Carlton Annual Report 2000

OPERATING AND FINANCIAL REVIEW

CARLTON MEDIA

Turnover in Carlton Media increased by 12 per cent to Ł982m (1999: Ł879m) and operating profit rose by 13 per cent to Ł201m (1999: Ł178m). Strong growth in advertising revenue was the major driver of both turnover and profits.

1. FREE-TO-AIR TELEVISION AND ADVERTISING
Carlton Sales achieved an excellent performance, increasing its ITV advertising revenue in Carlton's regions by 8.8 per cent to Ł692m (1999: Ł636m). Demand was strong in the first nine months of the year, with growth peaking at 22 per cent in the third quarter, at the time of ITV's coverage of the Euro 2000 football championship. The demand for advertising weakened in the fourth quarter.

ITV's peak time audience share during our financial year was 37.1 per cent, a lead of almost 9 percentage points over BBC1, and more than four times the size of its nearest commercial competitor, Channel 4. Who Wants To Be A Millionaire, Champions League Football and ITV dramas, including Peak Practice, The Vice and Blue Murder from Carlton, played a key role in delivering ITV's mass audience.

Carlton's share of network programme costs increased 10 per cent to Ł252m (1999: Ł230m), with the Rugby World Cup and Euro 2000 arising in the financial year. ITV's network budget is rising to approximately Ł750m in calendar 2001 and Carlton's share is expected to increase from Ł252m in fiscal 2000 to approximately Ł306m in fiscal 2001, including Ł40m in respect of HTV.

Further enhanced football coverage, with Premiership action up to three nights a week next season, event television such as Survivor (to be produced by Carlton) and a raft of original dramas will be new highlights in ITV's schedule.

Carlton intends to renew its Midlands licence for ten years from 1st April 2001, with the new cash bid payable from 1st January 2002, following which all four of Carlton's licences will have been renewed.The cash bid and percentage of qualifying revenue (PQR) paid by Carlton, Midlands is expected to increase, although looking ahead, as PQR is not paid in respect of digital viewing, there will be a significant boost to profits from the "digital dividend". For example, every 10 per cent of extra digital viewing will save Carlton over Ł10m a year in special broadcasting taxes.

Since the year end, Carlton has acquired 100 per cent of HTV, bringing a further 5.7 per cent of ITV's advertising revenue, and has sold its 20 per cent minority holding in Meridian. Carlton has continued to expand its advertising sales portfolio, which now includes six ITV regions, 11 digital channels and over 2,000 UK cinema screens, and has established Carlton Hyperactive as a dedicated online media sales house. Carlton Screen Advertising, the UK's largest cinema advertising business, won the contract to sell advertising for CINE-UK's 210 multiplex screens from July 2000 and has launched a poster sales business for cinema foyers throughout the UK and Republic of Ireland.

2. CONTENT CREATION AND DISTRIBUTION
Carlton's production businesses made good progress, growing their output for ITV and other channels by almost 10 per cent to Ł162m (1999: Ł148m), while expanding the range and diversity of their programmes.

Carlton produces programmes as diverse as The Brit Awards and The Railway Children for ITV, The Big Breakfast and Churchill's Secret Army for Channel 4, and Late Night with Jerry Springer and The Mole for Channel 5.

Carlton's investment in new programmes is made up of Ł123m for ITV (including Ł44m of regional and news) and Ł39m for other channels. Including co-production investment by Carlton America and Carlton International and Carlton's studio and outside broadcasting activities, total investment in production reached Ł200m.

Carlton built on its record of high quality drama productions with Dirty Tricks starring Martin Clunes and The Waiting Time with John Thaw, while winning its first commission for a long running drama serial with the return of Crossroads.

Carlton made some important breakthroughs in entertainment programming with a strong slate including Lily Live!, our daily magazine programme Celebrity and live events such as The Brit Awards, The Classical Music Awards and the highly popular British Soap Awards.

Carlton's factual output now includes quality signature pieces like Hell in the Pacific and more of our "…in colour" franchise with Britain at War in Colour. Recent developments include a deal with Newsweek to develop factual programming for the international market place.

Carlton is one of the UK's leading sports' producers and will be covering 1,000 hours of football for ITV and ONdigital in the coming year, including the Worthington Cup, the Champions League, the Football League and highlights of the Premier League.

Carlton International, now incorporating Carlton Video, Carlton Books and Carlton America, had sales of Ł83m (1999: Ł65m). Carlton America, one of the largest US producers and acquirors of television movies, boosted its output to 17 films in 2000 and has scored popular and critical acclaim with movies like Tuesdays With Morrie which won four EMMYs. Carlton International has secured key long term partnerships or output deals in Italy, Germany, the USA, France and Japan, reflecting the scale and geographical spread which the business has now achieved. Carlton now licences content to 40 television channels in the UK.

The relaunch of Thunderbirds has generated huge consumer interest, with over 100 consumer products placed in the UK prior to Christmas, including best-selling Carlton branded videos, DVDs and books.An international roll-out is planned in over 20 countries including Japan, the USA and France. To date over 400,000 video and DVD units of Thunderbirds product have been sold in the UK.

