ANNUAL REPORT 2011 including the Annual Financial Report ANNUAL REPORT 2011 ...... 1 TECHNICOLOR AND ITS SHAREHOLDERS ...... 87 5 5.1 Share capital ...... 88 PRESENTATION OF THE GROUP 5.2 Listing information ...... 95 1 AND ITS ACTIVITIES ...... 5 1.1 Selected Financial Data ...... 6 SOCIAL INFORMATION AND SUSTAINABILITY ...... 97 1.2 History and Strategy of the Company ...... 9 6.1 Employees and workforce ...... 98 1.3 Business Overview ...... 13 6 6.2 Environmental matters ...... 107 6.3 Technicolor Foundation for Cinema Heritage ...... 117 OPERATING AND FINANCIAL REVIEW AND PROSPECTS ...... 21 2 ADDITIONAL INFORMATION ...... 119 2.1 Overview ...... 22 7.1 Property, Plant and Equipment ...... 120 2.2 Trends in the Media & Entertainment industry ...... 22 7 7.2 Memorandum and bylaws ...... 124 2.3 Summary of results ...... 23 7.3 Material contracts ...... 125 2.4 Seasonality ...... 24 7.4 Additional tax information ...... 126 2.5 Geographic breakdown of revenues & Effect of exchange rate fluctuations ...... 24 7.5 Organization of the Group ...... 127 2.6 Events subsequent to December 31, 2011 ...... 25 7.6 Documents on display ...... 130 2.7 Notification of interests acquired in the share capital of French 7.7 Information on accounting services ...... 130 companies in 2011 ...... 26 7.8 Accounting fees and services ...... 131 2.8 Notification of interests acquired in the share capital of French 7.9 Persons responsible for the Registration Document companies in 2010 ...... 26 and the Annual Financial Report ...... 132 2.9 Results of operations for 2011 and 2010 ...... 26 2.10 Liquidity and capital resources ...... 33 FINANCIAL STATEMENTS ...... 133 2.11 Priorities and objectives for 2012 ...... 41 8 8.1 Technicolor 2011 consolidated financial statements ...... 134 8.2 Notes to the consolidated financial statements ...... 141 RISK FACTORS ...... 43 8.3 Statutory Auditors’ report on the Consolidated Financial 3 3.1 Risk related to the debt restructuring ...... 44 Statements ...... 231 3.2 Market Risk ...... 46 8.4 Technicolor sa parent company financial statements ...... 233 3.3 Risks related to the business ...... 47 8.5 Notes to the Parent Company Financial Statements ...... 236 3.4 Other risks ...... 53 8.6 Parent company financial data over the five last years (under article R.225-102 of the French Commercial code) ...... 257 3.5 Insurance ...... 55 8.7 Statutory auditors’ report on the financial statements for the year ended December 31, 2011 ...... 258 CORPORATE GOVERNANCE AND INTERNAL 8.8 Statutory Auditor’s Special report on regulated agreements CONTROL PROCEDURES ...... 57 and commitments ...... 260 4 4.1 Board of Directors ...... 58 4.2 Chairman’s report on corporate governance, internal control and REGISTRATION DOCUMENT CROSS REFERENCE risk management ...... 64 TABLE ...... 261 4.3 Statutory Auditors’ report on the Chairman’s report on internal 9 control procedures ...... 76 4.4 Compensation and benefits of Directors ...... 77 4.5 Executive Committee ...... 84
I TECHNICOLOR I ANNUAL REPORT 2011 Société a nonyme with a share capital of €223,759,083 Registered Office : 1-5, rue Jeanne d’Arc 92130 Issy-Les-Moulineaux Nanterre Register of Commerce and companies No. 333 773 174
ANNUAL REPORT 2011
This Registration document (Document de Référence) was filed with the Autorité des Marchés Financiers (AMF) on March 27, 2012 in accordance with Article 212-13 of the AMF General Regulations. It may be used in connection with a financial transaction provided it is accompanied by a transaction note (note d’opération) approved by the AMF. This document was prepared by the issuer and is the responsibility of the signatories thereof.
T his registration document can be consulted on the website of the AMF (French version only) (www.amf-france.org) and on the website of Technicolor (www.technicolor.com).
TECHNICOLOR I ANNUAL REPORT 2011 I 1 FORWARD-LOOKING STATEMENTS
In this Annual Report, unless otherwise stated, the “Company” refers to This Annual Report contains certain forward-looking statements with Technicolor SA and “Technicolor” and the “Group” refer to Technicolor respect to Technicolor’s financial condition, results of operations and SA together with its consolidated affiliates. business and certain plans and objectives of the Group. These statements are based on management’s current expectations and beliefs in light of This Annual Report includes: the information currently available and are subject to a number of factors and uncertainties that could cause actual results to differ materially (i) the Annual Financial Report (Rapport Financier Annuel) issued from those described in the forward-looking statements. In addition pursuant to Article L. 451-1-2-I and II of the French Monetary to statements that are forward-looking by reason of context, other and Financial Code (Code monétaire et financier) and referred forward-looking statements may be identified by use of the terms “may”, to in Article 222-3 of the AMF General Regulation (règlement “will”, “should”, “expects”, “plans”, “intends”, “anticipates”, “believes”, général de l’AMF) (a cross-reference table is set forth on page 267 “estimates”, “projects”, “predicts” and “continue” and similar expressions between the documents referred to in Article 222-3 of the AMF identify forward-looking statements. By their nature, forward-looking General Regulation and the relevant sections of this Registration statements involve risk and uncertainty because they relate to events Document); and depend on circumstances that are anticipated to occur in the (ii) the Management Report (rapport de gestion) adopted by future. Such statements are also subject to assumptions concerning, the Board of Directors of Technicolor SA pursuant to Article among other things, Technicolor’s anticipated business strategies; its L. 225-100 et seq. of the French Commercial Code (Code de intention to introduce new products and services; anticipated trends in Commerce) (the cross-reference table on page 266 mentions the its business; and Technicolor’s ability to continue to control costs and elements of this report); and maintain quality. (iii) the Chairman’s report on corporate governance, internal control procedures and risk management issued pursuant to Article L. 225-37 of the French Commercial Code (this report is included in Chapter 4: “Corporate governance and internal control procedures” in section 4.2: “Chairman’s report on corporate governance, internal control and rise management” on page 64 and seq).
2 I TECHNICOLOR I ANNUAL REPORT 2011
STATEMENTS REGARDING COMPETITIVE POSITION
This Annual Report contains statements regarding market trends, market n MRG (Multimedia Research Group) for information on IPTV network share, market position and products and businesses. Unless otherwise software; noted herein, market estimates are based on the following outside n Parks Associates, IMS Research and dataxis.com for information on sources, in some cases in combination with internal estimates: set-top boxes; n PricewaterhouseCoopers, Futuresource Consulting Ltd., IDATE, n Dell’Oro Group and Infonetics Research for information on DSL and IHS, Adams Media Research, IMdb, Hollywood Reporter, UBS and cable modems, routers & gateways, and telephony markets; Display Search for overall market trends in the Media & Entertainment n Generator Research, Morgan Stanley, UBS, CEA for information on industries; Tablets market. Futuresource Consulting Ltd. for information on DVD replication and n distribution services; n IHS, CEA (Consumer Electronics Association, Informa) for information on film-related services, and post-production content; n IHS for information on Broadcast & Networks systems and services;
TECHNICOLOR I ANNUAL REPORT 2011 I 3
4 I TECHNICOLOR I ANNUAL REPORT 2011 PRESENTATION OF THE 1 GROUP AND ITS ACTIVITIES
1.1 SELECTED FINANCIAL DATA ...... 6 1.3 BUSINESS OVERVIEW ...... 13 1.3.1 Technology ...... 13 1.2 HISTORY AND STRATEGY OF THE COMPANY ...... 9 1.3.2 Entertainment Services ...... 15 1.2.1 Company Profile ...... 9 1.3.3 Digital Delivery ...... 17 1.2.2 Historical Background ...... 9 1.3.4 Other ...... 20 1.2.3 Organization ...... 10 1.3.5 Discontinued operations ...... 20 1.2.4 Strategy ...... 11
TECHNICOLOR I ANNUAL REPORT 2011 I 5 1 - PRESENTATION OF THE GROUP AND ITS ACTIVITIES Selected Financial Data
1.1 SELECTED FINANCIAL DATA
The Company has derived the following selected consolidated financial consolidated financial statements and the Company’s significant data from its consolidated financial statements as of and for each of the accounting policies are discussed in note 2 of the consolidated financial years ended December 31, 2011, 2010 and 2009. These consolidated statements. These selected financial data represent only a summary and, financial statements have been prepared in accordance with International therefore, should be read together with the Company’s consolidated Financial Reporting Standards (“IFRS”) as approved by the European financial statements and the notes thereto which are included in this Union. You should read the following selected consolidated financial Annual Report. The changes in consolidation scope and discontinued data together with Chapter 2: “Operating and Financial Review and operations are presented in notes 4 and 11, respectively, of the Prospects” in this Annual Report. The basis of preparation of the Company’s consolidated financial statements.
6 I TECHNICOLOR I ANNUAL REPORT 2011 PRESENTATION OF THE GROUP AND ITS ACTIVITIES - 1 Selected Financial Data
(in € millions) 2011 2010 2009 Statement of Operations (selected items) (1) Revenues from continuing operations 3,450 3,574 3,619 Adjusted EBITDA (2) 475 505 499 Profit (loss) from continuing operations before tax and net finance income (expense) (33) 38 99 Net finance income (expense) (3) (187) 116 (68) Income tax (83) 2 (35) Net income (loss) from continuing operations (303) 156 (4) Net income (loss) from discontinued operations (21) (225) (338) Net income (loss) (324) (69) (342) Profit (loss) from discontinued operations (4) n Discontinued results related to the Grass Valley and Media Networks businesses (19) (221) (342) n Discontinued results related to the other discontinued businesses (2) (4) 4 Earnings per Ordinary Share Weighted average number of shares outstanding – (basic net of treasury stock) 206,857,493 104,817,755 26,308,997 Earnings (loss) (Group share) per share from continuing operations (in €) Basic (1.5) 1,3 (0,2) Diluted (5) (1.3) 1,0 (0,2) Total earnings (loss) (Group share) per share (in €) Basic (1.6) (0,8) (13,0) Diluted (5) (1.4) (0,5) (13,0) Balance sheet (selected items) Total non-current assets 1,907 2,299 2,238 Total current assets (excluding cash and cash equivalents) 1,142 1,303 1,513 Cash and cash equivalents 370 332 569
TOTAL ASSETS 3,419 3,934 4,320 Total non-current liabilities 1,940 2,038 692 Total current liabilities 1,324 1,391 4,081 Share capital 224 175 1,012 Shareholders’ equity (deficit) 151 503 (455) Minority interests 422
TOTAL SHAREHOLDERS’ EQUITY (DEFICIT) AND LIABILITIES 3,419 3,934 4,320 Dividends/distributions Dividends/distributions per share (in €) ---
(1) Results for 2011, 2010 and 2009 are presented in accordance with IFRS 5 and therefore exclude activities now treated as discontinued from profit (loss) from continuing operations. (2) Please refer to the definition In section 2.9.9: “Analysis indicators” of Chapter 2: “Operating and Financial Review and Prospects” of this Annual Report. (3) Comprises “Net interest expense” and “Other net financial income (expense)”. Please refer to note 9 of the Group’s consolidated financial statements for more information. (4) Grass Valley and Media Networks: On January 28, 2009, Technicolor announced its decision to sell the Grass Valley and Media Networks (comprising Convergent, PRN and Screenvision) businesses. In 2010, the Group decided to end the sale process of the PRN business and therefore PRN was consolidated within continuing activity as part of the Entertainment Services segment. Other discontinued activities prior to 2009: Silicon Solutions businesses and Audio-Video and Accessories businesses (AVA). In 2011, the scope of discontinued operations has not been modified compared to 2010. The originally reported profit (loss) from discontinued operations for previous years is disclosed in the table below. (5) Please refer to note 31 of the Group’s consolidated financial statements for more information on the dilutive instruments affecting earnings per share on a diluted basis.
TECHNICOLOR I ANNUAL REPORT 2011 I 7 1 - PRESENTATION OF THE GROUP AND ITS ACTIVITIES Selected Financial Data
Reconciliation of discontinued operations
(in € millions) 2010 2009 2010 Annual Report Loss disclosed in 2010 (225) (338) Total loss disclosed in 2009 (375) Change in perimeter due to PRN (Media Networks) in 2010 37 2009 Annual Report Loss disclosed in 2009 (375) Discontinued results due to Grass Valley & Media Networks discontinued (379) businesses Total profit of other discontinued operations disclosed in 2009 4
8 I TECHNICOLOR I ANNUAL REPORT 2011 PRESENTATION OF THE GROUP AND ITS ACTIVITIES - 1 History and Strategy of the Company
1.2 HISTORY AND STRATEGY OF THE COMPANY
1.2.1 COMPANY PROFILE 1.2.2 HISTORICAL BACKGROUND Legal and commercial name: Technicolor has been contributing to the development of video TECHNICOLOR technologies and services for more than 95 years. Technicolor now occupies leading positions worldwide in the development of technologies Registered office address: and in the supply of production, postproduction and distribution solutions 1-5, rue Jeanne d’Arc and services for content creators, broadcasters and network operators. 92130 Issy-les-Moulineaux, France Tel.: +33 (0)1 41 86 50 00 Fax: +33 (0)1 41 86 58 59 Change in Businesses E-mail: [email protected] Over the last ten years, the Company’s scope of activities shifted towards the Media & Entertainment industry through a series of acquisitions and Domicile, legal form and applicable legislation: Technicolor is a French disposals. corporation (société anonyme), governed by Title II of the French Commercial Code pertaining to corporations, by all laws and regulations In 2009, the Group decided to refocus on technologies, products and pertaining to corporations, and its bylaws. services related to content creation and delivery. Technicolor completed the exit of its Retail Telephony activity and entered into the disposal The Company is registered in the Register of Commerce and process of businesses outside its new strategic framework, namely its Companies (Registre du Commerce et des Sociétés) of Nanterre under Professional Broadcast & Networks business (Grass Valley activities No. 333 773 174 and its APE Code, which identifies a company’s type including broadcast equipment, head-end and transmission) and its of business and activities, is 6420Z, corresponding to the business of Media Networks business. corporate administration. In 2010, the Group sold a majority of its participation in Screenvision Date of incorporation and length of life of the Company: Technicolor U.S. (part of Media Networks) and sold its broadcast business (part (formerly Thomson) was formed on August 24, 1985. It was registered on of Grass Valley). Grass Valley’s transmission business and head-end November 7, 1985 for a term of 99 years, expiring on November 6, 2084. business were sold in the first half of 2011.
Fiscal year: January 1 to December 31. In 2011, Technicolor has continued to optimize its portfolio of assets. The Group seized an opportunity to monetize its 25.7% stake in Stock Exchange: The Group is listed on Euronext Paris (for more ContentGuard and used the proceeds to reduce its debt level. information, please refer to Chapter 5: “Shareholders and Listings lnformation”, section 5.2.1: “Market for the Company’s securities” of this Annual Report). On March 21, 2011, Technicolor delisted from the 2009 Sauvegarde Plan New York Stock Exchange. As a result, its American Depositary Shares On November 30, 2009, the Company filed a Sauvegarde Plan based on (ADSs) now trade on the OTC market. the restructuring agreement reached with its senior creditors on July 24, 2009, following the announcement on January 28 and March 9, 2009 of Activity: Technicolor is a technology-driven company supporting its the breach of certain covenants contained in financial agreements under Media & Entertainement ( M&E ) customers in shaping their digital future. which the Company had borrowed substantially all of its outstanding Technicolor’s activities are organized into three operating segments, senior debt, i.e. around €2.8 billion. The Sauvegarde Plan was filed after namely Technology, Entertainment Services, and Digital Delivery (for the Company failed to identify and obtain the unanimous approval of more information, please refer to section 1.2.3: “Organization”). All all its senior creditors on the restructuring agreement, due principally other activities and corporate functions (unallocated) are presented to the CDS auction process organized by the International Swaps and within the “Other” segment. In fiscal year 2011, Technicolor generated Derivatives Association (ISDA) at the end of October 2009 with respect €3,450 million of consolidated revenues. On December 31, 2011, the to the Company’s senior debt, and due to the fact that the identity of Group had 16,942 employees in 28 countries. the new creditors had not been definitively established and the debt instruments continued to be sold on the market and were the subject of new CDS contracts.
TECHNICOLOR I ANNUAL REPORT 2011 I 9 1 - PRESENTATION OF THE GROUP AND ITS ACTIVITIES History and Strategy of the Company
In accordance with French law, the proposed Sauvegarde Plan was Sauvegarde Plan, after ensuring that it protected the interests of all submitted to the vote of the Committees of the creditors meetings creditors and offered a “viable solution” (“une possibilité sérieuse on December 21 and 22, 2009. In addition, on January 27, 2010, the pour l’entreprise d’être sauvegardée”). The Sauvegarde Plan, which Combined General Shareholders’ Meeting approved the resolutions was implemented on May 26, 2010, is binding upon all creditors of required to implement the Sauvegarde Plan, authorizing the completion Technicolor SA. For more information about the risks related to the of the equity issuances contemplated thereby. Finally, on February 17, Sauvegarde Plan, please refer to Chapter 3: “Risk Factors”, section 3.1: 2010, the Nanterre Commercial Court approved the proposed “Risk related to the debt restructuring”.
1.2.3 ORGANIZATION As discussed below, the Group is organized around three operating segments: Technology, Entertainment Services, and Digital Delivery. All other activities and corporate functions (unallocated) are presented within the “Other” segment. Within these segments, main businesses are:
Technology Entertainment Services Digital Delivery
Creation Services Research & Innovation Connected Home & Theatrical Services
Licensing DVD Services Media Services
MediaNavi PRN Broadcast Services
Technology Entertainment Services (13% of 2011 Consolidated Revenues) (52% of 2011 Consolidated Revenues) Technology, which generated consolidated revenues of €456 million Entertainment Services develops and offers video-related technologies in 2011 (13% of the Group’s consolidated revenues), is organized around and services for the Media & Entertainment industry. This segment the following businesses: offers services related to content production, preparation and creation (Creation Services), content distribution through both physical media n Research & Innovation; (Film Services and DVD Services) and digital media (Digital Cinema).
n Licensing; Entertainment Services, which generated consolidated revenues of n MediaNavi. €1,779 million in 2011 (52% of the Group’s consolidated revenues), is organized around the following businesses: Research & Innovation includes the Group’s fundamental research activities. The Licensing business is responsible for protecting and Creation Services (Visual Effects, Animation and Postproduction monetizing the Group’s Intellectual Property portfolio and generates n Services) and Theatrical Services (photochemical film and digital most of the Technology revenues. The MediaNavi business includes the cinema distribution); Group’s platforms and applications aiming at simplifying and enriching the end-user experience for consuming dematerialized premium content. n DVD Services; PRN (Premier Retail Networks). For more information about the Technology segment, please refer to n section 1.3.1: “Technology” of this Annual Report. For more information about the Entertainment Services segment, please refer to section 1.3.2: “Entertainment Services” of this Annual Report.
10 I TECHNICOLOR I ANNUAL REPORT 2011 PRESENTATION OF THE GROUP AND ITS ACTIVITIES - 1 History and Strategy of the Company
Digital Delivery Technicolor’s ambition is to lead (35% of 2011 Consolidated Revenues) innovation in media monetization Digital Delivery develops and supplies hardware and software solutions technologies to the Telecom and Media & Entertainment industries. Technicolor’s mission is to enhance media experience on any screen, Its areas of expertise include access and delivery platforms, as well as in theaters, at home or on the go. The Amplify 2015 plan will put content preparation and management services, enabling its customers Technicolor on a new growth path to achieve its strategic ambition: to deliver an improved end-user entertainment experience. lead innovation in media monetization solutions.
Digital Delivery, which generated consolidated revenues of Amplify 2015 is built on three pillars: €1,210 million in 2011 (35% of the Group’s consolidated revenues), and shipped a total of 23.2 million access products in 2011 (2010: 24.9 million n boost our innovation pipeline and expand in licensing; units), is organized around the following main businesses: n develop innovative solutions to address expanding digital markets; n Connected Home; n consolidate and expand geographically to gain scale or access broader ecosystems. n Media Services; The vision is derived from Technicolor’s assessment of key trends in the n Broadcast Services. Media & Entertainment industry, which provide material opportunities This segment also encompasses the VoIP (Voice-over-IP) & IPTV for growth. It is also based on Company’s assets and identity, in particular: (Television-over-IP) business. n world-class innovation, technologies and Intellectual Property For more information about the Digital Delivery segment, please refer monetization in video-related technologies; to section 1.3.3: “Digital Delivery” of this Annual Report. n talents and high added-value services for content creators (visual effects “VFX”, animation, postproduction and digital cinema); Other n leadership and expertise in digital distribution and quick ramp-up of The “Other” segment comprises all other continuing activities and advanced capabilities in related software and services; corporate functions (unallocated). n trusted relationships with leading creators and studios (film, TV For more information, please refer to section 1.3.4: “Other” of this and advertising), Pay-TV providers and Consumer Electronics Annual Report. manufacturers. Boost our innovation pipeline and expand 1.2.4 STRATEGY in licensing In 2011, Technicolor has entered in a new phase of its development. While continuing to file patent applications, leading to about 2,000 The two previous years had been dedicated to debt restructuring, asset patent grants per year in promising technology areas and launching disposals and the stabilization of continuing businesses. Management new patent licensing programs, Technicolor will also expand its licensing focus was given to the acquisition of customers, innovation and activities by: operational excellence in the different business units of the Group. In 2011, Technicolor conducted a disciplined strategic review and n leveraging the growing range of connected devices in patent licensing negotiated a consent about certain amendments to its debt agreements programs; with its creditors, increasing its strategic flexibility. n broadening our presence in growing markets, such as Extended Home Applications;
n entering new geographies, such as China, India and Brazil;
n developing new licensing models such as Technology Licensing.
TECHNICOLOR I ANNUAL REPORT 2011 I 11 1 - PRESENTATION OF THE GROUP AND ITS ACTIVITIES History and Strategy of the Company
Develop innovative solutions to address n Packaged Media: Technicolor will continue to focus on cash flow expanding digital markets generation by expanding its client base, extending its Blu-rayTM capacity, lowering its cost structure and innovating in Supply Chain Technicolor will expand its presence in digital media monetization solutions. platforms, deriving new revenues from a broad array of media. For example, M-GO is the result of intensive R&D, market testing and n Connected Home: Technicolor will implement the turnaround plan investment over the past 3 years. It aims at providing end-users with a announced in December 2011, deploy its Digital Home software suite seamless experience for media consumption. M-GO will be preloaded for smart home applications and participate in consolidation to gain as of the second quarter of 2012 on most U.S. connected devices of scale. Samsung and VIZIO and on Intel Ultrabooks™. Technicolor expects these strategic initiatives to provide substantial revenue and profit growth in the upcoming years, proving that it has Consolidate and expand geographically gone back to a growth path. to gain scale or access broader ecosystems Amplify 2015 Goals (1) (at constant scope of activities) are: Technicolor will leverage its asset portfolio and seize external growth opportunities to consolidate and expand geographically in Innovation n Profit growth: Adjusted EBITDA above €600 million (vs. €475 million and Licensing, Media Creation and Media Distribution. in 2011);
n Free Cash Flow generation: over €400 million generated over 2012- Innovation and Licensing: the Group aims to seize opportunities to n 2015 which will be used to repay debt; add complementary patents to its existing portfolio and carry out targeted technology acquisitions. n Significant deleveraging: Technicolor’s Net debt/Adjusted EBITDA ratio to fall below 1.2x (vs. 2.4x in 2011 based on nominal debt). n Media Creation and Distribution: the Group aims to consolidate and expand geographically as well as develop new added value services for its studio customers.
(1) This information does not constitute a forecast from which the likely level of net results can be computed.
12 I TECHNICOLOR I ANNUAL REPORT 2011 PRESENTATION OF THE GROUP AND ITS ACTIVITIES - 1 Business Overview
1.3 BUSINESS OVERVIEW
The table below sets forth the contribution to the Group’s consolidated revenues of its segments for 2011 and 2010. In accordance with IFRS, revenues from continuing operations exclude the contribution of discontinued operations, comprising Grass Valley and Media Networks (mainly Screenvision).
(in millions of €, except percentages) 2011 % of total 2010 % of total Revenues from continuing operations Technology 456 13% 450 13% Entertainment Services 1,779 52% 1,697 47% Digital Delivery 1,210 35% 1,423 40% Other 5 0% 4 0%
TOTAL 3,450 100 3,574 100%
Please refer to Chapter 2: “Operating and Financial Review and The main objective of Research & Innovation is to develop and transfer Prospects”, section 2.5: “Geographic breakdown of revenues and effect innovative technology to support the services, software and solutions of exchange rate fluctuation” of this Annual Report, for a breakdown of the Group provides in order to develop its competitive advantage and the Group’s revenues by geographic markets. explore new business opportunities. Research & Innovation has a proven capacity for invention, which results in the generation of patents that Please refer to Chapter 2: “Operating and Financial Review and sustain a continuous flow of licensing revenues. Prospects”, section 2.4: “Seasonality” of this Annual Report, for a description of seasonal trends in the Group’s business. It employs around 400 people at December 31, 2011, based in five research centers: Rennes (France), Paris (France), Hanover (Germany), For more information on capital expenditure by business segment, Palo Alto (United States) and Beijing (China). please refer to note 5.1 of the Group’s consolidated financial statements. Research focuses on key drivers of the Media & Entertainment industry evolution, addressed in three strategic programs: 1.3.1 TECHNOLOGY n the Enhanced Media program (3D & Content Coding) aims Technology generated consolidated revenues of €456 million in 2011 at delivering new 3D technology and at improving audio/video (13% of the Group’s consolidated revenues). Technology comprises content quality and color fidelity in order to facilitate the delivery Research & Innovation, Licensing and MediaNavi. of the content of the Group’s creative partners. Research includes rendering (generating an image from a model, by means of computer Technology develops, protects and monetizes technology, principally programs), animation, and specifically targets 3D and compression through licensing Technicolor’s Intellectual Property, which represents technologies; most of the segment’s consolidated revenues (€451 million in 2011). n the Media Production program (Workflow & Content Access) will enable customers to efficiently shift to digital production tools by Research & Innovation delivering automated semantic metadata generation, annotation and The Research & Innovation group is treated as a cost center within indexing for efficient content preparation, restoration, structuring and Technology. This group supports very actively the business lines of the repurposing. This program will also create new techniques for content Company with research programs whose deliverables are further applied search, recommendation and access; in the product development roadmaps and with business partners. Total n the Media Delivery program (Home Networking) focuses on Group research and development expenses are disclosed in note 7 of technologies for delivering content and media services within the the Group’s consolidated financial statements. home, and ensuring connectivity outside the home via multiple devices. Content and services management quality-of-experience and content consumer privacy are central topics.
TECHNICOLOR I ANNUAL REPORT 2011 I 13 1 - PRESENTATION OF THE GROUP AND ITS ACTIVITIES Business Overview
Licensing In 2011, the program generating the most revenue was MPEG-2, which is licensed through the MPEG LA pool of which Technicolor is a member. Technicolor’s Licensing business generated consolidated revenues of This program contributed to 56% of Licensing revenues in 2011. The €451 million in 2011 (approximately 13% of the Group’s consolidated Group expects this program to remain a significant contributor to revenues). As of December 31, 2011, this business employed 207 people its Licensing revenues for several years. In parallel, Technicolor has based in 13 locations; principally in France, the United States, Germany, launched and is active in advanced standards, such as HEVC and DVB- Switzerland, Japan, South Korea, China and Taiwan. Technicolor’s 3DTV, which will be implemented in future products, thereby providing strong patent portfolio in technologies, combined with its licensing for additional licensing revenues. expertise, constitute significant competitive advantages. Technicolor is also leveraging its expertise in Patent Licensing Technicolor is developing licensing opportunities in Patent Licensing and through licensing services to third-party patent holders. The Licensing Trademark Licensing and is also considering the Technology Licensing organization has offered its expertise and know-how to other patent opportunity. holders (such as Xerox-PARC for optical devices with laser diodes), and it has all of the necessary assets to develop this model, beyond the Patent Licensing traditional legacy programs, whether patent or brand-related. Technicolor intensified its Patent Portfolio Management Policy to increase the technology relevance and the quality of its large portfolio Trademark Licensing while maintaining cost control. A group of prominent technical experts The Licensing organization manages not only patents, but all of the contributed to the selection of inventions and to the reviews of the Group’s Intellectual Property assets and has developed a business of patent portfolio through worldwide committees. Specific reviews of trademark licensing, monetizing valuable brands (such as RCA™ and identified technology areas were also conducted to eliminate patents Thomson™) which were operated in the past when the Group was active of lower licensing value before their expiration date. in the retail business. These brands have a strong historical heritage and foothold in their respective zones, which allow continuation of As of December 31, 2011, the Technicolor patent portfolio comprised the recurrent revenue models beyond their traditional relevance and around 40,000 patents and applications worldwide, generating licensing which has secured the further development of the Trademark Licensing income predominantly in the field of digital technologies, derived from business in the transition into the digital world. approximately 5,600 inventions in the fields of compression, video processing, networking, communication, interactivity, user interfaces, security, displays, storage and optical technologies. At the end of 2011, Technology Licensing around 70% of Technicolor’s patent portfolio had a lifetime greater than In addition to its Patent and Trademark Licensing activities, the Group 10 years. In 2011, Technicolor filed 416 priority applications in respect is developing its investment in Technology Licensing as an additional of new inventions. revenue stream. Technicolor’s patent licensing approach mainly consists in granting licenses for a given application after market adoption of The Licensing team works closely with Technicolor’s the corresponding family of products and services. The technology Research & Innovation group and the development centers within licensing approach is an initiative to bring to the market innovations in businesses, identifying inventions that might be translated into patents. an implementable form, beyond patents, to enhance and optimize their Leveraging these inventions, the Licensing team is responsible for the solutions, open new markets and pave the way for new businesses for creation and the management of the patent portfolio. It also detects the licensees who adopt them. Seeding technology early in the market uses of the Group’s patents by third parties products. will develop potential opportunities in the future for patent licensing for products and services embedding these technologies. An initial contract The Licensing team is also responsible for negotiating and granting to on mood classification for music on consumer devices has been signed, third parties the right to use Technicolor’s patents for manufacturing with earliest potential being in 2012. their products (in the frame of licensing programs; digital television, for example). Rather than licensing individual patents, the Technicolor licensing policy consists of granting the right to use the whole patent MediaNavi portfolio as applicable to the licensed product, including patents which In 2011, Technicolor entered into an agreement with DreamWorks may be filed during the term of the license agreement. The Licensing Animation regarding MediaNavi, the Group’s initiative to develop team manages around 1,100 licensing agreements across 15 licensing emerging content distribution models. At the 2012 International programs. The licensing agreements are typically renewable and have Consumer Electronics Show, Technicolor unveiled its new consumer an average duration of five years; royalties are primarily based on sales brand M-GO. M-GO is a free application which offers seamless access volumes. to media content across all connected devices, through a cloud-based
14 I TECHNICOLOR I ANNUAL REPORT 2011 PRESENTATION OF THE GROUP AND ITS ACTIVITIES - 1 Business Overview
experience. M-GO has a state-of-the-art discovery engine that quickly Creation Services and Theatrical Services and painlessly delivers to consumers the content that they want to watch when they want it. M-GO can also be used with smartphones Through its Creation Services and Theatrical Services business, or connected tablets as a premium second-screen experience, when Technicolor offers a full set of leading services, including digital content watching TV. Technicolor established strategic relationships around production, content postproduction, as well as film processing and M-GO with Intel® Corporation, Samsung, and VIZIO. M-GO launch distribution in both physical and digital formats to major and independent is expected in the U.S. in the second quarter of 2012. film studios, broadcasters, advertisers and video game companies.
Creation Services 1.3.2 ENTERTAINMENT SERVICES Technicolor offers a comprehensive set of content creation and The Entertainment Services segment, which generated consolidated content completion services to M&E clients in the theatrical, television, revenues of €1,779 million in 2011 (52% of the Group’s consolidated commercial/advertising, and interactive gaming segments. The range revenues), offers services related to content production, postproduction of services provided includes digital dailies, editorial sounds, visual (Creation Services) and content distribution through physical and effects (VFX), Digital Intermediate (DI) postproduction, sound mixing, digital media (Theatrical Services, DVD Services) for the global deliverables to the theaters and also includes animation. Media & Entertainment (M&E) industry. In addition, through its PRN (Premier Retail Networks) business the Group offers digital place-based Creation Services include Digital Production and Postproduction media services that enable retailers, marketers and in-venue owners to Services, which are described below. engage, inform and motivate consumers where they shop. Digital Production Some segments of the M&E industry are geographically concentrated, The Digital Production activity consolidates Technicolor’s existing resulting in a number of key studio clients, based primarily on the West Content Creation activities and oversees the growth and production Coast of the United States, accounting for a substantial portion of the of visual effects and animation for major studios, animation studios, businesses and revenues of Entertainment Services. game studios, Intellectual Property holders, commercial agencies, and commercial production companies. In 2011, physical media activities (DVD/Blu-ray™and Photochemical Film) represented 78% of Entertainment Services’ revenues, compared VISUAL EFFECTS with 81% in 2010. Although the Group expects physical media activities Technicolor offers under the MPC brand a team of visual effect to remain a significant contributor to Entertainment Services revenues supervisors and artists, working with state-of-the-art technology and Blu-ray™ services to continue increasing over the next several years, it and creative tools. Its facilities offer pre-visualization, asset building, supports actively and guides clients through the industry-wide transition texturing, animation, rigging, rotoscoping, lighting, match move and to digital formats and services. Based on its current and targeted compositing. client base, the Group believes this transition offers opportunities, in particular in the areas of high-end digital production (visual effects and This activity is based in London, Los Angeles, New York, Vancouver animation), digital cinema distribution, digital postproduction in both (Canada) and Bangalore (India) and closely collaborates with the its existing markets (principally the United States, Europe and Asia) Group’s centers in Beijing (China). The Group opened its facility in and new regions. Thus, Technicolor is currently extending the range New York during 2011 and re-inforced its Vancouver office. and depth of its product and service offerings, while developing new technology solutions to support the transition of its customers to digital. Historically Technicolor’s key customers on the motion picture side of This strategy builds on the Group’s leading existing market positions the business include all major Hollywood studios. For the advertising in this segment, very close relationships with M&E clients, and strong business, key clients include global advertising networks such as Publicis, capabilities in research and innovation. WPP, BBDO/Omnicom, and smaller agencies. Client agreements are typically project-specific.
TECHNICOLOR I ANNUAL REPORT 2011 I 15 1 - PRESENTATION OF THE GROUP AND ITS ACTIVITIES Business Overview
In 2011, VFX teams have notably worked on Warner Bros’s Harry Potter Theatrical Services and the Deathly Hallows - Part 2 and Wrath of the Titans, Disney’s Pirates of Caribbean: On stranger Tides, and Fox’s Prometheus. Film Services Technicolor offers a full range of services, including photochemical Technicolor’s main competitors in this area are ILM, Sony Pictures film processing (during the film making process), film release printing, Imageworks, Digital Domain, Weta, Framestore, Double Negative and physical distribution services to cinemas for theatrical releases. and The Mill. Technicolor is the only provider of large format (65/70 mm) film processing and release printing for the major U.S. studios. However, ANIMATION following the rapid shift to digital cinema since 2010, the Company has Technicolor helps customers turn their ideas into reality thanks to the launched several initiatives in order to optimize its photochemical film talents of its experienced teams in Burbank, (California) and Bangalore activities. These initiatives led to the creation of a mini-lab in Glendale (India). Technicolor provides a unique solution for the creation of high- (for 65/70 mm), the closing of the North Hollywood facility and the quality CGI (computer-generated imagery) animation. Technicolor is signing of subcontracting agreements with Deluxe. These agreements benefiting from a growing consumer demand for computer-generated led to ceasing the release printing manufacturing operations in North animation worldwide. America and the closure of the Mirabel (Canada) laboratory. In December 2011, the Group announced its intention to subcontract all Major customers include DreamWorks Animation, Nickelodeon, release printing services in Europe to Deluxe, resulting in the closure Electronic Arts and Mattel. Main competitors include Reel FX, Prana of the release printing services of 3 European locations in 2012: Rome, Studios, DQ Entertainment and CGCG. Customer agreements are Madrid, London. These initiatives enable the Group to have a more typically project-specific, with longer-term contracts where possible. flexible cost structure in Europe and North America.
In 2011, key achievements include Mattel’s Barbie: A perfect Christmas. In 2011, Photochemical Film accounted for approximately 7% of Technicolor’s revenues, compared with 10% in 2010. The largest cost Postproduction Services in this activity is the cost of purchasing raw film stock, for which Kodak Technicolor supports its clients in the transition from photochemical to was the major supplier in 2011. digital, from the image capture on the production set through creation of final distribution masters. The demand for Postproduction Services is Digital Cinema principally driven by theatrical, television, and commercials production. Technicolor Digital Cinema activities offer content owners and distributors a set of digital cinema services including mastering, In 2011, Technicolor acquired the assets of Laser Pacific in Los Angeles, versioning, hard drive and electronic distribution and digital key expanding its television and theatrical digital postproduction capabilities management for theatrical content, all supported by 24/7 customer and increasing its creative talent pool in Hollywood. Technicolor sold service. its New York assets to Postworks and entered into a license agreement enabling PostWorks to operate its Postproduction Services under Digital Cinema conversion continues to grow and Technicolor internal the Technicolor brand. In 2011, Technicolor opened its new sound estimates now put digital screen penetration at over 50% as of 2011 year- postproduction facility on the Paramount Pictures studio lot in end. Screen conversion continues to be driven by accelerated funding Hollywood, and recruited key talents to operate it. of the digital equipment worldwide, supported by studio virtual print fee agreements. Technicolor’s key customers in this activity include major studios such as Warner Bros., Paramount, Sony, Fox, NBC Universal, and The Walt In order both to consolidate and to accelerate its leading position in the Disney Company, mini-major studios including Lionsgate, Relativity field of satellite content distribution, Technicolor acquired in 2011 the Media, The Weinstein Company, and independent producers, for distribution assets of Cinedigm. scripted television series and commercials. Customer agreements are typically project-specific. Technicolor’s key customers in this activity include major studios and independents including The Walt Disney Company, Lionsgate, Relativity Technicolor’s main competitors in this activity are Deluxe (including its Media, Paramount, Warner Bros. and The Weinstein Company. acquisition of Ascent Media in 2011), and numerous boutique vendors, Technicolor’s main competitor in this activity is Deluxe. Technicolor which vary depending on market segment and geography. Technicolor has a leading market share in Digital Cinema distribution with more than believe that it is among the top 2 worldwide vendors in postproduction, 55% of the North American market (source: Technicolor estimates), and with operations in 11 key markets around the globe. operates the largest theater satellite network in North America (over 900 sites as of December 31, 2011).
16 I TECHNICOLOR I ANNUAL REPORT 2011 PRESENTATION OF THE GROUP AND ITS ACTIVITIES - 1 Business Overview
DVD Services multiple contractual arrangements for specific types of services within particular geographical areas. In 2010, Technicolor and Warner Bros. Technicolor manufactures and distributes video and game DVD entered into a long-term worldwide contractual agreement covering a and Blu-ray™ discs for leading global content producers. Technicolor broad number of areas, including replication and distribution services provides turnkey integrated supply-chain solutions that encompass for DVD and Blu-ray™ discs, as well as other aspects relating to strategic mastering, replication, packaging, direct-to-retail distribution of new technology initiatives. release and catalog products, returns handling and freight management, as well as procurement and retail inventory management services. Technicolor is the market leader worldwide in DVD production and number two in worldwide Blu-ray™ production, as measured by In 2011, Technicolor sold approximately 1.5 billion DVD and Blu- manufacturing volume output (source: FutureSource Consulting, 2012). ray™ discs, compared with approximately 1.3 billion discs in 2010. Technicolor’s largest competitor is Sony DADC . Technicolor’s replication activities are concentrated in two primary facilities in Guadalajara (Mexico) and Piaseczno (Poland). Packaging and distribution in the United States and Europe are supported by a Premier Retail Networks multi-region/multi-site facility platform, with a concentration of such Premier Retail Networks (PRN) provides digital place-based media activities in the United States in the Group’s Memphis (Tennessee) and services that enable retailers, marketers and in-venue owners to reach Livonia (Michigan) facilities. consumers in more than 8,500 locations in the United States and Mexico. PRN works with leading retailers, advertisers, content and As of December 31, 2011, Technicolor had annual capacity to produce technology companies to create and deliver place-based media that approximately 2.0 billion DVD and Blu-ray™ discs, allowing it to respond engages, informs and motivates consumers where they shop. to the increasingly seasonal demand for packaged media. Operations are supported by approximately 8 million square feet of dedicated PRN’s customers include SuperValu, Sam’s Club/Walmart, Costco, manufacturing and distribution space. and Target retail locations. PRN’s competitors include CBS Outernet, Captivate, and Reach Media Group. Technicolor made continued investments in Blu-ray™ in 2011, expanding annual production capacity to approximately 300 million discs. The Blu-ray™ video market continued to grow strongly in 2011, expanding 1.3.3 DIGITAL DELIVERY by approximately 27% in volume over 2010 (source: FutureSource Consulting, 2012), with ongoing growth driven by multiple factors, Digital Delivery brings together mainly the Connected Home business including increasing HDTV and Blu-ray™ player penetration, expanding and the Digital Content Delivery business (Broadcast Services, Media selection of available titles, and ongoing extensive marketing activities of Services) and supports Pay-TV and network services operators to the studios and consumer electronics companies. Technicolor intends to capture the shift to digital distribution. Digital Delivery develops and continue to invest in additional Blu-ray™ capacity as required to meet the supplies hardware and software technologies to the Telecom and needs of its customers in this growing segment of the market. Media & Entertainment industries, as well as content preparation and management services, thus enabling its customers to deliver an improved Technicolor’s customers include major film studios such as Warner end-user entertainment experience. Bros., The Walt Disney Company, Paramount/ DreamWorks, and Universal Studios, as well as independent studios and software and Digital Delivery generated consolidated revenues of €1,210 million games publishers. Most major customers are covered by multi-year in 2011 (35% of the Group’s reported consolidated revenues) and contracts (generally, two to four years), which typically contain volume shipped a total of 23.2 million products in 2011 (2010: 24.9 million units). and/or time commitments. Major client relationships typically consist of
TECHNICOLOR I ANNUAL REPORT 2011 I 17 1 - PRESENTATION OF THE GROUP AND ITS ACTIVITIES Business Overview
The following diagram reconciles the current nomenclature of the Digital Delivery segment with the nomenclature presented in the 2010 Annual Report:
2010 2011 Digital Delivery Digital Delivery
Connect Connect Digital Home Connected Home Set-Top Box
IPTV & VoIP IPTV & VoIP
Digital Content Digital Content Delivery Delivery
Broadcast Services Broadcast Services
Media Services Media Services
Connected Home Modems, Routers and Services Gateways The Connected Home business offers a wide range of devices and Technicolor designs and supplies access devices (modems, routers and software solutions to broadband network and Pay-TV operators for the gateways) deployed by telecom and cable operators to deliver multiple- delivery of digital entertainment, data and voice, as well as advanced play services (video, voice, data, and mobility) to their subscribers: services to subscribers. n in Telecom, the product range includes service gateways, high-end In 2011, the division was re-organized by regrouping all its product triple-play gateways capable of running rich applications, business management forces, centralizing Research & Development (now split gateways for the small and mid-size market, integrated access devices, into software and hardware) and regionalizing its go-to-market effort double-play gateways with VoIP and data, WiFi gateways, as well as (sales, pre-sales, customization). This initiative aims at maximizing modems and routers. Technicolor’s main customers include major synergies when defining new solutions, better aligning with the customers operators like Verizon, Telecom Italia, Telefonica, Telmex (America base, and addressing the challenges encountered in delivering to Móvil), TeliaSonera, Telekom Austria, and Tele2. Main competitors customers the right level of quality on time. include Pace/2Wire, D-Link, Sagem, ZTE, Huawei and ZyXEL;
n in Cable, the product range covers modems, integrated voice and The Connected Home business comprises the 3 following set of data products (eMTA) up to advanced services platforms for fully solutions: customizable multiple-play services, including an expanded set of IP services accessible on the ecosystem of voice and video-connected Broadband Access Modems, Routers and Services Gateways; n products in the home. Technicolor’s key customers include Comcast, n Set-Top Boxes; UPC (Liberty Global), Kabel Deutschland, and Time Warner Cable. Technicolor’s main competitors include Arris, Motorola, and Cisco. n Managed Wireless Tablets. Technicolor ranks among the top players for supplying advanced Leveraging its experience and expertise in these solutions, Technicolor gateways worldwide, based on volume of more than 10 million gateways is also positioning itself on next generation converged media gateway shipped every year for the last 7 years. In 2011, Technicolor reached the that combines broadband and broadcast content access to deliver a milestone of 40 million wireless gateways delivered worldwide. seamless multi-room, multi-screen video experience.
18 I TECHNICOLOR I ANNUAL REPORT 2011 PRESENTATION OF THE GROUP AND ITS ACTIVITIES - 1 Business Overview
Set-Top Boxes communications tablet compatible with its wireless gateway and integrated into Telstra’s communication infrastructure; Technicolor designs and supplies Set-Top Box platforms to satellite, cable and telecom operators to enable the delivery of services and n security, monitoring and automation control screens: Technicolor is video entertainment over broadcast, broadband, or hybrid broadcast/ partnering with specialized companies (such as iControl) to build a broadband networks. bundled offering that network services providers can deploy under their brand. n In Satellite, Technicolor offers a wide range of set-top boxes in These tablets are specifically designed for each solution or to meet standard and high-definition, which may include hard-drive recording the services providers’ request. They run Google, Android, or native capability. Main customers include DIRECTV, Sogecable, Viasat, Linux software, and their user interfaces are customized for the target India’s TataSky, Malaysia’s Astro and Australia’s Austar. DIRECTV applications and branded by the NSP. has been a Technicolor customer since 1994. In July 2008, the Group amended its agreement with DIRECTV, which agreed to grant Technicolor a significant portion of all set-top boxes purchased IPTV & VoIP through the end of the contract. As part of the amendment, the The IPTV & VoIP activities consist of the Cirpack softswitch (voice- contract was extended until June 2010. In July 2010, Technicolor over-IP) and SmartVision software (television-over-IP) operations. announced the signing of a three-year contract extension to provide a wide range of standard and high definition set-top boxes to n Technicolor develops next-generation voice switching platforms DIRECTV. marketed under the Cirpack brand that allow network operators n In Cable, Technicolor designs and sells a wide range of standard and (Cable, Telecom) and Internet Service Providers (ISPs) to deliver high-definition set-top boxes to Pay-TV network operators. Main unified communication, fixed-mobile convergence and advanced customers include Comcast, UPC (Liberty Global), NET Brazil business application support. Main customers include Free, SFR, (Telmex), and HOT. Main competitors are Motorola, Cisco, Arris, Bouygues Telecom, Numericable, T-Online, and Telecom Italia. and Pace. Main competitors are Alcatel-Lucent, Ericsson, Huawei, Microsoft, and Nokia Siemens Networks. n In Hybrid, the Technicolor product range includes low-end media adapters and decoders up to high-end platforms with video recording n The SmartVision service platform supports content delivery over capabilities able to serve personal and premium content across the managed broadband networks. The platform is maintained and home. Products rely on modular and flexible system architecture to exclusively supported for existing customers, such as Bouygues cover a variety of network access (cable, terrestrial, satellite, IP) and Telecom and Telenor. content media formats (SD, HD, MPEG-2, H264, etc.). Technicolor’s main customers include Bouygues Telecom, and Telenor. Main Media Services competitors are Samsung, Pace, and Cisco. The Media Services activity provides tape and digital media asset Technicolor is the world’s third largest supplier of digital Pay-TV set-top management solutions allowing secure storage, management and boxes based on volume (source: IMS-Research, 2010). retrieval of content for easy distribution to multiple distribution channels.
Demand for Media Services is principally driven by the number of new Managed Wireless Tablets film and episodic title releases and the exploitation of a content owner’s Technicolor designs and supplies services providers with operator- catalog in new territories or via new technologies/different delivery managed tablets in order to deliver pre-integrated solutions in the formats (i.e. electronic sell-through, VoD, IPTV, mobile, 3D, Blu-ray™, fields of: etc.). Customer agreements are typically project-specific, with longer- term contracts where possible. n managed second screen content delivery: Technicolor has, for example, delivered to PCCW (Hong Kong) an end-to-end solution Key customers include major studios such as Sony, Paramount, and for advanced multimedia services and packaged live and video on DreamWorks, as well as independent studios, broadcasters, and network demand content on second screen; operators. n portable video communication solutions at home: Technicolor is Technicolor’s main competitors are Deluxe, as well as the in-house providing Telstra with a complete voice and video communications facilities of certain major studios. package comprising IP DECT handset and a dedicated video
TECHNICOLOR I ANNUAL REPORT 2011 I 19 1 - PRESENTATION OF THE GROUP AND ITS ACTIVITIES Business Overview
In 2011, Technicolor continued to promote its MediAffinity™ digital 1.3.4 OTHER library management service. MediAffinity™ is an automated workflow solution enabling content owners to manage, access and monetize their “Other” operations are as follows: content library, as well as to preserve and digitize deteriorating physical assets, in a secure, automated environment. Technicolor also launched n unallocated Corporate functions, which comprise the operation and MediaEcho™, an application for tablets which improves the end-user management of the Group’s Head Office, together with various entertainment experience by synchronizing the device with Blu-ray™, Group functions centrally, principally Sourcing, Human Resources, Video on Demand (VoD), or broadcast programs. While viewing a IT, Finance, Marketing and Communication, Corporate Legal program, users can access a wealth of content such as cast, crew and Operations and Real Estate Management. The costs of these production information, historical facts, audio and video, without functions are allocated to the Group’s segments where costs can cluttering the main screen. be clearly identified as relating to a particular business within that segment. Residual costs are reflected in the results of the segment entitled “Other” in the Group’s segment reporting; Broadcast Services n after-sales service operations and commitments related to former CE The Broadcast Services activity consists of programming, both operations, mainly pension and legal costs. for pre-recorded and live content, and manages the production, playout, postproduction and media management of video content for broadcasters through playout facilities in a number of locations 1.3.5 DISCONTINUED worldwide. Technicolor also offers services around catch-up TV and OPERATIONS mobile content delivery, as well as the full management of all technical operations for TV channels in a demanding environment (i.e. live news Technicolor has finalized a number of disposals over the last few years, and sport channels). The demand for Broadcast Services is principally principally the Grass Valley business and Screenvision, the results driven by the trend towards outsourcing broadcast services, as well as of which are reported as discontinued operations under IFRS. For a by the continued migration of channels to High Definition. Customer description of the financial implications resulting from the exit from agreements are typically long-term contracts. these businesses, please refer to Chapter 2: “Operating and Financial Review and Prospects”, section 2.9.7: “Profit (loss) from discontinued Technicolor’s main competitors are RedBee Media (owned by operations” of this Annual Report. Macquarie) and Encompass Digital Media. Technicolor is among the top two worldwide players in the Broadcast Services market (source: Cinema Advertising (Screenvision) Technicolor estimates). In 2010, the Group sold a majority of its 50% stake in Screenvision In 2011, Technicolor continued to support its broadcast customers in U.S. to Shamrock Capital Growth Fund II. The Group retains an 18.8% deploying new channels and in migrating TV channels to high definition. interest in a newly-formed Screenvision holding company, which is now The Group served 27 broadcast networks globally broadcasting 188 consolidated under the equity method in continuing operations. unique channels, including 35 channels in high definition. Technicolor also launched the first independent broadcast services platform ready Grass Valley to broadcast 3D channels for its network service provider customers out of its U.K. and Saint-Cloud (France) -based facilities. Following the January 2009 decision to exit the Grass Valley business, Technicolor reorganized the Grass Valley Business into three distinct On March 13, 2012 Technicolor announced that it had received a binding activities in March 2010: Broadcast, Head-end, Transmission. They were offer from Ericsson, the world leader in communication technologies and subsequently sold in 2010 and 2011: services, for the acquisition of its Broadcast Services activity. For more information about this transaction, please refer to Chapter 2: “Operating n the Broadcast business was sold to Francisco Partners. The deal was and Financial Review and Prospects”, section 2.6: “Events subsequent completed in December 2010; to December 31, 2011” of this Annual Report. n the Transmission business, operating under the Thomson Broadcast brand, was sold to PARTER Capital Group. The deal was completed in April 2011;
n the Head-end business, operating under the Thomson Video Networks brand, was sold to the FCDE in 2011. The deal was completed in May 2011.
20 I TECHNICOLOR I ANNUAL REPORT 2011 OPERATING AND FINANCIAL 2 REVIEW AND PROSPECTS
2.1 OVERVIEW ...... 22 2.9 RESULTS OF OPERATIONS FOR 2011 AND 2010 ...... 26 2.9.1 Analysis of revenues ...... 26 2.2 TRENDS IN THE MEDIA & ENTERTAINMENT 2.9.2 Analysis of Adjusted EBITDA ...... 28 INDUSTRY ...... 22 2.9.3 Profit (loss) from continuing operations before tax and net finance costs ...... 29 2.3 SUMMARY OF RESULTS ...... 23 2.9.4 Net finance costs ...... 30 2.4 SEASONALITY ...... 24 2.9.5 Income tax ...... 30 2.9.6 Profit (loss) from continuing operations ...... 30 2.5 GEOGRAPHIC BREAKDOWN OF 2.9.7 Profit (loss) from discontinued operations ...... 30 REVENUES & EFFECT OF EXCHANGE RATE 2.9.8 Net Income (loss) of the Group ...... 31 FLUCTUATIONS ...... 24 2.9.9 Adjusted indicators ...... 31 2.6 EVENTS SUBSEQUENT TO DECEMBER 31, 2011 ...... 25 2.10 LIQUIDITY AND CAPITAL RESOURCES ...... 33 2.7 NOTIFICATION OF INTERESTS ACQUIRED IN THE 2.10.1 Overview ...... 33 SHARE CAPITAL OF FRENCH COMPANIES IN 2011 ...... 26 2.10.2 Cash flows ...... 34 2.10.3 Financial resources ...... 35 2.8 NOTIFICATION OF INTERESTS ACQUIRED IN THE SHARE CAPITAL OF FRENCH COMPANIES IN 2010 ...... 26 2.11 PRIORITIES AND OBJECTIVES FOR 2012 ...... 41
TECHNICOLOR I ANNUAL REPORT 2011 I 21 2 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS Overview
2.1 OVERVIEW
Technicolor is a technology-driven company supporting its (for more information, please refer to section 1.2.3: “Organization”). Media & Entertain ment ( M&E ) customers in shaping their digital future. All other activities and corporate functions (unallocated) are presented Technicolor’s activities are organized into three operating segments, within the “Other” segment. namely Technology, Entertainment Services and Digital Delivery
2.2 TRENDS IN THE MEDIA & ENTERTAINMENT INDUSTRY
Technicolor performance and strategy are highly influenced by the In film entertainment, worldwide box office grew by 5.1% in 2011 (source: way Media & Entertainment is created, distributed, monetized and Screen Digest) and is expected to continue growing in the next few consumed. years, driven by growth worldwide and in particular in emerging countries such as China, Russia, India and Brazil. In the U.S., the largest home Technicolor considers four major trends as crucial to drive the future of entertainment market, spending has started to rebound, with digital Media & Entertainment industry in its shift to digital: distribution and Blu-ray™ starting to more than compensate for the losses in SD-DVD. (i) unprecedented speed of innovations in video-enabled and connected devices, software, applications and service platforms Leveraging the increasing time spent on TV worldwide and stimulated stimulating digital and on-demand consumption; by stronger Over The Top (OTT) challenge, the Pay-TV industry has grown mainly through Average Revenue Per User (ARPU) increase in (ii) innovative distribution channels and business models providing new North America and through subscriber acquisition in other territories. monetization opportunities and value pools for content owners; It has also tried to increase and/or diversify its revenue streams by (iii) fast commoditization of devices and platforms requiring a providing more value added services in the home like multi-room, multi- continuous flow of intellectual properties and technologies; screen, extended wireless coverage, customized user interface, TV guide (iv) increasing Computer Generated Imagery (VFX, animation) and or content recommendation… developing end-to-end digital workflow transforming in depth Global fixed and mobile broadband penetration continues to grow. content creation and production processes and boosting creativity, Increasing high bandwidth availability enables more and more people time to market and productivity. to consume bandwidth-intensive content such as video, at home As a result of the four trends, the Media & Entertainment industry has and on-the-go. This has been supported by the proliferation of new continued to grow globally in 2011: single digit growth of box office, digital platforms and CE devices capable of delivering and consuming advertizing and Pay-TV, double digit growth of online M&E, resilience high quality video anywhere, anytime. After game consoles, PC and of packaged media. It is likely to sustain growth in the coming years. smartphones, connected TV and tablets are gaining mainstream adoption. Technicolor’s main customers, which include content creators, film studios, broadcasters and network service providers have generally High quality content, being distributed through an increasing number grown substantially in both revenue and profitability in 2011, thanks to of channels to many more devices, is becoming more valuable. Thanks increased consumer demand for film entertainment, spending on Pay- to increasing competition for content, major content owners have not TV and broadband services, a rebounding advertisement market and an only been able to increase their revenue from traditional distribution increasingly meaningful contribution from new digital media. channels such as Pay-TV, but are also discovering that revenue from new
22 I TECHNICOLOR I ANNUAL REPORT 2011 OPERATING AND FINANCIAL REVIEW AND PROSPECTS - 2 Summary of results
digital distribution platforms are becoming more and more attractive TVs, Blu-ray™ players, game consoles, tablets, smartphones and set- and meaningful to their profitability. They are experimenting alternative top-boxes are expected to double in the next five years. These devices release windows and formats, which provide new monetization levers. use intellectual properties and technologies in a wide range of domains, including Wi-Fi, 3G, LTE, video encoding and compression, display The Media & Entertainment industry dynamics benefit from a virtuous technologies, metadata, search and recommendation algorithm, user cycle of innovations in technology, cloud services, social media, content interface, audio and video analysis, enhanced audio, etc. metadata, user interface, search, discovery and recommendation, and new business models such as targeted and performance based video In addition, as computer generated imagery (CGI) technologies advertisement. These innovations, while initiated by internet start-ups continue to improve due to increased computing power and software have also pushed incumbents to redesign the experience they offer capabilities, content producers are relying more and more on visual to their clients. Simplicity, personalization and on-demand become a effects, animation and digital postproduction to implement their creative common request in a world of many choices and complexities. visions and improve productivity. Using CGI helps content producers create scenes and effects that are impossible, or diminish the danger or The accelerating pace for innovation to avoid commoditization has the cost to shoot physically. More importantly, these digital technologies created a strong demand for the underlying Intellectual Property and are now becoming integral to the story-telling. technologies. This is highlighted by significant Intellectual Property transactions in 2011, including the acquisition of Nortel patent portfolio Technicolor has implemented a comprehensive monitoring of industry or the tentative merger between Motorola Mobility and Google Inc. trends and early identification of possible evolution to fuel its innovation, Shipment of connected video-enabled devices, such as connected investment and business development processes.
2.3 SUMMARY OF RESULTS
Technicolor’s revenues from continuing operations amounted to to a still difficult economic environment. For more information, please €3,450 million in 2011, down 3.5% at current currency compared refer to section 2.9.1: “Analysis of revenues” of this Chapter. with 2010, and down 1.1% at constant currency. The Technology segment benefited from resilient Licensing revenues, notwithstanding the Group’s Adjusted EBITDA from continuing operations decreased by €30 million decision to continue some licensing contracts negotiations into 2012 in 2011 compared with 2010. This was due to a material degradation given its focus on preserving royalty rates. Entertainment Services in Digital Delivery due to Connected Home, partially offset by posted solid revenue growth in 2011, with good performances in North improvements in other businesses. For more information, please refer America and slightly lower performances in Europe across the different to sections 2.9.2: “Analysis of Adjusted EBITDA” and 2.9.9: “Adjusted activities. DVD Services recorded a strong growth in revenues as a total indicators” of this Chapter. of 1.5 billion of DVD were replicated in 2011, which is the highest level ever recorded by the Group. Creation Services had also a strong year Profit from continuing operations before tax and net finance costs was a whereas Theatrical Services revenues declined further in 2011 compared loss of €33 million in 2011, compared with a profit of €38 million in 2010. with 2010 as the acceleration in Digital Cinema theater installations For more information, please refer to section 2.9.3: “Profit (loss) from in the U.S. and Europe continued. This trend strongly benefited the continuing operations before tax and finance costs”. Group’s Digital Cinema distribution business but adversely impacted photochemical film volumes. In Digital Delivery, a combination of several Net finance result was a charge of €187 million in 2011, compared with factors weighed on the performance of the Connected Home business, an income of €116 million in 2010. In 2010, the finance result included a including weaker shipments, a less favorable geographic and product gain of €381 million, resulting from Technicolor’s debt restructuring on mix as well as continued slowdown in customer demand in Europe due May 26, 2010. For more information, please refer to section 2.9.4: “Net finance costs” of this Chapter.
TECHNICOLOR I ANNUAL REPORT 2011 I 23 2 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS Seasonality
The Group’s total income tax was a charge of €83 million in 2011, In 2011, the total loss from discontinued operations was €21 million compared with a profit of €2 million in 2010. For more information, (compared with a loss of €225 million in 2010 mainly due to the Grass please refer to section 2.9.5: “Income tax” of this Chapter. Valley businesses). For more information, please refer to section 2.9.7: “Profit (loss) from discontinued operations” of this Chapter. Profit (loss) from continuing operations was a loss of €303 million in 2011, compared with a profit of €156 million in 2010. For more information, The Group’s consolidated net loss totaled €324 million in 2011, compared please refer to section 2.9.6: “Profit (loss) from continuing operations” with a loss of €69 million in 2010. For more information, please refer to of this Chapter. section 2.9.8 “Net income (loss) of the Group” of this Chapter.
2.4 SEASONALITY
The Group’s revenues have historically tended to be higher in the second half of 2011, revenues from continuing operations totaled €1,891 million, half of the year than in the first half, with customers’ activity being greater or 55% of the Group’s annual revenues, compared with €2,075 million in in the second half, especially for Entertainment Services. In the second the second half of 2010, representing 58% of annual revenues.
2.5 GEOGRAPHIC BREAKDOWN OF REVENUES & EFFECT OF EXCHANGE RATE FLUCTUATIONS
The table below shows Group 2011 and 2010 revenues from continuing States and Europe, accounting for 44.4% and 30.5%, respectively, of operations broken down by destination and classified by customer origin. revenues in 2011. As the table shows, the Group’s most important markets are the United
Revenues of continuing operations by customer origin
(in percentage) 2011 2010 United States 44.4% 43.9% Rest of Americas 14.5% 13.2% Europe 30.5% 32.2% Asia-Pacific 9.0% 9.6% Other 1.6% 1.1 %
24 I TECHNICOLOR I ANNUAL REPORT 2011 OPERATING AND FINANCIAL REVIEW AND PROSPECTS - 2 Events subsequent to December 31, 2011
The table below shows Group 2011 and 2010 revenues from continuing important markets are the United States and Europe, accounting for operations broken down by origin and classified by the location of the 37.3% and 44.2%, respectively, of revenues in 2011. entity that invoices the customer. As the table shows, the Group’s most
Revenues of continuing operations by invoicing entity
2011 2010 United States 37.3% 37.2% Rest of Americas 12.7% 11.7% Europe 44.2% 45.1% Asia-Pacific 5.8% 6.0 %
As the Group has an important part of its activities located in the United and net finance costs, please refer to note 26.1 (f) to the Group’s States or in other countries whose currencies are closely linked to the consolidated financial statements. U.S. dollar, the main exposure to fluctuations in foreign currencies is related to the exchange rate of the U.S. dollar against the euro. For year-on-year comparisons, the current financial year revenue figures Generally, a rise of the dollar against the euro has a positive effect on are adjusted accordingly by applying the exchange rate used for the Group revenues while a decrease of the dollar against the euro has the consolidated statement of operations in the previous financial year. The opposite impact. In 2011 compared with 2010, exchange rate fluctuations Group believes that this presentation of change in revenues, adjusted to had a negative impact of €85 million on consolidated revenues. reflect exchange rate fluctuations, is helpful in analyzing its performance from one year to the next. For more information on exchange rate fluctuations, including an analysis of the impact of an appreciation of 10% of the U.S. dollar against the The table below shows the exchange rate effect on the Group’s euro on revenues and result from continuing operations before taxes revenues from continuing operations in 2011, compared with 2010, on a consolidated and a segment-by-segment basis.
2010 revenues at 2011 revenues at 2011 revenues at % change 2010 exchange 2010 exchange Exchange rate 2011 exchange at constant % at current (in € millions unless otherwise stated) rates rates impact rates exchange rates exchange rates Continuing operations 3,574 3,534 (85) 3,450 (1.1) (3.5) Of which: Technology 450 459 (3) 456 2.1 1.4 Entertainment Services 1,697 1,833 (54) 1,779 8.0 4.8 Digital Delivery 1,423 1,237 (27) 1,210 (13.1) (15.0) Other 4 5 0 5 17.8 17.0
2.6 EVENTS SUBSEQUENT TO DECEMBER 31, 2011
Following the January 20, 2012 and February 3, 2012 rulings by the was filed, Technicolor implemented the Sauvegarde Plan in May 2010. Tribunal de Commerce in Nanterre, France, Technicolor acquired On November 18, 2010, the Versailles Court of Appeal dismissed the postproduction activities, certain operating assets and took over claims of the TSS holders and confirmed the validity of Technicolor’s 54 employees from the Quinta Industries group, especially from ADJ Sauvegarde Plan. The holders of TSS have appealed on February 14, (Les Auditoriums de Joinville), SIS (Société Industrielle de Sonorisation), 2011 to the Cour de cassation (pourvoi en cassation) against the decision Scanlab and Duboi. of the Versailles Court of Appeal. This appeal was rejected by the Cour de cassation on February 21, 2012. Any risk related to the termination of On February 17, 2010, the Nanterre commercial court approved the the Sauvegarde Plan, the capital markets transactions which implemented Sauvegarde Plan which is now binding on all of Company’s creditors. the Sauvegarde Plan in May 2010 and the issuance of the new shares An appeal against the decision of the Nanterre commercial court was issued in December 2010 and December 2011 for the redemption of brought by certain holders of Titres Super Subordonnés (“TSS”) in the the NRS and the DPN is now eliminated. Versailles court of appeal. As no temporary stay of the Nanterre decision
TECHNICOLOR I ANNUAL REPORT 2011 I 25 2 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS Notification of interests acquired in the share capital of French companies in 2011
On March 13, 2012, Technicolor announced that it had received a binding This transaction fits well into the Group’s ongoing efforts to leverage offer from Ericsson, the world leader in communication technologies and its existing portfolio, optimize its investments allocation and free cash services, for the acquisition of its Broadcast Services activity. The offer flow generation, as outlined in the 2012-2015 strategic roadmap. The includes a purchase price of €19 million and a potential earn-out based Broadcast Services activity was classified as held for sale in the Group on 2015 revenues of the Broadcast Services activity of up to €9 million. consolidated balance sheet as of December 31, 2011.
2.7 NOTIFICATION OF INTERESTS ACQUIRED IN THE SHARE CAPITAL OF FRENCH COMPANIES IN 2011
In compliance with Article L. 233-6 of the French Commercial Code, Technicolor discloses that it acquired 50% of Nagra Thomson Licensing SA in 2011.
2.8 NOTIFICATION OF INTERESTS ACQUIRED IN THE SHARE CAPITAL OF FRENCH COMPANIES IN 2010
In compliance with Article L. 233-6 of the French Commercial Code, Technicolor notes that the Group did not acquire an interest in any French companies in 2010.
2.9 RESULTS OF OPERATIONS FOR 2011 AND 2010
The Group’s revenues, Adjusted EBITDA and profit (loss) from and product mix as well as continued slowdown in customer demand in continuing operations before tax and net finance costs for the years Europe due to a still difficult economic environment. 2011 and 2010 are presented below for each of the Group’s operating segments – Technology, Entertainment Services, Digital Delivery – and the “Other” segment. The results of discontinued operations Technology are presented separately under section 2.9.7: “Profit (Loss) from Consolidated revenues for Technology totaled €456 million in 2011, Discontinued Operations”. compared with €450 million in 2010, up 1.4% at current currency, and 2.1% at constant currency. Consolidated revenues for Licensing totaled The Group’s results are presented in accordance with IFRS 5. €451 million in 2011, compared with €447 million in 2010, up 0.8% at Consequently the contributions of discontinued operations are current currency and 1.6% at constant currency. presented on one line in the consolidated statements of operations, named “Net loss from discontinued operations”. In 2011, notwithstanding the Group’s decision to continue some licensing contracts negotiations into 2012 given its focus on preserving royalty rates, the business grew, thanks to a higher contribution from MPEG LA 2.9.1 ANALYSIS OF REVENUES (which represents approximately 55% of revenues) and a sustained performance of other programs, such as Digital TV. In 2011, Technicolor’s revenues from continuing operations amounted to €3,450 million, compared with €3,574 million in 2010, down 3.5% at Licensing revenues include estimates from license agreements. The current currency and down 1.1% at constant currency. The decline in difference between estimated and actual revenue figures derived revenues was primarily due to lower revenues in the Digital Delivery from cash collection for the years ended December 31, 2011 and 2010, segment due to a combination of several factors including weaker measured as a percentage of total Licensing revenues, amounted to shipments of Connected Home products, a less favorable geographic excesses of actual over estimated revenue of 2.4% and 3.1%, respectively.
26 I TECHNICOLOR I ANNUAL REPORT 2011 OPERATING AND FINANCIAL REVIEW AND PROSPECTS - 2 Results of operations for 2011 and 2010
In 2011, Research & Innovation (R&I) transferred several technologies Creation Services (Visual Effects, Animation and Postproduction to other businesses. R&I transferred to Digital Production new tools for Services) revenues increased significantly in 2011 compared with 2010, in-painting, which is one of the most time-consuming steps in 2D to reflecting strong growth across all activities. The Group notably 3D conversion activities as well as a postproduction tool called “Looky” benefited from the addition of new capacities in VFX, which drove which solves problems occurring when one initial video is processed in further market share gains, expansion in the portfolio of customers in two different workflows and color decisions need to be transferred from animation, as well as resilient demand for Postproduction Services. one workflow to the other. A technology that allows redistributing an incoming video/TV stream to portable devices adapting to the screen Theatrical Services (Film Services and Digital Cinema) revenues were format and network status was delivered to the Connected Home lower in 2011 compared with 2010. Growth in Digital Cinema activities, business. A timeline synchronization technology, enabling a second driven by the continued conversion of theaters to digital partly offset screen application to offer a range of services directly associated with the decline in photochemical film volumes. the content being shown on the consumers primary screen was delivered to Media Services and the MediaEcho product. DVD Services revenues grew in 2011 compared with 2010. A total of 1.5 billion of DVD were replicated in 2011 up 22% compared with 2010, Entertainment Services which is the highest level ever recorded by the Group. Consolidated revenues for Entertainment Services totaled €1,779 million PRN revenues were lower in 2011 compared with 2010. in 2011, compared with €1,697 million in 2010, up 4.8% at current currency and 8.0% at constant currency.
Replicated DVD volumes
(in millions of units) 2011 2010 Change (%)
TOTAL DVD 1,540 1,263 22% Of which SD-DVD 1,270 1,073 18% Of which Blu-ray™ 152 94 62% Of which DVD for games and kiosks 118 96 23%
Digital Delivery was partially offset by continued strong customer demand across Latin America, notably for Cable broadband gateways. Overall Consolidated revenues for Digital Delivery totaled €1,210 million in 2011, Cable product mix decreased slightly compared with the same period compared with €1,423 million in 2010, down 15.0% at current currency of 2010; and 13.1% at constant currency. n in Telecom, a sharp volume decline reflecting a continued slowdown This mostly reflects a decrease in Connected Home revenues, due in spending from European customers in a still difficult economic to a combination of several factors, including weaker shipments of environment, with market demand remaining more oriented towards Connected Home Products, adverse mix effects and a continued lower-end products. Overall Telecom product mix was less favorable slowdown in customer demand in Europe. compared with 2010, due to weaker shipments of higher-end broadband gateways. Total volumes amounted to 23.2 million units in 2011 (compared IPTV & VoIP revenues declined in 2011 compared with 2010. with 24.9 million units in 2010), a decrease which can be explained by the following factors: Digital Content Delivery revenues decreased in 2011 compared with 2010 driven by the decrease in Media Services revenues. This in Satellite a growth in volumes driven by solid demand especially in n reflected a decline in traditional Tape Duplication Services, particularly in Latin America, but an overall less favorable product mix due to the North America, due to continued market shift towards digital workflows. greater weight of Latin America in overall volumes as well as lower This negative impact was partially offset by improving revenue mix shipments of higher-end HD-PVR; across European operations as well as additional customers for Digital n in Cable, a slight volume decline due to an unfavorable comparison Services, both in Europe and in North America. Broadcast Services base as 2010 benefited from large deliveries of Digital-to-Analog revenues decreased slightly in 2011 compared with 2010. products to a key North American customer . This negative impact
TECHNICOLOR I ANNUAL REPORT 2011 I 27 2 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS Results of operations for 2011 and 2010
Connected Home Product Volumes
(in millions of units) 2011 2010 Change (%)
TOTAL CONNECTED HOME PRODUCTS 23.2 24.9 (7)% Of which Satellite 9.5 8.2 +16% Of which Cable 7.0 7.2 (3)% Of which Telecom 6.7 9.5 (29)%
Other Entertainment Services Revenues presented in the “Other” segment comprised: Adjusted EBITDA for Entertainment Services was €239 million in 2011 or 13.4% of revenues (compared with €217 million in 2010 or 12.8% of n corporate revenues for €4 million, compared to €1 million in 2010, revenues). mainly related to services charged to third parties; This €22 million increase in Adjusted EBITDA was attributable to the n other activities totaling €1 million in 2011 compared to €3 million following factors: in 2010.
n Creation Services Adjusted EBITDA increased in 2011 compared 2.9.2 ANALYSIS OF ADJUSTED with 2010, thanks to increased activity levels in all activities, as well as EBITDA targeted cost optimization actions in postproduction, offsetting the ramp-up costs of new facilities in Digital Production; For the purpose of analyzing the Group’s performance, and in addition n Theatrical Services Adjusted EBITDA increased in 2011 reflecting to its published results presented in accordance with IFRS, Technicolor an improved mix between photochemical and Digital Cinema publishes an Adjusted EBITDA. This indicator excludes factors it distribution activities; considers to be non-representative of Technicolor’s normal operating performance. For a comprehensive definition of adjusted indicators and n DVD Services Adjusted EBITDA increased in 2011. Some specific a description of their limitations as performance indicators please refer customer price reductions were compensated for by an overall to section 2.9.9: “Adjusted Indicators” of this Chapter. increase in volume, an increased mix of Blu-ray™ product and the positive impact of ongoing cost savings initiatives; In 2011, Technicolor’s Adjusted EBITDA amounted to €475 million, n PRN Adjusted EBITDA decreased in 2011 compared with 2010. compared with €505 million in 2010, down 5.9%. The decline in Adjusted EBITDA was primarily due to the material degradation in Digital Delivery, which was not offset by improvements in Adjusted EBITDA Digital Delivery for Technology and Entertainment Services. Adjusted EBITDA for Digital Delivery was a loss of €29 million in 2011 (compared with a profit of €55 million in 2010).
