4m of
operating exceptional items, which are discussed in
more detail below. Before exceptional items the Group
operating loss for the year was £44.3m. This reflected
a significant deterioration in Recorded Product trading
in particular, substantial debt provisions and other
one off costs in Artist Management, and one off
provisions and non-recurring costs across other
parts of the Group.
Recorded Product
Turnover in Recorded Product was £67.7m (2004
restated: £82.1m; 2004 as previously reported
£127.3m). A substantial element of this reduction was
attributable to slippage and cancellation of Urban
releases.
The division’s operating loss for the year was £60.2m
(2004 restated: £5.0m loss; 2004 as previously
reported £13.9m profit), which included £33.5m
of exceptional costs, principally in respect of artist
advance, stock, returns and debt provisions. Before
exceptional items, the division’s operating loss
was £26.7m.
Recorded Product, which accounted for approximately
half of the Group’s turnover in 2004, has experienced
difficult trading conditions since April 2005,
particularly in its Urban Records operation and, on
17 June 2005, the Group announced that its interim
results would be significantly lower than in the same
period in the prior year, principally due to significant
delays in record releases. A number of releases in the
Urban Records operation were cancelled, and, while
some of those that were rescheduled were released in
6
the early part of the second half of 2005, most of the
remainder have now been cancelled and the Group will
make no further releases under its Urban Records
operation.
The deterioration in Recorded Product’s trading
performance was further exacerbated in the US by a
number of other factors. These included exceptional
returns of product shipped in the previous financial
year and substantial losses on a number of frontline
album releases. These factors, combined with the
problems with Urban releases outlined above,
substantially depressed gross profit (and, in the
case of returns, turnover). Further gross profit was
lost due to higher than expected marketing expenditure
and over-shipment of product, the impact of which is
believed to have been exacerbated by accelerated
returns processing by the division’s main US
distributor. In the UK, Recorded Product was
adversely affected by the slippage in US releases,
a weaker release schedule than in 2004 and nonrecurring copyright and product costs.
Following a management review of the position of the
US Recorded Product business, a significant
reorganisation and headcount reduction was initiated
prior to the year end. This has been continued in the
first quarter of 2006. The Group has closed its Urban
Records division and its Canadian office and is
actively preparing to close its office in Raleigh,
North Carolina.
Artist Services
Turnover in Artist Services was £85.2m (2004
restated: £78.6m; 2004 as previously reported
£87.7m). The division’s operating loss for the year
was £14.4m (2004 restated: £2.6m loss; 2004 as
previously reported £3.5m profit). This was after the
impact of £9.6m of exceptional costs, principally in
respect of debt, and artist and manager advance
provisions. These were incurred in its Artist
Management and Merchandising businesses and
did not affect the Live Agency business.
Artist Services incorporates three of the Group’s core
businesses: Artist Management, Merchandising and
Live Agency.
• Artist Management turnover was very closely in
line with 2004 (as restated) but, after the impact
of debt and manager advance provisions, the
division reported a substantial operating loss
for the year.
The Sanctuary Group plc . Annual Report 2005
Financial Review continued
The Group reduced its manager roster during the
year in order to focus its Artist Management
activity on higher commission earning managers
and artists, and has further reduced the number
of managers employed by the Group in the first
quarter of the 2006 financial year. The expected
impact of this strategy is to reduce turnover
initially and to increase future margins and gross
profit.
• Merchandising successfully grew its sales compared
to 2004 and maintained its operating profit before
exceptional items at a similar level to that reported
for 2004. However, after exceptional advance and
debt provisions, the business was only marginally
profitable in the year.
• Live Agency contributed £0.6m less to Group
operating profits than in 2004 on similar turnover.
Exceptional items and goodwill amortisation
Total net exceptional items in the year were £89.1m
(2004 restated: £11.4m; 2004 as previously reported:
£11.4m), of which £67.4m were operating in nature
and £21.7m were non-operating.
The operating exceptional items consisted of asset
write downs following the Group’s review of its
business and of the estimation techniques it applied
to its accounting estimates:
• £43.2m of changes in accounting estimates
principally in respect of recoupable advance, stock,
returns and debt provisions, and onerous leases.
• £4.5m of investment, tangible asset and intangible
asset impairment losses.
• £19.7m of goodwill impairment losses, out of a
total goodwill amortisation charge in the year of
£26.2m (2004 restated: £4.8m; 2004 as previously
reported: £4.8m), which reflected a reduced
valuation of certain assets following the Group’s
business review.
The non-operating exceptional items consisted of:
• £14.6m of further provisions against the Cloud 9
loan notes, further details of which are included in
Note 1 to the financial statements.
• £7.1m of restructuring costs. The Group’s business
review was undertaken in the last quarter of the
2005 financial year. The subsequent restructuring
programme was initiated prior to the year end and
has continued into the first quarter of the 2006
financial year. It has resulted in a 25 per cent.
reduction in global headcount, which is expected
to reduce annual staff costs by £13.7m and total
overheads by £14.6m between the year ended
The Sanctuary Group plc . Annual Report 2005
30 September 2005 and the year ending
30 September 2006. It also involves office closures
and termination of certain Recorded Product
contracts. £3.2m of the cash impact of the
exceptional restructuring charge will fall in the year
ended 30 September 2006. To the extent that these
costs were not incurred prior to 30 September
2005, they were provided for at that date.
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 charge
reflects taxation in certain businesses which cannot be
relieved against UK tax losses.
At 30 September 2005, the Group had corporation tax
liabilities of £3.6m. At the same date, the Directors
recognised a deferred tax asset of £3.2m, which
largely relates to the amount of tax losses which
current projections indicate will be recovered against
taxable profits in the next 3 years.
Loss per share and dividends
The basic and diluted loss per share were 40.14p
(2004 restated: 8.80p loss per share; 2004 as
previously reported 2.08p loss per share).
The Board recommends that no final dividend should
be paid. No dividend will have been paid or payable in
respect of the year ended 30 September 2005 (2004:
0.45p per share).
Balance sheet
The Group had net liabilities of £55.0m at 30
September 2005 compared with £76.1m net assets in
the restated balance sheet at 30 September 2004 and
£122.8m net assets in the reported balance sheet at
30 September 2004. The significant deterioration
during the year compared with the restated balance
sheet at 30 September 2004 was as a result of the
losses recorded in the year. The further deterioration
compared with the balance sheet previously reported
at 30 September 2004 reflected the impact of prior
year adjustments in respect of changes in accounting
policies.
Net borrowings and cash flow
The Group’s net debt at 30 September 2005 was
£140.4m compared with £73.9m at 30 September
2004. This included Convertible Loan Notes of £30m
(2004: £21.5m). The Group drew down the final
£8.5m tranche of the Convertible Loan Notes during
the year to help fund the acquisition of Twenty-First
Artists Limited.
7
Financial Review continued
The Group’s total operating loss of £111.7m for the
year ended 30 September 2005 included £67.4m in
respect of changes in accounting estimates and
goodwill and fixed asset impairment losses, reported
as operating exceptional items, which did not affect
the net cash movement in the year. The operating loss
before these exceptional items was £44.3m. This
compared with a net cash outflow from operating
activities of £42.5m (2004 restated: £2.7m inflow;
2004 as previously reported £7.2m inflow), which
included £1.7m of cash restructuring costs and a
£9.0m outflow of monies held on behalf of clients.
£3.1m of tax was paid, following full utilisation of the
Group’s brought forward UK tax losses, while the
Group’s net cash outflow for returns on investments
and servicing of finance in the year were £8.6m,
£3.0m higher than in 2004 (restated and previously
reported: £5.6m) due to the higher level of funding
that was in place during the year and an increase in
the average cost of finance.
Net capital expenditure of £5.5m included £3.8m in
respect of copyrights shared with recording artists. The
Group issued £12.1m of shares and used £4.4m of
cash to acquire Twenty-First Artists Limited.
Financial reporting procedures
Since early 2005, the Group’s business has been
subject to continuous review both internally and by
external parties. This has placed severe pressure on the
Group’s ability to produce accurate financial
information on a timely basis, and has highlighted
certain shortcomings in its financial reporting
procedures and systems. The Group plans to rectify
these by improving its management reporting,
budgeting and forecasting procedures and systems.
Other steps are continuing to be taken to improve
internal control and risk management within the
business.
8
International Financial Reporting Standards
(“IFRS”)
The first financial year in which IFRS will apply to the
Group will be the year ending 30 September 2006,
although the interim report for the six months ending
31 March 2006 will be prepared under IFRS. In
anticipation, the Group has considered the impact of
IFRS on the Group’s reported results and, while the
impact has not yet been finalised, there are a number
of areas that have been identified where financial
results will be reported differently:
• Under IFRS there is an increased emphasis on
identifying specific intangible assets upon
acquisition. This will lead to a reduction in reported
goodwill;
• Goodwill itself will no longer be subject to
amortisation but will be reviewed periodically for
impairment; and
• IFRS requires significantly more information to be
provided in respect of each business segment than
is currently required under UK accounting
standards.
Paul Wallace
Group Finance Director
14 February 2006
The Sanctuary Group plc . Annual Report 2005
O P E R AT I O N A L H I G H L I G H T S
Operational Highlights
We have highlighted already that the Group suffered
from a number of trading issues during the year
specifically in the Recorded Product area but also
in Artist Management.
On the following pages we explain what those
issues were and what we have done to resolve them
and to strengthen the business going forward.
On the other hand, Merchandising and Live Agency
operated normally during the year and, across all
our businesses, there were many highlights and
events that demonstrate the underlying strength
of the Sanctuary Group.
Recorded Product
As referred to previously, 2005 has been a harsh year
for Recorded Product within Sanctuary. In response to
the main issues, outlined below, we have made a
number of key changes to our business model in this
area in order to stabilise the business and to allow a
return to sustainable growth.
As well as seeing a number of key releases slipping
from the first half of the financial year into the second
half and some into the first half of the current
financial year, we took some releases out of the
schedule to ensure that the remaining releases are
serviced and marketed effectively.
We suffered from higher than expected levels of
returns from wholesalers and retailers in the late
summer. This was a reflection of concerns amongst
retailers with regard to our financial position,
exacerbated by the long period of uncertainty about
our ownership. However, we are now seeing better
orders and lower levels of return as confidence starts
to return and we expect this situation to improve
still further as more high profile releases are
delivered in 2006.
Our move into Urban Records was a miscalculation.
We have closed that aspect of our business and we
have reduced our artist roster appropriately. In
addition, we have rationalised the business, primarily in
the US, and also worldwide and we have significantly
reduced our cost base. However, we feel comfortable
that we have retained a sufficiently sized
infrastructure to be in a position to grow the business.
9
Operational Highlights
Recorded Product (continued)
Our strategy for Sanctuary Records is to refocus on
the long term, established artists, with more
predictable sales patterns, that our model has long
been based on. Where we develop new artists,
principally through Rough Trade and Fantastic Plastic,
they will continue to be on a low cost basis and they
will be artists who develop their fan bases through live
performance and the media. We intend to continue the
digitisation of our catalogue to exploit online sales
opportunities
Digital
The IFPI states that digital music sales for the first
half of 2005 amounted to US$790m, representing
6% of total record industry sales and are expected
to take a 12-18% share of the global recorded music
sales total by the end of 2007. We have been very
active in ensuring that our music is available on as
many of the digital music services as possible,
including iTunes, Napster, Yahoo!Music Unlimited,
MSN Music as well as Vodafone live!, O2 Active,
Orange World, T-Mobile tzones and 3. Whilst our
revenues from digital music are still relatively small,
we are seeing good growth year on year and we will
continue to exploit the value of the Sanctuary Records
catalogue to ensure that digital revenues continue
to grow.
Performance Review
During the year under review, there were some notable
successes in both new and catalogue releases. Robert
Plant’s album, ‘The Mighty Rearranger’, has sold (net
of returns) approaching 500,000 since its release in
May 2005 and has also been critically praised as his
best solo album.
The Libertines’ self-titled second album on our Rough
Trade label was Sanctuary Records’ first UK Number
One album and sales have now reached over 350,000.
Babyshambles’ first two singles on Rough Trade were
both Top Ten in the UK Chart and the eagerly awaited
debut album ‘Down In Albion’ was released in
November 2005 and entered the UK charts at
Number Ten.
10
Morrissey’s debut album, ‘You are the Quarry’, which
was released May 2004, has continued to sell well
throughout 2005 and we are pleased to have signed
him for his next album, Ringleader of the Tormentors,
which is to be released in the Spring 2006.
Other acts with new albums released in the year
included Alison Moyet, Blue Nile, St Etienne, Billy Idol
and Nancy Sinatra on the Sanctuary Records label
and Adam Green, Antony & The Johnsons, Arcade Fire
and British Sea Power on the Rough Trade label.
Antony & The Johnsons was also awarded the
prestigious Mercury Music Prize in September.
Our catalogue arm had a number of strong sales
successes, using our music catalogues to develop new
products such ‘Reggae Love Songs 2’, ‘Teenage Kicks’
and ‘Shake, Rattle & Roll’, which have sold over
250,000 copies collectively.
High profile new albums in 2005-2006 are due from
Morrissey, Belle & Sebastian, The Strokes,
Babyshambles and The Charlatans.
Sanctuary Visual Entertainment had a Number One
selling Music DVD with T-Rex and Marc Bolan’s
‘Born To Boogie’, which has sold 70,000 copies to
date. Morrissey’s ‘Who Put The M In Manchester’,
filmed on his sell-out tour in 2004, has sold
over 50,000 copies.
In a year that has been particularly harsh for
Sanctuary, it is testimony to the underlying strength of
Recorded Product that share of sales, certainly in the
UK, has remained fairly steady with Sanctuary
showing a 1.9% share across all products which is
very similar to that achieved in 2004 and registers
Sanctuary as the 6th most successful record company
in the UK during 2005. In addition, in US Recorded
Product which has been heavily restructured, it is
particularly encouraging to note that Ray J’s album
‘Raydiation’ has sold in excess of 230,000 copies and
has been in the Billboard Top 200 chart for 17 weeks
up to the end of January 2006.
The Sanctuary Group plc . Annual Report 2005
HIGHLIGHTS 0F 2005
RECORDED PRODUCT
Mercury and Brits
for Antony
The party goes on...
Status Quo, the band with the
most hit singles in the UK
Charts in history, stormed back
with a top selling UK album on
Sanctuary Records called
‘The Party Ain’t Over Yet…’
Up in Albion
Having won the prestigious Mercury Music
prize for the album ‘I Am a Bird Now’,
Antony & The Johnsons (Rough Trade)
was also nominated for a Brit Award.
Babyshambles demonstrated
that they could capture the
headlines musically with
the top UK album, ‘Down in
Albion’ released post the
year-end on Rough Trade.
Robert Plant and the
Strange Sensation
F
The legendary Robert Plant and
his band, the Strange Sensation,
returned with the platinum selling
album ‘Mighty Rearranger’ released
on Sanctuary Records. The album,
rated by many as Robert’s best work
in recent times, also led to Robert
garnering two Grammy Award
nominations for Best Solo Rock
Vocal and for Best Hard Rock
Performance.
The Sanctuary Group plc . Annual Report 2005
Morrissey reignited
his fans in 2005
ollowing the
global success
of Morrissey’s
‘You Are The
Quarry’, a number
2 album in the
UK, which was
released on the
Attack imprint,
Morrissey is back
in the Spring
2006 with his
follow up album,
also on the
Attack imprint,
entitled
‘Ringleader Of
The Tormentors’.
11
Operational Highlights
Artist Services
Artist Management
Sanctuary Artist Management continues to be a
premier international management company, with
recent major additions to the roster including Elton
John, Joss Stone, James Blunt, Scott Stapp, Fightstar
and Alanis Morrissette.
However, as with Recorded Product there have been a
number of issues that have impacted on the business
during 2005. Specifically, there have been a number of
Urban management company acquisitions that have
not performed to expectations, which have added to
the costs of the business and have taken up
management time to resolve. We have now withdrawn
from these underperforming acquisitions.
In addition, we have taken steps to create a roster of
acts and managers that is of an optimum size and mix
to ensure both excellent service to the artists and
maximum profitability for Sanctuary.
Our core focus going forward will be primarily on
growing our rock and metal genre rosters and ensuring
that we recruit and train young managers who can
attract and successfully exploit long term career acts.
We have trimmed our roster and we have 18 managers
based in London, New York, Los Angeles and Berlin
managing some 40 acts in total. Management turnover
comprises fees which are usually charged as a
percentage of an artist’s gross earnings from all
income streams including recorded music, music
publishing, TV and movies, advertising, endorsement
and sponsorship and live performance.
Performance review
Demonstrating the strength of the roster however,
there was a number of highlights for some of the key
managed artists during the year.
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 is
continuing to play arena and stadium concerts around
the world and he was the 6th highest grossing touring
artist in 2005. Elton John wrote the music for ‘Billy
Elliot - The Musical’ which opened with great success
in London’s West End and the single ‘Electricity’ from
the musical entered the UK Chart at Number 4.
12
Billy Elliott has also been nominated for 9 Olivier
Awards and is heading for Broadway. A new musical,
‘Lestat’, with music written by Elton John and based
on the vampire books by Anne Rice, opened in San
Francisco in December 2005.
James Blunt’s debut album, ‘Back To Bedlam’, has
now sold over 2.4m copies in the UK and was the
UK’s best selling album in 2005. The single ‘You’re
Beautiful’ was also the 4th top selling single and also
a top selling download. The album is now being heavily
promoted in North America and James’s live dates in
autumn and winter 2005-6 sold out immediately.
Joss Stone’s most recent album, ‘Mind, Body & Soul’,
has now sold over 2.8m copies worldwide since its
release in 2004, which was followed by her BRIT
awards for British Female Solo Act and British Urban
Act. Joss will also be appearing in Gap’s autumn/
winter 2005-6 worldwide advertising campaign as well
as performing live in North America and the UK, with
some solo dates and some as main support for the
Rolling Stones. She is currently working on her new
album.
