Progress Review

In May 1999 we published our objectives for the next three years.Whilst it is still early days, we are making real progress towards the delivery of these objectives.

Carlton Media Group

Carlton Media Group's mission is to create, broadcast and exploit high quality television and internet-based entertainment brands globally.

1. Build and promote the Carlton Brand

In September we rebranded our Central and Westcountry ITV licences as "Carlton". Together with our London licence, the Carlton network now broadcasts to a growing base of 22 million people with demographics of above average spending power and internet usage. The new branding has been extended to Carlton Productions, Carlton Books, Carlton Video and Carlton International.Trading under one banner will enable us to market all of our products and services more effectively, including our internet hub, carlton.com.

2. Grow advertising revenue ahead of RPI

Carlton generates the largest screen-based advertising revenues in the UK - derived from television, cinema, videos and the internet - and they grew by 7 per cent to £684m.The technology revolution in the telecom, internet and pay television industries is creating new brands, which need to be established quickly. With a weekly reach of almost 90 per cent and peak time viewing share of 39 per cent, ITV is a vital tool for raising brand awareness. This growing number of new brands already accounts for £60m of Carlton's advertising revenue and has grown by 65 per cent in the last year, highlighting the potential for further growth in advertising revenue well ahead of RPI.

Advertising revenues from our cinema, digital channels, videocassette and internet operations grew by 11 per cent to £48m. ITV met its 38 per cent goal for peak time audience share in calendar 1998 and came close to 39 per cent in 1999.This growth in audiences has been driven by investing over £800m in ITV's schedule. Programming successes in the current year included Who Wants To Be A Millionaire?, one of the UK's most successful ever game shows, and the European Champions League football, produced by Carlton/ISN. Both programmes achieved peak audiences of 19 million viewers (67 per cent share).

PROGRAMME MAKING

3. Doubling programme production

Doubling our revenues from programme production is a big challenge. As many ITV programmes are commissioned a year in advance, the 1999 figures primarily reflect the previous year's commissions, with sales to ITV of £69m (1998: £80m). Sales to third party channels and our digital channels were £17m (1998: £8m) and £11m (1998: £2m) respectively. We are now making progress with encouraging sales in August and September and £91m worth of production already commissioned for ITV for future years, including £30m of drama and OK! TV, ITV's first "masthead" programme. Recent talent deals from Carlton Productions have included two years of Lily Savage's entertainment programming for ITV.

Our biggest programme brand, Peak Practice, is now televised 26 weeks per year and is ITV's most successful 9.00pm long running show. We are extending this brand to the internet, enabling customers to chat to the stars, buy videos and access information on health and medicine (peakpractice.co.uk).

We have strengthened our production team with the arrival of Waheed Alli (co-founder of Planet 24), Anne Bulford (BBC), Michael Foster (Ginger Media Group) and Mark Wells (LWT).They plan to deliver industry leading profitability by attracting the right mix of creative talent to Carlton, building a culture in which they can thrive, and enhancing our efficiency.

Following a review of our digital channels we have decided to focus on Carlton Cinema, using our library of over 2,000 films, and the Carlton Food Network, which has significant e-commerce opportunities.These channels are linked to Carlton's dedicated internet sites, Popcorn and SimplyFood.

4. Exploit television brands and library globally

Carlton International distributes programming on behalf of over 200 producers to over 100 countries.The ITC library has been integrated into our business.With 2,000 films we have the largest English language film library outside of Hollywood and an 18,000 hour programme library that can now be exploited through relaunches, remakes and sequels including Captain Scarlet and Thunderbirds. Carlton Video is publishing a wide range of films and television programmes on videocassette and DVD, including the "Silver Collection" of 15 classic British films on DVD. We have increased our presence in the important merchandising market and are currently marketing Mopatop's Shop with over 100 lines of children's products.

We are continually refreshing the Carlton library with our own production, by investing in third party projects and through the 14 made-for-television movies we co-fund each year through Hollywood-based Carlton America (formerly known as Hamdon), which is now 100 per cent-owned and led by CEO Stephen Davis.

DIGITAL PAY TELEVISION

5. Grow ONdigital subscriber numbers to 2 million

ONdigital - multichannel, digital pay television through an aerial - is the first of its type in the world. Despite initial box shortages and intense competition, ONdigital has made excellent progress and signed up over 550,000 subscribers by the end of December 1999. Recent figures from Continental Research show that the launch of digital pay television has been almost four times as successful as the launch of analogue pay television at the end of the 1980s. Over the past year, ONdigital has been the fastest growing pay television platform in Europe.

The Government has announced a timetable for switching off analogue broadcasts. The future is clearly digital and we are targeting 2 million subscribers within three years.