Technology This loss reflected the following factors: Adjusted EBITDA for Technology was €346 million or 75.9% of revenues in 2011 (compared with €327 million or 72.7% of revenues Connected Home reported a loss due to lower volumes, an overall in 2010). less favorable product and geographic mix and a continued slowdown in customer demand in Europe, due to a still difficult economic Adjusted EBITDA margin for the Technology segment improved environment; by 3.2 points year-over-year, notwithstanding the Group’s decision to continue some licensing contracts negotiations into 2012. This Digital Content Delivery Services Adjusted EBITDA was stable performance was achieved despite a high comparison basis and despite compared with 2010. some softness in the Consumer Electronic market. It reflected a solid performance of the Licensing business, continuing optimization in Other patent prosecution, filing and annuities costs and a slight decline in Research & Innovation expenses. Adjusted EBITDA for “Other” was a charge of €81 million, compared with a charge of €94 million in 2010. This improvement was largely due to cost-saving actions and a reduction in headcount.
28 I TECHNICOLOR I ANNUAL REPORT 2011 OPERATING AND FINANCIAL REVIEW AND PROSPECTS - 2 Results of operations for 2011 and 2010
2.9.3 PROFIT (L OSS) FROM Restructuring Costs CONTINUING OPERATIONS Restructuring costs for continuing operations totaled €83 million BEFORE TAX AND NET in 2011 or 2.4% of revenues (compared with €41 million in 2010 or 1.1% of revenues). This increase in restructuring charges was largely FINANCE COSTS related to the cost reduction actions announced in December 2011, for Profit (loss) from continuing operations before tax and net finance costs a total amount of €53 million, concerning mainly the Connected Home was a loss of €33 million in 2011, compared with a profit of €38 million business, European Photochemical Film activities as well as the Group’s in 2010. transversal functions.
Cost of Sales Impairment Losses on Non-Current Operating Cost of sales amounted to €2,714 million in 2011, compared with Assets €2,795 million in 2010. The decrease in cost of sales in 2011 was In 2011, Technicolor recorded impairment charges for an amount of mainly attributable to the Digital Delivery segment due to lower sales, €188 million (compared with €183 million in 2010). improvement of production costs and better supply chain management. Goodwill impairment charges were booked for a total of €147 million in Gross margin from continuing operations reached €736 million, or 21.3% 2011 (compared with €161 million in 2010) in Digital Delivery, reflecting of consolidated revenues in 2011 (compared with €779 million in 2010 a worsening European economic environment, the late rollout of certain or 21.8% of revenues). This slight decline in gross margin reflected a new contracts and an increase in development costs. material degradation of the gross margin of the Digital Delivery segment due to volumes decrease and continuous price erosion in the Connected Net asset write-offs (excluding goodwill) amounted to €41 million Home division. This decrease was partly offset by improvements in the in 2011 (compared with €22 million in 2010). Main assets impacted were gross margin of Entertainment Services due to a higher level of sales and capitalized R&D (€19 million) and Mirabel (Canada) Photochemical an improvement in production costs related to the end of non-recurrent Film fixed assets (€5 million). For more information, please refer to costs related to the Warner Bros. contract on DVD activity. notes 8, 12 and 13 of the Group’s consolidated financial statements.
Selling and Administrative Expenses Other Income (Expense) Sales and marketing expenses amounted to €127 million in 2011, or 3.7% Other income (expense) amounted to €6 million in 2011, compared of revenues (compared with €118 million in 2010, or 3.3% of revenues), with €28 million in 2010. For further information, please refer to note 6 a 7.3% increase compared with 2010 attributable to a higher level of to the Group’s consolidated financial statements. expenses in Entertainment Services segment related to an increase in activity.
General and administrative expenses amounted to €249 million in 2011, Profit (loss) from continuing operations before tax and net finance costs or 7.2% of revenues (compared with €279 million in 2010, or 7.8% of was a gain of €342 million for Technology in 2011 (compared with a revenues), a 10.8% reduction compared with 2010 due to lower IT and gain of €315 million in 2010). For Entertainment Services, profit (loss) Finance expenses as well as cost reduction of other support functions. from continuing operations before tax and net finance costs was a gain of €2 million in 2011 (compared with a loss of €62 million in 2010). For Digital Delivery, profit (loss) from continuing operations before tax and Research and Development Expenses net finance costs was a loss of €282 million in 2011 (compared with a Research and Development (R&D) expenses for continuing operations loss of €118 million in 2010). For “Other”, profit (loss) from continuing amounted to €128 million in 2011, or 3.7% of revenues (compared operations before tax and net finance costs was a charge of €95 million with €148 million in 2010, or 4.2% of revenues). This decrease was in 2011 (compared with a charge of €97 million in 2010). attributable mainly to Digital Delivery as increased capitalization and lower amortization of R&D offset higher gross R&D expenses. Of the total spending on research and development in 2011, 34% was spent in Technology, which includes the Research & Innovation business.
TECHNICOLOR I ANNUAL REPORT 2011 I 29 2 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS Results of operations for 2011 and 2010
2.9.4 NET F INANCE C OSTS The current tax charge in 2011 was notably the result of current taxes due in France, Thailand, Australia, Mexico and Italy, as well as The net financial result was an expense of €187 million in 2011 (compared withholding taxes on income earned by our licensing activities, which with an income of €116 million in 2010), and breaks down as follows: were only partially credited against taxes payable in France and in the United States, and were booked as an income tax charge. The current Net interest expense income tax charge amounted to €12 million in France (reflecting mainly withholding taxes and “CVAE”) and €14 million outside France. The net interest expense for continuing operations totaled €149 million in 2011 compared with €139 million in 2010. For further information, In 2011, French tax rules were amended whereby the use of tax loss please refer to notes 9 and 25 of the Group’s consolidated financial carry-forward is now limited to only 60% of yearly taxable profit instead statements. Interest expense has been computed at the effective interest of 100% previously. rate on the new Reinstated Debt from May 26, 2010. As a consequence of this new rule and updated forecasts within the 2010 gain on T echnicolor’s debt French tax group, French deferred tax assets have been partially impaired. The French deferred tax decreased by €63 million compared restructuring to the deferred tax assets recognized as at December 31, 2010 (of which Technicolor’s debt restructuring on May 26, 2010 led to a non-cash €55 million in the consolidated statement of operations and €8 million gain of €381 million in 2010. This gain consisted primarily of a gain of in Equity). The remaining deferred tax assets correspond to a usage by €150 million representing the difference between the carrying value of 2025, which represents the estimated Licensing activity’s predictable the debt extinguished and the fair value of the equity instruments issued taxable income period based on existing licensing programs. For further and €231 million representing the difference between the nominal value information, please refer to note 10 of the Group’s consolidated financial and the fair value of the new debt. statements.
For more information, please refer to notes 3.9, 22 and 25 of the Group’s consolidated financial statements of this Annual Report. 2.9.6 PROFIT (L OSS) FROM CONTINUING OPERATIONS Other financial income (expense) Loss from continuing operations was €303 million in 2011, compared Other financial expense for continuing operations totaled €38 million with a profit of €156 million in 2010. in 2011, compared with €126 million in 2010. Other financial expenses mainly include in 2011 the financial component of pension plan for €15 million and a depreciation of a financial asset. In 2010, other financial 2.9.7 PROFIT (L OSS) FROM expenses included €55 million of exchange loss, €32 million of fees linked to the debt restructuring not recognized in equity (refer to details DISCONTINUED in the consolidated statements of changes in equity and note 23 to the OPERATIONS Group’s consolidated financial statements) and to the 2% late payment In 2011, the total loss from discontinued operations was €21 million interest payable pursuant to the Sauvegarde Plan. For more information, (compared with a loss of €225 million in 2010). The loss from please refer to note 9 of the Group’s consolidated financial statements. discontinued operations before impairment losses on assets was €16 million in 2011 (compared with a loss of €208 million in 2010), including a loss of €14 million (compared with loss of €182 million 2.9.5 INCOME TAX in 2010) relating to the Grass Valley businesses. In 2011, the Group In 2011, the Group total income tax expense on continuing operations, recorded an impairment loss of €5 million on discontinued operations including both current and deferred taxes, amounted to €83 million to adjust the held for sale businesses at their fair value less costs to sell compared to a gain of €2 million in 2010. (compared with an impairment loss of €17 million in 2010). For more information, please refer to note 11 to the Group’s consolidated financial statements.
30 I TECHNICOLOR I ANNUAL REPORT 2011 OPERATING AND FINANCIAL REVIEW AND PROSPECTS - 2 Results of operations for 2011 and 2010
2.9.8 NET INCOME (L OSS) These adjustments for 2011 and 2010 are directly identifiable in the Group’s consolidated financial statements, with the exception of the OF THE GROUP heading “Depreciation and Amortization” (D&A). The Group’s consolidated net loss was €324 million in 2011 (compared with a loss of €69 million in 2010). The net loss attributable to non The additional indicators have inherent limitations as performance controlling interests in 2011 is €1 million in 2011 (compared to nil in 2010). indicators. Adjusted profit from continuing operations before tax, Accordingly, the net loss attributable to shareholders of Technicolor SA finance costs, plus depreciation and amortization (Adjusted EBITDA) totaled €323 million (compared with a loss of €69 million in 2010). Net and adjusted profit from continuing operations before tax and net loss per non-diluted share was €1.6 in 2011, compared with a net loss finance costs (Adjusted EBIT) are not indicators recognized by IFRS per non-diluted share of €0.8 in 2010. and are not representative of cash generated by these activities for the periods indicated. In particular, Adjusted EBITDA does not reflect the Group’s working capital needs for its operations, interest charges 2.9.9 ADJUSTED INDICATORS incurred, payment of taxes, or capital expenditures necessary to replace depreciated assets. Adjusted EBITDA and Adjusted EBIT indicators do In addition to its published results presented in accordance with IFRS and not have standard definitions and, as a result, Technicolor’s definition with the aim of providing a more comparable view of the changes in its of Adjusted EBITDA and Adjusted EBIT may not correspond to the operating performance, the Group presents a set of adjusted indicators, definitions given to these terms by other companies. In evaluating these which exclude impairment charges, restructuring charges and other indicators, please note that Technicolor may incur similar charges in income and expenses with respect to Adjusted EBIT, and amortization future periods. The presentation of these indicators does not mean that charges as well as the impact of provisions for risks, warranties and Technicolor considers its future results will not be affected by exceptional litigation with respect to Adjusted EBITDA (in addition to adjustments or non-recurring events. Due to these limitations, these indicators should included in Adjusted EBIT). Technicolor considers that this information not be used exclusively or as a substitute for IFRS measures. may help investors in their analysis of the Group’s performance by excluding factors it considers to be non-representative of Technicolor’s These adjustments amount to an impact on the Group EBIT from normal operating performance. Technicolor uses Adjusted EBIT and continuing operations of €265 million for the year 2011, compared to Adjusted EBITDA to evaluate the results of its strategic efforts. This an impact of €196 million for the year 2010. definition of Adjusted EBITDA compares to the definition as per Technicolor’s credit agreements and is used in calculating applicable financial covenants.
Reconciliation of adjusted indicators
(in € millions unless otherwise stated) 2011 2010 Change Profit (Loss) from continuing operations before tax and net finance costs (33) 38 (71) Restructuring costs, net (83) (41) (42) Net impairment losses on non-current operating assets (188) (183) (5) Other income/(expense) 6 28 (22) Adjusted EBIT from continuing operations 232 234 (2) As a % of revenues 6.7% 6.5% +0.2 pt Depreciation and amortization (D&A) (1) 243 271 (28) Adjusted EBITDA from continuing operations 475 505 (30) As a % of revenues 13.8% 14.1% (0.3) pt Adjusted EBITDA of non-strategic activities (2) na (27) na Adjusted EBITDA of discontinued activities (2) (11) na na Adjusted EBITDA used for covenants (2) 464 478 (14)
(1) Including impact of provisions for risks, litigation and warranties. (2) The EBITDA used for the covenants in 2010 was the Adjusted EBITDA from continuing operations excluding non-strategic activities (mainly PRN). From 2011 the total Adjusted EBITDA of the Group is retained.
TECHNICOLOR I ANNUAL REPORT 2011 I 31 2 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS Results of operations for 2011 and 2010
The adjusted profit from continuing operations before tax and net The adjusted profit from continuing operations before tax and net finance costs plus depreciation and amortization (Adjusted EBITDA) finance costs (Adjusted EBIT) totaled €232 million in 2011, or 6.7% of totaled €475 million in 2011, or 13.8% of revenues, a decrease of 0.3 point revenues, an increase of 0.2 point compared with 2010. compared with 2010.
Profit from continuing operations before tax and net finance costs and adjusted indicators by segment
(in € millions unless otherwise indicated) 2011 2010 Change Profit (Loss) from continuing operations before tax and net finance costs (33) 38 (71) As a % of revenues (0.9)% 1.1% (2.0) pts of which: Technology 342 315 +28 As a % of revenues 75.2% 70.1% +5.1 pts Entertainment Services 2 (62) 64 As a % of revenues 0.1% (3.7)% +3.8 pts Digital Delivery (282) (118) (164) As a % of revenues (23.3)% (8.3)% (15.0) pts Adjusted EBIT from continuing operations 232 234 (2) As a % of revenues 6.7% 6.5% +0.2 pt of which: Technology 337 315 +22 As a % of revenues 73.9% 70.0% +3.9 pts Entertainment Services 64 35 +29 As a % of revenues 3.6% 2.1% +1.5 pts Digital Delivery (84) (20) (64) As a % of revenues (7.0)% (1.4)% (5.6) pts Adjusted EBITDA from continuing operations 475 505 (30) As a % of revenues 13.8% 14.1% (0.3) pt of which: Technology 346 327 +19 As a % of revenues 75.9% 72.7% +3.2 pts Entertainment Services 239 217 +22 As a % of revenues 13.4% 12.8% +0.6 pt Digital Delivery (29) 55 (84) As a % of revenues (2.4)% 3.9% (6.3) pts
32 I TECHNICOLOR I ANNUAL REPORT 2011 OPERATING AND FINANCIAL REVIEW AND PROSPECTS - 2 Liquidity and capital resources
2.10 LIQUIDITY AND CAPITAL RESOURCES
This section should be read in conjunction with Chapter 3: “Risk Factors”, n dividends. No dividends were paid in 2011 for 2010 and no dividend is section 3.2 : “Market Risk” of this Annual Report and notes 23, 25 and planned for 2012.The financing documentation implemented as part 26 to the consolidated financial statements. of the restructuring of the Group’s debt imposes restrictions on the Group’s ability to pay dividends. For more information, please refer to section 2.10.3: “Financial Resources”. 2.10.1 OVERVIEW 2.10.1.2 Key liquidity resources 2.10.1.1 Principal cash requirements To meet its cash requirements, the Group’s main sources of liquidity The principal cash requirements of the Group arise from the following: consist of: n working capital requirements from continuing operations. The working n cash and cash equivalents. The amount of Cash and cash equivalents capital requirements of the Group are based in particular on the level was €370 million at December 31, 2011. Of this amount, €45 million of inventories, receivables and payables; held by TCE Taiwan Television can be used only for the payment of local expenses. In addition to the €370 million in cash and cash n losses relating to discontinued operations. The Group must also fund equivalents, €49 million in cash collateral and security deposits was the losses and cash requirements of its discontinued operations. outstanding at December 31, 2011 to secure credit facilities and other For more information on the risks associated with the sale of these Group obligations; activities please refer to: Chapter 3 “Risk Factors” section 3.4: “Other Risks” of this Annual Report; n cash generated from operating activities. As part of the restructuring under the Sauvegarde Plan, the Group is required to dedicate 80% of n capital expenditures. The new financing contracts in place as part of its excess cash to repaying debt. For more information, please refer restructuring under the Sauvegarde Plan impose limitations on the to section 2.10.3: “Financial Resources”; amount of capital expenditures by the Group; n proceeds from sales of assets. As part of the restructuring under the n repayment or refinancing of debt. At each debt maturity date, the Sauvegarde Plan, the cash flow generated from the sale of certain Group must either repay or refinance the maturing amounts. discontinued activities in periods beyond 2010 must be used to repay Upon taking office in the fall of 2008, the new management team, in debt; close consultation with the Board of Directors, conducted a review n committed credit lines. Under the debt restructuring, the Group of the Group’s operations, strategy, operational performance and negotiated two lines of credit secured by receivables, for an amount up financial situation. One of the main findings of this review was that to €197 million. The availability of these credit lines varies depending the Group was confronted with a very significant amount of financial on the amount of receivables. debt for which it would not have the capacity to meet the scheduled repayments in 2011 and 2012. The Board of Directors considered the Group’s cash flow projections which support the operating performance, with the sensitivities Within the framework of the Group’s debt restructuring under highlighted in note 13 of the consolidated financial statements and the Sauvegarde Plan, the Group’s gross debt was reduced by believes that the Group can meet its expected cash requirements, approximately 45% (by means of capitalization) and the maturities address potential financial consequences of ongoing litigation until at of the Group’s senior debt were restructured pushing the key least December 31, 2012. maturities out to 2016 and 2017. For more information please refer to section 2.10.3: “Financial Resources”;
TECHNICOLOR I ANNUAL REPORT 2011 I 33 2 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS Liquidity and capital resources
2.10.2 CASH F LOWS
(in € millions) 2011 2010 Net operating cash generated from continuing activities 265 120 Net operating cash used in discontinued operations (19) (55) Net cash from operating activities 246 65 Net investing cash used in continuing activities (138) (99) Net investing cash used in discontinued operations (20) (5) Net cash used in investing activities (158) (104) Net financing cash used in continuing activities (57) (207) Net financing cash used in discontinued operations - (2) Net cash used in financing activities (57) (209) Net (decrease)/increase in cash and cash equivalents 31 (248) Exchange gains on cash and cash equivalents 711
CASH AND CASH EQUIVALENTS AT DECEMBER 31 370 332
Net cash generated from operating n cash used in the restructuring of continuing operations, which activities amounted to €48 million in 2011 (compared with €36 million in 2010); Net cash generated from operating activities was €246 million in 2011, n net change in provisions of €1 million in 2011 (net balance of the compared with €65 million generated from operating activities in 2010. new provisions for the year and the outflows linked to utilizations), This significant increase compared to 2010 was principally attributable to compared with a net change in provisions of €(22) million in 2010; a reduction of the working capital requirements of continuing operations. n net interest paid (corresponding to interest paid net of interest received) of €119 million in 2011 (compared with €134 million in 2010);
Continuing operations n taxes paid of €7 million in 2011 (compared with €21 million in 2010). Net operating cash generated from continuing operations was Loss from continuing operations in 2011 was €303 million, compared €265 million in 2011 (compared with €120 million generated in with a gain of €156 million in 2010. In 2011, non-cash elements included continuing operations in 2010). This variation reflects: mainly:
n the decrease in the net income from continuing operations, with n impairment of assets amounting to €191 million (compared with a net loss of €303 million in 2011 (compared with a net profit of €184 million in 2010); €156 million in 2010); however a large portion of this net profit in 2010 consisted of non-cash elements such as the gain on debt restructuring n depreciation and amortization of €261 million (compared with of €381 million; €284 million in 2010);
n the change in working capital requirements and other assets and n net change in provisions. liabilities (including contract advances) which had a positive impact of €20 million in 2011 (compared with a negative impact of €93 million Discontinued operations in 2010). This significant positive change is mainly linked to a positive Net operating cash used in discontinued operations was €19 million impact on inventories and receivables, explained by the decreasing in 2011 (compared with €55 million in 2010). volumes of Connected Home products, better cash collection and inventory management across the Group;
34 I TECHNICOLOR I ANNUAL REPORT 2011 OPERATING AND FINANCIAL REVIEW AND PROSPECTS - 2 Liquidity and capital resources
Net cash used in investing activities Continuing operations Net cash used in investing activities was €158 million in 2011 (compared Continuing operations used €57 million in 2011 (compared with with €104 million in 2010). €207 million used in 2010). The net cash used in 2011 was primarily to repay borrowings for €55 million.
Continuing operations The net cash used in 2010 was primarily to repay borrowings for Net investing cash used in continuing activities was €138 million in 2011 €338 million, to pay TSS holders €25 million in accordance with the (compared with €99 million in 2010), and included: Sauvegarde Plan and for the payment of fees relating to the debt restructuring of €51 million. The payments were offset in part by the n net capital expenditures amounted to €165 million in 2011 (compared €203 million of proceeds from the Group’s capital increase. with €165 million in 2010) due to cash expended relating to tangible and intangible capital expenditures of €170 million in 2011 (compared with €176 million in 2010), net of cash received from tangible and Discontinued operations intangible asset disposals of €5 million in 2011 (compared with No cash was used by discontinued operations in 2011, compared to €11 million in 2010); €2 million used in 2010. n cash outflow for the acquisition of equity holdings in subsidiaries (net of cash acquired), amounting to €12 million in 2011 (compared with 2.10.3 FINANCIAL RESOURCES €4 million in 2010); Gross financial debt totaled €1,327 million (IFRS value) at the end of 2011 n proceeds received from sales of equity holdings, amounting to (compared with €1,325 million at the end of 2010). At December 31, €14 million in 2011 (compared with €37 million in 2010), net of cash 2011, financial debt consisted primarily of €520 million of notes and of companies disposed of; €776 million of term loans. At December 31, 2010, financial debt n net variation of cash collateral and security deposits (to secure the consisted primarily of €519 million of notes and €777 million of term Group’s obligations) generated a net cash inflow of €24 million in 2011 loans, both issued in May 2010 as part of the Group’s debt restructuring. (compared with a net cash inflow of €34 million in 2010). Financial debt due within one year amounted to €85 million at the end of 2011 (compared with €47 million at the end of 2010). Discontinued Operations Net investing cash used in discontinued operations was €20 million The private placements and the borrowings drawn under the Group’s in 2011 (compared with €5 million of cash used in 2010). credit lines were restructured in 2010 in accordance with the Sauvegarde Plan, with the impact of reducing the amount of debt and extending its maturity. Net cash used in financing activities Net cash used in financing activities amounted to €57 million in 2011 At December 31, 2011 the Group had €370 million of cash and (compared with €209 million used in 2010). deposits of which €45 million was restricted for an available amount of €325 million (compared to €332 million at December 31, 2010 of which €45 million was restricted for an available amount of €287 million).
For more detailed information on the restructuring and the Group’s debt, please refer to note 25 to the Group’s consolidated financial statements.
TECHNICOLOR I ANNUAL REPORT 2011 I 35 2 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS Liquidity and capital resources
The table below summarizes Technicolor’s net financial debt at December 31, 2011.
Amount at Type of December 31, 2011 Existence interest rate (in € millions) First maturity (1) of hedges Term Loans (Non-amortizing tranche) Floating 536 2017 Yes Term Loans (Amortizing tranche) Floating 240 2012 Yes Notes (Non-amortizing tranche) Fixed 360 2017 No Notes (Amortizing tranche) Fixed 160 2012 No Other non-current debt Various 10 2013 No Other current debt Floating 21 2012 No
TOTAL DEBT 1,327 Available cash and deposits (2) Floating 325 0 to 1 month No Committed credit facilities (3) Floating 197
TOTAL LIQUIDITY 522
(1) Please refer to note 25.3 for a maturity schedule of the Group’s debt. (2) Cash and deposits net of restricted cash. (3) Availability varies depending on the amount of receivables (refer to note 25.3 (f))
Sauvegarde Plan purchase NRS (subject to rules relating to public offerings that restrict participation by investors in certain countries including the On January 28 and March 9, 2009, the Company announced that when United States), the 2008 audited consolidated financial statements would become available, it would be in breach of certain covenants contained in financial – the issuance of notes redeemable in cash or shares of the Company agreements under which the Company had borrowed substantially all (Disposal Proceeds Notes, or the DPN), linked to the disposal of its outstanding senior debt, i.e. approximately €2.8 billion (the senior proceeds of certain non-core assets of the Company, reserved debt). to the senior creditors up to an aggregate principal amount of €300 million which was reduced by €48 million of disposal The Group then entered into discussions to restructure its senior debt. proceeds received before the closing of the restructuring; On November 30, 2009, the Company requested that the Commercial n the execution of a new term loan facility and the issuance of new Court of Nanterre open a Sauvegarde proceeding. On February 17, 2010, notes which would allow the repayment of up to an aggregate the Commercial Court of Nanterre approved the Sauvegarde Plan. The principal amount of €1,550 million of senior debt (on the basis of the principal characteristics of the debt restructuring as contemplated by the exchange rate set out in the Sauvegarde Plan, i.e. U.S. $1.30/€1.00 Sauvegarde Plan were as follows: and €1.1/£1.00).
n a conversion of up to an aggregate principal amount of €1,289 million The principal characteristics of the new shares, the NRS, the DPN and (on the basis of the exchange rate set out in the Sauvegarde Plan, i.e. the Reinstated Debt (as defined below) implemented in accordance U.S. $1.30/€1.00 and €1.1/£1.00) of the senior debt into securities with the Sauvegarde Plan are described below under “Description of by way of: indebtedness” and “New Shares, NRS and DPN”, as well as in notes 22.2 and 25.3 to the Group’s consolidated financial statements. – a share capital increase in cash through the issuance of new shares, while maintaining the preferential subscription rights (droits préférentiels de souscription) of shareholders (subject Description of indebtedness to rules relating to public offerings that restrict participation by The following contains an overview of the terms of the Group’s investors in certain countries including the United States) in up to Reinstated Debt which was put in place in connection with the closing a maximum amount of approximately €348 million (including share of the capital markets transactions pursuant to the Sauvegarde Plan on premium). The capital increase was fully backstopped pursuant to May 26, 2010. a subscription commitment by the senior creditors, – the issuance of Notes Redeemable in Shares of the Company (the Overview NRS, reserved for the senior creditors, for an aggregate principal amount of up to €641 million), with the Company’s existing Pursuant to the Sauvegarde Plan described above, the Company shareholders having the opportunity to purchase such NRS up to prepared documentation relating to its reinstated senior debt, comprising an amount of approximately €75 million pursuant to warrants to a Credit Agreement, a Note Purchase Agreement and an Intercreditor Agreement as defined below (collectively, the Reinstated Debt) prior
36 I TECHNICOLOR I ANNUAL REPORT 2011 OPERATING AND FINANCIAL REVIEW AND PROSPECTS - 2 Liquidity and capital resources
to the launch of the capital markets transaction described below. The due and payable existing debt claims against the Company. This amount Reinstated Debt was advanced by way of set-off against the amounts of €965 million was divided into two tranches: due under existing debt claims on the settlement date of the capital markets transactions on May 26, 2010. n one amortizing tranche for an amount of €311 million with a six-year maturity (2016), carrying interest payable each quarter at the rate of In particular, the Company entered into the following contractual EURIBOR/LIBOR (subject to a floor of 2%) plus an initial margin of documentation related to the Reinstated Debt: 500 basis points which reduces as the Company’s leverage decreases; one tranche, payable at maturity, for an amount of €654 million with (i) a loan agreement between the Company as borrower, certain n a seven-year maturity (2017), carrying interest payable each quarter subsidiaries as guarantors, a facility agent and the lenders at the rate of EURIBOR/LIBOR (subject to a floor of 2%) plus an thereunder (the Credit Agreement); initial margin of 600 basis points which reduces as the Company’s (ii) a note purchase agreement between the Company as issuer, leverage decreases. certain subsidiaries as guarantors and the noteholders thereunder (the Note Purchase Agreement); New Notes Pursuant to the Note Purchase Agreement, and on the settlement date (iii) an Intercreditor Agreement (as defined below). of the capital markets transactions, the Company issued new notes in a A security package consisting of share pledges, pledges of certain principal amount of €628 million (1) (the New Notes), which was placed receivables under material customer contracts, pledges of material intra- in private transactions with the Company’s existing noteholders and was group loans and pledges of material cash-pooling accounts secures the subscribed by way of set-off against a portion of the due and payable borrower’s and each guarantor’s obligations under the Credit Agreement debt claims against the Company held by the noteholders. and Note Purchase Agreement. The New Notes were substituted for the relevant existing notes in their In October 2011, the Credit Agreement, the Note Purchase Agreement corresponding currencies, i.e. in euros, U.S. dollars or pounds sterling. and the Intercreditor Agreement were modified following agreement The issue of the New Notes was divided into two tranches: from the required majorities of noteholders and lenders. The modifications relate principally to the restrictions concerning disposals, n one amortizing tranche for an amount of €203 million with a 6-year joint ventures and acquisitions. maturity (2016), carrying an annual interest payment of 9% for the notes in euros, 9.35% for the notes in U.S. dollars and 9.55% for the The Company also entered into two committed receivables facilities (the notes in pounds sterling; Committed Receivables Facilities) in 2010, as contemplated under the one tranche, payable at maturity, for an amount of €425 million with Reinstated Debt documents. The Sauvegarde Plan provides, and the n a 7-year maturity (2017), carrying an annual interest rate of 9% for the Reinstated Debt permits, that the Group may borrow up to €200 million notes in euros, 9.35% for the notes in U.S. dollars and 9.55% for the under the Committed Receivables Facilities. notes in pounds sterling. Reinstated Debt Mandatory prepayments The nominal value of the Reinstated Debt at the exchange rates The Company is required to prepay the outstanding Reinstated Debt prevailing on the settlement date of the capital markets transactions of in certain circumstances, including the following: May 26, 2010 amounted to €1,593 billion. n asset disposals: the net proceeds in respect of any disposal of any of its assets to an unaffiliated third party will be applied to repay the New Term Loan Facilities outstanding Reinstated Debt, subject to a minimum threshold, on Pursuant to the Credit Agreement, and on the settlement date, the the understanding that this undertaking will not apply to the disposal Company put in place term loans for €965 million (1) (the New Term of certain assets, the proceeds of which will be used during the year Loan Facilities), that were used to pay by way of set-off a portion of the to finance capital expenditures;
n equity issuances: at least 80% of the net proceeds received in respect of any new equity issuances (other than any share issuances permitted under the share capital increase that maintains the preferential subscription rights (droits préférentiels de souscription)
(1) Nominal amounts issued and converted at the exchange rates as of May 26, 2010.
TECHNICOLOR I ANNUAL REPORT 2011 I 37 2 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS Liquidity and capital resources
of shareholders under the terms of the Sauvegarde Plan, shares issued In 2011, the only disposal that triggered a mandatory prepayment was in redemption of the DPN and the NRS) will be applied to repay the the sale of the Group’s stake in ContentGuard for $25 million which outstanding Reinstated Debt. In addition, the Company may opt to resulted in a mandatory pre-payment in the amount of €19 million of use the proceeds received in respect of any new equity issuances to which €17 million was recorded as a reduction of balance sheet debt and prepay a portion of the NRS IIC; €2 million, corresponding to the partial reversal of the gain recorded when the Reinstated Debt was initially recognized at fair value, was n excess cashflow: in respect of 2011 and subsequent financial years, 80% recorded as a financial loss. of the excess cashflow (defined as the aggregate of net cash from operating and investing activities, subject to certain adjustments) will In 2011, the Group generated excess cashflow as defined above in the be applied to prepay the Reinstated Debt; amount of €25 million which will be used to prepay Reinstated Debt n change of control: upon the occurrence of a change of control in in 2012. the Company, all advances under the Credit Agreement and the outstanding principal amount of the New Notes, together with any Voluntary prepayments other outstanding amounts under the Reinstated Debt, will become Under the terms of the Credit Agreement, Note Purchase Agreement immediately due and payable. In addition, the NRS will become and Intercreditor Agreement, the Company may, at its election, prepay immediately redeemable in the form of shares at the option of the all or part of its advances under the Credit Agreement and any principal holders thereof; amount of the New Notes, including any make whole payment, under n other: net proceeds in respect of any payment or claim under any the Note Purchase Agreement. insurance policy or issuance of subordinated debt in connection with any refinancing, shall in each case be applied to the repayment of the Reinstated Debt (in the latter case a customary “make whole” amount must be paid to noteholders).
Summary of repayments The table below summarizes the payments as described above on the Reinstated Debt by type of payment:
(in € millions) 2011 2010 Start of period (cumulative) 30 - Normal scheduled principal repayments 32 10 Mandatory prepayments from disposals 19 20 End of period (cumulative) 81 30
Covenants of the Company and certain of its subsidiaries, subject in each case to The Credit Agreement and the Note Purchase Agreement contain certain exceptions and limitations, to (among other things): certain customary representations and warranties. They also contain certain affirmative and financial covenants including covenants that in n create or grant security interests that secure financial indebtedness particular require that (i) EBITDA be not less than a certain multiple on any of its present or future assets; of net total interest on a trailing twelve month basis (“interest cover n incur additional financial indebtedness in excess of €40 million covenant”) on June 30 and December 31 of each financial year, (ii) total excluding certain permitted financial indebtedness including, among net debt be not more than a certain multiple of EBITDA on a trailing others, the refinancing of the Reinstated Debt and Committed twelve month basis (“leverage covenant”) on June 30 and December 31 Receivables Facilities; of each financial year, and (iii) capital expenditure be not more than grant guarantees; a certain amount for each financial year. Each of the interest cover n covenant and leverage covenant will become stricter over time. The n grant loans for an aggregate amount greater than €20 million except exact levels of these covenants are given in note 25.3 (g) to the Group’s in certain cases related to deferred compensation related to disposals; consolidated financial statements. n enter into derivatives contracts, interest rate or currency hedging or treasury transactions other than as required by the Credit Agreement In addition to certain information provision covenants, the Credit and Note Purchase Agreement and other than for hedging Agreement and Note Purchase Agreement, both as amended in transactions arising in the ordinary course of business; October 2011, include certain negative covenants that restrict the ability n amalgamate, merge or consolidate with or into any other person;
n substantially change the general scope of its business;
38 I TECHNICOLOR I ANNUAL REPORT 2011 OPERATING AND FINANCIAL REVIEW AND PROSPECTS - 2 Liquidity and capital resources
n enter into material transactions or arrangements with affiliates unless n creditors’ proceedings for any assets in excess of €25 million that are in the ordinary course of business and on an arm’s length basis; not discharged within 60 days; n invest in joint ventures or partnerships where the total cash investment n any security enforcement in excess of €25 million that is not set aside is in excess of €25 million in cash per year; within 30 days; n acquire any companies, businesses, shares or securities in excess of n any event which has a material adverse effect on the ability of the €50 million in cash or €200 million in shares per year; Company or its guarantors, taken as a whole, to perform their material obligations under the Reinstated Debt. n issue, attribute or allot any shares or redeem or repurchase any shares previously issued (other than resulting from the capital increase provided for by the Sauvegarde Plan and the redemption in shares Committed Receivables Facilities of the NRS and DPN and certain other contractual arrangements); Pursuant to the Sauvegarde Plan, and as permitted under the Reinstated Debt, the Company entered into two committed receivables facilities for Group Members other than the Company, declare or pay any n pursuant to which it can borrow up to €197 million. For more information dividends or make any other distribution in respect of any class of its about these credit facilities, please refer to note 25.3 (f) to the share capital or apply any sum for any such purpose. consolidated financial statements. Events of Default The Credit Agreement and the Note Purchase Agreement also contain Intercreditor Agreement certain events of default, the occurrence of which provide creditors with To establish the relative rights of certain of their creditors under the the ability to immediately demand payment of all or a portion of the Reinstated Debt, the Company and the guarantors entered into an outstanding amounts under the Reinstated Debt. If the creditors exercise intercreditor agreement with the lenders under the Credit Agreement, their enforcement rights pursuant to the Reinstated Debt, the NRS will the holders of the New Notes, each holder of the DPN, certain intra- be prepaid, in shares. group lenders, certain intra-group debtors and a security trustee (the Intercreditor Agreement). The events of default pursuant to the Reinstated Debt include, among other things, and subject to certain exceptions and grace periods: New shares, NRS, DPN n non-payment of any amount due under the Reinstated Debt or any permitted hedging agreements; New shares n failure by the Company or any of the guarantors to comply with its On May 26, 2010, the Company proceeded with a capital increase with material obligations and undertakings under the Reinstated Debt; shareholders’ preferential subscription rights, in an amount (including the share premium) of €348 million through the issuance of 526,608,781 n certain events of insolvency; new shares at a subscription price of €0.66 per share, corresponding to n any auditor’s report qualification made to either the Company’s ability an issue premium of €0.56 per share. On July 15, 2010 the Company to continue as a going concern or the accuracy of the information effected a 10 for 1 reverse share split and thus the number of these new given; shares was reduced by a factor of 10 to 52,660,878. n failure by the Company or any guarantor to comply with the material The subscription for the new shares was reserved in priority to the obligations under the Intercreditor Agreement; Company’s existing shareholders and to third parties having purchased n non-payment of any financial indebtedness of any Group Member preferential subscription rights in the market from the Company’s in excess of €25 million; existing shareholders. The new shares could be subscribed on a pro-rata and over-subscription basis (à titre irréductible et à titre réductible) on n acceleration of any financial indebtedness of any Group Member in the basis of two new shares for one existing share held in the Company. excess of €25 million under the committed receivables facilities or €203 million of the €348 million capital increase was subscribed by default under any other financial indebtedness of any Group Member shareholders on exercise of their preferential subscription rights. in excess of €25 million that gives the relevant creditor or creditors the right to accelerate the date for payment of such indebtedness;
TECHNICOLOR I ANNUAL REPORT 2011 I 39 2 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS Liquidity and capital resources
All of the new shares which were not subscribed by the Company’s In addition, the Company had the option to redeem all or, subject to existing shareholders or third parties having purchased preferential certain conditions, part of the NRS IIC in cash at a premium however subscription rights on the market were subscribed by the Senior the Company did not exercise this option. Creditors in accordance with a subscription agreement as stipulated in the Sauvegarde Plan, pro-rata to the amount of their debt claims against The NRS are redeemable in whole in cash in the event of a liquidation the Company. of the Company. The NRS are subordinated to the New Term Loan Facilities, the New Notes and the DPN. The subscription price of the New Shares was paid by the senior creditors by way of set-off against their due and payable debt claims against the The NRS were subscribed for exclusively by the Senior Creditors, and Company. the Company’s existing shareholders were entitled to purchase NRS from the Senior Creditors for an aggregate maximum nominal amount of €75,346,557 of NRS upon exercise of the NRS Warrants. NRS On May 26, 2010, the Company issued NRS for an amount of The NRS were admitted to trading on Euronext Paris. As of December 31, €638 million, entitling their holders to receive approximately 97 million 2011, the NRS II and NRS IIC, in respect of which redemption was shares of the Company taking into account the 10 for 1 reverse share deferred until December 31, 2012, are no longer admitted to trading split that occurred on July 15, 2010. on Euronext Paris.
The issuance of NRS was divided into three tranches: NRS I, NRS II and NRS IIC. Each tranche was subdivided into three series: one in euro, one DPN in U.S. dollar and one in pounds sterling. On May 26, 2010, the Company issued DPN redeemable in cash or shares of the Company on December 31, 2010 for a net amount of The NRS were issued in nominal amounts of €1, U.S.$1.30 and £0.91 per €261 million (€309 million, converted at the May 26, 2010 exchange NRS. Each subscriber received 50% of NRS I and 50% of NRS II and IIC. rate, net of the €48 million of existing disposal proceeds).
The NRS were redeemable in ordinary shares of the Company on On December 31, 2010, the DPN (including interest) were fully December 31, 2010 (NRS I) or December 31, 2011 (NRS II and NRS IIC) redeemed through a cash payment of €52 million (including the and bear bore interest at a rate of 10%, payable at one time in ordinary proceeds from the disposal of Screenvision U.S.) and through the shares of the Company at the redemption date (except for the holder’s issuance of 50 million new shares. ability to defer the redemption date, for each NRS tranche, for a period of one year). Deeply subordinated perpetual notes At December 31, 2010, 1.7% of the NRS I holders requested a one-year The Group’s financial debt of €1,327 million (IFRS value) as of deferral of the redemption date and the remainder of the NRS I were December 31, 2011, excludes the 5.75% (5.85% yield to first call date) redeemed for approximately 45 million new shares. €500 million deeply subordinated perpetual notes (“TSS”) issued in September 2005. Because of their perpetual and subordinated nature At December 31, 2011, 5.1% of the NRS II and NRS IIC holders requested and the optional nature of the coupon, these notes are recorded in a one-year deferral of the redemption date and the remainder of the shareholders’ equity under IFRS for the net value received of €492 million NRS II and IIC along with the NRS I that had been deferred from 2010 (representing the issue price minus the offering discount and fees). were redeemed for approximately 49 million new shares. The notes are perpetual and have no stated maturity date; they may, The NRS may be redeemed in ordinary shares of the Company prior however, be redeemed at the Company option under certain conditions, to their maturity at the holder’s request, specifically on the occurrence in particular (i) on or after September 25, 2015, (ii) at any time in the of (i) a change of control of the Company, (ii) the disposal of all or event of a change of control of Technicolor or (iii) as a result of certain substantially all assets of Technicolor (except for activities conducted tax reasons. These notes provide that if there is a change of control and by Grass Valley, PRN or Screenvision U.S.), (iii) decisions taken by the as a result, the rating for the Company’s senior unsecured obligations Company’s Board of Directors in breach of the internal rules of the is downgraded by one full notch by either Moody’s Investors Services Board of Directors (please refer to Chapter 4: “Corporate governance Inc. (Moody’s ), or Standard and Poor’s (S&P ) such that the reduction and internal control procedures”), section 4.2.1.2: “Structure of Boards results in a rating below Baa3 by Moody’s or BBB- by S&P, Technicolor of Directors’ work – Internal Board rules” of this Annual Report, or may redeem the notes without penalties. (iv) the incurrence of an event of default under the Reinstated Debt. The internal rules of the Board of Directors will be published on the Company’s website until redemption of the NRS.
40 I TECHNICOLOR I ANNUAL REPORT 2011 OPERATING AND FINANCIAL REVIEW AND PROSPECTS - 2 Priorities and objectives for 2012
Pursuant to the terms of the Sauvegarde Plan, Technicolor paid Ratings €25 million to the holders of the deeply subordinated perpetual notes in definitive redemption of their interest claims under the notes. On The Group uses the services of rating agencies to help investors evaluate February 17, 2010 the Nanterre Commercial Court approved the the credit quality of the Group’s debt. proposed Sauvegarde Plan after ensuring it protected the interests of Standard & Poor’s (S&P) attributes the following ratings to the Group: a all creditors and offered a “viable solution” for the continuation of the long-term issuer rating and a short-term credit rating. Until the Group’s Group. The Court judgment was appealed before the Versailles Court debt restructuring, S&P also attributed a specific rating covering the of Appeal on February, 23, 2010 by a number of the holders of the Group’s syndicated credit facility and a specific rating covering the TSS Company’s TSS. The Versailles Court of Appeal, on November 18, 2010, issued in September 2005. and the French Supreme Court (Cour de cassation), on February 21, 2012, dismissed the claims of the TSS holders and confirmed the validity Moody’s attributes a Corporate Family Rating ( corporate rating ) and of Technicolor’s Sauvegarde Plan. For more information about the TSS a rating indicating the likelihood of default. Until the restructuring a instruments, please refer to note 22.4 to the Group’s consolidated specific rating covered the TSS. financial statements. On March 29, 2011, S&P raised the Group’s long-term credit rating Provisions for pensions and assimilated to B- from CCC+ and the short-term credit rating to B from C and benefits changed the outlook on both ratings from positive to stable. On May 3, 2011 Moody’s upgraded the Group’s corporate rating and the likelihood In addition to the debt position as described above, the Group also has of default rating to B3 from Caa1 with stable outlook. On December 23, reserves for post-employment benefits that it provides to its employees, 2011, Moody’s changed the outlook of the Group’s rating from stable which amounted to €386 million at December 31, 2011 compared with to negative. €378 million at December 31, 2010. For more information on the Group’s reserves for post-employment benefits, please refer to note 27 of the Neither the Reinstated Debt, the NRS nor the Committed Receivables Group’s consolidated financial statements. Facilities have clauses referring to the Group’s credit ratings. Liquidity risk For more information about the Group’s liquidity risk, please refer to note 26.3 of the Group’s consolidated financial statements.
2.11 PRIORITIES AND OBJECTIVES FOR 2012
For 2012, the Group’s objective is to reach an Adjusted EBITDA in the The Group expects to continue to generate positive Free Cash Flow range of €475-500 million reflecting: despite higher restructuring expenses and investments in growth businesses. The Group also anticipates to operate within the financial n continued strength in Technology and Entertainment Services; covenants of its credit agreements in 2012. n return to Adjusted EBITDA breakeven in Connected Home, with positive Adjusted EBITDA in the second half; n an increase in operating expenses to support the ramp-up of growth businesses, including M-GO; n an uncertain macroeconomic environment.
TECHNICOLOR I ANNUAL REPORT 2011 I 41 42 I TECHNICOLOR I ANNUAL REPORT 2011 3 RISK FACTORS
3.1 RISK RELATED TO THE DEBT RESTRUCTURING ...... 44 3.4 OTHER RISKS ...... 53 3.1.1 Risks relating to the Sauvegarde Plan ...... 44 3.4.1 Risks related to antitrust procedures ...... 53 3.1.2 Risks related to indebtedness of the Group ...... 44 3.4.2 Risks related to business disposals ...... 53 3.4.3 Risks related to economic and social conditions ...... 53 3.2 MARKET RISK ...... 46 3.4.4 Risks related to Human Resources ...... 53 3.2.1 Risk of interest rate fluctuations ...... 46 3.4.5 Risks related to the environment ...... 54 3.2.2 Risk of exchange rate fluctuation ...... 46 3.4.6 Risks related to the impairment of certain tangible 3.2.3 Risks related to liquidity ...... 47 and intangible assets, including goodwill ...... 54 3.2.4 Fair value of financial instruments ...... 47 3.4.7 Litigation ...... 55
3.3 RISKS RELATED TO THE BUSINESS ...... 47 3.5 INSURANCE ...... 55 3.3.1 Risks related to commercial activity ...... 47 3.3.2 Risks related to the capacity to develop products and services that respond to customers’ technological choices ...... 48 3.3.3 Risks related to changes in market, technologies and consumer demand ...... 48 3.3.4 Risks related to the evolution of the Media & Entertainment (M&E) industry ...... 49 3.3.5 Competition ...... 49 3.3.6 Risks of being dependent on suppliers or partners ...... 50 3.3.7 Risk related to product defects or product or service quality defects ...... 50 3.3.8 Risks related to acquisitions and partnerships ...... 51 3.3.9 Risks related to changes in the Licensing business ...... 51 3.3.10 Risks related to the protection of Intellectual Property 52 3.3.11 Risks related to the security of assets ...... 52
TECHNICOLOR I ANNUAL REPORT 2011 I 43 3 - RISK FACTORS Risk related to the debt restructuring
This section describes the main risks identified by the Group that could This section should be read in conjunction with notes 3.1, 3.3, 12, 13, 16, affect its businesses, financial situation or sustainability. Additional risks 22, 23, 24, 25, 26 and 35 to the consolidated financial statements. which are either not identified or which are considered as not significant may also have a significant impact on the Group’s performance.
3.1 RISK RELATED TO THE DEBT RESTRUCTURING
3.1.1 RISKS RELATING TO Commercial Code would require the prior consent of the creditors’ and noteholders’ Committees, and the subsequent approval of the French THE SAUVEGARDE PLAN Commercial Court. Risk of termination of the Sauvegarde Plan and reduced flexibility throughout the 3.1.2 RISKS RELATED TO duration of the Sauvegarde Plan INDEBTEDNESS OF THE GROUP The Group is required to comply with the terms of the Sauvegarde Risks related to indebtedness principally result from: Plan until February 17, 2017, including the repayment schedules and other terms of the Group’s principal debt agreements (as amended). For n the substantial level of indebtedness of the Group; further information, see “Risks related to indebtedness”, below. n the financial and operational covenants set out in the Reinstated Debt If the Group fails to comply with the terms of the Sauvegarde Plan, agreements; and the Commercial Court of Nanterre could terminate the Plan (on the n certain mandatory prepayment provisions in the Reinstated Debt recommendation of the public prosecutor’s office and the administrator agreements, which provisions require the Group to use a large portion charged with execution of the Plan). If at such time the Group is in of any excess cash flow to prepay outstanding Reinstated Debt. cessation des paiements (insolvency), the court could institute bankruptcy (redressement) proceedings if a restructuring were determined to be The Group’ substantial debt could adversely affect its financial possible, failing which the court would order judicial liquidation. condition, due to the significant interest and principal payments, and prevent the Group from fulfilling its obligations under the In addition, changes in the business or the markets in which the Group Reinstated Debt and the Committed Receivables Facilities. operates could necessitate certain modifications to the Sauvegarde Plan during the course of the next five years. The Group has a substantial amount of debt and significant debt servicing obligations. At December 31, 2011, the Group had €1,500 million of To the extent that such modifications are not considered material total nominal debt (€1,327 million of balance sheet debt, taking into modifications in the objectives or means of the Plan within the meaning account the fair value adjustment under IFRS) (on the basis of the of Article L. 626-26 of the French Commercial Code, the Group could exchange rates as of December 31, 2011). The debt principally consists make such modifications without requiring any prior approval, except of debt under a credit agreement, note purchase agreement and in the case of the financing agreements, for which the consent of the intercreditor agreement (the “Reinstated Debt”), under which the contractually required majority of creditors who are party to such Group had €1,469 million of senior debt outstanding at December 31, agreements is required. In October 2011, the Group obtained creditor 2011 (€1,296 million of senior balance sheet debt, taking into account consent to make certain amendments to the Reinstated Debt contracts the fair value adjustment under IFRS) (on the basis of the exchange rates (for more information about these amendments, see Chapter 1: as of December 31, 2011). The Group has two committed receivables “Presentation of the Group and its activities”, section 1.2.2 “Historical facilities (the “Committed Receivables Facilities”) under which it may background” of this Annual Report). borrow up to €197 million on the basis of the amount of receivables available. For further information on the terms of these debt facilities Notwithstanding the foregoing, any material modification of the and instruments, see Chapter 2: “Operating and Financial Review and Sauvegarde Plan within the meaning of Article L. 626-26 of the French Prospects”, section 2.10.3: “Financial Resources” of this Annual Report.
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The level of the debt may have significant negative consequences for n leverage covenant: total net debt is not more than a specified the Group and its shareholders. For example, the level of the debt: multiple of EBITDA on a trailing twelve month basis on June 30 and December 31 of each financial year; and n requires the Group to dedicate a large portion of any excess cash capital expenditure covenant: capital expenditure is not more than a flow towards repayment of outstanding Reinstated Debt, thereby n specified amount in each financial year. reducing the availability of cash flow to fund working capital requirements (please refer to the risk factor below entitled “The Each of the interest cover covenant and leverage covenant becomes terms of the Reinstated Debt require the Group to use a large portion stricter over time. For further information, see Chapter 2 : “Operating and of any excess cash flow and the proceeds of certain transactions to Financial Review and Prospects”, section 2 .16.3: “Financial Resources” repay outstanding Reinstated Debt.”). The amount of Reinstated and the note 25.3 (g) of consolidated financial statements of this Annual Debt as well as the covenant provisions have been determined Report. on the basis of their compatibility with the operating and financial performance prospects of the Group at the time of the Reinstated A large number of factors, many of which are outside the control of the Debt negotiations; Company (including a downturn in the industries in which the Group operates, a general economic downturn, or any of the other risks increases the Group’s vulnerability to adverse general economic n identified in this document), could cause the Group to fail to comply conditions and industry developments; with such covenants. n may limit the Group’s flexibility in planning for, or reacting to, changes in the business and the industries in which the Group operates (see, In addition, the terms of the Reinstated Debt and the Committed however, the amendments to the terms of the Reinstated Debt Receivables Facilities include provisions which significantly limit the increasing the Group’s strategic flexibility; please refer to Chapter 1: Group’s flexibility in operating its business. In particular, the Group is “Presentation of the Group and its activities”, section 1.2.2: “Historical subject to restrictions on its ability to, among other things and subject background” of this Annual Report); to certain exceptions: n limits the Group’s ability to raise additional debt or equity capital; n pay dividends and make other distributions on its shares; n may limit the Group’s ability to make strategic acquisitions and take n incur additional debt; advantage of business opportunities (see, however, the amendments to the terms of the Reinstated Debt increasing the Group’s strategic n invest in joint ventures; flexibility; please refer to Chapter 1: “Presentation of the Group and n acquire new businesses or assets; and its activities”, section 1.2.2: “Historical background” of this Annual Report); and n dispose of businesses or assets. n may place the Group at a competitive disadvantage compared to For joint ventures, acquisition and disposals, see the amendments to the competitors with less debt. terms of the Reinstated Debt increasing the Group’s strategic flexibility.
Any of the foregoing could severely limit the Group’s ability to operate Failure to comply with any of the covenants described in this risk and grow the business. factor may (in certain cases following the expiration of a grace period) constitute an event of default under the Reinstated Debt which, absent The Reinstated Debt contains covenants that require the Group to a waiver from the senior creditors, would provide the senior creditors meet certain financial tests and impose limitations and restrictions with the right to declare the Reinstated Debt that is outstanding at the on its ability to operate its business. time of any default (plus accrued interest, fees and other amounts due hereunder) immediately due and payable. Such breach of covenants The terms of the Reinstated Debt require compliance with certain could also constitute a breach of the Sauvegarde Plan which, if substantial, covenants, including the following: could trigger the termination of the Plan (see “Risk of termination of the Sauvegarde Plan and reduced flexibility throughout the duration of interest cover covenant: EBITDA (as defined in the Reinstated Debt n the Sauvegarde Plan”). A breach of the covenants in the Committed contracts) is not less than a specified multiple of net total interest on Receivables Facilities may (in certain cases following the expiration of a trailing twelve month basis on June 30 and December 31 of each a grace period) constitute a default hereunder. financial year;
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In addition, if the senior creditors declare the outstanding Reinstated n equity issuances: at least 80% of the net proceeds received in respect Debt immediately due and payable following the occurrence of an event of any new equity issuances (subject to certain exceptions, including of default, each holder of Notes Redeemable in Shares (NRS) would in respect of shares issued in redemption of the NRS) must be applied have the right to require the Group to redeem its NRS In ordinary shares. to repay outstanding Reinstated Debt. However, the Group may use proceeds received in respect of any new equity issuances to prepay Upon the occurrence of a change of control in the Group (see a portion of the NRS IIC; Chapter 2: “Operating and Financial Review and Prospects”, excess cash flow: 80% of excess cash flow (which is defined as the section 2.10.3: “Financial Resources – Sauvegarde Plan – Change of n aggregate of net cash from operating and investing activities, Control Provisions”), any outstanding amounts under the Reinstated subject to certain adjustments) must be applied to repay outstanding Debt would become immediately due and payable and the NRS would Reinstated Debt; and become immediately redeemable in ordinary shares at the option of their holders. n other: subject to certain exceptions, the net proceeds received from any payment or claim under any insurance policy or issuance The Group cannot assure that it would have sufficient liquidity to repay of subordinated debt in connection with any refinancing must, in or the ability to refinance all or any of the amounts outstanding under each case, be applied to repay outstanding Reinstated Debt (in the the Reinstated Debt and/or the Committed Receivables Facilities if event of a refinancing, a customary “make whole” amount must be they were to become payable following the occurrence of an event of paid in respect of amounts due to the noteholders pursuant to the default hereunder. note purchase agreement). Complying with these obligations will significantly reduce the amount of The terms of the Reinstated Debt require the Group to use a funds the Group has available to fund its working capital requirements large portion of any excess cash flow and the proceeds of certain and, together with the limitations contained in the covenants described transactions to repay outstanding Reinstated Debt. above, also limit the Group’s investment capacity. The ability of the Under the terms of the Reinstated Debt documentation, the Group Group to successfully maintain its market position and grow its businesses, is required to apply funds towards the repayment of outstanding particularly in the context of a changing technological environment that Reinstated Debt in certain circumstances, including the following: may require additional investment to capitalize on business opportunities (see “Risks related to changes in market, technologies and consumer demand”) may be severely limited while the Reinstated Debt remains n asset disposals: the net proceeds in respect of the disposal of any assets of the Group to an unaffiliated third party must be applied to repay outstanding. In addition, these requirements are limiting severely the outstanding Reinstated Debt, subject to certain exceptions, including funds the Group has to pay dividends or to make other distributions, a minimum threshold and the disposal of certain assets where the on its shares or to buy back its shares. proceeds thereof will be used within a year to fund capital expenditure;
3.2 MARKET RISK
3.2.1 RISK OF INTEREST RATE 3.2.2 RISK OF EXCHANGE RATE FLUCTUATIONS FLUCTUATION Interest rate fluctuations may lead to decreases in the Group’s Currency exchange rate fluctuations may lead to decreases in financial results. Technicolor’s financial results.
Technicolor is mainly exposed to interest rate risk on its deposits and A significant part of the net revenues of the Group, as well as a portion indebtedness. Failure to manage interest rate fluctuations effectively of its operating income, are in subsidiaries that use the U.S. dollar as in the future, or changes in interest rates, may have a material their functional currency. As a result, fluctuations in the U.S. dollar/ adverse impact on the Group’s financial charges. See note 26.2 of euro exchange rate have a significant translation impact on the Group’s the consolidated financial statements to this Annual Report for more revenues and, to a lesser extent, on profit from continuing operations information about this risk. before tax and net finance income (expense). To the extent the Group
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incurs costs in one currency and has sales in a different currency, there 3.2.4 FAIR VALUE OF FINANCIAL is also foreign currency transaction risk, and the Group’s profit margins may be affected by changes in the exchange rates between the two INSTRUMENTS currencies. See note 26.1 of the consolidated financial statements to The fair value of forward exchange contracts and currency swaps is this Annual Report. computed by discounting the difference between the contract and the market forward rate and multiplying it by the nominal amount. For the fair value of interest rate caps, the marked-to-market value determined 3.2.3 RISKS RELATED by independent financial institutions is used. The fair value of all current TO LIQUIDITY assets and liabilities (trade accounts receivable and payable, short-term loans and debt, cash, bank overdrafts) is considered to be equivalent to Liquidity risk may make it difficult for the Group to finance or the net book value, due to their short-term maturities. For the long-term refinance its financial obligations coming due. portion of the Reinstated Debt, the Group uses the observed market trading levels of this debt to determine the fair value. The fair value of Technicolor’s access to financial markets was significantly impacted listed investment securities is calculated using their last known market by the deterioration of its financial situation, the subsequent debt price at year-end. restructuring negotiations, and the Sauvegarde proceeding. The debt restructuring allowed the Group to improve its financial structure and, as For a tabular presentation of the fair value of the derivative financial a result, the Group was able to put in place two committed receivables- instruments as of December 31, 2011, see note 24 to the consolidated backed credit facilities in 2010. Nevertheless, due to its overall level of financial statements. See also note 26.6 to the consolidated financial indebtedness and restrictions in its Reinstated Debt documentation, the statements for information on the fair value of the financial assets and Group’s access to financial markets remains very limited. See note 26.3 liabilities, as well as note 16 to the consolidated financial statements for of the consolidated financial statements to this Annual Report. information on the fair value of the available-for-sale assets. For other information on the borrowings and the financial instruments and market- For additional discussion on the Group’s liquidity position and certain related exposures, see notes 25 and 26, to the consolidated financial related risks, please refer to Chapter 2: “Operating and Financial Review statements. and Prospects”, section 2.10: “Liquidity and Capital Resources”, notes 23, 25 and 26 of the consolidated financial statements of the Group, and section 3.1: “Risks related to the debt restructuring” of this Annual Report.
3.3 RISKS RELATED TO THE BUSINESS
3.3.1 RISKS RELATED TO For example, the Theatrical Services and DVD Services activities depend on the relationships with a number of major motion picture COMMERCIAL ACTIVITY studios. The Group generally negotiates exclusive, long-term contracts The Group’s businesses operate in concentrated markets and depend with these studios. The top five studio customers accounted for on a number of major customers and the long-term maintenance of approximately 64% of the revenues of Entertainment Services and 33% relationships and contractual arrangements with them. The Group’s of the Group’s consolidated net revenues in 2011. In Digital Delivery, a financial results may suffer if these relationships weaken or large proportion of revenue is derived from various network operators terminate, if the Group is unable to renew these contractual under long-term contractual arrangements. The top five customers in arrangements when they expire or is only able to renew them on the Digital Delivery segment accounted for approximately 47% of the significantly less favorable terms, or if certain of its customers face reported 2011 revenues of the segment and approximately 17% of the financial difficulties. Group’s 2011 consolidated net revenues. In respect of the Licensing business, see “Risks related to the evolution of the Licensing business” The Group’s businesses operate in the Media & Entertainment below. (“M&E”) industry, which is a concentrated market, and where customer relationships have historically played an important role. As a result, The Group’s ten largest customers accounted for 58% of the 2011 several of the businesses depend on a number of major customers and consolidated net revenues. If these customers were to reduce or cease the long-term relationships and contractual arrangements with them. purchases, it could adversely affect the Group’s businesses, results and prospects.
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Although the Group has signed multi-year contracts with many of the Entertainment Services segment. Another example of a Group customers, most of its major customer relationships include multiple technological choice concerns 3D technology and its acceptance by contractual arrangements with varying terms and conditions and customers. The Group develops products and uses technologies for the expiration dates, and certain contracts come up frequently for renewal production and distribution of 3D content that may not be deployed across each of the business lines. as broadly as the Group’s forecasts. These types of situations occur primarily because the Group has no control over its customers’ business In order to anticipate and prevent the deterioration of major customer plans and investment decisions which, in turn, depend largely on the relationships, the Group closely and continuously monitors its sales and public’s fast changing preferences. Furthermore, the content market is marketing process and, in particular, the renewal and renegotiation of key highly competitive, and competing technologies and products are often contracts. By working in cooperation with the Sales organization, each released into the marketplace at the same time. segment has devised sales and marketing strategies for major customers and formulated plans new client development. All such plans, along In an effort to manage this risk and keep up to date on market trends and with the evolution of sales and marketing activity, are regularly reviewed influence the industry, the Group invests and participates in organizations by management. The Group has implemented a systematic formal that set technology standards. The Group also emphasizes customer review process for offers prior to their submission to clients, according relationship management as a means to mitigate this risk. to strategic and financial criteria and tiered approval levels. The most significant commercial proposals made to customers are subject to prior approval by the Investment Committee, chaired by the CEO (please 3.3.3 RISKS RELATED TO CHANGES refer to Chapter 6: “Internal and External Controls Procedures” of this IN MARKET, TECHNOLOGIES Annual Report). Among the financial criteria, the analysis of the impact of each project on cash flow and the demand for working capital receives AND CONSUMER DEMAND particular attention, as does the return on investment. The markets for the Group’s products, services and technologies are characterized by rapid change and technological evolution. The Group will need to expend significant resources on research and 3.3.2 RISKS RELATED TO development in order to continue to design and deliver innovative THE CAPACITY TO products, services, and technologies for the M&E industry, including technologies that the Group may license to manufacturers and other DEVELOP PRODUCTS third parties. The Group may not be able to develop and effectively AND SERVICES THAT market new products, services, and technologies that adequately RESPOND TO CUSTOMERS’ or competitively address the needs of the changing marketplace. TECHNOLOGICAL CHOICES New products, services, and technologies can be subject to delays in The sources and timing of the Group’s revenues and the results development and may fail to operate as intended. There may be no or depend in large part on its customers’ business plans and investment limited market acceptance of new products, services, or technologies decisions for certain technologies, products and services which, in which the Group offers, and significant competitive products, services, turn, may depend on the preferences of the public. If the customers or technologies may be successfully developed by the competitors. do not commit resources to technologies, products, and services supplied by Technicolor or if the Group’s technologies, products, or The Group has oriented its strategy and investment plans based on its services do not adequately respond to customer demand, revenues expectations regarding the development of its markets, such as (1) the may fluctuate significantly from year to year, and the Group’s speed of development and commercialization of Blu-ray™ technology in financial results may suffer. the DVD sector as compared with standard DVD technology, (2) the digital switchover in films, (3) development of 3D technology, and (4) the For example, in the Digital Delivery segment, the customers of the rate at which electronic distribution will replace sales of physical products. Digital Home Products business (such as set-top boxes or dual/triple These trends will determine the rate of transition from certain mature play gateways) may choose to deploy a particular or proprietary activities toward new activities. These expectations and predictions may technology that the Group has not anticipated or chosen to support not be accurate, which may require adjustments in the Group’s strategy and thus may buy products from competitors. In the DVD markets, and investment policy. Additionally, current challenging global economic new distribution formats and their deployment may reduce revenues environment may have as an effect to accelerate or to slow down some
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market transitions. As a consequence of these transitions, the Group will Digital distribution of premium content to homes is a significant strategic have to adapt its structure to new market conditions. For example, the growth area for Technicolor. This strategy will be affected by many Group restructured in 2011 its Film business: this type of restructuring external factors, including the following: exposes the Group to risks of execution, including the timing as well as legacy risks, such as the one linked to the facilities. If new technologies n consumer adoption will depend on extensive access to content from were to develop more quickly than anticipated, the Group may be studios as soon as such content is available the quality of the viewing required to increase its investments, which may be incompatible with experience; the user-friendly home device; and attractive pricing; the covenants under its Reinstated Debt agreements (please see “Risks n in order to satisfy end users, studios will need to be more aggressive related to indebtedness of the Group”). Similarly, if mature technology in their digital delivery, and this may even cause a conflict with on which a significant portion of the activities relies were to decline distribution of tangible media to and in retail channels; more quickly than anticipated, cash flows generated by these activities could be negatively affected. The growth and success of the Group’s n one of the key enablers of the viewing experience is the speed and strategy depends to a great extent on its ability to develop and deliver quality of the broadband connection at home. Although broadband innovative products, services, and technologies that are widely adopted speeds are increasing, the emergence of over-the-top models is by the customers in response to changes in the M&E industry. These impacting Network Service Providers’ (NSPs) appetite to invest. technologies also have to be compatible with the products, services, or Regulatory frameworks, which differ from country to country and may technologies introduced by other entertainment industry participants. vary within a country, also play a key role in convincing NSPs to invest;
n to date, the Connected Home is made of disparate product families from different vendors; each, with their own networks and protocols. 3.3.4 RISKS RELATED TO Connectivity across devices is still immature, and in-home integration THE EVOLUTION OF THE is complex;
MEDIA & ENTERTAINMENT n finally, market-place consolidation will also impact the overall (M&E) INDUSTRY investments of industry. The success of the Group’s strategy depends in large part of the The consumer electronics industry is also a key part of Technicolor’s M&E industry evolution. cash generation. A slower than expected consumer adoption of digital media-enabled devices may have a negative impact on the revenues Economic conditions have an impact on funding mechanisms for film Technicolor generates through its patent licensing business. making. With reduced upfront funding, studios are likely to be even more cautious with their investments in film production. For example, a If the M&E, Pay-TV and Consumer Electronics industries fail to grow consolidation of players could take place, resulting in reduction of their at the pace the Group anticipates or are affected by other events, overall spending. Similarly, unless an alternate funding mechanism is conditions or trends (including those described above), the Group’s adopted, use of 3D screens may not develop as rapidly as expected, growth and financial results could suffer. notwithstanding the attractiveness of this technology.
The current business is centered on well known large M&E companies, 3.3.5 COMPETITION whose results may be impacted by: The Group faces strong competition in many of its businesses, including from groups that are significantly larger than Technicolor n the type of public demand for large international productions or small and from existing customers that may develop in-house capabilities. local productions or even content developed by users; and Competition may cause prices to decline to unprofitable levels. n the introduction of copyright protection. In the event of non- compliance with Intellectual Property legislation and copyrights, The products and services the Group supplies are subject to intense the budgets for new content may suffer due to a lower return on price competition and, although the Group has leading positions in many investment caused by piracy and distribution of unlicensed content. of the market segments, competing businesses are sometimes part of
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groups which are significantly larger than Technicolor. These groups on external suppliers may also expose Technicolor to the effects of may include customers who may already have, or may develop, in- suppliers’ non-compliance with applicable regulations or third-party house capabilities to supply the products or services which Technicolor Intellectual Property rights. offers, such as studio customers who have Content Services capabilities in-house, or broadcasters who have equipment design and sourcing The Group manages its inventory on a just-in-time basis, which exposes capabilities in-house. If the Group’s competitors or customers use their it to performance risks by its suppliers, as well as to certain force majeure size and resources to put additional competitive pressure on Technicolor, risks. As a result, in addition to delays or other performance failures its operations could be materially and adversely affected. of its suppliers, the Group’s operations may be disrupted by external factors beyond its control. Depending on the severity and duration of the Furthermore, due to technological innovation and changing business disruption, the Group’s results of operations could be adversely affected. models, new operators may take advantage of changing market conditions by offering alternative solutions, thereby taking away market The development of action plans to reduce the potential impact of share from current market participants. The Group seeks to innovate these supplier risks is the responsibility of the Sourcing Department. and differentiate its products and services, as well as to design, build and These plans include the nearly systematic use of two or more supply source its products and their components in such a way as to minimize sources for key components or use of electronic subcontractors. As the effects of these risks. regards financial risk, the Group closely oversees suppliers that could be sources of risk, tracking their cash flow positions and calling in other In order to identify changing market conditions and minimize the suppliers if necessary. Suppliers are also subject to audits of their services exposure to related risks, the Group develops models to identify trends and supplies, and of key performance indicators, resulting in regular and key factors to summarize trends and risks to map the industry and evaluations of the quality of products or services supplied. Technicolor’s position therein, to create options for each scenario, and generate a series of indicators to manage and adapt the strategy and The Sourcing Department has also established very detailed procedures priorities. for operational and contractual monitoring of principal suppliers, including electronics sub-contractors in Eastern Europe, Mexico, and Asia, and suppliers of key components such as integrated circuits, 3.3.6 RISKS OF BEING DEPENDENT memory chips or hard disks, as well as suppliers of raw materials used in ON SUPPLIERS OR PARTNERS the production of DVDs. The Group relies on third-party suppliers and partners to manufacture a substantial number of its products or sub-components, to develop 3.3.7 RISK RELATED TO PRODUCT or co-develop new products or solutions, and to manage inventory DEFECTS OR PRODUCT OR on a just-in-time basis. These practices entail financial risks, risks of suppliers failing to perform, and reputational and other risks to SERVICE QUALITY DEFECTS Technicolor. The Group is sometimes exposed to warranty claims relating to product or service performance issues. Furthermore, customers The Group purchases approximately 80% of its raw materials, may limit or halt purchases from the Group in the event of quality components and finished products from its top 25 suppliers. In addition, issues or if the Group is not able to supply the products and services the Group outsources to its external suppliers extensive operational requested. activities, including procurement, manufacturing, logistics and other services, such as research and development. Reliance on outside There can be no assurance that the Group will not experience suppliers reduces the ability to prevent products from incorporating (i) problems with products or services, (ii) large-scale product recalls, or defective technology or components. The Group could also be exposed (iii) a reduction or cessation of purchases by a major customer following to the effects of production delays or other performance failures of quality issues or defective performance, and that these will not have such suppliers. Any defects in the production, quantity or delivery of a negative impact on its reputation and sales. The Group generally these products could adversely affect the Group’s performance. Reliance maintains insurance against many products and service liability risks and
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makes provisions in its accounts with respect to warranties, based on 3.3.9 RISKS RELATED TO CHANGES historical or expected defect rates. However there can be no assurance that this coverage or these warranty provisions will be adequate for IN THE LICENSING BUSINESS liabilities ultimately incurred. In addition, there can be no assurance that Patent licensing constitutes a significant source of revenue, cash insurance will continue to be available on terms acceptable to the Group. flow, and profits for the Group. If sales by the licensees of products incorporating the Group’s technologies or the licensing fees decline Centers for product development or implementation of services include or if the Group is unable to replace expiring patents with new quality assurance functions that are responsible for establishing and patents, the Group’s financial results could suffer. measuring suitable quality indicators and developing action plans to improve the quality of the products and services. These quality programs The Group derives significant profits from the licensing of various include short- and medium-term improvement plans developed from technologies to product manufacturers. The top ten licensees accounted quality studies with customers. These programs are also developed for approximately 80% of total Licensing revenues in 2011, and revenues with the Group’s main solutions and component suppliers and their from the MPEG LA Licensing pool (in respect of MPEG-2 technology) effectiveness is assessed through quality audits. accounted for approximately 55% of Technology’s revenues in 2011. Licensing revenue is dependent on sales by the licensees of products that use the Group’s patents. The Group cannot control these and the 3.3.8 RISKS RELATED manufacturers’ product development or marketing efforts or predict TO ACQUISITIONS their success. If these licensees were to sell fewer products incorporating the Group’s patents, or otherwise face significant economic difficulties, AND PARTNERSHIPS the Group’s Licensing revenue and profits could be adversely affected. The Group may seek to expand its product and services offering, technologies portfolio and geographic coverage, and hence its Licensing revenue is tied to the remaining life of the licensed patents. customer base, through acquisitions and partnerships. These The right to receive royalties related to the patents terminates with decisions give rise to corresponding risks and uncertainties that are the expiration of the last patent covering the relevant technologies. typical for such transactions. For further information on the Licensing business, see Chapter 1: “Information on the Company”, section 1.3.1 “Technology” of this Annual Such acquisitions and partnerships may give rise to many risks, including Report. risks of execution, integration and funding. In addition, the Group must pay particular attention to risks in connection with the protection of In addition, standards-setting bodies may require the use of so-called its Intellectual Property rights. Risks inherent in partnerships and joint “open standards,” meaning that the technologies necessary to meet ventures may adversely affect the Group’s results or financial condition. those standards are freely available without payment of a licensing fee or As an example of such a partnership, the Group in 2011 entered into a royalty. The use of open standards may therefore reduce the opportunity partnership agreement with DreamWorks to maximize the development to generate licensing revenue. of the MediaNavi program. With respect to acquisitions, the Group is limited by restrictions in its Reinstated Debt contracts, which severely restrict the Group’s ability to invest in new joint ventures and make acquisitions. These limitations have been reduced in the context of debt agreements amendments, in October 2011 (please refer to Chapter 3.1: “Risk related to the debt restructuring” of this Annual Report).