Iron Maiden released a live album, ‘Death On The
Road’, and was the special guest on the Ozzfest tour
in North America, having played a series of European
stadium dates, and then headlined the Reading and
Leeds festivals, receiving some of the best reviews of
their career for all the sold-out dates. Funeral For
A Friend and Slayer also had major tours during
the year.
During the year, Morrissey released his ‘Who Put The
“M” In Manchester’ DVD and the ‘Live at Earl’s
Court’ DVD but spent much of the year writing and
recording his new album ‘Ringleader of the
Tormentors’ for release in 2006 when he will spend the
year touring in support of the new album.
The Sanctuary Group plc . Annual Report 2005
HIGHLIGHTS 0F 2005
ARTIST MANAGEMENT
Star rising James Blunt’s year
has been incredible by any
standards. Not just the biggest
selling UK album in 2005, a
number one UK single and a
top selling download, but he
has also been honoured with
five nominations for this year’s
Brit Awards.
Live on the Road
Billy, Red Pianos
and Elton
Elton John’s passion for performing and composing
music continued unabated during the year, with the
series of sell-out ‘Red Piano’ shows at Caesar’s
Palace in Las Vegas, arena and stadium tours
worldwide and success with the highly acclaimed
‘Billy Elliot’ musical.
Fightstar
fights hard
I
n a ‘quiet’ year
for the band,
Iron Maiden
produced a series
of highly
acclaimed live
performances
globally,
culminating in the
headline shows at
the sold-out
Reading and Leeds
festivals as well as
releasing the live
album ‘Death on
the Road’.
Iron Maiden
Joss Stone continued
her rise as a world
sensation, topping her
Brit awards and her
Amongst the new artists
signed to Sanctuary
recently has been Fightstar
who are fast building a
reputation through their
sell-out live performances
and who will be releasing
their first album ‘Grand
Fightstar
Unification’ in early 2006.
2.8m selling album
‘Mind Body & Soul’
with a sell-out tour,
some of which was
in support of the
Rolling Stones, as well
as appearing in Gap’s
2005/2006 worldwide
advertising campaign.
Joss Stone
The Sanctuary Group plc . Annual Report 2005
13
Operational Highlights
Artist Services (continued)
Merchandising
Bravado is one of the world’s premier merchandising
companies specialising in exploiting intellectual
property rights for over 100 artists and brands.
Bravado has not suffered from any particular issues
during the year and remains a strong, well-focused
business.
The business has had a successful year with retail sales
continuing to show strong growth. Retail now accounts
for some 40% of total merchandising sales with
products from acts such as Iron Maiden, Metallica,
H.I.M and Guns N’ Roses proving particularly popular.
We continue to grow these sales through major retail
outlets including Hot Topic, Spencergifts and Target in
the US and HMV and H&M in the UK.
Our merchandising client list was enhanced with
new clients added including Kurt Cobain, Metallica,
Kelly Clarkson and Anastacia.
We also announced a new licensing arrangement with
Wilsons The Leather Experts, the leading specialty
retailer of leather outerwear, accessories and apparel
for men and women in the United States.
Live Agency
As with our Merchandising business, our Live Agency
activity has not suffered from any significant issues
during the year. Our strategy remains to achieve
organic growth through an increase in the already
impressive roster of acts represented and to take on
additional agents where they become available.
Music Publishing
Sanctuary Music Publishing owns and exploits music
publishing copyrights for songwriters and composers.
Income is earned when those copyrights are used in
recordings and performance, and increasingly in
commercials, video games and movies and on TV.
We also work with new and established songwriters to
develop new music.
Air-Edel also manage composers and arrange music
for movies, TV and commercials and have had a
successful year. Particular highlights have included
extensive work on the box office hit Harry Potter &
The Goblet Of Fire, as well as Pride & Prejudice and
Nanny McPhee. Air-Edel has also had continued
success with high profile television and radio
commercials for clients including; Sunsilk, BMW,
ASDA, L’Oreal & PC World.
Studios
Sanctuary Studios comprises Townhouse (recording
and mastering) and Post (post-production). Acts using
the facilities during the year included such high profile
artists as Coldplay recording their worldwide success
‘X&Y’, Fightstar, Goldfrapp, Elton John with Blue,
Roger Daltrey, Kaiser Chiefs, McFly, Gorillaz and
Antony & The Johnsons.
The business represents some 220 acts for live
performance, arranging tours and concerts, and is the
largest agency business outside North America.
Income is derived from fees, which are a percentage
of gross live performance fees earned by an artist.
Our two live agencies once again generated steady
income for the Group, with the summer festival season
in the second half of the year as busy as ever and some
important acts touring.
Major acts who toured in the year included System
of a Down, Avril Lavigne, Iron Maiden, The Darkness,
Destiny’s Child, Marilyn Manson, Franz Ferdinand,
Faithless, Busted and Kings of Leon and new acts
signed include The Automatic, Son of Dork and
Robert Post.
14
The Sanctuary Group plc . Annual Report 2005
MERCHANDISING AND LIVE AGENCY
HIGHLIGHTS 0F 2005
Bravado has continued
to increase retail sales
of music related
merchandising with
products from Iron
Maiden, Metallica and
Guns N’ Roses.
Retail sales are being
exploited through
outlets such as Hot
Topic and Target in
the US and HMV and
H&M in the UK.
Wilsons Leather and
Bravado have launched
a range of licensed
merchandise of
vintage and classic
styles, featuring
such icons as
The Who,
Guns N’
Roses and
Def Leppard.
Leather and Rock & Roll
Live and
kicking
Live Agency again had a
successful live touring year with
high profile acts such as Franz
Ferdinand, nominated for Best
British Group and Best British
Rock Act in this year’s Brits.
Another Live Agency
touring act this year
has been the Kaiser
Chiefs, another hot
rock act and one
that has been
nominated for five
Brit Awards in 2006.
Kurt Cobain, part of the iconic
Nirvana, is one of the artist properties
to sign to Bravado during the year
The Sanctuary Group plc . Annual Report 2005
Kaiser Chiefs
15
Board Members
Andy Taylor, Executive Chairman, 55
Joe Cokell, Director, Head of Recorded Product, 48
Andy Taylor co-founded Sanctuary with Rod
Smallwood, whom he met at Cambridge, in 1976.
Andy is a Chartered Accountant and has overall
responsibility for the Group’s strategic development.
Previously Managing Director of Castle Music, which
Sanctuary acquired in 2000, Joe has more than 25
years’ experience in the music industry. He has held
director positions in Marketing and Sales for BMG,
Universal Music and Warner Music. As Head of
Recorded Product he has overall responsibility for
commercial and corporate affairs within the division.
Paul Wallace, Group Finance Director, 55
Paul joined the Sanctuary Group plc on 6 December
2005. He is a member of the Canadian Institute of
Chartered Accountants and was a partner with Price
Waterhouse Coopers for 7 years. He has acted as Chief
Financial Officer of a Hong Kong-based conglomerate,
First Pacific Company Limited, where he was involved
in raising debt and equity totalling over US$1bn. Over
the past 5 years, he has been involved in a number of
corporate restructurings in both the UK and Asia.
Mike Miller, Head of Corporate Development, 45
Mike joined Sanctuary in 1986, having qualified as
a Chartered Accountant the year before. He was
Finance Director between 1991 and 2005.
Jim Driscoll MBE, Non-Executive Director, 59
Merck has been with Sanctuary since 1987, dividing
his time between artistic and commercial activities. He
is instrumental in the management of artists such as
Elton John, Joss Stone, Guns N’ Roses and Morrissey.
Jim has worked in the media industry for many years
and has extensive interests in smaller company
development and animation. He joined Sanctuary as
a Non-Executive Director in 1998 and is a member
of the Remuneration Committee and Chairman of the
Audit Committee. Jim is also Chairman of Galleon
Holdings plc.
Rod Smallwood, Director, Head of Artist Relations, 55
Johnny Greenall, Non-Executive Director, 66
After leaving Cambridge, where he met Andy Taylor,
Rod joined booking agents MAM Ltd. In 1974 he
left to manage Steve Harley & Cockney Rebel and in
1976 founded Sanctuary with Andy Taylor and two
years later discovered Iron Maiden, whom he still
personally manages. Overseeing Artist Relations,
Rod continues to develop a roster of successful
managed acts.
Johnny Greenall joined the Board of Sanctuary
in 2002 following a 42-year career in the City,
latterly as Director of Corporate Broking at
Investec Securities. He is Chairman of the
Remuneration and the Nomination Committees
and a member of the Audit Committee.
Merck Mercuriadis, Head of Creative Strategy, 42
Aky Najeeb, Director, Head of Artist Services, 46
Aky joined Sanctuary in 1984 and has considerable
expertise and experience within both the music and
TV areas of the business. As Head of Artists Services
he has overall responsibility for commercial and
corporate affairs within the division.
Tina Sharp, Non-Executive Director, 44
Tina joined the Board of Sanctuary as a NonExecutive Director in 2000. After graduating from
Oxford she has followed a career in the banking and
private equity sectors, including a directorship at
ABN AMRO Mezzanine (UK) Ltd. Tina now
specialises in fundraising and is a member of
Sanctuary’s Audit, Remuneration and Nomination
Committees.
Sarah Standing, Company Secretary, 41
Sarah joined Sanctuary as Group Financial Controller
in 1994. Previously with accountants PKF, Sarah is
a Chartered Accountant. She works closely with Paul
Wallace within the Finance Department, as well
as being Company Secretary to all the Group’s
UK companies.
Sir Christopher Meyer, Non-Executive Director, resigned from the Board on 22 September 2005.
Douglas McArthur OBE, Non-Executive Director, resigned from the Board on 16 November 2005.
16
The Sanctuary Group plc . Annual Report 2005
R E P O R T S A N D F I N A N C I A L S TAT E M E N T S
Reports and
Financial Statements
CONTENTS
18 Directors’ Report
20 Corporate Governance
23 Independent Auditors’ Report
25 Directors’ Remuneration Report
28 Consolidated Profit and Loss Account
28 Statement of Total Recognised Gains
and Losses
29 Consolidated Balance Sheet
30 Company Balance Sheet
31 Consolidated Cash Flow Statement
31 Reconciliation of Movements in
Shareholders’ Funds
32 Statement of Accounting Policies
35 Notes to the Financial Statements
17
Directors’ Report
The Directors have pleasure in presenting their report and the
financial statements of the Company and the Group for the year
ended 30 September 2005.
Principal Activities
The Executive Chairman’s Review, Financial Review and
Operational Highlights in this Annual Report together contain
details of the principal operations of the Company and the
Group and their results during the year, as well as likely
future developments.
Substantial Interests
According to the register kept for the purpose of recording
interests of 3% and over in the Company’s share capital, the
following interests as at 27 January 2006, are recorded:
Ordinary Shares
of 12.5p each
% of total issued
share capital
72,060,500
45,304,881
36,386,351
34,318,000
28,392,914
27,626,704
21,536,500
18,363,115
19.42%
12.20%
9.81%
9.25%
7.65%
7.44%
5.80%
4.95%
13,555,623
11,500,000
11,500,000
3.65%
3.10%
3.10%
Directors
Talpa Beheer B.V
Goldman Sachs Group Inc
Fidelity Investment Services Limited
Capital International Limited
Morgan Stanley Securities
Lehman Brothers
ABM Generali Asset Managers
UBS AG
Gartmore Investment
Management Plc
R C Smallwood
A J Taylor
The Directors who have held office during the year, together with
their beneficial interests in the share capital of the Company, were
as follows:
Environmental and Employment Policies
Results and Dividends
The Consolidated profit and loss account set out on page 28 shows
a loss for the year of £142,559,000 (2004: restated loss of
£26,734,000) before taxation, minority interests and after an
exceptional loss of £89,134,000 (2004: £11,400,000).
The Board is precluded from recommending a final dividend.
AJ Taylor
MD Miller
RC Smallwood
A Najeeb
J Cokell
M Mercuriadis
TM Sharp
DB McArthur1
JC Driscoll
JDT Greenall
Sir CJR Meyer2
30.9.05
Ordinary Shares
of 12.5p each
30.9.04
Ordinary Shares
of 12.5p each
11,500,000
2,000,000
11,500,000
2,401,866
459,697
904,298
15,738
25,000
25,000
-
11,500,000
2,000,000
11,500,000
2,401,866
459,697
904,298
15,738
25,000
25,000
-
None of the Directors hold any warrants in the Company.
1
On 16 November 2005 Mr DB McArthur resigned as a Director
of the Company.
2
On 22 September 2005 Sir CJR Meyer resigned as a Director of
the Company.
On 8 December 2005 Mr PF Wallace was appointed as a Director
of the Company.
Mr AJ Taylor, Mr RC Smallwood and Mr JC Driscoll submit
themselves for re-election at the forthcoming Annual General
Meeting. Biographies of the present Directors of the Company are
set out on page 16.
Apart from the interests above and the options to subscribe for
Ordinary Shares set out on page 27, no Director held any other
interests in the share capital of the Company during the year. No
changes to the interests disclosed above have taken place since the
year end.
CREST
The Company’s shares are eligible for settlement in CREST, the
paperless Stock Exchange system for settlement of share
transactions.
18
Environmental Policy
The majority of our businesses have little impact on the
environment but, where they do, we ensure a responsible approach
is taken at all times and are committed to continually improving
our policies and those of our suppliers towards the environment.
We aim to comply with existing UK and European legislation and
monitor the progress of such policies annually.
Board responsibility for our environmental policy rests with the
Executive Chairman, Mr AJ Taylor. Management of environmental
issues is the responsibility of each division.
Whilst we are not a manufacturing company, we do recognise that
there are areas in which we can make a difference to a cleaner
and better environment. This also involves the education and
training of employees in environmental issues and the
environmental effects of their activities.
Initiatives include:
• all waste from our Head Office, which houses one third of our
worldwide employees, is taken away and sorted for recycling.
This minimises the frequency of waste collections and allows
for proper sorting off the premises;
• we encourage the use of public transport by employees, with
season ticket loans available to staff and cycle parking
facilities provided. We have already reduced our fleet of
company cars.
We continue to:
• aim to minimise waste wherever possible through better use of
resources;
• aim to recycle as much paper and packaging material as
possible;
• monitor our water and energy efficiency;
• minimise the use of solvents and lead-based paints;
• aim to use timber only from sustainable (managed) forests;
• seek to minimise noise disturbance to neighbours;
• phase out CFCs and ozone-depleting substances.
The Sanctuary Group plc . Annual Report 2005
Directors’ Report
continued
Employment Policy
Payment of Suppliers
We are committed to our employees’ welfare and personal and
career development.
The Company does not follow a standard code for dealing
specifically with the payment of creditors. The Company negotiates
payment terms with its suppliers on an individual basis and
generally settles its accounts in accordance with those terms.
Trade creditor days of the Company as at 30 September 2005
were 61 days (2004: 39 days), based on the ratio of Company
trade creditors at the end of the year to the amounts invoiced
during the period by trade creditors.
Employees at Sanctuary have constant access to communication
concerning significant matters affecting the operational and
financial performance of the Group through information bulletins,
intranet systems and meetings and they are actively encouraged to
contribute to, and involve themselves in, the decision-making of all
operating sectors.
We have two share option schemes and an Employee Benefit
Trust. Also, in the UK, we operate a Save As You Earn (SAYE)
share option scheme for all eligible employees. Sanctuary is fully
compliant with all new EU workplace and employment legislation
and a programme of ongoing education is in place to ensure that
line managers are fully up to date with any changes. It is the
Group’s policy to give every consideration to applications from
disabled persons and to afford them full opportunity for
appointment to, and training for, positions within their capabilities.
Should an employee become disabled during employment with the
Group, every effort is made to continue employment within his or
her capacity where practicable or, failing that, in some suitable
alternative capacity.
Donations
The Group made charitable donations totalling £45,000 in the
year (2004: £63,000). These were principally to music relatedcharities both in the UK and US. No political donations were
made (2004: £nil).
Auditors
The Directors are requesting proposals from a number of firms to
act as auditors for the Company and the Group. The Directors will
present members with a resolution to appoint auditors, which will
be considered at the Annual General Meeting.
Approved by the Board and signed on its behalf by
Sarah Standing
Company Secretary
14 February 2006
The Sanctuary Group plc . Annual Report 2005
19
Corporate Governance
Corporate Governance and Internal Control
The Board is responsible to Shareholders for the effective
direction and control of the Group and this report describes the
framework of corporate governance and internal control that the
Directors have established to enable them to carry out this
responsibility.
In July 2003, the Financial Reporting Council issued a revised
version of the Combined Code on Corporate Governance (the
‘Revised Combined Code’). The Company fully supports the
principles of the Revised Combined Code and has adopted them
wherever possible, taking into consideration the size and nature of
the Group.
Directors
The business of the Group is managed by the Board. During the
financial year, the Board consisted of eleven members: an
Executive Chairman, five Executive Directors and five NonExecutive Directors.
The Executive Chairman, Mr AJ Taylor, has responsibility for the
commercial and financial strategy of the Group, assisted by the
divisional CEOs, who have day-to-day executive responsibility for
the running of the Group’s businesses.
In recent years, the Board was of the opinion that the Group has
been best served by the CEOs of the operating divisions reporting
to the Executive Chairman without the need for a Group CEO.
However, in December 2004, due to the rapid expansion of the
Group globally, Merck Mercuriadis was appointed as Group CEO,
with specific brief to direct and manage the creative strategy of
the Group, whilst the responsibilities of the operational CEOs were
extended.
Since the year end, the Board has again reviewed its structure
and, with the departure of two Non-Executive Directors and the
implementation of the Group’s new business plan, a new Executive
Director, Mr PF Wallace, has been appointed and it has been
announced that a new Non-Executive Chairman will be appointed,
with the current Executive Chairman retaining a senior executive
position on the Board.