ONdigital's exclusive content includes a four year contract, together with ITV, for the European Champions League, special editions of soap operas such as Emmerdale and interactive video games. We are planning, with SDN, the launch of pay-per-view channels during 2000. Since launch, ONdigital has added MTV and Sky Sports 2 and will be offering two channels from Discovery at the beginning of 2000. ONdigital now delivers more football coverage than any other platform.

ONdigital has expanded the traditional retail route to market by adding direct sales and launching Britain's first pre-paid set top box.Three TV manufacturers (Philips, Matsui, Alba) now have fully integrated digital televisions with embedded ONdigital conditional access in the shops.

As digital penetration increases, the taxes payable on advertising from our free-to-air broadcasting licences will be reduced.These taxes totalled £89.7m in 1999.

2000 will see further interactive developments such as e-mail and home shopping. Future plans include full internet access, which will provide a further competitive advantage.

During the year we acquired 7.5 per cent of Onda Digital, the Spanish digital terrestrial television business, which is planning to launch its services in 2000.

THE INTERNET

6. Profitable online destination sites

We aim to promote carlton.com as an entertainment and e-commerce based internet hub and have already developed three award winning destination sites, Simplyfood.co.uk (food & drink), Jamba.co.uk (games) and Popcorn.co.uk (entertainment information and e-commerce).We are promoting them across the Carlton network and our digital channels.Total page impressions are running at around 5m each month and have increased tenfold over the last year.

We intend to establish a strong position in the online classified advertising market by using our mass media and advertising assets to build up and promote a portfolio of on-line businesses. Since the year end we have acquired a 20 per cent stake in PeopleBank, the online recruitment service and set up a joint venture with Granada which will hold a 50 per cent stake in Ask Jeeves UK, a British version of the highly successful internet question answering service.

In 2000 we expect to invest £10m in Carlton Online and, in addition, will continue to build up investments in selected internet businesses. We are targeting profitability within three years. Rupert Miles, who established beeb.com, has joined the Carlton Media Group board to head up all of our internet and interactive television businesses.

TECHNICOLOR GROUP

Technicolor's objective is to be a world-wide, high quality, piracy-free, low cost service partner for film and programme makers, software developers and cinema owners.

7. Global fulfilment in all packaged media formats

Technicolor sales outside of its US base grew 14 per cent to £280m (1998: £245m) and now account for 31 per cent of the total.Technicolor continues to develop its presence in a range of other markets and its new Canadian and Mexican video acquisitions have been integrated and are performing well.

Video volumes grew by 10 per cent and DVD volumes, on a like-for-like basis, were up 162 per cent.

DVD is widely considered to be one of the most successful new consumer electronics products of all time and reached an installed base of over 4 million US homes by the end of calendar 1999.With our plans to expand our worldwide DVD capacity from 60m units to over 100m units during the current year, we will be well positioned to capture a leading share of this high growth market.

Disney has started to release children's animated classics, while best selling DVD titles are now targeted to sell 2 million copies each. In November, Technicolor announced a three year manufacturing and technology agreement with Microsoft to replicate millions of discs, starting with Windows 2000 product.The agreement makes Technicolor Microsoft's leading supplier of discs.

At Technicolor Film, we are now operating two dye transfer processing lines and are planning for several releases using the new process, including Toy Story 2 (Disney), On Any Given Sunday (Warner), and Rear Window (re-release by Universal). Two new customers have recently been added, Destination Films and USA Films, and we are continuing a programme of cost reduction.

8. Lower total supply chain costs for customers

In video, productivity improvements contributed £17m of cost savings in the year through new technology, the integration of Nimbus and by expanding our plants in Memphis and Mexico.

Technicolor continues to expand its video, DVD and film distribution and logistics services for its key customers, including Disney, Warner, DreamWorks and Microsoft, enabling them to focus on their core activities. This distribution activity has grown significantly over recent years and now accounts for sales of over £70m. A fully automated, state-of-the-art, centralised returns' processing centre, with an annual capacity of 100 million units, was established in Memphis during the year.

9. Full service provider for cinemas

Technicolor Entertainment Services, which distributes film prints and promotional materials to cinemas across the US, continued to grow sales and profits.Technicolor distributes some 60 per cent of films and 70 per cent of advertising materials to cinemas in the US.Technicolor Screen Services, a US version of our UK cinema advertising business, has recently been established. The US market is relatively undeveloped and offers significant growth opportunities.

10. Digital media asset management and distribution

Technicolor acquired 58 per cent of Real Image Digital during the year and the two companies are now developing a digital cinema business. A prototype full service solution is expected by the end of 2000 and should be in operation at demonstration sites within the following six months.

Other Activities

Quantel and Solid State Logic made combined profits of £4m (1998: £23m). At Quantel sales were down 22 per cent and operating results declined to breakeven.We have strengthened the board at Quantel and overheads have been reduced by £4m. The Inspiration news and sport editing and broadcasting system at ITN is working well and more orders are in the pipeline.

Since the year end we have sold SSL for £44m.