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3.3.10 RISKS RELATED TO 3.3.11 RISKS RELATED TO THE PROTECTION OF THE SECURITY OF ASSETS INTELLECTUAL PROPERTY Failure by Technicolor to adequately protect its tangible and If the Group is unable to protect effectively its Intellectual Property intangible assets, as well as those of third parties, could materially rights in the technologies, brands, and know-how the Group uses or adversely affect the Group. Technicolor is entrusted with the licenses to its customers, its business could be adversely affected. creation and distribution of highly sensitive images and content on The Group may have difficulty enforcing Intellectual Property rights behalf of its clients. effectively in many important markets as a result of the limited recognition and enforcement of Intellectual Property rights in many As a provider to the movie, television and digital industry, Technicolor jurisdictions outside the European Union and North America, such is entrusted with highly valuable content, which may be unreleased as in China. or otherwise non-public. Therefore, Technicolor must provide its clients with a secure working environment to ensure they are not at Effective Intellectual Property rights protection may not be available risk of a breach of confidentially or leak of information. Any failure by under the laws of the countries where the products of the Group’s Technicolor to adequately ensure the security of the content entrusted Licensees are located. Any significant infringement of the Group’s to it by its clients could adversely affect its reputation and lead to the Intellectual Property rights could harm the business or the Group’s Group incurring liability, which could have an adverse effect on the ability to compete. The Group has taken steps to enforce its Intellectual Group’s financial position and results of operations. Property rights and expects to continue to do so in the future. However, it may not be practicable, effective or cost-efficient for the Group to Management of this risk is achieved by a global approach to Intellectual enforce its Intellectual Property rights fully, particularly in certain Property protection through the use of physical security, digital security countries outside the European Union and North America or where and secured workflow controls. Under the leadership of the Chief the initiation of a claim might harm business relationships. For example, Security Officer (CSO), the Technicolor Security Office ensures that the Group has experienced, and expects to continue to experience, all deployed security controls and standards work in concert across the problems with Asian and other product manufacturers using the Group’s Group to provide a security cohesiveness that safeguards our customers’ patents in their products without a license. If the Group is unable to Intellectual Property. successfully stop unauthorized use of its Intellectual Property, the In 2011, Technicolor continued to develop its Intellectual Property Group could experience increased enforcement costs in important security program through its ongoing internal Content Security manufacturing markets, such as in China, and suffer substantial loss of Compliance (CSC) program. The goal of the CSC program is to Licensing revenues. achieve higher standards by continuously monitoring risk via internal and/ The Group generally seeks patent protection for its innovations. It is, or external surveys and/or audits focusing on compliance with security however, possible that some of these innovations may not be protectable. policies and industry best practices. In addition to the CSC program, In addition, given the costs of obtaining patent protection, the Group a number of sites across the Group in 2011 achieved the Content may choose not to protect certain innovations that later turn out to be Delivery and Storage Association’s (CDSA) Content Protection and important. The Group has limited or no patent protection in certain Security certification. These certifications are in addition to Technicolor’s foreign jurisdictions, and there is always the possibility, despite its efforts, continued participation in the Motion Picture Association of America that an issued patent may later be found to be invalid or unenforceable. (MPAA)’s Site Security Surveys and customer audits. The CSC program Moreover, the Group seeks to maintain certain inventions as trade and internal audits, along with the third party certifications and audits, secrets. These trade secrets could be compromised by third parties, or help the Group segments adopt a continuous improvement approach intentionally or accidentally by its employees, which would cause the to security and, in particular, Intellectual Property protection. Group to lose the competitive advantage resulting from such trade secrets.
52 I TECHNICOLOR I ANNUAL REPORT 2011 RISK FACTORS - 3 Other risks
3.4 OTHER RISKS
3.4.1 RISKS RELATED TO customers of the activities sold, and possible decline of revenues and operating result prior to closure. In addition, after the disposal of a ANTITRUST PROCEDURES business, the Group may have to cope with risks linked to remaining Claims and investigations relating to competition law could commitments as well as guarantees. There is also a risk of being unable to materially adversely affect the Group’s performance. eliminate structural costs that cannot be passed on to the buyer or which may be the result of the split of businesses into autonomous segments The Group is subject to certain claims and investigations relating to of business. alleged anti-competitive conduct by Technicolor and certain of its subsidiaries in connection with the former cathode ray tubes business. See note 35 to the consolidated financial statements for more information. 3.4.3 RISKS RELATED TO ECONOMIC AND SOCIAL Should the Group or any of the subsidiaries ultimately become subject to fines or penalties in respect of any such alleged conduct, or be held liable CONDITIONS therefore to any third parties, or settle any related claims or proceedings, The Group sources a large number of goods from emerging markets it is possible that the amounts of any such fines or penalties, liability or and is subject to risks inherent in these markets, including currency settlement could be substantial. At the present time, there are too many fluctuations, political and social uncertainty, exchange controls, and uncertainties to assess the extent of any liability that Technicolor may expropriation of assets. incur as a consequence of these investigations. These risks could disrupt production in such countries and the ability The Group continues to take all appropriate measures to meet requests to produce and procure goods for sale in the principal North American for information from the administrations concerned. Furthermore, in and European markets. order to prevent other procedures or events of this nature, it is important to ensure that the Group’s management and sales force are appropriately Risks concerning the economic and social environment are managed sensitive to competition regulations and to build up their knowledge by each business, either in decentralized form for risks specific to a on the subject. The Group has developed and implemented training given activity, or through Group support functions. They are regularly programs on the subject, in particular using on-line training methods. reviewed in detail by Group management as part of the monthly or quarterly business review meetings. 3.4.2 RISKS RELATED TO BUSINESS DISPOSALS 3.4.4 RISKS RELATED TO HUMAN In 2009, the Group decided to sell or close activities that are considered RESOURCES non-strategic, such as Grass Valley, Screenvision and residential The Group’s success depends upon retaining key personnel and telephony. As of December 31, 2011, these disposals have been hiring qualified personnel. completed. In 2011, Broadcast Services business has been classified as held for sale. It is possible that the Group decides to dispose of some The Group’s success depends to a significant degree upon the continued other businesses. involvement of the management team. A limited number of individuals have primary responsibility for managing the business, including the The sale or closure of a business exposes the Group to a range of risks relationships with key customers, licensees, and major suppliers. If the which include risks linked to asset sales, risks of delay, risks on funding Group were to lose a key member of the team, whether from retirement, working capital requirements during the period of sale and additional competing offers or other causes, the Group may be prevented costs of closure, especially labor-related costs, clauses in supplier and from executing its business strategy, lose key customer or licensee customer contracts which may lead to penalty claims, risk of losing relationships, or otherwise suffer an adverse effect on its operations.
TECHNICOLOR I ANNUAL REPORT 2011 I 53 3 - RISK FACTORS Other risks
The Group’s performance also depends upon the talents and efforts 3.4.6 RISKS RELATED of highly skilled individuals. The Group’s products, services and technologies are complex, and the future growth and success depend TO THE IMPAIRMENT to a significant extent on the skills of capable engineers and other key OF CERTAIN TANGIBLE personnel. Ongoing training of personnel is also necessary to maintain AND INTANGIBLE ASSETS, a superior level of innovation and adapt to technological changes. The INCLUDING GOODWILL ability to recruit, retain and develop quality staff is a critical success factor for the Group. Changes in assumptions underlying the use or the profitability of certain tangible and intangible assets, or a change in market In order to limit the impact that these risks might have, the Group has conditions or technological environment, may indicate that an established a set of human resource management programs, such as an impairment test of such assets, including goodwill, should be annual Talent Review and succession planning process for key people conducted. Goodwill and intangible assets with indefinite useful in each segment, and development programs for high potential profiles. lives are reviewed annually for impairment. These different programs are regularly monitored by the Executive Committee. Tangible and intangible assets with finite useful lives are reviewed using the future cash flow generated from the assets (or the cash generating unit). To determine the recoverable amounts of the cash generating units, 3.4.5 RISKS RELATED the Group depends on certain key assumptions, including assumptions TO THE ENVIRONMENT regarding budget and cash flow projections, growth rate projections and post-tax discount rates. For additional information on the impairment A certain number of the Group’s manufacturing sites have been used tests, see notes 3.3, 12 and 13 to the consolidated financial statements. If for industrial purposes for many years. Contamination of the soil or management’s estimates change or market conditions evolve adversely, the subterranean groundwater, which has already occurred at some the estimate of the fair value of tangible and intangible assets could sites, could occur again or be discovered on other sites in the future. decrease significantly and result in impairment. While impairment of tangible and intangible assets, including goodwill, does not affect cash The industrial waste from any sites that the Group built or acquired flows, it does result in a non-cash charge in the consolidated statements may expose the Group to clean-up or remediation costs. The Group of operations, which could have a material adverse effect on the Group’s has identified certain sites whose contamination required or will require results of operations or financial position. At December 31, 2011, the remedial actions. The Group believes that the provisions it has set aside Group had €481 million of goodwill, €401 million of tangible assets and and contractual guarantees from which it benefits (contained in the €459 million of intangible assets. Based on the 2011 impairment review acquisition agreements for certain industrial assets) provide reasonable the Group booked a €147 million impairment on goodwill, a €22 million coverage for its environmental health and safety obligations. However, impairment on intangible assets and a €19 million impairment on tangible potential problems cannot be foreseen with certainty and provisioned assets. Please refer to the section “Sensitivity of recoverable values” amounts may not be adequate in all cases. Moreover, future events, such in note 13 to the consolidated financial statements for a discussion of as changes in government or changes in laws on safety, the environment, changes to certain parameters that could reduce the recoverable value or health, or the discovery of new risks, could create additional costs of certain cash generating units below their book value and therefore that could have unfavorable effects on the Group’s business, results of result in the recording of a loss. operations, or financial condition. Cumulative goodwill located in activities for which any change In addition, some products the Group sells, or has sold in the past, in assumptions would have an immediate impact on impairment are subject to electronics recycling legislation in certain jurisdictions represented €431 million out of a total goodwill of €481 million for or other legislation regulating certain aspects of the materials used in the Group at December 31, 2011. The main goodwill considered as and the manufacturing or design of the product. Many jurisdictions are sensitive relates to DVD Services for €358 million, Media Services for also considering similar legislation that may impact products the Group €23 million and Connect division for €50 million. The discounted cash sells or sold. For further details of environmental actions conducted flows (recoverable value) for these businesses were equal or close to by Technicolor, see Chapter 6: “Social Information and Sustainability”, their book values as of December 31, 2011. Consequently, worse than section 6.2: “Environmental matters” of this Annual Report. See also anticipated market conditions could result in additional impairment note 35 to the consolidated financial statements. charges for the Group. No assurance can be given as to the absence of significant further impairment charges in future periods, particularly if market conditions deteriorate further.
54 I TECHNICOLOR I ANNUAL REPORT 2011 RISK FACTORS - 3 Insurance
3.4.7 LITIGATION relating to alleged anti-competitive conduct in connection with the Group’s former cathode ray tube business, are described in note 35 to In the normal course of its business activities, the Group is involved in the Group’s consolidated financial statements in this Annual Report. legal proceedings and is subject to tax, customs and administrative audits. The Group generally records a provision whenever a risk represents a Except for the litigation described in note 35 to the consolidated financial contingent liability towards a third party and when the possible loss that statements in this Annual Report, there are no other governmental, may result can be estimated with sufficient accuracy. judicial or arbitration proceedings, including any proceedings of which the Group is aware, that are currently pending or threatened, which The principal legal proceedings and governmental investigations in could have, or have had over the past 12 months, a material effect on progress or envisaged, including certain claims and investigations the financial situation or profitability of the Company and/or the Group.
3.5 INSURANCE
The Group has a “Corporate Risk & Insurance” Department in charge The deductible levels are determined and applied according to the assets of insurance and associated risk management for the Company. and operational risks of the business units.
Through this department, Technicolor arranges global insurance Insurance policies are purchased whenever required by law or when programs covering the major risks related to its activities that are activities or circumstances render them necessary. Thus, the Group has underwritten with well-known insurers via a global broker. These established insurance covering motor vehicles and personal liability, in programs, established on behalf of its subsidiaries worldwide, are countries where such insurance is required. implemented through a “Master” insurance policy that strengthens the coverage offered by local policies, and provides “difference in In addition, in partnership with its insurers, Technicolor has developed conditions” and “difference in limits” over these policies. a loss prevention program in order to reduce its exposure to its assets and operating losses that may occur in case such risks should materialize. These programs cover risks such as general and professional liability, Thanks to this program, several key sites have obtained the “Highly property and business interruption (the Group carries exposures in high Protected Risk” status, which is the best grade in the assessment risk, natural hazard areas and has purchased adequate specific insurance implemented by our insurer. The Corporate Legal Department has coverage in this regard), and country-specific risks such as Employer’s established procedures and rules in order to manage contractual risk. It Liability in the U.K. and Workers’ Compensation insurance in the U.S. ensures, in conjunction with the Corporate Risk & Insurance team, that these rules are applied throughout the world. For risks considered non-strategic, subsidiaries are allowed to subscribe to additional insurance policies in their local market. The Group intends to continue its policy of comprehensive coverage for all its exposure to major risks, expand its coverage when necessary, These insurance programs also cover the risk of damage to goods in and reduce costs through self-insurance when it is deemed appropriate. transit, where such insurance is required, as well as the environmental damage caused by pollution. In addition, Technicolor has insurance The Group does not foresee difficulties in setting up insurance policies for the risks associated with the liability of its Directors and executive in the future. officers. To date, the Group does not have a captive insurance or reinsurance The Group insurance policies are issued on an “all risks” basis, but with company. standard market exclusions.
TECHNICOLOR I ANNUAL REPORT 2011 I 55 56 I TECHNICOLOR I ANNUAL REPORT 2011 CORPORATE GOVERNANCE 4 AND INTERNAL CONTROL PROCEDURES
4.1 BOARD OF DIRECTORS ...... 58 4.4 COMPENSATION AND BENEFITS OF DIRECTORS ...... 77 4.1.1 Corporate governance structure ...... 58 4.4.1 Compensation and benefits of Mr. Denis Ranque, 4.1.2 Composition and expertise of the Board of Directors . 58 Chairman of the Board of Directors ...... 77 4.1.3 Other information about Members of the Board 4.4.2 Compensation and benefits of of Directors ...... 59 Mr. Frederic Rose , Chief Executive Officer ...... 77 4.4.3 Overview of compensation, benefits, options 4.2 CHAIRMAN’S REPORT ON CORPORATE and performance shares attributed to the GOVERNANCE, INTERNAL CONTROL AND RISK Executive Directors ...... 79 MANAGEMENT ...... 64 4.4.4 Directors’ fees and other compensation ...... 80 4.2.1 Preparation and organization of the Board 4.4.5 Stock options awarded to Executive Directors – of Directors’ work ...... 64 Free Shares ...... 81 4.2.2 Internal control procedures ...... 70 4.5 EXECUTIVE COMMITTEE ...... 84 4.3 STATUTORY AUDITORS’ REPORT ON 4.5.1 Members of the Executive Committee ...... 84 THE CHAIRMAN’S REPORT ON INTERNAL 4.5.2 Executive Committee compensation ...... 85 CONTROL PROCEDURES ...... 76
TECHNICOLOR I ANNUAL REPORT 2011 I 57 4 - CORPORATE GOVERNANCE AND INTERNAL CONTROL PROCEDURES Board of Directors
4.1 BOARD OF DIRECTORS
4.1.1 CORPORATE GOVERNANCE Independence STRUCTURE At its meeting on December 16, 2011, the Board of Directors reviewed the independence of its members according to the definition and criteria The Company is governed by a Board of Directors and a Chief Executive set forth in the Corporate Governance Code of Listed Companies Officer. The Board of Directors is chaired by Mr. Denis Ranque, who has issued by the Association Française des Entreprises Privées (AFEP) and been a Director since February 17, 2010. Mr. Fre de ric Rose, who is also the Mouvement des Entreprises de France (MEDEF) of April, 2010 (the a Director, has been Chief Executive Officer since September 1, 2008. “AFEP-MEDEF Corporate Governance Code”) to which the Company At its meeting on February 17, 2010, the Board of Directors decided, adheres (see paragraph 4.2.1.1 below). According to this Code, “a on the proposal of Mr. Frede ric Rose and the recommendation of the Director is independent when he does not maintain a relationship of Remuneration, Nomination and Governance Committee, to separate any kind whatsoever with the Company, its group or its management the functions of Chairman of the Board of Directors and Chief Executive that may compromise the exercise of his free judgment”. According Officer. to the criteria set forth in the AFEP-MEDEF Corporate Governance Code, of the nine Members of the Board of Directors, seven Directors In accordance with French law, the Chairman of the Board of Directors are considered independent: Ms. Catherine Guillouard, Messrs. Denis organizes and directs the activities of the Board of Directors, and Ranque, Lloyd Carney, Bruce Hack, Didier Lombard, John Roche, reports thereon to the Shareholders’ Meeting. He ensures the proper and Rémy Sautter. Those Directors not considered independent are functioning of the Company’s management bodies and in particular that Mr. Frede ric Rose, Chief Executive Officer, and Mr. Loïc Desmouceaux, the Directors are capable of performing their duties. an employee and Director representing employee shareholders. The Chief Executive Officer is vested with the broadest possible Expertise powers to act in any circumstances on behalf of the Company, subject to limitations imposed by the corporate purpose and those matters Messrs. Denis Ranque, Frederic Rose , Lloyd Carney, and Didier Lombard expressly reserved by law to the General Shareholders’ Meeting and the have acquired, through their professional experience in high technology Board of Directors. However, as an internal order measure, his powers companies, a high degree of experience in technology and research. are limited by the Internal Rules of the Board of Directors, which are Messrs. Bruce Hack, Rémy Sautter and Loïc Desmouceaux share a high described in paragraph 4.2.1.2 below. degree of professional experience in the Media & Entertainment sector. Finally, Ms. Catherine Guillouard and Mr. John Roche have significant financial experience in international groups. The biographies setting 4.1.2 COMPOSITION AND forth the professional experience of the Members of the Board are presented in paragraph 4.1.3.1 below. EXPERTISE OF THE BOARD OF DIRECTORS The duration of the Directors’ term of office is defined by the Company’s bylaws and is set at three years. Directors may be re-elected and can As of the date of this Annual Report the Board of Directors comprises be dismissed at any time by the Ordinary Shareholders’ Meeting. nine Members, including one woman. Mr. Rémy Sautter is Vice- Article 16 of the Company’s bylaws provides that the term of office of Chairman of the Board and Lead Independent Director. In this capacity, the Chairman will automatically terminate when he reaches 70 years of Mr. Sautter chairs the Board in the event of the absence of the Chairman, age. Article 11.2 of the Company’s bylaws provides that Directors are as well as any meeting of the Board deciding matters relating to the each required to hold at least 200 shares of Technicolor stock during Chairman (remuneration, evaluation of his performance, or renewal of their term of office. his term of office). The Members of the Board of Directors have no family relationship with one another.
58 I TECHNICOLOR I ANNUAL REPORT 2011 CORPORATE GOVERNANCE AND INTERNAL CONTROL PROCEDURES - 4 Board of Directors
Composition of the Board of Directors as of the date of the present Annual Report
Present Remuneration, position Start Expiration Nomination and Main within the Other of term of term Audit Governance Technology Name Age business address Company positions of office of office Committee Committee Committee Technicolor Director 1-5, rue Jeanne d’Arc, Chairman of 92130 Issy-les- the Board of Denis Ranque (1) 60 Moulineaux Directors - February 2010 AGM* 2012 Member Technicolor Director 1-5, rue Jeanne d’Arc, Chief 92130 Issy-les- Executive Fre de ric Rose 49 Moulineaux Officer - October 2008 AGM* 2012 Xsigo SYSTEMS 70 W. Plumeria Drive CEO, Xsigo Lloyd Carney (1) 50 San Jose, CA 95134 Director Systems June 2010 AGM* 2013 Chairman Market Technicolor Director, Business 1-5, rue Jeanne d’Arc, Employee Intelligence, Loïc 92130 Issy-les- shareholders E mployee Desmouceaux (2) 49 Moulineaux Representative S hareholding May 2003 AGM* 2014 Member Eutelsat Financial Catherine 70, rue Balard, Director, Guillouard (1) (2) 47 75015 Paris Director Eutelsat February 2010 AGM* 2014 Member 151 Central Park West 10C, New York, NY Bruce Hack (1) 63 10023 Director - February 2010 AGM* 2013 Member Member c/o Technicolor 1-5, rue Jeanne d’Arc, 92130 Issy-les- Didier Lombard (1) 70 Moulineaux Director - May 2004 AGM* 2013 Member c/o Technicolor 1-5, rue Jeanne d’Arc, 92130 Issy-les- John Roche (1) 64 Moulineaux Director - February 2010 AGM* 2012 Chairman President of EDIRADIO/RTL Director the Supervisory 22, rue Bayard Vice-Chairman Board of Rémy Sautter (1) (2) 66 75008 Paris of the Board Ediradio/RTL January 2006 AGM* 2014 Chairman
* Annual General Shareholders’ Meeting. (1) Independent Director. (2) The terms of Ms. Catherine Guillouard and Messrs. Loïc Desmouceaux and Rémy Sautter were renewed by the Combined General Shareholders’ Meeting of June 8, 2011 for a period of three years.
4.1.3 OTHER INFORMATION Denis Ranque ABOUT MEMBERS OF THE Mr. Denis Ranque holds Board positions in various French- BOARD OF DIRECTORS headquartered international companies. He was Chairman and Chief Executive Officer of Thales from January 1998 to May 2009, on which date Thales’s main shareholder changed. From 1994 to 1998, he was 4.1.3.1 Biographies of Directors, Chief Executive Officer of Thomson Marconi Sonar, the joint venture functions and directorships held set up by Thomson-CSF and GEC-Marconi. From 1992 to 1994, he was during the past five years Chairman and CEO of Thomson Sintra Activités Sous-marines. Prior to This section contains the biographies and information about the that, he held various positions within the Thomson Group and became Directors and their directorships as of February 23, 2012 Chief Executive Officer of Thomson Tubes Electroniques in 1989. He joined the Thomson Group in 1983 as Planning Director. He began his career at the French Ministry for Industry, where he held various positions in the energy sector. In 1999, Mr. Denis Ranque was made Chevalier de l’Ordre de la Légion d’Honneur, and in 2008 was promoted
TECHNICOLOR I ANNUAL REPORT 2011 I 59 4 - CORPORATE GOVERNANCE AND INTERNAL CONTROL PROCEDURES Board of Directors
to Officier in the same Order. He is also an Officier de l’Ordre National New Zealand Limited, Alcatel Shanghai Bell Software Co. Ltd., Alcatel du Mérite. Furthermore, Mr. Denis Ranque was appointed honorary Shanghai Bell Co. Ltd., Commander of the Order of the British Empire (CBE) in July 2004 and Member of the Ordre du Mérite de la République Fédérale d’Allemagne Vice-Chairman and Member of the Supervisory Board of Alcatel-Lucent in September 2010. Mr. Denis Ranque chairs the Cercle de l’Industrie Austria AG., and the Association Nationale Recherche Technologie (ANRT), as well Vice-Chairman of Board of Directors of Zhejiang Bell Technology as the École des Mines Paris Tech. Mr. Denis Ranque graduated from Co. Ltd., Alcatel (Chengdu) Communication System Co. Ltd., Alcatel École Polytechnique and École des Mines. Shanghai Bell Software Co. Ltd., Vice-Chairman and Chief Executive Officer of Alcatel-Lucent Shanghai Current Directorships: Bell Co. Ltd., IN FRANCE: Chairman of the Board of Directors of Alcatel-Lucent Philippines Inc., Alcatel-Lucent China Investment Co. Ltd., Director of Saint-Gobain, CMA-CGM, CGG Veritas, Fonds Director of the Weinstein Company Holding LLC. Stratégique d’Investissement and SCILAB-Enterprises.
Directorships held during the past five years: Lloyd Carney Chairman and Chief Executive Officer of Thales. Mr. Lloyd Carney has been Chief Executive Officer and Director of Xsigo since 2007. Prior to that, he led IBM’s Netcool division. This division provides IT and telecom infrastructure management tools to Frede ric Rose a variety of customers in enterprise computing, transportation, and Mr. Frede ric Rose is a Director and has been Chief Executive Officer wireless networking. When IBM acquired Micromuse, Mr. Carney was since September 1, 2008. He also served as Chairman of the Board of appointed Chairman and CEO of this company. Mr. Carney was COO Directors from April 27, 2009 to February 17, 2010. at Juniper Networks, where he oversaw the sales, marketing, engineering, manufacturing, and customer service organizations. He also has headed Prior to joining Technicolor, Mr. Frederic Rose held various positions up three divisions at Nortel Networks: the Core IP Division, the Wireless within Alcatel-Lucent, and was a Member of that company’s Executive Internet Division and the Enterprise Data Division. Mr. Carney chairs Committee. From 2007 to 2008, he was President of Alcatel-Lucent’s the Lloyd and Carole Carney Foundation. Europe, Asia and Africa region. Prior to that, he was President of the Asia Pacific Region and held the position of President of Alcatel Shanghai Current Directorships: Bell, Alcatel-Lucent’s flagship joint venture in China. Mr. Frederic Rose OUTSIDE FRANCE: is a graduate of the Georgetown University School of Foreign Service Director of Xsigo Systems and Cypress Semiconductor. and the Georgetown University Law Center.
Current Directorships: Directorships held during the past five years: IN FRANCE: Director of Micromuse and BigBand Networks. Chief Executive Officer of Technicolor SA. Loïc Desmouceaux OUTSIDE FRANCE: Mr. Loïc Desmouceaux has been Vice President Market Business Director of Logica Plc; Intelligence for Technicolor since November 2006. In the Group Director and Vice-Chairman of Technicolor SFG Film Technology since 1988, he has held various management positions in Marketing, Co., Ltd. Strategy and Technology. In 2006 he was Prospective Marketing manager and Strategic Development. From 2001 to 2005, he was Directorships held during the past five years: Research and Innovation Marketing manager. From 1996 to 2001, he Chairman of the Board of Directors of Technicolor SA from April 27, served as Marketing manager, User Interface and Consumer Experience. 2009 to February 17, 2010. From 1993 to 1996, he was Product manager Europe, Video Division. From 1988 to 1993, he held the position of Market Research manager and Director of Alcatel-Lucent Teletas Telekomunikasyon A.S., Alcatel Product manager in the Television Division Europe. Mr. Desmouceaux Integracion y Servicios SA, Alcatel-Lucent China Investment Co. Ltd., graduated from the Institut d’Études Politiques of Bordeaux and from Alcatel Japan Ltd., Alcatel-Lucent Singapore Pte Ltd., Alcatel the École Supérieure de Commerce et d’Administration des Entreprises Korea Ltd., Alcatel-Lucent Japan Ltd., Alcatel-Lucent Australia Limited, of Bordeaux. Taiwan International Standard Electronics Limited, Alcatel-Lucent
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Current Directorships: Seagram Company Ltd. in 1982 after serving as a trade negotiator at IN FRANCE: the U.S. Treasury in Washington, D.C. Among his roles at Seagram Chairman of the Supervisory Board of FCPE Technicolor Gestion and were Chief Financial Officer of Tropicana Products, Inc. and Director, Technicolor Epargne (Technicolor Employee Mutual Funds); Strategic Planning, at The Seagram Company Ltd. Mr. Hack earned Permanent representative of Sovemarco Europe SA on the Board of a BA at Cornell University and an MBA in finance at the University of Directors of Sellenium SA; Chicago. Permanent representative of Sellenium SA at the Supervisory Committee of YB Holding SAS; Current Directorships: Director of Desamais Distribution SA. OUTSIDE FRANCE: Director of MiMedx Group, Inc. and Demerx, Inc. Directorships held during the past five years: Director of Yvan Béal SA. Directorships held during the past five years: Director and Chief Executive Officer of Vivendi Games; Catherine Guillouard Director and Vice-Chairman of Activision Blizzard; Director of Jagex Limited and Jagex Management Inc.; Ms. Catherine Guillouard has been Chief Financial Officer of Eutelsat Director of iSuppli Corporation. since September 2007. She is a Member of the Group’s Executive Committee. Prior to joining Eutelsat, Ms. Guillouard held various positions within Air France. From 2005 to September 2007, she was Didier Lombard Senior Vice President of Finance at Air France. Prior to that, at Air Mr. Didier Lombard is Chairman of the Supervisory Board of France, she was Senior Vice President of Human Resources and STMicroelectronics since spring 2011. He was also Chief Executive Change Management, Senior Vice of President Flight Operations, and Officer of France Telecom from March 2005 to March 2010 and Deputy Vice President of Corporate Control. She began her career Chairman of the Board from March 2005 to February 2011. From 2003 in 1993 at the Treasury of the Ministry of Finance in the CFA Zone of to 2005, he was Executive Vice President of France Telecom in charge the Africa Department and then in the Banking Affairs Department. of the technologies, partnership and new services mission. From 1999 to Ms. Guillouard graduated from the Institut d’Etudes Politiques of Paris the beginning of 2003, Mr. Lombard served as Ambassador in charge of and the École Nationale d’Administration . She also holds a post-graduate foreign investment and Chief Executive Officer of the French Agency degree (DESS) in European Union Law. for I nternational I nvestment. From 1991 to 1998, he was Chief Executive Officer of Industrial Strategy in the Ministry of Economy, Finance and Current Directorships: Industry. From 1988 to 1990, he served as Technical and Scientific Director, Aéroports de Paris. manager in the Ministry of Research and Technology. Mr. Lombard graduated from École Polytechnique and École Nationale Supérieure des Télécommunications. Directorships held during the past five years: Member of the Supervisory Board of Atria Capital Partners. Current Directorships: IN FRANCE: Bruce Hack Member of the Supervisory Board of Radiall; Mr. Bruce Hack is a Director of several companies and is the Chairman Director of Thales. of the Audit Committee of Demerx, Inc. Mr. Hack was Vice-Chairman of the Board and Chief Corporate Officer of Activision Blizzard until OUTSIDE FRANCE: 2009. Prior to that, Mr. Hack was Chief Executive Officer of Vivendi Chairman of the Supervisory Board of STMicroelectronics. Games from 2004 to 2008. Mr. Hack also served as EVP, Development and Strategy, Vivendi Universal, from 2001 to 2003; Vice-Chairman Directorships held during the past five years: of the Board, Universal Music Group, from 1998 to 2001; and Chief Chairman and Chief Executive Officer of France Telecom; Financial Officer, Universal Studios, from 1995 to 1998. He joined the Chairman of the Board of Directors of Orange.
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John Roche 4.1.3.2 Statement on the absence of Mr. John Roche is a Director and the Chairman of the Audit Committee convictions for fraud, bankruptcy of the Banque Accord. He also worked at the Auchan Group from 1990 and incrimination during the past to 2010 where he was advisor of the President, Secretary to the Board five years and Secretary of Auchan’s Audit Committee. He was also a Director and the Chairman of the Audit Committee of the Adeo Group. Prior to To the Company’s knowledge, no Member of the Board of Directors that, he held various positions within Citibank, mainly in Asia. Mr. Roche has been: (i) convicted of fraud, (ii) associated with a bankruptcy, graduated from Princeton and Stanford. receivership or liquidation, (iii) sanctioned by any statutory or regulatory authorities (including professional organizations), or (iv) disqualified Current Directorships: by a court decision from (a) acting as a Member of the administrative, management or supervisory bodies of a public company or (b) acting in IN FRANCE: the management or conduct of the affairs of a public company during Director of the Banque Accord; the past five years. Managing Director of the Company ETIMA.
Directorships held during the past five years: 4.1.3.3 Regulat ed agreements – absence Director of the Adeo Group. of conflicts of interest French law governs agreements known as “regulated agreements”. These agreements are entered into directly or through an intermediary Rémy Sautter between a Company and its Chief Executive Officer, one of its Deputy Mr. Rémy Sautter has been Chairman of the Supervisory Board Chief Executive Officers, if any, or one of its Directors or certain of Ediradio/RTL since 2000. From 1996 to 2000, he was Chief shareholders (shareholders holding more than 10% of the voting rights Executive Officer of CLT Multi Media and then of CLTUFA Group or, in the case of a company shareholder, the parent company controlling (Luxembourg). From 1985 to 1996, he served as Vice-Chairman and it) that do not affect current transactions and are not concluded under Chief Executive Officer of Ediradio/RTL. From 1983 to 1985, he was normal conditions. Chief Financial Officer of Havas. Mr. Sautter graduated from the Institut d’Études Politiques of Paris and the École Nationale d’Administration . These agreements must be approved by the Board of Directors before their execution, reviewed by the Statutory Auditors, who issue a special Current Directorships: report on the transaction, and submitted to the Shareholders’ Meeting for IN FRANCE: approval pursuant to Articles L. 225-38 et seq. of the French Commercial Chairman of the Supervisory Board of Ediradio/RTL; Code. See Chapter 8, “Financial statements ” , section 8.8 “Statutory Chairman and Chief Executive Officer of Société Immobilière Bayard Auditors’ Report on Regulated Agreements and Commitments” of this d’Antin; Annual Report. Member of the Supervisory Board of M6; Director of Pages Jaunes , SERC/FUN Radio, SODERA/RTL2, IP and To the Company’s knowledge, there is no potential conflict of interest IP Régions. between the Directors and Company managers’ duties towards Technicolor and their private interests and/or other duties. OUTSIDE FRANCE: Director of PARTNER Reinsurance Ltd. and TVI SA Belgique. In accordance with the Company’s bylaws, a Member of the Board of Directors must hold a minimum of 200 shares during his term of office. Other than the above obligation, Members of the Board of Directors Directorships held during the past five years: are not subject to any contractual restriction regarding the shares they Chairman of the Board of Directors of FIVE and of SICAV hold in the Company’s share capital. The Company’s “Corporate Multimedia & Technologies; Policy on the Purchase and Sale of Company Shares, Insider Trading Director of Taylor Nelson Sofres Ltd., Wanadoo and M6 Publicité; and Protection of Material Non-public Information” defines the rules Member of the Supervisory Board of Navimo. applicable to transactions in Technicolor securities and defines “black-
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out periods” during which transactions are prohibited. This protocol 4.1.3.4 Arrangements or agreements also stipulates that corporate officers holding stock options and/or free made with major shareholders, shares (i) are not authorized to carry out risk hedging transactions in accordance with the AFEP-MEDEF Corporate Governance Code and customers, suppliers or others (ii) are subject to blackouts on the exercise of options. pursuant to which the Board Members and Executive Committee members were selected As of the date hereof, there are no arrangements or agreements with the major shareholders, customers, suppliers or other parties, by virtue of which a Member of the Board of Directors or a Member of the Executive Committee has been selected.
4.1.3.5 Directors’ shareholdings in the Company’s registered capital In accordance with the Article 11.2 of the Company’s bylaws, a Member of the Board of Directors must hold a minimum of 200 shares of Technicolor stock during his term of office.
To the Company’s knowledge, the situation regarding Directors’ shareholdings in the Company’s registered capital as of February 23, 2012 is as follows:
Technicolor shares/Shares held Directors present as of the date hereof through FCPE Denis Ranque 2,000 Fre de ric Rose 25,600* Lloyd Carney 30,000 Loïc Desmouceaux 4,146 Catherine Guillouard 800 Bruce Hack 5,000 Didier Lombard 641 John Roche 8,000* Rémy Sautter 1,000
* Those amounts include shares acquired on March and August 2011 (see below).
Details regarding stock options granted to Executive Directors are set forth in paragraph 4.4.5, “Stock options awarded to Executive Directors – Free Shares.”
The table below shows the transactions in Technicolor’s securities executed during 2011 by the Directors and O fficers in application of Article L. 621-18-2 of the French Monetary and Financial Code:
Description of Number Date of Type of the financial of shares/ Transaction First name and last name transaction transaction instrument instruments Unit price amount Frederic R ose 03/04/2011 Purchase Shares 10,000 €5.168 €51,680 John Roche 03/08/2011 Purchase Shares 4,000 €5.1051 €20,420.40 John Roche 08/03/2011 Purchase Shares 2,000 €3.5808 €7,161.60
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4.1.3.6 Service and other contracts 4.1.3.7 Loans and guarantees granted between Board Members to Board Members and the Group None. To the Company’s knowledge, as of the date hereof, there are no service contracts between Board Members and the Group or any of its subsidiaries that provides for benefits upon termination of such contracts.
Mr. Loïc Desmouceaux, Director representative of employee shareholders, has an employment contract with the Company.
4.2 CHAIRMAN’S REPORT ON CORPORATE GOVERNANCE, INTERNAL CONTROL AND RISK MANAGEMENT
This report was established by Mr. Denis Ranque, Chairman of AFEP-MEDEF Corporate Governance Code to exclude from the the Board of Directors, pursuant to Article L. 225-37 of the French Remuneration Committee any executive Director (dirigeant mandataire Commercial Code. For the establishment of the corporate governance social; namely, the Chairman of the Board and the Chief Executive sections of this report, the Chairman tasked the Legal Department; Officer). In its decision of February 17, 2010, the Board decided to for the establishment of the internal control sections, the Chairman combine the Remuneration Committee and the Governance and tasked the different departments of Corporate Finance (Controlling, Nominations Committee, and named Mr. Denis Ranque as Chairman Treasury, Accounting, internal audit, Internal Control) as well as the of the Board and Member of the Remuneration, Nomination and Legal and IT Departments. It was reviewed by the Audit Committee Governance Committee. The Board (i) believed that the considerable and the Remuneration, Nomination and Governance Committee. It was experience of Mr. Denis Ranque with other business groups was approved by the Board of Directors during its meeting of March 21, 2012. complementary to those of Messrs. Rémy Sautter and Bruce Hack, (ii) recalled that the Board of Directors comprises nine Directors, Information relating to the composition of the Board of Directors appears including seven Independent Directors, and three Committees, in section 4.1.2 “Composition and expertise of the Board of Directors”. (iii) intended that the Remuneration, Nomination and Governance Committee be composed solely of Independent Directors and (iv) decided that Mr. Denis Ranque (Independent Director) would 4.2.1 PREPARATION AND not attend the Committee with respect to any questions relating to ORGANIZATION the Chairman of the Board of Directors, whether concerning his term of office, evaluation or remuneration. Finally, as previously indicated, OF THE BOARD the functions of Chairman and Chief Executive Officer have been OF DIRECTORS’ WORK separated.
4.2.1.1 Compliance with AFEP-MEDEF 4.2.1.2 Structure of Board of Directors’ Corporate Governance Code work – Internal Board rules Pursuant to the Law of July 3, 2008 transposing European Directive The preparation and organization of the Board of Directors’ work 2006/46/CE of June 14, 2006, the Company now adheres to the are described in the Board of Directors’ Internal Board Rules. These AFEP-MEDEF Corporate Governance Code of April 2010 in the rules were amended on January 27, 2010 in order to conform to the preparation of the report contemplated by Article L. 225-37 of the Company’s commitments under the Sauvegarde Plan approved by the French Commercial Code. Nanterre Commercial Court on February 17, 2010 and on April 21, 2010. The main provisions of the Internal Rules are summarized below. In accordance with Article L. 225-37 of the French Commercial Code, the Company declares it has not followed the recommendation of the
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Board of Directors’ powers and missions (vii) the modification of the terms of the main finance contracts or the conclusion of new finance contracts increasing the Technicolor The Board of Directors determines the Group’s strategic direction and group’s level of indebtedness (with the exception of decisions ensures its implementation. It examines all questions relating to the made for the purpose of implementing the Sauvegarde Plan proper functioning of the Company, subject to the powers explicitly approved by the Nanterre Commercial Court in the context of attributed to the Shareholders’ Meetings. the Company’s Sauvegarde proceeding); (viii) the granting of any security or guarantee to any of the creditors Limitations imposed by the Board of Directors for a financial debt of the Technicolor group of more than on the powers of the Chief Executive Officer €20 million, or any modification of any such security or guarantee; According to French law and the Company’s bylaws, the Chief (ix) the takeover by any company of the Group of a third-party Executive Officer is vested with the broadest possible powers to act entity for more than €25 million, or any contributions, mergers in any circumstances on behalf of the Company. He exercises these or de-mergers having an impact of more than €25 million on the powers subject to the limitations imposed by the Company’s corporate Company’s business value; purpose and those matters expressly reserved by law to the Shareholders’ Meeting and the Board of Directors. Moreover, the Chief Executive (x) the appointment of the Chairman of the Board of Directors and Officer must obtain Board approval for the decisions listed below and the Chief Executive Officer of the Company; falling within its compentence. (xi) any decision concerning the liquidation or dissolution of the Company (or of one of its main subsidiaries), or any decision to In accordance with the Sauvegarde Plan, the Internal Board Rules were proceed with a restructuring; amended in order to require that the following strategic decisions of the Company be approved by a qualified majority of two-thirds of the (xii) any decision to implement protective mechanisms for NRS Directors: holders in the event of any operation on capital as set out in Articles L. 228-98 et seq. of the French Commercial Code or (i) the acquisition or transfer of any entity or activity whatsoever by in compliance with the specific terms applicable to the NRS by any Member of the Technicolor group, including the Company virtue of the note agreement; or its subsidiaries as defined in Article L. 233-1 of the French (xiii) the appointment of a Statutory Auditor who is not part of a Commercial Code (hereinafter “Group”), for an amount of more network of international repute; than €25 million, either per operation or per series of related operations; (xiv) any decision, by any Member of the Group, to settle litigation underway where such settlement would result in a payment of (ii) the acquisition by the Company of its own ordinary shares (with more than €10 million to the relevant counterparty; the exception of the acquisition of shares conducted in the context of plans giving executive or salaried employees rights (xv) the commencement of any litigation where the amount at issue to shares, or stock-option plans, or in the context of a liquidity is more than €10 million; contract concluded by the Company); (xvi) any decision to modify the business plan having the effect of (iii) any decision relating to the payment of dividends or other reducing the EBITDA of the Company by more than €50 million distributions; on an annual basis; (iv) any anticipated merger aimed at the absorption of the Company (xvii) any significant changes to accounting principles applicable to the (or one of its main subsidiaries) by another corporation; Company or to any subsidiary of the Group, other than changes made in application of applicable law or required by the Statutory (v) any decision modifying the Company’s Articles of Incorporation, Auditors of the Company or the relevant subsidiary. and specifically, any modification designed to change the number of Directors of the Company currently provided for in the Articles Moreover, pursuant to Article L. 225-35 of the French Commercial of Incorporation; Code, security interests and guarantees granted by the Company on behalf of third parties must be authorized by the Board of Directors. (vi) the issuance or the authorization of the issuance of any new An annual report is made to the Board of Directors on the use of such shares (ordinary or preferred ) or any equity-linked securities in the authorization. Company or one of its main subsidiaries, by way of redemption, conversion, exchange, or any other means (with the exception of issuances required to implement the Sauvegarde Plan approved by the Nanterre Commercial Court in the context of the Company’s Sauvegarde proceeding);
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Board Committees Directors’ right to information The Board of Directors is assisted in the exercise of its duties by three The Chairman is required to communicate to each Director all Committees: the Audit Committee, the Remuneration, Nomination and documents and information necessary to carry out his or her work. Governance Committee, and the Technology Committee. Article 20.3 of the Internal Board Rules stipulates that “outside of Board meetings, Directors receive important information concerning Each Committee formulates proposals, recommendations and the Company and are informed of any event or development that could assessments in its area of expertise, which is defined by the charter of have a significant impact on the Company’s transactions”. each Committee. For this purpose, it may carry out any study that may help the Board of Directors’ deliberations. The Board of Directors may consult with the Company’s outside advisors (financial and legal advisors) during its meetings. It may also The Chairman of each Committee draws up the agenda for the visit Technicolor sites. meetings, which agenda is then communicated to the Chairman of the Board of Directors. The proposals, recommendations and assessments produced by the Committees are compiled in a report to the Board of Directors’ duties Directors. Members of the Board of Directors are required to abide by a general confidentiality obligation concerning the content of deliberations in the Board and its Committees, and in relation to information that is Board meetings confidential in nature or presented by its Chairman as being confidential. Each year, the Board of Directors draws up the schedule of its meetings for the coming year, based on a proposal from the Chairman. The Internal Board Regulations stipulate that each Director is required to inform the Chairman of any personal situation that is likely to create a This schedule sets the dates for the Board of Directors’ regular meetings conflict of interest with the Company or any of the Group’s companies. If (in conjunction with the release of quarterly financial information, necessary, the Chairman asks for an assessment from the Remuneration, the previous year’s annual results, the half year results, the Ordinary Nomination and Governance Committee. Shareholders’ Meeting, etc.). In addition to the meetings included in the schedule, the Board of Directors holds meetings whenever required by the Company’s circumstances. If necessary, the Directors meet in working sessions. In addition, the Directors may meet in “executive sessions”, in which the Chief Executive Officer does not participate.
4.2.1.3 Board of Directors’ activities in 2011 In 2011, the Board met seven times, with an average participation rate of 98.41%.
The table below shows the participation rates of each Director:
Directors Participation rate Denis Ranque 100% Fre de ric Rose 100% Lloyd Carney 100% Loïc Desmouceaux 100% Catherine Guillouard 100% Bruce Hack 100% Didier Lombard 100% John Roche 100% Rémy Sautter 85.71%
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In 2011, the Board of Directors reviewed the Company’s quarterly, 4.2.1.4 Composition and activities half-yearly and annual financial information and the process for of the Board Committees preparing this information: 2011 annual budget, parent company and consolidated financial statements for 2010 and the first quarter of 2011, Audit Committee and quarterly revenues for the first and third quarters of 2011. It reviewed major accounting issues, such as impairment of goodwill. Each Board Adherence to the AMF’s report on Audit Committees meeting which approved the quarterly, half yearly or annual accounts The Company referred to the AMF’s report on Audit Committees was preceded by one or more meetings of the Audit Committee, issued on July 22, 2010. which systematically provided a report to the Board on the questions reviewed during these meetings. Moreover, the Board of Directors Composition reviewed the press releases issued after each meeting, as well as the The Audit Committee comprises Mr. John Roche (Chairman), Registration Document, after examination by the Audit Committee and Ms. Catherine Guillouard, and Mr. Bruce Hack. the Remuneration, Nomination and Governance Committee for the sections falling under their respective fields of competence. The Board of Directors meeting of February 17, 2010, which decided the composition of the Audit Committee, determined that its composition The Board of Directors continued the works related to the financial was in compliance with the requirements of Article L. 823-19 of the debt and approved the terms and conditions of the amendments French Commercial Code established by Ordinance No. 2008- negotiated with the Company’s senior creditors to the Reinstated Debt 1278 of December 8, 2008 and the recommendation of the AMF agreements; mostly, the provisions relating to acquisitions, transfers, working group issued on July 22, 2010. The three members of the and joint ventures. Committee are considered independent by the Board of Directors The Board reviewed and approved the Company’s strategic plan in with respect to the AFEP-MEDEF Corporate Governance Code a two- step process, the board first approved the three-year plan and (please refer to section 4.1.2 “Composition and expertise of the Board monitored operational performance and the corresponding action plans of Directors” above). Furthermore, the Board of Directors meeting of on a regular basis. February 17, 2010 stated its belief that Ms. Catherine Guillouard meets the qualification of financial expert as defined by the Ordinance of In addition, the Board of Directors approved the transfer of the stake in December 8, 2008. Moreover, Messrs. John Roche and Bruce Hack ContentGuard Holdings Inc. also have special skills in financial matters.
Concerning governance, the Board of Directors conducted an evaluation Mission of its Chairman and of the Chief Executive Officer’s performance and The Audit Committee’s mission and the organization of its activities compensation. are defined by applicable law (the Ordinance of December 8, 2008), its charter, and by the Internal Board Rules. In 2010, on the Moreover, it performed a self-evaluation of its performance and that of recommendation of the Remuneration, Nomination and Governance the Committees for 2011 , by means of a detailed questionnaire drawn Committee and the Audit Committee, the Charter of the Committee up by the Remuneration, Nomination and Governance Committee and was amended to take into account updates of regulations and best- sent to all Directors. The evaluation questionnaire included a series of practices recommendations. questions on the following themes: the structure, missions, functions and functioning of the Board of Directors, organization and functioning of The Committee assists the Board of Directors in fulfilling its the Committees . The results of this self-evaluation were examined by responsibilities concerning financial information and its publication, the Remuneration, Nomination and Governance Committee, and then internal control procedures and risk management, internal auditing, reviewed by the Board of Directors on March 21, 2012. and internal procedures to verify compliance with applicable laws and regulations. In particular, it examines the draft parent company The Board of Directors also adopted a long-term incentive plan for unconsolidated financial statements and consolidated financial Management and key Group contributors. statements prior to their presentation to the Board of Directors, and verifies that the procedures adopted (i) ensure that the accounts provide Finally, it determined the independence of each member of the Board a true and fair view of the Company’s financial position; and (ii) are in of Directors. compliance with applicable accounting standards.
Similarly, the Audit Committee expresses its opinion and makes proposals to the Board of Directors concerning the nomination, remuneration, dismissal, mission and activities of the Statutory Auditors. In compliance with applicable regulations, the Committee also gives its authorization, or adopts procedures for authorization of services other than audits by the Statutory Auditors.
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Pursuant to the Ordinance of December 8, 2008, the work of the Audit The Committee also reviewed the Company’s annual risk evaluation Committee also relates to the evaluation of the efficiency of internal and an in-depth review of certain risks (“Technicolor Risk Management ”). controls and the assessment of risks. It reviewed the semi-annual internal audit plans and their results, and internal control, security, IT and insurance procedures. The Audit Committee reviews the works conducted by the Ethics Compliance Committee, which include “whistleblowing” investigations. Moreover, the Audit Committee reviewed the functioning of the Ethics The Ethics Compliance Committee reports to the Audit Committee Compliance Committee. (see section 4.2.2.2 “General Control Environment” below). The Audit Committee examined the Statutory Auditors’ audit plan and Organization of the Audit Committee’s activities reviewed the Statutory Auditors’ independence, which was confirmed. The Audit Committee meets at least four times a year, and whenever Finally, the Audit Committee conducted a self-evaluation of its activity necessary before a Board of Directors’ meeting, according to a in 2011. predetermined annual schedule. In performing its missions, the Committee may directly discuss matters with the Statutory Auditors
in the absence of the managers or of persons contributing to the Remuneration, Nomination and Governance preparation of the financial statements. It may also directly discuss Committee matters with the internal auditors in the absence of management. The Remuneration, Nomination and Governance Committee comprises The Audit Committee may call upon the services of experts within or Messrs. Rémy Sautter (Chairman), Denis Ranque and Bruce Hack. outside the Group; in particular, legal counsel, accountants or other advisors or independent experts. Mission The Remuneration, Nomination and Governance Committee submits The Statutory Auditors participate in each Audit Committee meeting. proposals pertaining to the Company’s governance, in particular, in respect of the organization and functioning of the Board of Directors. The review process for annual and interim financial statements by It also makes proposals to the Board of Directors for the appointment the Audit Committee includes an initial meeting for the review of of the Board Members, the Chairman, the Chief Executive Officer and the initial closing issues and a second meeting for the review of the Board Committee Members. financial statements. As some of the Directors who attend the Audit Committee reside outside of France, for practical reasons, the second In addition, the Remuneration, Nomination and Governance Committee meeting may sometimes take place the day before the meeting of the issues recommendations to the Board of Directors regarding the Board of Directors. compensation of the Executive Directors and the amount of Directors fees to be submitted to the Shareholders’ Meeting. The Committee Audit Committee’s activities also makes proposals in respect of the awarding of stock options and The Audit Committee met six times in 2011, with an average participation free shares to the Group’s employees, and more generally concerning rate of 100%. employee shareholder and shareholder savings programs, and issues recommendations on the consistency of the remuneration of Executive During 2011, the Audit Committee examined the following financial Directors as compared with that of the other managers and employees. information: parent company and consolidated financial statements for 2010 and the first half of 2011, quarterly revenues for the first and third Remuneration, Nomination and Governance quarters of 2011. The Audit Committee looked into accounting issues Committee’s activities related to the closing of accounts for 2010, the first half of 2011 and the The Remuneration, Nomination and Governance Committee met four year 2011. In particular, he conducted an in-depth review of impairment times in 2011, with an average participation rate of 91.6%. of goodwill and important issues surrounding the closing of accounts. The financial statements were examined through presentations by the In 2011, the Committee examined the variable compensation of the Company’s Chief Financial Officer and the Statutory Auditors. Chief Executive Officer, (please refer to section 4.4: “Compensation and benefits of Directors”) as well as the implementation of the long-term As part of its duties, the Committee directed its attention to the incentive management plan (LTIP) awarding stock options and free Group’s debt and cash flow situation. In this regard, it looked into the shares (please refer to section 6.1.4: “Stock option plans and free share procedures implemented by the Group for the monitoring and projected plans” of Chapter 6 “Social information and sustainability”). management of cash flow and on exchange rate hedging policies.
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The Committee reviewed the Company’s succession plan for the Chief The Committee also monitored the opening of the Palo Alto research Executive Officer and members of the Executive Committee and the laboratory in California and discussed the composition and the Group Talent Review, which describes the methods for selecting and conclusions of the Scientific Committee’s works. Finally, it conducted training high-potentials and key Group contributors. a full review of the technology programs/roadmap of the MediaNavi project (M-GO). With respect to governance, the Committee recommended the renewal of the directorships of Ms. Catherine Guillouard and Messrs. Loïc One of the meetings was held during the CES trade show in Las Desmouceaux and Rémy Sautter. Moreover, the Remuneration, Vegas, where the members of the Committee were able to attend the Nomination and Governance Committee at its meeting on February 22, technology and consumer demonstrations conducted by Technicolor 2012 and the Board of Directors at its meeting on February 23, 2012 teams in the trade show booths and to review the main innovations of examined the Company policy regarding equal employment and wages. competitors.
Finally, it reviewed the results of the self-assessment of the Board of Directors and the Board Committee’s activities in 2011 (see above). 4.2.1.5 Other information from the Chairman’s report on conditions for preparation and organization Technology Committee of the Board of Directors’ work, Composition on internal control procedures The Technology Committee comprises Messrs. Lloyd Carney and risk management (Chairman), Didier Lombard, and Loïc Desmouceaux. Principles and rules adopted by the Board of Mission Directors to determine compensation and benefits The Technology Committee examines issues relating to innovation of any kind granted to Directors in accordance with and research. It provides opinions and recommendations to the Board Article L. 225-37 of the French Commercial Code of Directors on the various technological choices they face, and The principles and rules established by the Board of Directors to participates in defining the strategic direction of the Company. The determine compensation and benefits of Mr. Fre de ric Rose, Chief Committee carries out its work alongside the Chief Scientist, the Head Executive Officer, are discussed in paragraph 4.4.2 below. The principles of Technology division, and the Head of Research and Innovation. and rules adopted by the Board of Directors to determine Director’s Technology Committee activities fees and other Director’s compensation are discussed in paragraph 4.4.4 below. The Technology Committee met twice during 2011, with a participation Information relating to stock options and free shares granted to rate of 100%. Directors is provided in paragraph 4.4.5 below and in Chapter 6: “Social information and Sustainability”, section 6.1.4: “Stock option plans and The Committee reviewed the “Excellence” program, which aims free share plans” of this Annual Report. to improve the operational performance of the Connected Home business and discussed the status of the “Revolution” project related to Connected Home. Participation of shareholders in General Meetings There is no specific arrangement for participation of shareholders in In addition, it reviewed the organization of Research & Innovation the Company’s General Meetings. For further information about the activity, the major research programs underway, and the actual transfers conditions of participation for Shareholders’ Meetings, see Chapter 7: of technology for the past year. In July, it reviewed the relevance of R&I “Additional information”, section 7.2.5: “Shareholders’ Meetings” of this projects and how such projects support the patents and technology Annual Report. licensing strategy in addition to the strategy of other business segments. The Committee also examined the relevance of existing R&I programs in relation to future consumer electronics and reviewed the composition of the portfolio of patents and trends by type of application.
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4.2.2 INTERNAL CONTROL n compliance with applicable laws and regulations to determine the behavioral standards that the Company incorporates into its PROCEDURES compliance objectives; The internal control procedures mentioned in the present chapter apply n reliability of financial information obtained through the implementation to the Company and all its subsidiaries and are under the responsibility of internal control procedures. of each Technicolor employee. Internal control system aims at preventing and mitigating risks arising The major components underlying the preparation of this report are (i) from the Group’s conduct of business and risks of error or fraud, in the compliance with Loi de Sécurité Financière (LSF or Law regarding particular, in areas of accounting and finance. As for every control Financial Security), (ii) the Ordinance No. 2008-1278 of December 8, system, it cannot provide an absolute guarantee that these risks are 2008 and the AMF guidelines on risk management and internal control totally eliminated. and (iii) the work of internal audit. To attain these objectives, internal controls must be implemented at In late December, 2010, the Board of Directors of Technicolor approved the level of each legal entity and for different categories of transactions the principle of a voluntary delisting of its American Depositary Shares carried out by the Group. (ADSs) from the New York Stock Exchange (NYSE), and the voluntary termination of the registration of its securities under the U.S. Securities Internal control methodology Exchange Act of 1934. The Board of Directors delegated to the CEO the authority to implement the decision to delist and deregister, which The new internal control methodology is based on three pillars: decision was communicated on February 28, 2011. n a self assessment on controls implementation by the most significant The Company filed a Form 25 with the NYSE and the Securities entities (Primary scope). These self assessed controls are designed to Exchange Commission (SEC) on March 11, 2011, and the delisting was mitigate Technicolor major risks, as identified during the Technicolor effective as of March 21, 2011. On March 24, 2011, the Company filed Risk Management (TRM) process, defined at the highest level of the a Form 15-F with the SEC, thereby initiating the deregistration process. Group. In 2011, 195 control owners were designated to perform a self Upon filing the Form 15-F, the Company’s Exchange Act obligations assessment on 4,683 controls over finance and non finance processes; were immediately suspended. n an independent testing managed by internal audit covering 20% of the self assessed controls. This testing aims at providing assurance that Following the delisting, the Group decided to maintain high standards the Technicolor internal control framework is effective. Independent of financial reporting discipline capitalizing on the work undertaken testers are composed of internal auditors, internal control coordinators previously. The process is now being overhauled to enhance the linkage and members of the central internal control team; between Internal Control, risks, and Technicolor’s strategic objectives. The project 8TIC’S was launched at the beginning of 2011 with the n a questionnaire, made of eight key internal control topics (regarding objective to maintain and expand the internal control scope beyond customer offer review, costs monitoring, budget and forecast, ethical financial reporting through a risk-based approach. policies, delegation of authority, legal monitoring, succession plan and internal control monitoring), completed and signed by Heads and Financial Controllers of Business Groups/Divisions/Functions 4.2.2.1 Objectives of internal control (35 people). This assessment in the form of a questionnaire covers procedures and implementation both the Primary scope and all other entities (Secondary scope). As a result, the new framework applies to all entities within the Group. Objectives of internal control procedures The internal control team ensures a continuous monitoring of the The Group internal control framework is designed to achieve the Internal control testing campaign, through KPI’s such as self assessment/ following main objectives: independent testing completion rates, deficiency rates, severities of reported deficiencies. The internal control team sends regular n application of the instructions and directional guidelines fixed by communication to internal control communities, including training on the Group’s management bodies in line with the Company’s overall the approach, the tools to be used, and reports to the Audit Committee. objectives and the inherent risks;
n correct functioning of the Company’s internal processes, particularly those implicating the security of its assets; all operational, industrial, commercial and financial processes are concerned;
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The management community is involved in the deficiency remediation The Code of Ethics (in French and in English), the Whistleblower Policy and takes an active role in the implementation of corrective actions (in French and in English), and the related policies are available to all raised during the internal control campaign. Group personnel via the Group’s internal website.
A strong cohesion exists between the Internal Audit Department and the Financial Ethics Charter internal control team to ensure efficient coordination between entities To reinforce awareness of the ethical dimension of finance activities, and top management expectations. Technicolor has published an Ethics Charter specific to Finance personnel and activities. It is an extension of the Company’s Code of 4.2.2.2 General control environment Ethics, which applies to all employees. The ethical values and principles of conduct for the The Financial Ethics Charter was first published in December, 2005, is Group’s managers signed by the Chief Executive Officer and the Chief Financial Officer, and is distributed to key persons within the Finance organization. The values and principles of conduct for the Group’s managers are defined in two of the Group’s principal internal documents: the Group’s This policy promotes the following rules: acting honestly and with Code of Ethics and the Financial Ethics Charter. integrity and avoiding conflicts of interest, providing accurate, complete and objective information, compliance with all rules and regulations, Code of Ethics public and private, to which the Group is subject, acting in good faith Created in 1999 and updated in 2006, the Code of Ethics establishes without misrepresenting material facts or allowing one’s judgment to the foundation of the Group’s core values and requires all employees to be unduly influenced, respecting confidentiality of information, sharing observe high standards of business and personal ethics in the conduct and maintaining appropriate knowledge and skills, promoting ethical of their duties and responsibilities. The Code of Ethics has four basic behavior in one’s environment, using and controlling responsibly assets principles: Respect for People, Respect for the Environment, Valuing under one’s supervisions and reporting known or suspected violations Integrity, and Valuing Creativity. The Group is committed to offering of the Charter. equal employment opportunity, developing its employees, and ensuring health and safety. The Group also aims to apply consistent policies and A copy of the Code of Ethics and the Financial Ethics Charter is programs to protect the environment. Finally, protection of Intellectual available on the Company’s website at www.technicolor.com or upon Property and inventions is integral to continuing innovation in the media request to the Company. chain. Although the Group is no longer subject to the “SOX” requirements The Group also created an Ethics Compliance Committee in 2006, following its NYSE delisting and SEC deregistration (as described which is responsible for all ethical issues related to Technicolor’s activities above), the Financial Ethics Charter is planned to be maintained in the and which is governed by the Code of Ethics and the Charter for the coming years. Ethics Compliance Committee. This includes implementing any new policies if needed, training on existing policies, and investigating any Group Management and decision-making and all reports of unethical behavior. It meets at least quarterly and more frequently when required. processes At December 31, 2011, the Group Management is organized around Beginning in 2008 and continuing through 2011, the Group deployed four principal bodies: ethics training programs. Several online training sessions were launched n the Executive Committee; to educate employees on various ethical rules and obligations. Some dedicated training sessions were also organized on specific sites or for n the Management Committee; specific functions. These training sessions involved around 4,000 people n the Senior Leadership Team; in 2008 and 2009 and around 9,000 employees for the period 2010-2011. n the Technicolor Country Heads. Finally, the Group implemented a Whistleblower Policy in 2006, which Placed under the authority of the Group’s Chief Executive Officer, the enables employees and other holders of relevant information to report Executive Committee currently comprises eight members consisting suspected financial, accounting, banking and bribery activities to the of Senior Executive Vice Presidents and Executive Vice Presidents in Ethics Compliance Committee. In 2010, the Group provided to U.S. charge of Technicolor’s major businesses and of the principal corporate employees the ability to submit a Whistleblower report through an functions (Finance, Human Resources, etc.). The Executive Committee independent third party. The third party’s telephony and web-based meets every two weeks to analyze and evaluate the financial performance hotline solution enables employees to easily and confidentially submit (sales, operating income and cash flow) of the Group’s various businesses Whistleblower reports. compared with the budget, strategic developments, and major events affecting the Group (sales contracts, partnerships, investments, etc.).
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In 2010, a Management Committee was created; it includes the Executive Risk Management Committee Members as well as leaders of Technicolor’s main functions In 2005, the Group launched the Enterprise Risk Assessment (ERA), and business operations. Its responsibilities are to ensure achievement a worldwide program to evaluate corporate risks. The goal of the ERA of the Group’s objectives and to provide leadership across Technicolor. process is to identify, assess, validate and monitor risks that may impact The Management Committee meets monthly. the Group’s ability to achieve its near and long-term objectives. The Senior Leadership Team (SLT), whose Members reflect the diversity The overall risk assessment allows for identification operational risks listed of the corporation in terms of business and organizations, serves as the under Chapter 3: “Risk Factors”. After the assessment, the Group moves operational arm of the Management Committee. Senior Vice Presidents, from the risk identification process to the risk management process, appointed by the CEO, are Members of the SLT which, along with which consists of identifying who is in charge of producing and following Executive Committee and Management Committee Members, form a an action plan for mitigating and monitoring the risk. The overall risk group of leaders of around 50 people. The SLT also aims to provide a management system is called “Technicolor Risk Management”. strong forum for presenting proposals, generating new ideas and further enabling understanding and communication within the Company. The In 2009, following the Group’s strategic realignment and management SLT meets at least twice a year. changes, the risk assessment approach was revised. As a consequence, risk identification and assessment are now performed by the Executive Together, the three senior management bodies help ensure rapid, Committee on behalf of the Group. In 2010 and 2011, risk owners were responsive decision-making as well as smooth, efficient implementation appointed in respect of the Group’s most significant risks. The risk owner of such decisions. is a Member of the Executive Committee or a direct report. The risk owner is in charge of analyzing the risk and defining and implementing In several countries where the Company operates (typically, the action plans to mitigate it. The risk owner also ensures the monitoring significant countries other than France and the USA), senior managers of the risk. are appointed as Technicolor Country Heads. Their first priority is to drive an in-country “one company” approach for employees, local The Technicolor Risk Management process is subject to status reports customers, and support function structures. They are also responsible presented to the Executive Committee and the Audit Committee. This for Technicolor’s local representation efforts, performance management process is supported and facilitated by Internal Audit Department. and investments decisions.
The Group holds quarterly Business Reviews for each business, during 4.2.2.3 Internal audit which the management reviews the performance of the business, The Internal Audit Department reports its results to the Group’s the progress of the key programs in each business, key performance management. The Audit Committee reviews and approves the indicators, and any specific operational topic which requires management audit plan twice a year and is informed of the main audit results. The attention. These programs cover key customer issues, new product Internal Audit Department provides support in the risk assessment and introduction, operational performance, transformation programs, cost management process. reduction, and HR-related programs. The Internal Audit Department consists of around 12 auditors located in In addition, the Group established an Investment Committee in 2010 three key sites for the Group: Issy-les-Moulineaux (France), Indianapolis, to drive prioritization and optimization of resource allocation across Indiana (U.S.) and Burbank, California (U.S.). The Chief Audit Officer the Company’s o rganization. The Investment Committee is composed is located in Issy-les-Moulineaux. of the CEO, Senior Executive Vice Presidents, and the Company Secretary. The Investment Committee decides on all significant The internal audit Department completes audits covering the following investment decisions, including material customer opportunities, capital domains: operational processes, financial audits, transversal or local expenditures, restructuring, M&A and joint ventures, asset disposals, financial processes, review of contracts or projects, compliance audits, pension contributions, large procurement contracts, leases, and financing and follow-up audits. In 2011, 34 audit engagements were performed commitments. The Investment Committee ensures compliance with the (both assurance and assistance types), compared to 37 completed Board governance rules and debt agreement obligations and is a key part of the Group’s internal control procedures. It meets on a weekly basis.
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in 2010. Most of the segments and support functions are covered, projections, analyses trends: costs base structure, customers base through a risk-based approach. analysis, suppliers and capex needs. It includes also key strategic initiatives and their financial impact in the budget (and going forward) 4.2.2.4 Internal control procedures and a risk and opportunities analysis. relating to the preparation n In November and December, review and approval by Senior Executive and treatment of accounting management and corporate finance teams of proposed action plans and financial information and budgets prepared at the business level. n Approval of the budget by the Board of Directors; at the latest, at the The internal control related to the preparation and treatment of beginning of the following year. accounting and financial information relies on the Controlling organization with its processes and controls (budgetary process, monthly n Split of the budget into monthly periods to serve as a reference for reporting and forecasting, quarterly reporting of financial and operational the Group’s monthly reporting. performance review) as well as on the Internal Audit Department and In the context of the budgetary procedure, KPIs are presented by each the Group’s Accounting Department (regrouping accounting standards business, and analyzed and monitored on a monthly basis. and methods and share services centers teams).