Meetings of the Board
No. of meetings
Attendance:
AJ Taylor
MD Miller
RC Smallwood
A Najeeb
J Cokell
M Mercuriadis
TM Sharp
DB McArthur
JC Driscoll
JDT Greenall
Sir CJR Meyer
Principal committees of the Board
Chairman
Other members
20
Messrs J Cokell, M Mercuriadis, MD Miller, A Najeeb and
RC Smallwood will form an Operational Board, which will also
include Mr AJ Taylor and Mr PF Wallace, and will thereafter
resign from the Company Board. Mr AJ Taylor and Mr PF
Wallace and the Group’s Non-Executive Directors will thereafter
form a newly-constituted board under the direction of the new
Non-Executive Chairman.
The Board considers each of the Non-Executive Directors to be
independent of management and free from any business
relationships which could materially interfere with the exercise of
their independent judgement. During the year Mr JDT Greenall
was appointed as Senior Independent Director. Short biographies
of each of the Directors appear on page 16.
Under the Company’s articles of association one-third, or the
number nearest to, but not greater than, one-third of all Directors
must seek re-election by Shareholders each year.
The Board is scheduled to meet ten times a year, with other
meetings being convened when required. Board members receive a
steady flow of information and explanations which they believe are
sufficient to enable them to discharge their duties. Members of the
Board receive appropriate training in respect of their obligations,
have access to the advice and services of the Company Secretary,
and are able to obtain independent professional advice, at the
Company’s expense, if required. There is a formal written schedule
of matters reserved for the Board’s decision. This schedule, which
is subject to regular review by the Board, includes the approval of
annual and interim results, acquisitions and disposals, material
agreements, capital expenditures, budgets and strategic plans.
Other matters are delegated to Board committees, including the
three principal committees: the Audit Committee, the
Remuneration Committee and the Nomination Committee, each of
which are described in more detail below.
The table below sets out the number of meetings of the Board, and
of the principal committees of the Board, during the year, together
with details of attendance.
Board
Audit
Remuneration
Nomination
23
2
2
n/a
22
23
15
21
20
21
22
23
21
21
18
n/a
n/a
n/a
n/a
n/a
n/a
2
2
2
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1
2
2
Audit
JC Driscoll
TM Sharp
DB McArthur
Remuneration
Nomination
JDT Greenall JDT Greenall
JC Driscoll
TM Sharp
Sir CJR Meyer to 22.9.05
AJ Taylor
DB McArthur from 22.9.05
The Sanctuary Group plc . Annual Report 2005
Corporate Governance
continued
In addition to the formal meetings of the Board, the Chairman and
the Finance Director maintain regular contact with all divisional
CEOs and hold informal meetings with Non-Executive Directors to
discuss issues affecting the Group.
The members of three principal committees of the Board, the
Audit Committee, the Remuneration Committee and the
Nomination Committee, during the period under review are set out
in the table on the previous page. The Audit and Remuneration
Committees operated throughout the year and have written terms
of reference setting out their authority and duties.
Audit Committee
The Audit Committee meets at least twice a year. The committee
examines the process of financial reporting within the Group,
reviews the Group’s accounting policies and monitors the integrity
of the financial statements. It also reviews the Group’s system of
internal control and processes for monitoring and evaluating the
risks facing the Group. The committee is responsible for the
appointment of the external auditors, for monitoring the auditors’
independence and cost-effectiveness and for reviewing the scope
and results of the audit with them.
The committee’s policy is to undertake a formal assessment of the
auditors’ independence each year which includes:
• a review of non-audit services provided to the Group and
related fees;
• discussion with the auditors of a written report detailing all
relationships with the Company and any other parties that
could affect independence or the perception of independence;
• a review of the auditors’ own procedures for ensuring the
independence of the audit firm and partners and staff involved
in the audit, including the regular rotation of the audit
partner; and
• obtaining written confirmation from the auditors that, in their
professional judgement, they are independent.
An analysis of the fees payable to the external audit firm in
respect of both audit and non-audit services during the year is set
out in Note 4 to the financial statements.
Remuneration Committee
The Remuneration Committee meets at least once a year. It is
responsible for determining the Company’s policy on Executive
Directors’ remuneration, for agreeing the overall framework of
remuneration policy for the Company and overseeing the operation
of the Company’s share-based incentive schemes. It takes advice
from the Executive Chairman, who is invited to attend meetings of
the committee except when his own performance and remuneration
are under review.
A more detailed review of the remuneration policy and the
operation of the committee is set out in the Directors’
Remuneration Report on pages 25, 26 and 27.
Nomination Committee
The Nomination Committee meets as required. Its primary
responsibility is to make recommendations on appointments to the
Board and to consider the structure and composition of the
Board. When required to make a recommendation on an
appointment, the committee prepares a specification for the role
and, in the case of an executive position, considers whether an
internal appointment would be appropriate before engaging
The Sanctuary Group plc . Annual Report 2005
independent executive search consultants to assist it in finding
suitable candidates. In making its selection, the committee has
regard for particular requirements of the role, the general and
specific business experience of the individual and, in the case of
non-executive appointments, a candidate’s other commitments.
Relations with Shareholders
The formal channels of communication by which the Board
accounts to Shareholders for the overall performance of the
Company are the annual report and accounts, the interim report
and the preliminary annual and interim announcements made
through the RNS Service of the London Stock Exchange.
Members of the Board meet frequently with representatives of
institutional investors, fund managers and financial analysts
throughout the year. These meetings discuss information made
public by the Company and help to ensure that the strategies and
objectives of the Company, and the views and concerns of
investors, are well understood. Presentations are made to
representatives of the investment community following the
publication of the Company’s annual and interim results.
Company information and announcements may be viewed on our
corporate website www.sanctuarygroup.com and Shareholders
who have any queries relating to their shareholding or to the
affairs of the Company generally are welcome to contact the
Company Secretary.
Internal Controls
The Board is responsible for establishing and maintaining the
Group’s system of internal controls and for reviewing its
effectiveness. Although no system of internal controls can provide
absolute assurance against material misstatement or loss, the
Group’s systems are designed to provide the Board with
reasonable assurance that all business and financial risks are
identified on a timely basis and appropriate action taken. There is
a formal on-going process for identifying, evaluating, managing
and reviewing the risks by the business. This process is reviewed
regularly by the Board.
Divisional Board meetings, chaired by the CEO of each operating
division and consisting of the relevant Executive Directors and
other senior executives with responsibility for all aspects of that
operating division’s activities, form the basis of the control system.
These meetings take place monthly to allow discussion of all
major business issues and the prompt resolution of any matters
that arise. They address operational issues, monitor financial
performance against budget and have responsibility, up to defined
levels, for development, production and capital expenditure. The
Divisional Boards control an integrated process for identifying,
evaluating and monitoring significant business risks through which
the members are accountable for the managing of risk within their
business areas. The results of this process are also made available
to the Audit Committee and the main Board.
Amongst the other key elements of the Group’s system of internal
controls are:
• A comprehensive budgeting system including reviews at all
levels of the business and approval of the annual budget and
long-term plans by the Board;
• frequent reporting of results to each level of management as
appropriate, including monthly reporting to the Board of
actual results against budget and revised forecasts with
corrective action being taken as necessary;
21
Corporate Governance
continued
•
•
•
•
detailed financial analysis and evaluation, undertaken for all
significant business opportunities;
a clearly defined organisational structure with written job
descriptions, clear responsibilities and delegated authority
levels;
procedures for the approval and monitoring of capital
expenditure; and
written authority limits for the ordering of goods and services
and for payments by the Group.
The Directors have reviewed the effectiveness of the Group’s
internal controls and are satisfied that they have operated
throughout the year. However, steps are continuing to be taken to
improve internal control and risk management further into the
operations of the business. In view of the size of the Group and the
existing framework of internal controls, the Board has been of the
opinion that an internal audit function was not required, however,
on the recommendation of the Audit Committee, due to the growth
in the Group in recent years, the Board has now decided to
appoint an internal audit function.
Statement of Compliance with the Combined Code
Throughout the year ended 30 September 2005, the Company
complied with the provisions of the Revised Combined Code on
Corporate Governance issued by the Financial Reporting Council
in July 2003, save for the limited exceptions outlined below:
A2.1 The Revised Combined Code states that the roles of
Chairman and CEO should not be exercised by the same
individual. During the year, a role of Group CEO was created
with a specific brief to direct and manage the creative
strategy of the Group, whilst the Executive Chairman
continued to direct and manage the commercial and
financial strategy of the Group. Since the year end, in line
with implementation of the Group’s new business plan, it
was announced in November 2005 that a new Chairman
would be appointed with the current Executive Chairman
retaining a senior executive position.
A3.3 Prior to April 2005 there was no appointed Senior
Independent Director. On 31 March 2005 Mr JDT Greenall
was appointed to this role by the Board.
A6.1 The performance evaluation of the Board is undertaken by
the Board as a whole and is not formally documented. The
Board considers that the creation of separate committees
and formal procedures is unnecessary given the size of the
Group.
C2.1 Whilst the Board regularly reviews the internal controls as
set out above, no formal report has been drafted. The Group
has now adopted a formal process of review and this will be
published in future years.
C3.1 The Audit Committee comprises three independent NonExecutive Directors. It has been recognised during the year
that the committee could benefit from a new member with
more recent and relevant financial experience and the Board
is currently considering the appointment of an additional
independent Non-Executive Director with such experience
who would also be appointed to the Audit Committee.
22
Going Concern
The Group incurred substantial losses in the year ended
30 September 2005 and had net liabilities as at that date.
Based on the information disclosed on page 32, the Directors are
confident that the Company and the Group have adequate
resources to continue in operational existence for the foreseeable
future. For this reason, the Directors consider it appropriate to
adopt the going concern basis in preparing the Company’s and the
Group’s financial statements.
Directors’ Responsibilities in the Preparation
of Financial Statements
Company law requires the Directors to prepare financial
statements for each financial period which give a true and fair
view of the state of affairs of the Company and the Group as at
the end of the financial period and of the profit or loss of the
Group for that period. In preparing those financial statements, the
Directors are required to:
(a) select suitable accounting policies and then apply them
consistently;
(b) make judgements and estimates that are reasonable and
prudent;
(c) state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
(d) prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group will
continue in business.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company and the Group and to enable
them to ensure that the financial statements comply with the
requirements of the Companies Act 1985. They are also
responsible for safeguarding the assets of the Group and hence for
taking reasonable steps for the prevention and detection of fraud
and other irregularities.
The Directors are responsible for the maintenance and the
integrity of The Sanctuary Group plc website. Legislation in the
United Kingdom governing the preparation and dissemination of
financial statements may differ from the legislation in other
jurisdictions.
The Sanctuary Group plc . Annual Report 2005
Independent Auditors’ Report to the Members of
The Sanctuary Group plc
We have audited the financial statements on pages 28 to 56. We
have also audited the disclosures required by Part 3 of Schedule
7A to the Companies Act 1985 contained in the Directors’
Remuneration Report under the headings ‘Analysis of Directors’
Remuneration’ and ‘Directors’ Share Options’ (‘the auditable
part’)
This report is made solely to the Company’s members, as a body,
in accordance with section 235 of the Companies Act 1985. Our
audit work has been undertaken so that we might state to the
Company’s members those matters we are required to state to
them in an auditors’ report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company’s members as
a body, for our audit work, for this report, or for the opinions we
have formed.
Respective responsibilities of directors and auditors
The directors are responsible for preparing the Annual Report and
the Directors’ Remuneration Report. As described on page 22, this
includes responsibility for preparing financial statements in
accordance with applicable United Kingdom law and Accounting
Standards.
Our responsibility is to audit the financial statements and the
auditable part of the Directors’ Remuneration Report in
accordance with relevant legal and regulatory requirements, and
United Kingdom Auditing Standards.
We report to you our opinion as to whether the financial
statements give a true and fair view and whether the financial
statements and the auditable part of the Directors’ Remuneration
Report have been properly prepared in accordance with the
Companies Act 1985. We also report to you if, in our opinion, the
Directors’ Report is not consistent with the financial statements, if
the Company has not kept proper accounting records, if we have
not received all the information and explanations we require for
our audit, or if information specified by law regarding directors’
remuneration and transactions with the Company and other
members of the Group is not disclosed.
We review whether the Corporate Governance Statement reflects
the Company’s compliance with the nine provisions of the 2003
FRC Code specified for our review by the Listing Rules of the
Financial Services Authority, and we report if it does not. We are
not required to consider whether the board’s statements on
internal control cover all risks and controls, or form an opinion on
the effectiveness of the Group’s corporate governance procedures
or its risk and control procedures.
We read the other information contained in the Annual Report and
consider whether it is consistent with the audited financial
statements. This other information comprises only the Directors’
Report, the unaudited part of the Directors’ Remuneration Report,
the Executive Chairman’s Review, the Operational Highlights, the
Financial Review and the Corporate Governance Statement. We
consider the implications for our report if we become aware of
any apparent misstatements or material inconsistencies with the
financial statements. Our responsibilities do not extend to any
other information.
The Sanctuary Group plc . Annual Report 2005
Basis of audit opinion
We conducted our audit in accordance with United Kingdom
Auditing Standards issued by the Auditing Practices Board. An
audit includes examination, on a test basis, of evidence relevant to
the amounts and disclosures in the financial statements and the
auditable part of the Directors’ Remuneration Report. It also
includes an assessment of the significant estimates and judgements
made by the directors in the preparation of the financial
statements, and of whether the accounting policies are appropriate
to the Company’s circumstances, consistently applied and
adequately disclosed.
We planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in
order to provide us with sufficient evidence to give reasonable
assurance that the financial statements and the auditable part of
the Directors’ Remuneration Report are free from material
misstatement, whether caused by fraud or other irregularity or
error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial
statements and the auditable part of the Directors’ Remuneration
Report.
Fundamental uncertainty
In forming our opinion, we have considered the adequacy of
disclosures made in the financial statements concerning the
possible outcome of negotiations for additional finance to replace
existing borrowings of £149.7m as at 31 December 2005. The
financial statements have been prepared on a going concern basis,
the validity of which depends upon future funding being available.
The financial statements do not include any adjustments that
would result from a failure to obtain funding. Details of the
circumstances relating to this fundamental uncertainty are
described on page 32. Our opinion is not qualified in this respect.
Adverse opinion arising from disagreement
about accounting treatments
As is explained on pages 32 to 33 and elsewhere in these financial
statements, the directors have treated various significant
adjustments as changes in accounting policy. We do not agree with
certain of those treatments, as follows:
Recorded Product - catalogue exploitation contracts (‘CECs’)
Income due under these contracts was recognised in accordance
with the Group’s previously stated accounting policy which
accords with FRS 5 ‘Reporting the substance of transactions’.
There has been no substantive change to that accounting standard
since 30 September 2004, nor have any new or revised contracts
been signed since that date. The effect of the Group’s accounting
adjustments has been to cancel previously-recognised income of
£49.0m and profits of £19.3m and defer recognition to future
accounting periods.
Recorded Product - other rights exploitation contracts (‘ORECs’)
Income amounting to £27.8m, and associated profit of £14.0m
which was received in cash have been recognised in respect of
rights sold by the Group. The cash received is offset (recoupable)
against future product sales to third parties. There are no
circumstances in which the cash is repayable, nor has the Group
any outstanding contractual obligations to the purchaser. In our
opinion, FRS 5 requires this income to be recognised when
contractually due and not, as the Group now contends, by
23
Independent Auditors’ Report to the Members of
The Sanctuary Group plc continued
reference to product sales to third parties. The effect of the
Group’s accounting adjustments has been to cancel previously
recognised profits of £14.0m and to defer recognition to future
periods, including £7.5m in the current year. The Group has also
created a creditor amounting to £6.5m at 30 September 2005,
although no liability exists.
Recorded Product - origination costs
In previous years costs of £8.9m were capitalised in accordance
with generally accepted accounting principles in recognition of the
fact that the expenditure created an asset. The resultant asset was
amortised over its expected useful life. The policy of immediate
write-off of expenditure now adopted by the Group is, in our
opinion, inconsistent with generally accepted accounting principles.
The effect of the Group’s accounting adjustments has been to
eliminate the previously-recognised assets and to cancel previous
amortisation and impairment charges which, in net terms, reduce
shareholders funds by £8.6m at 30 September 2005 (2004:
£8.9m).
In our opinion the foregoing treatments adopted by the Group,
which have the effect of de-recognising income of £45.2m and
pre-tax profits of £18.8m reported in the year to 30 September
2004 (2003: £9.6m income and £11.7m profits respectively) and
re-recognising those amounts in future years, are not consistent
with the requirements of FRS 18 ‘Accounting policies’.
Consequential adjustments have been reflected by re-stating the
Group balance sheet at 30 September 2004 and the profit and
loss account for the year then ended. In our opinion, in accordance
with FRS 18, the 2004 figures should not have been re-stated, the
assets should have been subjected to impairment reviews and any
resultant adjustments should have been treated as revisions in
accounting estimates and reflected in the current year’s results.
The financial effect of the treatment adopted by the Group is
therefore to understate the loss for the current year by £15.9m
(2004 and prior loss overstated by £42.2m) and to understate net
assets by £26.3m (2004 understated by £42.2m).
24
All of the foregoing figures are stated before tax.
Because of the significance of these matters, in our opinion:
• the financial statements do not give a true and fair view
of the state of affairs of the Group or the Company at
30 September 2005 or of the Group loss for the year then
ended; and therefore
• the financial statements have not been properly prepared in
accordance with the Companies Act 1985.
In our opinion the auditable part of the Directors’ Remuneration
Report has been properly prepared in accordance with the
Companies Act 1985.