In October 2000 Andre Deutsch Limited was acquired, including the publishing contracts for both Granada Media and Manchester United Football Club. Combining this business with Carlton Books will create the UK's leading publisher of football and ITV-related titles.

Media Pro, one of Spain's premier independent production companies, and Carlton have announced the formation of a joint venture to produce long running Spanish dramas and soaps. It is estimated that 400 million people worldwide speak Spanish, including 33 million in the US.

3. PAY TELEVISION AND NEW MEDIA
ONdigital sales have grown to more than one million at the end of December 2000.

The business made rapid progress during the year, adding 12 channels and launching e-mail, pay-per-view, games and other services for subscribers. ONdigital acquired important sports rights including the Football League, and continues to have more live football than any other pay television platform. ONdigital viewers can watch the Champions League, the Premier League, the Football League, the Worthington Cup, the FA Cup and the Bundesliga.

ONnet was launched in September 2000 and provides the internet through a standard television. ONdigital now has over 100,000 users of its online services.

Carlton Cinema, the most popular film channel available through ONdigital, is now also taken by 1.3m cable homes. Investment in digital channels totalled Ł28m for the year (1999: Ł33m). Carlton Interactive, our online business, further developed its food and entertainment web sites, and its services are now available through ONnet, NTL,Telewest and BT Openworld's ADSL service.

The newly launched "Taste" joint venture with Sainsbury's is a unique collaboration, incorporating the Carlton Food Network, our digital television channel, and SimplyFood.co.uk, our dedicated food site, with Sainsbury's growing e-commerce and fulfillment services. Sainsbury's estimate that the UK online grocery market could be worth Ł7.5 billion a year by 2005.

Carlton Active, the interactive television business, achieved a number of "firsts", launching the first interactive commercials and programmes through ONdigital and developing the first fully interactive television series, BabyBaby, on ITV. The business will be running interactive services for Champions League Football, CITV (ITV's Children's programme service) and The Brit Awards.

Carlton offers advertisers a full interactive advertising service, including design, production and airtime sales. Carlton Active will be the first to roll out interactive advertising on ITV, with the launch of services in February 2001. Carlton's regions will be the only regions in which interactive advertising will be available.

TECHNICOLOR

5. THE TECHNICOLOR GROUP
Technicolor's sales increased by 14 per cent to Ł1,055m (1999: Ł927m) and operating profit was similar to last year at Ł150m (1999: Ł150m).

Growth in sales and profits at Technicolor Film was partially offset by volume discounts at Technicolor Packaged Media, which was also affected by fewer big titles from its major Hollywood Studio customers in the second half of the year. Technicolor made good progress during the year in building its digital service businesses, including DVD, digital imaging and digital film.

Technicolor Packaged Media made profits of Ł102m (1999: Ł104m) on sales of Ł684m (1999: Ł646m). Combined DVD and VHS volumes increased 9 per cent. DVD sales grew strongly and total optical media sales (CD, CD-ROM, DVD, DVD-ROM) rose to Ł163m or 24 per cent of the total.Technicolor now provides DVD services for a wide range of Hollywood studios, including Disney, DreamWorks, MGM, Columbia TriStar and Warner Bros. Forecasts suggest the worldwide DVD-Video market could expand by as much as 300 per cent in the next four years.

Technicolor Packaged Media further expanded its geographical coverage, through the acquisition of Canada's second largest video services company and an investment in the leader of Australian video and optical disc services. Major titles in 2000 included Saving Private Ryan from DreamWorks, Toy Story 2 and Fantasia 2000 from Disney and Pokemon and Perfect Storm from Warner.

Technicolor has further developed its relationship with the world's largest software publisher Microsoft, which is scheduled to launch its future generation video games console -Xbox- in Autumn 2001.Technicolor has been awarded a multi-year contract to provide DVD services for Xbox in the US, together with distribution of the related hardware. Technicolor will also be providing DVD services for Microsoft in Europe. Xbox is expected to be one of Microsoft's largest consumer product launches.

Independent forecasts for DVD-ROM and CD-ROM predict a combined market of over 3 billion units a year in North America and Europe by 2003, considerably larger than the current VHS market.

Technicolor Film made operating profits of Ł48m (1999: Ł46m) on sales of Ł372m (1999: Ł281m).Technicolor's laboratories produced over 9,000 prints of Gladiator for DreamWorks and over 8,000 prints of Perfect Storm for Warner. Next year's highly anticipated releases include Pearl Harbor (Disney) and A.I. (Warner).

After the year end,Technicolor Film announced its expansion in Canada with the proposed acquisition of Groupe Covitec and the proposed construction of a new, world class film processing facility in Montreal.

The acquisition of CFI in March 2000 further expanded capacity and establishes Technicolor as a leading processor in all formats including 70mm and iMAX.The development of Technicolor's digital cinema business was significantly enhanced through a new joint venture with Qualcomm.