Under the authority of the Group’s Chief Financial Officer, the Periodic performance review dedicated teams are responsible for: The Controlling organization reviews the Group financial performance periodically: n the establishment of the Group’s consolidated financial statements and Technicolor SA’s statutory accounts; n on a monthly basis: n the preparation of the budget and the analysis of its execution through – the reporting on actual performance is managed by the Controlling monthly management and performance reporting; and organization and a detailed review, performed during the closing n the implementation of the Group’s accounting and Controlling period of the financial accounts (analysis of variance vs. budget and methods, procedures and standards (and their adaptation in last year) is presented to management, accordance with changes). – the forecasting of the current and next quarter is performed by each The Group’s financial organization follows its operational organization, business and also presented to management; based on three segments (Entertainment Services, Digital Delivery n on a quarterly basis: and Technology), comprising eleven Businesses, organized in several activities. One additional segment (Corporate and other) completes this – reporting of operational performance through a business review organization. Each one of these businesses and activities is under the (review of major KPIs, risks and opportunities, market trend and responsibility of a controller and is assisted by a controlling supporting competition, customer portfolio analysis, strategic programs and team, in charge of budget, reporting follow-up, performance analysis key initiatives) with management and closing of financial statements, and estimates. Accounting operations within the legal entities are for the – the forecasting of the current and next three quarters is performed most part managed through two internal shared services centers. The at the beginning of each quarter by each business (including main accounting teams work according to Group accounting standards and income statement indicators such as revenue and adjusted EBITDA methods and liaise with the Controlling organization through Services as well as Free Cash Flow items) and reviewed at Group level. Level Agreements. Accounting and management reporting Budgetary process and closing period work at the Group level The budgetary process is mandatory for all of the Group’s segments The Group accounting and financial data are consolidated into one and businesses. The principal stages in the budgetary process are the Group reporting system. following: At the end of each month, the Group’s entities report their financial data n in September and October, preparation by each business of a budget into this system. The Group reporting system uses a common chart of for each quarter of the following year, based on market analysis and accounts, which is regularly updated. The main accounting and financial
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figures of the operational and functional departments consolidated at Prior to being published, the above financial information is also reviewed the Group level are analyzed by the Group’s financial controlling team by Members of the management team and senior managers within the and reviewed by the Group’s Executive Committee. Corporate Finance and Legal Departments, each for their respective fields. The closing process for the half-year and annual consolidated financial statements occurs in two steps. The first step consists of a “hard close” completed for the May and October closings. This review is initiated 4.2.2.5 Other Internal Control Procedures by the circulation of instructions prepared by the Group’s Accounting Department. Procedures define the controls and actions which Information Technology Security Procedures must be undertaken at the entity level (entries in accounting books, The Chief Information Officer leads the Technicolor’s IT organization reconciliations, etc.) and the persons authorized to implement them. and is supported by a Leadership Team composed of senior IT managers. The managers either directly support each of Technicolor’s This step leads to a first review by the Statutory Auditors, completed businesses (Entertainment Services, Digital Delivery and Technology) initially at the subsidiary level within a majority of the Group’s legal or support shared service IT functions and applications used world wide entities, then at the Group level. This “hard close” allows for the by the entire organization (Corporate Functions applications, Corporate identification of the most complex issues, which may be reported to services and applications, Global infrastructure). These individuals are the Senior Management Team. experienced IT professionals with a broad background and are well versed with the businesses and technologies they support. They ensure The second step occurs in July and in January/February and involves that the IT tools, services, and applications used by all Technicolor sites the finalization of half-year and annual consolidated financial statements and businesses (e.g. e-mail, networks, phone systems, collaboration under International Financial Reporting Standards (“IFRS”). tools, video conferencing, web technologies, business intelligence tools, business applications, etc.) are operated and managed in an efficient, After each monthly closing, the Group’s financial results for the month cost-effective, safe and secure manner. In addition, they also support and the current quarter are presented to the Executive Committee. After the tools, applications, and control practices used to govern, control, and each quarterly closing, the quarterly financial results (as well as half-year manage the IT organization as well as protecting and safeguarding our and annual results) are presented to the Audit Committee. These results global IT assets (antivirus, anti-SPAM, regulatory compliance, internal IT are also presented to the Board of Directors. standards and best practices, project and project portfolio management processes). The Group’s accounting principles are defined in a set of documents entitled “Technicolor Accounting Principles and Methods”, which The IT Department has developed and applied a governance framework are available on the Company’s intranet site and provided to all the which defines rules and procedures regarding application development, Group’s Finance Departments. These documents outline the accounting monitoring and management as well as IT project management. This treatment of such items as tangible and intangible assets, provisions, governance framework defines the best practices for selecting and using intercompany transactions, revenues and hedges. IT tools, for accessing data, programs and applications, and for ensuring the confidentiality, integrity and availability of these assets. These rules In addition, the Group publishes and distributes procedures that and procedures are audited annually by the CIO and general managers accountants and financial controllers must respect in terms of purchasing, and updated as required. management of inventories, sales, payments, cash flow, or taxes. Moreover, the Technicolor IT governance model also covers the Preparation of financial information following areas:
The Group’s financial information is prepared by the Finance n the execution of a broad global infrastructure strategic plan focusing Department. It is based on information reported through the Annual on operational performance; Reporting and accounting consolidation processes and on operational and market information, which is specifically centralized for the n the creation and execution of a three-year detailed application preparation of the Company’s Annual Report. The latter is prepared strategic plan focusing on consolidation and standardization of jointly by the Finance Department and the General Secretary of the systems, tools and business processes; Company. n the management of the IT projects portfolio;
The quarterly, half-yearly and annual financial information is reviewed n the divestiture process for all held-for-sale entities and integration by the Group’s Audit Committee and the Board. for acquisitions;
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n the measurement of the performance delivered by the IT function; launched. It overlaps the future architecture with the IT 3-year-plan, and to identify and address any gaps. n the standardization of Technicolor’s project and portfolio management processes and methodologies across the organization. Security of people, assets and Intellectual Property The Technicolor Chief Security Officer (CSO) oversees all of the In 2011, IT protection levels were enhanced through the following Group’s security activities: actions:
n People; n to ensure that computer vulnerabilities are identified and properly mitigated, the use of vulnerability assessments and monitoring was n Physical; enhanced in key data centers and business production environments; n Digital/IT; n to manage the identities and system access rights of Technicolor’s n Intellectual Property/Content Security. Human Resources, the deployment of UAM-IAM tools and supporting processes was continued; Due to the importance of protecting the security of Technicolor’s people, assets, and its Intellectual Property in addition to the Intellectual Property n to further reduce the workload associated with periodic audits while entrusted to the Group by its customers, the CSO is responsible for maintaining the right level of compliance assurance, the SAS70/ the protection of information and high-value assets from a wide array SSAE16 scope was extended to include more customers; of threats in an effort to support the Group’s business objectives and n to reduce the risk of data loss when equipment is lost or stolen, full goals, to mitigate or reduce risk, and to safeguard the legitimate interests disk encryption software was installed on high-risk laptops; of relevant third parties. n to conform with MPAA and industry best practices for the At the end of 2011, it was decided to realign the Security organization by management of data centers in the areas of IT Security, Risk establishing a Technicolor Security Office structured as follows: Management and Compliance, the Infrastructure Security Baseline, which describes the minimal required standards was improved and n Central Security Office; expanded; n Divisional security: Responsible for implementation, management and n to improve transparency and awareness of IT service levels, IT oversight of security program activities on behalf of the Technicolor “dashboards” for each strategic business unit and included KPIs Security Office; (Key Performance Indicators) were enhanced to monitor functional, technical and operational performance; n Business Security services (encryption, forensics, assessment…) for all Technicolor businesses to enable it to make security a key n to better control and deliver IT initiatives to the business, the use of differentiator in its offerings. formal IT project management processes and common reporting tools was expanded, regular management reviews of key initiatives were The Technicolor Security Office, led by the CSO, will be in charge instituted, and common processes for project launch and progress of defining the Security Strategy at the Group level, setting priorities, tracking were introduced; defining best practices, developing common metrics and promoting the necessary security tools for the Group (e.g. policy, risk management, n to enable the IT Security organization to remain tightly linked to the compliance, incident response, privacy….). Technicolor Security Office business and to ensure that security solutions are mitigating business will work closely with IT that will manage IT Security Architecture and information security risks, formal security steering committees were Operations. The process of centralization of security disciplines across continued; all segments will continue into 2012 and will facilitate and harmo nize n to establish an application vision for all of Technicolor and to better areas of security excellence across all business segments. control the cost of IT, the Enterprise Architecture program was
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4.3 STATUTORY AUDITORS’ REPORT ON THE CHAIRMAN’S REPORT ON INTERNAL CONTROL PROCEDURES
This is a free translation into English of a report issued in French and is provided solely for the convenience of English-speaking readers. This report should be read in conjunction with, and is construed in accordance with, French law and professional auditing standards applicable in France.
To the Shareholders,
In our capacity as Statutory Auditors of Technicolor SA, and in accordance with Article L.225-235 of the French Commercial Code (“Code de commerce”), we hereby report on the report prepared by the Chairman of your company in accordance with Article L.225-37 of the French Commercial Code for the year ended December 31, 2011.
It is the Chairman’s responsibility to prepare, and submit to the Board of Directors for approval, a report on the internal control and risk management procedures implemented by the company and containing the other disclosures required by Article L.225-37 particularly in terms of the corporate governance measures.
It is our responsibility:
n to report to you on the information contained in the Chairman’s report in respect of the internal control and risk management procedures relating to the preparation and processing of the accounting and financial information, and
n to attest that this report contains the other disclosures required by Article L.225-37 of the French Commercial Code (“Code de commerce”), it being specified that we are not responsible for verifying the fairness of these disclosures. We conducted our work in accordance with professional standards applicable in France.
Information on the internal control and risk management procedures relating to the preparation and processing of accounting and financial information These standards require that we perform the necessary procedures to assess the fairness of the information provided in the Chairman’s report in respect of the internal control and risk management procedures relating to the preparation and processing of the accounting and financial information. These procedures consisted mainly in:
n obtaining an understanding of the internal control and risk management procedures relating to the preparation and processing of the accounting and financial information on which the information presented in the Chairman’s report is based and existing documentation;
n obtaining an understanding of the work involved in the preparation of this information and existing documentation;
n determining if any significant weaknesses in the internal control procedures relating to the preparation and processing of the accounting and financial information that we would have noted in the course of our engagement are properly disclosed in the Chairman’s report. On the basis of our work, we have nothing to report on the information in respect of the company’s internal control and risk management procedures relating to the preparation and processing of accounting and financial information contained in the report prepared by the Chairman of the Board in accordance with Article L.225-37 of the French Commercial Code (“Code de commerce”).
Other disclosures We hereby attest that the Chairman’s report includes the other disclosures required by Article L.225-37 of the French Commercial Code (“Code de commerce”).
The Statutory Auditors Paris La Défense, March 23, 2012 Courbevoie, March 23, 2012 KPMG Audit Mazars A division of KPMG SA French original signed by French original signed by Isabelle Allen Jacques Pierre Jean-Louis Simon Simon Beillevaire
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4.4 COMPENSATION AND BENEFITS OF DIRECTORS
4.4.1 COMPENSATION AND BENEFITS OF MR. DENIS RANQUE, CHAIRMAN OF THE BOARD OF DIRECTORS Mr. Denis Ranque took up his position of Chairman of the Board of Directors on February 17, 2010. He does not have any employment contract with the Company or any Group company and is not an officer of any other Group company.
The compensation of Mr. Denis Ranque in his capacity as Chairman of the Board amounts to €180,000 gross a year. Mr. Denis Ranque does not receive any Director’s fees in his capacity as Director.
Table summarizing the compensation of Mr. Denis Ranque (table no. 2 of the Annex of the AFEP-MEDEF Corporate Governance Code)
2010 2011 (in euros) Amounts due Amounts paid Amounts due Amounts paid Fixed 155,537.60* 155,537.60* 180,000 180,000 Variable compensation N/A N/A N/A N/A Directors’ fees N/A N/A N/A N/A Fringe benefits N/A N/A N/A N/A
TOTAL 155,537.60 155,537.60 180,000 180,000
* Amount calculated prorata temporis from February 17, 2010.
4.4.2 COMPENSATION AND n a triple qualitative target, accounting for 20% of the total targeted bonus, the achievement of which will be determined BENEFITS OF MR. FREDERIC in the discretion of the Board of Directors, relating to ROSE , CHIEF EXECUTIVE (a) implementation of the actions defined by a three-year OFFICER strategic plan approved by the Board of Directors, (b) definition and achievement of the actions undertaken in respect of the Mr. Frede ric Rose took up his position on September 1, 2008. He does business portfolio management of the Group as they were not have an employment contract with the Company or any Group proposed to the Board of Directors, and (c) retention and company. motivation of the management team.
The compensation of Mr. Frederic Rose for his functions as Chief 80% of each of the Consolidated Adjusted EBITDA and Consolidated Executive Officer was decided by the Board of Directors on July 23, Free Cash Flow targets must be achieved in order to entitle Mr. Frederic 2008 on the basis of proposals by the Remuneration Committee and on Rose to receive that variable component. In the event that 80% to 100% February 28, 2011 regarding the performance criteria applicable to 2011. of a target were to be achieved, the amount of variable compensation The Remuneration Committee’s proposal was based on a comparison of for that target would be reduced. The amount of variable compensation the remuneration of Chief Executive Officers of comparable companies. may represent 100% of the annual gross fixed compensation in the event the targets are achieved, and is limited to 150% in the event the targets His compensation includes a fixed portion for an annual gross amount of are exceeded. €800,000, and a variable portion, conditional upon achievement in 2011 of the following performance targets: The Board of Directors, held on February 23, 2012, reviewed the level of achievement of the above objectives for 2011. The n consolidated Adjusted EBITDA (1) target, accounting for 40% of the Consolidated Adjusted EBITDA target was 0.03 achieved for the total targeted bonus; year 2011; and the Consolidated Free Cash Flow target was 1.407 achieved (on a scale from 0 to 1.5). Moreover, the Board of Directors n consolidated Free Cash Flow (2) target, accounting for 40% of the total targeted bonus; and
(1) Adjusted EBITDA is defined as profit from continuing operations before tax, finance costs, plus depreciation and amortization. (2) Free Cash Flow is defined as net operating cash from/(used in) operating activities, less purchases of property, plant & equipment (net of disposals), and intangible assets.
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considered that the triple qualitative target was globally achieved. Indemnity payable in case of removal As a result the gross variable compensation of Mr. Frederic Rose of position as Chief Executive Officer for 2011 amounted to €600,000. In the event of removal from his position as Chief Executive Officer, Mr. Frederic Rose does not receive any Director’s fees in his capacity except in the case of gross negligence or gross misconduct, Mr. Frede ric as Director. Rose is entitled to an indemnity whose maximum gross amount would be equal to fifteen months fixed and variable compensation. This Since Mr. Frederic Rose joined the Group in 2008, his fixed amount would be calculated according to his total fixed and variable compensation has remained unchanged. During the same period, the compensation in relation to the fiscal year preceding the date of the average fixed compensation of the Group’s employees increased up Board of Director’s decision to remove him from office. Pursuant to 2.68% in 2010 and up 2.03% in 2011. Article L. 225-42-1 of the French Commercial Code, the payment of this indemnity is subject to performance requirements based on the Group Management Incentive Plan (MIP-SP1) consolidated Adjusted EBITDA (1) and Free Cash Flow (2), determined On the recommendation of the Remuneration, Nomination and on a yearly basis by the Board of Directors. Governance Committee, the Board of Directors decided on June 17, Half of the indemnity payment is subject to the achievement of a 2010, to implement a mid-term Management Incentive Plan designed to consolidated EBITDA target and the remaining half is subject to retain key Company contributors while aligning their interests with those achievement of a Free Cash Flow target. If at least 80% of either of the Company and its shareholders. Mr. Frede ric Rose is a beneficiary the EBITDA or Free Cash Flow performance target is not achieved, of this Plan. no indemnity will be due. Should the percentage of achievement All of the conditions of this plan are described in sub-section 4.4.5 “Stock of either target fall between 80% and 100%, the indemnity would options awarded to Executive Directors – Free Shares” below. be correspondingly reduced. The achievement of all operational consolidated EBITDA and Free Cash Flow targets is measured, on the basis of a constant scope of consolidation, by comparison to the average Long-term Management Incentive Plan EBITDA and Free Cash Flow targets determined for the three fiscal (LTIP) years prior to the dismissal date. Mr. Frede ric Rose also benefits from the long-term profit-sharing plan Furthermore, in the event of termination from his duties, a non- approved, on the recommendation of the Remuneration, Nomination competition clause will be enforceable for a period of 9 months following and Governance Committee, by the Board of Directors on June 8, 2011. termination, and applicable in Europe, Asia and the United States, in exchange for which he will receive monthly compensation calculated on All of the conditions of this plan are described in sub-section 4.4.5 “Stock the basis of his last monthly overall pay. This commitment was approved options awarded to Executive Directors – Free Shares” below. by the Board of Directors’ meeting of July 23, 2008 and modified at the Board meeting of March 9, 2009 which cancelled the Company’s The Board of Directors of Technicolor held on March 21, 2012, noted ability to refuse this commitment. This modification was approved by that Mr. R ose acquired the following rights for 2011 : (i) a cash premium the Annual Shareholders’ Meeting held on June 16, 2009. of €52 ,148 (gross) and (ii) 20,859 free shares. These shares would be definitely awarded in June, 2015, on condition that he remains within Mr. Frede ric Rose does not benefit from any specific pension scheme. the Company until June, 2013. He enjoys benefits in kind providing for the use of a vehicle, for an amount of €4,260 for 2011.
The employer’s charges paid by the Company in respect of Mr. Frederic Rose’s compensation amounted to €493,435.54 in 2011.
(1) Adjusted EBITDA is defined as profit from continuing operations before tax, finance costs, plus depreciation and amortization. (2) Free Cash Flow is defined as net operating cash from/(used in) operating activities less purchases of property, plant & equipment (net of disposals) and intangible assets.
78 I TECHNICOLOR I ANNUAL REPORT 2011 CORPORATE GOVERNANCE AND INTERNAL CONTROL PROCEDURES - 4 Compensation and benefits of Directors
Table summarizing the compensation of Mr. Fre de ric Rose (table no. 2 of the Annex of the AFEP-MEDEF Corporate Governance Code)
2010 2011 (in euros) Amounts due Amounts paid Amounts due Amounts paid Fixed 800,000 800,000 800,000 800,000 Variable compensation 869,760 (1) 400,000 (2) 600,000 (3) 869,760 (1) Cash premium (LTIP) N/A N/A 52 ,148 _ Exceptional bonus under Sauvegarde 600,000 600,000 N/A N/A Signing Bonus (2008) N/A 150,000 (4) N/A N/A Directors’ fees (5) N/A N/A N/A N/A Fringe Benefits 4,260 4,260 4,260 4,260
TOTAL 2,274,020 1,954,260 1,456,408 1,674,020
(1) Variable compensation for 2010, paid in 2011. (2) Variable compensation for 2009, paid in 2010. (3) Variable compensation for 2011 to be paid in 2012. (4) Given the Company’s situation, Mr. Frederic Rose requested that the payment of the signing bonus be suspended. This compensation was declared as part of the Company’s liabilities under the Sauvegarde proceeding opened in favor of the Company on November 30, 2009 and has been paid under the Sauvegarde Plan. (5) Mr. Frederic Rose is not entitled to receive Director’s fees.
Details regarding stock options and free shares granted to Mr. Frederic Rose are set forth in paragraph 4.4.5, “Stock options awarded to Executive Directors – Free Shares.”
4.4.3 OVERVIEW OF COMPENSATION, BENEFITS, OPTIONS AND PERFORMANCE SHARES ATTRIBUTED TO THE EXECUTIVE DIRECTORS Summary table of the compensation options and shares awarded to each Executive Director (table no. 1 of the Annex of the AFEP-MEDEF Corporate Governance Code)
Denis Ranque Frede ric Rose Amounts due Amounts due (in euros) Fiscal 2010 Fiscal 2011 Fiscal 2010 Fiscal 2011 Compensation owed for the fiscal year 155,537.60 (1) 180,000 2,274,020 1,456,408 (detailed in the tables provided in paragraphs 4.4.1 and 4.4.2) Valuation of options granted during the fiscal year N/A N/A 333,344 N/A (detailed in the table provided in paragraph 4.4.5) Valuation of performance shares granted during the fiscal year N/A N/A N/A 638,368 (detailed in the table provided in paragraph 4.4.5)
TOTAL 155,537.60 (1) 180,000 2,607,364 2,094,776
(1) Amount calculated prorata basis from February 17, 2010 (see paragraph 4.4.1 ).
Summary table of benefits granted to the Executive Directors (table no. 10 of the AMF recommendation)
Indemnities or benefits due or possibly due following taking up, Additional pensions ceasing or changing Indemnities due to a non- Employment Contract scheme position competition clause Executive Directors Yes No Yes No Yes No Yes No Denis Ranque X X X X Fre der ic Rose X X X (1) X (1)
(1) See paragraph 4.4.2 below.
TECHNICOLOR I ANNUAL REPORT 2011 I 79 4 - CORPORATE GOVERNANCE AND INTERNAL CONTROL PROCEDURES Compensation and benefits of Directors
4.4.4 DIRECTORS’ FEES AND n an additional fixed fee of €5,000 for each Director non-resident in OTHER COMPENSATION France; n a Director’s fee of €3,000 per meeting of the Board of Directors and In compliance with Article L. 225-37 of the French Commercial Code, the €2,000 per Committee meeting (with the exception of meetings by principles and rules established by the Board of Directors to determine conference call that last under two hours, for which Directors fees the Directors’ fees awarded to Executive Directors are shown below. are not paid). The Remuneration, Nomination and Governance Committee The Directors’ fees paid in 2011 correspond to the Directors’ fees owed recommends to the Board of Directors the total amount of Directors for 2010. The amount of the Directors’ fees was distributed based on the fees to be submitted for shareholders’ approval at the Annual General Directors’ actual attendance, and their total amount could not exceed Shareholders’ Meeting, and their allocation among the Directors. The the total amount of €450,000 set by the Shareholders’ Meeting. maximum annual amount of Directors fees that can be paid to the Directors was set at €450,000 by the Annual General Shareholders’ The Directors did not receive any other compensation besides Directors’ Meeting held on May 7, 2004 and this amount has not been modified fees in respect of fiscal year 2011. Except for Mr. Frederic Rose, t he since this date. Directors of the Company do not hold office at any of the Company’s subsidiaries. The annual distribution of Directors’ fees was approved by the Board of Directors on December 16, 2010 according to the following terms starting in 2011:
n fixed fee of €35,000 for each Director;
Directors’ fees and other compensation allocated to the non-executive Directors (table no. 3 of the Annex of the AFEP-MEDEF Corporate Governance Code)
Directors serving on the Board of Directors at the date of this Annual Report Name Amounts paid in 2010 (3) Amounts paid in 2011 (3) Extraordinary Extraordinary (in euros) Directors’ fees (1) compensation Directors fees (2) compensation Lloyd Carney N/A N/A 56,000 6,000 (4) Loïc Desmouceaux 59,016 (5) - 59,000 (5) - Catherine Guillouard N/A N/A 67,000 - Bruce Hack N/A N/A 80,000 - Didier Lombard 53,809 - 53,000 - John Roche N/A N/A 67,000 - Rémy Sautter 60,752 - 67,000 - Directors who served on the Board of Directors and received Directors’ fees in 2010 Name Amounts paid in 2010 (3) Amounts paid in 2011 (3) Extraordinary Extraordinary (in euros) Directors’ fees (1) compensation Directors fees (2) compensation Éric Bourdais de Charbonnière 57,715 - N/A N/A François de Carbonnel 73,770 - N/A N/A Pierre Lescure 26,905 - N/A N/A Paul Murray 59,016 - N/A N/A Marcel Roulet - 64,815 (6 ) N/A N/A Eddy W. Hartenstein - 20,880 (7 ) N/A N/A
TOTAL 390,983 85,695 449,000 6,000
(1) Directors fees for 2009 paid in 2010. (2) Directors fees for 2010 paid in 2011. (3) Some amounts were subject to withholding. (4) Compensation as non-voting director (censeur) (for the period of February 17, 2010 to June 17, 2010, when Mr. Lloyd Carney was appointed as a Director). (5) €4,000 was paid directly to the Technicolor Employee Shareholders’ Association at the request of Mr. Loïc Desmouceaux. (6) Compensation as non-voting director (censeur) (for the period of October 15, 2008 to February 17, 2010). (7) Compensation as non-voting director (censeur) (for the period of July 23, 2008 to January 23, 2010). 80 I TECHNICOLOR I ANNUAL REPORT 2011 CORPORATE GOVERNANCE AND INTERNAL CONTROL PROCEDURES - 4 Compensation and benefits of Directors
Directors fees paid in 2012 (Directors fees for 2011) Name Amounts paid in 2012 Extraordinary (in euros) Directors fees (1) compensation Lloyd Carney 63,449 - Loïc Desmouceaux 58,568 (2) - Catherine Guillouard 66,377 - Bruce Hack 77,115 - Didier Lombard 58,568 - John Roche 66,377 - Rémy Sautter 59,544 -
(1) The maximum annual amount of Directors fees being reached, the Board of Directors decided to reduce the amount due to each Director on a prorata basis. (2) €5,000 was paid directly to the Technicolor Employee Shareholders’ Association at the request of Mr. Loïc Desmouceaux
4.4.5 STOCK OPTIONS AWARDED or as an Executive Director («dirigeant mandataire social») within the TO EXECUTIVE DIRECTORS – Company and/or affiliated companies. FREE SHARES Subject to the achievement of the presence and performance conditions, the stock options will be exercisable after the fourth year following their Stock options and performance shares allotment by the Board of Directors, or after June 18, 2014. granted to Mr. Fre de ric Rose Subject to the achievement of the presence and performance-related On the recommendation of the Remuneration, Nomination and conditions, the cash portion of the Performance Units will be acquired by Governance Committee, the Board of Directors decided on June 17, Beneficiaries on the date the Board of Directors approves the accounts 2010 to implement a mid-term Management Incentive Plan designed to for the fiscal year ended December 31, 2012 and will be paid as soon as retain key Company personnel while aligning their interests with those possible after the determination of such cash portion. of the Company and its shareholders (MIP-SP1). Mr. Frede ric Rose is a beneficiary of this Plan which awards Performance Units comprised Performance conditions: of half cash and, in the case of Mr. R ose , half stock options. Under this Plan, Performance Units were granted to Mr. R ose , representing n Technicolor shall not breach the covenants set forth in the contracts 10 to 15 months of fixed compensation at the date of award, i.e. a cash signed with its creditors under the Company’s debt restructuring bonus ranging from €333,300 to €500,000 maximum and stock options process (Credit Agreement dated April 23, 2010 and Note Purchase ranging from 143,720 to 215,570 (after adjustment due to the reverse Agreement dated April 23, 2010). Should this occur, the Performance share split). Units will be considered null and void;
It was decided that the exercise price for the stock options calculated n the amount of Performance Units definitely acquired by the in accordance with the provisions of Article L. 225-177 of the French beneficiaries will be based on the Net Debt/EBITDA ratio validated Commercial Code could not be less than €0.66, which corresponds to by the Board of Directors based on the accounts for the fiscal year the subscription price of the shares issued as part of the capital increase ended December 31, 2012. conducted on May 26, 2010. The subscription price was set at €6.60 This ratio is defined in the covenants set forth in the Credit Agreement ( with the exercise price adjusted from €0.66 to €6.60, in light of the and the Note Purchase Agreement dated April 23, 2010. For the purposes reverse share split). of the plan, the Net Debt/EBITDA ratio will be established based on the same terms and conditions as those set forth in the contracts. The The Performance Units are subject to presence and performance definition and calculation of this ratio and of its components (Net Debt conditions. These conditions are cumulative. and EBITDA) will be the same as outlined in the contracts. For the sake of confidentiality, the ratios defined by the Board of Directors are not Presence conditions: the beneficiary must be present without interruption made public. Those ratios are stricter than the corresponding financial during the whole acquisition period of the Plan, either as an employee covenant as set forth in the Company’s Reinstated Debt agreements.
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In application of Article L. 225-185 paragraph 4 of the French the difference between the value of the shares on the date of exercise Commercial Code, in the event all or some of the stock options granted and the strike price free of taxes and social contributions including social to him were exercised, Mr. Frederic Rose will have to keep (in registered charges or charges of any nature due on the date of exercise as well as form), until the end of his term, the amount of shares acquired through those potentially due after that date, and regardless of the country in the exercise of options representing 20% of net proceeds, defined as which these charges apply.
Stock options granted to Mr. Frederic R ose (table no. 4 of the Annex of the AFEP-MEDEF Corporate Governance Code)
Value of the options at the grant date of the Number of Type of Performance Units (2) options granted Plan number and date options (in euros) during 2010 Exercise price Exercise period MIP-SP1 June 17, 2010 Subscription 333,344 215,570 (1) €6.60 June 18, 2014 – June 16, 2018
(1) Maximum number of options that can be granted depending on the achievement of the performance conditions. (2) According to IFRS 2, this valuation is reestimated at the end of each reporting period depending on the achievement of the performance conditions of the plan.
Free shares granted to Mr. Fre de ric Rose ranking would result in the award of zero P erformance U nits. Between these two scenarios, the number of performance shares acquired would On the recommendation of the Remuneration, Nomination and be regressive. Governance Committee, on February 28, 2011, the Board of Directors established the major features of a Long-term Management Incentive The Performance Units will be acquired progressively in three annual Plan, whose purpose is to reward loyalty of key Group contributors by tranches corresponding to 20%, 30% and 50%, respectively, of the aligning their interests with the Group’s and its shareholders (LTIP Plan). total number, at which times the achievement of the performance and On June 8, 2011, the Board of Directors approved its implementation. presence conditions will be measured. The rights acquired by Mr. Rose The plan, which is based on a three-year period, provides for the award for the first tranche are mentioned in section 4.4.2 “Compensation and of performance units (hereinafter “Performance Units”) comprised for benefits of Mr. Rose, Chief Executive Officer” of this Chapter. one- third of a cash bonus and for two- thirds of free (“performance”) shares. Under the terms of this plan, Mr. Frederic Rose was awarded Moreover, Mr. Rose committed to acquire, during the four-year Performance Units representing a cash bonus which could reach acquisition period mentioned above, a number of Technicolor shares €533,333 and a maximum of 213,333 free shares. equivalent to €200,000.
The final number of Performance Units that will be acquired will be In accordance with Article L. 225-185, paragraph 4 of the French based on conditions of performance, which will be identical for the Commercial Code, it is provided that in the event of the exercise of all Chief Executive Officer and the other beneficiaries of the plan. These or part of the shares awarded to him, Mr. Rose shall keep in bearer form, conditions are related to (i) a net debt/EBITDA ratio, and (ii) the until the end of his functions, a quantity of shares corresponding to 20% stock exchange performance measured annually by benchmarking of the gain on acquisition net of taxes and social security expenses owed Technicolor’s share price against the share price of a panel of about for the acquisition and transfer of the shares. The reference price to twenty comparable companies in North America, Europe and Asia that calculate the number of shares in question shall be the opening share are representative of the technology, media and telecom industries. price on the date of acquisition of the shares.
Regarding the first criteria, which counts for 2/3 of the evaluation, the Finally, in accordance with Article L. 225-197-6 of the French Commercial objectives for attaining 100% of the eligible Performance Units are Code, new agreements for the benefit of the employees of Technicolor stricter than the corresponding financial covenant as set forth in the and its French subsidiaries constituting an improvement of the profit- Company’s Reinstated Debt agreements. Regarding the second criteria, sharing conditions were implemented (see Chapter 6 “Corporate which counts for 1/3 of the evaluation, in order to receive 100% of the information and Sustainability ”, Section 6.1.2 “Employee Profit-Sharing” eligible Performance Units, the achieved benchmark need to rank among of this Annual Report). the top three selected comparable securities, and a non-satisfactory
82 I TECHNICOLOR I ANNUAL REPORT 2011 CORPORATE GOVERNANCE AND INTERNAL CONTROL PROCEDURES - 4 Compensation and benefits of Directors
Free shares granted to Mr. Fre de ric Rose (table no. 6 of the Annex of the AFEP-MEDEF Corporate Governance Code)
Value of the shares at the grant date of the Number of shares Performance Units (2) Plan number and date granted in 2011 (in euros) Dates of acquisition Availability date June 8, 2013 for the 2011 and 2012 LTIP Tranches and Early 2014 June 8, 2011 213 ,333 (1) 638,368 (2 ) for the 2013 Tranche June 8, 2015 (3)
(1) Maximum number of options that can be granted depending on the achievement of the performance conditions. (2) According to IFRS 2, this valuation is reestimated at the end of each reporting period depending on the achievement of the performance conditions of the plan. (3) Except for the quantity that Mr. Frederic Rose is required to keep in registered form pursuant to Article L. 225-185, paragraph 4 of the French Commercial Code (see above).
Other information concerning stock option plans or free shares awarded to Executive Directors Stock option plans During 2011, no stock options previously awarded to the Executive Directors were exercised by the beneficiaries.
Stock Options exercised during the fiscal year by each Executive Director (Table no. 5 of the Annex of the AFEP-MEDEF Corporate Governance Code) None
Free shares The Chief Executive Officer was awarded rights to free shares by the Board of Directors on June 8, 2011 (see above). No rights to free shares were awarded to other Directors during 2011.
Free shares that became available for each E xecutive O fficer in 2011 (Table no. 7 of the Annex of the AFEP-MEDEF Corporate Governance Code) None
TECHNICOLOR I ANNUAL REPORT 2011 I 83 4 - CORPORATE GOVERNANCE AND INTERNAL CONTROL PROCEDURES Executive Committee
4.5 EXECUTIVE COMMITTEE
4.5.1 MEMBERS OF THE EXECUTIVE COMMITTEE As of the date hereof, the Executive Committee comprises eight Members. The following table shows their responsibilities and year of appointment.
Name of Executive Committee Member Age Responsibility Appointed Frederic Rose 49 Chief Executive Officer 2008 Human Resources & Sustainability, Sourcing and Security David Chambeaud 44 Broadcast Services & Media Services 2009 Béatrix de Russé 64 Intellectual Property & Licensing 2004 Gary Donnan 53 Technology & Research 2010 Vince Pizzica 48 Corporate Partnerships & Ventures 2008 Connected Home - VoIP/IPTV Michel Rahier 58 Operations Services & Transformation 2011 Lanny Raimondo 68 Entertainment Services 2001 Chief Financial Officer Stéphane Rougeot 43 Strategy & Portfolio Management 2008
Biographies of Executive Committee Mr. Gary Donnan is Head of Technology & Research since June, 2010. Members Before joining Technicolor, Mr. Donnan held similar responsibilities at Alcatel in Research & Innovation, in addition to serving on the Alcatel Mr. Frederic Rose assumed the position of Chief Executive Officer France Executive Committee. Immediately prior to that role, he was starting September 1, 2008. For more information about his biography, the R&D Technical Director (3G) in Alcatel/Fujitsu (Evolium). During please refer to paragraph 4.1.3.1 above. the previous 14 years, Mr. Gary Donnan worked in R&D operations in the fields of satellite & nuclear control systems, transmission systems, Mr. David Chambeaud is Head of Human Resources & Sustainability switching systems, and radio infrastructure. In addition to leading since July 2009. As an Executive Committee Member, he is also in Technicolor Research & Innovation, Mr. Gary Donnan currently heads charge of managing: Broadcast Services and Media Services Divisions, the Company’s Technology, and Research organization – charged and the Sourcing and Security functions at the Group level. Previously with promoting advanced technologies and services throughout the and since 2005, he was Head of Sourcing for the Group. From 1995 Company. He received his degrees in Computer Systems from the to 2005, Mr. David Chambeaud occupied various functions within the University of Ulster, Ireland. Sourcing Management team based in France and Germany, assuming regional or divisional responsibilities for this function. He also worked Mr. Vince Pizzica is Head of Corporate Partnerships and Ventures since within the Packaging Division of the Danone Group from 1992 to 1994. October, 2011. In addition, he direct s the processes for the Technology David Chambeaud is a graduate of the EPSCI (École des practiciens du Licensing activities of Technicolor, the MediaNavi venture and previously commerce international), an international business school which is part led Digital Delivery Business Group and the Strategy, Technology and of the ESSEC Group. Research corporate teams. Prior to joining Technicolor and over a 27- year career in the telecoms industry, Mr. Vince Pizzica spent 17 years Ms. Béatrix de Russé is Head of Intellectual Property and Licensing since at Telstra at various operation and technology positions, including as February 2004. Prior to this and since 1999, she was Head of Licensing. advisor to the COO of Telstra on Mediacomms technology. H e also From 1993 to 1999 she was successively Head of Licensing, and then spent 7 years at Alcatel Lucent in charge of Technology, Strategy and Head of Patents and Licensing for Thomson. From 1984 to 1992, Ms. Marketing for the EMEA and APAC region as well as CTO for the Béatrix de Russé was in charge of international contracts and Intellectual APAC region. Mr. Vince Pizzica holds a Bachelor of Engineering from Property at Thomson Components and STMicroelectronics, where the Institute of Engineers in Australia, and a Master of Telecoms & Info she specialized in Intellectual Property matters. From 1976 to 1983, she Systems from the University of Essex, U.K. worked as an international attorney at the international division of Thales (former Thomson CSF). Ms. Béatrix de Russé holds a Master’s degree in law and DESS in International Trade law as well as a Master’s degree in English and a CDCI diploma.
84 I TECHNICOLOR I ANNUAL REPORT 2011 CORPORATE GOVERNANCE AND INTERNAL CONTROL PROCEDURES - 4 Executive Committee
Mr. Michel Rahier is Head of Connected Home and VoIP/IPTV Please refer to section 4.2.2.2: “General control environment – Group Divisions since October 2011. He is also in charge of Operations management and decision – making processes” of this Annual Report. Transformation and IT. He joined the Technicolor Executive Committee in April 2011 following his appointment as Executive Vice-President, Operations Services & Transformation. Mr. Michel Rahier was most 4.5.2 EXECUTIVE COMMITTEE recently Executive Vice-President Operations and member of the COMPENSATION Management Committee at Alcatel-Lucent, in charge of the global company transformation. Prior to this, he became President of the Fixed Communications Group at Alcatel since 2005, then at Alcatel-Lucent, Executive Committee compensation President of the Carrier Business Group in 2007. Mr. Michel Rahier In 2011, the total compensation paid by the Company and/or other holds a Master and a Ph.D. in electrical engineering from the University companies of the Group to the Members of the Executive Committee, of Louvain as well as an MBA from Boston University. including the Chief Executive Officer, was €7.0 million (excluding charges and including a variable component of €2.4 million with respect Mr. Lanny Raimondo is Head of Entertainment Services since to 2010 on the basis of the Group financial results). September 2001. Mr. Lanny Raimondo has worked at Technicolor since 1994 and was appointed President and Chief Executive Officer In 2010, the total compensation paid by the Company and/or companies of Technicolor Inc. in 1998, after having served as President of the of the Group to Members of the Executive Committee (including the Company’s Home Entertainment business. Prior to that, he spent Chief Executive Officer) within Technicolor as of the publication of 16 years with Pirelli Cable Corporation where he managed large our 2010 Annual Report amounted to €7.2 million (including a variable subsidiary companies in Great Britain, Canada and the U.S., holding component of €1.8 million with respect to 2009 on the basis of the the position of President and Chief Executive Officer of North American Group financial results). Group from 1985 to 1994. Mr. Raimondo is a graduate of Purdue University with a degree in electrical engineering. The total amount of compensation paid to previous Members of the Executive Committee with respect to 2011 amounted to €0.9 million. Mr. Stéphane Rougeot is Chief Financial Officer and also Head of Strategy and Portfolio Management. Prior to joining Technicolor in The total amount provided for pensions and retirement and other November 2008, he spent five years with France Telecom Orange, similar benefits granted to the Members of the Executive Committee first as Head of Strategy for Equant, then as Head of Indirect Sales for amounted to €3.4 million in 2011. Orange Business Services and finally as Group Controller. Previously, he had been in charge of investor relations and head of Corporate Loans and guarantees granted Communications for Thomson. Mr. Rougeot began his career with Total in Africa and Paris, serving in a range of financial control, project or established for the Members finance and M&A functions. He is a graduate of the IEP business school of the Executive Committee in Paris and holds a DEA in International Economics and Finance from None. Paris Dauphine University.
Role of the Executive Committee The Executive Committee meets under the direction of the CEO every two weeks, with an agenda determined collectively by its Members. It examines questions relating to the activities of the Group. In this regard, it deals primarily with business activities, specific projects, following up on transactions and financial results, and the identification and assessment of risks.
TECHNICOLOR I ANNUAL REPORT 2011 I 85 4 - CORPORATE GOVERNANCE AND INTERNAL CONTROL PROCEDURES Executive Committee
86 I TECHNICOLOR I ANNUAL REPORT 2011 TECHNICOLOR AND 5 ITS SHAREHOLDERS
5.1 SHARE CAPITAL ...... 88 5.2 LISTING INFORMATION ...... 95 5.1.1 Distribution of share capital and voting rights ...... 88 5.2.1 Market for the Company’s securities ...... 95 5.1.2 Purchases of equity securities by the issuer 5.2.2 Listing on Euronext Paris ...... 96 and affiliated purchasers – Board of Directors’ report on treasury shares ...... 90 5.1.3 Individuals or entities holding control of the Company ...... 90 5.1.4 Shareholders’ agreements ...... 90 5.1.5 Modifications in the distribution of share capital over the past three years ...... 91 5.1.6 Changes to share capital ...... 91 5.1.7 Potential modifications to the Company’s share capital ...... 92 5.1.8 Delegations granted to the Board of Directors by the Shareholders’ Meetings ...... 93 5.1.9 Dividend policy ...... 94 5.1.10 Other information relating to share capital ...... 94
TECHNICOLOR I ANNUAL REPORT 2011 I 87 5 - TECHNICOLOR AND ITS SHAREHOLDERS Share capital
5.1 SHARE CAPITAL
Share Capital as of December 31, 2011 Old shares not exchanged for new On December 31, 2011, in accordance with the Sauvegarde Plan, the (post-reverse split) shares Company redeemed 5,328,181 NRS I, 189,877,533 NRS II, and 112,961,194 At this date, there remained 1,469,580 old shares of the Company NRS IIC through the issuance of 48,912,458 Company shares. which were not exchanged for new (post-reverse split) shares with a nominal value of €0.10 (ISIN Code FR0000184533) These shares, which At December 31, 2011, Company share capital was composed have not been listed since July 15, 2011 (See Chapter 5: “Technicolor of 223,759,083 fully paid-up shares with a nominal value of €1.00 each and its shareholders”, section 5.2.2, “Listing on Euronext Paris”) can (ISIN Code FR0010918292), all of which were of the same category. be presented in exchange for new shares (post-reverse split) until the expiration of the two-year period from the date of the reverse split transaction on July 15, 2012. On that date, in accordance with Article L. 228-6- of the French Commercial Code, the new shares which remain unclaimed by the holders will be sold on the market by the Company and the net proceeds of the sale will be held for ten years in a blocked account opened by a financial institution. The old shares which were not exchanged for new (post-reverse split) shares will lose their voting rights and their dividend rights will be suspended (for further information about the voting rights attached to the old shares, see Chapter 7: “Additional information”, section 7.2.3: “Rights, privileges and restrictions linked to shares” of this Annual Report).
5.1.1 DISTRIBUTION OF SHARE CAPITAL AND VOTING RIGHTS The table below shows the Company’s shareholding structure over the past three years:
At December 31, 2011 (1) At December 31, 2010 At December 31, 2009 Number of % of % of Number of % of % of Number of % of % of Shareholders shares held shares held voting rights shares held shares held voting rights shares held shares held voting rights Public (2) (3) 222,645,191 99.50% 99.77% 173,720,715 99.36% 99.71% 258,448,001 95.77% 98% TSA (French 508,205 0.23% 0.23% 508,205 0.29% 0.29% 5,264,950 1.95% 2.00% Government) (4) Technicolor (4) 605,687 0.27% - 617,705 0.35% - 6,177,077 2.28% -
TOTAL 223,759,083 100% 100% 174,846,625 100% 100% 269,890,028 100% 100%
(1) Information provided on the basis of the number of new shares resulting from the reverse share split. At December 31, 2011, 1,469,580 old shares not exchanged for new (post-reverse split) shares were still in circulation. One (1) voting right is attached to each old share and ten (10) voting rights are attached to each new share (see Chapter 7: “Additional Information”, section 7.2.3 “Rights, privileges and restrictions linked to shares”). (2) Estimate obtained by substraction. (3) These amounts include investments held by the major institutional funds. (4) Shares in pure nominative form.
88 I TECHNICOLOR I ANNUAL REPORT 2011 TECHNICOLOR AND ITS SHAREHOLDERS - 5 Share capital
Share ownership threshold notified to the Company in 2011 According to Article L. 233-13 of the French Commercial Code and to the Company’s knowledge, the following share ownership thresholds were notified to the Company or the Autorité des marchés financiers (AMF) by the following entities for the account of their respective customers or for their own account in 2011:
Date of Share ownership crossing the share threshold upwards Threshold Percentage of the Number of Shareholders ownership threshold or downwards crossed share capital held shares held Apollo Management Holdings L.P. December 30, 2011 upwards 5.00% 8.58% 19,193,093 Société Générale December 29, 2011 downwards 5.00% 3.90% 8,724,856 RBS Group December 15, 2011 upwards 5.00% 5.02% 8,783,000 RBS Group November 9, 2011 downwards 5.00% 4.94% 8,630,000 Société Générale November 8, 2011 upwards 5.00% 5.01% 8,765,389 RBS Plc November 1, 2011 downwards 5.00% 4.74% 8,294,677 Société Générale October 20, 2011 downwards 5.00% 4.66% 8,145,155 RBS Group September 21, 2011 downwards 10.00% 9.96% 17,420,207 Société Générale September 20, 2011 upwards 5.00% 5.16% 9,029,078 RBS Plc February 8, 2011 downwards 10.00% 9.72% 17,003,810
Situation as of December 31, 2011 share capital and voting rights (including shares with no voting rights attached in accordance with Article 223-11 of the General Regulation In accordance with Article L. 233-13 of the French Commercial Code of the AMF) of the Company. and to the knowledge of Technicolor, it is further noted that (i) as at December 16, 2011, the Royal Bank of Scotland Group Plc. indirectly To the Company’s best knowledge, no shareholder other than The Royal held, on behalf of the companies it controls, 5.02% of the share capital Bank of Scotland Group Plc., Third Point LLC. and Apollo Management and voting rights (including shares with no voting rights attached in Holdings L.P., held more than 5% of the share capital or voting rights accordance with Article 223-11 of the General Regulation of the AMF) at March 15, 2012. of the Compnay, this holding resulting from a shares borrowing and (ii) as at December 31, 2011, Apollo Management Holdings, L.P. directly or indirectly held, on its own behalf or on behalf of its clients, 8.58% of Other information regarding the the share capital and voting rights (including shares with no voting rights Company’s shareholders attached in accordance with Article 223-11 of the General Regulation of To the Company’s knowledge, the members of the administrative and the AMF) of the Company. management bodies hold less than 1% of the share capital or voting rights of the Company (for more information about the Board of Directors’ Situation as of March 15 , 2012 shareholding, please refer to Chapter 4: “Corporate Governance and Internal Control procedures”, section 4.1.3.5 “Directors’ Shareholdings At February 14, 2012, Third Point LLC. directly or indirectly held, on its in the Company’s Registered Capital” of this Annual Report). own behalf or on behalf of its clients, 5.3% of the share capital and voting rights (including shares with no voting rights attached in accordance with The main shareholders of the Company do not hold voting rights that Article 223-11 of the General Regulation of the AMF) of the Company. are different from those of other shareholders. At March 12 , 2012, Apollo Management Holdings, L.P. directly or indirectly held, on its own behalf or on behalf of its clients, 8.58% of the
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5.1.2 PURCHASES OF EQUITY This authorization was granted for a term of 18 months. It may be implemented only if applicable legal conditions have been satisfied. SECURITIES BY THE Moreover, it may not be used during any public tender on the Company’s ISSUER AND AFFILIATED securities. PURCHASERS – BOARD OF The share repurchase program would be solely designed to provide DIRECTORS’ REPORT ON stimulus to the market for Technicolor shares in connection with a TREASURY SHARES liquidity contract entered into with an investment services provider acting The following paragraphs include information required in accordance independently and in compliance with an Ethics Charter approved by with Article L. 225-211 of the French Commercial Code. the Autorités des marchés financiers.
The number of shares thus purchased and the number of shares held Share repurchase program may not exceed 10% of share capital, i.e., 22,375,908 shares as at No share repurchase program has been implemented by the Company December 31, 2011. The unit purchase price of the shares may not exceed since 2008. €15.00, for a theoretical maximum purchase amount of €335,638,620.
The Combined Shareholders’ Meeting of June 8, 2011, authorized a At December 31, 2011, the Company held 605,687 shares representing potential implementation of a share repurchase program subject to the approximately 0.27% of the share capital, for a gross book value of provisions of Article L. 225-209 et seq. of the French Commercial Code €98,121,995.87 and a nominal value of €605,687. and of European Commission Regulation 2273/2003 of December 22, 2003.
Shares purchased by Technicolor and allocation of treasury shares as of December 31, 2011
Percentage of treasury shares held directly or indirectly 0.27% Number of treasury shares held directly or indirectly (1) 605,687 Number of shares cancelled over the last 24 months (1) 0 Gross book value of shares owned (in euros) 98,121,995.87 Market value of shares owned (2) (in euros) 703,808.29
(1) Last 24 months preceding December 31, 2011. (2) Based on a quoted market price of €1.162 per share on December 30, 2011.
The 605,687 shares held by the Company as of December 31, 2011 5.1.3 INDIVIDUALS OR ENTITIES were allocated by the Board of Directors on October 20, 2010 for employee option programs or other allocations of shares to employees HOLDING CONTROL and directors and officers of the Group. The number of treasury shares OF THE COMPANY delivered to employees of the Group in 2011 is provided in Chapter 6: None. “Social Information and Sustainability”, section 6.1.4 “Stock option plans and free share plans” of this Annual Report. 5.1.4 SHAREHOLDERS’ AGREEMENTS To the Company’s knowledge, there are no shareholders’ agreements among any of its shareholders.
90 I TECHNICOLOR I ANNUAL REPORT 2011 TECHNICOLOR AND ITS SHAREHOLDERS - 5 Share capital
5.1.5 MODIFICATIONS IN THE In 2010 and 2011 DISTRIBUTION OF SHARE In 2010, the implementation of the Company’s Sauvegarde Plan resulted CAPITAL OVER THE PAST in the conversion of part of the financial debt of the Company into securities issued by the Company (for more information about these THREE YEARS share capital transactions, see Chapter 2: “Operating and Financial Review and Prospects”, section 2.10.3 “Financial Resources”). When In 2009 all of these transactions were completed, the portion of share capital The distribution of the share capital changed in 2009 due to the decrease held by individual shareholders decreased to 28% as of January 21, 2011. in the participation of several institutional shareholders in Technicolor’s share capital. Thus, the portion of the share capital held by retail Holdings of institutional shareholders in the Company’s share capital and shareholders grew from around 38% as of April 30, 2009, to around the crossing of thresholds declared to the Company are noted above 54% as of December 31, 2009. under section 5.1.1: “Distribution of share capital and voting rights” of this Chapter.
5.1.6 CHANGES TO SHARE CAPITAL
Total Increase/ amount of Additional Value of the Cumulated Number of decrease of the the share paid-in capital additional paid-in amount Nominal shares issued share capital capital variation capital balance of shares value Transaction date or cancelled (in euros) (in euros) (in euros) (in euros) (in euros) (in euros) At December 31, 2008 1,012,087,605 1,643,402.595 269,890,028 3.75 At December 31, 2009 - - 1,012,087,605 - 1,643,402,595 269,890,028 3.75 January 27, 2010 - (985,098,602) 26,989,003 (1,643,402,595) - 269,890,028 0.10 Reduction of share capital by reason of losses (reduction in the nominal value) May 26, 2010 526,608,781 52,660,878 79,649,881 294,900,917 294,900,917 796,498,809 0.10 Increase of capital by issuance of new shares July 15, 2010 79,649,881 - 294,900,917 79,649,881 1 Reverse share split* Fees linked to the issuance of shares 79,649,881 (9,035,399) 285,865,518 79,649,881 – December 31, 2010 45,196,744 45,196,744 124,846,625 300,075,371 585,940,889 124,846,625 1 Capital increase after conversion of NRS I December 31, 2010 50,000,000 50,000,000 174,846,625 162,750,000 748,690,889 174,846,625 1 Capital increase after conversion of DPN At December 31, 2010 174,846,625 748,690,889 ** 174,846,625 1 December 30, 2011 48,912,458 48,912,458 223,759,083 323,376,245 1,072,067,134 48,912,458 1 Capital increase after conversion of remaining NRS I and of NRS II and IIC At December 31, 2011 223,759,083 1,072,067,134** 223,759,083 1
* On July 15, 2010, following the decision of the Board of Directors’ meeting of January 27, 2010, a reverse share split was implemented with 10 old shares with a par value of €0.10 exchanged for each new share with a par value of €1. ** Different from IFRS equity because Notes Redeemable in Shares (NRS) are considered as an equity component and not as a debt.
TECHNICOLOR I ANNUAL REPORT 2011 I 91 5 - TECHNICOLOR AND ITS SHAREHOLDERS Share capital
5.1.7 POTENTIAL MODIFICATIONS – 119,150,196 NRS IIC, redeemable in ordinary shares of the Company on December 31, 2011, or in cash at the option of the Company, in TO THE COMPANY’S SHARE accordance with the stipulations in paragraph 4.2.8.2, with a nominal CAPITAL value per NRS of €1.00, U.S.$1.30, or £0.91;
n issuance of 2,902,074 Disposal Proceeds Notes (“DPN”) redeemable Stock options in cash or in ordinary shares, from the net disposals proceeds of the At December 31, 2011, a total of 1,494,156 stock options was allocated sale of certain non-strategic activities of Technicolor. to certain employees, directors and officers pursuant to the stock option On December 31, 2010 the Company proceeded with the redemption of: plans (for details about these plans, see Chapter 6: “Social Information and Sustainability”, section 6.1.4 “Stock option plans and free share n 313,890,656 NRS I, by the issuance of 45,196,744 new shares of the plans”). Company (a request for deferred redemption of 5,328,181 NRS I until December 31, 2011 was made); If all of the options in the stock option plans mentioned above were exercised, 1,494,156 shares would be issued. Technicolor capital would n the entirety of the DPN. This security therefore is no longer in be composed of 225,253,239 ordinary shares, an increase of 0.67% circulation. in the number of shares as compared to the number existing as of On December 30, 2011 the Company proceeded with the redemption of: December 31, 2011.
n 5,328,181 NRS I still in circulation, 189,877,533 NRS II and 112,961,194 Convertible/Exchangeable bonds/Share NRS IIC, through the issuance of 48,912,458 new shares of the purchase warrants Company. When this transaction was completed, the total number of Company shares was increased to 223,759,083. In accordance with the transaction note approved on April 27, 2010, by the AMF (n° 10-107), the Company issued the following securities on A request for deferred redemption of 10,191,567 NRS II and 6,189,002 May 26, 2010: IIC was made.
n 638,438,133 Notes Redeemable in Shares (“NRS”) allocated to its These NRS will be redeemed on December 31, 2012 under the following senior creditors. The NRS were divided into three tranches: terms: – 319,218,837 NRS I, redeemable in ordinary shares of the Company n Redemption Ratio: 0.131; on December 31, 2010 for a nominal value per NRS of €1.00, U.S.$1.30 or £0.91, n Interest Payment Ratio: 0.028. – 200,069,100 NRS II, redeemable in ordinary shares of the Company on December 31, 2011 for a nominal value per NRS of €1.00, U.S.$1.30 or £0.91,
92 I TECHNICOLOR I ANNUAL REPORT 2011 TECHNICOLOR AND ITS SHAREHOLDERS - 5 Share capital
5.1.8 DELEGATIONS GRANTED TO THE BOARD OF DIRECTORS BY THE SHAREHOLDERS’ MEETINGS In accordance with Article L. 225-100 paragraph 7 of the French Commercial Code, the table below provides the delegations of power in force granted by the Combined Shareholders’ Meeting of June 8, 2012 (the “CSM”) to the Board of Directors and the use made of these delegations during the 2010 fiscal year:
I – Financial delegations to allow equity-linked instruments excluding employees or executive officers
Maximum Duration amount of the of the issuance of delegation equity-linked and date of debt securities Maximum amount of the issuance of Amount Amount Type of the financial delegation expiration (in euros) equity-linked debt securities used available €87,423,312, representing 50% of the share capital at the date of the present Shareholders’ Capital increase with preferential subscription Meeting, and representing 39%of the share rights through the issuance of shares and/or capital after redemption in shares of all of the equity-linked securities giving access, immediately NRS Issued pursuant to the sixth and seventh or in the future, to the Company’s share capital 26 months resolutions of the Shareholders’ Meeting held 100% of the (8th resolution of the CSM of June 8, 2011) August 7, 2013 500 million on January 27, 2010 None scope €34,969,325 , representing 20% of the share Capital increase, without preferential subscription capital at the date of the present Shareholders’ rights and by a public offering, through the Meeting, and representing 15.5% of the share issuance of shares and/or equity-linked securities capital after redemption in shares of all of giving access, immediately or in the future, to the NRS Issued pursuant to the sixth and seventh Company’s share capital 26 months resolutions of the Shareholders’ Meeting held 100% of the (9th re solution of the CSM of June 8, 2011) August 7, 2013 300 million * on January 27, 2010 None scope Capital increase, without preferential subscription rights, through the issuance of shares and/or €34,969,325 , representing 20% of the share equity-linked securities giving access, immediately capital at the date of the present Shareholders’ or in the future, to the Company’s share capital, by Meeting, and representing 15.5% of the share an offering in accordance with Article L. 411-2 of capital after redemption in shares of all of the French Monetary and Financial Code NRS Issued pursuant to the sixth and seventh (private placement) 26 months resolutions of the Shareholders’ Meeting held 100% of the (10th resolution of the CSM of June 8, 2011) August 7, 2013 300 million * on January 27, 2010 None scope Increase of the number of shares to be issued in the event of a capital increase with or without preferential subscription rights up to 15% of the Counts towards the individual ceilings of the amount of the initial increase (Green shoe) 26 months 8th, 9th and 10th resolutions as well as towards the 100% of the (11th resolution of the CSM of June 8, 2011) August 7, 2013 N/A overall ceiling stipulated in the 13th resolution None scope Issuance of shares and/or equity-linked securities giving access, immediately or in the future, to the Company’s share capital in consideration for contributions in kind granted to the Company 26 months 100% of the (12th resolution of the CSM of June 8, 2011) August 7, 2013 N/A €50 million None scope €87,423,312, representing 50% of the share capital at the date of this Shareholders’ Meeting and 39% of the share capital after redemption Global limitations of the issuances under above in shares of all of the NRS Issued pursuant delegations to the sixth and seventh resolutions of the (13th resolution of the CSM of June 8, 2011) 500 million Shareholders’ Meeting held on January 27, 2010 N/A N/A
* The ceilings of the 9th and 10th resolutions are common so that the use of one of these delegations will count towards the individual ceiling of the other delegation as well as towards the overall ceiling set out in the 13th resolution.
TECHNICOLOR I ANNUAL REPORT 2011 I 93 5 - TECHNICOLOR AND ITS SHAREHOLDERS Share capital
II – Delegations to allow equity-linked instruments for employees or executive officers
Duration of the Number Number delegation and Number of shares that may be issued and percentage of shares of shares Type of the financial delegation date of expiration of the share capital issued available Grant of free shares to Company employees 2,500,000 shares representing 1.43% of the share capital at the date or certain categories of employees of the present Shareholders’ Meeting, and representing 1.10% of (Long-term incentive plan for key Group the share capital after redemption in shares of all of the NRS Issued employees) 38 months pursuant to the sixth and seventh resolutions of the Shareholders’ 100% of the (14th resolution of the CSM of June 8, 2011) August 7, 2014 Meeting held on January 27, 2010 None scope 3,059,815 shares representing 1.75% of the share capital at the date of the present Shareholders’ Meeting, and representing 1.35% of Increase of the share capital through issuances the share capital after redemption in shares of all of the NRS Issued reserved to members of a group savings plan 18 months pursuant to the sixth and seventh resolutions of the Shareholders’ 100% of the (15th resolution of the CSM of June 8, 2011) December 7, 2012 Meeting held on January 27, 2010* None scope Capital increase reserved to certain 3,059,815 shares representing 1.75% of the share capital at the date categories of beneficiaries (Shareholding of the present Shareholders’ Meeting, and representing 1.35% of transactions for employees outside a savings the share capital after redemption in shares of all of the NRS Issued plan) 18 months pursuant to the sixth and seventh resolutions of the Shareholders’ 100% of the (16th resolution of the CSM of June 8, 2011) December 7, 2012 Meeting held on January 27, 2010* None scope 1,500,000 at the date of grant of the options, i.e. 0.86% of the share capital at the date of the present Shareholders’ Meeting, and Grant of share subscription or purchase options 0.66% of the share capital after redemption in shares of all of the to employees and executive officers 38 months NRS Issued pursuant to the sixth and seventh resolutions of the 100% of the (17th resolution of the CSM of June 8, 2011) August 7, 2014 Shareholders’ Meeting held on January 27, 2010 None scope 3% of the share capital after redemption in shares of all of the Global limitations of the issuances NRS Issued pursuant to the sixth and seventh resolutions of the under above authorizations Shareholders’ Meeting held on January 27, 2010 (ceiling calculated (18th resolution of the CSM of June 8, 2011) as of the date of the decision of the Board of Directors) N/A N/A
* The ceilings of the 15th and 16th resolutions are common so that the use of one of these delegations will count towards the individual ceiling of the other delegation as well as the global ceiling set out in the 18th resolution.
5.1.9 DIVIDEND POLICY 5.1.10 OTHER INFORMATION Any payment of dividends or other distributions depends on the RELATING TO SHARE CAPITAL Company’s financial condition and results of operations, especially net income, and its investment policy. The Company has not distributed any Technicolor shares subject to a security dividends in respect of the 2010, 2009 and 2008 fiscal years. interest To the knowledge of the Company, as of March 15 , 2012, no shares of The Internal Rules of the Board of Directors (described in Chapter the Company were subject to a pledge or other security interest. 4: “Corporate Governance and Internal Control procedures”, section 4.2.1: “Preparation and organization of the Board of Directors’ works” in paragraph 4.2.1 .2 “Structure of Board of Directors’ work – Internal Elements likely to have an influence in case Board Rules” in this Annual Report) require the approval of a qualified of a public offer majority of two-thirds of the Directors for any decision relating to payment of dividends. In addition, the Reinstated Debt agreements Pursuant to Article L. 225-100-3 of the French Commercial Code, it is contain covenants restricting the ability of the Company or certain of its indicated that the agreements pertaining to the Restructured Debt and subsidiaries to declare or pay dividends (see Chapter 2: “Operating and the NRS Issued include a change of control clause. For more information Financial Review and Prospects”, section 2.10.3: “Financial Resources”). on the agreements pertaining to the Restructured Debt and the NRS, please refer to Chapter 2: “Operating and Financial Review and Prospects”, section 2.10.3: “Financial Resources” in this Annual Report.
94 I TECHNICOLOR I ANNUAL REPORT 2011 TECHNICOLOR AND ITS SHAREHOLDERS - 5 Listing information
5.2 LISTING INFORMATION
5.2.1 MARKET FOR THE the next determination date. Such option may be maintained on each COMPANY’S SECURITIES subsequent determination date upon payment of an additional fee. Equity securities traded on a deferred settlement basis are considered Listing on Euronext Paris to have been transferred only after they have been registered in the Since November 3, 1999, Technicolor’s shares have been listed on purchaser’s account. Under French securities regulations, any sale of Euronext Paris (Compartiment B) in the form of ordinary shares and a security traded on a deferred settlement basis during the month of are eligible for the Système de Règlement Différé (Deferred Settlement a dividend payment date is deemed to occur after the dividend has Service). been paid. Thus if the deferred settlement sale takes place during the month of a dividend payment, but before the actual payment date, the As of July 15, 2010, when the Company effected a reverse share split, purchaser’s account will be credited with an amount equal to the dividend its new ordinary shares have been listed on Euronext Paris under the paid and the seller’s account will be debited by the same amount. designation TECHNICOLOR, ISIN Code FR0010918292, with the trading symbol TCH. For information about old shares not exchanged Prior to any transfer of securities listed on Euronext Paris held in in the reverse share split implemented in July 2010, see Chapter 5: registered form, the securities must be converted into bearer form “Technicolor and its shareholders”, section 5.1 “Share capital” of this and accordingly recorded in an account maintained by an intermediary Annual Report. accredited with Euroclear France, SA, a registered central security depositary. Trades of securities listed on Euronext Paris are cleared Technicolor’s shares are eligible for the Deferred Settlement Service. through L.C.H. Clearnet and settled through Euroclear France SA using In the Deferred Settlement Service, the purchaser may on the a continuous net settlement system. determination date (date de liquidation), which is the fifth trading day prior to the last trading day of the month, either (i) settle the trade no In France, Technicolor’s ordinary shares are included in the SBF 120 later than the last trading day of such month, or (ii) upon payment of Index, and on the CAC Media, CAC Consumer Services, CAC an additional fee, extend to the determination date of the following MID&SMALL and CAC Mid 60 Indices. month the option either to settle no later than the last trading day of such month or postpone again the selection of a settlement date until
TECHNICOLOR I ANNUAL REPORT 2011 I 95 5 - TECHNICOLOR AND ITS SHAREHOLDERS Listing information
5.2.2 LISTING ON EURONEXT PARIS The tables below set forth, for the periods indicated, the high and low prices (in euro) for Technicolor’s outstanding shares on Euronext Paris (after reverse share split adjustment).
Euronext Paris Volume of transactions Share price (in euros) (in millions Number of Average Average Years ending December 31 of euros) Shares traded volume closing price High Low 2007 6,357.9 48,452,053.2 190,008.1 129.50 156.00 94.30 2008 3,016.1 99,755,864.4 389,671.3 36.30 96.50 7.60 2009 3,446.6 357,370,155.9 1,401,451.6 9.50 18.40 3.60 2010 1,716.1 170,758,549.9 6,686,057 6.29 11.62 3.55 2011 1,494.3 455,522,406.0 1,772,460.7 3.54 5.73 0.98
Source: NYSE Euronext.
Euronext Paris Volume of transactions Share price (in euros) (in millions Number Average Average Quarters of euros) of Shares traded volume closing price High Low 2009 First quarter 747.5 91,927,628.5 1,459,168.7 9.30 18.40 3.60 Second quarter 782.1 88,941,065.5 1,434,533.3 8.50 11.80 5.50 Third quarter 943.2 88,123,018.3 1,335,197.2 9.30 14.90 5.50 Fourth quarter 973.8 88,378,443.6 1,380,913.2 10.80 14.60 8.00 2010 First quarter 162.0 155,371,100.0 7,434,369.6 10.30 11.20 9.20 Second quarter 204.1 324,864,888.7 15,267,774.3 6.70 7.70 5.70 Third quarter 92.1 62,519,280.0 2,841,786.0 4.10 4.50 3.70 Fourth quarter 113.6 26,439,897.6 1,200,299.0 4.30 4.30 3.80 2011 First quarter 705.1 150,062,103.0 2,344,720.4 4.61 5.73 3.42 Second quarter 250.8 51,928,885.0 824,268.0 4.79 5.35 4.06 Third quarter 306.2 95,548,514.0 1,447,704.8 3.24 4.67 2.01 Fourth quarter 232.2 157,982,904.0 2,468,482.9 1.56 2.52 0.98
Source: NYSE Euronext.
Euronext Paris Volume of transactions Share price (in euros) (in millions Number Average Average Last six months of euros) of Shares traded volume closing price High Low 2011 September 69.1 27,768,067.0 1,262,184.9 2.59 3.08 2.01 October 68.1 30,694,964.0 1,461,665.0 2.22 2.52 1.97 November 109.2 80,328,430.0 3,651,292.3 1.31 1.89 1.02 December 54.8 46,959,510.0 2,236,167.1 1.16 1.36 0.98 2012 January 316.0 165,884,300.0 7,540,195.0 1.55 2.69 1.14 February 241.9 106,304,876.0 5,062,137.0 2.25 2.63 2.00
Source: NYSE Euronext.
96 I TECHNICOLOR I ANNUAL REPORT 2011 SOCIAL INFORMATION 6 AND SUSTAINABILITY
6.1 EMPLOYEES AND WORKFORCE ...... 98 6.2 ENVIRONMENTAL MATTERS ...... 107 6.1.1 Overview ...... 98 6.2.1 General ...... 108 6.1.2 Employee profit-sharing ...... 99 6.2.2 Programs, systems, and activities ...... 108 6.1.3 Shares held by employees ...... 99 6.2.3 Operational data and results ...... 112 6.1.4 Stock option plans and free share plans ...... 99 6.2.4 Data collection method and rationale ...... 115 6.1.5 Human Resources & Sustainable Development ...... 102 6.1.6 Talent and development ...... 102 6.3 TECHNICOLOR FOUNDATION FOR CINEMA HERITAGE ...... 117 6.1.7 Training policy ...... 104 6.1.8 Remuneration policy ...... 104 6.1.9 Labor relations ...... 105 6.1.10 Global compact progress ...... 106 6.1.11 Health and safety management ...... 106
TECHNICOLOR I ANNUAL REPORT 2011 I 97 6 - SOCIAL INFORMATION AND SUSTAINABILITY Employees and workforce
6.1 EMPLOYEES AND WORKFORCE 6.1.1 OVERVIEW On December 31, 2011, the Group employed 16,942 employees, (67% male and 33% female) compared to 17,858 employees at December 31, 2010, a decrease of 5.1%.
The highly competitive and rapidly-changing Media & Entertainment sector in which the Group provides its products, technology and services requires continuing adjustment to the workforce.
The table below shows Technicolor’s total workforce as of December 31, 2011, 2010, 2009 and 2008, as well as the distribution of personnel across geographical regions.
2011 2010 2009 Europe 5,766 6,424 7,590 North America 6,497 7,473 8,719 Asia (1) 1,975 1,797 2,139 Other countries (2) 2,704 2,164 2,370
TOTAL NUMBER OF EMPLOYEES (3) 16,942 17,858 20,818 Number of employees in entities accounted for under the equity method* 277 3,092
* Mainly the joint venture with NXP, NuTune in 2009 and 2008. (1) Of which People’s Republic of China including Hong Kong. 568 606 720 (2) Including Mexico. 1,608 1,435 1,468 (3) Includes employees of activities treated as discontinued.
Total workforce figures above account for executives, non-executives and workers. Temporary employees and trainees are excluded.
The following table indicates the number of Group employees by segment as of December 31, 2011:
Number of Division/Segment employees Percentage Entertainment Services 10,403 61,4% Digital Delivery 4,253 25,1% Technology 664 3,9% Transversal functions 1,622 9,6%
TOTAL 16,942 100%
The overall reductions in work force during 2011 resulted primarily from the Group strategy to refocus on its core business.
The decline in film processing and film print distribution required a realignment of the workforce in these activities in Europe, North America and Asia.
Increases in the workforce occured mainly in Creative Services, Digital Productions and MediaNavi.
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6.1.2 EMPLOYEE PROFIT-SHARING (Fonds Communs de Placement d’Entreprise), and the number of shares directly held by the employees and subject to a lock-up period was Three French subsidiaries of the Company offer employees incentive 313,820 shares, representing 0.14% of the share capital. plans based on the related subsidiary’s results. The Combined Shareholders’ Meeting of June 8 , 2011 authorized the The total annual bonuses distributed to employees in connection with Board of Directors to proceed with share capital increases reserved to the these incentive plans over the three most recent years amount to the Group’s employees in connection with an employee shareholding plan following: (for more information, see Chapter 5: “Technicolor and its shareholders”, section 5.1.8 “Delegations granted to the Board of Directors by the n amounts distributed in 2009 for year 2008: €358,521; Shareholders’ Meetings”). n amounts distributed in 2010 for year 2009: €1,616,929; and n amounts distributed in 2011 for year 2010: €736,312. 6.1.4 STOCK OPTION PLANS AND In addition, several of our locations in France and in the United States FREE SHARE PLANS offer their employees profit-sharing plans based on Company results and/or achievement of individual objectives. Stock option plans On June 11, 2011, Technicolor concluded with all representative unions The Shareholder’s Meeting held on June 8, 2011 authorized the Board at Group level in France an agreement on profit sharing, covering all of Directors to grant subscription or purchase options to the Group’s French subsidiaries. This agreement, which applies for the years 2011, employees or Directors. This authorization was given for a period of 38 2012 and 2013, allows to generalize for all Group employees in France months, and is valid until August 8, 2014. Options granted under this the opportunity to receive an incentive. This is based half on economic authorization shall not give rights to a total number of shares greater than objectives, EBITDA and Free Cash Flow, common to all subsidiaries 0.86% of the share capital as of the day of the Shareholder’s Meeting and, for the other half on goals specific to each of them. held on June 8, 2011 (i.e. 1,503,680 shares) and 0.66% of the share capital after redemption in shares of all of the NRS Issued on the day of the Board of Directors’ decision to grant the options. 6.1.3 SHARES HELD BY EMPLOYEES As of December 31, 2011, the number of shares held by the Group’s employees in the Group Saving Plan (Plan d’Épargne Entreprise), by employees and former employees through Technicolor’s savings plan
TECHNICOLOR I ANNUAL REPORT 2011 I 99 6 - SOCIAL INFORMATION AND SUSTAINABILITY Employees and workforce
The stock option plans in existence as of December 31, 2011 and closed during the year are as follows:
Plan Plan Plan Plan Plan Plan Plan MIP-SPI Date of Shareholders’ Meeting 11/10/2000 11/10/2000 11/10/2000 05/10/2005 05/10/2005 05/10/2005 05/22/2008 Date of Board of Directors’ meeting 10/12/2001 09/22/2004 04/19/2005 12/08/2005 09/21/2006 12/14/2007 06/17/2010 Type of options Subscription Subscription Purchase Purchase Subscription Subscription Subscription Number of options granted, including: 3,540,300 7,366,590 719,400 1,993,175 2,739,740 1,307,100 12,167,000 Number of options granted to Directors and officers: Frederic R ose
n before adjustments ------2,155,700 (1) n after adjustments ------215,570 Loïc Desmouceaux
n before adjustments - 7,600 - - 2,000 1,000 -
n after adjustments - 915 - - 241 121 - Number of options granted to the first ten employee beneficiaries - before adjustments ------7,196,400
n after adjustments ------719,640
n Beginning of the exercise period 10 /13 /2004 09 /23 /2007 04 /20 /2008 12 /09 /2008 09 /22 /2008 12 /15 /2009 06 /18 /2014 Plan life 10 years 10 years 10 years 10 years 8 years 8 years 8 years Expiration date 10/11/2011 09/21/2014 04/18/2015 12/07/2015 09/20/2014 12/14/2015 06/17/2018 Exercise price at grant time €31.50 €16.00 €20.82 €17.73 €12.49 €10.43 €0.66 Exercise period 50%: 50%: 50%: 50%: 50%: 50%: 10/13/2004 09/23/2007 04/20/2008 12/09/2008 09/22/2008 12/15/2009 100%: 100%: 100%: 100%: 100%: 100%: 100%: 10/13/2005 09/23/2008 04/20/2009 12/09/2009 09/22/2009 12/15/2010 06/18/2014 Number of shares subscribed as of 12/31/2011 ----1-- Number of options cancelled since the beginning of the plan 3,540,300 4,635,510 422,600 1,508,550 1,955,940 755,600 2,119,700 Number of options cancelled during the 2011 exercise 270,000 1,126,310 107,000 445,400 647,390 265,100 1,397,600 Number of outstanding options at the end of the exercise before adjustments 0 2,731,080 296,800 484,625 783,799 551,500 10,047,300 Number of outstanding options at the end of the exercise (after May 26, 2010 capital adjustment) (2) 0 3,285,200 357,023 582,991 942,892 663,453 N/A Exercise price N/A €13.30 €17.31 €14.74 €10.38 €8.67 N/A Number of outstanding options at the end of the exercise (after July 15, 2010 adjustments due to the grouping of shares) 0 328,596 35,712 58,356 94,365 66,465 1,004,730 Exercise price N/A €133.00 €173.10 €147.40 €103.80 €86.70 €6.60
(1) Information provided pursuant to Article L. 225-184 of the French Commercial Code. (2) Adjustment coefficient: 0.83135.
As of December 31, 2011, the total options granted under the plans In accordance with Article L. 225-184 of the French Commercial Code, amounted to 94,068 purchase options and 1,494,156 subscription options it is noted that no options were exercised in 2011. granted to 353 beneficiaries.
The exercise price of the various stock option plans have been fixed without discount and calculated on the basis of the average share price of the 20 trading days prior to the Board of Directors’ meeting except for the Plan MIP-SP1.