Baker Tilly
Registered Auditors
Chartered Accountants
2 Bloomsbury Street
London WC1B 3ST
14 February 2006
The Sanctuary Group plc . Annual Report 2005
Directors’ Remuneration Report
The Remuneration Committee
The Remuneration Committee is responsible for determining
the remuneration and other terms of service of the Executive
Directors. The Committee members are three Non-Executive
Directors: Mr JC Driscoll, Mr JDT Greenall, Sir CJ Meyer
(to 22 September 2005) and Mr DB McArthur
(from 22 September 2005). The Committee consults with the
Chairman on the remuneration of Executive Directors and
has access to external advice. The Committee was chaired
during the period by Mr JDT Greenall. The Committee has
complied throughout the period with the best practice
provisions of the Financial Services Authority for
Executive Directors’ remuneration.
Policy
The remuneration policy is determined by the committee and is
designed to offer executive remuneration packages that attract,
retain and motivate directors of the high calibre required by the
business within a cost-effective framework that considers the stage
of growth of the business, individuals’ performance and industry
influences.
In determining the policy, the committee considers the following:
• The remuneration structures, in particular performance-related
bonus structures and incentives for Executives, are aligned
with Shareholder interest to motivate Executives to perform at
the highest level and achieve significant growth.
• The criteria for determining individual Executive’s
remuneration should take into consideration not only individual
performance but also specific industry comparators for the
sector within which the Executive’s Group company operates.
• The performance criteria for Executives should be challenging
yet realistic to ensure motivation and achievement of the
Company’s objectives.
• Executive Directors are not eligible for transaction-related
bonuses.
• The Executives’ remuneration is compared with those in a
comparator group of companies. The committee determines
which companies are in the comparator group and decides
which companies are to be added or removed on an annual
basis. The comparator companies are considered comparable
to The Sanctuary Group plc in size and nature of their
business. The current comparator group is: Chrysalis,
Bloomsbury, Hit Entertainment, Johnston Press, Scottish
Radio, Taylor & Francis and Trinity Mirror.
Directors’ Remuneration
An analysis of Directors’ remuneration is set out on page 26.
Service Contracts
All Executive Directors have entered into Directors’ service
agreements with the Company, which may be terminated by either
party on 12 months’ written notice. Each agreement has a
restrictive covenant, which prevents soliciting any business carried
out by the Group during the 12 months prior to termination. This
restrictive period is 12 months following termination.
Ms T Sharp, Mr JDT Greenall and Mr JC Driscoll each has
entered into a letter of appointment for Non-Executive Directors
for a 12 month period, to be reviewed annually at the Annual
General Meeting. On 31 March 2005, Mr JDT Greenall was
appointed as Senior Independent Non-Executive Director.
The Sanctuary Group plc . Annual Report 2005
The personal service companies of Mr AJ Taylor (Sphere
Entertainment Limited) and Mr RC Smallwood (R&K Enterprises
Limited) have each entered into an agreement for services with
the Company, the material terms of which are outlined below:
Sphere Entertainment Limited and R&K Enterprises Limited
procure the full-time provision of services to support the Executive
Chairman and the President of Sanctuary Artist Services
respectively, namely: administration, travel co-ordination, event
management, financial analysis and back-up secretarial services:
• both agreements may be terminated by either party with 12
months’ notice; and
• both agreements include a provision entitling the Company to
make a payment or fee (excluding bonus) in respect of the
notice period required at the time of termination, effectively in
lieu of entitlement to notice, in the event that the agreement is
terminated.
Components of Executive Directors’ Remuneration
The main elements of Executive Directors’ remuneration are:
(a) Basic salary and benefits – The salaries of individual Directors
are reviewed annually with any increases generally taking
effect on 1 January. These reviews take into account individual
performance, any changes to responsibilities and market rates
for comparable positions within the industry sector. The main
elements of benefits available are private health care, life
assurance and overseas accommodation where appropriate.
(b) Annual Bonuses – The Group operates a discretionary
performance-related bonus scheme for its Executive Directors.
With effect from 1 October 2004 the following policy has been
approved by the Remuneration Committee.
The level of potential bonus is expressed as a percentage of
basic salary (or salary plus fees) with Executive Directors
eligible to earn up to 50% of basic salary subject to
achievement of financial targets, namely: EPS; divisional
profit; cash generation/targeted cash borrowing, plus
managerial responsibilities. The bonuses are paid in cash. The
annual total sum of bonuses paid to Executives will not exceed
3% of EBITDA, and payment of any bonuses is subject to
EBITDA increasing by a minimum of 10% over the previous
year.
Executives’ performance is reviewed following the end of the
financial year with the bonus being paid in the January
following the end of the previous financial year.
The Committee is responsible for determining and reviewing
bonuses, and ensuring, if granted, they are appropriate in all
circumstances, including the effect of acquisitions during the
year.
In the event that actual divisional EBITDA significantly
exceeds budgeted EBITDA over the year, the Executives
concerned may be eligible for a share in a sliding scale
superbonus (not to exceed £1m), according to the extent to
which EBITDA was exceeded.
(c) Share Incentive Scheme – All Executive Directors are eligible
to participate in the Company’s Unapproved Executive Share
Option Scheme and Approved Executive Share Option Scheme.
(d) Pension arrangements – All Executive Directors’ salaries are
inclusive of any contributions towards any pension. All UK
Executive Directors are eligible to join the Group Personal
Pension Scheme, but will not receive any further Company
contributions.
25
Directors’ Remuneration Report
continued
Remuneration of Non-Executive Directors
Employee Share Option Scheme
The Non-Executive Directors receive fees which are determined by
the Board for their time in relation to Board and Committee
meetings and other requirements. They are not eligible to
participate in any of the Company’s pension or share option plans.
The Company has two share option schemes, The Sanctuary Group
plc Approved and Unapproved Executive Share Option Schemes.
The schemes are for eligible employees (including Executive
Directors) of the Group under which option holders may be
granted rights to subscribe for or purchase Ordinary Shares.
Directors’ Interest in Share Options
Details of the Unapproved Executive Share Options and Approved
Executive Share Options held by Directors to subscribe for
Ordinary Shares of 12.5p in the Company are set out on page 27.
Details of the total number of Ordinary Shares under option as at
30 September 2005 are given in Note 21.
The exercise of options is conditional on there having been an
increase in earnings per share over the increase in the rate of
inflation averaged over the previous three financial years prior to
exercise of not less than 3% over the period.
Analysis of Directors’ Remuneration (Audited):
Date of
contract or letter
of appointment
Executive Directors:
AJ Taylor
RC Smallwood
MD Miller
A Najeeb
J Cokell
M Mercuriadis (Based in US)
Non-Executive Directors:
TM Sharp
DB McArthur
JC Driscoll
JDT Greenall
Sir CJR Meyer1
Bonuses
£000
Benefits
£000
Total
2005
£000
Total
2004
£000
1 October
1 October
1 October
1 October
1 January
1 July
2000
2000
2000
2000
1997
2000
391
391
344
238
356
757
100
100
–
–
75
414
–
–
–
–
–
68
491
491
344
238
431
1,239
452
452
375
195
494
627
1 February
1 January
1 January
1 January
1 January
2004
2004
2004
2004
2004
49
40
20
27
23
2,636
–
–
–
–
–
689
–
–
–
–
–
68
49
40
20
27
23
3,393
46
50
18
23
24
2,756
Sir CJR Meyer resigned from the Board on 22 September 2005.
Bonuses included in the above table are those charged to the
profit and loss account in the year under the previous bonus policy,
whereby bonuses were discretionary with due consideration to
individual performance against annual strategic objectives.
None of the Directors was involved in any long-term share
incentive plans.
The benefits shown in the table above comprise accommodation
costs in New York and health and dental insurance.
Total Shareholder Return Performance Graph
The graph below charts the Total Shareholder Return (TSR) on a
holding of shares in the Company for five years from 1 October
2000 to 30 September 2005 relative to a recognised equity index.
In the absence of a suitable index of true comparators, the
Committee has elected to show Sanctuary’s performance related
to the FTSE All Share Index and the FTSE All Share Media and
Entertainment Index. TSR is defined as share price growth plus
reinvested dividends.
Policy on Outside Appointments
The Executive Directors are permitted to take external
appointments as Non-Executive Directors, but none are with
another publicly quoted company. They may retain the
remuneration from such appointments. All appointments must be
approved by the Board to ensure that they do not give rise to any
scope for conflicts of interest.
Value of original £100 investment(£)
1
Salary and fees
£000
120
100
80
60
40
20
0
Sep 00
Sep 01
Sep 02
FTSE Media & Entertainment
26
Sep 03
Sep 04
Sep 05
FTSE All Share
Sanctuary Group
The Sanctuary Group plc . Annual Report 2005
Directors’ Remuneration Report
continued
Directors’ Share Options (Audited)
The following options over shares have been granted at nil to the Directors pursuant to The Sanctuary Group plc Unapproved Executive
Share Option Scheme:
Number of
options at
30 Sep 2004
Number of
options granted
in year
Number of
options exercised
in year
Number of
options at
30 Sep 2005
Exercise
price
167,817
100,000
75,000
100,000
100,000
195,787
100,000
75,000
100,000
100,000
83,908
80,000
50,000
100,000
100,000
83,908
80,000
50,000
100,000
100,000
50,000
150,000
100,000
200,000
250,000
100,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
167,817
100,000
75,000
100,000
100,000
195,787
100,000
75,000
100,000
100,000
83,908
80,000
50,000
100,000
100,000
83,908
80,000
50,000
100,000
100,000
50,000
150,000
100,000
200,000
250,000
100,000
37p
73p
71p
45p
37.5p
37p
73p
71p
45p
37.5p
37p
73p
71p
45p
37.5p
37p
73p
71p
45p
37.5p
71p
45p
37.5p
71p
45p
37.5p
AJ Taylor
RC Smallwood
MD Miller
A Najeeb
J Cokell
M Mercuriadis
Exercise period
commences
29 Dec
23 Jan
29 Jan
15 July
13 Nov
29 Dec
23 Jan
29 Jan
15 July
13 Nov
29 Dec
23 Jan
29 Jan
15 July
13 Nov
29 Dec
23 Jan
29 Jan
15 July
13 Nov
29 Jan
15 July
13 Nov
29 July
15 July
13 Nov
2002
2004
2005
2005
2005
2002
2004
2005
2005
2005
2002
2004
2005
2005
2005
2002
2004
2005
2005
2005
2005
2005
2005
2005
2005
2005
Exercise period
expires
28 Dec
22 Jan
28 Jan
14 July
12 Nov
28 Dec
22 Jan
28 Jan
14 July
12 Nov
28 Dec
22 Jan
28 Jan
14 July
12 Nov
28 Dec
22 Jan
28 Jan
14 July
12 Nov
28 Jan
14 July
12 Nov
28 Jan
14 July
12 Nov
2006
2008
2009
2009
2009
2006
2008
2009
2009
2009
2006
2008
2009
2009
2009
2006
2008
2009
2009
2009
2009
2009
2009
2009
2009
2009
Mr M Mercuriadis has options over 122,448 Ordinary Shares of 12.5p each pursuant to the Approved Share Option Scheme which were
granted on 9 July 1999 at an exercise price of 24.5p. The exercise period commenced on 9 July 2002 and expires on 8 July 2009.
Mr J Cokell has options over 26,666 Ordinary Shares of 12.5p pursuant to the Approved Share Option Scheme which were granted on
22 January 2001 at an exercise price of 73p. The exercise period commences on 23 January 2004 and expires on 22 January 2011.
Details of Directors’ shareholdings are given in the Directors’ Report on page 18.
All options have been issued without a discount to the then current mid-market price. The mid-market price of the shares at
30 September 2005 was 5.9p (2004: 48.25p) and at the date of this report was 1.4p (2004: 44.5p) and the range of mid-market
prices during the year was between 47.75p and 5.9p (2004: 53.25p and 44p). It is no longer the Company policy to grant options
to Executive Directors.
Approved by the Board and signed on its behalf by
Sarah Standing
Company Secretary
14 February 2006
The Sanctuary Group plc . Annual Report 2005
27
Consolidated Profit and Loss Account
for the year ended 30 September 2005
Notes
Results before
the impact of
exceptional
items
£’000
Exceptional
items
(note 1)
£’000
2005
2004
Total
£’000
Restated
£’000
Turnover:
Existing operations
Acquisitions
Turnover – continuing operations
Cost of sales
Gross profit
3
2
2
152,782
5,136
157,918
(116,542)
41,376
(1,774)
(1,774)
(36,640)
(38,414)
151,008
5,136
156,144
(153,182)
2,962
166,687
166,687
(110,887)
55,800
2
(8,390)
(3,342)
(73,865)
(85,597)
(21,242)
(2,512)
(5,286)
(29,040)
(29,632)
(5,854)
(79,151)
(114,637)
(6,476)
(3,154)
(55,908)
(65,538)
(48,081)
3,860
(44,221)
575
(9,779)
(53,425)
(311)
(53,736)
35
(53,701)
15
(53,686)
(67,454)
(67,454)
(21,680)
(89,134)
(89,134)
(89,134)
(89,134)
(115,535)
3,860
(111,675)
(21,680)
575
(9,779)
(142,559)
(311)
(142,870)
35
(142,835)
15
(142,820)
(9,738)
(9,738)
(11,400)
93
(5,689)
(26,734)
(2,450)
(29,184)
(129)
(29,313)
(1,528)
(30,841)
(40.14)p
(40.14)p
(8.80)p
(8.80)p
Total administrative expenses:
Amortisation
Depreciation
Other administrative expenses
Total administrative expenses
Group operating (loss)/profit:
Existing operations
Acquisitions
Group operating loss – continuing operations
Exceptional items
Interest receivable and similar income
Interest payable and other charges
1
7
4
8
Loss on ordinary activities before taxation
Taxation on loss on ordinary activities
Loss on ordinary activities after taxation
Minority interests
Loss on ordinary activities for the financial year
Dividends
9
Retained loss for the financial year
Earnings per share:
Basic
Diluted
10
10
Earnings before interest, taxation, depreciation and amortisation (EBITDA) are set out in Note 2b.
Statement of Total Recognised Gains and Losses
for the year ended 30 September 2005
2005
Notes
Loss for the financial year
(Loss)/profit on retranslation of foreign currency subsidiaries
Profit/(loss) on retranslation of long term funding of overseas subsidiaries
Total recognised gains and losses relating to the financial year
Prior Year Adjustment
Total recognised gains and losses since last annual report
28
28
£’000
(142,835)
(2,530)
259
(145,106)
(46,713)
(191,819)
2004
Restated
£’000
(29,313)
1,151
(1,825)
(29,987)
The Sanctuary Group plc . Annual Report 2005
Consolidated Balance Sheet
at 30 September 2005
Notes
£’000
2004
Restated
£’000
11
12
13
14
14,896
78,287
8,957
72
22,653
84,185
13,652
17,907
14
14
1,862
(1,862)
102,212
2,135
(2,135)
138,397
Stocks
Debtors – amounts falling due within one year
Debtors – amounts falling due after more than one year
Investments
Cash at bank and in hand
15
16
16
14
5,296
57,253
4,869
2,500
9,739
79,657
10,524
56,346
22,329
20,046
109,245
Creditors – amounts falling due within one year
17
(110,515)
(30,858)
(92,631)
16,614
71,354
(115,113)
(11,255)
(55,014)
155,011
(78,876)
76,135
46,388
250
91,079
(193,039)
(55,322)
308
(55,014)
41,997
250
81,493
(47,948)
75,792
343
76,135
2005
Fixed assets:
Intangible assets
Goodwill
Tangible assets
Investments
Investments in joint ventures
Share of gross assets
Share of gross liabilities
Current assets:
Net current (liabilities)/assets
Total assets less current liabilities
Creditors – amounts falling due after more than one year (including convertible debt)
Provisions for liabilities and charges
17
20
Net (liabilities)/assets
Capital and reserves:
Called up share capital
Shares to be issued
Share premium account
Profit and loss account
21
21
23
23
Equity shareholders’ funds
Minority interests
Total capital employed
Approved by the Board on 14 February 2006 and signed on its behalf by:
A J Taylor
PF Wallace
Director
Director
The Sanctuary Group plc . Annual Report 2005
29
Company Balance Sheet
at 30 September 2005
Notes
£’000
2004
Restated
£’000
11
13
14
751
2,892
89,760
93,403
68
3,647
110,621
114,336
Stocks
Debtors – amounts falling due within one year
Debtors – amounts falling due after more than one year
Cash at bank and in hand
15
16
16
20
Creditors – amounts falling due within one year
17
Net current assets
3
9,907
1,924
25,731
37,565
(24,747)
12,818
Total assets less current liabilities
106,221
198,233
17
20
(113,695)
(4,553)
(12,027)
(75,707)
122,526
21
21
23
23
46,388
250
91,079
(149,744)
(12,027)
41,997
250
81,493
(1,214)
122,526
2005
Fixed assets:
Intangible assets
Tangible assets
Investments
Current assets:
Creditors – amounts falling due after more than one year (including convertible debt)
Provisions for liabilities and charges
Net (liabilities)/assets
10
21,252
204
72,128
93,594
(9,697)
83,897
Capital and reserves:
Called up share capital
Shares to be issued
Share premium account
Profit and loss account
Equity shareholders’ funds
Approved by the Board on 14 February 2006 and signed on its behalf by:
A J Taylor
PF Wallace
Director
Director
30
The Sanctuary Group plc . Annual Report 2005
Consolidated Cash Flow Statement
for the year ended 30 September 2005
2005
Notes
Net cash flow from operating activities
Returns on investment and servicing of finance
Taxation
Capital expenditure and financial investment
Acquisitions and disposals
Equity dividends paid
25a
25b
25b
25b
Cash outflow before financing
Financing
25b
Decrease in cash in the year
Reconciliation of net cash flow to movement in net debt
Decrease in cash in the year
Cash flow from movement in debt and lease financing
Change in net debt resulting from cash flows
New finance leases
Movement in net debt in year
Net debt at 1 October 2004
Net debt at 30 September 2005
25c
25c
25c
£’000
2004
Restated
£’000
(42,473)
(8,631)
(3,128)
(5,520)
(4,520)
(1,535)
(65,807)
37,602
(28,205)
2,687
(5,596)
(168)
(8,616)
(9,288)
(1,328)
(22,309)
21,482
(827)
(28,205)
(37,595)
(65,800)
(750)
(66,550)
(73,852)
(140,402)
(827)
(20,882)
(21,709)
(500)
(22,209)
(51,643)
(73,852)
Reconciliation of Movements in Shareholders’ Funds
for the year ended 30 September 2005
2005
Notes
Opening Shareholders’ funds – as previously reported
Prior Year Adjustment
Opening Shareholders’ funds – as restated
Loss for the financial year
Dividends
Exchange difference on retranslation of net assets of subsidiary undertakings
Profit/(loss) on retranslation of long term funding of overseas subsidiaries
Issue of share capital
Movements in shares to be issued
Net reduction in shareholders’ funds
Closing shareholders’ funds
The Sanctuary Group plc . Annual Report 2005
28
23
£’000
122,505
(46,713)
75,792
(142,835)
15
(2,530)
259
13,977
(131,114)
(55,322)
2004
Restated
£’000
129,534
(25,155)
104,379
(29,313)
(1,528)
1,151
(1,825)
3,428
(500)
(28,587)
75,792
31
Statement Of Accounting Policies
Principal Accounting Policies
The principal accounting policies are summarised below. They have
been applied consistently in dealing with items which are
considered material in relation to the accounts except for the
changes in accounting policies referred to below. In 2005 the
Directors have also made certain changes to accounting estimates,
the effects of which are set out in Note 1.