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Free share plan On December 31, 2011, the maximum number of rights to receive existing company shares at the end of the vesting periods mentioned Global Free Share Plan 2007 above amounts to 345,960 performance shares. The Shareholders’ Meeting of May 15, 2007 authorized, with delegation to the Board of Directors, the allocation of free shares to employees and Long-Term Management Incentive Plan officers of the Group. (LTIP 2011) The Shareholders’ Meeting of June 8, 2011 authorized, with delegation Making use of this delegation, the Board of Directors’ meeting held on to the Board of Directors, the allocation of free shares to employees June 21, 2007 approved the implementation of a global free share plan and/or directors and officers of the Group. to eligible employees of the Group. This plan provided, depending on the country, for either two-year or four-year vesting periods. On June 21, Based on this delegation, on June 8, 2011, the Board of Directors 2009, at the end of the two-year vesting period, 142,820 free shares, approved the adoption of a long-term incentive plan designed to retain which accounted for 0.08% of the Company’s share capital at that time, key Group employees while aligning their interests with those of the were granted to employees who met all the granting conditions. Company and its shareholders. This three-year plan provides for the granting of Performance Units comprising a cash bonus and free shares Taking into account the share price on June 15, 2011, at the end of the (known as “performance shares”), representing one-third and two-thirds four-year vesting period, and with the aim of avoiding high administrative respectively. costs given the small number of shares granted (two shares per employee following the reverse share split transaction of July 2010), the Board of In addition to a condition requiring recipients to be employed by Directors modified the regulations of the plan applicable to the countries the Group at the end of each vesting period, the final number of concerned (United States, Brazil, China, Hong Kong, Indonesia, Japan, Performance Units granted will depend on the performance conditions, Mexico and Thailand), to enable the delivery date for the free shares to which will be the same for each recipient. These conditions relate to be delayed, and to introduce the possibility of payment in cash in lieu (i) the net debt/EBITDA ratio, and (ii) the stock market performance of the delivery of free shares. 5,736 shares, equivalent to 0.003% of the measured each year by comparing the change in the Technicolor share share capital, were delivered to eligible employees who opted to receive price with the change in the share prices of a sample of around 20 stocks shares. 6,282 shares were sold on the market and the proceeds from the listed in North America, Europe and Asia that are representative of the sale were paid to the employees who opted to receive cash instead. technology, media and telecoms sectors.
Performance share plans As regards the former criterion, which accounts for two-thirds of the assessment, the conditions for obtaining 100% of the Performance Management Incentive Plan 2010-2014 Units are stricter than those contained in the corresponding covenant (MIP - SP1 and SP2) in the agreements relating to the Restructured Debt. For the second criterion, which accounts for one-third of the assessment, for 100% of The Board of Directors meeting of June 17, 2010 approved the the Performance Units to be awarded, the Company must be among implementation of a mid-term management incentive plan (MIP - SP1 the top three comparable stocks reporting the best performances, and and SP2) for the benefit of the CEO and approximately 80 Group key in the event that the comparison is not satisfactory, no Performance executives. This plan awards Performance Units comprised of half cash Units will be granted. Between these two situations, the percentage of and, according to the categories of beneficiaries, either half subscription Performance Units granted will be reduced accordingly. options or half performance shares. Depending on the achievement of attendance and performance conditions, subscription options will be The right to the delivery of the shares and the payment of the cash bonus exercisable as from June 18, 2014. On December 31, 2011, the maximum will be recorded in three annual tranches: number of rights to receive existing shares of the Company after the four-year vesting period, subject to the achievement of specified n 20% of the Performance Units granted will be conditional on the attendance and performance conditions, was 1,004,730, accounting for achievement of the performance conditions related to the consolidated 0.4% of the share capital. financial statements for the year ended December 31, 2011;
Depending on the achievement of cumulative attendance and n 30% of the Performance Units granted will be conditional on performance conditions, this plan requires, depending on the country, the achievement of the performance conditions related to the a four-year vesting period or a two-year vesting period with a two-year consolidated financial statements for the year ended December 31, holding period as from the acquisition of the performance shares. 2012;
n 50% of the Performance Units granted will be conditional on the achievement of the performance conditions related to the consolidated financial statements for the year ended December 31, 2013.
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For each tranche, the payment of the cash bonus and the delivery of n HR Information Systems, Processes and KPIs, focusing on the shares will be further subject to the uninterrupted employment of implementing coherent and sustainable tools supported with adequate the recipient at the Company. processes; Corporate Social Responsibility (CSR); Depending on the achievement of cumulative attendance and n performance conditions, this plan requires, depending on the country, n Labor Relations. a four-year vesting period or a two-year vesting period with a two-year The Regional HR Competence Centers, built on a shared service holding period as from the acquisition of the performance shares. model, ensure a consistent HR approach across sites and functions within each geographical region and guarantee that Technicolor On December 31, 2011, the maximum number of rights to receive remains fully compliant with local employment laws and practices. In existing company shares at the end of the vesting periods mentioned order to maximize services delivery and quality, Technicolor’s regions above amounts to 1,494,270 performance shares. are regrouped under a unique leader and Regional HR Centers are geographically organized as follows:
6.1.5 HUMAN n Asia-Pacific; Greater China and India; RESOURCES & SUSTAINABLE Americas; DEVELOPMENT n n Europe. Technicolor’s Human Resources & Sustainability organization is aimed at reinforcing Technicolor’s strategic priorities and at contributing to Last but not least, HR Leaders have been appointed within the Regional the Group’s objectives. In order to remain fully aligned with the Group’s Competence centers in each of the sites to better support business different businesses and to reinforce global HR leadership capability, activities with common processes and regulations at site level by HR&S has adopted in 2010 a new operating model and has, during 2011, delivering all necessary HR transactional activities.HR Site Leaders pursue its reinforcement across the Group. also contribute to the implementation of Corporate HR programs and facilitate coherent local communications. HR Sites Leaders report to This model has three dimensions: their respective Regional HR Competence Centers.
The Head of HR&S, a Member of Technicolor’s Executive Committee, n Strong Partnership with Business; defines HR&S strategic priorities in line with Technicolor’s strategic n Global Centers of Expertise; plan, implements and adapts the HR&S model, identifies organizational n Regional Human Resources Competence Centers, reinforced with needs and related resources, and pilots HR&S initiatives across all of the the nomination of HR sites leaders. Group’s activities. The integration of business strategy and HR has been reinforced through the HR Business Partner function. HR Business Partners work closely with 6.1.6 TALENT AND DEVELOPMENT each business leader to analyze and plan the evolution of Technicolor’s workforce skills and competencies and ensure they are in line with its In 2011, Technicolor has consolidated and stabilized the programs development goals. They leverage with the Company’s Global Centers initiated in 2010. The ultimate Talent & Development objectives remain of Expertise and Regional Competence Centers to deliver high quality the development of skills aligned with the Group’s values, vision and and cost-efficient services. strategy and to ensure the necessary leadership skills to meet our goals in the short and long term. The Global Centers of Expertise ensure consistency and delivery of key Group HR projects and provide specialized advice and expertise across By capitalizing on existing programs, the Group has aimed at optimizing the whole organization in the following areas: their benefits, deepening the understanding and the ownership of Technicolor’s values and challenges. Simultaneously, fundamental n Compensation & Benefits focusing on rewards, incentive programs, aspects to construct a successful future such as critical competencies pension schemes, medical care and other benefits; evolution planning and people development capabilities were reinforced.
n Talent and Development focusing on people development, talent management, mobility, performance management and organizational development practices;
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Talent Review Development of the Sales Force The changes in the Talent Review implemented in 2010 have led to a The Technicolor Sales Academy deploys a unified sales skills more exhaustive talent identification process reaching all levels of the development approach to the global sales force. The sales development organization The impact of these changes are visible in the increase of curriculum on reinforcement of customer relations was complemented the Group talent pool in 2011 as well as in the higher involvement of by workshops on approaches to sell value and consultative selling. managers at all levels of the organization in the talent review process. In 2011, 19 groups were formed to follow the sales trainings in London, A thorough talent review was conducted between May and September, Paris, Los Angeles, Hong Kong and Sao Paulo. mobilizing managers at all levels of Technicolor around the identification of employees with the right level of potential and performance to integrate the Group’s Talent pool and participate in development R&D Long-term Competency Plan programs in 2012. In September, 13 Talent Committees were performed In order to continue to ensure Technicolor’s competitively and involving each organization leader and ExCom member. innovation capacity, a major focus was given to the design of a global competencies framework integrating all the Group’s R&D capabilities. This framework improves the Group’s capacity to anticipate the need Development of Leadership of R&D resources and skills as well as training and development actions As a result of a more exhaustive talent review process, the number of to follow the evolution and to update critical R&D competencies. high potential employees and executives to whom the opportunity to participate in a leadership development curriculum was given raised from 30 in 2010 to 75 in 2011. In line with the evolution of Technicolor Line managers Network markets and development model, the leadership development actions Created in 2010, the Technicolor Line Managers Network gathers in 2011 combined the enhancement of business acumen in the digital managers in different sites of the Group and facilitates the promotion environment with the development of personal and interpersonal skills of management practices aligned with Technicolor values and business impacting people management and leadership. priorities. The network activities concentrate on ensuring an efficient communication to line managers, on supporting managers to deliver This development curriculum included a program on value creation important business and organization information to their teams; in ME&C industries done in partnership with the Institute for on offering learning opportunities to develop or to refresh people Media & Entertainment/IESE and workshops on assertiveness, leadership management skills; and on increasing interaction and information sharing and influence. All participants of the programs were closely supported among managers of different divisions and functions. by coaches and HR Business Partners, maximizing the relevancy and the application of concepts learned in their jobs. In addition Leadership The communication aspect of the network was emphasized in 2011, in this Forums to discuss Technicolor challenges led by the CEO, Executive perspective, new sessions dedicated to business and financial information Committee Members and other Group Executives took place in Paris reserved to the Line managers Network members were created in the and Los Angeles. Group Intranet. In order to ensure an efficient information flow within the organization, these sessions include presentations, communication packs and feedback forms prepared with the intent of assisting managers People Development Capabilities to deliver the information to their teams. In support to the development of skills aligned with Technicolor vision, values and strategy, a special program was created to reinforce the In continuity to the learning programs promoting management people development capabilities of HR Business Partners and HR practices aligned with our corporate values, more than 400 managers managers. This program includes methodologies and tools to identify have followed an e-learning path on “Diligent – the Customer Centric and develop a wide range of transversal competencies, provide 360 Attitude”, summing nearly 900 hours of e-training. In addition and to feedback and basic coaching. In this first year, 24 members of the HR allow Line managers to discuss and share their management practices community have participated and supported employees, particularly aiming at the identification and response to clients needs, 25 meetings High Potentials from Technicolor’s talent pool, to build and execute were organized in Technicolor sites. individual development plans.
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Women’s Forum Transversal Functions The Technicolor Women’s Forum is a network that consists of around Particular transversal functions managed centrally may define dedicated 80 women, each of whom plays a role in raising awareness of changing training programs to develop specific technical and functional skills gender values. In 2011, this network has ensured that each Technicolor relative to their function and expertise. site has one appointed woman leader who coordinates regular site meetings on the progression of women in the Company and how can women be key change initiators for Technicolor. Two large events Site took place last year: in Las Vegas during the International Consumer Local HR managers are responsible for training plans that address Electronics Show (CES) in January and in Paris in June gathering almost business needs as defined by Divisions and individual needs as expressed 40 women from France. In addition a new policy to encourage gender during objectives/performance assessment reviews. As part of this diversity in senior management positions is now adopted: Technicolor process, each employee discusses and defines specific development requires recruitment and personnel search professionals worldwide plans with his or her manager, including training. Local management to ensure that the curriculum vitae of at least one qualified woman is tracks consolidation and follow-up. included in every list of finalist submitted for open senior management positions within the Company. Overall training initiatives in 2011 encompassed 260.000 person-hours.
Fellowship Network 6.1.8 REMUNERATION POLICY The Fellowship Network, grouping the key technical experts of Total remuneration is considered a key pillar of Technicolor’s Human Technicolor, has been enlarged in 2011, with the selection of 26 new Resources policy. The remuneration policy is tailored to acknowledge members (1 Fellow, 5 Distinguished members, 20 Associate Members). and fairly recognize an employee’s contribution to the short and longer It now totalize 79 members, representing the different business units and term success of the Group. research centers of Technicolor. New members have been celebrated during the Engineering Awards and Fellows ceremony, organized in Technicolor continues to incorporate a classification structure using on Hollywood, in May 2011. Towers Watson methodology, with grades and bands that ultimately emphasizes and reinforces the strong link between contribution and Fellows network members are involved in multiple activities, which have remuneration. Technicolor is steadily reviewing its job definitions and been developed in 2011: levels and reflects the evolutions of the Group. Such classification allows the Group to ensure the internal equity of remuneration packages; n they evaluate invention and patents, as members of patent portfolio analysis groups; moreover, Technicolor participates to relevant salary surveys to assess the competitiveness of remuneration in the proper marketplaces. This n they give regular seminars on specific technical domains, open to all provides Technicolor with sustainable, objective and equitable means of network members, and accessible to all Technicolor staff; remunerating employees while closely controlling its wage bill.
n they participate to different work groups, or workshops, contributing to the Group technology related strategic decisions; The total remuneration policy is structured around flexible and competitive fixed and variable compensation elements driven by market n they leverage Technicolor scientific and technical excellence through best practices and the Group’s objectives for long-term value creation cross fertilization among expertise domains and corporate groups. appropriate to circumstances and goals:
n competitiveness: appropriate market benchmarks of total 6.1.7 TRAINING POLICY compensation against peer companies allows Technicolor to offer The Technicolor training policy is implemented at three levels. competitive compensation packages to employees in accordance with competitive pressures in the marketplace. This ensures that Technicolor continues to attract and retain high potential and key Company wide contributors for which Technicolor competes in an international Technicolor provides development programs for the Company’s talent market place while controlling cost structures; pools in order to develop leadership capabilities, reinforce management n equitable approach: Technicolor believes that it remunerates implication, consolidate management skills and meet cultural integration its employees on an equitable basis in each of its geographical challenges and strategic functional competencies. locations both in line with local standards and proposed corporate
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programs. The remuneration policy is set according to the Group’s the development of its employees by means of various remuneration “broadbanding policy” which allows consistent assessment of factors defined by the Group. responsibility, contribution and levels of expertise on an international business basis across all businesses and functions. In addition, the remuneration policy of top executives is centralized to facilitate 6.1.9 LABOR RELATIONS consistency of various remuneration components; and Labor relations with Technicolor employees are the responsibility of n business and skills focus: the remuneration of professionals, engineers the managers of each country with the support of Human Resources. and managers is a sound, market-driven policy and ultimately administered to stimulate business performance. A significant part With respect to its European operations, Technicolor entered into a of the total remuneration package is composed of variable elements labor agreement with a European council of employee representatives that drive a performance culture and support the Company’s strategy. (the “European Council”) confirming the Group’s labor practices. These variable elements are meant to stimulate, recognize and reward On May 10, 2006, this agreement was renewed unanimously by ten not only individual contribution but also and in particular, strong union organizations representing the European companies in the Group and Divisions performances. Group. This council, which meets several times each year, comprises In accordance with the principles and rules established by the Group, union representatives or Members of local works councils in European each Group entity is entitled to recognize the potential and encourage countries.
In 2011, Technicolor has renewed the composition of its European Works Council in order to reflect its business evolution in Europe; as a consequence, the European Works Council is now composed with:
Country Number of European Works Council seats Belgium 1 France 3 Germany 1 Italy 1 Poland 1 Spain 1 The Netherlands 1 UK 3
Technicolor’s European Council is a supranational body, the purpose In Canada, in 2011, we entered into three collective bargaining of which is to address topics of a transnational nature. The European agreements. In the United States, in 2011, approximately 8.5% of the Council is informed of Technicolor’s European operations in respect of Group’s employees were unionized and were covered by the collective personnel, finance, production, sales, and research and development, bargaining agreements negotiated with the national and/or local and their impacts upon employment and working conditions. It is also unions. These agreements, with an average duration of three years, informed of major structural, industrial and commercial changes as address salaries, employment benefits, and the working conditions and well as organizational transformations within the Group. It met 8 times organization. In Mexico, employment agreements are renegotiated in 2011. every year The proportion of employees belonging to a union is 55%. In Brazil, where less than 1% of employees are unionized, one such In accordance with applicable law in the European Union, Technicolor’s agreement was signed. managers of each European country meet annually with labor organizations to discuss remuneration and working conditions. In Australia, 50% of employees belong to a union and no collective agreement was signed in 2011. In accordance with domestic laws, data regarding the level of unionization is not available in most of European countries (the laws in these countries do not allow this type of statistic to be published). In 2011, Technicolor entered into three collective bargaining agreements with its German employees; 10 such agreements in France; one such agreements in Italy and one in Spain.
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6.1.10 GLOBAL COMPACT Technicolor understands that each employee has the ability to impact its EH&S efforts and performance, thus it is critical that they are PROGRESS provided with the appropriate tools, resources and knowledge. EH&S Technicolor has been a Member of the United Nations Global Compact training programs develop awareness and skills that allow employees since 2003. The Global Compact is a United Nations initiative which and contractors to perform their jobs in such a manner that will not challenges Member companies to align their operations and strategies only ensure compliance with appropriate laws, regulations and policies, around 10 universally accepted principles in the areas of human rights, but also so that they may prevent accidents which may lead to injuries labor standards, environmental practices and anti-corruption and to or harm to the environment. Training programs are evaluated during develop best practices in these fields. Technicolor seeks to comply the Corporate Audit process, and are a core requirement in the EH&S with the highest ethical standards, to take into account the legitimate performance measurement process. and ethical interests of all its stakeholders as well as the United Nations founding principles and each year submits a Communication on Progress EHS training as part of its support and engagement in favor of the Global Compact. The most recent public Communication on Progress is available on the In 2011, 38,690 hours of documented training on a wide variety of Group’s website at the following location: environmental and safety compliance and protection, injury prevention, http://www.technicolor.com/uploads/associated_materials/technicolor_ emergency preparation and response, and occupational health topics ungc_2010_cop.pdf were provided to employees and contractors throughout Technicolor.
Community outreach and employee initiatives 6.1.11 HEALTH AND SAFETY Technicolor sites facilitated a variety of community outreach and MANAGEMENT employee protection initiatives in 2011, including medical exams, vaccinations, flu shots, blood drives, wellness programs, ergonomic Health and Safety evaluations, first aid training, holiday adoptions, food, clothing, eyewear collections and other cash, product, and time donations. An effective occupational health and safety program, as defined by Technicolor, looks beyond specific requirements of law to address all hazards. The aim of the occupational health and safety program Safety performance is to prevent injuries and illnesses, whether or not compliance is at What follows are results of key safety metrics that were tracked in 2011: issue. The Group believes that the necessary elements of an effective program include, at a minimum, provisions for systematic identification, In 2011, Technicolor experienced a 23% decrease in work related injury evaluation, and prevention or control of general workplace hazards, incident rate (number of recordable injuries per 200,000 hours worked) specific job hazards, and potential hazards that may arise from from 1.37 in 2010 to 1.05 in 2011. The work-related lost workday incident foreseeable conditions. rate (number of recordable lost workday injuries per 200,000 hours worked) decreased similarly, from 0.48 in 2010 to 0.32 in 2011. Technicolor’s health and safety programs are designed to identify potential risks and take appropriate prevention and severity reduction No longer a company characterized by very large, highly industrialized measures. Accident and injury prevention programs include active local manufacturing sites with multiple full-time EH&S staff professionals, Safety Committees and specialized task forces, job safety analysis, today’s Technicolor comprises a network of leaner, quick-response written plans and procedures, employee training, monitoring for potential services and solutions operations that may not have such EH&S staff chemical, physical, biological, and ergonomic risks, inspections and on site. Thus, the Group is designating highly attentive and skilled key audits, incident investigations and the implementation of appropriate business owners from well-established and high-performing sites to lead corrective actions. its injury reduction initiative and workplace safety programs.
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Work Related Incident Rates for 200,000 hours worked
Incident Lost workday Injuries Rate Injuries Incident rate 2009 374 1.87 128 0.64 2010 291 1.37 102 0.48 2011 218 1.05 67 0.32
2011 Incident and Lost Workday Incident Rates for 200,000 hours worked.
Incident Lost workday Injuries Rate Injuries Incident rate Digital Delivery 15 0.38 8 0.20 Entertainment Services 198 1.23 58 0.36 Technology 0000 All Other 5 0.89 1 0.18
6.2 ENVIRONMENTAL MATTERS
This report provides an overview of the activities that Technicolor is n Edegem Belgium Implemented a “green car” policy related to leasing taking to fulfill its responsibilities as a global corporate citizen with respect whereby maximum carbon emissions are specified depending on range to Environment, Health, and Safety (EH&S). As such, Technicolor is of vehicle selected and also requiring diesel or hybrid powerplants; reporting on what it has determined to be the most significant aspects n a new lifeline technology was put in place in the chemical storage area and impacts, both globally and by business unit, for the fiscal year 2011. of the Madrid Spain film lab to further reduce risks of any chemical technicians working near above ground tanks; In alignment with the principles stated within the EH&S Charter, Technicolor continually assesses the EH&S performance of its n Manaus Brazil site published its carbon emissions inventory and took facilities to identify opportunities and implement measures to reduce some reforestation action to compensate for the industrial impact adverse environmental impacts and to improve the health and safety of the site; of its workplaces and their surrounding communities. For the 2011 n Melbourne Australia DVD factory improved their building management report a total of 47 reporting locations are included. management system to the extent of saving hundreds of kilowatt- hours every weekend by altering the building postures or set-ups There were many notable EH&S achievements during 2011 and several when inactive; of them are summarized below: n Piaseczno Poland DVD factory made a special provision for flood n additional investments for cardboard baling in Angers France reduced prevention during rainy season; the number of disposal transports more than five to one; n Rome Italy film lab invested in additional wastewater carbon filtering n Bangkok Thailand film lab planned and implemented flood to further improve effluent characteristics; preparations and countermeasures in advance of the event, and Newly acquired businesses are reviewed by Technicolor to identify EH&S recovered immediately when waters receded with minimal damage aspects of their operations, to evaluate the status and effectiveness of and disruption; existing management and control systems, to determine compliance n Brampton Canada packaging and distribution continued a year of with Technicolor EH&S Policies and Guidelines, to communicate service with no lost time injuries and received incentive payments Technicolor’s EH&S initiatives and requirements, and finally, to assist from two different safety-related associations based on Brampton’s in the establishment of location-specific programs that conform to good performance; Technicolor’s requirements and meet the needs of the Group.
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6.2.1 GENERAL Corporate EH&S group in 1993 to develop, direct and oversee the development of global policies, guidelines, programs and initiatives. Policy and Charter The Corporate EH&S organization reports to Human Resources and Sourcing, headed by the Director of Human Resources and Sourcing, As a global leader in providing a diverse range of communication and who is a Member of Technicolor’s Executive Committee. Overseeing video technologies, finished products, systems, equipment, and services the EH&S group is a Corporate manager, who directs the efforts of to businesses and professionals in the entertainment and media industries, EH&S personnel throughout the business. Business Unit liaisons work Technicolor understands the importance of establishing consistent and to ensure that initiatives relevant to their particular business are shared universally applied standards. Such standards not only assist each of quickly among sites with similar industrial activity. Legal support and its locations to meet the requirements of the country in which they are counsel for issues such as product safety, environmental protection and located, but also provide an added benefit of encouraging each location workplace safety is provided by Technicolor in-house attorneys. to develop programs that go beyond local regulatory requirements. To formalize this critical philosophy, Technicolor has developed a It is the responsibility of the Corporate EH&S Organization to develop Corporate Environment, Health and Safety (EH&S) Charter. The EH&S policies, programs, processes and initiatives to help the business meet Charter supports the Technicolor Ethics Charter and the Corporate the principles and commitments outlined within the EH&S Charter. Social Responsibility Charter, and is the cornerstone of the Group’s Each Technicolor industrial location identifies personnel who, along with EH&S program. It defines key management principles designed to the support of local EH&S Committees, are responsible for reviewing protect human health and the environment, helps Technicolor meet and localizing Corporate Policies and Guidelines and applicable its legal and corporate responsibilities, and provides direction for each governmental laws and regulations, and for implementing site-specific Technicolor location’s activities and operations. programs and procedures which will ensure compliance and minimize the potential for their operation to cause harm to human health or the The EH&S Charter has been translated into six languages and is available environment. on the Group’s intranet, and is displayed at each industrial site.
Environmental Risk Profile 6.2.2 PROGRAMS, SYSTEMS, During 2011, the Group operated 47 main locations, most of which are AND ACTIVITIES industrial. By Technicolor’s definition an industrial location is a facility A number of programs and initiatives have been established and where DVDs are produced, packaged or distributed, where motion implemented to ensure that the Group meets its legal responsibilities picture film is processed or distributed, where broadcast or network and operates in a manner that identifies risks and takes measures to systems are manufactured, or where any digital delivery product is made. reduce harm to human health and the environment. The most significant of these are described below: To provide finished products and services, Technicolor utilizes purchased materials, chemicals, components, energy, and water. As a result of the products and services it provides, there are a number of Policies and Guidelines potential activities that may result in adverse impacts to the environment. Corporate EH&S Policies and Guidelines have been developed to establish requirements and provide guidance for the development, Environmental aspects reviewed in this report include waste management implementation and maintenance of EH&S programs. EH&S Policies (total waste generated, landfilled, and recycled), energy consumption and Guidelines were first developed in 1993 and are periodically reviewed (electricity and fossil fuels), water consumption, air emissions (greenhouse and revised, and when necessary, adapted to ensure that they address gas emissions), main materials used, and processing wastewater effluents. current regulatory and business needs, most recently distracted driving, The 47 sites included in this report may be reviewed in the subsection emerging disease and workplace violence. “Data Collection Method and Rationale” herein. Each Technicolor industrial location is responsible for reviewing the Organization EH&S Policies and Guidelines and applicable laws and regulations, and developing local programs that ensure compliance and address site- EH&S is managed transversally within Technicolor and by extension specific issues. Along with the Charter and other key information, the becomes the duty of each Executive Committee Member, Technicolor Policies and Guidelines are available to employees via the Technicolor business manager and Site manager. Technicolor established a EH&S intranet website.
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Annual Performance Measurement One of the many challenges that are present in a globally operated Process business is ensuring effective communication, particularly in the event of a crisis. At Technicolor, a system was designed to provide a consistent A process was implemented in 1997 to allow for the consistent internal worldwide approach for managing and mitigating significant EH&S benchmarking of key management programs and requirements within incidents. The Significant Business Incident (SBI) system enables timely each of the Group’s industrial locations, and tracking of site progress communication to and involvement of top management and ensures the toward environmental, safety and resource conservation improvement quick and effective allocation of appropriate resources with consistent goals. This process establishes benchmark criteria, helping the Group crisis management measures throughout the world. This process also create consistent global focus and action plans on key programs, serves as a valuable tool for identifying potential concerns within each requirements and initiatives. of Technicolor’s businesses and to ensure that appropriate preventive measures are effectively implemented. During 2010, and in partnership Measured criteria include EH&S related employee training, each with the office of the Chief Security Officer, the SBI policy and process location’s progress toward zero work related injuries and lost workdays, was renewed and cascaded throughout the Group. reducing environmental impacts, and reducing the consumption of water and energy. In 2011, seven SBI’s associated with EH&S aspects were reported, and one penalty or fine in the amount of €9,600 was incurred. Training Technicolor understands that each employee has the ability to impact Management Systems the Group’s EH&S efforts and performance, thus it is critical that An Environmental Management System (EMS) is a continual cycle of they are provided with appropriate tools, resources and knowledge. planning, implementing, evaluating and improving practices, processes The EH&S training program develops awareness and skills that allow and procedures to meet environmental obligations and successfully employees and contractors to perform their jobs in such a manner integrate environmental concerns into normal business practices. An that will not only ensure compliance with appropriate laws, regulations effective EMS helps identify and eliminate the causes of potential and policies, but also prevents accidents which may lead to injuries environmental problems, establish and achieve environmental goals, or harm to the environment. Training programs are evaluated during reduce potential risk and liability, and operate a more effective the Corporate EH&S audit process, and are a core requirement in the environmental program. EH&S performance measurement process. In 2011, 38,690 hours of documented training were provided on a wide variety of environmental ISO 14001 is the most widely accepted international standard for an and safety compliance and protection, injury prevention, emergency EMS. In today’s global market, participation in the ISO 14001 process preparedness and response, and occupational health topics. is one way for an organization to demonstrate its commitment to the environment. To receive certification, organizations are required to Emergency Preparedness and Response develop detailed plans and procedures to identify, evaluate, quantify, prioritize and monitor environmental impacts of its activities. Even the best designed programs and procedures cannot eliminate the occurrence of unforeseen events. The development and periodic review During 2011, a total of 17 sites held an ISO 14001 certification, and one of emergency preparedness and response plans is critical to the success newly opened site requiring certification was working toward certification. of Technicolor’s EH&S program, making these, along with associated training and testing, key components of the EH&S performance measurement process.
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Technicolor Locations with ISO 14001 Certified EMS
Site Business Unit Original certification date Angers Digital Delivery June 2011 Bangkok Entertainment Services November 2011 Coventry Entertainment Services November 2004 Guadalajara Entertainment Services October 2004 Hilversum Digital Delivery June 2011 Madrid Entertainment Services July 2010 Manaus Digital Delivery August 2003 Melbourne Entertainment Services December 2005 Mirabel Entertainment Services October 2004 Montreal Entertainment Services October 2004 North Hollywood Entertainment Services November 2004 Piaseczno Entertainment Services December 2004 Pinewood Entertainment Services August 2009 Roma Entertainment Services November 2001 Rugby Entertainment Services November 2004 Sydney Entertainment Services December 2005 Toronto Entertainment Services October 2005
Restriction of Hazardous Substances The audits include physical inspections of the location, review of (RoHS) and Waste Electrical and documents and records, and examination of activities within the EH&S program. The use of Technicolor specific audit protocols helps ensure Electronical Equipments (WEE) and maintain consistency in approach while also bringing renewed focus Compliance methods and actions are in place with regard to the RoHS, to key corporate requirements. In addition, the protocols allow for, WEEE, and REACH (Registration, Evaluation, Authorisation and and require, the inclusion of location-specific regulatory and business Restriction of Chemicals) European directives, or similar legislation in requirements. Issues and recommendations identified during the audit other regions, dealing with the Restriction on the use of Hazardous process are reviewed and discussed with Members of the location’s Substances within products and systems, and preparing for better end- management. of-life handling of Electrical and Electronic Equipment Waste. In 2011, six locations were audited as part of Technicolor’s objective of auditing each industrial location at least every three years. As a result of Audits and Internal Governance these audits potential improvement items were identified and evaluated, EH&S audits remain a key part of Technicolor’s continued efforts to and more importantly, appropriate associated action plans developed. improve EH&S management and performance, and to prevent accidents from occurring. In addition to the establishment of internal audits within each manufacturing, packaging, and film lab site, a comprehensive Supplier Involvement and Compliance corporate audit program was implemented in 1996. The aim of the audit Through meetings and other methods of formal communication, the program is to review the Group’s industrial locations’ compliance with Group shares its expectations that suppliers and their subcontractors Corporate EH&S Policies and Guidelines and specific applicable EH&S provide safe and healthy working conditions for their employees, laws and regulations. The audit program has also been demonstrated abide by Human Rights laws and standards, and strive for continual to be a valuable tool for increasing EH&S awareness, identifying best improvement in their environmental management systems, processes practice opportunities, communicating successful initiatives between and product. plants, creating opportunities for different approaches to problem solving, and exposing EH&S personnel to other aspects of the Group’s Technicolor requires its suppliers to actively support its EH&S Principles. multi-faceted business. Suppliers are required to comply with the legal requirements and standards of their service or industry as applicable under the national law of the countries in which they operate. Technicolor suppliers
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also ensure the compliance of their components and products with n During site closure at an Indiana (USA) CRT factory, soil specific legal requirements applicable in the countries where their contamination was discovered while de-commissioning storage pits products are being sold. Certificates are required from suppliers as and liners. Site assessment work was begun in 2005 and Technicolor to their compliance with such regulations and standards as well as entered into a Voluntary Remediation Agreement with the appropriate with Technicolor programs and specifications. A key supplier audit environmental agency in 2006. Initial soil clean-up actions took place tool, which includes a review of EH&S systems and performance, has in 2006 and groundwater assessment was completed during 2009. been developed. In light of regulations banning or restricting certain The remediation work plan for this site has been approved and is now chemical substances, Technicolor implemented an extended process for primarily related to monitoring. obtaining and tracking information about its suppliers. This system allows n As a result of a minor groundwater contamination discovered at a for the identification and estimation of relevant chemical substances former Technicolor site in North Carolina (USA), an exhaustive in Technicolor’s products and ensures that banned substances are not environmental site assessment and corrective action plan was included. completed in 2005. The corrective action plan was approved by the appropriate environmental agency in September 2006, and Acquisitions and Closures remediation activities at the site were completed in 2007. Monitoring of the declining groundwater contamination continued in 2011. Technicolor has established a process for reviewing locations prior to acquisition and upon closure to identify and understand the likelihood n During site demolition at a closed London film lab with a prior history and extent of potential environmental contamination associated with the of contaminated groundwater, soil contamination was discovered locations’ activities. This process not only helps limit financial liability, while removing below grade structures and piping. All contaminated but also to understand the type and level of support required to ensure soil was excavated and disposed of properly. After demolition was that the Group’s corporate policies and guidelines are effectively completed, a sitewide groundwater assessment was made, and implemented. Once acquired, locations are expected to comply with a remediation strategy prepared. The remediation strategy was Technicolor’s EH&S policies and guidelines, which include, as an approved by the governing environmental and health agencies at end example, the development of chemical and waste management practices of 2009, and sub-surface remedial chemical treatment was completed to minimize the potential for uncontrolled releases to air, water and land. during 2010. Groundwater monitoring continues as the effects of the remedial treatment progress. Environmental Investments, Remediation, The Group believes that the amounts reserved and the contractual and Pollution Prevention guarantees provided by its contracts for the acquisition of certain production assets will enable it to reasonably cover its safety, health In total, approximately €1 million was spent on environmental and environmental obligations. However, potential problems cannot remediation projects in 2011. be predicted with certainty and it cannot be assumed that these reserve amounts will be sufficient. In addition, future developments such as A certain number of Technicolor’s current and previously-owned changes in governments or in safety, health and environmental laws or manufacturing sites have an extended history of industrial use. Soil and the discovery of new risks could result in increased costs and liabilities groundwater contamination, which occurred at some sites, may occur or that could have a material effect on the Group’s financial condition or be discovered at other sites in the future. Industrial emissions at sites that results of operations. Based on current information and the provisions Technicolor has built or acquired expose the Group to remediation costs. established for the uncertainties described above, the Group does not The Group has identified certain sites at which chemical contamination believe it is exposed to any material adverse effects on its business, has required or will require remedial measures. financial condition or results of operations arising from its environmental, health and safety obligations and related risks. n Soil and groundwater contamination was detected at a former production facility in Taoyuan, Taiwan acquired in the 1987 transaction In addition, Technicolor has initiated a number of environmental projects with General Electric Company and Technicolor’s affiliate in Taiwan at various locations to ensure that they are in compliance with applicable owned the facility from approximately 1988 to 1992, when it was sold to laws and regulations and Technicolor standards, for which approximately an entity outside the Group. Soil remediation was completed in 1998. €0.63 million was invested. In 2002, the Taoyuan Environmental Protection Bureau ordered remediation of the groundwater underneath the former facility. The groundwater remediation process is underway. It is Technicolor’s position that General Electric Company has a contractual obligation to indemnify Technicolor with respect to certain liabilities resulting from activities that occurred prior to the 1987 agreement with General Electric (for further information, please refer to Note 35 of Technicolor’s Consolidated Financial Statements for 2011, included in this report).
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6.2.3 OPERATIONAL DATA Technicolor is firmly committed to continually assessing the impacts of its facilities and products. Technicolor’s goal is to continually evaluate AND RESULTS information needs and collection processes to ensure that it remains consistent, with a focus on present activities and issues as well as Goals and Performance 2009-2011 anticipated future requirements. Technicolor established the following EH&S goals and objectives for the Group, to be met by its worldwide industrial operations by the end Environment of 2011: The year 2011 continued a shift in the environmental profile of the n 5% Annual Reduction of Injury Rate; Group in alignment with the increasing emphasis on business to business partnerships with Media & Entertainment professionals. n 10% Annual Reduction in Water Consumption;
n 5% Annual Increase in Waste Recycling Rate. What follows are results of key environmental metrics that were tracked in 2011. Prior year results are reported for sites within the reporting Reporting Perimeter perimeter of the year reported, thus sites divested may continue to be reported in prior years and sites acquired are not reported in prior year’s This report contains data from 47 operating locations, of which 27 are results. industrial. Prior year data are reported for the same locations when available, although some newly acquired sites may not have data values for years prior to acquisition. Given the diversity of the Group’s Energy operations, the environmental aspects and potential impacts vary by In 2011 worldwide energy use was approximately 1,485 tera joules, a location, thus not every location is required to report on each of the decrease of 8% compared with 2010. Of the total energy consumed, established metrics. 80.8% was in the form of electricity (of which 8.4% was from renewable sources), 18.8% was in the form of fossil fuels, and 0.34% was in the The Corporate EH&S Organization has identified key information that is form of purchased steam. When compared to total revenue, average tracked and reported on either a monthly, quarterly, or annual basis. This energy use rate was 0.430 TJ/M€ across the business in 2011. In 2010, information includes utility consumption, waste generation, recycling non-industrial sites were asked to provide their consumption for the first and disposal, air emissions, main raw materials used, and water effluent time. The non-Industrial site consumption represented approximately from industrial locations. 14% of the total 2011 consumption. For the purposes of comparison, the table below features two lines showing 2010 results according to both perimeters.
Energy consumption (tera joules or tj/m€)
Total Electricity Fuel Sources Total per revenue 2009 1,313 996 317 0.320 2010 (ref 2009) 1,369 1,021 348 0.336 2010 (1) (ref 2010) 1,618 (2) 1,258 354 0.398 2011 1,485 (2) 1,201 279 0.430
(1) Total energy includes energy from non-industrial locations not reporting energy prior to 2010. (2) Total energy includes about 5 TJ steam purchase.
2011 energy consumption (tera joules or %)
Total Energy % Total Group Electricity % Total Division Fuels % Total Division Digital Delivery 178 12.0% 156 87.6% 22 12.4% Entertainment Services 1,282 86.3% 1,025 80.0% 257 20.0% Technology 4 0.3% 4 100% - - Corporate 21 (1) 1.4% 16 76.2% - -
(1) Total energy includes about 5 TJ steam purchase.
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Water In 2011, water consumption at the Technicolor reporting locations decreased by 24% versus 2010 to 1,488 thousand cubic meters. When compared to total revenue, average water consumption rate was 0.431 KM3/M€ across the business in 2011. In 2010, non-industrial sites were asked to provide their water consumption for the first time. The non-industrial site consumption represented approximately 10% of the total 2011 consumption.
Water consumption (thousand cubic meters or km3/m€)
Total Consumption Total per Revenue 2009 1,841 0.449 2010 (ref 2009) 1,791 0.440 2010 (ref 2010) 1,962 (1) 0.482 2011 1,488 (1) 0.431
(1) Total water includes water from non-industrial locations not reporting water prior to 2010.
2011 water consumption (thousand cubic meters)
Total Consumption % Total Digital Delivery 145 9.7% Entertainment Services 1,335 89.7% Technology 2 0.2% Corporate 6 0.4%
Process Waste Water Waste Within Technicolor’s facilities, 14 utilize water within their manufacturing Technicolor has a long-standing commitment to the principles of sound processes. In order to assess the potential environmental impact of the and environmentally responsible management of waste. Establishing discharge of this treated water, the Group referenced both the European the hierarchy of internal re-use, recycling and reclaiming followed by Community (EC) and U.S. Environmental Protection Agency (EPA) treatment and then landfill as the last option, Technicolor has developed criteria for “priority pollutants”. Based upon these lists, and information and implemented programs to reduce waste generation, decrease the provided by Technicolor’s sites regarding the parameters that require amount of hazardous waste, decrease waste sent to landfill, and increase to monitoring and reporting, 13 pollutants were identified on either the recycling. EC or EPA list. Hazardous waste is defined at each site using guidance from local For 2011, the amount of treated water discharged was 1.04 million cubic governing agencies, but in general it means waste chemicals, fuels, meters, and the total estimated amount of discharged priority pollutants oils, solvents, batteries, fluorescent light bulbs, or other items that may was 0.24 metric tons. have been in contact with the hazardous material, for example, cleaning materials or empty containers. In addition, due to effluent characteristics, nine sites are required to monitor biological oxygen demand (BOD) or chemical, oxygen demand Total waste generated was 39,748 tons, an increase of 911 metric tons or (COD), an estimated total of 111 and 46 metric tons were discharged 2.3% compared to 2010. The recycling rate was 76.4% improving slightly within process effluent respectively. compared to 2010. When compared to total revenue, the average waste generation rate across the business was 11.5 M-Ton/M€ in 2011. All above quantities of discharged pollutants are fully compliant with authorized limits.
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Waste (metric tons or m-ton/m€)
Total Waste Generated % Treated Hazardous % Recycled Total per Revenue 2009 43,348 3.2% 77.1% 10.58 2010 38,837 5.2% 75.5% 9.54 2011 39,748 5.7% 76.4% 11.5
2011 waste generation (metric tons or %)
Total Waste Generated % Total % Treated Hazardous % Recycled Digital Delivery 1,180 3.0% 1.9% 75.7% Entertainment Services 38,568 97.0% 5.9% 76.4% Technology 0--- Corporate 0---
Air Emission Upon evaluation of its operations, Technicolor determined the most significant but limited air emission contaminant resulting from the Group’s industrial operations to be carbon dioxide associated with on-site combustion of fuels for heating.
In 2011, a total of 15,694 metric tons of CO2 were emitted from combustion sources within Technicolor’s industrial plants and larger non-industrial locations. This figure was calculated using the 1996 Intergovernmental Panel on Climate Change (IPCC) Emission factors.
Air emission (metric tons)
CO2 2009 17,987 2010 (1) 19,916 2011 (1) 15,694
(1) Total energy includes energy from non-industrial locations not reporting energy prior to 2010.
In 2011, Technicolor participated for the fifth consecutive year in the Carbon Disclosure Project, targeting collaboration between large international firms and investors related to global warming. Technicolor’s answer is available on the CDP’s website: http://www.cdproject.net.
The Group’s first carbon footprint assessment was published for the year 2008, taking into account business travel, worker travel between home and work, incoming and outgoing freight and transportation, energy use, waste disposal, raw materials, and the use of refrigerants and industrial gasses.
Raw Material Usage The main raw materials consumed by the Group’s businesses in 2011 were:
Raw materials (metric tons)
Polycarbonate molding plastic 23,248 Cardboard and paper packaging 10,897 Polyester motion picture film 3,342 Plastic packaging 1,889 Bonding resin 1,256
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6.2.4 DATA COLLECTION METHOD monthly and annual basis, depending upon the information provided. Data is organized and consolidated globally and is communicated to the AND RATIONALE Vice President, Corporate EH&S and others as appropriate. This report contains data from 47 locations. Given the diversity of the Group’s operations, environmental impacts vary by location, thus not The collection period runs from January 1, 2011 to December 31, 2011. every location is required to report on each of the established metrics. Data Verification: Data reporting requirements, and data collection The Corporate EH&S Organization has identified key information that and consolidation systems are developed by the Corporate EH&S is tracked and reported. This information includes utility consumption, organization communicated to individual locations. Each location is waste generation, recycling and disposal, air emissions and water effluent responsible for developing internal systems for the collection of required from the identified locations. To ensure the timely and consistent data and reporting that data to the Corporate EH&S group. Corporate reporting of information from Technicolor’s worldwide locations, the EH&S reviews the submitted data for accuracy and works directly with Group has developed its own electronic reporting system. This system the locations to clarify and when necessary, resolve inconsistencies. In serves as a vital tool for identifying and acting upon trends at the addition, the location’s data are reviewed during scheduled Corporate reporting site, business unit, regional and global levels. The reporting EH&S audits. locations provide required data through the electronic system on a
Scope of Data Collection: The following sites provided data for this report:
2009 2010 2011 Segment Site (ref 2011) Location E H&S E utility H&S E utility H&S Angers Digital Delivery France XXXXXXXX Atlanta N/A (1) Georgia, USA X Bangalore Entertainment ServicesIndia X X X X X Bangkok Entertainment Services Thailand XXXXXXXX Beaverton N/A (1) Oregon USA X X X Bejing Digital Delivery China X X X X X Issy/Boulogne Corporate France X X X X X Brampton Entertainment Services Canada XXXXXXXX Breda N/A (1) The Netherlands XXXXX Burbank Entertainment ServicesCalifornia, USA X X X X X Camarillo Entertainment Services California, USA XXXXXXXX Chiswick Digital Delivery UK X X X X X Conflans N/A (1) France XXXXX St.-Honorine Coventry Entertainment Services (1) (2) UK XXXXXXXX Detroit Entertainment Services Michigan, USA XXXXXXXX Edegem Digital Delivery Belgium X X Glendale Digital Delivery California, USA X X X X X Glendale (film) Entertainment California, USA X X X Services Guadalajara Entertainment Services Mexico XXXXXXXX Hannover Technology Germany X X X X X Hilversum Digital Delivery The Netherlands X X X X X Hollywood Entertainment ServicesCalifornia, USA X X X X X Indianapolis Digital Delivery Indiana, USA X X X X X Kobe N/A (1) Japan X X X Livonia Entertainment Services Michigan, USA XXXXXXXX
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2009 2010 2011 Segment Site (ref 2011) Location E H&S E utility H&S E utility H&S London MPCEntertainment ServicesUK X X X X X Madrid Entertainment Services Spain XXXXXXXX Manaus Digital Delivery Brazil XXXXXXXX Melbourne Entertainment Services Australia XXXXXXXX Memphis Entertainment Services Tennessee, USA XXXXXXXX Mexicali Entertainment Services Mexico XXXXXXXX Mirabel Entertainment Services (2) Canada XXXXXXXX Montreal Entertainment Services Canada XXXXXXXX Nevada City N/A (1) California, USA XXXXX New York Entertainment Services (2) New York, USA XXXXX XX North Hollywood Entertainment Services (1) (2) California, USA XXXXXXXX Ontario Entertainment Services California, USA XXXXXXXX California Perivale Digital Delivery UK X X X X X Piaseczno Entertainment Services Poland XXXXXXXX Pinewood Entertainment Services UK XXXXXXXX Princeton Technology New Jersey, USA X X X X X Rennes Cesson Digital Delivery France XXXXXXXX Rome Entertainment Services Italy XXXXXXXX Rugby Entertainment Services UK XXXXXXXX Saint-Cloud Digital Delivery France X X X X X San Francisco Entertainment California, USA X X Services Southwick N/A (1) Massachusetts, USA XXXXX Sydney Entertainment Services Australia XXXXXXXX Toronto (film) Entertainment Services Canada XXXXXXXX Toronto (post)Entertainment ServicesCanada X X Türgi N/A (1) Switzerland XXXXX Tultitlan Entertainment Services Mexico XXXXXXXX Vancouver (film) N/A (1) Canada X X Vancouver MPCEntertainment ServicesCanada X X Vancouver (post)Entertainment ServicesCanada X X Villingen N/A (1) Germany X Weiterstadt N/A (1) Germany XXXXX Wilmington Entertainment Services Ohio, USA XXXXXXXX
E = Environmental data, Utility = Water and Energy data, H&S = Work injury data. (1) These sites have been closed or sold. (2) These sites stopped operating during 2011, and there partial-year figures for the duration of their operation are included in this report.
116 I TECHNICOLOR I ANNUAL REPORT 2011 SOCIAL INFORMATION AND SUSTAINABILITY - 6 Technicolor Foundation for Cinema Heritage
6.3 TECHNICOLOR FOUNDATION FOR CINEMA HERITAGE
The Technicolor Foundation for Cinema Heritage operates worldwide n it defines and conducts specific education programs targeting mostly to safeguard films of the past, in order that they may be seen now and film school students: the Foundation is involved in various ways from in the future. offering a complete curriculum incorporated in film school programs to conducting regular workshops in these programs or during festivals Created in 2006 for an initial duration of five years, the Technicolor (India, USA, China, France, Romania, Russia, Italy, Portugal, Ethiopia Foundation is a non-profit entity, acting in the field of the preservation and Turkey). These educational programs cover basic aspects of film and promotion of film heritage, which reflects the history and the heritage: preservation concerns and risks, access to film heritage, basic culture of a country. Its duration has just been extended for five years technical and legal knowledge, filmmaker responsibilities (rights and and remains extendable indefinitely. The foundation changed its name duties). The objective is to raise the awareness of the future generation in 2010, from Thomson Foundation to Technicolor Foundation, as a of filmmakers, in close liaison with film industry representatives and consequence of its founder’s name change. film archive institutions; it supports classics festivals or creates specific festivals or events for The programs are built around three main guiding principles: n the promotion of film heritage: creation in India of the Pune Film Treasures Festival and IFFI Goa Film Treasures, classics section of n preserve film heritage as a key part of a country’s memory; the International Film Festival of India; free-access and outdoor n promote and highlight film heritage in order that it may be seen by events mixing screening and music on stage (Tati Concerts at the and shared with as wide an audience as possible; and International Film Festival of La Rochelle (France) followed by Hong Kong, Addis-Abeba and Berlin) to provide access to film heritage to n train and sensitize everyone who can play a part in the safeguarding of film heritage. a new audience; and To meet these three main objectives, the Foundation operates in n it supports film Archive Federations: regular support of the FIAF different ways: (International Film Archive Federation); annual support to the annual conference of AMIA (Association of Moving Image Archivists) which n it operates directly on site with the related film and/or television gathers film archive professionals from around the world in the USA; archive institutions (Cambodia, India): annual programs are defined to and professional training with scholarships in moving image archiving upgrade the archive and enable access to these archives (preservation (Sid Sollow Scholarship and Technicolor Foundation/Technicolor work, equipment donations, education programs for local teams, Fellowship). collection enrichment, etc.); In 2010, particular attention was paid to The Complete Film Works n it defines and monitors major restorations: each year, one of by Pierre Etaix, which had not been viewable for more than 20 years the objectives of the Foundation is to restore and promote key due to a legal imbroglio, that was solved by the direct support of the international cinema titles in order better to raise audiences’ awareness Technicolor Foundation, jointly with the Groupama Gan Foundation. of the importance of film heritage and the risks of endangering The Foundation also worked on several other restoration projects films that are not properly safeguarded. A project team is set up, including films by Agnès Varda (France) andJin Xie (China). The last which includes the Foundation, the rights owners and a film archive restoration of the Foundation A Trip to the Moon in color by Georges institution. The Foundation monitors the whole process from the Méliès (1902) has been presented at the Cannes Film Festival during preservation to the non-commercial distribution of the restored the Opening evening, on May 11, 2011 with an original soundtrack by version in the world. The Foundation also most notably provides legal the French band, AIR. support and technical expertise. In 2008, the Foundation restored Lola Montès by Max Ophuls and in 2009 Mr. Hulot’s Holiday by Jacques For all of these programs, the Foundation identifies the appropriate Tati, Selvi Boylum al Yazmalim by Atif Yilmaz and The Complete resources required and helps set up multi-disciplinary teams. These Film Works of Pierre Etaix in 2010 with The Great Love selected at include experts from its founder Technicolor and experts from leading Cannes Classics. The films were proposed and selected by Cannes film archive institutions, film preservation schools and cinema schools. and Bologna film festivals, which both present major international Knowledge transmission and education play a key role in each program. restorations each year, before a large circulation around the world;
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118 I TECHNICOLOR I ANNUAL REPORT 2011 ADDITIONAL 7 INFORMATION
7.1 PROPERTY, PLANT AND EQUIPMENT ...... 120 7.5 ORGANIZATION OF THE GROUP ...... 127 7.1.1 Operating Facilities and Locations ...... 120 7.5.1 Legal organizational chart as of December 31, 2011 .... 127 7.5.2 Operational organization ...... 129 7.2 MEMORANDUM AND BYLAWS ...... 124 7.2.1 Corporate purpose ...... 124 7.6 DOCUMENTS ON DISPLAY ...... 130 7.2.2 Board of Directors and Executive Committee members ...... 124 7.7 INFORMATION ON ACCOUNTING SERVICES ...... 130 7.2.3 Rights, privileges and restrictions linked to shares ...... 124 7.7.1 Statutory Auditors ...... 130 7.2.4 Changes in shareholders rights ...... 124 7.7.2 Substitute Statutory Auditors ...... 131 7.2.5 Shareholders’ Meetings ...... 125 7.2.6 Bylaws requirements for holdings exceeding 7.8 ACCOUNTING FEES AND SERVICES ...... 131 certain percentages ...... 125 7.9 PERSONS RESPONSIBLE FOR THE REGISTRATION 7.3 MATERIAL CONTRACTS ...... 125 DOCUMENT AND THE ANNUAL FINANCIAL REPORT 132 7.9.1 Declaration by the person responsible for the 7.4 ADDITIONAL TAX INFORMATION ...... 126 Registration Document and the Annual Financial Report ...... 132 7.9.2 Responsible for information ...... 132
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7.1 PROPERTY, PLANT AND EQUIPMENT
7.1.1 OPERATING FACILITIES estate footprint. These actions have resulted in a reduced global real estate footprint from 13.5 million square feet at end-2010, to 12.2 million AND LOCATIONS square feet at end-2011, or a reduction of 9.56%. Technicolor occupies, as owner or tenant, a number of office buildings, manufacturing plants, and distribution and warehousing sites around the The preceding numbers do not include the square footage or cost world. Technicolor is constantly reviewing its real estate needs in order of the Grass Valley sites (which includes Broadcast, Head-end and to improve efficiency and minimize costs. During the 2011 financial year, Transmission businesses that were sold in 2010 and 2011. The sale of Technicolor took a number of key actions to optimize its global real Grass Valley reduced the global real estate footprint by approximately 1.5 million square feet.
The key actions taken to reduce the Group’s real estate footprint (including the sale of Grass Valley) in 2011 included:
Operating Facilities Primary Activity Type of Action Coventry, United Kingdom Distribution Sale North Hollywood, CA, United States Manufacturing Closure Gurgaon, India (Bestech Chambers) Office Closure Memphis, TN, United States (Latham St.) Distribution Closure Hollywood, CA, United States (Building 62 and Buildings 48 &49) Office Closure Nevada City, CA, United States Office Transfer Sao Paulo, Brazil (8th Floor) Office Transfer Ajax, Ontario, Canada Office Transfer Grass Valley, CA, United States Distribution Closure Burbank, CA, United States (Suites 170 and 180 at 2255 N Ontario St.) Office Transfer San Jose, CA, United States Office Transfer Jacksonville, FL, United States Office Transfer Miami, FL, United States Office Transfer Norcross, GA, United States Office Transfer Rosemont, IL, United States Other Transfer Woburn, MA, United States R&D Transfer Southwick, MA, United States Office Transfer Ramsey, NJ, United States Sales Office Transfer Beaverton, OR, United States R&D Transfer Salt Lake City, UT, United States R&D Transfer Notting Hill, VIC, Australia Sales Office Transfer Beijing, China Office Transfer Chengdu, China Office Transfer Guangzhou, China Office Transfer Shanghai, China (2 Sites) Office Transfer Kobe, Japan (2 Owned Sites) Sales Office & R&D Transfer Kobe, Japan (Kobe Salon) Office Transfer Tokyo, Japan (2 Offices) Sales Office Transfer Dubai, UAE Sales Office Transfer Shatin, Hong Kong Office Transfer Singapore Office Transfer Flemington, NSW, Australia Sales Office Partial Sublease
120 I TECHNICOLOR I ANNUAL REPORT 2011 ADDITIONALINFORMATION - 7 Property, Plant and Equipment
Operating Facilities Primary Activity Type of Action Kuala Lumpur, Malaysia Office Transfer Brest, France Office Transfer Brussels, Belgium Sales Office Transfer Weiterstadt, Germany (3 Sites) Office & Manufacturing Transfer Cologne, Germany Administration Transfer Hamburg, Germany Office Transfer Berlin, Germany Sales Office Transfer Ruppach, Germany Sales Office Transfer Rome, Italy Office Transfer Breda, Netherlands Office Transfer Madrid, Spain Office Transfer Milan, Italy Office Partial Sublease Conflans-Ste-Honorine, France Office Transfer Reading, United Kingdom Office Transfer Indianapolis, IN, United States Office Partial Sublease Rennes, France (2 Sites) Office Transfer Eindhoven, Netherlands Office Transfer Moscow, Russia Office Partial Sublease Mumbai, India Sales and Service Office Partial Sublease Taipei, Taiwan Office Transfer Selangor, Malaysia Office Transfer Glendale, CA, United States Film Services/Office Closure Mississauga, Canada (Seasonal Space) Warehouse Closure Chiswick, London, United Kingdom – Building 12 Office Transfer New York, NY, United States Lab/Office Transfer Hilversum, Netherlands Warehouse Transfer
The Group operates various manufacturing, replication, film processing Technicolor’s objective is to optimize the location and the organization and distribution facilities in order to deliver products and services to of its operations, to reduce its production costs and working capital customers. In addition, Technicolor relies on external partners for requirements, maximize the quality, flexibility and responsiveness of its manufacturing some of its finished products, particularly for Connected products and services, while minimizing negative impacts that could Home. affect the environment, or the health and safety of its employees and contractors.
TECHNICOLOR I ANNUAL REPORT 2011 I 121 7 - ADDITIONALINFORMATION Property, Plant and Equipment
At the end of 2011, Technicolor occupied the following key facilities:
Principal Operating Facilities Primary Activity Own/Lease Square Feet Memphis (TN, United States) Distribution Lease 4,527,922 Livonia (MI, United States) Distribution Lease 788,174 Guadalajara (Mexico) Replication Own 272,850 Brampton (ON, Canada) Distribution Lease 529,552 Detroit (MI, United States) Distribution Lease 480,000 Piaseczno (Poland) Replication Own 291,776 Ontario (CA, United States) Distribution Lease 241,170 Bangalore (India) Office Lease 137,235 Tultitlan (Mexico) Distribution Lease 239,292 Rugby (United Kingdom) Distribution Lease 282,675 Burbank (CA, United States) Office Lease 172,489 Camarillo (CA, United States) Distribution Lease 158,256 Hilversum (The Netherlands) Office Lease 131,046 Chiswick (United Kingdom) Office Lease 123,769 Mississauga (ON, Canada) Distribution Lease 149,629 Wilmington (OH, United States) Distribution Lease 140,800 Rome (Italy) Film Services Own 197,119 Hollywood (CA, United States) Office Lease 120,620 Montreal (QC, Canada) Film Services Lease 102,133 Sydney (NSW, Australia) Distribution Lease 92,816 Toronto (ON, Canada) Office Lease 71,371 Mexicali (Mexico) Distribution Lease 210,630 Glendale (CA, United States) Film Services/Office Lease 114,013 Bangkok (Thailand) Film Services Own 65,994 London (United Kingdom) Office Lease 76,956 Saint-Cloud (France) Office Lease 25,942 Perivale (United Kingdom) Office Lease 50,198 Angers (France) Manufacturing Own 818,176 Indianapolis (IN, United States) Office Lease 343,277 Rennes-Cesson (France) Office Lease 115,335 Beijing (China) Office Lease 114,265 Manaus (AM, Brazil) Manufacturing Own 50,001 Issy-les-Moulineaux (France) Office Lease 195,410 San Francisco (CA, United States) Office Lease 45,843 Melbourne (Australia) Manufacturing Lease 31,064 London Pinewood Studios (United Kingdom) Film Services Lease 36,739 Madrid (Spain) Film Services Lease 39,904 Edegem (Belgium) Office Lease 37,869 Vancouver (Canada) Office Lease 30,220 Hannover (Germany) Office Lease 46,872 Princeton (NJ, United States) Office Lease 25,952
122 I TECHNICOLOR I ANNUAL REPORT 2011 ADDITIONALINFORMATION - 7 Property, Plant and Equipment
Percentage of Summary of Operating Facilities Square Feet Surface Office 1,837,385 15% Lab 794,460 7% Manufacturing 1,709,355 14% Warehouse/Distribution 7,865,230 64%
ALL PROPERTIES 12,206,430 100%
Manufacturing, Replication, Film Film Services Processing and Distribution Bulk-printing services are offered to customers for the release of film Technicolor’s manufacturing, replication, film processing and distribution to cinemas for theatrical release. Following the rapid shift to digital facilities accounted for 78% of its facilities space, at the end of 2011. The cinema since 2010, the Company has launched several initiatives in location of each facility can be found in the table above. order to optimize its photochemical film activities. These initiatives led to the creation of a mini-lab in Glendale (for 65/70mm), the closing Technicolor’s respective business segments have varying approaches to of the North Hollywood facility, and the signing of subcontracting performing these activities; each is discussed in turn below. agreements with Deluxe. These agreements led to ceasing the release printing manufacturing operations in North America and the closure of the Mirabel (Canada) laboratory. In December 2011 the Group DVD Replication and Distribution announced its intention to subcontract all release printing services in Global distribution and supply chain activities are provided in-house and Europe to Deluxe., resulting in the closure of 3 European laboratories through a network of contracted Third-Party Logistic Providers (3PLs). in 2012: Rome, Madrid, London. For more information, please refer to In markets where distributed unit volumes are sufficient, Technicolor section 1.3.1: “Entertainment Services”. completes all distribution and logistics activities in-house. In smaller markets, or where other considerations prevail, these activities are Set-Top Boxes, Gateways, completed by 3PL’s on Technicolor’s behalf. In North America, the Group distributed 100% in-house; in Europe, approximately 57% in- and Connected Devices house and approximately 43% by 3PL’s. In Australia, Technicolor does In 2011, Technicolor delivered a total of about 23.2 million Gateways, not presently provide distribution services. Set-Top Boxes, and Connected Devices. Overall, around 22.8 % of the Group’s total volume is manufactured in-house, with the rest of its volumes being outsourced to partners in Asia and Mexico.
The total in-house manufacturing and replication output for the Group can be found in the table below for 2011.
In-house Manufacturing and Replication Number of Units Entertainment Services DVD Replication 1.28 billion DVDs Blu-ray™ Replication 152 million Blu-ray™ discs Film Processing 1.7 billion feet of film Digital Delivery Gateways, Set-Top Boxes and Connected Devices 5.3 million units
TECHNICOLOR I ANNUAL REPORT 2011 I 123 7 - ADDITIONALINFORMATION Memorandum and bylaws
7.2 MEMORANDUM AND BYLAWS
This section contains the information required by paragraph 21.2, 7.2.3 RIGHTS, PRIVILEGES “Memorandum and Bylaws” of European Commission Regulation (EC) N° 809/2004 of April 29, 2004. AND RESTRICTIONS LINKED TO SHARES You may obtain copies of the Company’s bylaws in French from the Greffe of the Registry of Commerce and Companies of Nanterre, Voting rights France. “Each shareholder shall have as many votes as the shares that he possesses or represents by proxy” (Article 20 of the Bylaws). Each shareholder is entitled to one vote per share only. 7.2.1 CORPORATE PURPOSE “Technicolor’s corporate purpose is, directly or indirectly, in France and Under French law, treasury shares are not entitled to voting rights. in any other country: Under French law, old shares that were not exchanged for new (post- n the taking of equity holdings or interests in any business of any nature reverse split) shares are entitled to one (1) vote, and new shares are in any form whatsoever, whether in existence or to be created; entitled to ten (10) votes, such that the number of votes attached to the shares is proportional to the share of capital that they represent. In n the acquisition, management, and transfer of any and all real property accordance with Article 6 of the Decree n°048-1683 of October 30, rights and assets and any and all financial instruments, and the 1948, establishing certain characteristics of securities, the old shares execution of any and all financing transactions; not exchanged for new (post-reverse split) shares at the end of the n the acquisition, transfer and use of any and all Intellectual Property two-year period ending on July 15, 2012 will lose their voting rights at rights, licenses or processes; Shareholders’ Meetings and their right to dividends will be suspended. New shares not claimed by the beneficiaries shall be sold on the stock n the manufacture, purchase, importation, sale and export, anywhere, market and the net profit from the sale shall be held for them for 10 years of any and all materials and products, as well as the rendering of any in a blocked account opened at a financial institution. and all services. Technicolor may act directly or indirectly, for its own account or for the Other rights of shareholders account of third parties, whether alone or through an equity holding , agreement, association or Company, with any other legal entity or “In addition to the right to vote that is attributed by law, each share gives individual, and carry out, in France or abroad, in any manner whatsoever, the right to the ownership of the corporate assets, to share in the profits, any and all financial, commercial, industrial, real property, and personal and to the liquidation proceeds, in an amount equal to the portion of property transactions within the scope of its purpose or involving similar the share capital represented. or related matters” (Article 2 of the Bylaws). Whenever it may be necessary to own a certain number of shares in order to exercise a right, it is the responsibility of the shareholders who do not 7.2.2 BOARD OF DIRECTORS AND own an adequate number of shares, as the case may be, to group their shares in the amount necessary. EXECUTIVE COMMITTEE MEMBERS The ownership of share entails, by operation of law, adherence to the bylaws of the Company and to the decisions of the Shareholders’ Information relating to administrative bodies is listed in Chapter 4: Meeting and of the Board of Directors, as authorized by the Shareholders’ “Corporate governance and Internal Control”, section 4.1.2 “Composition Meeting” (Article 9 of the Bylaws). and expertise of the Board of Directors” of this Annual Report.
7.2.4 CHANGES IN SHAREHOLDERS RIGHTS Any amendment to the Bylaws must be voted or authorized by the Shareholders’ Meeting under the conditions of quorum and majority required by the laws or regulations in force for Extraordinary Shareholders’ Meetings.
124 I TECHNICOLOR I ANNUAL REPORT 2011 ADDITIONALINFORMATION - 7 Material contracts
7.2.5 SHAREHOLDERS’ MEETINGS provisions as those governing the legal obligation; the threshold-crossing declaration is to be made within the same time limit as for the legal Notice of Shareholders’ Meetings obligation, by registered letter with return receipt requested, by facsimile or by telex, indicating whether the shares or the voting rights are held “Shareholders’ Meetings are convened and deliberate pursuant to for the account of, under the control of, or in concert with other legal applicable laws and regulations” (Article 19 of the Bylaws). entities or individuals. An additional notice is required for each additional holding of 0.5% of the share capital or voting rights, without limitation. Attendance and voting at Shareholders’ This duty to inform applies under the same conditions when the equity Meetings holding or the voting rights decrease below the thresholds mentioned “Every shareholder has the right, upon proof of identity, to participate in the preceding paragraph. in Shareholders’ Meetings, by attending in person, by mailing in a voting form, or by designating a proxy. In the event of a failure to comply with the duty to inform provided above, the shareholder may, under the conditions and within the limits Such participation is subject to the recording of the shares, either in of applicable laws and regulations, be deprived of the right to vote in the Company’s registered share account, or in bearer share account respect of the shares exceeding the relevant threshold. This penalty is held by an authorized intermediary, within the time limits and under the independent of any penalty which may be decided by judicial decision conditions provided for by applicable regulation. In the case of bearer upon request of the Chairman, a shareholder, or the AMF. shares, the registration is evidenced by a certificate of participation (attestation de participation) issued by the authorized intermediary” For the purpose of determining the thresholds referred to above, shares (Article 19 of the Bylaws). or voting rights held indirectly and shares or voting rights associated with the shares or voting rights actually held, as defined by the provisions of Articles L. 233-7 et seq. of the French Commercial Code, are taken 7.2.6 BYLAWS REQUIREMENTS into account.
FOR HOLDINGS EXCEEDING The declarant must certify that the declaration includes all the securities CERTAIN PERCENTAGES giving access, immediately or in the future, to the share capital of the “Without prejudice to applicable law, any legal entity or individual, Company held or owned within the meaning of the preceding paragraph. whether acting alone or in concert, who comes to own directly or The declarant must also indicate the date or dates of acquisition. indirectly a number of shares or voting rights equal to or greater than 0.5% of the total number of shares or voting rights of the Company, Mutual fund management firms are required to report this information in must so inform the Company. This obligation is governed by the same respect of all of the voting rights attached to the shares of the Company held by the funds that they manage” (Article 8.2 of the Bylaws).
7.3 MATERIAL CONTRACTS
Readers are invited to refer to the description of the agreements affecting the Restructured Debt described in Chapter 2: “Operating and Financial Review and prospects”; section 2.10.3 “Financial resources” of this Annual Report.
TECHNICOLOR I ANNUAL REPORT 2011 I 125 7 - ADDITIONALINFORMATION Additional tax information
7.4 ADDITIONAL TAX INFORMATION
Total amounts, by category Total amount of certain non-deductible of expenditure, reinstated in the expenses under Articles 39-4 and 223 taxable profits following a definitive tax quater of the Tax Code adjustment under Article 223 quinquies The non-deductible expenses referred to in Article 39-4 of the (French) of the Tax Code Tax Code amounted to €179,958.77 in 2011 for the Company and None. correspond to the non-deductible rents on tourism cars.
126 I TECHNICOLOR I ANNUAL REPORT 2011 ADDITIONALINFORMATION - 7 Organization of the Group
7.5 ORGANIZATION OF THE GROUP
7.5.1 LEGAL ORGANIZATIONAL CHART AS OF DECEMBER 31, 2011 At December 31, 2011, the Group included 120 consolidated subsidiaries: 100 were located outside France; 20 in France (see notes 4 and 38 to the Group consolidated financial statements).
Main legal entities EUROPE
TECHNICOLOR SA
100% 99.99 % 100% Technicolor R&D Technicolor 77.30% 22.70% 99.99% International SOFIA SA Gallo 8 SAS France SNC SAS (France) (France) (France) (France) 99.99 % 100% Deutsche Technicolor Technicolor R&D 0,01% Paris SNC 99.99% Technicolor Thomson OHG Holdings Ltd. 100% Technicolor Delivery (Germany) (UK) (France) Entertainment Services Technologies SAS France SAS (France) (France) 100% Thomson 100% Technicolor Network Licensing SAS Services UK Ltd. 100% Technicolor Entertainment (France) Services Spain, S.A. (Spain) (Subsidaries in Japan 100% and Switzerland) 99.99% Thomson Multimedia Sales UK Ltd. Technicolor S.p.A. Thomson Angers 100% 0.01% (Italy) SAS (France)
Technicolor Trademark 100% Management SAS (France) Technicolor Ltd. 100% Technivision Ltd. 100% (UK) (UK)
100 % Technicolor Videocassette Holdings UK Ltd. (UK)
Technicolor Disc 100% Services Technicolor 100% International Ltd. (UK) Europe Ltd. (UK) 100% Technicolor Network Services Technicolor 100% 100 % France SAS (France) Video Services (UK) Technicolor Polska Sp Z.o.o. (Poland)
The Moving Picture 100% Company Ltd. (UK)
DIVISIONS:
Corporate Entertainment Technology (Corporate, Holding Others Services Connected Home or belonging to several divisions)
TECHNICOLOR I ANNUAL REPORT 2011 I 127 7 - ADDITIONALINFORMATION Organization of the Group
Main legal entities ASIA AND AMERICA
TECHNICOLOR SA
100% 100% Technicolor 100% International Technicolor Asia Pacific 100% SAS (France) Gallo 8 SAS Technicolor Inc. Investments (France) (USA) Pte Ltd. (Singapore) 99.90% Thomson 100% Beijing Thomson Technicolor 100% Licensing LLC 100% Sofia 99.99% Commerce (France) Holdings of Canada, (USA) Co. Ltd. (China) Technicolor Brasil Inc. (Canada) Midia E entretenimento Premier Retail 100% 22.70% Ltda. (Brazil) (Subsidaries 100% au Canada) Networks, LLC 100% Technicolor (China) Technicolor Delivery 77.30% (USA) Technology Technologies SAS Technicolor Canada, (France) Co. Ltd. (China) Inc. (Canada) Technicolor 100% Videocassette of Technicolor Home 100% Michigan, Inc. (USA) (Subsidaries in Australia, 100% 100% Thomson Holdings Canada, Hong Kong, Entertainment Services of America LLC (USA) Technicolor 100% (India) and Mexico) Technicolor Home Private Ltd. (India) Australia Investments 100% (Subsidaries in Mexico) Ltd. (UK) Entertainment Thomson Services, Inc. (USA) 100% Multimedia Ltd. 99.99% Technicolor Export 0.01% 100% Thomson Asia (Canada) Technicolor 100% (Subsidaries in Mexico, de Mexico, S de R.L. 100 % in USA and in UK) Pacific Holdings de C.V. (Mexico) Pty Ltd. Pte Ltd. (Singapore) (Australia) Technicolor Home 99.997% Thomson Telecom 100 % Entertaiment Services de Mexico (Mexico) Mexico SA de C.V. 99.99% Technicolor 0.01% 0.003% Technicolor India (Mexico) Technicolor Delivery 99.95% Mexicana, S. de R.L. Technologies Australia Private Ltd. de C.V. (Mexico) (India) Pty Ltd. (Australia) Technicolor, Inc. 100% (USA)
Technicolor (Subsidaries in USA) Technicolor 100% Holdings Ltd. Hong Kong Ltd. (Hong Kong) (UK) 8.16% 10.66% 100% SV Holdco, Technivision Ltd. LLC (UK) (USA)
100% (Subsidaries in USA)
Technicolor Ltd. (UK)
99.90% Technicolor (Thailand) Ltd. (Thailand)
DIVISIONS/ACTIVITIES:
Coporate Entertainment Technology (Corporate, Holding Others Services Connected Home or belonging to several divisions)
Indirect holding
128 I TECHNICOLOR I ANNUAL REPORT 2011 ADDITIONALINFORMATION - 7 Organization of the Group
7.5.2 OPERATIONAL The list of main consolidated subsidiaries is described in note 38 to the Group’s consolidated financial statements. A summary table sets ORGANIZATION forth the list of Group’s subsidiaries broken down by the geographic The Group’s organizational chart below contains the Group’s main location of the entity (please refer to note 4 to the consolidated financial operating subsidiaries, classified by segments. These subsidiaries are statements). directly held or indirectly held through Technicolor as of December 31, 2011. They have been selected based on their contribution to the Group’s Main financial data (revenues, profit (loss) from continuing and revenues (external and intra-group) for the entities of Entertainment discontinuing activities, geographic breakdown of assets and liabilities) as Services and Digital Delivery segments and also for the entities classified well as goodwill and trademarks are broken down for each segment in the as held for sale activities. They are based on workforce for the entities Group’s consolidated financial statements in notes 5 and 13, respectively. belonging to Technology. Revenues from these subsidiaries represent 95% of the Group’s revenues (external and intra-group) in 2011.
Technology Digital Delivery Entertainment Services
Thomson R&D France SNC Technicolor Delivery Technologies Technicolor Distribution Services France SARL France Thomson Licensing SAS Thomson Angers (1) Technicolor Network Services France SAS
(1) Europe NOB NV Technicolor Polska sp.zo.o. (1) excl. Technicolor Network Services UK Ltd MPC The Moving Picture Company Limited France Technicolor Disc Services International Ltd (Hammersmith) Technicolor SpA Technicolor Video Serv. (UK) Ltd Technicolor Ltd Technicolor Entertainment Services Spain Thomson multimedia Distribution (Netherlands) BV
(2) America Thomson Licensing LLC Technicolor USA Inc Technicolor Home Entertainment Serv. de MediaNaviCo LLC Technicolor Brasil Midia E Entretenimento LTDA Mexico S.A. de CV Technicolor Delivery Technologies Mexico, Technicolor Export de Mexico, S. de R.L. S.A. de C.V. Technicolor Mexicana, S. de R.L. de C.V. Comercializadora Thomson de Mexico SA Technicolor Canada Inc de CV Technicolor Home Entertainment Services Inc Technicolor Videocassette of Michigan, Inc Technicolor Creative Services US Inc Technicolor Inc PRN Corporation
Asia Technicolor (China) Technology Co., Ltd. Technicolor Delivery Technologies Australia Technicolor India Pvt Ltd Pty Ltd. Technicolor, Pty, Ltd Technicolor Asia Ltd Technicolor (Thailand) Ltd
TECHNICOLOR I ANNUAL REPORT 2011 I 129 7 - ADDITIONALINFORMATION Documents on display
Parent company Main cash flows between the parent As of December 31, 2011, Technicolor SA (“the parent company”) company and the subsidiaries comprised 408 employees. It hosts mainly the activities of Group The parent company ensures the financing of its subsidiaries by loans treasury, Group management and part of the segments Digital Delivery and current accounts (net receivable position of €382 million before and Technology. The profit and loss account of parent company (as depreciation at December 31, 2011) and equity instruments and, presented in statutory accounts) shows a loss of €338 million in 2011 consequently, has received €277 million of dividends and €122 million (compared to a net loss of €500 million in 2010) (for more information of other financial income in 2011. The Company has organized a system regarding the parent company, refer to Technicolor SA’s statutory of centralization of the treasury in the main countries where it operates accounts and notes to the financial statements in Chapter 8: “Technicolor and implements hedge transactions for the Group, in accordance with financial statements”, section 8.4: “Technicolor SA’s Statutory accounts” defined management rules. and 8.5: “Notes to Technicolor SA Statutory accounts” of this Annual Report). The parent company also provides services to companies affiliated to the Group in computing, purchases, management, treasury, people and various counsels. These services are invoiced either on the basis of a percentage of the income or/and on the subsidiaries, result by a fixed fee, or upon completion of the services.
For more details, refer to Chapter 8: “Technicolor financial statements”, section 8.4: “Technicolor SA parent company Financial statements”, note 21.
7.6 DOCUMENTS ON DISPLAY
The Bylaws and other corporate documents of the Company, any Moreover, historical financial information and regulated information of evaluation or statement prepared by an expert at the request of the the Group is available on the Company’s website (www.technicolor. com). Company, part of which is included or mentioned in this Annual Report, and, more generally, all documents sent or made available to Paper versions of this Annual Report are available free of charge. shareholders pursuant to French law may be consulted at the Company’s This Annual Report may also be consulted on the Technicolor website. headquarters, 1-5 rue Jeanne d’Arc, 92130 Issy-les-Moulineaux, France.
7.7 INFORMATION ON ACCOUNTING SERVICES
7.7.1 STATUTORY AUDITORS Starting date of Statutory Auditors’ first KPMG Audit – Division of KPMG SA mandate 1 , cours Valmy KPMG Audit: 2006. 92923 Paris La Défense Cedex Represented by Isabelle Allen and Jacques Pierre Mazars: 1985.
Mazars 61 rue Henri-Régnault – Tour Exaltis Duration and expiration date 92400 Courbevoie of Statutory Auditors’ mandate Represented by Jean-Louis Simon and Simon Beillevaire KPMG Audit: Appointed at the Ordinary Shareholders’ Meeting held on May 12, 2006. Its mandate will expire upon the Shareholders’ Meeting to be held in 2012 for the approval of 2011 annual accounts.
Mazars: Renewed by the Annual Ordinary Shareholders’ Meeting held on June 17, 2010. Its mandate will expire upon the Shareholders’ Meeting to be held in 2016 for the approval of 2015 annual accounts. 130 I TECHNICOLOR I ANNUAL REPORT 2011 ADDITIONALINFORMATION - 7 Accounting fees and services
7.7.2 SUBSTITUTE STATUTORY Duration and expiration date of Substitute AUDITORS Statutory Auditors’ mandate SCP de Commissaires aux comptes Prut Foulatière et autres SCP de Commissaires aux comptes Prut Foulatière et Autres: Approved 2 bis rue de Villiers at the Ordinary Shareholders’ Meeting held on May 12, 2006. Its 92309 Levallois-Perret Cedex mandate will expire upon the Shareholders’ Meeting to be held in 2012 for the approval of 2011 annual accounts. Mr. Patrick de Cambourg 1 rue André Colledebœuf Mr. Patrick de Cambourg: Renewed by the Annual Ordinary 75016 Paris Shareholders’ Meeting held on June 17, 2010. Its mandate will expire upon the Shareholders’ Meeting to be held in 2016 for the approval of 2015 annual accounts. 7.8 ACCOUNTING FEES AND SERVICES
KPMG Mazars Total (in € thousands) 2011 2010 2011 2010 2011 2010 Audit fees (1) 3,017 3,659 2,450 3,682 5,467 7,341
n Technicolor SA 910 1,367 1,038 1,430 1,948 2,797
n Subsidiaries 2,107 2,292 1,412 2,252 3,519 4,544 Audit-Related Fees (2) 67 124 70 164 137 288
n Technicolor SA 22 0 20 3 42 3
n Subsidiaries 45 124 50 161 95 285 Tax fees (3) 86 84 - - 86 84
n Technicolor SA 0 0
n Subsidiaries 86 84 86 84 Other fees 0 8 - - 0 8
n Technicolor SA 0 0
n Subsidiaries 0 8 0 8
TOTAL 3,170 3,875 2,520 3,846 5,690 7,721
(1) Audit Fees are the aggregate fees billed by KPMG and Mazars for professional services in connection with the audit of the Company’s consolidated annual financial statements and services normally provided by these auditors in connection with statutory and regulatory filings or engagements, including reviews of interim financial statements, as well as audits of statutory financial statements of the Company and its subsidiaries. (2) Audit-Related Fees consist of fees billed for services related to audits of financial statements in connection with disposals or acquisitions as well as other regulatory attestations. (3) Tax Fees include fees billed for tax compliance and for tax advice on actual or contemplated transactions, expatriate employee tax services and transfer pricing studies.
TECHNICOLOR I ANNUAL REPORT 2011 I 131 7 - ADDITIONALINFORMATION Persons responsible for the Registration Document and the Annual Financial Report
7.9 PERSONS RESPONSIBLE FOR THE REGISTRATION DOCUMENT AND THE ANNUAL FINANCIAL REPORT
7.9.1 DECLARATION BY THE n notes 1.2. and 3.1, which describe the impact of the financial restructuring as well as the reasons for applying the going concern assumption to PERSON RESPONSIBLE approve the consolidated financial statements; FOR THE REGISTRATION n notes 2.2. and 2.3., relating to the new standards effective as of January 1, DOCUMENT AND THE 2010, and to the new interpretation IFRIC 19 “Extinguishing Financial ANNUAL FINANCIAL REPORT Liabilities with Equity Instruments” which the Company adopted on January 1, 2010 in advance of its effective application date.” Mr. Frederic R ose, Chief Executive Officer, Technicolor. The report on the annual financial statements for the same fiscal year “I declare that, having taken all reasonable care to ensure that such is the included on page 281 of the 2010 Registration Document is unqualified case, the information contained in this Registration Document is, to the and contains the following observation: best of my knowledge, in accordance with the facts and that there is no omission likely to affect the fairness of the presentation. “Without qualifying our opinion, we draw your attention to the notes 1.2 and 2 to the financial statements which describe the impact of the financial I certify that, to the best of my knowledge, the financial statements have restructuring as well as the reasons for applying the going concern been prepared in accordance with the applicable set of accounting standards assumption to approve the financial statements.” and give a true and fair view of the assets and liabilities, financial position and results of the Company and of its consolidated subsidiaries, and that The Statutory Auditors’ report on the consolidated financial statements the management report, integrated within this Registration Document, fairly for the year ended December 31, 2009, included on page 299 of the presents the evolution of the business, results and financial position of the 2009 French Registration Document submitted to the AMF on March Company and its consolidated subsidiaries, together with a description of 30, 2010 under the n° D. 10-0193 and included by reference in this the principal risks and uncertainties that they face. Registration Document is unqualified and contains the following emphasis of matter: I have received a letter of completion of assignment from the Statutory Auditors, in which they state that they have verified the information relating “Without qualifying the above opinion, we draw your attention to notes to the financial position and the financial statements set out in this Registration 1.2 and 3.1 of the consolidated financial statements, which describe, Document and have read the Registration Document in its entirety. in particular, the Company’s situation in relation to the Sauvegarde proceeding and its financial restructuring.” The report on the consolidated financial statements for the year ended December 31, 2011, included on page 231 of this Registration Document The Statutory Auditors’ report on the parent company financial is unqualified and contains the following emphasis of matter: statements for the same fiscal year included on page 326 of the 2009 French Registration Document is unqualified and contains the following “Without qualifying our opinion, we draw your attention to note 3.1 to emphasis of matter: the consolidated financial statements which describes the reasons for applying the going concern assumption to approve the consolidated “Without qualifying the above opinion, we draw your attention to notes financial statements.” 1.2 and 2 of the financial statements, which describe, in particular, the Company’s situation in relation to the Sauvegarde proceeding and its The report on the annual financial statements for the same year, included financial restructuring.” on page 258 of this Registration Document is unqualified and contains the following emphasis of matter: The historical financial information presented in this Registration Document has been subject to reports by the Statutory Auditors.” “Without qualifying our opinion, we draw your attention to note 2 to the financial statements which describes the reasons for applying the going Chief Executive Officer, Technicolor, concern assumption to approve the financial statements." Frederic R ose The Statutory Auditors’ report on the consolidated financial statements for the year ended December 31, 2010, included on page 252 of the 2010 Registration Document submitted to the AMF on March 30, 2011 7.9.2 RESPONSIBLE FOR under the n° D. 11-0196 and included by reference in this Registration INFORMATION Document, is unqualified and contains the following emphasis of matter: Mr. Stéphane Rougeot, Chief Financial Officer, Technicolor “Without qualifying our opinion, we draw your attention to the following 1-5 rue Jeanne-d’Arc - 92130 Issy-les-Moulineaux - France notes to the consolidated financial statements: Tel.: +33 (0)1 41 86 50 00 – Fax: +33 (0)1 41 86 56 22
132 I TECHNICOLOR I ANNUAL REPORT 2011 8 FINANCIAL STATEMENTS
8.1 TECHNICOLOR 2011 CONSOLIDATED FINANCIAL 8.5 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS ...... 134 STATEMENTS ...... 236 8.1.1 Consolidated statements of operations ...... 134 8.1.2 Consolidated statements of comprehensive income . 135 8.6 PARENT COMPANY FINANCIAL DATA OVER THE FIVE LAST YEARS (UNDER ARTICLE R.225-102 8.1.3 Consolidated statements of financial position ...... 136 OF THE FRENCH COMMERCIAL CODE) ...... 257 8.1.4 Consolidated statements of financial position ...... 137 8.1.5 Consolidated statements of cash flows ...... 138 8.7 STATUTORY AUDITORS’ REPORT ON THE 8.1.6 Consolidated statements of changes in equity ...... 139 FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2011 ...... 258 8.2 NOTES TO THE CONSOLIDATED FINANCIAL I - Opinion on the financial statements ...... 258 STATEMENTS ...... 141 II - Justification of our assessments ...... 258 III - Specific verifications and information ...... 259 8.3 STATUTORY AUDITORS’ REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS ...... 231 8.8 STATUTORY AUDITOR’S SPECIAL REPORT ON 1 - Opinion on the consolidated financial statements ...... 231 REGULATED AGREEMENTS AND COMMITMENTS 2 - Justification of our assessments ...... 231 - GENERAL MEETING OF SHAREHOLDERS TO APPROVE THE FINANCIAL STATEMENTS 3 - Specific verification ...... 232 FOR THE YEAR ENDED DECEMBER 31, 2011 ...... 260 Agreements and commitments submitted to the 8.4 TECHNICOLOR SA PARENT COMPANY FINANCIAL approval of the Shareholders’ meeting ...... 260 STATEMENTS ...... 233 Agreements and commitments already authorized in 8.4.1 Statements of operations ...... 233 previous fiscal years ...... 260 8.4.2 Statements of financial position ...... 234 8.4.3 Statements of changes in equity ...... 235
TECHNICOLOR I ANNUAL REPORT 2011 I 133 8 - FINANCIAL STATEMENTS Technicolor 2011 consolidated financial statements
8.1 TECHNICOLOR 2011 CONSOLIDATED FINANCIAL STATEMENTS
8.1.1 CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, (in € millions) Note 2011 2010 Continuing operations Revenues 3,450 3,574 Cost of sales (2,714) (2,795) Gross margin 736 779 Selling and administrative expenses (6) (376) (397) Research and development expenses (7) (128) (148) Restructuring costs (28) (83) (41) Net impairment losses on non-current operating assets (8) (188) (183) Other income (expense) (6) 628 Profit (loss) from continuing operations before tax and net finance income (expense) (33) 38 Interest income (9) 56 Interest expense (9) (154) (145) Gain on Technicolor’s debt restructuring on May 26, 2010 (9) - 381 Other financial income (expense) (9) (38) (126) Net finance income (expense) (187) 116 Income tax (10) (83) 2 Profit (loss) from continuing operations (303) 156 Discontinued operations Net loss from discontinued operations (11) (21) (225)
NET INCOME (LOSS) (324) (69) Attributable to: Equity Holders (323) (69) Non-controlling interests (1) - Year ended December 31, (in euro, except number of shares) Note 2011 2010 Weighted average number of shares outstanding (basic net of treasury stock) (22) 206,857,493 104,817,755 Earnings (loss) per share from continuing operations (1) (31)
n basic (1.5) 1.3
n diluted (1.3) 1.0 Earnings (loss) per share from discontinued operations
n basic (0.1) (2.1)
n diluted (0.1) (1.5) Total earnings (loss) per share (1)
n basic (1.6) (0.8)
n diluted (1.4) (0.5)
(1) The payment of interest claims of the TSS holders (see note 22.4), since this does not impact the net result, is taken as a reduction of earnings for the purpose of calculating the earnings per share.
The accompanying notes on pages 141 to 230 are an integral part of these consolidated financial statements.
134 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Technicolor 2011 consolidated financial statements
8.1.2 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Period ended December 31, (in € millions) Note 2011 2010 Net income (loss) for the year (324) (69) Actuarial losses (1) (27) (29) (2) Fair value gains (losses), gross of tax on available-for-sale financial assets:
n reclassification adjustments to income on disposal of available-for-sale financial assets - (18)
n fair value adjustment of the year 1 - Fair value gains (losses), gross of tax on cash flow hedges:
n reclassification adjustments when the hedged forecast transactions affect profit or loss (22) - (6) Currency translation adjustments
n currency translation adjustments of the year 6 (46) (2) n reclassification adjustments on disposal or liquidation of a foreign operation -41 Tax effect (3) -- Total other comprehensive income (4) (22) (31)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR (346) (100) Attributable to:
n Equity holders of the parent (345) (100)
n Non-controlling interests (1) -
(1) Includes nil and €(2) million as of December 31, 2011 and December 31, 2010, respectively related to held for sale businesses. (2) Includes nil and €41 million as of December 31, 2011 and December 31, 2010, respectively related to held for sale businesses. (3) No significant tax effect due to the overall tax loss position of the Group. (4) Within the other comprehensive income, only the actuarial gains and losses will never be reclassified to income. All other elements may, depending on future events, be reclassified to income.
The accompanying notes on pages 141 to 230 are an integral part of these consolidated financial statements.
TECHNICOLOR I ANNUAL REPORT 2011 I 135 8 - FINANCIAL STATEMENTS Technicolor 2011 consolidated financial statements
8.1.3 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in € millions) Note December 31, 2011 December 31, 2010 Assets Non-current assets Property, plant and equipment (12) 401 430 Goodwill (13) 481 644 Other intangible assets (13) 459 512 Investments in associates (14) 14 12 Investments and available-for-sale financial assets (16) 74 Derivative financial instruments (24) 16 Contract advances and up-front prepaid discount (17) 49 73 Deferred tax assets (10) 394 488 Income tax receivable 20 48 Other non-current assets (20) 67 63 Cash collateral and security deposits (21) 14 19 Total non-current assets 1,907 2,299 Current assets: Inventories (18) 118 153 Trade accounts and notes receivable (19) 585 666 Current accounts with associates and joint ventures -4 Income tax receivable 13 17 Other current assets (20) 325 318 Cash collateral and security deposits (21) 35 55 Cash and cash equivalents (21) 370 332 Assets classified as held for sale (11) 66 90 Total current assets 1,512 1,635
TOTAL ASSETS 3,419 3,934
The accompanying notes on pages 141 to 230 are an integral part of these consolidated financial statements.
136 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Technicolor 2011 consolidated financial statements
8.1.4 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in € millions) Note December 31, 2011 December 31, 2010 Equity and liabilities Shareholders’ equity: (22) Common stock (223,759,083 shares at December 31, 2011 with nominal value of €1 per share) 224 175 Treasury shares (156) (156) Additional paid-in capital 857 641 Subordinated perpetual notes 500 500 Notes r edeemable in Shares 13 278 Other reserves 60 87 Retained earnings (accumulated deficit) (1,122) (791) Cumulative translation adjustment (225) (231) Shareholders’ equity 151 503 Non-controlling interests 42
TOTAL EQUITY 155 505 Non-current liabilities: Borrowings (25) 1,242 1,278 Retirement benefits obligations (27) 349 332 Restructuring provisions (28) 27 Other provisions (28) 83 97 Deferred tax liabilities (10) 167 193 Other non-current liabilities (30) 97 131 Total non-current liabilities 1,940 2,038 Current liabilities: Borrowings (25) 85 47 Derivative financial instruments (24) 1- Retirement benefits obligations (27) 37 46 Restructuring provisions (28) 79 49 Other provisions (28) 58 69 Trade accounts and notes payable 499 528 Accrued employee expenses 138 158 Income tax payable 14 17 Other current liabilities (30) 361 374 Liabilities classified as held for sale (11) 52 103 Total current liabilities 1,324 1,391
TOTAL LIABILITIES 3,264 3,429
TOTAL EQUITY AND LIABILITIES 3,419 3,934
The accompanying notes on pages 141 to 230 are an integral part of these consolidated financial statements.
TECHNICOLOR I ANNUAL REPORT 2011 I 137 8 - FINANCIAL STATEMENTS Technicolor 2011 consolidated financial statements
8.1.5 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 (in € millions) Note 2011 2010 Net income (loss) (324) (69) Loss from discontinued operations (21) (225) Profit (loss) from continuing operations (303) 156 Summary adjustments to reconcile profit from continuing operations to cash generated from continuing operations Depreciation and Amortization (1) 261 284 Impairment of assets (2) 191 184 Net changes in provisions 1 (22) Loss on asset sales (8) (31) Interest (Income) and Expense (9) 149 139 Gain on Technicolor’s debt restructuring on May 26, 2010 (9) - (381) Other non cash items (including tax) 80 39 Changes in working capital and other assets and liabilities (33) 20 (93) Cash generated from continuing operations 391 275 Interest paid (124) (138) Interest received 54 Income tax paid (7) (21) Net operating cash generated from continuing activities 265 120 Net operating cash used in discontinued operations (11.4) (19) (55) NET CASH FROM OPERATING ACTIVITIES (I) 246 65 Acquisition of subsidiaries, associates and investments, net of cash acquired (33) (12) (4) Net cash impact from sale of investments 14 37 Purchases of property, plant and equipment (PPE) (106) (135) Proceeds from sale of PPE and intangible assets 5 11 Purchases of intangible assets including capitalization of development costs (64) (41) Cash collateral and security deposits granted to third parties (21) (7) (7) Cash collateral and security deposits reimbursed by third parties (21) 31 41 Loans (granted to)/ reimbursed by third parties 1 (1) Net investing cash used in continuing activities (138) (99) Net investing cash generated used in discontinued operations (11.4) (20) (5) NET CASH USED IN INVESTING ACTIVITIES (II) (158) (104) Increase in capital (22) - 203 Changes in ownership interests with no gain/loss of control, net of transaction fees 3 - Proceeds from borrowings (25) 44 Repayments of borrowings (25) (55) (338) Fees paid linked to the debt and capital restructuring (33) (9) (51) Payment of the interests claims of TSS holders (22) - (25) Net financing cash generated used in continuing activities (57) (207) Net financing cash used in discontinued operations (11.4) - (2) NET CASH USED IN FINANCING ACTIVITIES (III) (57) (209)
NET (DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS (I+II+III) 31 (248) Cash and cash equivalents at beginning of year 332 569 Exchange gains on cash and cash equivalents 7 11 Cash and cash equivalents at end of year 370 332
(1) Including €2 million of depreciation of non-quoted shares in 2010. (2) Including €3 million and €1 million of impairment of assets as part of restructuring plans in 2011 and 2010, respectively (see note 28).
The accompanying notes on pages 141 to 230 are an integral part of these consolidated financial statements.
138 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Technicolor 2011 consolidated financial statements
8.1.6 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Non- Total controlling equity Attributable to equity holders of the Group interests (deficit) Total Additional Cumulative Group Share Treasury paid-in Perpetual Other Retained translation equity (in € millions) capital shares capital NRS Notes reserves earnings adjustment (deficit) Balance at January 1, 2010 1,012 (156) 1,643 - 500 112 (3,340) (226) (455) 2 (453) Variation for the year ended December 31, 2010 Total other comprehensive - - - - - (26) - (5) (31) - (31) income (*) Net income (loss) for 2010 ------(69) - (69) - (69) Total comprehensive income - - - - - (26) (69) (5) (100) - (100) for the period Reduction of share capital (985) - (1,643) - - - 2,628 - - - - through a reduction in the nominal value of the shares May 2010 increase in capital 53 - 295 - - - - - 348 - 348 by issuance of 526,608,781 new shares Capital increase linked to DPN 50 - 163 - - - - - 213 - 213 reimbursement Fees linked to the issuance of - - (9) - - - - - (9) - (9) new shares Gain on the debt - - (20) (100) - - - - (120) - (120) extinguishment through issuance of equity instruments (**) Issuance of n otes r edeemable - - - 638 - - - - 638 - 638 in shares of the Company (NRS) NRS converted into equity 45 - 204 (249) ------Fees linked to the issuance of - - - (17) - - - - (17) - (17) NRS Tax impacts on debt -- 86--- -14-14 restructuring (***) Payment of the interest claims of ------(25) - (25) - (25) the TSS holders Tax impacts on interest claims ------12 - 12 - 12 paid on TSS (***) Other tax impacts on equity (***) ------2 -2 -2 Share-based payment to -- ---1- -1 -1 employees (see note 29) Other ------1 - 1 - 1 Balance at December 31, 2010 175 (156) 641 278 500 87 (791) (231) 503 2 505
TECHNICOLOR I ANNUAL REPORT 2011 I 139 8 - FINANCIAL STATEMENTS Technicolor 2011 consolidated financial statements
Non- Total controlling equity Attributable to equity holders of the Group interests (deficit) Total Additional Cumulative Group Share Treasury paid-in Perpetual Other Retained translation equity (in € millions) capital shares capital NRS Notes reserves earnings adjustment (deficit)
Variation for the year ended December 31, 2011 Total other comprehensive - - - - - (28) - 6 (22) - (22) income (*) Net income (loss) for 2011 ------(323) - (323) (1) (324) Total comprehensive income - - - - - (28) (323) 6 (345) (1) (346) for 2011 NRS converted into equity 49 - 210 (259) ------Tax impact on debt - - 6 (6) ------restructuring (***) Share-based payment to -- ---1- -1 -1 employees (see note 29) Other tax impacts on equity (***) ------(8) - (8) - (8) Capital increase of non------33 controlling interests
BALANCE AT 224 (156) 857 13 500 60 (1,122) (225) 151 4 155 DECEMBER 31, 2011
(*) Refer to details in the “Consolidated Statements of Comprehensive Income”. (**) Refer to details in notes 3.9 and 22.1. (***) Due to full recognition of French consolidated tax loss carried forwards, €28 million related to fees on issuance of new shares and NRS, interest claims paid to TSS holders and losses on Treasury Shares have been recognized in 2010. In 2011, the depreciation of French deferred tax assets has been partly allocated to equity. See note 10.
The accompanying notes on pages 141 to 230 are an integral part of these consolidated financial statements.
140 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
8.2 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 General information ...... 142 Note 20 Other current and non-current assets ...... 181
Note 2 Summary of significant accounting policies ...... 142 Note 21 Cash, cash equivalents, cash collateral and security deposits ...... 181 Note 3 Critical accounting estimates and judgments ...... 154 Note 22 Shareholders’ equity ...... 182 Note 4 Significant changes in the scope of consolidation ...... 158 Note 23 Financial risk management ...... 185 Note 5 Information by operating segments and by geographic areas ...... 160 Note 24 Derivative financial instruments ...... 187
Note 6 Selling and administrative expenses Note 25 Borrowings ...... 187 and Other income (expense) ...... 164 Note 26 Financial instruments and market related exposures .. 194 Note 7 Research and development expenses ...... 164 Note 27 Retirement benefit obligations ...... 204 Note 8 Impairment losses on non-current operating assets ... 165 Note 28 Provisions for restructuring and other charges ...... 209 Note 9 Net finance income (expense) ...... 166 Note 29 Share-based compensation plans ...... 211 Note 10 Income tax ...... 166 Note 30 Other current and non-current liabilities ...... 215 Note 11 Discontinued operations ...... 169 Note 31 Earnings (Loss) per share ...... 216 Note 12 Property, plant and equipment ...... 173 Note 32 Information on employees ...... 217 Note 13 Goodwill and other intangible assets ...... 174 Note 33 Acquisitions, disposals and other cash operations Note 14 Investments in associates ...... 179 impacting the consolidated statements of cash flows ...... 218 Note 15 Interest in joint ventures ...... 179 Note 34 Contractual obligations and other commitments ...... 219 Note 16 Investments and available-for-sale financial assets .... 180 Note 35 Contingencies ...... 222 Note 17 Contract advances and up-front prepaid discount ..... 180 Note 36 Related party transactions ...... 227 Note 18 Inventories ...... 180 Note 37 Subsequent events ...... 228 Note 19 Trade accounts and notes receivable ...... 181 Note 38 List of main consolidated subsidiaries ...... 229
TECHNICOLOR I ANNUAL REPORT 2011 I 141 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
NOTE 1 GENERAL INFORMATION Disposal of ContentGuard On November 2, 2011, Technicolor sold its 25.7% stake in ContentGuard 1.1 General information to Pendrell Technologies LLC for net disposal proceeds of approximately $25 million (€18 million at the transaction date) which has been totally Technicolor provides a wide range of video technologies, systems, used to repay the Group’s financial debt in December 2011. The gain finished products and services to the Media & Entertainment (“M&E”) related to the disposal of ContentGuard amount to €6 million and is industry. booked in “Other income (expense)”. Since the second quarter of 2010, Technicolor’s activities are organized into three operating segments, namely Technology, Entertainment Share capital increase Services and Digital Delivery. All other activities and corporate functions Following the redemption of 5,328,181 NRS I, 189,877,533 NRS II and (unallocated) are presented within the “Other” segment. 112,961,194 NRS IIC at the end of 2011, the share capital of Technicolor SA increased by 48,912,458 shares equivalent to €49 million (see According to the sixteenth resolution voted during the Extraordinary note 22.2). Shareholders’ Meeting held on January 27, 2010, the name of the Company changed from Thomson to Technicolor.
In these consolidated financial statements, the terms “Technicolor NOTE 2 SUMMARY OF SIGNIFICANT group”, “the Group” and “Technicolor” mean Technicolor SA together ACCOUNTING POLICIES with its consolidated subsidiaries. Technicolor SA or the “Company” refers to the Technicolor group parent company. 2.1 Basis of preparation
The consolidated financial statements were approved by the Board The consolidated financial statements have been prepared on the basis of Directors of Technicolor SA on February 23, 2012. According to of the Group continuing to operate as a going concern (see note 3.1 French law, the consolidated financial statements will be considered for more detailed information) and in accordance with International as definitive when approved by the Company’s shareholders at the Financial Reporting Standards (IFRS) effective as of December 31, 2011 Ordinary Shareholders’ Meeting, which should take place in May 2012. and adopted by the European Union as of February 23, 2012.
The standards approved by the European Union are available on the 1.2 Main events of the year following web site: http://ec.europa.eu/internal_market/accounting/ ias/index_en.htm. Disposal of non-strategic activities The accounting policies applied by the Group are consistent with those Technicolor finalized in 2011 the disposal of all residual non-strategic followed last year. In 2011, the Group applied the following standards, activities classified as held for sale as of December 31, 2010: amendments and interpretations effective for the first time for annual periods beginning on January 1, 2011. n Grass Valley businesses: on April 4, 2011 Technicolor sold the Grass Valley Transmission business to Parter Capital Group. On May 3, 2011 Technicolor sold to the FCDE (Fonds de Consolidation et de Développement des Entreprises) the Grass Valley Head-end business, operating under the Thomson Video Networks brand;
n Screenvision Europe was sold on July 18, 2011.
142 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
2.2 Standards, amendments and interpretations effective as of January 1, 2011 and applied as of January 1, 2011
Main impacts on the 2011 consolidated financial New standard or interpretation Main provisions statements Improvements to IFRSs (May 2010) The IASB issued Improvements to IFRSs – a collection The application of this amendment since January 1, 2011 had no of amendments to seven International Financial material impact on the Group consolidated financial statements. Reporting Standards – as part of its program of annual improvements to its standards. IAS 24, Related Party Disclosures – Revised The revised standard provides a partial exemption for The application of this revised standard since January 1, 2011 had definition of related parties (revised) government-related entities and a revised definition no impact on the Group consolidated financial statements. of a related party. IAS 32, Financial Instruments: Presentation The amendment addresses the accounting for rights The application of this revised standard since January 1, 2011 had – Amendments relating to classification of issues that are denominated in a currency other than no impact on the Group consolidated financial statements rights issues the functional currency of the issuer. The amendment requires that, provided certain conditions are met, such rights issues are classified as equity regardless of the currency in which the exercise price is denominated. IFRIC 14, Prepayments of a Minimum The amendment applies in the limited circumstances The application of this revised standard since January 1, 2011 had Funding Requirement (amendment) when an entity is subject to minimum funding no impact on the Group consolidated financial statements. requirements and makes an early payment of contributions to cover those requirements. The amendment permits such an entity to treat the benefit of such an early payment as an asset.
2.3 Standards, amendments and interpretations that are not yet effective and have been early adopted by Technicolor as of January 1, 2010
New standard or interpretationMain provisions Main impacts on the consolidated financial statements IFRIC 19, Extinguishing Financial Liabilities IFRIC 19 clarifies that when an entity renegotiates the Technicolor has elected to apply IFRIC 19 in advance of the with Equity Instruments terms of a financial liability with its creditor and the deadline for application in the 2010 consolidated financial creditor agrees to accept the entity’s shares or other statements. The main impact of this interpretation in the 2010 equity instruments to settle the financial liability fully consolidated financial statements is the recognition of a non- or partially: cash financial gain of €150 million, representing the difference n the entity’s equity instruments issued to a creditor between the carrying amount of the debt extinguished by the debt are part of the consideration paid to extinguish restructuring process and the fair value of the equity instruments the financial liability; issued on May 26, 2010. n the equity instruments issued are measured at The impact of the gain on earnings per share in the 2010 their fair value. If their fair value cannot be reliably consolidated financial statements of IFRIC 19 is as follows: measured, the equity instruments should be n basic: €1.4; measured to reflect the fair value of the financial n diluted: €1. liability extinguished; There is no impact of IFRIC 19 in the 2011 consolidated financial n the difference between the carrying amount of statements. the financial liability extinguished and the initial measurement amount of the equity instruments issued is included in the entity’s profit or loss for the period.
TECHNICOLOR I ANNUAL REPORT 2011 I 143 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
2.4 Standards, amendments and interpretations that are not yet effective and have not been early adopted by Technicolor
New standard and interpretation Effective Date Main provisions IFRS 10, Consolidated Financial Annual periods beginning IFRS 10 establishes principles for the presentation and preparation of consolidated Statements on or after January 1, 2013. financial statements when an entity controls one or more other entities. IFRS 10 replaces the consolidation requirements in SIC-12, Consolidation - Special Purpose Entities and IAS 27, Consolidated and Separate Financial Statements . IFRS 11, Joint Arrangements Annual periods beginning IFRS 11 provides for a more realistic reflection of joint arrangements by focusing on the on or after January 1, 2013. rights and obligations of the arrangement, rather than its legal form (as is currently the case). The standard addresses inconsistencies in the reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities. Following the disposal of its main joint ventures in 2010 and 2011, the Group does not anticipate a significant impact of the application of this new standard based on its existing joint venture portfolio as of December 31, 2011. IFRS 12, Disclosure of Interests in Annual periods beginning IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms Other Entities on or after January 1, 2013. of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 13, Fair value measurement Annual periods beginning IFRS 13 sets out in a single IFRS a framework for measuring fair value and requires on or after January 1, 2013 disclosures about fair value measurements. IFRS1, Severe Hyperinflation and Annual periods beginning This amendment provides guidance for entities emerging from severe hyperinflation removal of Fixed Dates for first time on or after July 1, 2011. either to resume presenting IFRS financial statements or to present IFRS financial adoption (amendment) statements for the first time. IFRS 7, Disclosure – transfers of Annual periods beginning These amendments allow users of financial statements to improve their understanding Financial Assets (amendments) on or after July 1, 2011. of transfer transactions of financial assets (for example, securitisations), including understanding the possible effects of any risks that may remain within the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period. IAS 1, Presentation of Financial Annual periods beginning The amendments to IAS 1 only revise the way other comprehensive income is presented: Statements (amendments) on or after July 1, 2012. requiring separate subtotals for those elements which may be ‘recycled’ (e.g. cash flow hedging, foreign currency translation), and those elements that will not. IAS 12, Deferred tax - Recovery of Annual periods beginning This amendment applies when an asset is measured using the fair value model in IAS 40 Underlying Assets (amendment) on or after January 1, 2012. Investment Property. IAS 19, Employee Benefits Annual periods beginning These amendments include the main following items: (amendments) on or after January 1, 2013 n require recognition of changes in the net defined benefit liability (asset) in other comprehensive income (end of the corridor approach); n introduce enhanced disclosures about defined benefit plans; n modify accounting for termination benefits, including distinguishing benefits provided in exchange for service and benefits provided in exchange for the termination of employment and affect the recognition and measurement of termination benefits IAS 28, Investments in Associates Annual periods beginning This Standard supersedes IAS 28 Investments in Associates. It prescribes the accounting and Joint Ventures (amendments) on or after January 1, 2013 for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. IFRIC 20, Stripping Costs in the Annual periods beginning IFRIC 20 considers when and how to account separately for these two benefits arising Production Phase of a Surface Mine on or after January 1, 2013 from the stripping activity, as well as how to measure these benefits both initially and subsequently. IFRS 9, Financial Instruments – Annual periods beginning IFRS 9 uses a single approach to determine whether a financial asset is measured at Classification and Measurement on or after January 1, 2015 amortized cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39.
The impacts of the above standards, amendments and interpretations currently studied by IASB and IFRIC were not anticipated in these consolidated financial statements and cannot be reasonably estimated at this time.
144 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
2.5 Main accounting options selected by amounts of revenues and expenses during the reporting period of the the Group for the preparation of the consolidated financial statements. opening IFRS balance sheet at the Management regularly reviews its valuations and estimates based on transition date (January 1, 2004) its past experience and various other factors considered reasonable and relevant for the determination of the fair estimates of the assets IFRS 1, First-time Adoption of IFRS, sets out the rules to be followed by and liabilities’ carrying value and of the revenues and expenses. The first-time adopters of IFRS when preparing their first IFRS consolidated actual results could significantly differ from these estimates depending financial statements. The Group has opted to apply the following main on different conditions and assumptions. The critical accounting options and exemptions provided by IFRS 1: assumptions and estimates made by the Group are detailed in note 3. n Business combinations In accordance with IFRS 3, the Group has opted not to restate past 2.9 Positions taken by the Group when business combinations that occurred before January 1, 2004. no specific requirement exists in the n Cumulative translation differences IFRS The Group elected to recognize cumulative translation differences of These positions are linked to issues that are being analyzed by the the foreign subsidiaries into opening retained earnings as of January 1, IFRIC or the IASB. In the absence of standards or interpretations 2004, after having accounted for the IFRS adjustments in the opening applicable to the transactions described below, Group management has shareholders’ equity. All cumulative translation differences for all used its judgment to define and apply the most appropriate accounting foreign operations have therefore been deemed to be zero at the methods. The Group’s judgment-based interpretations relates to joint IFRS transition date. The gain or loss on a subsequent disposal of any venture. foreign operation will exclude translation differences that arose before the IFRS transition date but will include later translation differences. The accounting for gains or losses resulting from contribution of non monetary assets to jointly controlled entities, are not currently precisely Stock options and other share-based payments n defined by applicable IFRS. The Board discussed recently the consistency The Group elected to apply IFRS 2 to all equity instruments granted between IAS 27R (Consolidated and separate financial statements) after November 7, 2002 and for which the rights had not vested as and SIC 13 (jointly controlled entities – non monetary contribution by of December 31, 2004. venturers). For the time being the Group does not recognize a portion of the gain or loss which is attributable to the equity interests of the other 2.6 Functional and presentation currency venturers but rather applies the disposition of IFRS 3R and IAS 27R, i.e. recognizes the gain and loss on 100% of the contribution and values the These consolidated financial statements are presented in euro. All acquisition in the joint venture at its fair value. financial information presented in euro has been rounded to the nearest million, unless otherwise stated. 2.10 Scope and consolidation method 2.7 Basis of measurement (a) Subsidiaries The IFRS financial information has been prepared using the historical All the entities that are controlled by the Group (including special cost convention with some exceptions regarding various assets and purpose entities) i.e. in which the Group has the power to govern the liabilities, for which specific provisions recommended by the IFRS have financial and operating policies in order to obtain benefits from the been applied: available-for-sale financial assets at fair value, derivative activities, are subsidiaries of the Group and are consolidated. Control financial instruments and financial assets at fair value through profit and is presumed to exist when the Group directly or indirectly owns more loss, and initial recognition of a financial assets or liability at fair value. than half of the voting rights of an entity (the voting rights taken into account are the actual and potential voting rights which are immediately exercisable or convertible) and when no other shareholder holds a 2.8 Use of estimates significant right allowing veto or the blocking of ordinary financial and operating decisions made by the Group. Consolidation is also applied The preparation of consolidated financial statements in accordance with to special purpose entities that are controlled, whatever their legal forms IFRS requires management to make estimates and assumptions that are, even where the Group holds no shares in their capital. affect the reported amounts of assets and liabilities and the reported
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(b) Associates Goodwill is recognized in the currency of the acquired subsidiary/ associate and measured at cost less accumulated impairment losses An associate is an entity over which the Group has significant influence and translated into euros at the rate effective at the end of the period. and that is neither a subsidiary nor an interest in a joint venture. Significant Goodwill is not amortized but is tested annually for impairment. influence is the power to participate in the financial and operating policies decisions of the investee without having either control or joint control Transaction costs, other than those associated with the issue of debt or over those policies. Investments in associates are accounted for under equity securities, that the Group incurs in connection with a business the equity method. The goodwill arising on these entities is included in combination are expensed as incurred. the carrying value of the investment. Any contingent consideration payable is measured at fair value at the (c) Joint ventures acquisition date. Subsequent changes in the fair value of the contingent consideration are recognized in profit or loss, except if contingent A joint venture is a contractual arrangement whereby the Group and consideration is classified in equity. other parties undertake an economic activity that is subject to joint control. Investments in joint ventures are consolidated under the pro rata method: the assets, liabilities, revenues and costs are consolidated 2.12 Translation of foreign subsidiaries in proportion to the Group’s investment. For the financial statements of all the Group’s entities for which the functional currency is different from that of the Group, the following 2.11 Business combinations and goodwill methods are applied: Business combinations are accounted for using the acquisition method as n the assets and liabilities are translated into euro at the rate effective at the acquisition date, which is the date on which control is transferred at the end of the period; to the Group. n the revenues and costs are translated into euro at the average The Group measures goodwill at the acquisition date as: exchange rate of the period.
n the fair value of the consideration transferred; plus The translation adjustments arising are directly recorded in other comprehensive income. n the recognized amount of any previously owned non-controlling interests in the acquiree; plus
n if the business combination is achieved in stages, the fair value of the 2.13 Translation of foreign currency pre-existing equity interest in the acquire; less transactions n the net recognized amount (generally fair value) of the identifiable Transactions in foreign currency are translated at the exchange rate assets acquired and liabilities assumed. effective at the trade date. Monetary assets and liabilities in foreign Under option, for each business combination, any non controlling currency are translated at the rate of exchange prevailing at the balance interest in the acquiree is measured either at fair value (thus increasing sheet date. The differences arising on the translation of foreign currency the goodwill) or at the non controlling interest’s proportionate share of operations are recorded in the consolidated statement of operations as the acquiree’s identifiable net assets. Once control is achieved, further a profit or loss on exchange. acquisition of non-controlling interests or disposal of equity interest The non-monetary assets and liabilities are translated at the historical without losing control are accounted as equity transaction. rate of exchange effective at the trade date.
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The main exchange rates used for translation (one unit of each foreign currency converted to euros) are summarized in the following table:
Closing rate Average rate 2011 2010 2011 2010 U.S. dollar (U.S.$) 0.77259 0.74898 0.71482 0.75569 Pound sterling (GBP) 1.19303 1.15922 1.14666 1.16659 Canadian dollar (CAD) 0.75763 0.74999 0.72239 0.73140
The average rate is determined by taking the average of the month- 2.16 Intangible assets end closing rates for the year, unless such method results in a material distortion. Intangible assets consist mainly of capitalized development projects, trademarks, rights for use of patents and acquired customer relationships.
2.14 Property, Plant and Equipment Intangibles acquired through a business combination are recognized (PPE) at fair value at the transaction date. For material amounts, Technicolor relies on independent appraisals to determine the fair value of intangible All PPE are recognized at cost less any depreciation and impairment assets. Separately acquired intangible assets are recorded at purchase losses. They are essentially amortized using the straight-line method cost and internally generated intangibles are recognized at production over the useful life of the asset which ranges from 20 to 40 years for cost. buildings and from 1 to 12 years for materials and machinery. Each material component of a composite asset with different useful lives or Purchase cost comprises acquisition price plus all associated costs different patterns of depreciation is accounted for separately for the relating to the acquisition and set-up. All other costs, including those purpose of depreciation and for accounting of subsequent expenditure. relating to the development of internally generated intangible assets such as brands, customer files, etc., are recognized as expenses of the The assets held under finance leases are capitalized at the lower of the period when they are incurred. present value of future minimum payments and the fair value of the leased assets. They are amortized using the straight-line method over the Intangible assets considered to have a finite useful life are amortized shorter of the estimated useful life of the asset and the duration of the over their estimated useful lives and their value written down in the case lease. The costs related to the assets acquired through these contracts of any impairment loss. Intangible assets with indefinite useful lives are are included within the amortization allowances in the statement of not amortized but are tested for impairment annually. Depending on operations. the nature and the use of the intangible assets, the amortization of these assets is included either in “Cost of sales”, “Selling and administrative expenses”, “Other income (expense)” or “Research and development 2.15 Leases expenses”. Leases which transfer substantially all risks and rewards incidental to the ownership of the leased asset are classified as finance leases. This (a) Research and development projects transfer is based on different indicators analyzed such as (i) the transfer Research expenditures are expensed as incurred. Development costs of ownership at the end of the lease, (ii) the existence of a bargain are expensed as incurred, unless the project to which they relate meets price option in the agreement, (iii) the fact that the lease term is for the the IAS 38 capitalization criteria. Recognized development projects major part of the economic life of the asset, or (iv) the present value of correspond to projects which objectives are to develop new processes minimum lease payments amounts to substantially all of the fair value or to improve significantly existing processes, considered as technically of the leased asset. The assets held under finance leases are capitalized viable and expected to provide future economic benefits for the and the corresponding financial liability is accounted for by the Group. Group. Development projects are recorded at cost less accumulated Leases which are not classified as finance leases are operating leases. depreciation and impairment losses, if any. The costs of the internally The payments related to these contracts are recorded as expenses on generated development projects include direct labor costs (including a straight-line basis over the lease term. pension costs and medical retiree benefits), costs of materials and service fees necessary for the development projects. They are amortized over The aggregate benefits of lease incentives received from the lessor are a period ranging from one to five years starting from the beginning of recognized as a reduction of rental expense over the lease term, on a straight-line basis.
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the commercial production of the projects, based on units sold or based in the operational environment of the assets, a significant decline in the on units produced or using the straight-line method. expected economic performance of the assets, or a significant decline in the revenues or margin versus prior year and budget or in the market (b) Patents and trademarks share of the Group. Patents are amortized on a straight-line basis over the expected period The impairment test consists of comparing the carrying amount of the of use. Trademarks are considered as having an indefinite useful life and asset with its recoverable amount. The recoverable amount of the asset are not amortized, but are tested for impairment annually according to is the higher of its fair value (less costs to sell) and its value in use. IAS 36. The main reasons retained by the Group to consider a trademark as having an indefinite useful life were mainly its positioning in its market Value in use is the present value of the future cash flow expected to be expressed in terms of volume of activity, international presence and derived from an asset or group of assets. notoriety, and its expected long-term profitability. The fair value (less costs to sell) corresponds to the amount that could With respect to trademarks acquired through business combinations, be obtained from the sale of the asset (or the CGU), in an arm’s-length the valuation methodology used is based on the royalty relief method transaction between knowledgeable and willing parties, less the costs which takes into account the royalty that could reasonably be paid by of disposal. It can be determined using an observable market price for third-party licensees on similar trademarks. the asset (or the CGU) or using discounted cash flow projections that include estimated future cash inflows or outflows expected to arise (c) Customer relationships from future restructuring or from improving or enhancing the asset’s performance but exclude any synergies with other CGU of the Group. Customer relationships that are acquired through business combinations are amortized over the expected useful life of such relationships, which For determining the recoverable value, the Group uses estimates of range from 8 to 20 years, taking into account probable renewals of future pre-tax discounted cash flows generated by the asset including long-term customer contracts that last generally from 1 to 5 years. The a terminal value when appropriate. These flows are consistent with the initial valuation methodology used is generally based on the excess profit most recent budgets approved by the Board of Directors of the Group. method using the attributable discounted future cash flows expected to Estimated cash flows are discounted using pre-tax long-term market be generated. rates, reflecting the time value of money and the specific risks of the assets. Methodology and assumptions used by the Group are detailed (d) Other intangible assets in note 13. This caption comprises mainly acquired or internally developed software. An impairment loss corresponds to the difference between the carrying amount of the asset (or group of assets) and its recoverable amount and is recognized in “Net impairment losses on non-current operating assets” 2.17 Impairment of intangible assets, for continuing operations unless the impairment is part of restructuring goodwill and PPE plans, or related to discontinued operations in which case it is recognised in “Restructuring expenses”. In accordance with IAS 36, impairment of Goodwill, intangible assets having an indefinite useful life and goodwill cannot be reversed. development projects not yet available for use are tested annually for impairment during the last quarter of the year and updated in December and whenever circumstances indicate that they might be impaired. 2.18 Assets held for sale and discontinued For the purpose of impairment testing, goodwill is allocated to each of operations the cash-generating units (CGU) or groups of cash-generating units (hereafter called “goodwill reporting units” (GRU)) that represent the (a) Assets held for sale lowest level within the entity at which the goodwill is monitored for A non-current asset (or disposal group) is classified as held for sale internal management purposes. when its carrying amount will be recovered principally through a sale transaction rather than through continuing use. This means the asset PPE and intangible assets having a definite useful life are tested for (or disposal group) is available for immediate sale and its sale is highly impairment at the balance sheet date only if events or circumstances probable. A non-current asset (or disposal group) classified as held indicate that they might be impaired. The main evidence indicating that for sale is measured at the lower of its fair value less costs to sell and an asset may be impaired includes the existence of significant changes its carrying amount. Any impairment loss for write-down of the asset
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(or disposal group) to fair value (less costs to sell) is recognized in the the net realizable value of inventories is lower than its carrying amount, statement of operations. the inventory is written down by the difference.
(b) Discontinued operations 2.20 Customer contract advances A discontinued operation is a component of the Group that either and up-front prepaid discount has been disposed of (by sale or otherwise) or is held for sale. To be disclosed as discontinued, the operation must have been stopped or be As part of its normal course of business, Technicolor makes cash classified as “asset held for sale”. The component discontinued is clearly advances and up-front prepaid discount to its customers, principally distinguishable operationally and for reporting purposes. It represents a within its Entertainment Services segment. These are generally in the separate major line of business (or geographical area of business), is part framework of a long-term relationship or contract and can take different of a single major plan of disposal or is a subsidiary acquired exclusively forms. Consideration is typically paid as an advance to the customers for resale. in return for the customer’s various commitments over the life of the contracts. These contracts award to the Group a customer’s business The profit (loss) from discontinued operations is presented as a within a particular territory over the specified contract period (generally separate line item on the face of the statement of operations with a from 1 to 5 years). The contracts contain provisions that establish pricing detailed analysis provided in note 11. The statement of operations data terms for services and volumes to be provided and other terms and for all prior periods presented are reclassified to present the results of conditions. operations meeting the criteria of IFRS 5 as discontinued operations. In the statement of cash flows, the amounts related to discontinued Such advanced payments are classified under “Non-current assets”, operations are disclosed separately and detailed in note 11. recorded as “Contracts advances and up-front prepaid discount” and are amortized as a reduction of “Revenues” on the basis of units of When a non-current asset or disposal group no longer met the held production or film processed. for sale criteria, the asset or disposal group ceases to be classified as held for sale. 2.21 Financial assets It is then measured at the lower of: Financial assets are classified in the following categories, depending on the purpose for which the financial assets were acquired: financial assets n its carrying value before the asset (or disposal group) was classified as at fair value through profit or loss, loans and receivables, and available- held for sale, adjusted for any depreciation, amortization that would for-sale financial assets. Management determines the classification of have been recognized had the asset (or disposal group) not been its financial assets at initial recognition and re-evaluates this designation classified as held for sale; and at every reporting date. Except for financial assets at fair value through n its recoverable amount at the date of the subsequent decision not profit or loss, financial assets are recognized at fair value plus transaction to sell. Recoverable value is the higher of fair value less costs to sell costs at the date when the Group commits to purchase or sell the asset. and value in use. Financial assets at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed. Any adjustment to the carrying amount is included in profit and loss from continuing operations in which the assets ceased to be classified as held for sale. (a) Financial assets at fair value through profit or loss 2.19 Inventories This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A Inventories are valued at acquisition or production cost. The production financial asset is classified in this category if acquired principally for the costs include the direct costs of raw materials, labor costs and a part purpose of selling in the short term. Derivatives are also categorized as of the overheads representative of the indirect production costs, and “held for trading” unless they are designated as hedges. Assets in this exclude general administrative costs. The cost of inventory sold is category are classified as current assets if they are either held for trading determined based on the weighted average method or the FIFO (first or are expected to be realized within 12 months after the balance sheet in – first out) method, depending on the nature of the inventory. When date. Financial assets at fair value through profit or loss are subsequently
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carried at fair value. Gains or losses arising from changes in fair value, Fair value measurement including interest and dividend income, are presented in the statement The Group establishes fair value of the unlisted securities by using of operations within “Other financial income (expense)”, in the period valuation techniques. These include the use of recent arm’s length in which they arise. transactions (when available), reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing (b) Loans and receivables models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets in “Trade accounts and notes receivable”, Impairment of financial assets except for maturities greater than 12 months after the balance sheet The Group assesses at each balance sheet date whether there is objective date. These are classified as non-current assets. Loans and receivables evidence that a financial asset or a group of financial assets is impaired. A are, subsequent to initial recognition, carried at amortized cost using the significant or prolonged decline (more than 9 months) in the fair value of effective interest method. the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial (c) Available-for-sale financial assets assets, the cumulative negative changes in fair value – measured as the difference between the acquisition cost and the current fair value, less Available-for-sale financial assets are non-derivatives that are either any impairment loss on that financial asset previously recognized in profit designated in this category or not classified in any of the other categories. or loss – is removed from other comprehensive income in equity and They are included in non-current assets unless management intends to recognized as an expense in the statement of operations. Impairment dispose of the investment within 12 months of the balance sheet date. losses recognized in the statement of operations on financial instruments classified as available-for-sale are not reversed through the statement of Within the Group, available-for-sale financial assets consist mainly of operations, except if the instruments are disposed of. investments held in unlisted entities. Available-for-sale financial assets are subsequently carried at fair value and changes in the fair value are recognized in other comprehensive income. The foreign exchange 2.22 Financial liabilities and equity differences on monetary securities (debt instruments) denominated in instruments issued by the Group a foreign currency are recognized in profit or loss. When securities are sold or impaired, the accumulated fair value adjustments recognized Classification as debt or equity previously through other comprehensive income are recycled through profit or loss in the line item “Other financial income (expense)” in the Debt and equity instruments are classified as either financial liabilities statement of operations. or as equity in accordance with the substance of the contractual arrangement. Interest on available-for-sale securities calculated using the effective interest rate method is recognized in the statement of operations. Notes Redeemable in Shares (NRS) issued in connection with the Dividends on available-for-sale equity instruments are recognized in implementation of the Company’s Sauvegarde Plan, have been classified the statement of operations when the Group’s right to receive payments as equity because they are redeemable into a fixed number of shares is established. (including NRS IIC which are redeemable in cash or into a fixed number of shares at the Company option). Interests accrued on May 26, 2010 on NRS are redeemable into a fixed number of shares and have accordingly Derecognition been also classified into equity. Investments are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group Disposal Proceeds Notes (DPN) have been classified under debts has transferred substantially all risks and rewards of ownership. because they are redeemable into cash and a variable number shares. The cash amount is dependent upon the net sale proceeds of certain non-strategic assets to be sold by the Company. The remainder of the DPN is repaid into a number of shares based on the volume weighted average price per ordinary share on NYSE Euronext Paris over a
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period of 40 trading days ending on the third trading day preceding between the asset’s carrying amount and the present value of estimated the redemption date or in cash. future cash flows.
Equity instruments A receivable is derecognized when it is sold without recourse and when it is evidenced that the Group has transferred substantially all the An equity instrument is any contract that evidences a residual interest significant risks and rewards of ownership of the receivable and has no in the assets of the entity after deducting all of its liabilities. Equity more continuing involvement in the transferred asset. instruments issued by the Group are recorded for the proceeds received, net of direct issue costs. 2.25 Derivatives Subordinated perpetual notes The Group uses derivatives as hedging instruments for hedges of foreign On September 26, 2005, Technicolor issued subordinated perpetual currency risks, changes in interest rates, commodity prices and equity notes in a nominal amount of €500 million. Because of their perpetual market risks. These instruments may include agreements for interest and subordinated nature and the optional nature of the coupon, the rate and currency swaps, options and forward contracts. If hedge notes are recorded in shareholder’s equity for the net value received of accounting criteria are met, they are accounted for in accordance with €492 million (issue price less offering discount and fees). No derivative hedge accounting. was identified because the provisions of the notes detailed in note 22 fall outside the scope of the definition of a derivative under IAS 39 (the Derivative instruments may be designated as hedging instruments in “change of control” event represents a non financial event excluded one of three types of hedging relationships: from the definition of a derivative under IAS 39). More information is n fair value hedge, corresponding to a hedge of the exposure to the provided in note 22.4. change in fair value of an asset or a liability;
The Group’s objectives, policies and processes for managing equity are n cash flow hedge, corresponding to a hedge of the exposure to the described in notes 22, 23 and 26. variability in cash flows from future assets or liabilities;
n net investment hedge in foreign operations, corresponding to a 2.23 Borrowings hedge of the amount of the Group’s interest in the net assets of these operations. Borrowings are initially recognized at fair value. Borrowings are Derivative instruments qualify for hedge accounting when: subsequently stated at amortized cost using the effective interest rate method. Any difference between the proceeds (net of transaction costs) n at the inception of the hedge, there is a formal designation and and the redemption value is recognized in the statement of operations documentation of the hedging relationship; over the period of the borrowings using the effective interest rate n the hedge is expected to be highly effective, its effectiveness can be method. Borrowings are classified as current liabilities unless the Group reliably measured and it has been highly effective throughout the has an unconditional right to defer settlement of the liability for at least financial reporting periods for which the hedge was designated. 12 months after the balance sheet date. More information is provided in note 25. The effects of hedge accounting are as follows:
n for fair value hedges of existing assets and liabilities, the hedged 2.24 Trade receivables and payables portion of the asset or liability is recognized in the balance sheet at fair value. The gain or loss from remeasuring the hedged item at The trade receivables and payables are part of the current financial assets fair value is recognized in profit or loss and is offset by the effective and liabilities. At the date of their initial recognition, they are measured portion of the loss or gain from remeasuring the hedging instrument at the fair value of the amount to be received or paid. This generally at fair value; represents their nominal value because the effect of discounting is immaterial between the recognition of the instrument and its realization n for cash flow hedges, the portion of the gain or loss on the hedging (for assets) or its settlement (for liabilities). instrument that is determined to be an effective hedge is recognized in other comprehensive income (OCI) in equity, because the change The Group assesses at each balance sheet date whether there is any in the fair value of the hedged portion of the underlying item is not objective evidence that a trade receivable is impaired. If any such recognized in the balance sheet, and the ineffective portion of the evidence exists, the amount of the loss is measured as the difference gain or loss on the hedging instrument, if any, is recognized in profit
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or loss. Amounts recognized in OCI are subsequently recognized in n for taxable temporary differences associated with investments in profit or loss in the same period or periods during which the hedged subsidiaries, associates and interests in joint ventures, when the transaction affects profit or loss. Such periods are generally less than Group is able to control the timing of the reversal of the temporary 6 months except for the licensing activity and certain activities linked differences and when it is probable that these temporary differences to long-term contracts where the period is generally up to one year. will not reverse in the foreseeable future. Derivatives not designated as hedging instruments are measured at fair Deferred tax assets are recorded: value. Subsequent changes in fair value are recognized in the statement n for all deductible temporary differences, to the extent that it is of operations. probable that future taxable income will be available against which these temporary differences can be utilized, except when the related 2.26 Cash, cash equivalents, cash deferred tax asset results from the initial recognition of an asset or a liability in a transaction which is not a business combination and, at collateral and security deposits the trade date, affects neither the net income nor the taxable income Cash and cash equivalents include cash in hand, deposits held at call or loss; and with banks and other short-term highly liquid investments with original n for the carry forward of unused tax losses and unused tax credits, to the maturities of three months or less, i.e. investments that are readily extent that it is probable that future taxable income will be available convertible to a known amount of cash and subject to an insignificant against which the unused tax losses and credits can be utilized. risk of change in value. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. The recoverable amount of the deferred tax assets is reviewed at each balance sheet date and reduced when it is no longer probable that Cash collateral and security deposits represent cash granted to third sufficient taxable profit will be available to allow the benefit of part or parties to secure credit facilities and other obligations of the Group. all of the deferred tax assets to be utilized.
Deferred tax assets and liabilities are valued using the tax rates that are 2.27 Treasury shares expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or Treasury shares are recorded at purchase cost and deducted from substantively enacted by the balance sheet date. Deferred taxes are shareholders’ equity. The gain or loss on disposal or cancellation of classified as non-current assets and liabilities. these shares is recorded directly in equity. Income tax expense comprises current and deferred tax. Deferred tax is recognised in profit or loss, except to the extent that it relates to items 2.28 Equity transaction costs previously recognised outside profit or loss (either in OCI or directly in Incremental and external costs directly attributable to the equity equity). Moreover, IAS 12 does not specify whether tax benefits arising transactions are accounted for as a deduction from equity. from tax losses should be allocated to the source of the loss or the source of the realisation of the benefit. The Group has accounted for any tax benefits arising from tax losses from discontinued activities in continuing 2.29 Deferred and current income taxes operations since these tax losses will be used by future benefits from Deferred taxes result from: continuing operations.
n temporary differences arising from differences between the tax bases of assets and liabilities and their carrying amounts in the Group 2.30 Post employment benefits and other consolidated balance sheets; and long-term benefits n the carry forward of unused tax losses and tax credits. (a) Post employment obligations Deferred taxes for all temporary differences are calculated for each taxable entity (or group of entities) using the balance sheet liability The Group operates various post employment schemes for some method. employees. Contributions paid and related to defined contribution plans i.e. pension plans under which the Group pays fixed contributions All deferred tax liabilities are recorded except: and has no legal or constructive obligation to pay further contributions (for example if the fund does not hold sufficient assets to pay to all n when the deferred tax liability results from the initial recognition of employees the benefits relating to employee service in the current and goodwill, or from the initial recognition of an asset or a liability in a prior periods) are recorded as expenses as they fall due. transaction which is not a business combination and, at the trade date, affects neither the net income nor the taxable income or loss; and
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The other pension plans are analyzed as defined benefit plans (i.e. the probability of achieving the performance is assessed each year and pension plans that define an amount of pension benefit that an employee the expense is adjusted accordingly. will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation) and are recognized in The fair value of instruments, and especially of options granted, is the balance sheet based on an actuarial valuation of the defined benefit determined based either on a binomial option pricing model or on obligations at the balance sheet date less the fair value of the related the Black-Scholes valuation model that takes into account an annual plan assets. reassessment of the expected number of exercisable options. The recognized expense is adjusted accordingly. The method used for determining employee benefits obligations is based on the Projected Unit Credit Method. The present value of the Group benefit obligations is determined by attributing the benefits 2.32 Provisions to employee services in accordance with the benefit formula of each Provisions are recorded at the balance sheet date when the Group has plan. The provisions for these benefits are determined annually by an obligation as a result of a past event and when it is probable that an independent qualified actuaries based on demographic and financial outflow of resources embodying economic benefits will be required to assumptions such as mortality, employee turnover, future salaries and settle the obligation and a reliable estimate can be made of the amount benefit levels, discount rates and expected rates of return on plan assets. of the obligation.
Expenses related to interest cost and expected return on plan assets are The obligation may be legal, regulatory or contractual or it may represent recognized as financial expense and financial income in note 9. a constructive obligation deriving from the Group’s actions where, by an established pattern of past practice, published policies or a sufficiently According to revised IAS 19, net cumulative actuarial gains and losses specific current statement, the Group has indicated to other parties of the period are immediately recognized in the provision for post that it will accept certain responsibilities, and as a result, has created a employment obligation with a corresponding debit or credit to OCI in valid expectation on the part of those other parties that it will discharge the Statement of Comprehensive Income (SOCI). those responsibilities. Past service cost resulting from plan amendment are booked as an The recorded provision represents the best estimate of the expenditure expense on a straight line basis over the average period until the benefit required to settle the obligation at the balance sheet date. If a reliable become vested or booked immediately up-front if benefit are vested estimate cannot be made of the amount of the obligation, no provision immediately. is recorded but details of the obligation are disclosed in the notes to the consolidated financial statements. (b) Other long-term benefits Where the discounting effect is material, the recorded amount is the The obligations related to other long-term benefits (jubilee award) are present value of the expenditures expected to be required to settle also based on actuarial valuations. Actuarial gains and losses related the related obligation. The present value is determined using pre-tax to these obligations are immediately recognized in the consolidated discount rates that reflect the assessment of the time value of money. statement of operations. Unwinding of discounts is recognized in the line item “Net finance income (expense)” in the consolidated statement of operations. 2.31 Share-based payments Restructuring provisions The Group issues equity-settled and cash-settled share-based payments to certain employees. According to IFRS 2, the advantage given to Provisions for restructuring costs are recognized when the Group the employees regarding the grant of the stock options consists of an has a constructive obligation towards third parties, which results from additional compensation to these employees estimated at the grant date. a decision made by the Group before the balance sheet date and supported by the following items: Equity-settled share-based payments are measured at fair value at n the existence of a detailed and finalized plan identifying the sites the grant date. They are accounted for as an employee expense on concerned, the location, the role and the approximate number of a straight-line basis over the vesting period of the plans, based on the headcounts concerned, the nature of the expenses that are to be Group’s estimate of options that will eventually vest. For cash-settled incurred and the effective date of the plan; and share-based payments, a liability equal to the portion of the goods or services received is recognized at the current fair value determined at n the announcement of this plan to those affected by it. each balance sheet date with any changes in fair value recognized in The restructuring provision only includes the costs directly linked to profit or loss for the period within other financial income (expense). the plan. In addition, for plans based on non-market performance conditions,
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2.33 Revenues n the securities to be issued under the Company’s management incentive plan, to the extent the average market price of the Company’s stock Revenue is measured at the fair value of the amount received or exceeded the adjusted exercise prices of such instruments; and to be received, after deduction of any trade discounts or volume rebates allowed by the Group, including customer contract advances n shares issuable in relation to outstanding convertible bonds (DPN) amortization. and Notes redeemable in shares (NRS IIC), when dilutive.
When the impact of deferred payment is significant, the fair value of the 2.35 Related parties revenue is determined by discounting all future payments. A party is related to the Group if:
(a) Sales of goods n directly or indirectly the party (i) controls, is controlled by or is under Related revenue is recognized when the entity has transferred to the common control with the Group, (ii) has an interest in the Group that buyer the significant risks and rewards of ownership of the goods, which gives it significant influence over the Group; generally occurs at the time of shipment. n the party is an associate;
n the party is a joint venture in which the Group is a venture; (b) Services agreements n the party or one of its Directors is a Member of the Board of Directors The Group signs contracts which award to the Group a customer’s or of the Executive Committee of the Group or a close Member of business within a particular territory over the specified contract period the family of any individual referred to above. (generally over 1 to 5 years). The contracts contain provisions that establish pricing terms for services and volumes to be provided and other terms and conditions. NOTE 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Revenue is recognized when the entity has transferred to the customer the major risk and rewards of ownership, which generally occurs, Technicolor’s principal accounting policies are described in note 2 above. depending on contract terms, upon duplication or delivery. Certain of Technicolor’s accounting policies require the application of judgment by management in selecting appropriate assumptions for calculating financial estimates which inherently contain some degree of (c) Royalties uncertainty. Management bases its estimates on historical experience Patent licensing agreements generally state that a specified royalty and various other assumptions that are believed to be reasonable amount is earned at the time of shipment of each product to a third- under the circumstances, the results of which form the basis for making party by a licensee. judgments about the reported carrying values of assets and liabilities and the reported amounts of revenues and expenses. Actual results may The gross royalty amount is determined on a quarterly basis and in differ from these estimates, while different assumptions or conditions accordance with the license agreement. may yield different results. Technicolor’s management believes the following to be the critical accounting policies and related judgments and estimates used in the preparation of its consolidated financial statements 2.34 Earnings per share under IFRS. Basic earnings per share are calculated by dividing income (loss) attributable to ordinary equity holders of the parent entity by the weighted-average number of shares outstanding during the period, excluding treasury shares.
Diluted earnings per share is calculated by dividing income (loss) attributable to ordinary equity holders of the parent entity by the weighted-average number of shares outstanding during the period assuming that all potentially dilutive securities were exercised and that any proceeds from such exercises were used to acquire shares of the Company’s stock at the average market price of the period or the period the securities were outstanding.
Potentially dilutive securities comprise:
n outstanding put options, if dilutive;
154 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
3.1 Going concern calculation of an impairment test in accordance with the accounting policy. The recoverable amount of an asset or group of assets may The consolidated financial statements as of December 31, 2011 were require the Group to use estimates to assess the future cash flows approved by the Board of Directors on February 23, 2012 on a going expected to arise from the asset or group of assets and a suitable concern basis. discount rate in order to calculate present value. Any negative change in relation to the operating performance or the expected future cash The legal proceedings that have been initiated relating to the Sauvegarde flows of individual assets or group of assets will change the expected Plan by the TSS holders being terminated (see note 35), any risk related to recoverable amount of these assets or groups of assets and therefore the termination of the Sauvegarde Plan, the capital markets transactions may require a write-down of their carrying amount. which implemented the Sauvegarde Plan in May 2010 and the issuance of the new shares issued in December 2010 and December 2011 for the As of December 31, 2011, the Group reviewed its triggering indicators redemption of the NRS and the DPN is eliminated. and determined that some amortizable assets and cash generating units may have lost value. Consequently, it performed impairment tests for The Board of Directors considered the Group’s cash flow projections these assets or group of assets (see notes 12 and 13). The impairment which support the operating performance with the sensitivities booked on amortizable assets in 2011 amounts to €41 million, split highlighted in note 13 and believes that the Group can meet its expected between PPE (€19 million) and intangible assets (impairment of cash requirements and address potential financial consequences of €22 million). These amounts exclude impairment loss of assets in the ongoing litigation, until at least December 31, 2012. frame of a restructuring plan that amounted to €3 million in 2011.
Having considered the above, the Board of Directors determined that Consequently, as of December 31, 2011, the net carrying amount of PPE it was appropriate for these consolidated financial statements to be and intangible assets with finite useful lives amounted to €401 million prepared on a going concern basis. and €246 million, respectively (excluding PPE and intangible assets classified as held for sale). 3.2 Tangible and intangible assets with finite useful lives 3.3 Impairment tests of goodwill The Group records intangible assets with finite useful lives (mainly and intangible assets with customer relationships, software, development projects and certain indefinite useful lives rights on i ntellectual p roperty acquired) under “Other intangible assets” The Group reviews annually goodwill and other indefinite-lived intangible and tangible assets under “Property, plant and equipment” (“PPE”). assets for impairment in accordance with the accounting policy stated Significant estimates and assumptions are required to determine (i) the in note 2 above. Such review requires management to make material expected useful lives of these assets for purposes of their depreciation judgments and estimates when performing impairment tests. and (ii) whether there is an impairment of their value requiring a write- down of their carrying amount. Estimates that are used to determine Technicolor’s management believes its policies relating to such the expected useful lives of PPE and intangible assets are defined in impairment testing are critical accounting policies involving critical the Group’s accounting policies manual and are consistently applied accounting estimates because determining the recoverable amount throughout the Group. of cash-generating units requires (1) determining the appropriate discount rate to be used to discount future expected cash flow of the For the year ended December 31, 2011, the Group recognized cash-generating unit and (2) estimating the value of the operating cash amortization expense amounting to €115 million related to PPE and flows including their terminal value, the growth rate of the revenues amortization expense of €85 million for intangible assets with finite generated by the assets tested for impairment, the operating margin useful lives (these figures exclude depreciation expense booked in the rates of underlying assets for related future periods and the royalty loss from discontinued operations). rates for trademarks. These assumptions used by the Group for the determination of the recoverable amount are described in note 13. In order to ensure that its assets are carried at no more than their recoverable amount, Technicolor evaluates at each reporting date certain indicators (see note 2.17) that would result, if applicable, in the
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Additional to the annual review for impairment, Technicolor evaluates re-occur in the near future, and/or (2) the expectation of exceptional at each reporting date certain indicators that would result, if applicable, gains or (3) future income to be derived from long-term contracts. in the calculation of an additional impairment test in accordance with The Group considered tax-planning in assessing whether deferred tax the accounting policy stated in note 2 above. assets should be recognized.
The impairment tests performed in 2011 resulted in an impairment of In 2010, given the finalization of the debt restructuring process and goodwill of €147 million (see note 8) following adverse 2011 economic better visibility of the future taxable profit in France, the totality of conditions of some of the Group’s businesses. French tax losses carried forward have been recognized. In 2011, French Tax rules were amended by limiting the use of tax loss carryforward to Management believes the updated assumptions used concerning sales only 60% of yearly taxable profit interest instead of 100% previously. As growth, terminal values and royalty rates are reasonable and in line with a consequence of this new rule and updated forecasts French deferred updated market data available for each GRU. tax assets were partially written off. The remaining deferred tax assets correspond to a usage by 2025. Consequently, as of December 31, 2011, the net book value of goodwill and trademarks amounted to €481 million (excluding goodwill classified In 2011, the deferred tax expense amounts to €57 million in the as held for sale) and €213 million, respectively, after impairment. consolidated statement of operations and €8 million in Equity. See note 10.
3.4 Valuation of businesses held for sale As of December 31, 2011, the Group recorded deferred tax liabilities Businesses held for sale should be recorded at the lower of their carrying of €167 million and €394 million of deferred tax assets reflecting amount and fair value less costs to sell. Estimating fair value less costs management’s estimates of their recoverable amount. to sell requires management to make material judgments and estimates.