Basis of accounting
The financial information has been prepared under the historical
cost convention and in accordance with applicable accounting
standards.
Going concern
The Group incurred substantial losses in the year ended 30
September 2005 and had net liabilities as at that date.
The Group has initiated a reduction in its administrative costs in
the year ended 30 September 2005 and plans to dispose of certain
non-core assets. The expected impacts of these measures have
been reflected in the Group’s most recent trading and cash flow
forecasts, which have been carefully reviewed by the Board.
The Directors have also considered the legal proceedings in which
the Group is currently involved. The Group has taken extensive
external legal advice on material claims. On the basis of this
advice, the Directors believe the outcome of these proceedings will
not materially affect the Group’s financial position or result in a
material amendment to the Group’s forecasts. Further details of
these legal proceedings are disclosed in Note 22 to the financial
statements.
In December 2005, the Board announced that it would explore a
number of options for the medium and long term financing of the
Group. On 3 February 2006 the Board announced the following
conditional agreements:
• An equity fundraising underwritten by Evolution Securities
of £110m;
• Release of £35m of indebtedness; and
• New committed facilities.
Shareholders should be aware that the equity fundraising is to
occur at a significant discount to the current market price of the
ordinary shares. Due to the amount being raised relative to the
market capitalisation of the Group, existing shareholders will also
suffer significant dilution. To mitigate the effects of this the Board
intend to make an element of the equity fundraising available to
the existing shareholders and to allow excess applications under
any pro rata element of the fundraising. The equity fundraising
would be subject inter alia to the approval of existing
shareholders. The Board expect to recommend the proposed equity
fund raising to existing shareholders.
The proposed fundraising is expected to repair the Group’s
balance sheet and create a stronger foundation for the business
going forward.
The Group has also reached an agreement with its principal lender
and its convertible bondholder under which, subject to a successful
fundraising, inter alia, £35m of the Group’s outstanding
indebtedness will be released and which also covers the provision
of a future committed facility to the Group. The equity fundraising
and the agreement with the Group’s creditors are interconditional.
The Group has also entered into discussions to put in place new
facilities without an additional capital raising to meet the Group’s
working capital requirements in the event that the capital raising
was not to proceed, and the Group’s principal lender has stated
that based on the information currently available it remains the
banks current intention to support the Group for the 12 months to
14 February 2007. Such alternative arrangements would require
the approval of the bondholder.
The Directors have also reviewed the Group’s trading forecasts,
projected cash flows and other relevant information, which include
the expected effect of the reduction in administration costs
referred to above, and are confident that the Company and the
Group have adequate resources to continue in operational
existence for the foreseeable future. For this reason, the Directors
consider it appropriate to adopt the going concern basis in
preparing the Company’s and the Group’s financial statements.
Basis of consolidation
The Group financial information includes the assets and liabilities
and results of the Company and its subsidiary companies.
Transactions and balances between Group companies have been
eliminated.
Subsidiary companies have been identified as being those where
the Company exercises dominant influence, which may be
evidenced by the fact that the Company’s appointed Directors
dominate the Board, and the Company sets commercial policy.
Investments in associated undertakings, which are material, are
accounted for on the basis of the equity accounting method and
the Group’s share of the associated undertakings’ losses and
profits included in the consolidated financial information
accordingly.
Joint ventures are accounted for using the gross equity method.
Under Section 230(4) of the Companies Act 1985 the Company is
exempt from the requirement to present its own profit and loss
account. The loss for the financial year dealt with in the financial
statements of the holding company was £158,131,000 (2004
(restated): Profit £3,847,000).
Prior Year Adjustment
The Directors have decided to change certain of the Group’s
accounting policies and also certain of its accounting estimates in
order to increase the relevance, understandability and
comparability of the Group’s financial reporting.
The changes in accounting policies have been applied to all
financial reporting periods presented and the changes and their
financial effects are described below.
The changes in accounting estimates have been applied to all
individual assets and liabilities, and their financial impact
classified as exceptional items in 2005 as set out in Note 1.
32
The Sanctuary Group plc . Annual Report 2005
Statement Of Accounting Policies
continued
Recorded Product - catalogue exploitation contracts (CECs)
The Group previously recognised income from such contracts when
they became contractually binding and the Group considered that
it had substantially completed all of its obligations under such
agreements. Where such contracts were of a long term nature the
income and associated costs were discounted over their term. The
policy was followed, in part, because the contracts included terms
which provided for a guaranteed minimum amount of income.
Having re-assessed these contracts and the Group’s performance
obligations under the terms of these contracts, the Directors now
consider that the Recorded Product business will have significant
ongoing obligations to perform for the life of each contract, and,
therefore, that this accounting policy is no longer relevant.
In addition, the Directors have concluded that, as a result of
changes in the Group’s circumstances and in the recorded music
market, this accounting policy has ceased to be reliable. This
conclusion recognised, inter alia, the difficulty of objectively reassessing the net present value of CECs to reflect the impact of
changes in circumstances on their future performance in the
current trading environment.
The Directors have, therefore, adopted a more prudent policy
which does not depend on assessment of future contract
performance, but which recognises income in the profit and loss
account as the underlying sales are made. This policy provides a
more objective and reliable measure of the performance of the
business. The Group anticipates that, in the future, CECs may be
entered into on either an advance or a guarantee basis. The new
policy will treat both types of contract in a similar way, aiding
comparability of similar transactions. It will also be more in line
with industry practice and will aid comparability and
understanding of the Group’s financial statements.
Recorded Product – other rights exploitation contracts
The Group previously recognised income from such contracts when
signed heads of agreement or similar documentation had been
obtained and the Group considered that it had substantially
completed all of its obligations under such agreements.
This policy was derived from the nature of contracts under which
advances are received in consideration for an ongoing distribution
or license right, and are recoupable but not refundable. Hence the
Group would take such advances to the profit and loss account as
income as and when they were received in cash, together with an
estimate of associated costs, as if the advance represented sales
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 are made and the advance recouped.
The Directors consider that the revised policy will provide a more
reliable long-term measure of the performance of the business in
its current circumstances. In addition, it is more in line with
industry practice, aiding comparability and understanding of the
Group’s financial statements.
Recognition of management commission income
Under the Group’s previous policy, management commission
income was recognised when agreement had been obtained, there
was a high degree of certainty that such income would be
received, and the Group considered it did not need to perform any
further significant work to realise such income.
The Sanctuary Group plc . Annual Report 2005
This policy was considered appropriate because of the longevity of
the relationship between the Group’s artist managers and the acts
from whom a high proportion of the Group’s management
commissions were derived, and reflected the fact that managers’
efforts were expended in advance to secure the deals which
generated income.
As a result of the growth in the Group’s Artist Management
business, its roster now encompasses a wider and larger range of
artists and managers. In addition, artists now generally require a
more comprehensive and ongoing level of involvement from their
managers, with correspondingly less emphasis on negotiating deals
up front.
The new policy recognises income on an accruals basis when it
becomes contractually due, which is in accordance with the
requirements of UITF Abstract 40. The Directors consider this
policy more appropriately reflects the Group’s current
arrangements.
Recognition of origination costs
The Group’s previous policy was to capitalise and amortise
origination costs through cost of sales over a period of between
three and five years. This policy has been compared with those of
other music companies, and the Directors have decided to adopt a
more prudent policy of immediate write off of all origination costs.
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 gross basis. In current market conditions the travel
agency is earning income on a fee basis. Accordingly, the new policy
requires sales invoiced by the Group to be disclosed on a ‘net fee’
basis. ‘Net fees’ represent gross sales to customers less the amount
remitted to the third party. This change in accounting policy results
in a change in the amount of recorded income but does not affect
profit.
The effect of these changes on the accounts for the years ended
30 September 2004 and 2005 is comprehensively outlined in Note
28 to the financial statements.
Turnover
Turnover represents the invoiced value or contracted amount of
goods and services supplied to third parties. Turnover is stated
on a ‘net fee’ basis where appropriate, and excludes VAT and
similar sales-related taxes. Provision is made in respect of
expected future returns of goods and services supplied prior
to the balance sheet date.
License income
License income is accounted for on an accruals basis as it is
earned and becomes certain of receipt. Future amounts receivable
which are dependent on future performance by the licensee are
accounted for as they are earned and become certain of receipt.
Artist management commission income
Commission is recognised when the artist first becomes
contractually entitled to receive income and thereafter on an
accruals basis. Commission derived from touring activity is
not accrued on concerts scheduled to take place after the
balance sheet date.
Agency commission income
Agency commission income is accounted for on an accruals basis.
Commission is not accrued on concerts scheduled to take place
after the balance sheet date.
33
Statement Of Accounting Policies
continued
Goodwill
Deferred taxation
Goodwill arising on acquisitions is capitalised and amortised over
the Directors’ estimate of its expected useful life, restricted to 20
years, in accordance with FRS 10.
Deferred tax is recognised in respect of all timing differences that
have originated but not reversed at the balance sheet date where
transactions or events that result in an obligation to pay more tax
in the future or a right to pay less tax in the future have occurred
at the balance sheet date.
• Deferred tax assets are recognised only to the extent that the
Directors consider that it is more likely than not that there will
be suitable taxable profits from which the underlying timing
differences can be deducted.
• Deferred tax is measured on an undiscounted basis at the tax
rates that are expected to apply in the periods in which timing
differences are expected to reverse, based on tax rates and laws
that have been enacted or substantially enacted by the balance
sheet date.
Goodwill is reviewed for impairment at the end of the first full
financial year following acquisition and in other periods if events
or changes in circumstances indicate that the carrying value may
not be recoverable.
Goodwill arising on acquisitions made before 30 September 1998
has previously been taken to reserves. On disposal of subsidiary
and associated undertakings and businesses, such goodwill is
charged to the profit and loss account balanced by an equal credit
to reserves.
Intangible fixed assets
Recorded product catalogues are capitalised as intangible fixed
assets in the consolidated balance sheet and amortised by equal
annual amounts over between 5 and 20 years as appropriate.
Trademarks are carried at cost less amortisation and amortised
on a straight line basis over 8 years.
Tangible fixed assets
Depreciation is provided on cost in equal annual instalments in
order to write off each asset over its estimated useful life. The
rates of depreciation are shown in the table below:
Freehold land and buildings
2%
Short leasehold property and
leasehold improvements
over term of lease
Furniture, fixtures, fittings and office equipment
Motor vehicles
10%
25% or over term of lease
Light and sound equipment
between 10% and 33%
Computer equipment
between 20% and 33%
Websites
10%
Investments
Investments held as fixed assets, other than investments in
associates, are stated at cost less provision for impairment in
value. Current asset investments are stated at the lower of cost
and net realisable value.
Investments in joint ventures
Undertakings in which the Group has a long term interest and
shares control under a contractual arrangement are defined as
joint ventures.
Stocks
Stock is valued at the lower of cost and net realisable value.
Advance Payments to Artists to Secure Rights
Advance payments to artists and licensors to secure their
recording and audio visual rights are assessed and the value of the
unrecouped amount to be included in debtors is determined by
reference to the prospects of future recoupment, based on past
sales performance, current popularity and projected sales. Advance
payments to artists who are not yet fully established are fully
provided for in the profit and loss account as incurred.
34
Leased Assets
Assets acquired under finance leases and hire purchase contracts
are capitalised at their fair value on acquisition and depreciated
over their estimated useful lives. The finance charges are allocated
over the period of the lease in proportion to the capital element
outstanding.
Operating lease rentals are charged to income in equal annual
amounts as incurred over the lease term.
Pension Costs
The Group operates a money purchase pension scheme and
contributions are charged to the profit and loss account
as incurred.
Translation of foreign currencies
Transactions denominated in foreign currencies are translated into
sterling at the rates ruling at the dates of the transactions.
Non-monetary assets and liabilities denominated in foreign
currencies are translated into sterling at the rates of exchange
ruling at the balance sheet date. Any exchange differences arising
are taken to the profit and loss account.
Profits and losses of overseas subsidiaries are translated into
sterling at the average rate for the year and the assets and
liabilities of overseas subsidiaries are translated into sterling at
year end rates. Exchange differences arising on translation are
dealt with in Group reserves and disclosed in the Statement of
Total Recognised Gains and Losses.
Long-term financing of overseas subsidiaries intended to be, for all
practical purposes, as permanent as equity, is treated as part of
the investing company’s net investment and exchange differences
are dealt with through the reserves and disclosed in the Statement
of Total Recognised Gains and Losses.
Finance Costs
Finance costs of debt are recognised in the profit and loss account
over the term of such instruments at a constant rate on the
carrying amount.
The Sanctuary Group plc . Annual Report 2005
Notes to the financial statements
1.
Exceptional items
The Group initiated a fundamental restructuring in the year ended 30 September 2005 across all its operating locations and, in
particular, of its US Recorded Product business. The costs of this restructuring have been reported as an exceptional item.
Against this background, the Board of Directors comprehensively reviewed the estimation techniques used by the Group in applying its
accounting policies. As result of this review, the Directors have changed certain of the Group’s estimation techniques and, consequently,
certain of its accounting estimates. The effect of these changes in accounting estimates was material and has been reported 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 their expected net realisable value. As explained in Note 14b, these loans have now been reclassified as current
asset investments.
£’000
Deferred recognition of royalty income
Provision for sales returns
Turnover
382
1,392
1,774
Provisions for:
Recoupable advances
Returns
Debts
Stock
Royalties
Other costs
Onerous leases
29,524
(446)
4,043
5,209
512
1,769
800
Asset impairment:
Investment
Tangible assets
Intangible assets
Goodwill
515
2,512
1,524
19,718
Group operating loss
Restructuring costs
Provision against Loan Notes on disposal of Cloud 9
Non-operating exceptional items
Exceptional loss for the financial year
Exceptional items
£’000
65,680
67,454
7,080
14,600
21,680
89,134
Royalty income and provisions
These changes in estimate were based on revised assessments of the certainty of receipt of certain amounts of royalty income and of costs
arising from royalty audits.
Recoupable advances
During the year, the Group changed its method of estimating the likely level of recoupment shortfall on artist and licensor advances to
take greater account of sales performance to date and to place correspondingly reduced reliance on future sales projections. The
recoupable element of costs previously capitalised as ‘recording artist shared copyright costs’ under profit share arrangements with artists
were re-classified as recoupable advances and provided against in the same way as other advances. Advance payments to developing
artists continued to be fully provided for in the profit and loss account as incurred. The Group also wrote off certain unrecouped artist
manager balances.
Debt, returns and stock provisions
During the year, the Group changed its methods for estimating the levels of provision required in these areas and adopted a systematic
approach to their application.
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 were impaired. In the course of the review, certain other assets, including certain music catalogue and tangible
fixed assets, were also identified as impaired.
The Sanctuary Group plc . Annual Report 2005
35
Notes to the financial statements
continued
Historically, recording artist shared copyright costs have been capitalised as intangible fixed assets in the consolidated balance sheet and
amortised through cost of sales over a period not exceeding 5 years, in line with actual revenues earned from the sale of product which
first utilises such rights. The Directors have reviewed their estimation of the value of assets that will earn revenues over the periods
previously anticipated and these assets have been fully impaired in the current year.
2.
Analysis of operations and EBITDA
(a) Analysis of continuing operations:
2005
£’000
Cost of sales
Gross profit
Total administrative expenses
(153,182)
2,962
(114,637)
2004
Restated
£’000
(110,887)
55,800
(65,538)
The following amounts are included in the totals for the year ended 30 September 2005 in respect of acquisitions: Cost of sales £0.1m,
Gross profit £5.1m and Total administrative expenses £1.2m.
(b) Reconciliation of Group operating loss to earnings before interest, taxation, depreciation and amortisation charged after gross profit
(EBITDA):
Results before
exceptional items
£’000
Group operating loss
Add Depreciation
Add Amortisation
(44,221)
3,342
8,390
(32,489)
EBITDA (loss)
3.