Technicolor’s management believes its policies relating to such 3.6 Post employment benefits valuation are critical accounting policies involving critical accounting The Group’s determination of its pension and post-retirement benefits estimates because determining the fair value less costs to sell obligations and expense for defined benefit plans is dependent on the requires (1) determining the most probable selling price of the held use of certain assumptions used by actuaries in calculating such amounts. for sale businesses based on all available facts and circumstances and These assumptions are described in note 27 to the consolidated financial (2) estimating the outcomes of ongoing negotiations with potential statements and include, among others, the discount rate, expected long- buyers. term rate of return on plan assets and annual rate of increase in future compensation levels. Our assumptions regarding pension and post- In 2011, the Group reviewed the value of its held for sale businesses. retirement benefits obligations are based on actual historical experience This review led to an impairment of €5 million, impacting discontinued and external data. businesses (see note 11.3), reflecting management’s best estimates. The assumptions regarding the expected long-term rate of return on plan assets are determined by taking into account, for each country 3.5 Deferred tax where the Group has a plan, the distribution of investments and the Management judgment is required to determine the Group’s deferred long-term rate of return expected for each of its components. Capital tax assets and liabilities and the extent to which deferred tax assets markets experience fluctuations that cause downward or upward pressure can be recognized in accordance with the accounting policy stated in on assets value and higher volatility. As a result, short-term valuation note 2 above. When a specific subsidiary has a history of recent losses, of related plan assets fluctuates, causing a corresponding increase or future positive taxable income is assumed improbable, unless the asset decrease of the provision for pension and post-retirement obligations. recognition can be supported for reasons such as (1) the losses having While Technicolor’s management believes the assumptions used are resulted from exceptional circumstances which are not expected to appropriate, significant differences in actual experience or significant
156 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
changes in the assumptions may materially affect the Group’s pension 3.9 Impact of the Group’s debt and post-retirement benefits net obligations under such plans and related future expense. restructuring on financial result The allocation of the carrying value of the extinguished debt between As of December 31, 2011, the post-employment benefits provision the part extinguished through issuance of equity instruments and the amounted to €387 million (including €1 million provision classified part extinguished through new debt has been determined based on as held for sale). The present value of the obligation amounted to the restructuring agreement signed on July 24, 2009 with the majority €556 million, the fair value of plan assets amounted to €166 million of the Group’s creditors. In compliance with IFRIC 19 the difference and unrecognized prior service cost was €3 million. For the year ended between the carrying value of the financial debt extinguished through December 31, 2011, net pension expense was €21 million. issuance of equity instruments and the fair value of equity instruments issued has been recognized in “Other financial income (expense)” of the Group’s consolidated statement of operations under the line “Gain 3.7 Provisions and litigation on Technicolor’s debt restructuring on May 26, 2010” for an amount Technicolor’s management is required to make judgments about of €150 million. provisions and contingencies, including the probability of pending and potential future litigation outcomes that, by their nature, are In making its evaluation of the fair value of new shares, management dependent on future events that are inherently uncertain. In making considered the opening price of Technicolor’s shares on the NYSE its determinations of likely outcomes of litigation and tax matters, Euronext Paris on May 26, 2010. The evaluation of the fair value of management considers the opinion of outside counsel knowledgeable the NRS was considered to be the value of new shares except for the about each matter, as well as developments in case law. See note 35 for NRS IIC (see note 22) for which management made an estimate of the a description of the significant legal proceedings and contingencies for cash option value that reduces the fair value. the Group. In compliance with IAS 39, the restructuring of the remaining debt after partial conversion into equity instruments has been treated as a debt 3.8 Determination of royalties payable extinguishment of Technicolor’s original debt and the recognition of new financial debt. In compliance with IAS 39-43, the new financial debt In the normal course of its business, the Group may use certain has been recognized at fair value, resulting in a gain in the consolidated technology protected by patents owned by third parties. In the majority statement of operations under the line “Gain on Technicolor’s debt of cases, the amount of royalties payable to these third parties for the use restructuring on May 26, 2010” for an amount of €229 million. of this technology will be defined in a formal licensing contract. In some cases, and particularly in the early years of an emerging technology when Because Technicolor’s debt is not listed, in making the evaluation of the ownership of Intellectual Property rights may not yet be ascertained, the fair value, management considered a mix of parameters such as the management’s judgement is required to determine the probability of a listed price of debt of companies having a comparable S&P and Moody’s third party asserting its rights and the likely cost of using the technology rating and the trading of the Group’s debt in private transactions when when such assertion is probable. In making its evaluation, management available. considers past experience with comparable technology and/or with the particular technology owner. The royalties payable are presented within For further details, refer to notes 22 and 25. the captions “Other current liabilities” and “Other non-current liabilities” in the Group’s balance sheet and detailed in note 30.
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NOTE 4 SIGNIFICANT CHANGES IN THE SCOPE OF CONSOLIDATION For the years ended December 31, 2011 and 2010, Technicolor’s consolidated balance sheets and statements of operations include the accounts of all investments in subsidiaries, jointly controlled entities and associates (the main ones being listed in note 38). The following is a summary of the number of companies consolidated and accounted for under the full consolidation method, the equity method and the proportionate consolidation method.
As of December 31, 2011 2010 Europe (*) France U.S. Others Europe (*) France U.S. Others Number of companies: Parent company and consolidated subsidiaries 40 19 14 37 49 19 21 42 Companies consolidated under the 1-256225 proportionate method Companies accounted for under the equity -11--11- method Sub-total by region 41 20 17 42 55 22 24 47
TOTAL 120 148
(*) Except France.
4.1 Changes in 2011 (a) Main business acquisition
n Technicolor acquired Laser Pacific’s digital postproduction assets for $11 million (€8 million at transaction date) in September 2011.
Acquirees’ carrying amount before Fair value (in € millions) combination adjustments Fair value Net assets acquired Property, plant and equipment 10 (5) 5 Trade receivables and other assets 1 - 1
TOTAL NET ASSETS ACQUIRED 11 (5) 6 Cost of acquisition 8
TOTAL PURCHASE CONSIDERATION PAID 8 Goodwill (as of December 31, 2011) 2
The goodwill is mainly attributable to the anticipated future synergies and to the skills of the people transferred within the Group.
The contribution to the Group of the acquired business for the period from its acquisition date to the year ended December 31, 2011 is the following:
(in € millions) 2011 Contribution in revenue 5 Contribution in EBITDA adjusted 1
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(b) Main disposals n Technicolor launched its franchise licensing program with the establishment of Technicolor PostWorks New York. As part of the On April 4, 2011, Technicolor sold the Grass Valley Transmission n agreement, Technicolor sold its New York post production assets to business to Parter Capital Group. PostWorks in October 2011 with no significant impact on the Group’s n On May 3, 2011, Technicolor sold to the FCDE (Fonds de consolidated balance sheet and income statement. Consolidation et de Développement des Entreprises) the Grass n On November 2, 2011, Technicolor sold its 25.7% stake in Valley Head-end business, operating under the Thomson Video ContentGuard to Pendrell Technologies LLC for net disposal Networks brand. Technicolor is committed to certain future payments proceeds of approximately $25 million (€18 million at the transaction to FCDE that have been recorded in Technicolor 2011 consolidated date) which has been totally used to repay the Group’s financial debt financial statements. The net capital loss related to the sale of the in December 2011. The gain related to the disposal of ContentGuard Grass Valley businesses amounts to €7 million in 2011 and impacts amount to €6 million and is booked in “Other income (expense)”. the net loss from discontinued operations. n On July 18, 2011, Technicolor sold its remaining Screenvision Europe business.
Carrying amount as of the date of disposal Discontinued businesses (Grass Continuing businesses (in € millions) Valley and Screenvision Europe) (ContentGuard) Net assets disposed of Goodwill -12 Intangible assets -4 Inventories 14 - Trade receivables 35 - Tax assets -9 Other assets 28 - Bank and cash balances 52 Provisions (36) - Trade payables (36) - Other liabilities (10) (9) Deferred tax liabilities - (6)
TOTAL NET LIABILITIES/(ASSETS) DISPOSED OF - (12) Disposal consideration Cash consideration received 118
TOTAL DISPOSAL PRICE 118 Costs linked to the disposals (1) - Commitments to future payments (8) - CTA recycled in P&L 1-
GAIN/(LOSS) ON SHARE DISPOSED OF (7) 6
(c) Other transactions n On August 22, 2011, Technicolor formed a new entity jointly with Dreamworks called “MediaNaviCo” (to collaborate on a VOD platform that will be launched in 2012). Technicolor brought its MediaNavi start-up activity and Dreamworks invested a cash consideration representing a minority ownership of MediaNaviCo.
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4.2 Changes in 2010 – Main disposals – the right for Technicolor to receive additional consideration from the buyer based on the potential future remuneration of the new n On October 14, 2010, Technicolor closed a transaction under which it owners of the disposed entity. sold the majority of its 50% interest in Technicolor Cinema Advertising, LLC (“Screenvision U.S.”) to a newly formed holding company, SV Based on the book value of the assets, the Group registered a loss Holdco, LLC (“SV Holdco”), an affiliate of Shamrock Capital-Growth for this disposal in its 2010 consolidated financial statements of Fund II, a leading private equity fund focused on media, entertainment €97 million. Given the structure of the deal, Technicolor did not and communication. The sale price for the shares was $60 million receive cash proceeds from this disposal to be applied against its (€43 million at transaction date), of which $55 million (€39 million) DPN issued in May 2010. was paid in cash and $5 million (€4 million) was placed in escrow to n On January 27, 2010, Technicolor entered into an agreement with satisfy post closing indemnity claims against Technicolor, if any. As Sony Electronics Inc. for the sale of Convergent Media System part of the transaction, Technicolor also exchanged its remaining Corporation, specialized in digital signage and content distribution interest in Screenvision U.S. for a minority interest in SV Holdco systems. Convergent lies outside the scope of Technicolor’s strategic represented by Class A Common Units. Simultaneously at closing, focus on content creators. Carmike Cinemas, Inc. acquired Class C Common Units in SV Holdco representing 20% of the voting rights and 20% of profit and loss of The terms of this transaction are financially non-material to SV Holdco, in exchange for entering into a Theater Agreement with Technicolor. The impact of the disposal on the Group consolidated Screenvision U.S. Technicolor’s Class A Common Units represented financial statements is a loss of €7 million at the date of transaction an 18.8% interest in SV Holdco. (the sale price amounted to €4.6 million at the date of transaction) recognized in net loss from discontinued operations. Technicolor Under the terms of the transaction, Technicolor will no longer have applied the cash proceeds towards redemption of the DPN issued joint control of Screenvision U.S., but will retain one seat on the Board on May 26, 2010. of SV Holdco and will continue to be Screenvision U.S.’s provider of both film and digital services. Accordingly, Technicolor will have a significant influence and will account for the stake in Screenvision NOTE 5 INFORMATION BY OPERATING U.S. under the equity method. SEGMENTS AND BY In accordance with IAS 31 paragraph 45, the residual interest has GEOGRAPHIC AREAS been accounted for at fair value (€9 million) after discount for lack of The Group’s Executive Committee (considered as the Chief Operating marketability and lack of control. The net loss recognized in net loss Decision Maker in the meaning of the standard) makes its operating from discontinued operations on the disposal date was €16 million. decisions and assesses performances on the basis of three types of The portion of that result attributable to recognizing the investment activities. These are therefore the reportable operating segments under retained in the former subsidiary at its fair value when joint control IFRS 8: Technology, Entertainment Services and Digital Delivery. All was lost is €4 million. Technicolor applied the $60 million proceeds the remaining activities (including unallocated Corporate functions) are towards repayment of the DPN. grouped in a segment “Other” as a reconciling item. n On July 26, 2010 Technicolor received a binding offer from Francisco Partners for the acquisition of the Grass Valley Broadcast business. n Technology: This disposal process contributes to the strategic refocus around Technology segment is organized around the following businesses: its content creators and network service providers customer base, initiated by the Group in 2009. The transaction was closed on – Research & Innovation; December 31, 2010. – Licensing; The transaction with Francisco Partners comprised the following: – MediaNavi. – U.S.$80 million promissory note (€60 million at the transaction Research & Innovation includes the Group’s fundamental research date) issued to Technicolor with a six-year maturity and bearing activities. The Licensing business is responsible for protecting and a capitalized interest of 5% per year. The amount of the monetizing the Group’s Intellectual Property portfolio and generates note represents the value of the business minus the present value most of the Technology revenues. The MediaNavi business includes of retirement liabilities transferred; the Group’s platforms and applications aiming at simplifying and – the transfer by Technicolor of a net amount of €27 million of cash enriching the end-user experience for consuming dematerialized required for the ongoing management of the activity; premium content. MediaNavi platform services will be available on the market in 2012.
160 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
n Entertainment Services: n the caption “EBITDA adjusted” corresponds to the profit (loss) from continuing operations before tax and net finance income (expense), Entertainment Services develops and offers video-related technologies net of other income/(expense), depreciation and amortization and services for the Media & Entertainment (M&E) industry. This (including impact of provision for risks, litigation and warranties); segment offers services related to content production, preparation, creation and content distribution through both physical media and n the caption “Profit (loss) from continuing operations before tax and digital media, and is organized around the following businesses: net finance income (expense)” does not include intercompany items;
– Post Production Services and Theatrical Services: Film Services, n the captions “Amortization of customer relationships” and “Other Content preparation and creation; depreciation and amortization” only relate to continuing operations and include amortization of customer advances and upfront prepaid – DVD Services: Replication and distribution of DVD, Blu-rayTM discs discount (in “other depreciation and amortization”); and video and game CD; the caption “Other non-cash income (expenses)” includes mainly the – Digital Production; n net variation of provisions without cash impact; – PRN (Premier Retail Networks). n the caption “Other segment assets” includes advances to suppliers n Digital Delivery: and to customers and excludes cash and cash equivalents;
Digital Delivery brings together the Connected Home business n the caption “Total segment assets” includes all operating assets used and the Digital Content Delivery (DCD) business. Digital Delivery by a segment and consists principally of receivables, inventories, develops and supplies hardware and software technologies to the property, plant and equipment, intangible assets and goodwill, net of Telecom and Media & Entertainment industries. Its areas of expertise depreciation and provisions. Segment assets do not include income include access and delivery platforms, as well as content preparation tax assets and cash; and management services, enabling its customers to deliver an the caption “Unallocated assets” includes mainly financial assets, improved end-user entertainment experience. n current accounts with associates and joint ventures, income tax assets, Digital Delivery is organized around the following businesses: cash and cash equivalents and assets classified as held for sale;
– Connected Home, which encompasses Modems, Gateways, Hybrid n the caption “Unallocated liabilities” includes mainly financial and and Set-Top Box products, which are developed with third-party income tax liabilities and liabilities classified as held for sale; middleware for all types of Pay-TV providers (satellite, cable, the caption “Capital expenditures” excludes the net change in terrestrial), as well as Wireless Tablets, which are developed using n payables to suppliers of both PPE and intangible assets (amounting Technicolor’s Connected Home software suite; to €15 million and €(1) million as of December 31, 2011 and 2010, – VoIP (Voice-over-IP) & IPTV (Television-over-IP); respectively).
– Media Services, which provides services related to content n the caption “Capital employed” is defined as being the aggregate of preparation and distribution; net both tangible and intangible assets (excluding goodwill), operating working capital and other current assets and liabilities (with the – Broadcast Services, which offers broadcast play-out services, live exception of provisions including those related to employee benefits, production support, as well as media asset management services. income tax, payables on acquisition of companies and payables to This activity has been classified as held for sale as of December 31, suppliers of PPE and intangible assets); 2011 in the balance sheet of Technicolor and its results are still presented within the Digital Delivery segment in the below tables. n all the statement of operations and balance sheet items disclosed in the tables below have been measured in accordance with IFRS; The following comments are applicable to the three tables below: n no external customer represents more than 10% of the Group’s n the Technology segment generates substantially all of its revenue revenue as of December 31, 2010. As of December 31, 2011, one from royalties. Entertainment Services and Digital Delivery generate external customer within the Entertainment Services segment and their revenue from the sale of goods and services; one external customer within the Digital Delivery segment represent more than 10% of the Group’s revenue (respectively €490 and €403 million).
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5.1 Information by business segment
Digital Entertainment Consolidation Technology Delivery (1) Services Other Adjustments Total (in € millions) Year ended December 31, 2011 Statement of operations items Revenues with external customers 456 1,210 1,779 5 - 3,450 Intersegment sales 4 8 1 2 (15) - EBITDA adjusted 346 (29) 239 (81) - 475 Profit (loss) from continuing operations before tax and net 342 (282) 2 (95) - (33) finance income (expense) Out of which the main non-cash items below: Amortization of customer relationships - (15) (13) - - (28) Other depreciation and amortization (8) (47) (162) (4) - (221) Impairment losses on non-current operating assets (2) - (178) (10) - - (188) Other non-cash income (expenses) (4) (26) (56) (8) - (94) Balance sheet items Assets Operating segment assets 79 401 1,068 15 - 1,563 Goodwill - 73 408 - - 481 Other segment assets 170 84 130 17 - 401 Total segment assets 249 558 1,606 32 - 2,445 Investments in associates 4 - - 10 - 14 Unallocated assets 960
TOTAL CONSOLIDATED ASSETS 3,419 Liabilities Segment liabilities 148 452 635 472 - 1,707 Unallocated liabilities 1,557
TOTAL CONSOLIDATED LIABILITIES 3,264 (WITHOUT EQUITY) Other information Capital expenditures (8) (54) (122) (1) - (185) Capital employed 132 125 689 (39) - 907
(1) Assets and liabilities of Broadcast Services have been classified as held for sale as of December 31, 2011 and are therefore presented within the unallocated assets and liabilities. Broadcast Services’ statement of operations items are included in the Digital Delivery figures mentioned above. (2) See details in note 8.
162 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
Digital Entertainment Consolidation Technology Delivery Services Other Adjustments Total (in € millions) Year ended December 31, 2010 Statement of operations items Revenues with external customers 450 1,423 1,697 4 - 3,574 Intersegment sales 2 1 6 3 (12) - EBITDA adjusted 327 55 217 (94) - 505 Profit (loss) from continuing operations before tax and net 315 (118) (62) (97) - 38 finance income (expense) Out of which the main non-cash items below: Amortization of customer relationships - (19) (12) - - (31) Other depreciation and amortization (10) (66) (169) (5) - (250) Impairment losses on non-current operating assets (2) - (108) (103) - - (211) Other non-cash income (expenses) (6) (10) (30) - - (46) Balance sheet items Assets Operating segment assets 71 572 1,093 25 - 1,761 Goodwill 12 240 392 - - 644 Other segment assets (1) 124 95 154 38 - 411 Total segment assets 207 907 1,639 63 - 2,816 Investments in associates 2 - - 10 - 12 Unallocated assets (1) 1,106
TOTAL CONSOLIDATED ASSETS 3,934 Liabilities Segment liabilities 165 536 569 525 - 1,795 Unallocated liabilities 1,634
TOTAL CONSOLIDATED LIABILITIES 3,429 (WITHOUT EQUITY) Other information Capital expenditures (5) (49) (121) - - (175) Capital employed 110 258 756 (101) - 1,023
(1) Cash has been reclassified from “other segment assets” to “unallocated assets”. (2) See details in note 8.
TECHNICOLOR I ANNUAL REPORT 2011 I 163 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
5.2 Information about geographical areas
Rest of Rest of (in € millions) France UK Europe U.S. Americas Asia/Pacific Total December 31, 2011 Revenues with external customers (1) 828 202 496 1,288 439 197 3,450 Segment assets 446 134 177 1,297 283 108 2,445 Non-current assets (2) 182 94 44 917 130 76 1,443 December 31, 2010 Revenues with external customers (1) 994 249 368 1,328 419 216 3,574 Segment assets 684 184 184 1,361 265 138 2,816 Non-current assets (2) 320 152 90 963 124 88 1,737
(1) Net sales are classified according to the location of the entity that invoices the customer. (2) Non-current assets exclude financial instruments, deferred tax assets and assets classified as held for sale.
NOTE 6 SELLING AND ADMINISTRATIVE EXPENSES AND O THER INCOME (EXPENSE)
(in € millions) 2011 2010 Selling and marketing expenses (127) (118) General and administrative expenses (249) (279)
SELLING AND ADMINISTRATIVE EXPENSES (376) (397)
OTHER INCOME (EXPENSE) (1) 628
(1) The line “Other income (expense)” includes the main following elements: (a) For 2011: n A settlement loss of €6 million with a third party together with €3 million one-off exit costs in the context of the reorganization of our European logistic business within our Entertainment Services segment. n Gain on the sale of ContentGuard for €6 million. n Gains on disposal of various tangible and intangible assets for €3 million. (b) For 2010: n Gain on disposal of tangible and intangible assets amounting to €6 million and gain related to reversal of provisions.
NOTE 7 RESEARCH AND DEVELOPMENT EXPENSES
(in € millions) 2011 2010 Research and development expenses, gross (175) (165) Capitalized development projects 42 27 Amortization of research and development intangible assets (18) (30) Subsidies (1) 23 20
RESEARCH AND DEVELOPMENT EXPENSES, NET (128) (148)
(1) Include mainly research tax credit granted by the French State.
164 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
NOTE 8 IMPAIRMENT LOSSES ON NON-CURRENT OPERATING ASSETS
Digital Entertainment (in € millions) Technology Delivery Services Other Total 2011 Impairment losses on g oodwill (1) - (147) - - (147) Impairment losses on intangible assets (1) - (22) - - (22) Impairment losses on tangible assets (2) - (9) (10) - (19)
IMPAIRMENT LOSSES ON NON-CURRENT OPERATING - (178) (10) - (188) ASSETS (3) (4) 2010 Impairment losses on g oodwill (1) - (103) (58) - (161) Impairment losses on customer relationships (1) - - (15) - (15) Impairment losses on tangible assets (2) - (5) (30) - (35)
IMPAIRMENT LOSSES ON NON-CURRENT OPERATING - (108) (103) - (211) ASSETS Reversal of impairment losses on customer relationships - - 25 - 25 Reversal of impairment losses on contracts and up-front prepaid discount - - 3 - 3 NET IMPAIRMENT LOSSES ON NON-CURRENT OPERATING - (108) (75) - (183) ASSETS (3) (4)
(1) For details, see note 13 “Goodwill and intangible assets”. (2) For details, see note 12 “Property, plant and equipment”. (3) Additional €3 million and €1 million on tangible assets have been written-off respectively in 2011 and 2010 in the frame of a restructuring plan, apart from impairment process. Total impairment of assets amounts therefore to €191 million and €184 million in 2011 and 2010, respectively. (4) Additional €5 million and €17 million impairment was booked on current assets in the discontinued perimeter in 2011 and 2010, respectively.
TECHNICOLOR I ANNUAL REPORT 2011 I 165 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
NOTE 9 NET FINANCE INCOME (EXPENSE)
(in € millions) 2011 2010 Interest income 56 Interest expense (154) (145) Interest expense, net (1) (149) (139) Gain on the debt restructuring through issuance of equity instruments (2) - 150 Gain on the new debt at fair value (3) - 229 Gain on disposal proceeds notes – DPN -2 Gain on Technicolor’s debt extinguishment on May 26, 2010 - 381 Financial component of pension plan expense (15) (16) Exchange profit (loss) (4) (1) (55) Change in fair value on financial instrument (loss) (5) (7) (7) Other (6) (15) (48) Other financial (expense) income, net (38) (126)
TOTAL NET FINANCE INCOME (EXPENSE) (187) 116
(1) The debt extinguishment in 2010 did not result in any fees that adjusted the carrying value of the Reinstated Debt. Interest expense has been computed using the effective interest rate on the new Reinstated Debt from May 26, 2010. In 2010, until the debt restructuring on May 26, 2010 interest expense was at an average effective rate of 2.30% and from May 26, 2010 until December 31, 2010 at 11.17%. In 2011 the average effective rate was 11.78% (see note 26.2 for more details). Interest expense includes € 30 million (€18 million in 2010) due to the difference between the effective interest rate and the nominal rate of the debt. (2) In accordance with IFRIC 19 (see notes 3.9 and 22), the difference between the carrying value of the debt converted into equity and the fair value of the equity instruments issued corresponds to a non cash financial gain of €150 million recognized in the consolidated statements of operations. (3) In accordance with IAS 39-43 (see notes 3.9 and 25), the Reinstated Debt was recognized initially at its fair value and the difference (a non cash financial gain of €229 million) recognized in the consolidated statements of operations. (4) In 2010, the exchange rate result was negatively impacted for €54 million by the ineffectiveness of a U.S. dollar borrowing that was originally put in place to hedge a net investment in a U.S. subsidiary. Given the decrease of the net investment the hedge was no longer effective and therefore, the revaluation of the borrowing was booked in financial result. (5) In 2011 and 2010, related mainly to a loss from revaluation of interest rate caps. (6) In 2010, includes €32 million of fees linked to the debt restructuring not recognized in Equity (refer to details in the consolidated statements of changes in equity and note 22) and the 2% late payment interest payable pursuant to the Sauvegarde Plan. In 2011, other expenses are mainly explained by a depreciation of a financial asset.
NOTE 10 INCOME TAX Income tax expense is summarized below:
(in € millions) 2011 2010 Current income tax France (12) (10) Foreign (14) (20) Total current income tax (26) (30) Deferred income tax France (55) 19 Foreign (2) 13
Total deferred income tax (57) 32
TOTAL INCOME TAX PROFIT (EXPENSE) ON CONTINUING OPERATIONS (83) 2
In 2011, the Group total income tax expense on continuing operations, including both current and deferred taxes, amounted to €83 million compared to a gain of €2 million in 2010.
The current tax charge in 2011 was notably the result of current taxes due in France, Thailand, Australia, Mexico and Italy, as well as withholding taxes on income earned by our licensing activities, which were only partially credited against taxes payable in France and in the United States, and
166 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
were booked as an income tax charge. The current income tax charge In 2011, French tax rules were amended whereby the use of tax loss amounted to €12 million in France (reflecting mainly withholding taxes carry-forward is now limited to only 60% of yearly taxable profit instead and “CVAE”) and €14 million outside France. of 100% previously.
The current tax charge in 2010 was notably the result of current taxes due As a consequence of this new rule and updated forecasts within the in France, Brazil, Australia, Mexico and Italy (where tax losses expired French tax group, French deferred tax assets have been partially at the end of 2009) as well as withholding taxes on income earned impaired. The French deferred tax decreased by €63 million compared by our licensing activities, which were only partially credited against to the deferred tax assets recognized as at December 31, 2010 (of which taxes payable in France and in the United States, and were booked as €55 million in the consolidated statement of operations and €8 million an income tax charge. The current income tax charge amounted to in Equity). The remaining deferred tax assets correspond to a usage by €10 million in France (reflecting mainly withholding taxes and “CVAE”) 2025, which represents the estimated Licensing activity’s predictable and €20 million outside France. taxable income period based on existing licensing programmes.
In 2010, the remaining unrecognized French tax losses carried forward As per the Group’s current interpretation of the U.S. Tax rules, were capitalized as deferred tax assets totalling €265 million (a namely Section Code 382, the May 26, 2010 share capital increase of €47 million increase compared to the deferred tax assets recognized as at Technicolor SA and NRS issuance under the Sauvegarde Plan leads to an December 31, 2009, of which €19 million in the consolidated statement “ownership change” of the U.S. Group of subsidiaries. Such “ownership of operations and €28 million in Equity), reflecting the improved change” severely restricts the use of tax losses carried forward of the U.S. visibility following the finalization of the Group debt restructuring. subsidiaries. The Group is lobbying against such a severe application The full capitalisation of these tax losses over an extended timeframe of the Section 382. is supported by sustained high levels of taxable income generated by the Licensing activity in France in the past, which are expected to be Due to this restriction on our U.S. tax losses, in the 2010 consolidated recurring for the coming years given the strength of the Group’s existing financial statements, the Group wrote off the gross deferred tax assets patent portfolio and licensing programmes known to date. from €890 million down to €268 million, but without P&L impact as those gross deferred tax assets had been depreciated up to the level of In 2010, Technicolor recorded a net deferred tax profit of €32 million the deferred tax liabilities. due to the additional recognition of tax losses in France (see above) and outside France.
TECHNICOLOR I ANNUAL REPORT 2011 I 167 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
10.1 Analysis of the difference between the theoretical and effective income tax expense The following table shows reconciliation from the theoretical income tax expense – using the French corporate tax rate of 36.1% and 34.43% as at December 31, 2011 and 2010, respectively– to the reported tax expense. The reconciling items are described below:
(in € millions) 2011 2010 Consolidated net income / (loss) (324) (69) Discontinued operations (21) (225) Income tax (83) 2 Share of profit (loss) from associates (1) -
Pre-tax accounting income on continuing operations (219) 154 Theoretical income tax using the statutory rate 79 (53) Change in unrecognized deferred tax assets (1) (147) (16) Tax credits -2 Effect of difference in tax rates (2) (1) 15 Permanent differences (3) (6) 54 Withholding taxes not recovered (4) (2) (3) Other, net (5) (6) 3 Effective income tax on continuing operations (83) 2 Pre-tax accounting income on continuing operations (219) 154 Effective tax rate N/A N/A
(1) In 2011, net change in unrecognized deferred tax assets relates mainly to the partial deferred tax assets impairment in France for €69 million and unrecognized deferred tax assets in the U.S for €70 million. In 2010, net change in unrecognized deferred tax assets relates mainly to the recognition of previous years’ tax losses not yet recognised in France for €38 million and to tax losses fully depreciated in the U.S. for €49 million. (2) In 2011 and in 2010, this amount comprises €4 million related to the licensing revenue taxed at reduced rate in France. (3) In 2011, this amount comprises €(52) million related to impairment of non-current assets and €24 million related to assets disposals. In 2010, this amount comprises €41 million related to debt restructuring, €(54) million related to impairment of non-current assets and €67 million related to Grass Valley disposal. (4) Withholding tax not recovered related to withholding tax paid on licensing revenues but not refunded through current income tax in France and in the U.S. (5) In 2011 and in 2010, this amount comprises respectively €6 million and €5 million related to “CVAE” of French entities.
10.2 Analysis of variations of deferred tax assets and liabilities
(in € millions) Deferred tax assets Deferred tax liabilities Total, net deferred tax assets At January 1, 2010 426 (198) 228 Changes impacting 2010 continuing result 44 (12) 32 Changes impacting 2010 Shareholder ‘s equity 28 - 28 Other movement (*) (10) 17 7 Year ended December 31, 2010 488 (193) 295 Changes impacting 2011 continuing result (73) 16 (57) Changes impacting 2011 Shareholder ‘s equity (8) - (8) Other movement (*) (13) 10 (3)
YEAR ENDED DECEMBER 31, 2011 394 (167) 227
(*) In 2011 this caption corresponds mainly to the disposal of ContentGuard (€3 million net). In 2010, it corresponds mainly to currency translation adjustments (€1 million) and to the disposal of Screenvision US (€8 million).
168 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
10.3 Analysis of tax position by major temporary differences and unused tax losses and credits
(in € millions) 2011 2010 Tax effect of tax losses carried forwards 1,344 1,222 Tax effect of temporary differences related to: Property, plant and equipment 23 49 Goodwill 34 Intangible assets (81) (109) Investments and other non-current assets (28) (18) Inventories 413 Receivables and other current assets 58 Borrowings 79 73 Retirement benefit obligations 66 60 Restructuring provisions 23 20 Other provisions 41 50 Other liabilities current and non current 61 54
Total deferred tax on temporary differences 196 204 Deferred tax assets / (liabilities) before netting 1,540 1,426 Valuation allowances on deferred tax assets (1,313) (1,131)
NET DEFERRED TAX ASSETS / (LIABILITIES) 227 295
10.4 Expiration of the tax losses carried forward
(in € millions)
2012 11 2013 13 2014 7 2015 2 2016 6 2017 and thereafter 4,008
TOTAL 4,047
NOTE 11 DISCONTINUED OPERATIONS n Screenvision US: On October 14, 2010, Technicolor sold the majority of its 50% interest in Technicolor Cinema Advertising, LLC (“Screenvision US”) to a newly formed holding company, SV Holdco, 11.1 Scope of the discontinued operations LLC (“SV Holdco”), an affiliate of Shamrock Capital Growth Fund II For the year 2011, there has been no change in discontinued perimeter (see note 4 for more details); compared to 2010. n Screenvision Europe which was sold on July 18, 2011.
Operations within the discontinued perimeter in 2011 and 2010 are n Grass Valley businesses: On December 31, 2010 Technicolor sold its mainly: Grass Valley Broadcast business to Francisco Partners. On April 4, 2011 Technicolor sold the Grass Valley Transmission business to n Convergent: On January 27, 2010, Technicolor entered into an Parter Capital Group. On May 3, 2011 Technicolor sold to the FCDE agreement with Sony Electronics Inc. for the sale of Convergent (Fonds de Consolidation et de Développement des Entreprises) the Corporation, specialized in digital signal and content distribution Grass Valley Head-end business, operating under the Thomson Video systems; Networks brand.
TECHNICOLOR I ANNUAL REPORT 2011 I 169 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
11.2 Results of discontinued operations As of December 31, 2011 and 2010, the results of these discontinued operations are as follows:
(in € millions) Year ended December 31, 2011 Results related to Results related to the Grass Valley other discontinued businesses businesses Total Revenues 27 5 32 Cost of sales (18) (5) (23) Gross Margin 9-9 Expenses other than impairment of assets (1) (21) (1) (22) Profit (loss) from operations before tax and finance income (expense) and before impairment (12) (1) (13) Net interest expense -11 Other financial expense (2) (2) (4) Income tax --- Profit (loss) for the year from discontinued operations before impairment (14) (2) (16) Loss on impairment of businesses held for sale (2) (5)
PROFIT (LOSS) FOR THE YEAR FROM DISCONTINUED OPERATIONS (21)
(in € millions) Year ended December 31, 2010 Results related to activities Results related to Results related to discontinued in the Grass Valley the Media Network 2008 (*) businesses (MN) businesses Total Revenues - 426 68 494 Cost of sales 3 (284) (46) (327) Gross Margin 3 142 22 167 Expenses other than impairment of assets (1) (5) (319) (42) (366) Profit (loss) from operations before tax and finance income (2) (177) (20) (199) (expense) and before impairment Net interest expense - - - - Other financial expense (1) (3) - (4) Income tax (1) (2) (2) (5) Profit (loss) for the year from discontinued operations before (4) (182) (22) (208) impairment Loss on impairment of businesses held for sale (2) (17)
PROFIT (LOSS) FOR THE YEAR FROM DISCONTINUED (225) OPERATIONS
(*) Corresponds mainly to the AVA business (1) In 2011, includes net capital losses on the disposal of Grass Valley activities for €7 million. In 2010, includes restructuring costs for €53 million, a net curtailment gain on pension plans for €4 million and net capital losses on the disposal of Convergent, Screenvision US and Grass Valley Broadcast activities for €120 million. (2) Corresponds to an impairment loss to adjust the held for sale businesses at their fair value less costs to sell. See note 11.3 below.
11.3 Losses on impairment of held for sale Based on the latest information available to the Group regarding the potential selling prices of the held for sale businesses and on the non- businesses current assets carrying values of such businesses, the Group recognized IFRS 5.15 requires that a disposal group classified as held for sale be in 2011 an impairment loss of €5 million for the held for sale businesses measured at the lower of its carrying amount and fair value less costs classified as discontinued. This impairment loss amounted to €17 million to sell. as of December 31, 2010 for the discontinued held for sale businesses.
170 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
11.4 Net cash used in discontinued operations
(in € millions) 2011 2010 Loss from discontinued operations (21) (225) Summary adjustments to reconcile loss from discontinued operations to cash used in discontinued operations Depreciation and Amortization 11 Impairment of assets 517 Net changes in provisions (22) 17 Loss on asset sales (1) 7 120 Other non cash items (including tax) -3 Changes in working capital and other assets and liabilities 10 11 Cash used in discontinued operations (20) (56) Net interest received 11
NET OPERATING CASH USED IN DISCONTINUED OPERATIONS (I) (19) (55) Net cash impact from sale of investments (32) 3 Cash collateral and security deposits granted to third parties - (13) Cash collateral and security deposits reimbursed by third parties 12 5
NET INVESTING CASH USED IN DISCONTINUED OPERATIONS (II) (20) (5) Repayments of borrowings - (2)
NET FINANCING CASH USED IN DISCONTINUED OPERATIONS (III) - (2)
NET DECREASE IN CASH AND CASH EQUIVALENTS (I+II+III) (39) (62)
(1) In 2011, corresponds to the capital loss of the remaining Grass Valley activities for €7 million. In 2010, corresponds to the capital loss on the disposal of Convergent for €7 million, Screenvision US for €16 million and Grass Valley Broadcast activities for €97 million.
TECHNICOLOR I ANNUAL REPORT 2011 I 171 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
11.5 Assets and liabilities held for sale As of December 31, 2010, two businesses were classified as held for sale: Grass Valley (Transmission and Head-end) and Screenvision Europe. These businesses have been sold during 2011.
As of December 31, 2011, Broadcast Services is the only business classified as held for sale.
The major classes of assets and liabilities comprising the businesses classified as held for sale are as follows:
(in € millions) December 31, 2011 December 31, 2010 Goodwill and intangible assets 20 - Intangible assets 3- Property, plant and equipment 21 - Other assets 725 Inventories -23 Accounts receivable and other receivables 15 42
TOTAL - ASSETS CLASSIFIED AS HELD FOR SALE 66 90 Provisions 429 Retirement benefit obligations 18 Accounts payable and other liabilities 47 66
TOTAL - LIABILITIES DIRECTLY ASSOCIATED WITH ASSETS CLASSIFIED AS HELD FOR SALE 52 103
172 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
NOTE 12 PROPERTY, PLANT AND EQUIPMENT
(in € millions) Land Buildings Machinery & Equipment Other Tangible Assets (1) Total At January 1, 2010 Cost 8 84 1,045 201 1,338 Accumulated depreciation - (31) (769) (107) (907)
CLOSING NET AMOUNT 8 53 276 94 431 2010 Opening net amount 8 53 276 94 431 Exchange differences - 1 18 6 25 Additions - 1 42 96 139 Acquisition of subsidiaries - - - - - Disposals (2) - (2) (1) (5) Depreciation charge - (3) (110) (16) (129) Impairment loss (2) - (14) (17) (5) (36) Reclassification out of held for sale (3) -- 17-17 Other (4) 2 (1) 42 (55) (12) Closing net amount 8 37 266 119 430 At December 31, 2010 Cost 8 86 1,187 235 1,516 Accumulated depreciation - (49) (921) (116) (1,086)
CLOSING NET AMOUNT 8 37 266 119 430 2011 Opening net amount 8 37 266 119 430 Exchange differences - - 4 4 8 Additions - 3 62 61 126 Acquisition of subsidiaries (5) -- - 55 Disposals (1) - (3) (1) (5) Depreciation charge - (3) (97) (15) (115) Impairment loss (2) - (3) (17) (2) (22) C lassification as held for sale (3) - - (18) (3) (21) Other (4) - - 30 (35) (5) Closing net amount 7 34 227 133 401 At December 31, 2011 Cost 7 73 931 255 1,266 Accumulated depreciation - (39) (704) (122) (865)
CLOSING NET AMOUNT 7 34 227 133 401
(1) Includes tangible assets in progress. (2) In 2011, corresponds to: n an impairment on Entertainment Services assets for €10 million, mainly related to the end of the photochemical film printing operations in Mirabel (Canada) (€4 million) and to the reorganization of our European logistic business (€2 million); n an impairment on Digital Delivery assets for €9 million, mainly related to Digital Content Delivery Services activity in the UK. It also includes a depreciation of PPE for €3 million in the frame of a restructuring plan that is not included in the impairment losses on non-current operating assets disclosed in note 8. In 2010, corresponds to: n an impairment on Entertainment Services assets, mainly related to the Theatrical Services activity; n an impairment on Digital Delivery assets, mainly related to Digital Content Delivery Services activity. It also includes a depreciation of PPE for €1 million in the frame of a restructuring plan that is not included in the impairment losses on non-current operating assets disclosed in note 8. (3) Refer to note 11 above for details. In 2011, Broadcast Services business has been classified as held for sale. In 2010, PRN was reclassified into continuing operations. (4) Corresponds mainly to the transfer of tangible assets in progress to machinery and equipment. (5) Related to the acquisition of Laser Pacific’s digital post production business.
TECHNICOLOR I ANNUAL REPORT 2011 I 173 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
NOTE 13 GOODWILL AND OTHER INTANGIBLE ASSETS
Patents and (in € millions) trademarks Customer relationships Other intangibles (1) Total intangible assets Goodwill At January 1, 2010 Cost 469 378 272 1,119 Accumulated amortization and impairment (199) (254) (210) (663)
CLOSING NET AMOUNT 270 124 62 456 746 2010 Opening net amount 270 124 62 456 746 Exchange differences 16 13 2 31 44 Additions (2) 58 - 34 92 1 Disposal - - (1) (1) - Amortization charge (28) (31) (40) (99) - Impairment loss (3) - (15) - (15) (161) Reversal of impairment loss (3) -25- 25- Reclassification out of held for sale(4) 4 15 5 24 14 Other - (2) 1 (1) - Closing net amount 320 129 63 512 644 At December 31, 2010 Cost 558 494 314 1,366 Accumulated amortization and impairment (238) (365) (251) (854)
CLOSING NET AMOUNT 320 129 63 512 644 2011 Opening net amount 320 129 63 512 644 Exchange differences 6 2 3 11 12 Additions - - 49 49 2 Acquisition of subsidiary - - - - 2 Disposal - - (1) (1) - Disposal of subsidiary (5) (4) - - (4) (12) Amortization charge (29) (28) (28) (85) - Impairment loss (3) - (3) (19) (22) (147) C lassification as held for sale (4) - (1) (2) (3) (20) Other - - 2 2 - Closing net amount 293 99 67 459 481 At December 31, 2011 Cost 608 485 279 1,372 Accumulated amortization and impairment (315) (386) (212) (913)
CLOSING NET AMOUNT 293 99 67 459 481
(1) Includes capitalized development projects, acquired or internally developed software and acquired technologies on a stand-alone basis or as part of a business combination. (2) In 2010, the addition on patents and trademarks for €58 million relates mainly to intellectual property rights granted to Entertainment Services. (3) Impairment loss regarding trademarks and customer relationships are detailed below in note 13.1 and note 13.2, respectively. The impairment on goodwill is detailed in note 13.3. (4) In 2011, Broadcast Services business has been classified as held for sale. In 2010, PRN has been reclassified into continuing operations. (5) Relates to the disposal of ContentGuard.
174 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
13.1 Trademarks trademarks are tested on a stand-alone basis by calculating their fair value. The value of Technicolor® trademark has been assessed based on As of December 31, 2011, trademarks total €213 million and consist a royalty relief method. Under this approach, the value of the trademark mainly of Technicolor®, RCA®, THOMSON®, PRN® and MPC®. is estimated as the present value of the after-tax royalties that the Group avoids to pay to a third-party. This method is commonly used to estimate Trademarks are considered to have indefinite useful lives. Consequently, the fair value of trademarks. The values of the other trademarks have they are tested annually for impairment. For the purpose of this test, been assessed based on the value in use.
Technicolor® RCA® Total Method used to determine the recoverable amount Royalty relief method Discounted cash flows Budget and cash flow projections, Description of key assumptions trademark royalty rate Budget and cash flow projections Period for projected future cash flows 5 years 5 years Growth rate used to extrapolate cash flow projections beyond projection period 0% 2.5% Post-tax discount rate applied as of December 31, 2011 8.2% 8% Net amount of trademarks 174 29 203 Other trademarks 10
TOTAL NET AMOUNT OF TRADEMARKS 213
TECHNICOLOR I ANNUAL REPORT 2011 I 175 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
13.2 Customer relationships As of December 31, 2010, some of the customer relationships of Entertainment Services have been tested for impairment due to the Customer relationships are amortizable assets. Consequently, they are existence of the triggering events mentioned in the table below. Their tested for impairment only if management identifies triggering events recoverable values have been assessed using an excess profit method. that may result in a loss of value of such assets. In the excess profit method, the value of an intangible asset is estimated at the present value of the excess profits that the intangible asset is As of December 31, 2011, management didn’t identify any triggering expected to generate in the future. The excess profits are estimated by event that may result in a loss of value of such assets. deducting from the post-tax operating profit of the activity as a whole a fair return on other assets used to generate this profit.
Technicolor HES / PDSC / Duplitek / Other
2011 triggering events n None
2010 triggering events n Negotiations of contract renewal in the second semester of 2010 with a major customer that led to lower than expected operating margins on the contract and therefore to an impairment of M€ 15. n Performance in the second semester of 2010 confirming higher than previously expected operating margins with a customer that contributed to the partial reversal of 2008 and 2009 impairments for M€ 25. Method used to determine the recoverable amount Excess Profit Method Description of key assumptions Budget and cash flow projections, renewal probability of contracts, margin rate per client Period for projected future cash flows Expected remaining life Rate used to extrapolate cash flow projections Specific attrition rate Post-tax discount rate applied as of December 31, 2010 8.5% Net amount of customer relationships 79 before impairment Impairment loss for the period (15) Reversal of impairment for the period 25 Net amount of customer relationships tested as of December 31, 2010 89 Other customer relationships not tested for impairment 40
TOTAL CUSTOMER RELATIONSHIPS AS OF DECEMBER 31, 2010 129
13.3 Goodwill n in the Digital Delivery segment, two GRU are considered: Connect and Media Services, (Media Services and Broadcast Services business Impairment tests of g oodwill are carried out based on groups of Cash- were previously tested globally within the GRU named Digital Generating Units (hereafter called “Goodwill reporting units” (GRU)): Content Delivery Services). Following classification of Broadcast Services business as held for sale, Media Services business is tested n in the Entertainment Services segment, 4 GRU are considered: DVD on a stand-alone basis. The goodwill previously allocated to the GRU Services, Post Production Services and Theatrical Services, Digital Digital Content Delivery Services has been split between Media Production and PRN; Services and Broadcast Services based on their respective fair value;
n the Technology segment is considered as a single GRU.
176 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
The following table provides the allocation of the significant amounts of goodwill and trademarks to each significant goodwil l reporting unit based on the organisation effective as of December 31, 2011.
Held for sale (in € millions) Entertainment Services Digital Delivery Technology business Total DVD Post Digital PRN Media Connect Broadcast Services Production Production Services Services and Theatrical Services As of December 31, 2011 Goodwill before impairment of 358 5 29 16 41 179 - 20 648 the period Impairment of the period - - - - (18) (129) - - (147) Reclassification as held for sale ------(20) (20)
NET AMOUNT 358 5 29 16 23 50 - - 481 OF G OODWILL Technicolor trademark 174 - 174 Net amount of trademark other --24 -- 33-39 than Technicolor (1)
Held for sale (in € millions) Entertainment Services Digital Delivery Technology businesses Total DVD Post Digital PRN Digital Connect Grass Media Services Production Production Content Valley Networks and Delivery Theatrical Services Services As of December 31, 2010 Goodwill before impairment of 348 58 29 15 109 234 12 - - 805 the period Impairment of the period - (58) - - (49) (54) - - - (161)
NET AMOUNT 348 - 29 15 60 180 12 - - 644 OF G OODWILL Technicolor trademark 169 - - - 169 Net amount of trademark other - - 2 4 - - 33 - - 39 than Technicolor (1)
(1) Includes: n Moving Picture Company® (MPC) trademark included in the Digital Production Goodwill reporting unit; n PRN® trademark included in the PRN Goodwill reporting unit; n THOMSON® trademark and the license to use the RCA® trademark in the Technology Goodwill reporting unit.
TECHNICOLOR I ANNUAL REPORT 2011 I 177 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
In order to perform the annual impairment test, the Group used the following assumptions to determine the recoverable amount of the main Goodwill reporting units:
Entertainment Services Digital Delivery Post Production and Theatrical Digital DVD Services Services Production PRN Media Services Connect Basis used to determine Fair Value (1) the recoverable amount Description of key assumptions Budget and cash flow projections Period for projected future cash flows (*)(*) 5 years 5 years 5 years 5 years Growth rate used to extrapolate cash flow projections beyond projection period ( ) ( ) n As of December 31, 2011 * * 2% 2% 2% 2% ( ) ( ) n As of December 31, 2010 * * 2% 2% 2% 2% Post-tax discount rate applied (2) n As of December 31, 2011 8% 8.5% 8.5% 9% 9% 11%
n As of December 31, 2010 8.5% 9% 9% 9% 9.5% 11%
(1) In the absence of a binding sale agreement at closing date, of an active market and of comparable recent transactions for any of our Goodwill reporting units, we used discounted cash flow projections to estimate fair value less costs to sell. Technicolor management considers that fair value less costs to sell is the most appropriate method to estimate the value of its businesses as it takes into account the future restructuring the Group will need to make to adapt to a quickly changing technological environment. Such restructuring would be taken into account by any market participant given the economic environment of the businesses the Group evolves in. (2) The corresponding pre-tax discount rates are within a range from 12% to 16.9%. (*) Certain activities within the DVD Services, the Post Production Services and Theatrical Services are considered to have a finite life, determined on the expected timing for the obsolescence of the underlying technology of these activities. Accordingly, no terminal value has been applied for these activities. A growth rate of respectively 3% and 2% has been applied to the remaining activities within DVD Services and Post Production Services.
The Group recorded as of December 31, 2011 an impairment charge of n For DVD Services, a 0.6% basis point increase in the post-tax discount €147 million on goodwill. This impairment was triggered by the following rate assumption would bring the recoverable value in line with the factors: book value; likewise, a 5% fall in cash flow would bring the recoverable value in line with the book value; n in Media Services it is essentially the accounting consequence of the For Post Production and Theatrical Services, no reasonably expected split of the DCD GRU into two separate business units; n change in assumptions would result in any impairment; n in Connect, it reflects a worsening European economic environment, For Digital Production, no reasonably expected change in assumptions the late rollout of certain new contracts and an increase in development n would result in any impairment; costs. For PRN, no reasonably expected change in assumptions would result The Group recorded as of December 31, 2010 an impairment charge of n in any impairment; €161 million on g oodwill. This impairment was triggered by the following factors: n For Media Services, as the fair value equals the book value as of December 31, 2011, any negative change in the main assumptions n in Entertainment Services essentially it results from the decision would bring the recoverable value below the book value. A 0.5% taken in the second semester of 2010 by the Group to scale down its increase in the post-tax discount rate assumption would generate photochemical film replication capacities; an impairment of €3 million. A 1% decrease of gross margin would decrease the recoverable value by €9 million; n in Digital Delivery, it reflects the impact on profitability of the Group’s commercial difficulties in relation with its financial restructuring. n For Connect, as the fair value equals the book value as of December 31, 2011, any negative change in the main assumptions Sensitivity of recoverable amounts would bring the recoverable value below the book value. A 0.5% At December 31, 2011, among the main Goodwill reporting units listed increase in the post-tax discount rate assumption would generate above: an impairment of €10 million. A decrease of 5% in revenue would generate an impairment of €47 million.
178 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
NOTE 14 INVESTMENTS IN ASSOCIATES
(in € millions) 2011 2010 Beginning of the year 12 7 Acquisition (1) -9 Share of (loss) / profit before impairment on associates - - Disposal - (4) Other equity movements 2-
END OF THE YEAR 14 12
(1) In October 2010, as part of the transaction in which Technicolor sold a major part of its 50% interest in Technicolor Cinema Advertising, LLC (“Screenvision US”), Technicolor also exchanged its remaining interest in Screenvision US for a minority interest in SV Holdco, LLC representing 18.8% of the equity in SV Holdco, LLC. See note 4.2.
Details of investments in associates are summarized below:
Group’s share of associates’ Group’s share of associates’ % Interest net assets profit (loss) (in € millions) 2011 2011 2010 2011 2010 SV Holdco, LLC 18.8% 10 9 - NA Techfund Capital Europe (France) 20% 4 3 - - Others N/A - N/A - -
TOTAL 14 12 --
NOTE 15 INTEREST IN JOINT VENTURES As Screenvision Europe and ContentGuard have been sold in the course of 2011 the Group doesn’t hold any longer significant interest in joint ventures.
The joint ventures’ contribution to the Group’s consolidated balance sheet and statement of operations items is summarized below:
(in € millions) 2011 2010 Balance Sheet Total current assets 738 Total non-current assets 332 Total current liabilities 734 Total non-current liabilities -6 Statement of operations Revenues 12 17 Expenses (21) (23)
CONTRIBUTION TO THE GROUP’S INCOME FOR THE PERIOD (1) (9) (6)
(1) In 2011 and 2010, includes the net loss from joint ventures classified in discontinued operations for €6 million and €3 million, respectively
TECHNICOLOR I ANNUAL REPORT 2011 I 179 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
NOTE 16 INVESTMENTS AND AVAILABLE-FOR-SALE FINANCIAL ASSETS
(in € millions) Listed securities Unlisted securities (1) Total January 1, 2010 (2) 36 6 42 Disposals (3) (18) (1) (19) Fair value adjustment (4) (18) - (18) Depreciation recorded through income - (2) (2) Currency translation adjustment - 1 1 December 31, 2010 -44 Acquisitions -33
DECEMBER 31, 2011 - 7 7
(1) This caption includes minority positions in unquoted companies strategic to the Group. (2) As of January 1, 2010, investments consist mainly of Videocon securities for €36 million. (3) In 2010, total cash received from disposals amounts to €40 million and mainly relates to the sale of Videocon shares. (4) This caption includes fair value adjustments mainly on Videocon securities recorded directly in other comprehensive income (OCI) in equity for €(18) million in 2010.
NOTE 17 CONTRACT ADVANCES AND UP-FRONT PREPAID DISCOUNT
(in € millions) 2011 2010 Entertainment Services
NET AMOUNT OF CONTRACT ADVANCES AND UP-FRONT PREPAID DISCOUNT 49 73 Of which amortization booked during the year (49) (53) Of which impairment booked during the year (1) -3
(1) In 2010, reversal of impairment of €3 million.
NOTE 18 INVENTORIES
(in € millions) 2011 2010 Raw materials 57 66 Work in progress 15 14 Finished goods and purchased goods for resale 59 86 Gross value 131 166 Less: valuation allowance (13) (13)
TOTAL (1) 118 153
(1) As of December 31, 2011, inventories balances were lower compared to December 31, 2010 due mainly to the lower level of activity of Connect business.
180 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
NOTE 19 TRADE ACCOUNTS AND NOTES RECEIVABLE
(in € millions) 2011 2010 Trade accounts and notes receivable 622 700 Less: valuation allowance (37) (34)
TOTAL (1) 585 666
(1) Including €46 million which are past due as of December 31, 2011 (€59 million as of December 31, 2010) for which no valuation allowance was recorded as the amount is still considered recoverable.
The credit risk exposure on the Group’s trade receivables corresponds to the net book value of these assets (€585 million as of December 31, 2011 compared to €666 million as of December 31, 2010).
NOTE 20 OTHER CURRENT AND NON-CURRENT ASSETS
(in € millions) 2011 2010 Other non-current assets 67 63 Other current assets (1) 325 318
TOTAL OTHER ASSETS 392 381
(1) See details below: 2011 2010 Value added tax receivable (*) 35 55 Research tax credit and subsidies 33 21 Prepaid expenses 42 34 Other current assets (**) 215 208 Total Other current assets 325 318
(*) The value added tax receivable corresponds to the consolidated value added tax position generated in the normal course of the Technicolor group’s business. (**) As of December 31, 2011 and 2010 other current assets include €128 million and €105 million of accrued royalty income, respectively.
NOTE 21 CASH, CASH EQUIVALENTS, CASH COLLATERAL AND SECURITY DEPOSITS
(in € millions) 2011 2010 Cash 210 117 Cash equivalents 160 215
TOTAL 370 332 Of which restricted cash (1) 45 45
CASH COLLATERAL AND SECURITY DEPOSITS (2) 49 74
(1) Cash held in TCE Television Taiwan with restricted use except to pay local expenses. (2) Cash to secure credit facilities and other obligations of the Group, out of which the current portion amounts to €35 million as of December 31, 2011. Some cash collaterals for U.S. entities are classified as current because of their short maturity but are renewed automatically for periods of 12 months.
The average interest rate on short-term bank deposits was 1.58% in 2011 (2010: 1.41%); these deposits generally have a maturity of less than 1 month.
TECHNICOLOR I ANNUAL REPORT 2011 I 181 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
NOTE 22 SHAREHOLDERS’ EQUITY
22.1 Reverse share split On July 15, 2010, a 10:1 reverse share split was executed (one new share with a nominal value of €1 for 10 existing shares with a nominal value of €0.10).
22.2 Common stock, additional paid-in capital and notes redeemable in shares (NRS) Share capital The change to the shares and the share capital since January 1, 2010 is as follows:
(in euros, except number of shares) Number of shares Par value Euros As of January 1, 2010 269,890,028 3.75 1,012,087,605 Reduction of capital through reduction in the nominal value of the shares (1) 269,890,028 0.1 26,989,003 Share capital increase of May 26, 2010 (2) 526,608,781 0.1 52,660,878 Subtotal before stock reverse split impact 796,498,809 0.1 79,649,881 Sub-total after stock reverse split (3) 79,649,881 1 79,649,881 Share capital increase after NRS I redemption (4) 45,196,744 1 45,196,744 Share capital increase after DPN redemption (5) 50,000,000 1 50,000,000 Share Capital as of December 31, 2010 174,846,625 1 174,846,625 Weighted average number of shares outstanding (basic net of treasury stock) 104,817,755 Share capital increase after NRS I redemption (4) 767,249 1 767,249 Share capital increase after NRS II and NRS IIC redemption (6) 48,145,209 1 48,145,209
SHARE CAPITAL AS OF DECEMBER 31, 2011 223,759,083 1 223,759,083 Weighted average number of shares outstanding (basic net of treasury stock) 206,857,493
(1) In accordance with the resolutions approved by the General Shareholders’ Meeting on January 27, 2010, the share capital was reduced through a reduction in the nominal value of the shares. The share capital, previously in the amount of €1,012,087,605.00 was reduced to €26,989,002.80 comprising 269,890,028 shares with a new nominal value of €0.10 each. (2) The ordinary shares outstanding were increased on May 26, 2010 through the issuance of 526,608,781 ordinary shares at a par value of €0.10 per share, issued at a price per share of €0.66. The shareholders subscribed 308,270,876 shares and the senior creditors subscribed 218,337,905 shares as a set-off against their debt. The share capital was increased accordingly by €52,660,878 and the share premium by €294,900,917 at nominal value. (3) On July 15, 2010, a 10:1 reverse share split was executed (see note 22.1). (4) In 2011, for the “NRS tranche I” (corresponding to redemption of “NRS tranche I” which was differed in 2010 to year 2011 at the option of the holders): 5,328,181 notes redeemable in shares (“NRS tranche I”) corresponding to €5,328,181, were redeemed including amounts in respect of capitalized interest with 767,249 newly issued shares of the Company at a fixed rate of €1/$1.3 and € 1.1/1£ for the notes in foreign currencies. In 2010, 313,890,656 notes redeemable in shares (“NRS tranche I”) corresponding to €313,866,278, were redeemed including amounts in respect of capitalized interest with 45,196,744 newly issued shares of the Company at a fixed rate of €1/$1.3 and € 1.1/1£ for the notes in foreign currencies. (5) In 2010, €212,750,000 Disposal Proceeds Notes (DPN) including interest were redeemed by 50,000,000 newly issued shares of the Company (see note 25). (6) For the “Tranche II”: 189,877,533 notes redeemable in shares (“NRS tranche II”) corresponding to €189,877,533 were redeemed including amounts in respect of capitalized interest with 30,186,650 newly issued shares of the Company at a fixed rate of € 1/$1,3 and € 1.1/1£ for the notes in foreign currencies. For the “Tranche IIC”: 112,961,194 notes redeemable in shares (“NRS tranche IIC”) corresponding to € 112,961,194 were redeemed including amounts in respect of capitalized interest with 17,958,559 newly issued shares of the Company at a fixed rate of € 1/$1,3 and € 1.1/1£ for the notes in foreign currencies.
182 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
In accordance with the Sauvegarde Plan (see note 25 for more explanation), the following equity instruments were issued as of May 26, 2010:
Fair value net Nominal of issuance (in € millions) value Fair value Difference (1) cost & tax (2) Share capital 53 53 - 53 Paid-in-surplus 295 275 20 267 NRS 638 538 100 525
TOTAL EQUITY INSTRUMENTS ISSUED AS OF MAY 26, 2010 986 866 120 845
(1) Correspond to the difference between the carrying value of the debt extinguished and the fair value of equity instruments issued on May 26, 2010. Refer to the “Statement of changes in equity” and note 3.9. Of the €150 million total IFRIC 19 gain on debt extinguished by equity, €120 million are analyzed above and €30 million gain resulted from the exchange rate difference between the extinguishment of the debt at the exchange rates used in the Sauvegarde Plan and the exchange rates as at May 26, 2010. (2) €26 million fees linked to the issuance of new shares and the NRS have been recognized in Equity as a reduction of the paid-in capital and the NRS respectively for €9 million and €17 million (with a global tax effect of €8 million and €6 million respectively). Refer to the “Statement of changes in equity”.
Notes Redeemable in Shares NRS IIC were redeemed on December 2011 into a fixed number of shares except for 10,191,567 holders of “NRS tranche II” and 6,189,002 On May 26, 2010, €638 million of NRS were issued by way of set- holders of “NRS tranche IIC” who requested to defer redemption until off debts of senior creditors. The NRS I were redeemed in December December 31, 2012. Because all the interest is capitalized and repaid by a 2010 (except for 5,328,181 NRS I for which redemption was deferred fixed number of shares, the NRS were classified in their entirety as equity. until December 31, 2011 at the option of the holders). The NRS II and
The number of NRS issued as of May 26, 2010 were as follows:
Number of bonds issued Maturity NRS I 319,218,837 December 31, 2010 NRS II 200,069,100 December 31, 2011 (2) NRS IIC 119,150,196 December 31, 2011 (2)
TOTAL NRS ON MAY 26, 2010 638,438,133 NRS I redeemed by issued shares on December 31, 2010 (313,890,656)
TOTAL NRS ON DECEMBER 31, 2010 (3 ) 324,547,477 (will be redeemed by new shares at conversion ratio 0.144 for NRS I which have not been converted yet and of 0.159 for NRS II and NRS IIC) NRS I redeemed by issued shares on December 30, 2011 (1 ) (5,328,181) NRS II and NRS IIC redeemed by issued shares on December 30, 2011 (1 ) (302,838,727)
TOTAL NRS ON DECEMBER 31, 2011 (1) (3) 16,380,569 (will be redeemed by new shares at conversion ratio of 0.159 for NRS II and NRS IIC)
(1) The redemption of 5,328,181 NRS I into shares were deferred until December 31, 2011 at the bond holder’s request. The redemption of 10,191,567 NRS II and 6,189,002 NRS IIC into shares (16,380,569 NRS in total) was deferred until December 31, 2012 at the bond holder’s request. NRS IIC may be redeemed by cash at Technicolor’s option. (2) Or December 31, 2012 maturity at holders option. (3) Amounts to €278 million and €19 million in the statement of change in equity after IFRIC 19 impact and net of fees and tax as of December 31, 2010 and 2011 respectively.
In accordance with IFRIC 19 the equity issued (share capital, paid-in capital and NRS) in exchange for the debt extinguished has been stated at fair value using the listed price of Technicolor shares on the Euronext Paris as of May 26, 2010.
TECHNICOLOR I ANNUAL REPORT 2011 I 183 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
22.3 Treasury shares
2011 2010 Number of Treasury shares at opening 617,705 6,177,077 Net purchased and sold in the period -- Treasury shares delivered (1) (12,018) (27) Number of Treasury shares before stock reverse split N/A 6,177,050 Number of Treasury shares after stock reverse split 605,687 617,705
(1) The delivery of Technicolor shares were made in 2011 and 2010 in the framework of the Free Share Plan launched in 2007 for all Group employees.
22.4 Subordinated perpetual notes The terms and conditions of the notes specify also that, if any judgment is issued by any competent court for the judicial liquidation (liquidation On September 26, 2005, Technicolor issued deeply subordinated notes judiciaire) of Technicolor, or following an order of redressement judiciaire, in a nominal amount of €500 million. Because of their perpetual and the sale of the whole of the business of Technicolor or in the event of subordinated nature and the optional nature of the coupon, the notes are the voluntary dissolution of Technicolor or if Technicolor is liquidated recorded under IFRS in shareholder’s equity for the net value received of for any other reason, then the notes will become immediately due and €492 million (issue price less offering discount and fees). The notes can payable at their principal amount together with accrued interest to the be redeemed at Technicolor’s option at par on September 25, 2015 and date of redemption. In that case, because of their subordinated nature, at each interest payment date thereafter. The notes have an annual fixed the right of the subordinated notes would be paid to the extent that all coupon of 5.75% and a yield to the call date of 5.85%. If not redeemed other creditors of Technicolor ranking in priority to the subordinated the interest rate starting September 25, 2015 is the 3-month EURIBOR note holders have been reimbursed. deposit rate plus 3.625%. On any interest payment date, payment of interest is optional only if Technicolor did not declare and pay a dividend Pursuant to the Sauvegarde Plan the payment in 2010 of the interest at the most recent General Meeting of its shareholders or before the claims of the TSS holders against the Company in cash for an amount due date of interest and it has not bought back shares in the previous of €25 million definitely extinguished these interest claims (for further six months. details, see note 35) and is consequently recorded as a reduction of equity. The notes have a specific provision whereby if Technicolor’s senior rating is reduced by one full notch by either Moody’s or S&P - such that after the reduction the rating is below investment grade - in anticipation of 22.5 Dividends and distributions or as a result of a change of control-Technicolor can redeem the notes The Group did not pay any dividend in 2011 or 2010. at no penalty; however should Technicolor decide not to redeem the notes, an additional margin of 5% is added to the interest rate of the Under the internal rules of the Board adopted in connection with the coupon. A change of control is defined as having occurred when any Sauvegarde Plan, any decision to propose a dividend needs to be person or persons acting in concert own or acquire more than 50% of the approved at least by 2/3 of the Board Members. capital or more than 50% of the voting rights. Even though Technicolor’s senior credit ratings (S&P: B- and Moody’s: B3) are currently below investment grade (S&P: BBB- and Moody’s: Baa3), this provision does 22.6 Non-controlling interests not apply because no change of control has occurred. The above mentioned provision does not constitute a derivative because it falls In 2010, there was no significant change in non-controlling interests. outside the scope of the definition under IAS 39 (the “change of control” event represents a non financial event excluded from the definition of In 2011, Technicolor formed a new entity jointly with Dreamworks called a derivative under IAS 39). “MediaNaviCo”. Technicolor brought its MediaNavi start-up activity and Dreamworks invested a cash consideration representing a minority The coupon adjustment clause after 10 years does not in itself imply ownership of MediaNaviCo (for futher details, see note 4). any particular intention on the part of Technicolor at that time. Because the notes are perpetual and Technicolor has no obligation to pay either the notes or a dividend, the notes are classified in shareholders’ equity.
184 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
22.7 Net Equity Hedging Reserve continually and reported regularly to the Chief Financial Officer, to the Executive Committee and to the Audit Committee via various reports Gains and losses on hedging instruments accounted for as cash flow showing the Company’s exposures to these risks with details of the hedges are recognized in other comprehensive income directly in equity. transactions undertaken to reduce these risks.
During 2011, of the result on hedging instruments recognized in OCI at To reduce interest rate, currency exchange rate and commodity risk, the December 31, 2010, €4 million in loss was recognized in profit (loss) from Group enters into hedging transactions using derivative instruments. The continuing operations as the underlying hedged amounts were realized. Group’s commodity exposure is limited, consisting mainly of risk due to At December 31, 2011, a gain of €0.2 million on hedging instruments the variation in prices of certain metals, notably silver. This risk may be was recognized in OCI. covered with futures contracts.
During 2010, of the result on hedging instruments recognized in OCI Because of the different nature of the Group’s U.S.dollar exposure at December 31, 2009, €0.8 million in loss was recognized in profit related to its licensing activity (mainly a U.S.dollar sales exposure) (loss) from continuing operations as the underlying hedged amounts compared to the U.S.dollar exposures of its other segments, the Group were realized. At December 31, 2010, a loss of €0.5 million on hedging may hedge the U.S.dollar licensing exposure separately. Apart from this instruments was recognized in OCI. exception the Group tries to net offsetting exposures and to hedge only the net exposure with banks.
22.8 Loss of half of the share capital With regard to derivative instruments, Technicolor’s policy is not to Due to the accumulated losses, Technicolor SA’s statutory shareholders’ use derivatives for any purpose other than for hedging its commercial equity is negative since December 31, 2008. According to Article L. 225- and financial exposures. This policy does not permit the Group or its 248 of the French Commercial Code, shareholders were consulted at subsidiaries to take speculative market positions. the Annual Ordinary and Extraordinary Shareholders’ Meeting held on June 16, 2009 and voted against the early dissolution of Technicolor SA. Credit risk on commercial clients is managed centrally or in some cases managed by each segment based on policies that take into account the Technicolor SA is under a Sauvegarde Plan and Article L. 225-248 of the credit quality and history of customers. From time to time, the Group French Commercial Code (rules for Limited Liability company in case of may decide to insure or factor without recourse trade receivables in order loss in excess half of the share capital) is not applicable to Technicolor to manage underlying credit risk. SA until the end of the plan which will end on February 17, 2017 (Article L. 225-248 al.5 of the French Commercial Code). The Group’s derivative and cash transaction counterparties are limited to highly rated financial institutions. Moreover the Group has policies limiting the maximum amount of exposure to any single counterparty. NOTE 23 FINANCIAL RISK The Group’s financial risk management, and in particular its liquidity risk, MANAGEMENT has been impacted by the debt restructuring. The deterioration of the Technicolor faces a wide variety of financial risks including market Group’s financial condition and the subsequent debt negotiations and risk (due to fluctuations in exchange rates, interest rates, and prices Sauvegarde proceeding considerably increased the liquidity risk of the of financial instruments and commodities), liquidity risk and credit risk. Group but the closing of the debt restructuring in May 2010 as well as the putting in place of two committed receivables backed credit facilities Technicolor’s financial market risks and liquidity risk are managed has reduced somewhat this risk. centrally by its Group Treasury Department in France. The Group treasury has reporting to it one regional Treasury Department in The Sauvegarde proceeding did not have a direct impact on the Indianapolis, United States. The Treasury Department is part of the Group’s outstanding derivatives, however the events described above Group Finance Department and reports to the Chief Financial Officer. including the Sauvegarde Plan have impacted the Group’s management Total staffing of treasury is 10 persons. of financial risks because the Group has had more limited access to the over-the-counter derivatives markets and is currently only able to Management of financial risks by the Group treasury is done in execute operations on a short-term, cash collateralized basis. accordance with Group policies and procedures which cover, among other aspects, responsibilities, authorizations, limits, permitted See notes 25 and 26 for more complete information on the Group’s instruments and reporting. All financial market risks are monitored borrowing situation and financial risks.
TECHNICOLOR I ANNUAL REPORT 2011 I 185 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
NOTE 24 DERIVATIVE FINANCIAL Ineffectiveness recognized in profit and loss INSTRUMENTS The forward points on the foreign currency hedges described above are excluded from hedging relationship and are recognized in profit and 24.1 Disclosures related to derivatives loss. In 2011 this impact was a loss of € 1 million taken in Other financial qualifying for hedge accounting income (expense), net. treatment The ineffective portion of the interest rate caps is recognized in profit As described in note 23 the Group uses derivatives to reduce market and loss. In 2011 a loss of €6 million was taken in Other financial income risk. Technicolor uses principally forward foreign currency operations (expense), net. to hedge foreign exchange risk and interest rate caps to hedge interest rate risk. 24.2 Fair value of derivatives Cash Flow hedges The fair value of all derivative financial instruments is shown in the table below. The fair value of forward exchange contracts and currency swaps Forward foreign currency operations hedging forecast exposures of is computed by discounting the difference between the forward contract commercial purchases and sales in foreign currencies are designated as rate and the market forward rate and multiplying it by the nominal cash flow hedges. Generally such hedges are for periods of 6 months amount. The fair value of caps is determined by independent financial or less. The amounts related to these hedges that is recognized in other institutions and verified using standard option pricing methods. comprehensive income (OCI) as well as the amounts reclassified from OCI to profit or loss for the period are given in note 22.7. The Group’s financial derivatives are governed by standard ISDA (International Swaps and Derivatives Association, Inc.), Master The Group put in place interest rate caps in 2010 for a part of its debt Agreements or similar master agreements customary in the French at variable interest rate as described in note 26.2; they were classified market, which, in each case, contain cross default provisions. as cash flow hedges. The Sauvegarde proceeding did not have a direct impact on the Group’s In 2011 a total of €90 million in forecast transactions for which hedge outstanding derivatives, however did impact the Group’s management accounting had been applied did not occur and as a result the hedges of financial risks because the Group has had more limited access to the were cancelled resulting in a gain of €4 million. over the counter derivatives markets and is currently only able to execute operations on a short-term, cash collateralized basis. Fair Value hedges Forward foreign currency operations hedging accounts payable and accounts receivable in foreign currencies are designated as fair value hedges. At December 31, 2011 there was a gain of €5 million on the outstanding hedging instruments and a loss of €5 million on the hedged items.
186 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
(in € millions) December 31, 2011 December 31, 2010 Assets Liabilities Assets Liabilities Interest rate caps (1) 1-6- Total non-current 1 - 6 - Forward foreign exchange contracts- cash flow and fair value hedges - 1 - - Total current - 1 - -
TOTAL 1 1 6 -
(1) For further information, refer to details in note 26.1
Credit risk on these financial derivative assets arises from the possibility that counterparties may not be able to meet their financial obligations to Technicolor. The maximum risk is the marked-to-market carrying values shown in the table above, that is, €1 million at December 31, 2011, €6 million at December 31, 2010.