Exceptional
items
£’000
(67,454)
2,512
21,242
(43,700)
2005
2004
£’000
Restated
£’000
(111,675)
5,854
29,632
(76,189)
(9,738)
3,154
6,476
(108)
Segmental analysis
Turnover
2005
£’000
2004
Restated
£’000
Loss on ordinary activities
before taxation
2005
£’000
2004
Restated
£’000
Net assets
2005
£’000
2004
Restated
£’000
Analysis by class of business:
Recorded product
Artist services
Group services
Less: Intra group
Other income and interest costs
Net interest bearing liabilities
Exceptional item (note 1)
67,743
85,200
4,686
(1,485)
156,144
156,144
82,143
78,598
5,946
166,687
166,687
(60,162)
(14,366)
(37,147)
(111,675)
(9,204)
(21,680)
(142,559)
(4,952)
(2,590)
(2,196)
(9,738)
(5,596)
(11,400)
(26,734)
23,045
30,697
31,646
85,388
(140,402)
(55,014)
77,601
40,330
32,056
149,987
(73,852)
76,135
The amounts attributable to acquisitions in the year as set out in the profit and loss account for turnover and Group operating profit are
not material for segmental analysis.
The Group Services loss for 2005 includes goodwill impairment losses of £19,718,000 (note 12).
The geographical turnover of the Group was as follows:
£’000
2004
Restated
£’000
66,137
62,307
22,414
5,286
156,144
64,198
59,999
27,716
14,774
166,687
2005
Analysis by geographical region:
UK
US
Rest of Europe
Rest of world
In the opinion of the Directors, a geographical analysis of profits and losses and net (liabilities)/assets would be seriously prejudicial to
the commercial interests of the Group and therefore is not presented.
36
The Sanctuary Group plc . Annual Report 2005
Notes to the financial statements
continued
4.
Loss on ordinary activities before taxation
£’000
2004
Restated
£’000
5,304
550
523
208
29,632
2,405
83
2,581
573
411
74
6,476
1,077
2,129
68
565
124
109
282
139
28
217
63
38
8
178
17
3
8
2005
Number of
employees
2004
Number of
employees
212
308
173
693
243
194
169
606
2005
£’000
2004
£’000
35,438
2,694
795
38,927
28,480
2,465
533
31,478
2005
Loss on ordinary activities before taxation is stated after charging:
Depreciation of tangible fixed assets
owned assets
leased assets
Loss on disposal of tangible fixed assets
Loss on disposal of intangible fixed assets
Amortisation – charged after gross profit
Amortisation – cost of sales
Operating lease payments – land and buildings
Operating lease payments – plant and equipment
Auditors’ remuneration as auditors to the Group
Principal Auditors
Other Auditors
Auditors’ remuneration for non audit services
Total non audit fees were as follows:
Due diligence and acquisition related fees capitalised
Taxation advisory
Taxation compliance
Further assurance services
5.
Employees
The average monthly number of persons (including Directors) employed by the Group during the year was:
Recorded Product
Artist Services
Group Services
Staff costs for the above persons:
Wages and salaries
Social security costs
Other pension costs
6.
Directors’ remuneration
Details of Directors’ remunerations, pension entitlements and share options are included in the Directors’ Remuneration Report on pages
25, 26 and 27.
Directors’ aggregate emoluments
2005
£’000
2004
£’000
3,393
2,756
Aggregate emoluments of the highest paid Director for the year ended 30 September 2005 were £1,239,000 (2004: £627,000).
The Sanctuary Group plc . Annual Report 2005
37
Notes to the financial statements
continued
7.
Interest payable and other charges
On bank loans and overdrafts
On Convertible loan notes
On Finance leases
8.
2005
£’000
2004
£’000
8,392
1,246
141
9,779
4,639
899
151
5,689
2005
£’000
2004
Restated
£’000
233
516
1,045
1,794
1,211
114
1,018
2,343
(1,483)
311
107
2,450
Tax on loss on ordinary activities
(a) Analysis of charge in year
Current tax:
UK corporation tax at 30% (2004: 30%)
Overseas taxation payable
Adjustment in respect of previous years
Total current tax (note 8b)
Deferred tax:
Origination and reversal of timing differences
Tax on loss on ordinary activities
(b) Factors affecting the charge for the year
Tax assessed for the year differs from the standard rate of corporation tax in the UK (30%).
The difference is explained below:
Loss on ordinary activities before tax
Loss on ordinary activities multiplied by the standard rate of corporation tax in the UK at 30% (2004: 30%)
Effects of:
(Income not taxable)/expenses not deductible for tax purposes
Capital allowances lower than depreciation
Amortisation
Tax losses
Other timing differences
Higher rates on overseas earnings
Adjustments to tax charge in respect of previous periods
Current tax charge for year (note 8a)
(142,559)
(26,734)
(42,768)
(8,020)
2,353
1,752
8,890
18,838
11,684
1,045
1,794
(5,240)
1,345
1,943
10,300
997
1,018
2,343
(c) Factors that may affect future tax charges:
In 2005 the Group utilised tax losses and it is anticipated that further brought forward losses will be utilised in 2006 and subsequent
years. The deferred tax asset at 30 September 2005 of £3,163,000 (note 16) relates largely to losses carried forward which the
Directors conservatively expect to be recoverable against future taxable profits in the near-term with a high degree of certainty. If the
Group were to make higher than expected taxable profits, there are additional tax losses and other timing differences available with a
value in excess of £40,000,000.
9.
Dividends
2005
£’000
2004
£’000
Dividends are recommended as follows:
Proposed dividend at £nil per share (2004: 0.45p per share)
Adjustment to prior year dividend
(15)
(15)
1,550
(22)
1,528
10. Earnings per share
Basic and diluted earnings per share have been calculated in accordance with FRS 14 - ‘Earnings per Share’. Basic earnings per share
have been calculated using losses of £142,835,000 (2004: £29,313,000) and a weighted average of shares in issue during the year of
355,830,453 shares (2004: 333,039,273 shares).
Diluted earnings per share is equivalent to basic earnings per share as the effect of potential ordinary shares would decrease the net loss
per share and so the potential ordinary shares cannot be treated as dilutive in accordance with FRS 14.
38
The Sanctuary Group plc . Annual Report 2005
Notes to the financial statements
continued
11. Intangible fixed assets
Group
Recorded
Product
catalogue
£’000
Copyright
of animated
programme
and literary
works
£’000
Trademarks
and theatrical
rights
£’000
Recording
artists
shared
copyrights
£’000
Origination
£’000
Total
£’000
Cost:
1 October 2004 – as previously reported
Prior Year Adjustment (note 28)
28,347
(6,263)
130
-
209
-
7,080
-
1 October 2004 – restated
Additions
Disposals
Reclassification (note 1)
22,084
215
(188)
-
130
-
209
1,065
(2)
-
7,080
3,835
(10,915)
At 30 September 2005
22,111
130
1,272
-
6,594
(1,657)
46
-
138
-
1,729
-
1 October 2004 - restated
Charge for the year – amortisation
Impairment losses (note 1)
Eliminated on disposal
Reclassification (note 1)
4,937
1,764
1,268
(1)
-
46
10
74
-
138
180
182
19
-
1,729
(1,729)
At 30 September 2005
7,968
130
519
7,296
(7,296)
43,062
(13,559)
-
29,503
5,115
(190)
(10,915)
-
23,513
Amortisation:
1 October 2004 – as previously reported
Prior Year Adjustment (note 28)
-
3,002
(3,002)
11,509
(4,659)
-
6,850
1,954
1,524
18
(1,729)
-
8,617
Net book value:
At 30 September 2005
14,143
-
753
-
-
14,896
At 30 September 2004
17,147
84
71
5,351
-
22,653
Company
Trademarks
and theatrical
rights
£’000
Cost:
1 October 2004
Additions
200
1,065
At 30 September 2005
1,265
Amortisation:
1 October 2004
Charge for the year
Impairment losses
Eliminated on disposal
132
225
133
24
At 30 September 2005
514
Net book value:
At 30 September 2005
751
At 30 September 2004
68
The impairment loss has been determined by reference to the value in use of income-generating units, and a 10% discount rate has been
applied to their forecast future cash flows.
The Sanctuary Group plc . Annual Report 2005
39
Notes to the financial statements
continued
12. Goodwill
Group
£’000
Cost:
1 October 2004
Additions
Disposals
At 30 September 2005
99,719
20,256
(219)
119,756
Amortisation:
1 October 2004
Charge for the year
Impairment losses (note 1)
Eliminated on disposal
15,534
6,436
19,718
(219)
At 30 September 2005
41,469
Net book value:
At 30 September 2005
78,287
At 30 September 2004
84,185
The impairment loss has been determined by reference to the value in use of income-generating units, and a 10% discount rate has been
applied to their forecast future cash flows.
40
The Sanctuary Group plc . Annual Report 2005
Notes to the financial statements
continued
13. Tangible fixed assets
Group
Freehold
land and
buildings
£’000
Short leasehold
property and
improvements
£’000
Light and
sound
equipment
£’000
Furniture,
fixtures,
fittings
and office
equipment
£’000
Motor
vehicles
£’000
Websites
£’000
Total
£’000
Cost:
1 October 2004
Acquisition of subsidiaries
Additions
Disposals
At 30 September 2005
1,158
(177)
1,836
234
(33)
5,930
198
(507)
13,958
40
1,171
(1,065)
457
51
(90)
1,230
1
-
24,569
40
1,655
(1,872)
981
2,037
5,621
14,104
418
1,231
24,392
682
232
16
(4)
2,943
632
1,381
(171)
6,356
13
2,363
507
(1,057)
303
80
3
(75)
926
4,785
8,182
311
Depreciation:
1 October 2004
Acquisition of subsidiaries
Charge for the year
Impairment losses (note 1)
Eliminated on disposal
At 30 September 2005
42
(42)
-
591
35
605
1,231
10,917
13
3,342
2,512
(1,349)
15,435
Net book value:
At 30 September 2005
981
1,111
836
5,922
107
-
8,957
At 30 September 2004
1,116
1,154
2,987
7,602
154
639
13,652
Included within the depreciation charge for each year are the following amounts in relation to assets held under finance leases.
30 September 2005
-
-
119
410
21
-
550
30 September 2004
-
-
152
413
8
-
573
Included within the aggregate net book value above are tangible fixed assets held under finance leases with a net book value as follows:
At 30 September 2005
-
-
700
1,129
33
-
1,862
At 30 September 2004
-
-
829
1,528
54
-
2,411
Furniture,
fixtures,
fittings
and office
equipment
£’000
Motor
vehicles
£’000
Websites
£’000
Total
£’000
Company
Cost:
1 October 2004
Additions
Disposals
5,570
839
-
75
11
(2)
106
-
5,751
850
(2)
At 30 September 2005
6,409
84
106
6,599
1 October 2004
Charge for the year
Impairment losses
Eliminated on disposal
1,988
1,466
86
-
44
16
3
(2)
72
34
-
2,104
1,516
89
(2)
At 30 September 2005
3,540
61
106
3,707
Depreciation:
Net book value:
At 30 September 2005
2,869
23
-
2,892
At 30 September 2004
3,582
31
34
3,647
The Sanctuary Group plc . Annual Report 2005
41
Notes to the financial statements
continued
14. Investments
(a) Investments – fixed assets
Group
1 October 2004
Disposals
Provisions
Reclassified as current assets
At 30 September 2005
Loan
notes
£’000
Shares
in associated
companies
£’000
17,100
(14,600)
(2,500)
-
159
(159)
-
Listed
investments
£’000
648
(50)
(526)
72
Total
£’000
17,907
(50)
(15,285)
(2,500)
72
The Loan Notes were issued as part of the disposal of the Cloud 9 Group of companies. These Loan Notes are repayable over a 15 year
period. Interest is payable at final maturity of the Loan Notes. The Loan Notes are secured over the assets of the holding company of the
Cloud 9 Group.
At 30 September 2004 a provision of £11,400,000 was charged to the profit and loss account against these Loan Notes as an
exceptional item. The provision was made as revenues in Cloud 9 were slower to materialise than expected. A further provision of
£14,600,000 has been charged to the profit and loss account in 2005 to reduce the Loan Notes to their estimated net realisable value.
The Group has 50% interests in the called up share capital of Sanctuary Music and Media Partnership Limited and Breakthrough Media
Group plc, both of which are incorporated in England and Wales, and are principally engaged in the exploitation of intellectual copyrights.
These companies are not considered material to the Group and have therefore not been consolidated.
Listed investments had a market value of £72,000 as at 30 September 2005 (2004: £183,000).
Company
1 October 2004
Additions
Disposals
Provisions
At 30 September 2005
Shares in
associated
companies
£’000
25
(25)
-
Shares in
subsidiary
companies
£’000
110,029
22,528
(42,848)
89,709
Listed
investments
£’000
567
(516)
51
Total
£’000
110,621
22,528
(25)
(43,364)
89,760
Listed investments had a market value of £51,000 as at 30 September 2005 (2004: £112,000).
(b) Investments – current assets
Group
Loan notes
£’000
1 October 2004
Reclassified from fixed assets
2,500
At 30 September 2005
2,500
The Loan Notes have been reclassified from fixed asset investments to current asset investments. This reflects the fact that the Group is
actively seeking a buyer for these Loan Notes.
42
The Sanctuary Group plc . Annual Report 2005
Notes to the financial statements
continued
(c) Investments in joint ventures
The Group has a 50% joint venture interest in Sanctuary Kobalt (UB40) Limited a company which is incorporated in England and Wales
and is principally engaged in the ownership and exploitation of music publishing rights.
The Group has a 50% joint venture interest in Sanctuary Kobalt (WAR) Limited a company which is incorporated in England and Wales
and is principally engaged in the ownership and exploitation of music publishing rights.
At 30 September 2005 there were loans due of £813,000 (2004: £744,000) from the joint ventures to the Group. Turnover from Joint
Ventures is not separately disclosed as it is immaterial to the Group.
(d) Principal trading subsidiaries
The principal trading subsidiaries, wholly owned by the Company, or wholly owned by subsidiaries of the Company where marked *, and
incorporated in England and Wales except where indicated, and all included in the consolidation at 30 September 2005 and 2004 were as
follows:
Principal activity
Sanctuary Artist Services Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Group administrative services
Sanctuary Artist Management Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Management of music groups
Focus Business Management Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Management, accounting and consultancy
Helter Skelter Agency Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Booking agency
Platinum Travel International Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Travel agency
Rough Trade Records Limited (49% owned)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Record label
Sanctuary Publishing Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Book publishing
Sanctuary Studios Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Recording, rehearsal, video and photographic
studio hire
Sanctuary Music Publishing Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Music publisher
Sanctuary Visual Entertainment Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Film and television production
Sanctuary Records Group Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Record label
Sanctuary Copyrights Limited* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Rights owner
Sanctuary Records GmbH (incorporated in Germany)* . . . . . . . . . . . . . . . . . . . . . . . . . .Record label
Trinifold Management Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Management of music groups
Bravado International Group Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Merchandiser
Sanctuary Group Inc (incorporated in the US) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Group administrative services
Sanctuary Artist Management Inc (incorporated in the US)* . . . . . . . . . . . . . . . . . . . . . .Management of music groups
Sanctuary Records Group Inc (incorporated in the US)* . . . . . . . . . . . . . . . . . . . . . . . . .Record label
Bravado International Group Inc (incorporated in the US)* . . . . . . . . . . . . . . . . . . . . . . .Merchandiser
K2 Agency Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Booking Agency
MW Entertainment Productions and Management Inc (incorporated in the US)* . . . . . . .Management of music groups
World Merchandise Inc (incorporated in the US)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Merchandiser
Twenty-First Artists Limited (2005 only) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Management of music groups
The Group owns 49% of the share capital in Rough Trade Records Limited. This company is treated as a subsidiary as the parent
company exercises dominant control in accordance with the shareholder agreement.
15. Stocks
Finished goods
The Sanctuary Group plc . Annual Report 2005
Group
2005
£’000
Company
2005
£’000
Group
2004
£’000
Company
2004
£’000
5,296
3
10,524
10
43
Notes to the financial statements
continued
16. Debtors
Company
2005
£’000
Group
Restated
2004
£’000
24,652
12,346
8,424
11,831
57,253
109
8,509
525
764
9,907
22,736
16,432
12,625
4,553
56,346
139
19,126
814
1,173
21,252
813
173
3,163
720
4,869
1,204
720
1,924
17,352
744
2,939
1,294
22,329
204
204
203
2,960
3,163
204
1,000
1,204
(29)
1,323
1,294
204
204
204
-
(3,079)
4,480
(157)
-
1,294
386
1,483
3,163
204
1,000
1,204
1,401
(107)
1,294
(157)
361
204
Group
Company
2005
£’000
2005
£’000
Group
Company
2005
£’000
2004
£’000
Debtors – Amounts falling due within one year:
Trade debtors
Advance payments to artists to secure rights
Amounts owed by subsidiaries
Other debtors
Prepayments and accrued income
Debtors – Amounts falling due after more than one year:
Advance payments to artists to secure rights
Loans due from Joint Venture investments
Other debtors
Deferred tax (see below)
Prepayments and accrued income
Deferred tax comprises:
Accelerated capital allowances
Tax losses carried forward
At 1 October 2004 – as originally reported
Prior Year Adjustment (note 28)
At 1 October 2004 - restated
Exchange adjustment
Deferred tax credited/(charged) to profit and loss account (note 8)
At 30 September 2005
(5,717)
7,011
17. Creditors
Group
Restated
2004
£’000
Company
Restated
2004
£’000
Creditors – Amounts falling due within one year:
Bank loans and overdrafts (note 19)
Unamortised loan financing costs
Trade creditors
Amounts owed to subsidiaries
Corporation tax
Obligations under finance leases
Other taxation and social security
Other creditors
Accruals and deferred income
Dividend proposed
36,952
(286)
19,337
3,577
654
5,181
11,373
33,727
110,515
16,500
(286)
1,201
152
1,513
337
1,017
1,192
3,121
24,747
19,054
(260)
21,088
4,376
747
4,414
15,477
26,185
1,550
92,631
3,000
(260)
902
132
654
405
687
902
1,725
1,550
9,697
82,000
30,000
(673)
535
3,251
115,113
82,000
30,000
(673)
247
2,121
113,695
52,000
21,500
(783)
597
5,562
78,876
52,000
21,500
(783)
181
2,809
75,707
Creditors – Amounts falling due after more than one year:
Bank loans (note 19)
Convertible loans (note 18 and 19)
Unamortised loan financing costs
Obligations under finance leases
Accruals and deferred income
44
The Sanctuary Group plc . Annual Report 2005
Notes to the financial statements
continued
18. Derivatives and other financial instruments
Financial Instruments
The Group’s financial instruments comprise cash balances, current asset investments and items such as trade debtors and trade creditors
that arise directly from its operations. Short-term debtors and creditors have been excluded from the disclosures below. It is, and has been
throughout the year under review, the Group’s policy that no trading in financial instruments shall be undertaken. The main risks arising
from the Group’s financial instruments are interest rate/liquidity risk and foreign currency risk. The policies for managing these risks are
summarised below and have been applied throughout the year.
Foreign Currency Risk
The Group has one significant overseas operation, in the US, whose revenues and expenses are denominated primarily in US dollars. In
order to protect the Group’s sterling balance sheet from the movements in the US dollar/sterling exchange rate, the Group finances its net
investment in this subsidiary by means of US dollar borrowings. The Group also makes sales to customers outside the UK. These sales are
primarily in US dollars and Euros.
At 30 September 2005, the Group had net monetary liabilities of £18,470,000 (2004: assets £3,371,000) denominated in US dollars
and net monetary assets of £8,980,000 (2004: £5,357,456) denominated in Euros. Due to the fluctuation of these balances, the Group
monitors these assets on a regular basis and adopts such hedging techniques as it considers appropriate.
Interest Rate/Liquidity Risk
Cash balances are placed so as to maximise interest earned while maintaining the liquidity requirements of the business. The Directors
regularly review the placing of cash balances. When seeking borrowings the Directors consider the commercial terms available and, in
consultation with their advisers, consider whether such terms should be fixed or variable and are appropriate to the business. Any surplus
cash balances during the year were placed on short-term deposit accounts at standard bank interest rates. The financial assets of the
Group at 30 September 2005 were designated in the currencies as per the table below and were earning standard bank interest rates.
These are disclosed under cash at bank and in hand of £9,739,000 (2004: £20,046,000) and their fair value was the same as the
carrying value.
Sterling
US dollars
Euros
Other currencies
2005
£’000
2004
£’000
5,028
3,572
464
675
9,739
6,729
11,310
1,352
655
20,046
The total financial liabilities were £150,141,000 (2004: £93,898,000) and their fair value was the same as the carrying value. These
amounts were designated in sterling except for £22,040,000 (2004: £12,152,000) which were designated in US dollars.
Floating rate financial liabilities of £118,952,000 (2004: £71,054,000) comprise bank borrowings and loans bearing interest rates fixed
in advance for periods ranging from overnight to six months, based on appropriate LIBOR rates.
Fixed interest financial liabilities comprise Convertible Loan Notes and finance leases. Interest on the Convertible Loan Notes of
£30,000,000 (2004: £21,500,000) is fixed at 4.75% on £21,500,000 and 5.75% on £8,500,000. Financing costs to be amortised in
respect of the Convertible Loan Notes at 30 September 2005 are £959,000 (2004: £1,043,000) of which £286,000 (2004: £260,000)
is included in Creditors: Amounts falling due within one year.
The Group had finance lease obligations of £1,189,000 (2004: £1,344,000) of which £654,000 (2004: £747,000) are included in
Creditors: Amounts due within one year (note 26a).
The weighted average interest rate of these fixed rate financial liabilities is 5.1% (2004: 4.9%) and the weighted average period for
which these liabilities are fixed is 3 years (2004: 4 years).
The Group has undrawn committed borrowing facilities available at 30 September 2005, in respect of which all conditions precedent had
been met, of £1,500,000 (2004: £6,000,000). These facilities expire in one year or less.
The Sanctuary Group plc . Annual Report 2005
45
Notes to the financial statements
continued
The Group also has financial assets in the form of listed investments and Loan Notes due from the Cloud 9 Group as part of the disposal
agreement.
The fair value of these financial assets, all designated in sterling, are set out below:
2004
2005
Book value
£’000
Listed investments
Cloud 9 Group Loan Notes
Joint Venture Loans
72
2,500
813
Fair value
£’000
721
2,5002
813
Book value
£’000
648
17,100
744
Fair value
£’000
1831
17,1002
744
1
Market rates have been used to determine fair values.
2
Loan Notes are repayable in 13 years and carry interest at an equivalent rate to that paid by the Group on bank loans and overdrafts
from time to time and is payable at maturity. These Loan Notes are secured on the assets of the Cloud 9 Group. A provision of
£14,600,000 was charged to the profit and loss account in the year ended 30 September 2005 against these Loan Notes as an
exceptional item (note 1).
19. Borrowings
Group
2005
£’000
Company
2005
£’000
Group
2004
£’000
Company
2004
£’000
36,952
3,000
79,000
118,952
16,500
3,000
79,000
98,500
19,054
3,000
49,000
71,054
3,000
3,000
49,000
55,000
30,000
148,952
30,000
128,500
21,500
92,554
21,500
76,500
Analysis of loan repayments:
Bank loans and overdrafts
Within one year or on demand
Between one and two years
Between two and five years
Convertible loan notes:
Between two and five years
Total borrowings
Bank loans and overdrafts are secured by fixed and floating charges over the assets of The Sanctuary Group plc and certain of its
subsidiaries.
Finance lease commitments are disclosed in note 26a.
On 28 November 2003 the issue of up to £30,000,000 of Convertible Loan Notes due 2008 and Warrants to subscribe for 8,919,722
Ordinary Shares was agreed at an Extraordinary General Meeting of the Company. £18,000,000 of these loan notes were issued on 28
November 2003 with a further £3,500,000 being issued on 27 February 2004. The final £8,500,000 Convertible Loan Notes were issued
on 1 April 2005.
Cash at bank and in hand includes £2,765,000 (2004: £11,757,000) relating to monies collected on behalf of client artists. The
corresponding liabilities are included in creditors falling due within one year.
46
The Sanctuary Group plc . Annual Report 2005
Notes to the financial statements
continued
20. Provisions for liabilities and charges
Group
At 1 October 2004
Deferred contingent consideration on acquisitions of subsidiaries
Charged to profit and loss account
At 30 September 2005
Total
£’000
Deferred
Consideration
£’000
Fundamental
Restructuring
£’000
Other
£’000
6,400
4,855
6,400
-
3,208
1,647
11,255
6,400
3,208
1,647
Certain of the acquisitions made by the Group involve an earn-out arrangement whereby the consideration payable includes a deferred
element that is contingent on the future financial performance of the acquired entity.
Provisions for liabilities and charges include a provision for contingent consideration of £6,400,000 (2004: £Nil). This represents the
Directors’ best estimates of amounts payable under various acquisition agreements. Included within this amount, £6,300,000 is due after
more than one year, of which £Nil is due after more than five years.
Provisions for fundamental restructuring (note 1) and the majority of other provisions are estimated to be payable within one year.
Total
£’000
Deferred
Consideration
£’000
Fundamental
Restructuring
£’000
At 1 October 2004
Deferred contingent consideration on acquisitions of subsidiaries
Charged to profit and loss account
4,000
553
4,000
-
553
At 30 September 2005
4,553
4,000
553
Company
The Company’s cash at bank and in hand at 30 September 2005 was £119,605,000 which has been reduced by £93,874,000 to provide
against the bank’s right of set off that exists with certain subsidiary undertakings.
21. Called up share capital
Authorised
No. of of shares
Ordinary shares of 12.5p each
At 1 October 2004
Issue of shares under share option schemes
Issue of shares in relation to acquisitions:
Twenty-First Artists Ltd
Other acquisitions
Issue of new warrants
At 30 September 2005
450,000,000
450,000,000
Issued and fully paid
£’000
Premium
Share warrants
No. of of shares
£’000
£’000
No. of warrants
56,250 335,972,377
358,361
41,997
45
38
9,648,121
-
30,000,000
4,768,128
3,750
596
8,400
1,343
371,098,866
46,388
56,250
2,527,254
12,175,375
Shares to be issued of £250,000 relates to an amount due in December 2006 under the acquisition agreement of April Music Limited
and MM&M. The number of shares to be issued and their price will be determined on the average mid market price over the five days
preceding the issue.
As outlined in note 18, the Company has debt which is convertible into up to 54,545,455 Ordinary 12.5p Shares at any time up to 28
November 2008 at the option of the holders. These shares will rank pari passu with the Ordinary 12.5p Shares in all respects.
As part of the arrangement with the Convertible Loan Note holder, 6,392,468 new warrants were issued on 27 February 2004 and a
further 2,527,254 new warrants were issued on 1 April 2005. All these warrants are exercisable up to 28 November 2008. The exercise
price for all these warrants is 55p.
The remaining 3,255,653 warrants were issued to BMG UK and Ireland Limited in April 2003 and are exercisable between 1 April 2004
and 31 March 2008. The exercise price is 35p.
The Sanctuary Group plc . Annual Report 2005
47
Notes to the financial statements
continued
Details of Ordinary Shares of 12.5p, which are subject to options under the existing share option schemes outstanding at 30 September
2005, are set out below:
Date granted
Number of
options at
30 Sept 2004
Number of
options granted
in the year
Number of
options exercised
in the year
Number of
options lapsed
in the year
Number of
options at
30 Sept 2005
Original
subscription
price
(203,264)
(42,553)
-
(13,608)
(20,000)
(6,757)
(2,500)
(35,000)
(20,000)
-
925,748
262,162
9,868
334,748
87,837
10,273
306,000
495,000
315,000
10,000
24.5p
18.5p
23.5p
76p
73p
74p
73p
71p
45p
37.5p
37.75p
9 July 2002 to 8 July
14 July 2002 to 13 July
2 Aug 2002 to 1 Aug
6 Sep 2003 to 5 Sep
23 Jan 2004 to 22 Jan
2 July 2004 to 1 July
6 Sep 2004 to 5 Sep
29 Jan 2005 to 28 Jan
15 July 2005 to 14 July
13 Nov 2005 to 12 Nov
9 June 2006 to 8 June
2009
2009
2009
2010
2011
2011
2011
2012
2012
2012
2013
(111,879)
-
(100,000)
(55,000)
(10,000)
(150,000)
531,420
702,250
145,271
995,000
1,390,000
1,275,000
360,000
50,000
20p
37p
73p
74p
71p
45p
37.5p
37.75p
47.25p
29 Dec 2000 to 28 Dec
29 Dec 2002 to 28 Dec
23 Jan 2004 to 22 Jan
2 July 2004 to 1 July
29 Jan 2005 to 28 Jan
15 July 2005 to 14 July
13 Nov 2005 to 12 Nov
9 June 2006 to 8 June
2 Feb 2007 to 1 Feb
2004
2006
2008
2008
2009
2009
2009
2010
2011
Exercise period
Approved Executive Share Option Scheme
9 July 1999
14 July 1999
2 Aug 1999
6 Sep 2000
23 Jan 2001
2 July 2001
6 Sep 2001
29 Jan 2002
15 July 2002
13 Nov 2002
9 June 2003
1,142,620
262,162
42,553
9,868
354,748
94,594
10,273
308,500
530,000
335,000
10,000
-
Unapproved Executive Share Option Scheme
29 Dec 1997
29 Dec 1999
23 Jan 2001
2 July 2001
29 Jan 2002
15 July 2002
13 Nov 2002
9 June 2003
2 Feb 2004
111,879
531,420
702,250
145,271
995,000
1,490,000
1,330,000
370,000
200,000
-
The exercise of options under the Approved and Unapproved Executive Share Options Schemes is conditional on there having been an
increase in earnings per share over the increase in the rate of inflation averaged over the previous three financial years prior to exercise of
not less than 3% over the period.
The Company also operates a SAYE scheme in the UK. The maximum possible shares to be issued under the scheme as at 30 September
2005 were as follows:
SAYE Scheme
48
Date granted
Number of
options at
30 Sept 2005
1 September 2003
1 September 2004
319,125
91,973
Original
subscription
price
Exercise period
36p 1 Sept 2006 to 31 March 2007
43p 1 Sept 2007 to 31 March 2008
The Sanctuary Group plc . Annual Report 2005
Notes to the financial statements
continued
22. Contingent liabilities
There are contingent Group liabilities of up to £Nil (2004: £56,000) in respect of indemnities, warranties and guarantees in relation to
subsidiaries and various companies and partnerships where the beneficial owners are artists with whom the Group has management,
agency or other commercial relationships.
The Group is involved in various legal proceedings, arising in the normal course of business. The Directors believe they have legal and
factual defences to these claims and do not believe the Group has any liability significantly in excess of the provisions made. Adverse
verdicts in these matters, however, could result in material losses to the Group.
Save as set out below, there are no and there have not been any legal, governmental or arbitration proceedings (including any such
proceedings which are pending or threatened of which the Group is aware) which may have or have had in the recent past a significant
effect on the Company and/or the Group’s financial position or profitability.
Sugar Hill Records
Sanctuary Records Group Limited and Sanctuary Copyrights Limited are engaged in an action brought by Sylvia Robinson, Sylvia Inc.
and others in the courts of New York, alleging that these companies failed to account and pay royalties to the plaintiffs pursuant to
certain contracts entered into between the plaintiffs and Sugar Hill Records (which were acquired by Sanctuary Copyrights Limited in
1995) and seeking damages and rescission of those contracts or, in the alternative, an accounting of royalties. A default judgment was
entered for the plaintiffs in May 2004 partially rescinding the contracts and awarding the plaintiffs the proceeds derived by the defendant
companies from 15 May 1995 from the exploitation of the recordings which were the subject of those contracts. An inquest was directed
to determine the amounts derived by the defendant companies to be awarded to the plaintiffs. In June 2004, the Group moved to vacate
the default judgment but was unsuccessful. On 15 June 2005, the plaintiffs submitted a claim to the inquest referred to above in the sum
of US$232,272,626 plus interest. On 22nd August 2005, the defendant companies submitted their own assessment of damages to the
inquest in various amounts according to different heads of and bases for damages.
The Group has been advised by US legal counsel that, in its opinion, the default judgment is not consistent with prevailing law. On 10
November 2005, the magistrate conducting the inquest requested the parties to brief him on whether the rescission of the contracts was
authorized by either New York State contract law or the United States Copyright Act and a brief was submitted on behalf of the Group
accordingly. The Group will continue to seek to have the default judgment vacated as unauthorised and/or to appeal in the event damages
are assessed. Should the default judgment not be vacated or overturned, the Group is uncertain as to what the outcome of the claim might
be and can offer no assurances on its prospects for successfully defending the claim. Should judgment be awarded for the plaintiffs (either
on the default judgment or in any subsequent proceedings), the Company is not yet in a position to assess whether the damages to be
awarded will have a significant effect on the Group’s financial position or profitability. However, the Company, having taken US legal
advice, believes that, based upon its estimates of actual sales of the offending recordings, associated costs incurred in connection with
those recordings and the royalty rates payable to the plaintiffs pursuant to the subject contracts, that damages are likely to be in the
region of US$300,000 to US$5,000,000 (plus interest) depending upon what basis a court may eventually determine that damages may
be payable in respect of the claims made.
5.1 Label Group
In January 2002, Sanctuary Records Group Inc (‘SRGI’) entered into an agreement with 5.1 Label Group LLC (‘5.1’) pursuant to which
SRGI was to license certain recordings to 5.1. In July 2005, 5.1 made a claim against SRGI (and is attempting to join the Company to
the action as a defendant) contending wrongful breach of that agreement as amended by a subsequent agreement dated 29 September
2003, breach of warranty, fraud and conspiracy in an amount in excess of US$50m plus the possibility of punitive damages. The Group,
having taken US legal advice, believes the claim for damages for these amounts to be without merit and will not be awarded. The Group is
contesting the claim and has filed a cross-complaint against 5.1. In particular, the Group will vigorously defend the claims of fraud made
against it.
Reggae
The Group has a substantial business in reggae music. In connection with its exploitation of certain reggae recordings, the Group is the
subject of a number of claims in French courts (or has indemnified other parties who are the subject of such claims), and expects to
become subject to other claims, alleging that certain artists whose performances are contained on those recordings did not give written
consent for their performances to be exploited on records and, in particular, on compilations. The amounts claimed or to be claimed are
not yet fully known but are expected to amount to at least Euros 9.4m. The Group believes, having been advised by French legal counsel
that, whilst the claims may or may not be substantiated, the damages to be awarded are likely to be less than the amounts claimed.
The Sanctuary Group plc . Annual Report 2005
49
Notes to the financial statements
continued
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 for cause, specifically alleging that Mr Carter and Mr Erving were in material breach of their employment
agreements with Sanctuary Urban and also in material breach of a stock purchase agreement dated 1 March 2004 relating to the sale
of their business to Sanctuary Urban and that Mr Davis was in material breach of his employment agreement with Sanctuary Urban and
also in material breach of a stock purchase agreement dated 9 September 2004 pursuant to which the Company purchased his business.
In particular, Sanctuary Urban and the Company have alleged that Mr Carter, Mr Erving and Mr Davis made material misrepresentations
and omissions of material facts in connection with the execution of those agreements and in connection with their subsequent
performance there under, none of which, in the good faith judgment of Sanctuary Urban and the Company, is reasonably susceptible
to cure. Since issuing those letters of termination and breach, 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 the stock purchase agreements referred to in the previous
paragraph (being US$3,898,333 in the case of Mr Davis and US$4,000,000 in the case of Mr Carter and Mr Erving) and the various
salaries and other benefits paid to Mr Carter, Mr Erving and Mr Davis under their employment agreements, plus interest. Sanctuary
Urban and the Company have been advised by US counsel that they have a reasonable prospect of success in this action. However, the
Company believes that Mr Carter, Mr Davis and Mr Erving may make counter-claims against the Company and Sanctuary Urban and
possibly other members of the Group, which counter-claims may be material in amount and which may make allegations concerning
the motives for the termination of the employment of Mr Carter, Mr Erving and Mr Davis with Sanctuary Urban, all of which
Sanctuary Urban and the Company will vigorously deny, having been advised by US counsel that such claims would be contrary to
what would be allowed under the employment contracts and purchase agreements as well as inconsistent with the law and facts as
the Company knows them.
23. Reserves
Share
premium
£’000
Group
profit and
loss reserve
£’000
Company
profit and
loss reserve
£’000
At 1 October 2004 – as previously reported
Prior Year Adjustment (note 28)
At 1 October 2004 - restated
Loss on retranslation of foreign currency subsidiaries
Profit on retranslation of long term funding of overseas subsidiaries
Issue of shares
Share issue costs
Loss attributable to members of the holding company
Equity dividend
81,493
81,493
9,781
(195)
-
(1,235)
(46,713)
(47,948)
(2,530)
259
(142,835)
15
2,273
(3,487)
(1,214)
9,781
(195)
(158,131)
15
At 30 September 2005
91,079
(193,039)
(149,744)
The cumulative goodwill written off against Group reserves up to 30 September 1998 amounted to £16,117,000.
24. Related party transactions
During the period the Company and its subsidiaries carried out a number of transactions with related parties in the normal course of
business on an arm’s length basis. These transactions are disclosed below:
Mr A J Taylor, Mr R C Smallwood and Mr A Najeeb are from time to time appointed Directors of various companies where the beneficial
owners are artists with whom the Group has Management, agency or other commercial relationships. Those companies do not pay any
separate fees to these Directors in respect of their services. Mr A J Taylor is also a Director of The Inn on the Green Limited. The Inn on
the Green Limited has provided catering services for which The Sanctuary Group plc on an annual basis has paid less than £5,000.
Sphere Entertainment Limited and R&K Enterprises Limited are companies in which Mr A J Taylor and Mr R C Smallwood respectively
have interests. These companies have entered into agreements with the Group as set out on page 25. At 30 September 2005 there were no
outstanding balances (2004 - £Nil) between R&K Enterprises Limited and any Group companies. At 30 September 2005 Sphere
Entertainment Limited was owed £48,000 (2004 - £Nil) from The Sanctuary Group plc and at 30 September 2005 Sphere
Entertainment Limited owed £Nil (2004 - £3,000) to The Sanctuary Group plc. The total amount of transactions in the year with these
companies amounted respectively to £221,000 (2004 - £284,000) with R& K Enterprises Limited and £321,000 (2004 - £284,000)
with Sphere Entertainment Limited.
Mr A Najeeb is a director of Cloud 9 Screen Entertainment Group Limited. The Group has issued Loan Notes and working capital loans
of £24,372,000 to Cloud 9 Screen Entertainment Group Limited which are repayable in 2019 (note 14a).
50
The Sanctuary Group plc . Annual Report 2005
Notes to the financial statements
continued
25. Reconciliation of operating loss to net cash flow from operating activities
2005
£’000
(a) Operating loss:
Depreciation of tangible assets
Amortisation of goodwill and intangible assets
Amortisation of intangible assets in cost of sales
Loss on disposal of tangible assets
Loss on disposal of intangible assets
Loss on disposal of investments
Decrease/(increase) in stocks
Decrease/(increase) in debtors
(Decrease)/increase in creditors
Net cash flow from operating activities
2004
Restated
£’000
(111,675)
5,854
29,632
523
208
735
5,228
30,802
(3,780)
(42,473)
(9,738)
3,154
6,476
1,077
411
74
(869)
(5,845)
7,947
2,687
575
(9,065)
(141)
(8,631)
93
(5,538)
(151)
(5,596)
(905)
(4,615)
(5,520)
(3,846)
(4,729)
124
(165)
(8,616)
(4,388)
(132)
(4,520)
(10,061)
773
(9,288)
7
8,500
(905)
600
21,500
(618)
(b) Analysis of cash flows for headings netted in the cash flow:
Returns on investments and servicing of finance:
Interest received
Interest paid
Interest element of finance lease rental payments
Net cash outflow for returns on investments and servicing of finance
Capital expenditure and financial investment:
Purchase of tangible fixed assets
Purchase of intangible fixed assets
Sale of tangible fixed assets
Purchase of investments
Net cash outflow for capital expenditure and financial investment
Acquisitions and disposals:
Purchase of subsidiary undertakings
Net cash acquired with subsidiaries
Net cash outflow for acquisitions and disposals
Financing:
Issue of Ordinary Share capital (net of related expenses)
Issue of Convertible Loan Notes
Capital element of finance lease rental payments
New secured loans:
repayable within one to two years
Net cash inflow from financing
The Sanctuary Group plc . Annual Report 2005
30,000
37,602
21,482
51
Notes to the financial statements
continued
At
30 September
2004
£’000
Cash flow
£’000
Other
non-cash
changes
£’000
At
30 September
2005
£’000
(c) Analysis of net debt:
Cash in hand and at bank
Overdrafts
Debt due within one year
Debt due after one year
Finance leases
Total before Convertible Loan Notes
Convertible Loan Notes
Total
20,046
(16,054)
3,992
(3,000)
(52,000)
(1,344)
(52,352)
(21,500)
(73,852)
(10,307)
(17,898)
(28,205)
(30,000)
905
(57,300)
(8,500)
(65,800)
(750)
(750)
(750)
9,739
(33,952)
(24,213)
(3,000)
(82,000)
(1,189)
(110,402)
(30,000)
(140,402)
(d) Major non-cash transactions:
During the year the Group entered into finance lease arrangements in respect of assets 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 Twenty-First Artists Limited was acquired (note 27).
2005
£’000
2004
£’000
The net assets acquired were as follows (book value and fair value)
Fixed assets
Stock
Debtors
Cash
Bank overdrafts
Creditors and provisions for liabilities and charges
Goodwill
27
3,199
(132)
(532)
2,562
13,976
16,538
178
457
779
773
(1,451)
736
11,980
12,716
12,150
4,388
16,538
1,216
1,439
10,061
12,716
The consideration was satisfied as follows:
Shares issued
Deferred consideration
Cash
Further consideration may be payable in connection with this acquisition dependent on the future performance of the acquired entity up
to a maximum of £10m. No provision has been made for this contingent consideration because in the opinion of the Directors, the
likelihood of any further payment is remote.
52
The Sanctuary Group plc . Annual Report 2005
Notes to the financial statements
continued
26. Commitments under finance and operating leases
(a) Finance leases
Commitments to future minimum lease payments under finance leases are as follows:
Group
2005
£’000
Company
2005
£’000
Group
2004
£’000
Company
2004
£’000
Amounts falling due
Within one year
Between two and five years
371
272
643
(59)
584
859
687
1,546
(202)
1,344
462
199
661
(75)
586
337
247
584
747
597
1,344
405
181
586
Group
2005
£’000
Company
2005
£’000
Group
2004
£’000
Company
2004
£’000
94
25
119
-
96
96
-
621
39
660
11
11
602
40
642
29
29
1,927
903
2,177
892
756
596
1,352
(163)
1,189
Less: Finance charges allocated to future periods
The commitments, net of finance charges, are included in the balance sheets as follows:
654
Due within one year
Due after more than one year
535
1,189
The finance leases liabilities are secured on the relevant fixed assets (note 13).
(b) Operating leases
At 30 September 2005, annual commitments under non-cancellable operating leases are as follows:
Expiring in the first year:
Land and buildings
Other
Expiring in the second to fifth year:
Land and buildings
Other
Expiring after five years:
Land and buildings
27. Acquisitions
Acquisitions made by the Group during the year are summarised below. All acquisitions have been accounted for using the acquisition
method of accounting.
Fair value of purchase consideration
Details
Total book value
of net assets
£’000
Total
adjustments
£’000
Total fair
value
£’000
Shares
and deferred
consideration
£’000
Cash
£’000
Total
£’000
Goodwill
£’000
2,562
-
2,562
12,150
4,388
16,538
13,976
2,562
-
2,562
6,400
(120)
18,430
4,388
6,400
(120)
22,818
6,400
(120)
20,256
Twenty-First Artists Limited
Deferred consideration on
acquisitions in previous years
(note 20)
Other adjustments
All goodwill has been taken to intangible assets. There were no adjustments of fair value to the book value of net assets acquired (note
25e).
The profit after taxation of Twenty-First Artists Limited for the 11 month financial period to 28 February 2005 was £793,000 (year to
31 March 2004: £1,053,000). The company was acquired with effect from 1 March 2005.
The Sanctuary Group plc . Annual Report 2005
53
Notes to the financial statements
continued
28. Prior year adjustments
The effect of the Group’s changes in accounting policy are as follows.
(a) Effect on consolidated profit and loss account for the year ended 30 September 2004
Recognition of income from catalogue and other rights exploitation contracts
Recognition of Artist Management commission income
Accounting for origination costs
Accounting for fee-based income
Turnover for the year
Group operating (loss) / profit for the year
Taxation on ordinary activities
Retained loss for the year
Exchange differences
Profit and loss account reserve for year ended 30 September 2004
Profit and loss account reserve for periods prior to year ended 30 September 2004
Accumulated effect on profit and loss account reserve
Accumulated reduction in net assets
Effect on
turnover
Increase /
(decrease)
£’000
Effect on
profit
Increase /
(decrease)
£’000
(45,198)
(6,711)
(2,369)
(54,278)
(16,594)
(6,124)
(2,214)
(24,932)
2,531
(22,401)
843
(21,558)
(25,155)
(46,713)
(46,713)
(b) Reconciliation of restated and previously reported consolidated profit and loss account
for the year ended 30 September 2004
Details
As originally
reported
£’000
Total turnover
Cost of sales
Gross profit
Total administrative expenses
Total Group operating loss
Taxation on ordinary activities
Retained loss for the year
220,965
(140,233)
80,732
(65,538)
15,194
(4,981)
(8,440)
54
CECs and
other rights
exploitation
contracts
£’000
(45,198)
28,604
(16,594)
(16,594)
(16,594)
Artist
Management
income
£’000
(6,711)
587
(6,124)
(6,124)
(6,124)
Accounting
for
origination
costs
£’000
(2,214)
(2,214)
(2,214)
(2,214)
Accounting
for
fee-based
income
£’000
(2,369)
2,369
-
Tax on
adjustments
£’000
2,531
2,531
As
restated
£’000
166,687
(110,887)
55,800
(65,538)
(9,738)
(2,450)
(30,841)
The Sanctuary Group plc . Annual Report 2005
Notes to the financial statements
continued
(c) Reconciliation of restated and previously reported consolidated balance sheet as at 30 September 2004
As originally
reported
£’000
CECs and
other rights
exploitation
contracts
£’000
Artist
Management
income
£’000
-
-
Accounting
for
origination
costs
£’000
Tax on
adjustments
£’000
As
restated
£’000
Fixed assets:
Intangible assets
Goodwill
Tangible assets
Investments
Share of gross assets
Share of gross liabilities
31,553
84,185
13,652
17,907
2,135
(2,135)
147,297
(8,900)
(8,900)
-
22,653
84,185
13,652
17,907
2,135
(2,135)
138,397
(8,900)
(8,900)
7,011
7,011
10,524
56,346
22,329
20,046
109,245
(92,631)
16,614
155,011
(78,876)
76,135
(8,900)
(8,900)
(8,900)
7,011
7,011
7,011
41,997
250
81,493
(47,948)
75,792
343
76,135
Current assets:
Stocks
Debtors - amounts falling due within one year
Debtors - amounts falling due after one year
Cash at bank and in hand
Creditors – amounts falling due within one year
Net current assets
Total assets less current liabilities
Creditors – amounts falling due after one year
Provisions for liabilities and charges
Net assets
10,524
82,922
41,585
20,046
155,077
(93,639)
61,438
208,735
(78,876)
(7,011)
122,848
(14,426)
(19,256)
(33,682)
408
(33,274)
(33,274)
(33,274)
(12,150)
(12,150)
600
(11,550)
(11,550)
(11,550)
41,997
250
81,493
(1,235)
122,505
343
122,848
(33,274)
(33,274)
(33,274)
(11,550)
(11,550)
(11,550)
Capital and reserves:
Called up share capital
Shares to be issued
Share premium account
Profit and loss account
Equity shareholders’ funds
Minority interests
Total capital employed
The overall effect of the changes in accounting policy on the Group is to reduce shareholders’ funds brought forward by £46,713,000.
(Company: reduction of £3,487,000).
The impact of the changes in accounting policy on the retained loss of the Company for the year ended 30 September 2005 is to reduce
the loss by £688,000.
(d) Effect of changes in accounting policies on the results for the year ended 30 September 2005
To the extent that it is practicable to quantify the effect of the changes in accounting policies on the results for the year ended 30
September 2005, these are set out in the table on the following page.
The table does not show the effects of the change in policy for recognition of management commission income on the results for the year
ended 30 September 2005 as it is not practicable for the Group to accurately quantify these. The Group discontinued, before the end of
the financial year, its procedures for capturing the information which, under the old policy, would have formed the basis for the recognition
of accrued income in the profit and loss account and the year end balance sheet, and is therefore not able to determine the amount of
income or associated profit that would have been recognised in the year under the old policy, nor the corresponding effect on net current
assets in the year end balance sheet.
As disclosed in note (c), this change in accounting policy for management commission income has resulted in a reduction in accrued
income and a reduction in accruals as at 30 September 2004 of £12,150,000 and £600,000 respectively. As a result, income recognised
in years prior to 30 September 2004 has been eliminated. This has had the impact of increasing income in the year ended 30 September
2005 by £12,150,000 and associated profit by £11,550,000 compared to the income and profit that would have been recognised under
the old policy. If the old policy had continued in effect, income and associated costs would have been accrued in the profit and loss
account for the year, which would have offset this impact either partially or in full. However, as indicated above, the Group is not able to
determine the amount of income or associated profit that would have been accrued in the profit and loss account and the year end
balance sheet under the old policy.
The Sanctuary Group plc . Annual Report 2005
55
Notes to the financial statements
continued
Year ended 30 September 2005
Reported
under new
policies
£’000
Effect on
balance sheet
of prior year
adjustments
in respect of
Management
income
and tax
£’000
CECs and
other rights
exploitation
contracts
(see note
below)
£’000
Accounting
for
origination
costs
£’000
Accounting
for
fee-based
income
£’000
Restated
under old
policies
£’000
Consolidated profit and loss account
Total turnover
Total Group operating loss
156,144
(111,675)
(19,454)
(15,570)
(335)
2,191
-
138,881
(127,580)
Consolidated balance sheet
Intangible assets
Other fixed assets
Fixed assets
Net current (liabilities) / assets
Total assets less current liabilities
Creditors – amounts falling due after one year
Provisions for liabilities and charges
Net (liabilities) / assets
14,896
87,316
-
-
8,565
-
-
23,461
87,316
102,212
(30,858)
11,550
17,704
8,565
-
-
110,777
(1,604)
71,354
(115,113)
(11,255)
(55,014)
11,550
(7,011)
4,539
17,704
17,704
8,565
8,565
-
109,173
(115,113)
(18,266)
(24,206)
Reduction in
Group
operating loss
£’000
Increase in
net current
liabilities and
net liabilities at
30 September
2005
£’000
Increase in
net current
liabilities and
net liabilities at
30 September
2004
£’000
11,234
6,470
17,704
19,326
13,948
33,274
CECs and other rights exploitation contracts
Increase in
turnover
£’000
Catalogue exploitation contracts
Other rights exploitation contracts
Total: CECs and other rights exploitation contracts
(4,411)
(15,043)
(19,454)
(8,092)
(7,478)
(15,570)
Catalogue exploitation contracts (‘CECs’)
Turnover of £4,411,000 and gross profit of £1,543,000 derived from these contracts were included in the profit and loss account for the
year ended 30 September 2005. Under the old policy these would have been recognised in earlier years.
In addition, under the old policy, it is estimated that £6,549,000 of impairment losses would have been recognised in the current year, net
of exchange movements, in order to reflect anticipated delays in recovering, or in some cases recognition of inability to recover, income
and associated profit which, under the old policy, would have been recognised in earlier years and carried forward in the balance sheet as
accrued income and associated cost accruals.
Therefore, the overall profit impact on the results for the year ended 30 September 2005 was to reduce the reported loss by £8,092,000.
The change in policy also had the effect of increasing net current liabilities at 30 September 2005 by £11,234,000 (2004:
£19,326,000).
Other rights exploitation contracts
Turnover of £15,043,000 and gross profit of £7,478,000 derived from these contracts over and above that which would have been
recognised under the old policy were included in the profit and loss account for the year ended 30 September 2005. Under the old policy
these amounts would have been recognised in earlier years.
None of the contracts from which this turnover and profit were derived are considered to be impaired; therefore, the overall profit impact
on the results for the year ended 30 September 2005 was to reduce the reported loss by £7,478,000.
The change in policy also had the effect of increasing net current liabilities at 30 September 2005 by £6,470,000 (2004: £13,948,000)
due to the recognition of a liability (in respect of advances received but not earned) which would not have been recognised under the old
policy.
Accounting for origination costs
Origination costs reported in the year ended 30 September 2005 were £335,000 lower under the new policy, and profit correspondingly
higher, than they would have been under the old policy. The change in policy had the effect of reducing intangible assets at 30 September
2005 by £8,565,000 (2004: £8,900,000).
Accounting for fee-based income
The change in policy reduced turnover and cost of sales for the year ended 30 September 2005 by £2,191,000 but had no effect on
reported profit or on the balance sheet at 30 September 2005.
56
The Sanctuary Group plc . Annual Report 2005
Head Office
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The Sanctuary Group plc
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Registered in England
Number 284340
Registered Office
Sanctuary House
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London W14 0NS
Bank of Scotland
West End Office
St James’s Gate
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Chartered Accountants
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Brokers
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