NOTE 25 BORROWINGS The tables below present information concerning Technicolor’s debt at December 31, 2011 compared to previous year.
25.1 Analysis by nature
(in € millions) December 31, 2011 December 31, 2010 Debt due to financial institutions (1) 1,319 1,319 Bank overdrafts -- Other financial debt 75 Accrued interest 11
TOTAL 1,327 (2) 1,325 (2) Total non-current 1,242 1,278 Total current 85 47
(1) In accordance with the Sauvegarde Plan, the old debt was converted on May 26, 2010 as follows by: n a share capital increase of €348 million (including share premium) of which €203 million was subscribed by shareholders and used to reimburse the debt; n the issuance of €638 million of notes redeemable in a fixed number of shares of the Company (notes redeemable in shares or “NRS”), reserved primarily for the senior creditors and classified as equity; n the issuance of notes redeemable in cash or shares of the Company (disposal proceeds notes, or “DPN”), linked to the disposal proceeds of certain non-core assets of the Company, reserved for the senior creditors in an amount of €299 million and out of which €48 million were reimbursed in cash by the Company to the creditors on May 26, 2010. n the execution of a new term loan facility and the issuance of new notes (the Reinstated Debt) valued initially at fair value in accordance with IAS 39-43 as explained below in note 25.3 (h). The DPN were redeemed on their maturity date of December 31, 2010. Since the DPN could be repaid partly or totally in cash and/or through a variable number of shares, they did not meet the criteria of equity instruments and were classified until their redemption as financial debt. At redemption on December 31, 2010, the DPN were reimbursed with €52 million of cash including €4 million for interest (of the €52 million, €46 million was from the proceeds of the sale of Screenvision US) and 50 million shares. (2) The nominal value is €1,500 million at December 31, 2011 and €1,523 million as of December 31, 2010 (see note 25.3).
TECHNICOLOR I ANNUAL REPORT 2011 I 187 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
25.2 Summary of the debt Debt as of December 31, 2011 consisted principally of the Reinstated Debt which includes €776 million of term loans and €520 million of notes as follows:
Amount Average Average Currency (in € millions) Type of rate Nominal rate (1) Effective rate (1) U.S.$ 382 Fixed 9.35% 12.37% U.S.$ 298 Floating (2) 7.70% 12.03% GBP 19 Fixed 9.55% 13.00% EUR 119 Fixed 9.00% 11.59% EUR 478 Floating (2) 7.70% 11.76% Reinstated debt 1,296 Other debt 31 Various 3.39% 3.39%
TOTAL 1,327 8.20% 11.81%
(1) Rates as of December 31, 2011. (2) 3 month EURIBOR/LIBOR with a 2% floor and an average margin of 5.70%.
25.3 Main features of the Group’s amounts in the balance sheet which for the new Reinstated Debt were initially recognized at fair value then subsequently revalued at amortised borrowings cost. The amounts do not include the mandatory prepayment in 2012 from excess cashflow generated in 2011 (see note 25.3 (g) for more (a) Maturity details). The table below gives the contractual maturity schedule of the Group’s debt. The amounts are the nominal amounts and thus differ from the
(in € millions) December 31, 2011 December 31, 2010 Less than 1 month 10 5 Between 1 and 6 months 22 10 Between 6 months and less than 1 year 53 32 Total current debt 85 47 Between 1 and 2 years 102 66 Between 2 and 3 years 110 94 Between 3 and 4 years 119 117 Between 4 and 5 years 61 119 Over 5 years 1,023 (1) 1,080 (2) Total non-current debt 1,415 1,476 Total nominal debt 1,500 1,523 IFRS Adjustment (3) (173) (198)
BALANCE SHEET DEBT UNDER IFRS 1,327 1,325
(1) Entire amount due May 26, 2017. (2) Of which €1,019 million due May 26, 2017. (3) In Technicolor’s balance sheet the Reinstated Debt was initially recognized at fair value and then subsequently is measured at amortized cost.
Technicolor’s senior debt outstanding under its private placement notes and the syndicated credit facility was restructured in 2010 under the Sauvegarde Plan. Under this plan, the Company’s debt level was reduced and the senior debt replaced by Reinstated Debt.
188 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
(b) Interest rate characteristics rates fixed for remaining periods beyond the threshold are considered at fixed rate. A threshold of 1 year seems pertinent inasmuch as it is also the The table below presents the periods for which the interest rates on threshold between current and non-current debt. This treatment should Technicolor’s debt are fixed for its debt with maturity greater than one make it easier to understand, from the financial information presented in year, the debt for which the interest rate is fixed for remaining periods these notes, the underlying interest rate risk of the Group. This treatment of under one year being considered to be at floating rate. The Group has no impact on the accounting treatment of the Group’s debt. has adopted this definition of floating rates in order to have a simple and consistent way of analyzing the interest rate risk on its debt. For The table below shows the periods for which the interest rate on the example, fixed rate non-current debt maturing in 3 months, 3 months Group’s debt is fixed. The amounts shown are the contractual nominal fixed rate term debt and long-term floating rate debt which is reset amounts and therefore do not correspond to the amounts in the balance every 3 months all have the same interest rate risk profile and under the sheet which were initially at fair value then subsequently revalued at Group’s definition are treated in the same manner as floating rate debt. amortised cost. Under this definition it is necessary to set a threshold such that interest
(in € millions) Amounts at December 31, 2011 with interest rate fixed for the following periods Floating rate debt (interest fixed for Greater than less than 1 year) 1 year to 5 years 5 years Total Total nominal debt 950 (1) 151 399 1,500 IFRS Adjustment (2) (173)
BALANCE SHEET DEBT UNDER IFRS 1,327
(1) Includes €896 million (nominal amount) of floating rate debt that has a 2% floor; this debt is partially hedged via interest rate caps with a cap rate of 3%. The combination of the floor and cap creates, for the hedged debt, debt that is at fixed rate when the reference EURIBOR or LIBOR rate is 2% or less, then is at variable rate when the reference rate is above 2% and less than 3% and then again is at fixed rate when the reference rate is 3% or above. (2) In Technicolor’s balance sheet the Reinstated Debt was initially recognized at fair value and then is subsequently measured at amortized cost.
(c) Effective interest rates at year-end The effective interest rates on the Group’s consolidated debt are as follows:
December 31, 2011 December 31, 2010 All borrowings 11.81% 11.78%
(d) Carrying amounts and fair value of borrowings (see note 26.6) (e) Analysis of borrowing by currency
(in € millions) December 31, 2011 December 31, 2010 Euro 611 620 U.S. Dollar 688 675 Other currencies 28 30
TOTAL DEBT 1,327 1,325
(f) Undrawn credit lines
(in € millions) December 31, 2011 December 31, 2010 Undrawn, committed lines expiring in more than one year 197 194
The Group has two receivables backed three year committed credit facilities, maturing in 2013, for a total amount of €197 million neither of which was drawn at December 31, 2011. The availability of these credit lines varies depending on the amount of receivables.
TECHNICOLOR I ANNUAL REPORT 2011 I 189 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
(g) Financial covenants and other limitations For the purposes of the covenants EBITDA means the IFRS amounts for the entire Group of “Consolidated profit before tax and net finance The Credit Agreement and the Note Purchase Agreement governing costs” excluding the impact (to the extent otherwise included in the Reinstated Debt contain certain affirmative and financial covenants EBITDA) of: including covenants that in particular require that (i) EBITDA be not less than a certain multiple of net total interest on a trailing twelve month n other income (expense); basis (“interest cover covenant”) on June 30 and December 31 of each financial year, (ii) total net debt be not more than a certain multiple n depreciation, amortization and impairment of assets; of EBITDA on a trailing twelve month basis (“leverage covenant”) n transaction costs (related to the debt restructuring); on June 30 and December 31 of each financial year, and (iii) capital expenditure be not more than a certain amount for each financial year. n restructuring costs; Each of the interest cover covenant and leverage covenant become n fair value adjustments; stricter over time. From 2011, the total net debt, the total net interest and the capital expenditures are all calculated on the basis of the entire n changes in provisions; Group perimeter. n any gain or loss against book value arising on the disposal (not made in the ordinary course of trading) or revaluation of any asset; and
n extraordinary and exceptional items.
The level of these covenants is as follows:
Interest cover covenant
Reference Period Interest coverage ratio (EBITDA/total net interest) July 1, 2009 to 30 June 30, 2010 2.55:1.00 January 1, 2010 to December 31, 2010 2.80:1.00 July 1, 2010 to June 30, 2011 3.05:1.00 January 1, 2011 to December 31, 2011 3.40:1.00 July 1, 2011 to June 30, 2012 3.35:1.00 January 1, 2012 to December 31, 2012 3.65:1.00 July 1, 2012 to June 30, 2013 3.70:1.00 January 1, 2013 to December 31, 2013 3.80:1.00 July 1, 2013 to June 30, 2014 3.95:1.00 January 1, 2014 to December 31, 2014 4.20:1.00 July 1, 2014 to June 30, 2015 4.45:1.00 January 1, 2015 to December 31, 2015 4.80:1.00 July 1, 2015 to June 30, 2016 and for each subsequent period 4.80:1.00
190 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
Leverage covenant
Leverage ratio Reference Date (Total Net Debt / EBITDA) June 30, 2010 3.85:1.00 December 31, 2010 3.20:1.00 June 30, 2011 3.05:1.00 December 31, 2011 2.55:1.00 June 30, 2012 2.70:1.00 December 31, 2012 2.25:1.00 June 30, 2013 2.30:1.00 December 31, 2013 1.95:1.00 June 30, 2014 1.95:1.00 December 31, 2014 1.60:1.00 June 30, 2015 1.60:1.00 December 31, 2015 and each subsequent June 30 and December 31 1.25:1.00
Capital Expenditure covenant
Year Ending Maximum Authorized Amount of Capital Expenditure (1) December 31, 2010 €190,000,000 December 31, 2011 €205,000,000 December 31, 2012 €220,000,000 December 31, 2013 €225,000,000 December 31, 2014 €225,000,000 December 31, 2015 €230,000,000 December 31, 2016 €235,000,000
(1) For the purposes of this covenant all capital expenditures in foreign currencies will be converted at the Group’s 2010 budget exchange rates.
At December 31, 2011, the calculation of these financial covenants was as follows:
Interest coverage covenant For the twelve months ending December 31, 2011, EBITDA for the Group must be no less than 3.40 times the net interest for the period.
EBITDA €464 million Net Interest €118 million Ratio EBITDA / Net Interest 3.93:1.00
Since 3.93 is greater than the required minimum level of 3.40, the Group meets this financial covenant.
Leverage covenant Total net debt of the Group at December 31, 2011 must be no more than 2.55 times the EBITDA for the Group for the twelve months ending December 31, 2011. For the calculation of the net debt, the accrued interest is excluded; moreover the debt and cash of the Group in foreign currencies are valued at the average exchange rate over the twelve months ending December 31, 2011.
Net Debt €914 million EBITDA €464 million Ratio Net Debt / EBITDA 1.97:1.00
Since 1.97 is less than the maximum allowed level of 2.55, the Group meets this financial covenant.
TECHNICOLOR I ANNUAL REPORT 2011 I 191 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
Capital Expenditure covenant provided for by the Sauvegarde Plan and the redemption in shares of Capital expenditure for the Group cannot exceed €220 million for the the NRS and DPN and certain other contractual arrangements); and financial year ending December 31, 2011. This amount consists of the n for Group Members other than the Company, declare or pay any maximum authorized amount of capital expenditure of €205 million dividends or make any other distribution in respect of any class of its plus €15 million of unused expenditure carried over from 2010. Since share capital or apply any sum for any such purpose. the total capital expenditure in 2011 was €169 million the Group meets this financial covenant. The acquisitions made by the Group (see note 33(b) for further information) in 2011 were in full compliance with the restrictions described above. Other Restrictions In addition to certain information provision covenants, the Credit Events of Default Agreement and Note Purchase Agreement include certain negative covenants that restrict the ability of the Company and certain of its The Credit Agreement and the Note Purchase Agreement also contain subsidiaries to undertake various actions. These restrictions were certain events of default, the occurrence of which provides creditors with modified in October 2011 following agreement from the required the ability to immediately demand payment of all or a portion of the majorities of noteholders and lenders. The modifications relate principally outstanding amounts under the Reinstated Debt. If the creditors exercise to the restrictions concerning disposals, joint ventures and acquisitions. their enforcement rights pursuant to the Reinstated Debt, the NRS and These negative covenants, as modified in October 2011, restrict the the DPN will be prepaid in shares and cash, respectively. ability of the Company and certain of its subsidiaries, subject in each The events of default pursuant to the Reinstated Debt include, among case to certain exceptions and limitations to (among other things): other things, and subject to certain exceptions and grace periods:
n create or grant security interests that secure financial indebtedness non-payment of any amount due under the Reinstated Debt or any on any of its present or future assets; n permitted hedging agreements; n incur additional financial indebtedness in excess of €40 million failure by the Company or any of the guarantors to comply with its excluding certain permitted financial indebtedness including, among n material obligations and undertakings under the Reinstated Debt; others, the refinancing of the Reinstated Debt and Committed Receivables Facilities; n certain events of insolvency;
n grant guarantees; n any Auditor’s report qualification made to either the Company’s ability to continue as a going concern or the accuracy of the information n grant loans for an aggregate amount greater than €20 million except given; in certain cases related to deferred compensation related to disposals; n failure by the Company or any guarantor to comply with the material n enter into derivatives contracts, interest rate or currency hedging or obligations under the Intercreditor Agreement; treasury transactions other than as required by the Credit Agreement and Note Purchase Agreement and other than for hedging n non-payment of any financial indebtedness of any Group Member transactions arising in the ordinary course of business; in excess of €25 million;
n amalgamate, merge or consolidate with or into any other person; n acceleration of any financial indebtedness of any Group Member in excess of €25 million under the committed receivables facilities or n substantially change the general scope of its business; default under any other financial indebtedness of any Group Member n enter into material transactions or arrangements with affiliates unless in excess of €25 million that gives the relevant creditor or creditors in the ordinary course of business and on an arm’s length basis; the right to accelerate the date for payment of such indebtedness;
n invest in joint ventures or partnerships where the total cash investment n creditors’ proceedings for any assets in excess of €25 million that are is in excess of €25 million in cash per year; not discharged within 60 days;
n acquire any companies, businesses, shares or securities in excess of n any security enforcement in excess of €25 million that is not set aside €50 million in cash or €200 million in shares per year; within 30 days.
n issue, attribute or allot any shares or redeem or repurchase any shares n any event which has a material adverse effect on the ability of the previously issued (other than resulting from the capital increase Company or its guarantors, taken as a whole, to perform their material obligations under the Reinstated Debt.
192 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
Change of control provisions from sales of marketable securities, net disposal proceeds (including Under the terms of the Reinstated Debt, in the event of a change of net disposal proceeds from sales of discontinued operations), net control in the Company, the advances under the Credit Agreement insurance proceeds, interest received, loans reimbursed by third and the outstanding principal amount of the New Notes, together with parties and net income of subsidiaries or joint ventures which cannot any other outstanding amounts under the Reinstated Debt, will become distribute such income to the Company due to legal or contractual immediately due and payable upon an occurrence of a change of control prohibitions, in the Company. Further, such change of control in the Company will – less total funding costs, which comprise the aggregate of interest trigger a mandatory redemption in shares of the NRS. paid during the year plus all scheduled repayments of debt (including the reinstated senior debt) and all voluntary or mandatory Intercreditor Agreement prepayments of the reinstated senior debt during the year, To establish the relative rights of certain of their creditors under the – all subject to certain adjustments relating to the making available Reinstated Debt, the Company and the guarantors entered into an of trapped cash. I ntercreditor A greement with the lenders under the Credit Agreement, the holders of the New Notes, each holder of the DPN, certain intra- In respect of 2011 and subsequent financial years, the Company’s group lenders, certain intra-group debtors and a security trustee (the excess cashflow (which is defined above) will be applied to prepay the Intercreditor Agreement). Reinstated Debt.
Change of control: upon the occurrence of a change of control in the Mandatory Prepayments n Company (see “Change of Control Provisions” above), all advances The Company will be required to prepay the outstanding Reinstated under the Credit Agreement and the outstanding principal amount of Debt in certain circumstances, including the following: the New Notes, together with any other outstanding amounts under the Reinstated Debt, will become immediately due and payable. In n Asset disposals: the net proceeds in respect of any disposal of any addition, the NRS will become immediately redeemable in the form of its assets to an unaffiliated third party will be applied subject to a of shares at the option of the holders thereof; and minimum threshold to repay the outstanding Reinstated Debt, on the understanding that this undertaking does not apply to: (i) the disposal n Other: net proceeds in respect of any payment or claim under any of certain non-core assets during 2010, the proceeds of which will insurance policy or issuance of subordinated debt in connection with be used to redeem the DPN; and (ii) the disposal of certain assets, any refinancing, shall in each case be applied to the repayment of the proceeds of which will be used during the year to finance capital the Reinstated Debt (in the case of a refinancing, a customary “make expenditures; whole” amount must be paid to noteholders). n Equity issuances: at least 80% of the net proceeds received in respect In 2011 the only disposal that triggered a mandatory prepayment was the of any new equity issuances (other than any share issuances permitted sale of the Group’s stake in ContentGuard for $25 million which resulted under the share capital increase that maintains the preferential in a pre-payment in the amount of €19 million of which €17 million subscription rights (droits préférentiels de souscription) of shareholders was recorded as a reduction of balance sheet debt and €2 million, under the terms of the Sauvegarde Plan, shares issued in redemption corresponding to the partial reversal of the gain recorded when the of the DPN and the NRS) will be applied to repay the outstanding Reinstated Debt was initially recognized at fair value, was recorded as Reinstated Debt. In addition, the Company could opt to use the a financial loss. proceeds received in respect of any new equity issuances to prepay all or a portion of the NRS IIC; however the Company chose to exercise In 2011 the Group generated excess cashflow as defined above in the its right to redeem the NRS IIC in shares on maturity at December 31, amount of €25 million which will be used to prepay Reinstated Debt 2011 except for the small number of holders who requested the in 2012. optional one year extension (see note 22). Voluntary Prepayments n Excess cashflow: means 80% of: Under the terms of the Credit Agreement, Note Purchase Agreement – the Group’s cashflow which comprises the aggregate of net cash and Intercreditor Agreement, the Company is, at its election, able to from operating and investing activities, plus the aggregate of cash prepay all or part of its advances under the Credit Agreement and any paid for acquisitions and marketable securities, interest paid, and principal amount of the New Notes, including any make whole payment, loans granted to third parties, less the aggregate of cash proceeds under the Note Purchase Agreement.
TECHNICOLOR I ANNUAL REPORT 2011 I 193 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
Summary of repayments
The table below summarizes the payments as described above on the Reinstated Debt by type of payment:
(in € millions) 2011 2010 Start of period (cumulative) 30 - Normal scheduled principal repayments 32 10 Mandatory prepayments from disposals 19 20 End of period (cumulative) 81 30
(h) Fair value of the new debt, in the U.S. dollar/euro exchange rate have a significant translation effective interest rate impact on the Group’s revenues and to a lesser extent on profit/ (loss) from continuing operations before tax and net finance costs. In 2011, In accordance with IAS 39 paragraph 43, the Reinstated Debt was exchange rate fluctuations of all currencies had a negative translation determined initially at its fair value. The difference between the fair impact of €85 million on revenue and a positive impact of €6 million on value of the Reinstated Debt and the nominal value has been booked profit/(loss) from continuing operations before tax and net finance costs. as a financial non cash gain of €229 million under the line “Gain on These impacts were in part due to the 3% increase in the U.S. dollar/ Technicolor’s debt extinguishment on May 26, 2010” of the consolidated euro rate over the year 2011. The Group estimates that this sensitivity Statement of Operations. has not significantly changed since the end of 2011.
Because Technicolor’s debt is not listed the fair value was estimated by To the extent that the Group incurs costs in one currency and has sales in using data from trading levels of the Group’s debt at or around the issue another there is foreign currency transaction risk and the Group’s profit date of May 26, 2010 by certain banks to the extent available and by margins may be affected by changes in the exchange rates between using trading levels and yields at that time of debt of companies having the two currencies. Most of Technicolor’s sales are in U.S. dollars and a similar rating (CCC). in euros; however, certain expenses are denominated in other currencies. In particular, some of the sales in the U.S. dollar and the euro have As a result, the fair value of the debt was estimated at €1,364 million related expenses in Mexican peso and Polish zloty respectively, due to at the May 26, 2010 exchange rate. Accordingly, the weighted average production facilities in Mexico and Poland. Moreover, the Group also effective rate of the new debt (excluding DPN) was originally determined has sales in Europe in euros where a portion of the expenses, related to be 11.89%. to the purchase of products from Asian suppliers, is in U.S. dollar. The Group’s UK subsidiaries also have transactional exposures to both the In October 2011, the Group renegotiated certain clauses of its Reinstated U.S. dollar and the euro. Currency transaction risk also impacts revenues Debt documentation and the related fees of approximately €5 million but the impact is significantly less than the translation impact on revenues were recorded as a reduction of debt. These fees will be charged to because 80-90% of the sales of the Group’s subsidiaries are in their interest over the remaining life of the Reinstated Debt using the effective domestic currencies. interest rate method. As a result, the average effective interest rate is now 12.00%. The Group’s foreign currency risk on translation and transactional exposures and on investments in foreign subsidiaries as well as the The fair value of the Group’s debt at December 31, 2011 can be found associated hedging policies are described in more detail below. in note 26.6. Even though the Group may hedge against currency risk, given the volatility of currency exchange rates and the occasional illiquidity in some NOTE 26 FINANCIAL INSTRUMENTS emerging market currencies together with the potential for changes AND MARKET RELATED in exchange control regulations in such emerging markets, the Group EXPOSURES cannot assure that it will be able to manage these risks effectively. Volatility in currency exchange rates may generate losses, which could have a material adverse effect on its financial condition or results of 26.1 Foreign exchange risk operations. A significant part of the net revenues of the Group, as well as a portion of its operating income (loss) are in subsidiaries that use U.S. dollars For more information on the sensitivity of the Group’s key financial as their functional currency. This reflects the strong presence of parameters to fluctuations of the U.S. dollar/euro exchange rate, see Technicolor in the United States, particularly with the Entertainment note 26.1(f) below “Sensitivity to Currency Movements”. Services and Digital Delivery segments. As a result, fluctuations
194 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
(a) Translation risks (c) Financial exposure The assets, liabilities, revenues and expenses of the Group’s operating The Group’s general policy is for subsidiaries to borrow and invest excess entities are denominated in various currencies, the majority being in cash in the same currency as their functional currency thereby eliminating U.S. dollar and the euro. The Group’s consolidated financial statements the exposure of its financial assets and liabilities to foreign exchange rate are presented in euro. Thus, assets, liabilities, revenues and expenses fluctuations. In certain emerging countries with currencies which may denominated in currencies other than euro must be translated into depreciate, the Group may, however, elect to maintain deposits in U.S. euro at the applicable exchange rate to be included in the consolidated dollar or euro rather than the subsidiaries’ functional currency. These financial statements. operations are performed through the Group Treasury Department to the extent practicable. In order to balance the currencies that the If the euro increases in value against a currency, the value in euro of Group Treasury Department borrows (both internally and externally) assets, liabilities, revenues and expenses originally recorded in such other with currencies that it lends to affiliates, it may enter into currency swaps. currency will decrease. Conversely, if the euro decreases in value against For more information regarding the use of currency swaps, see note 26.1 a currency, the value in euro of assets, liabilities, revenues and expenses (e) “Foreign Currency Operations” below. originally recorded in such other currency will increase. Thus, increases and decreases in the value of the euro can have an impact on the value in euro of the Group’s non-euro assets, liabilities, revenues and expenses, (d) Risk on investments in foreign subsidiaries even if the value of these items has not changed in their original currency. The Group’s general policy is to examine and hedge on a case by case the currency risk on its investments in foreign subsidiaries. The variations The Group’s policy is not to hedge translation risk. in the euro value of investments in foreign subsidiaries are booked under “Cumulative translation adjustment” in the Group’s balance sheet. There Translation risk is measured by consolidating the Group’s exposures and is no hedge as of December 31, 2011. by doing sensitivity analyses on the main exposures. (e) Foreign currency operations (b) Transaction risks In accordance with the Group’s policies on financial risk management as Commercial exposure described in note 23, the Group enters into foreign currency operations to hedge its exposures as described above. The swap points on currency Technicolor’s foreign exchange risk exposure mainly arises on purchase hedges that qualify as hedges under IAS 39 and the premiums paid on and sale transactions by its subsidiaries in currencies other than their currency options are excluded from the hedging relationship and taken functional currencies. In order to reduce the currency exposure on directly to the financial result: these amounts totaled €(1) million in 2011 commercial transactions, the Group’s subsidiaries seek to denominate and €(1) million in 2010. their costs either in the same currencies as their sales or in specific cases in currencies that they believe are not likely to increase in value In order to match the currencies that Technicolor’s group Treasury compared with the currencies in which sales are made. The Group’s Department borrows with the currencies that it lends, Technicolor may policy is for its subsidiaries to report regularly their projected foreign enter into currency swaps primarily (i) to convert euro borrowings into currency needs and receipts to the Group Treasury Department, which U.S. dollars which are lent to the Group’s U.S. subsidiaries/associates and then reduces the overall exposure by netting purchases and sales in each (ii) to convert U.S. dollars borrowed externally or from the Group’s U.S. currency on a global basis. Exposures that remain after this process subsidiaries/associates into euros. The forward points on these currency are hedged with banks using foreign currency forward contracts and swaps are accounted for as interest and amounted to nil in 2011 and occasionally foreign currency options. These hedges are recorded as €3 million in interest expense in 2010. At December 31, 2011 the Group cash flow hedges under IFRS, as described further under “Derivatives” did not have any currency swaps of this type outstanding. in note 2 to these consolidated financial statements. The future cash flows at the contracted rate of the Group’s foreign For products with a short business cycle, the Group’s policy is to hedge currency operations are shown below. The maturities of all of these on a short-term basis up to six months. For products and services which foreign exchange operations is under 1 year and the related cash flows are sold on a longer-term basis, and in particular the Group’s Licensing and impact on the profit and loss of the Group of the foreign exchange activities, hedges may be put in place for periods greater than six months. operations outstanding at December 31, 2011 will occur in 2012.
Transaction risk on commercial exposures is measured by consolidating the Group’s exposures and doing sensitivity analyses on the main exposures.
TECHNICOLOR I ANNUAL REPORT 2011 I 195 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
2011 2010 Forward exchange contracts (including currency swaps) Euro 19 9 Pound sterling -- Hong Kong dollar -- Canadian dollar -- Singapore dollar 2- U.S. dollar 28 - Polish zloty 12 18 Other currencies -- Total forward currency purchases 61 27 Euro (18) (18) Canadian dollar (2) - Pound sterling (28) - Japanese yen (9) (4) U.S. dollar (2) - Polish zloty -- Other currencies (2) (5) Total forward currency sales (61) (27) Deferred hedging gains (losses) related to forecast transactions - (1)
(f) Sensitivity to currency movements The Group believes a 10% fluctuation in the U.S. dollar versus the euro is reasonably possible in a given year and thus the tables below show the Because of the Group’s significant activities in the U.S. and in other impact of a 10% increase in the U.S. dollar versus the euro on the Group’s countries whose currencies are linked to the U.S. dollar, the Group’s main sales, on Profit from continuing operations before tax and net finance currency exposure is the fluctuation of the U.S. dollar against the euro. costs, on the currency translation adjustment component of equity and on net debt. A 10% decrease in the U.S. dollar versus the euro would After offsetting the U.S. dollar revenues of its European activities have a symmetrical impact in the opposite amount. These calculations with the U.S. dollar costs related to purchases of finished goods and assume no hedging is in place. components by its European affiliates, the net U.S. dollar exposure for continued operations was net revenue of U.S.$383 million in 2011 (net revenue of U.S.$ 493 million in 2010). These U.S. dollar exposures may be hedged separately in some cases in accordance with the general policy of the Group (see note 23).
196 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
Sales impact: the transaction impact on sales is calculated by applying a translation impact is calculated by applying a 10% increase in the U.S. 10% increase in the U.S. dollar/euro exchange rate to the external U.S. dollar/euro exchange rate to the profits of the affiliates with the U.S. dollar sales of affiliates with the euro as functional currency and to the dollar as functional currency. external euro sales of affiliates with the U.S. dollar or currencies pegged to the U.S. dollar (such as the Hong Kong dollar) as functional currency. For both the sales and profit the impacts are calculated before hedging. The translation impact is calculated by applying a 10% increase in the U.S. dollar/euro exchange rate to the sales of affiliates with the U.S. Equity impact: this is calculated by applying a 10% increase in the U.S. dollar or a currency pegged to the U.S. dollar as functional currency. dollar/euro exchange rate to the unhedged net investments in foreign subsidiaries that are denominated in U.S. dollar or currencies pegged Profit impact: the transaction impact on profit is calculated by applying to the U.S. dollar. This variation is booked in the cumulative translation a 10% increase in the U.S. dollar/euro exchange rate to the net U.S. adjustment component of equity. dollar exposure (sales minus purchases) of affiliates which have the euro as functional currency and then applying a factor estimated by Net debt impact: this is calculated by applying a 10% increase in the U.S. the Group to approximate the actual impact on profits. This factor is dollar/euro exchange rate to the net debt of the Group at December 31, applied because often changes in exchange rates lead to changes in 2011 that is denominated in U.S. dollar or currencies pegged to the U.S. competitive pricing. The factor varies depending on the business. The dollar.
2011 (in € millions) Transaction Translation Total Sales 62 142 204 Profit from continuing operations before tax and net finance costs 30 (8) 22 Equity Impact (c umulative translation adjustment) 28 Impact on net debt 60
2010 ( in € millions) Transaction Translation Total Sales 62 151 213 Profit from continuing operations before tax and net finance costs 37 (21) 16 Equity Impact (c umulative translation adjustment) 29 Impact on net debt 40
26.2 Interest rate risk exposure in accordance with target ratios of fixed to floating debt, as well as maximum risk targets, which are set periodically as a function of Technicolor is mainly exposed to interest rate risk on its deposits and market conditions. To hedge this exposure, the Group may enter into indebtedness. interest rate swaps, forward rate agreements and caps.
The Group’s policy is for all subsidiaries to borrow from, and invest Interest rate risk is measured by consolidating the Group’s deposit and excess cash with, the Group Treasury Department, which in turn satisfies debt positions and performing sensitivity analyses. the net cash needs by borrowing from external sources. Subsidiaries that are unable to enter into transactions with Group treasury because of At the nominal interest rates of the Reinstated Debt and without local laws or regulations borrow from or invest directly with local banks taking into account hedging, cash interest charges for a full year (at in accordance with the policies and rules established by the Treasury the December 31, 2011 exchange rate) would be €122 million on the Department. Reinstated Debt of approximately €1.5 billion (nominal amount rather than the IFRS amount in the balance sheet) compared to total gross In accordance with Group policies and procedures, the Treasury cash interest charges for 2011 of €124 million. In 2010 the total gross Department manages the financings, and hedges interest rate risk
TECHNICOLOR I ANNUAL REPORT 2011 I 197 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
cash interest charges were €138 million on the pre-Reinstated Debt In April 2010 in anticipation of the finalization of the new Reinstated until May 26, 2010 and on the Reinstated Debt from that date on (and Debt, the Group purchased caps. These caps for nominal amounts of including the payment of €11 million of accrued interest related to 2009 $480 million and €270 million protect the Group if 3 month LIBOR or 3 and €4 million of cash interest on the DPN). Note 26.2(d) below shows month EURIBOR respectively goes above 3%. If the reference rate goes the sensitivity of the Group’s interest charges to interest rate movements. above the cap rate the bank counterparty will pay the difference between the market rate and 3% to Technicolor. The caps mature in 2014. In 2010 under the terms of the Sauvegarde Plan the Group’s debt (the private placement notes and syndicated credit facility debt) was See note 24 for further information about the Group’s derivative restructured and replaced by new Reinstated Debt. operations.
(a) Interest rate operations (b) Cash flows on interest rate operations In accordance with the Group’s policies on financial risk management Because the Group has only interest rate caps outstanding and because as described in note 23, the Group enters into interest rate hedging of their nature whereby there are flows only if interest rates rise above a operations. certain level it is not possible to determine future cash flows related to interest rate hedging transactions.
(c) Effective interest rates The average effective interest rates on the Group’s consolidated debt are as follows:
2011 2010 Average interest rate on borrowings 11.78% 6.79% Average interest rate after interest rate hedging 11.78% 6.79% Average interest rate after currency swaps and interest rate hedging 11.78% 6.79%
The average effective interest rate in 2011 on the Group’s consolidated deposits was 1.58% (1.41% in 2010).
(d) Sensitivity to interest rate movements The average percentage of the Group’s debt in 2011 and 2010 at floating rates taking into account interest rate hedging operations is Interest rate movements impact the price of fixed rate financial assets as shown below. The Group considers all debt with interest rates fixed and liabilities held at fair value and the interest income and expense of for remaining periods of less than 1 year to be at floating rate (see note variable rate financial assets and liabilities. The Group has no significant 25.3 (b) above for more information about the Group’s classification fixed rate financial assets and liabilities held at fair value. between fixed and floating rate).
(in € millions) 2011 2010 Average debt 1,302 2,045 Percentage at floating rate (*) 59% 83%
(*) See the Group’s definition of floating rate in note 25.3(b). Includes €776 million (balance sheet value after IFRS adjustment) of floating rate debt that has a 2% floor; this debt is partially hedged via interest rate caps with a cap rate of 3%. The combination of the floor and cap creates debt that is at fixed rate when the reference EURIBOR or LIBOR rate is 2% or less, then is at variable rate when the reference rate is above 2% and less than 3% and then again is at fixed rate when the reference rate is 3% or above.
The Group’s average deposits in 2011 amounted to €300 million, 100% at floating rate.
198 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
The tables below present the Group’s interest rate sensitive assets and subsequently revalued at amortised cost. The amounts do not include liabilities by maturity with a breakout by fixed or floating rate at each year the mandatory prepayment in 2012 from excess cashflow generated in end. The amounts at December 31, 2011 and 2010 are the contractual 2011 (see note 25.3 (g) for more details). amounts and thus differ from the amounts in the balance sheet which for the Reinstated Debt were initially recognized at fair value then
Net exposure before Net exposure after Cash and deposits Borrowings hedging Interest rate hedging(1) hedging December 31, 2011 (a) (b) (c) = (b) – (a) (d) (e) = (c) + (d) Fixed Floating Fixed Floating Fixed Floating Fixed Floating Fixed Floating (in € millions) rate(2) rate rate(2) rate rate(2) rate rate(2) rate rate(2) rate Less than 1 year - 370 - 85 - (285) - - - (285) 1 to 2 years - - 38 64 38 64 - - 38 64 2 to 3 years - - 43 67 43 67 - - 43 67 3 to 4 years - - 47 72 47 72 - - 47 72 4 to 5 years - - 24 37 24 37 - - 24 37 More than 5 years (3) - - 399 624 399 624 - - 399 624
TOTAL - 370 551 949 551 579 - - 551 579 IFRS Adjustment (4) - - (53) (120) (53) (120) - - (53) (120) BALANCE SHEET - 370 498 829 498 459 - - 498 459 DEBT UNDER IFRS
(1) The caps will only be in the money when interest rates move above 3%. Until then, they do not have any impact on the split between fixed and floating and therefore have not been included in the table. (2) Interest rates fixed for remaining periods of greater than 1 year; otherwise considered floating rate. (3) Entire principal amount due May 26, 2017. (4) In Technicolor’s balance sheet the Reinstated Debt was initially recognized at fair value and then subsequently is measured at amortized cost.
Net exposure before Interest rate hedging(1) Net exposure after December 31, 2010 Cash and deposits (a) Borrowings (b) hedging (c) = (b) – (a) (d) hedging (e) = (c) + (d) Fixed Floating Fixed Floating Fixed Floating Fixed Floating Fixed Floating (in € millions) rate (2) rate rate (2) rate rate (2) rate rate (2) rate rate (2) rate Less than 1 year - 332 - 47 - (285) - - - (285) 1 to 2 years - - 26 40 26 40 - - 26 40 2 to 3 years - - 38 58 37 57 - - 37 57 3 to 4 years - - 49 67 50 67 - - 50 67 4 to 5 years - - 46 73 46 73 - - 46 73 More than 5 years (3) - - 418 661 418 662 - - 418 662
TOTAL - 332 577 946 577 614 - - 577 614 IFRS Adjustment (4) - - (59) (139) (59) (139) - - (59) (139) BALANCE SHEET - 332 518 807 518 475 - - 518 475 DEBT UNDER IFRS
(1) The caps will only be in the money when interest rates move above 3%. Until then, they do not have any impact on the split between fixed and floating and therefore have not been included in the table. (2) Interest rates fixed for remaining periods of greater than 1 year; otherwise considered floating rate. (3) Of which €1,019 due May 26, 2017. (4) In Technicolor’s balance sheet the Reinstated Debt was initially recognized at fair value and then subsequently is measured at amortized cost.
TECHNICOLOR I ANNUAL REPORT 2011 I 199 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
The Group’s debt and deposits are primarily in U.S. dollar and in euro For each of the scenarios, the impacts are calculated by multiplying and thus fluctuations of EURIBOR and $-LIBOR will impact the Group’s the Group’s floating rate net debt at contractual amounts (which at interest income and expense. The Group believes a 1% fluctuation in December 31, 2011 and 2010 differ from the amounts in the balance interest rates is reasonably possible in a given year and the tables below sheet which for the Reinstated Debt were initially at fair value and show the maximum annual impact of such a movement, taking into subsequently revalued at amortized cost) and after interest rate hedging account interest rate hedging operations. in euros and in U.S. dollar by 1%. A positive impact is an increase in income (decrease in expense) and a negative impact is a decrease in The Group’s Reinstated Debt consists of new variable term loans income (increase in expense). based on EURIBOR or LIBOR with a floor of 2% and new notes at fixed rates. The Sauvegarde Plan required that 2/3 of the term loans The impact on equity before taxes in the tables at December 31, 2011 and be hedged against interest rate risk and the Group put in place interest 2010 is an approximation and does not take into account adjustments rate caps to satisfy this requirement. The tables below show the impact necessary to determine the impact under IFRS using the effective after interest rate hedging of the variation of 1% in interest rates with interest rate method nor does it take into account the impact of the different assumptions regarding different EURIBOR and LIBOR levels change in market value of the caps. in the financial markets.
Maximum impact over one year on the net exposure after hedging at December 31, 2011 and with EURIBOR (*) and LIBOR (*) at 3% or more (in € millions) Impact on cash net interest Impact on equity before taxes Impact of interest rate variation of +1% 1 1 Impact of interest rate variation of -1% 6 6
Maximum impact over one year on the net exposure after hedging at December 31, 2011 and with EURIBOR (*) and LIBOR (*) at 2% (in € millions) Impact on cash net interest Impact on equity before taxes Impact of interest rate variation of +1% (6) (6) Impact of interest rate variation of -1% (3) (3)
Maximum impact over one year on the net exposure after hedging at December 31, 2011 and with EURIBOR (*) and LIBOR (*) at 1% or less (in € millions) Impact on cash net interest Impact on equity before taxes Impact of interest rate variation of +1% 3 3 Impact of interest rate variation of -1% (3) (3)
(*) At December 31, 2011, 3 month EURIBOR and 3 month LIBOR were 1.356% and 0.581% respectively.
Maximum impact over one year on the net exposure after hedging at December 31, 2010 and with EURIBOR (*) and LIBOR (*) at 3% or more (in € millions) Impact on cash net interest Impact on equity before taxes Impact of interest rate variation of +1% 0 0 Impact of interest rate variation of -1% 6 6
Maximum impact over one year on the net exposure after hedging at December 31, 2010 and with EURIBOR (*) and LIBOR (*) at 2% (in € millions) Impact on cash net interest Impact on equity before taxes Impact of interest rate variation of +1% (6) (6) Impact of interest rate variation of -1% (3) (3)
Maximum impact over one year on the net exposure after hedging at December 31, 2010 and with EURIBOR (*) and LIBOR (*) at 1% or less (in € millions) Impact on cash net interest Impact on equity before taxes Impact of interest rate variation of +1% 3 3 Impact of interest rate variation of -1% (3) (3)
(*) At December 31, 2010, 3 month EURIBOR and 3 month LIBOR were 0.93875% and 0.30281% respectively .
200 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
26.3 Liquidity risk and management The debt restructuring allowed the Group to improve its financial of financing and capital structure structure and notably to:
Liquidity risk is the risk of being unable to raise funds in the financial n reduce the level of net debt and increase net equity; markets necessary to meet upcoming obligations. In order to reduce this n maintain sufficient cash flow to cover liquidity needs and financial risk, the Group pursues policies with the objectives of having continued needs such as principal and interest repayments; uninterrupted access to the financial markets at reasonable conditions. These policies are developed based on regular reviews and analysis of n put in place credit lines secured by receivables and factoring in order its capital structure, including the relative proportion of debt and net to assure access to liquidity; and worth in the context of market conditions and the Group’s financial n spread out debt maturities with a significant portion being long-term. projections. Among other things these reviews take into account the Group’s debt maturity schedule, covenants, projected cash flows and As a result, the Group was able to put in place in April 2010 two 3-year financing needs. To implement these policies, the Group uses various committed receivables backed credit facilities for a total amount of long-term and committed financings which may include net worth, debt, €197 million (converted at the December 31, 2011 exchange rates). subordinated debt and committed credit lines. For further information Nevertheless due to its overall level of remaining indebtedness and to about the details of the Group’s net worth and debt please refer to notes the restrictions in the Group’s new Reinstated Debt, the Group’s access 22 and 25, respectively. to financial market remains very limited.
Technicolor’s access to financial markets was significantly impacted by For more information about the restrictions in the Group’s new the deterioration of its financial situation, subsequent debt restructuring Reinstated Debt see note 25. negotiations, and the Sauvegarde proceeding. The tables below show the future contractual cash flow obligations due on the Group’s debt. The interest rate flows due on floating rate instruments are calculated based on the rates in effect at December 31, 2011 and December 31, 2010, respectively. The amounts do not include the mandatory prepayment in 2012 from excess cashflow generated in 2011 (see not 25.3 (g) for more details).
At December 31, 2011 (€ in millions) 2012 2013 2014 2015 2016 There after (*) Total Fixed rate notes – principal 25 36 43 47 24 399 574 Floating rate term loans – principal 39 56 67 72 37 624 895 Fixed rate other debt – principal - 2--- -2 Floating rate other debt – principal 21 8--- -29 TOTAL DEBT PRINCIPAL PAYMENTS 85 102 110 119 61 1,023 1,500 IFRS Adjustment (173) Balance sheet debt 1,327 Fixed rate notes – interest 52 49 46 41 38 15 241 Floating rate term loans – interest 69 65 61 56 51 20 322 Fixed rate other debt – interest ------Floating rate other debt – interest 1---- -1
TOTAL INTEREST PAYMENTS 122 114 107 97 89 35 564
(*) Entire principal amount due May 26, 2017.
TECHNICOLOR I ANNUAL REPORT 2011 I 201 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
At December 31, 2010 There (€ in millions) 2011 2012 2013 2014 2015 after (*) Total Fixed rate notes – principal 12 24 36 42 46 418 578 Floating rate term loans – principal 19 39 57 67 73 661 916 Fixed rate other debt – principal - 2 2 7 - - 11 Floating rate other debt – principal 16 1 1---18 TOTAL DEBT PRINCIPAL PAYMENTS 47 66 96 116 119 1,079 1,523 IFRS Adjustment (198) Balance sheet debt 1,325 Fixed rate notes – interest 53 52 49 45 41 51 291 Floating rate term loans – interest 71 69 65 61 56 72 394 Fixed rate other debt – interest 2 1 1---4 Floating rate other debt – interest 1-----1
TOTAL INTEREST PAYMENTS 127 122 115 106 97 123 690
(*) Of which €1,019 of the principal amount due May 26, 2017.
The contractual cash flow obligations of the Group due to its current liabilities are considered to be equal to the amounts shown in the balance sheet.
26.4 Equity instruments At December 31, 2011 and 2010, Technicolor had no outstanding equity derivatives on its shares.
Technicolor sold in 2010 its only significant equity holding which was its participation in Videocon.
26.5 Financial counterparty risk The financial instruments used by the Group to manage its interest rate and currency exposure are all undertaken with counterparts having an investment grade rating.
The percentage of outstanding foreign exchange operations by counterparty credit rating is as follows:
Foreign exchange forwards: Counterparty’s rating (according to Standard & Poor’s) 2011 2010 A-1+ -- A-1 100% 100% A-2 --
TOTAL 100% 100%
202 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
All significant cash deposits are maintained with rated financial institutions.
The table below gives the percentage of outstanding cash deposits by counterparty credit rating:
Cash deposit: Counterparty’s rating (according to Standard & Poor’s) 2011 2010 A-1+ 14% 45% A-1 83% 50% A-2 -3% A-3 3% 1% Money Market funds -- Non rated financial institutions -1%
TOTAL 100% 100%
Credit risk arises from the possibility that counterparties may not be able to perform their financial obligations to Technicolor. The maximum credit risk exposure on the Group’s cash and cash equivalents was €370 million at December 31, 2011. The Group minimizes this risk by limiting the deposits made with any single bank and by making deposits primarily with banks that have strong credit ratings or by investing in diversified, highly liquid money market funds as shown in the table above.
26.6 Fair value of financial assets and liabilities Balance sheet financial instruments
December 31, 2011 Accounting Categories Fair Value Fair value Internal through Internal model P&L (incl. Available Payables Debt at Balance model with with non- derivative for sale and amortized sheet Quoted observable observable Fair instruments) assets receivables cost value Price parameters parameters Value Investments and available-for-sale -7 --7-7-7 financial assets Derivative financial instruments 1- --1-1-1 (current and non-current assets) Trade accounts and notes receivable - - 585 - 585 585 Borrowings - - - 1,327 1,327 1,217 Derivative financial instruments 1- --1 1 (current and non-current liabilities) Trade accounts and notes payable - - 499 - 499 499
December 31, 2010 Accounting Categories Fair Value Fair value Internal through Internal model P&L (incl. Available Payables Debt at Balance model with with non- derivative for sale and amortized sheet Quoted observable observable Fair instruments) assets receivables cost value Price parameters parameters Value Investments and available-for-sale -4 --4-4 -4 financial assets Derivative financial instruments 6- --6-6-6 (current and non-current assets) Trade accounts and notes receivable - - 666 - 666 666 Borrowings - - - 1,325 1,325 1,412 Derivative financial instruments ------(current and non-current liabilities) Trade accounts and notes payable - - 528 - 528 528
TECHNICOLOR I ANNUAL REPORT 2011 I 203 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
The fair value of the above assets and liabilities was determined as is considered to be equivalent to their net book value due to their follows: short-term maturities;
n Borrowings: The fair value of the Reinstated Debt was estimated n Investments and available-for-sale assets: see note 16; by using trading levels of the debt on or around December 31, 2011 n Derivative financial instruments: see note 24; and 2010, respectively. For the small amount of non-current debt other than the Reinstated Debt and due to the fact that most of it is n Trade accounts and notes receivable and notes payable: The fair secured, the Group has used the book value as an approximation of value of all current assets and liabilities (trade accounts receivable the fair value. The fair value of current debt other than the current and payable, short-term loans and debt, cash and bank overdrafts) portion of the Reinstated Debt is assumed to be the book value due to the short-term maturity.
NOTE 27 RETIREMENT BENEFIT OBLIGATIONS
27.1 Summary of the benefits
Medical (in € millions) Pension plan benefits post-retirement benefits Total 2011 2010 2011 2010 2011 2010 Opening provision 344 330 42 40 386 370 Net Periodic Pension Cost 19 20 2 2 21 22 Benefits paid and contributions (42) (35) (1) (2) (43) (37) Change in perimeter (8)---(8)- Actuarial (gains) losses recognized in OCI 27 1 2 (1) 29 - Currency translation differences 1 6 1 3 2 9 Change in held for sale provision (1) 14 - - (1) 14 Closing provision of continued operations (1) 340 336 46 42 386 378 Provision classified as held for sale 1 8 - - 1 8 TOTAL CLOSING PROVISION 341 344 46 42 387 386
(1) Out of which current portion amounts to €37 million and €46 million for years ended December 31, 2011 and 2010, respectively.
In 2011 the roll-forward provision of retirement obligation classified as held for sale liabilities is as follows:
Medical (in € millions) Pension plan benefits post-retirement benefits Total Opening provision (1) 8-8 Net Periodic Pension Cost - - - Benefits paid and contributions - - - Change in perimeter (2) (7) - (7) Actuarial (gains) losses recognized in OCI - - - Currency translation differences - - - CLOSING PROVISION 1 - 1
(1) This presentation excludes net asset in Switzerland of €1 million, classified in other assets. (2) €(8) million is related to Grass Valley disposal in France, the UK, USA, Japan, Switzerland and Germany and €1 million is related to Broadcast business classified as held for sale.
204 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
(a) Defined contribution plans The 2011 French pension reforms have no significant impact on the Group’s retirement benefit obligation. For the defined contribution plans, the Group pays contributions to independently administered funds. These plans guarantee employee A pension reform was voted by the Parliament in October 2010 which benefits that are directly related to contributions paid. The pension costs mainly increases the retirement age beyond 62. This reform had of these plans, corresponding to the contributions paid, are charged in limited impact on the consolidated financial statements which can be the statement of operations. The total contributions paid by Technicolor summarized as follows: amounted to €22 million in 2011 and €25 million in 2010 (of which €19 million relate to continued perimeter). – Concerning the lump sum paid to employees when they retire, the reform increases the amount to be paid due to longer period (b) Defined benefit plans of service but these increases are reduced due to longer discount period; These plans mainly cover pension benefits, retirement indemnities and medical post-retirement benefits. – The impact of the pension reform on termination indemnities was not significant except for a loss of €3 million recognized on early Pension benefits and retirements indemnities retirement in the 2010 consolidated statement of operations. The benefits are mainly based on employee’s pensionable salary and n In other countries, Technicolor mainly maintains a dedicated funded length of service. These plans are either funded through independently pension plan in the UK, which provides retirement annuity benefits. administered pension funds or unfunded. Pension plans maintained by the Group are mainly the following: Medical Post-retirement benefits In the U.S., Technicolor provides to certain employees a post-retirement n Within the Nafta area, the plans mainly consist of pension plans in medical plan. Under this plan, employees are eligible for medical benefits the United States: if they retire at age 55 or older with at least 10 years of service in most cases. The plan also includes life insurance benefits. This plan was eligible The employees of Technicolor are covered by a defined benefit pension to receive federal subsidies according to the U.S. Medicare Prescription plan, funded by a trust. Technicolor’s funding policy is to contribute Drug Improvement and Modernization Act of 2003. Such plan is no on an annual basis in an amount that is at least sufficient to meet the longer available to newcomers since 2003. minimum legal requirements of the U.S. law. Benefits are equal to a percentage of the plan Member’s earnings each year plus a guaranteed Technicolor has curtailed and eliminated certain post-retiree medical rate of return on earned benefits until retirement. benefit to U.S. employees in 2006 and 2007. This plan changes mainly (i) increased gradually the retires’ share of costs for medical and drug Technicolor mainly operates two defined benefit pension plans: a cash benefits beginning on January 1, 2009, (ii) changed the medical and balance pension plan that covers substantially all non-union employees, prescription drug design for 50-64 year olds and (iii) eliminated retiree funded through a trust fund, and an additional pension plan for executive life insurance for active employees. employees, closed to new participants.
A hard freeze occurred over 2009 on U.S. pension plans. The rights as (c) Multi-employer plan of January 1, 2010 remain vested but no additional pay-based credits One of Technicolor subsidiaries in the Netherlands participates in the are added to the c ash b alance a ccount under the Plans. Interest credits multi-employer defined benefits plan “Metalelektro”. As the information however, continue to be added to employees’ account. about the dividing up of contributions between each Member of the plan is not available, Technicolor accounts for this plan as a defined In Germany, employees are covered by several vested unfunded n contribution plan. pension plans. These plans mainly provide employees with retirement annuities and disability benefits. Since August 2009, Technicolor participates in the Motion Picture n In France, the Group is legally required to pay lump sums to Industry multi-employer defined benefit plan. As the information about employees when they retire. The amounts paid are defined by the the dividing up of contributions between each Member of the plan is not collective bargaining agreement in force and depend on years of available, Technicolor accounts for this plan as a defined contribution service within the Group and employee’s salary at retirement. plan.
TECHNICOLOR I ANNUAL REPORT 2011 I 205 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
27.2 Elements of the statement of operations
Medical (in € millions) Pension plan benefits post-retirement benefits Total 2011 2010 2011 2010 2011 2010 Service cost (6) (7) - (1) (6) (8) Interest cost (23) (27) (2) (2) (25) (29) Expected return on plan assets 10 12 - - 10 12 Amortization of prior service costs - (1) - 1 - - Effect of curtailment - 3---3 TOTAL NET PERIODIC PENSION COST (19) (20) (2) (2) (21) (22) Of which pension cost of discontinued perimeter (1) ------PERIODIC PENSION COST OF CONTINUING (19) (20) (2) (2) (21) (22) OPERATIONS
(1) In 2010 service and financial costs of discontinued operations were essentially offset by a curtailment gain of €4 million on the Grass Valley France restructuring plan.
Net periodic pension cost included in discontinued operations is nearly nil.
The financial components of pension plan expenses and expected return on assets are recognized in “Other financial income (expense)”.
206 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
27.3 Analysis of the change in benefit obligation
Medical (in € millions) Pension plan benefits post-retirement benefits Total 2011 2010 2011 2010 2011 2010 Change in benefit obligation Benefit obligation at opening (1) (533) (544) (42) (39) (575) (583) Current service cost (6) (7) - (1) (6) (8) Interest cost (23) (27) (2) (2) (25) (29) Amendment (1) (3) - 1 (1) (2) Plan participants contribution - (1) - - - (1) Curtailment / settlement 1 8 - - 1 8 Actuarial gain / (loss) (21) (4) (2) - (23) (4) Benefits paid 42 44 1 2 43 46 Currency translation adjustments (6) (19) (1) (3) (7) (22) Change in perimeter (2) 37 20 - - 37 20 Benefit obligation at closing (3) (510) (533) (46) (42) (556) (575) Benefits obligation wholly or partly funded (213) (231) - - (213) (231) Benefit obligation wholly unfunded (297) (302) (46) (42) (343) (344) Change in plan assets Fair value at opening (1) 187 172 - - 187 172 Expected return on plan assets 10 12 - - 10 12 Actuarial gain / (loss) (6) 2 - - (6) 2 Employer contribution (4) 17 12 - - 17 12 Plan participants contribution - 1---1 Settlement (1) (2) - - (1) (2) Benefits paid (17) (19) - - (17) (19) Currency translation adjustments 5 13 - - 5 13 Other - (1)---(1) Change in perimeter (2) (29) (3) - - (29) (3) Fair value at closing (3) 166 187 - - 166 187 Funded status (I) (344) (346) (46) (42) (390) (388) Unrecognized prior service cost (II) 3 2 - - 3 2 Of which recognition in held for sale (see note 11) (III) 1 8 - - 1 8
RETIREMENT BENEFIT OBLIGATIONS (340) (336) (46) (42) (386) (378) (I)+(II)+(III)
(1) The 2011 and 2010 opening position of DBO and plan asset includes a portion classified in held for sale. (2) The 2011 and 2010 changes in perimeter show impacts on disposal of Grass Valley businesses in the UK, France, U.S., Germany, Switzerland and Japan, and of Screenvision in Europe. (3) For NAFTA subsidiaries (which include U.S., Canada and Mexico) included in continued perimeter: n pension benefits obligations amount to €136 million and €133 million, for the years ended December 31, 2011 and 2010, respectively; n plan assets amount to €88 million and €83 million for the years ended December 31, 2011 and 2010, respectively; n medical post-retirement benefits obligations amount to €46 million and €41 million for the years ended December 31, 2011 and 2010, respectively (nil for plan assets and respectively nil and €0.5 million for unrecognized actuarial prior service cost). For German subsidiaries, the pension benefit obligation and the net pension accrual amount to €253 million and €252 million for the years ended December 31, 2011 and 2010, respectively. (4) Employer contributions are higher in 2011 due to the increase of US contributions compared to last year.
TECHNICOLOR I ANNUAL REPORT 2011 I 207 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
Medical post-retirement benefits plans are wholly unfunded.
The Group expects the overall 2012 cash payments to be equal to €36 million.
The experience adjustments are the following over the last five years:
(in € millions) Pension plan benefits Medical post-retirement benefits 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007 Benefit Obligation (510) (533) (544) (513) (540) (46) (42) (39) (38) (36) Asset Plan Fair Value 166 187 172 148 174 - - - - - Experience Adjustment 8 (9) 10 (50) (8) (1) (3) 1 (4) 13 In % of net benefit obligation (2.3)% 2.6% (2.7)% 13.7% 2.2% 2% 6% (3)% 11% (36)%
27.4 Plan assets When defined benefit plans are funded, mainly in the U.S. and UK, the investment strategy of the benefit plans aims to match the investment portfolio to the membership profile. Asset performance is reviewed on a quarterly basis and the asset allocation strategy is reviewed on an annual basis.
The 2011 actual return on plan assets amounts to €4 million and €14 million for the year ended 2010.
Technicolor’s pension plans weighted-average asset allocations by asset category are as follows:
Allocation of the fair value (in % and in € millions) Allocation of plan assets of plan assets 2011 2010 2011 2010 Equity securities 38% 42% 63 79 Debt securities 30% 31% 50 58 Insurance 21% 20% 35 36 Other 11% 7% 18 13
TOTAL 100% 100% 166 186
27.5 Assumptions used in actuarial calculations
Pension benefits Medical post-retirement benefits 2011 2010 2011 2010 Weighted average discount rate 4.5% 4.9% 4.6% 5.2% Weighted average expected return on plan assets 6.5% 6.4% NA NA Weighted average long-term rate of compensation increase 1.8% 2.0% NA NA
208 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
Discount rate methodology for the main benefits The projected benefit cash flows under the U.S. schemes are discounted using a yield curve determined based on AA rated corporate bonds. The discount rates used for the Euro-zone and the UK are determined based on AA rate corporate bonds common indexes and are as follows:
Euro zone U.S. UK Pension 4.5% 4.4% 4.7% Early retirement 3.3% NA NA Medical NA 4.7% NA
Other assumptions The long-term rates of return on plan assets (U.S. 6.5% and the UK 6.5%) have been determined for each plan in consideration of the investment policies, the expected return for each component of the investment portfolio and other local factors in the country of the plan.
Sensitivity analysis The table below shows the sensitivity to change in healthcare costs and change in discount rate:
Sensitivity of assumptions (in € millions) for 2011 1% increase in healthcare costs Impact on medical post-retirement benefit 2011 expense - Impact on medical post-retirement benefit obligation as of December 31, 2011 1 1% reduction in healthcare costs Impact on medical post-retirement benefit 2011 expense - Impact on medical post-retirement benefit obligation as of December 31, 2011 (1) 0.25% increase in discount rate Impact on pension and medical post-retirement benefit 2011 expense - Impact on pension and medical post-retirement benefit obligation as of December 31, 2011 (15) 0.25% reduction in discount rate Impact on pension and medical post-retirement benefit 2011 expense - Impact on pension and medical post-retirement benefit obligation as of December 31, 2011 16
TECHNICOLOR I ANNUAL REPORT 2011 I 209 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
NOTE 28 PROVISIONS FOR RESTRUCTURING AND OTHER CHARGES
28.1 Restructuring provisions
(in € millions) 2011 2010 Opening provisions 56 64 Current year expense (1) 90 55 Release of provision (1) (6) (11) Usage during the period (54) (54) Currency translation adjustment -2 Change in held for sale provision (1) 1 Other movements (2) (4) (1)
CLOSING PROVISIONS 81 56 Of which current 79 49 Of which non-current 27
(1) Restructuring expenses, net of release, have been posted as follows in the consolidated statement of operations:
(in € millions) 2011 2010 Profit (loss) from continuing operations Termination costs (80) (40) Impairment of assets (part of a restructuring plan) (2) (3) (1) Continuing restructuring expenses (*) (83) (41) Profit (loss) from discontinued operations Related to activities discontinued and classified as held for sale (3) 2 (50) Related to activities discontinued but not classified as held for sale (1) (3) Discontinued restructuring expenses 1 (53)
TOTAL RESTRUCTURING EXPENSES OF THE GROUP (82) (94)
(* ) On December 19, 2011, the Group announced a number of cost reduction action plans that should lead to a reduction in the Group’s global workforce of around 600 employees in 2012, impacting mainly Connect business, European photochemical film activities and streamlining of support functions. (2) These restructuring costs are reclassified in the consolidated balance sheet against assets prior to disposals and appeared therefore in the line “other movements” within the restructuring provision variation. (3) The amounts related to activities discontinued and classified as held for sale are not presented in the variation of restructuring provision above as they are presented within “Liabilities classified as held for sale” in the consolidated balance sheet.
210 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
28.2 Other provisions
(in € millions) Warranty (1) Others (2) Total (3) As of January 1, 2010 28 132 160 Current period additional provision 11 42 53 Release of provision (7) (30) (37) Usage during the period (7) (7) (14) Change in held for sale provision - 1 1 Currency translation adjustments and other 1 2 3 As of December 31, 2010 26 140 166 Current period additional provision 7 42 49 Release of provision (7) (29) (36) Usage during the period (4) (26) (30) Change in held for sale provision (1) (3) (4) Currency translation adjustments and other (3) (1) (4)
AS OF DECEMBER 31, 2011 18 123 141
(1) As of December 31, 2011, warranty provisions were lower compared to December 31, 2010 due mainly to the lower level of activity of Connect business. (2) Others include mainly provision for risk and litigation and for onerous contracts. As of December 31, 2011, provisions for litigation amount to €31 million. (3) Split of total provisions between non-current and current: n as of December 31, 2011, €83 million classified as non-current and €58 million as current. n as of December 31, 2010, €97 million classified as non-current and €69 million as current.
NOTE 29 SHARE-BASED Stock options will vest on the date the Board of Directors approves COMPENSATION PLANS the accounts for the fiscal year ended December 31, 2012 (“the first vesting date”, estimated to be in April 2013) and become exercisable as of June 17, 2014. The duration of the plan is eight years. 29.1 Plans granted by Technicolor For France-tax domicile beneficiaries, free shares will be acquired on n In February 2011, the Board of Directors approved the principles of a the date the Board of Directors approves the accounts for the fiscal Long-Term Incentive Plan (LTI) that has been implemented during year ended December 31, 2012 (“the first vesting date”, estimated to the first semester of 2011. As part of this plan, free performance shares be in April 2013) and will be subject to additional two-years holding may be awarded in 2012, 2013 and 2014 to some senior executives period. For non-French tax domiciled beneficiaries, free shares will subject to and proportionally to fulfillment of specified performance be acquired and exercisable on June 17, 2014. conditions based both on market performance criteria and on Beneficiaries need to be continuously employed for the plan’s entire Technicolor performance achieved respectively on December 31, duration. 2011, 2012 and 2013 as approved by the Board of Directors. For free performance shares that would be awarded based on 2011 and 2012 n The Board of Directors of the Group in June 2007 decided to launch performance, final vesting is still conditional to senior executives a Free Share Plan. According to this plan, Technicolor granted its staying in the Company at least until June 8, 2013. eligible employees two Technicolor newly issued shares for free. The vesting period of the shares was dependent on the country and n On June 17, 2010, the Board approved a Mid-term Incentive specific local rules. The vesting period was therefore two years for Plan (MIP) granting non-market performance units made up of a France and certain other European countries and four years for some combination of cash and, depending on Management level, either countries such as the United States. stock options or free shares. Subject to the presence condition and fulfillment of specified non-market performance conditions on As of December 31, 2011 the total number of outstanding stock December 31, 2012 as approved by the Board, the rights under the options amounted to a maximum of 1,381,396 options and 1,840,230 plan shall vest either partially or in full for each beneficiary in the free shares granted to employees and Directors and of 206,828 proportions set by the Board. options granted to employees and Directors that are not in the scope of IFRS 2 because of IFRS 1 exemptions. The details of these options are disclosed hereafter.
TECHNICOLOR I ANNUAL REPORT 2011 I 211 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
In accordance with the transition provisions of IFRS 2 “Share-based Payments”, IFRS 2 has been applied to all grants made after November 7, 2002 that were unvested as of January 1, 2005. As a result, only the following stock option plans are accounted for under IFRS 2, with the other plans being disclosed later in this section:
Estimated Number fair values of options Number Initial of the Type of initially of options number of Contractual Exercise options plan Grant date granted outstanding beneficiaries Vesting date option life price granted Plan 3 Subscription Sept. 22, 2004 359,990 121,768 574 50% as of Sept. 22, 2007 10 years €133.00 €65.3 options 50% as of Sept. 22, 2008 Plan 4 Purchase April 19, 2005 71,940 35,712 93 50% as of April 19, 2008 10 years €173.1 €73.2 options 50% as of April 19, 2009 Plan 5 Purchase Dec. 8, 2005 199,317 58,356 390 50% as of Dec. 8, 2008 10 years €147.40 €62.5 options 50% as of Dec. 8, 2009 Plan 6 Subscription Sept. 21, 2006 273,974 94,365 485 50% as of Sept. 21, 2008 8 years €103.8 €32.2 options 50% as of Sept. 21, 2009 Free Share Free Shares June 21, 2007 46,406 - 23,203 From June 21, 2009 - - From €124.1 Plan to June 21, 2011 to €130.8 LTIP (*) Free Shares Oct. 17, 2007 36,869 - (1) 124 From October 17, 2009 - - From to October 17, 2010 €107.4 to €111.1 Plan 7 Subscription Dec. 14, 2007 130,710 66,465 482 50% as of Dec. 14, 2009 8 years €86.7 €20.8 options 50% as of Dec. 14, 2010 MIP (*) Free Free Shares June 17, 2010 492,020 (2) 345,960 64 April 30, 2013 for France - - €5.5 Share June 17, 2014 for other countries MIP (*) options Subscription June 17, 2010 1,216,700 (2) 1,004,730 18 April 30, 2013 for France 8 years €6.60 €2.32 options June 17, 2014 for other countries LTI Free Free Shares April 28, 2011 1,637,152 (2) 1,494,270 63 June 2013 (50%) and - - €5.2 on Share and March 2014 (50%) average June 30, 2011
(*) Long-term Incentive Plan (LTIP) for key managers and high potentials/Management Incentive Plan (MIP) see description above. (1) Assessment due to non realization of grant conditions. (2) Maximum potential number.
212 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
Movements in the number of share options outstanding and their related weighted average exercise prices are as follows for 2011 and 2010:
Number of share Weighted Average options Exercise Price (in €) Outstanding as of December 31, 2009 644,256 143.2 (with an average remaining contractual life of 5 years – excluding free shares) (ranging from €0 to €208.2) Out of which exercisable 575,436 €151 Impact of factor in adjustment of 2010 capital increase 127,520 n.a New stock options granted in 2010 (maximum number) 1,221,010 6.6 New free shares granted 492,020 - Forfeited (274,732) 62.6 Outstanding as of December 31, 2010 2,210,074 46 (with an average remaining contractual life of 5 years – excluding free shares) (ranging from €0 to €208.2) Out of which exercisable 634,484 €148,6 New free shares granted in 2011 (maximum number) 1,637,152 - Delivered (1) (5,744) - Paid (1) (6,282) - Forfeited (613,574) 63.9 OUTSTANDING AS OF DECEMBER 31, 2011 3,221,626 19.4 (with an average remaining contractual life of 6 years – excluding free shares) (ranging from €0 to €208.2) Out of which exercisable 376,666 €148.6
(1) In 2011, in the frame of the Free Share Plan, Technicolor proposed to its employees either to receive the shares vested or to be paid for the value of such shares.
Significant assumptions used The estimated fair values of the stock options granted were calculated using the Black-Scholes option pricing model.
The inputs into the model were as follows:
(in % and in euro) Stock Options plans granted in 2010 2007 2006 2005 Weighted average share price at measurement date 5.5 99.8 124.1 184 Weighted average exercise price 4.68 104.3 124.9 186 Expected volatility 52% 28% 30% 35% Expected option life (*) 5 years 5 years 5 years 7 years Risk free rate 1.85% 4.1% 3.6% 3.6% Expected dividend yield 0% 3.4% 2.25% 1.8% Fair value of option at measurement date 2.3 2.08 3.2 6.5
(*) Which is shorter than the contractual option life as it represents the period of time from grant date to the date on which the option is expected to be exercised.
TECHNICOLOR I ANNUAL REPORT 2011 I 213 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
For stock options plans, Technicolor considered an expected turnover within the scope of IFRS 2. They are both cash settled share-based of 8% based on historical observation. Volatility is a measure of the transactions. amount by which a price has fluctuated or is expected to fluctuate during – For the “Value Options Plan” granted in December 2011, the a period. The measure of volatility used in option-pricing models is the employees will vest a lump sum payment upon a change in control annualized standard deviation of the continuously compounded rates of MediaNaviCo or an Initial Public Offering (IPO) equal to the of return on the stock over a period of time. amount, if any, by which the final per share value of MediaNaviCo exceeds the exercise price of the options, Factors that have been considered in estimating expected volatility for the long-term maturity stock option plans include: – For the “Profit Interest Plan”, the two executives will each be granted “incentives units” in 3 tranches: n the historical volatility of Technicolor’s stock over the longest period - 1.57% (T1) of MediaNaviCo gains and profits (equivalent to fair available; market value at liquidity event date minus fair market value at n adjustments to this historical volatility based on changes in grant date) after the grant date of T1 (granted in September 2011) Technicolor’s business profile; - 0.44% (T2) of MediaNaviCo gains and profits after grant date n for shorter maturity options, expected volatility was determined based of T2 (to be granted on January 1, 2013) on implied volatility on Technicolor’s share observable at grant date. - 0.34% (T3) of MediaNaviCo gains and profits after grant date For the 2011 and 2010 free shares granted as part of the MIP and the LTI, of 3rd tranche (T3) (to be granted on January 1, 2014). Technicolor considered an expected turnover of 4% based on historical These “incentives units” will vest 25% per year for 4 years from the grant data of related beneficiaries, an average initial share price of €5.2 in 2011 date. They can be exercised each year starting January 1, 2019 or earlier (€5.5 in 2010), and a dividend rate of 0% (in 2011 and 2010). in case of a change in control of MediaNaviCo or an IPO.
29.2 Plans granted by MediaNaviCo The estimated fair values of the options granted to the employees and to the two executives were calculated using a binomial option pricing n Technicolor’s subsidiary MediaNaviCo granted “Value Options model. Plan” to employees and a ”Profit Interest Plan” for two MediaNaviCo executives. Both plans are similar to share appreciation rights and fall
The inputs into the model were as follows:
Profit interest Options Value Options Number of options granted as of December 31, 2011 4,450,624 3,590,000 Expected volatility 60% 60% Expected vesting period (in years) 4 4.5 Risk free rate 2.1% 2.1% Repo rate 3% 3% Turnover rate 0% 15% Exercise price na 0.43 Fair value of option at measurement date (in euro) 0.20 0.20
Volatility is a measure of the amount by which a price has fluctuated or As the plans are cash settled, the counterpart of the expense in the is expected to fluctuate during a period. The measure of volatility used balance sheet is a liability that has to be remeasured at fair value at each is based on the volatility rates used by MediaNaviCo’s peers to value reporting date, by applying an option pricing model. their stock options plans. The impact of this plan on Technicolor’s 2011 result is nearly nil.
214 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
29.3 Compensation expenses charged 29.4 Elements concerning the plans to to income which IFRS 2 has not been applied (*) (*) Granted before November 7, 2002 and/or vested as of January 1, 2005. The compensation expenses charged to income for the services received during the period amount to €1 million and €1 million for the years ended December 31, 2011 and 2010, respectively. The counterpart of The equity instruments not restated under IFRS 2 in accordance with this expense has been credited fully to equity in 2011 and 2010. IFRS 1 includes BASAs (“Bons d’Achat et de Souscription d’Actions”) granted on September 15, 2004 and acquired by the Group’s employees who were eligible to participate in the plan.
The residual equity instruments not restated under IFRS 2 and for which the option life has not expired are the stock options granted in 2004 in replacement of stock option rights granted prior to November 7, 2002 (part of Plan 3).
Plan 1 expired on December 18, 2010 and Plan 2 expired on October 11, 2011.
The details of stock options (excluding BASAs) not accounted for under IFRS 2 because of IFRS 1 exceptions are as follows:
Weighted Average Number of options Exercise Price (in €) Outstanding as of December 31, 2009 311,265 228 (with an average remaining contractual life of 4 years) Out of which exercisable 311,265 228 Factor in the adjustment due to capital increase 54,866 - Forfeited (30,362) 164 Expired (Plan 1) (42,150) 559 Outstanding as of December 31, 2010 293,619 177 (with an average remaining contractual life of 3 years) Out of which exercisable 293,619 177 Forfeited (54,018) 160 Expired (Plan 2) (32,773) 315 OUTSTANDING AS OF DECEMBER 31, 2011 206,828 160 (with an average remaining contractual life of 3 years) Out of which exercisable 206,828 160
NOTE 30 OTHER CURRENT AND NON-CURRENT LIABILITIES
(in € millions) 2011 2010
TOTAL OTHER NON-CURRENT LIABILITIES 97 131 Taxes payable 32 35 Current royalties 98 99 Payables for PPE, intangible assets and contracts 37 21 Other 194 219
TOTAL OTHER CURRENT LIABILITIES 361 374
TECHNICOLOR I ANNUAL REPORT 2011 I 215 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
NOTE 31 EARNINGS (LOSS) PER SHARE shares (weighted number since May 26, 2010), for the computation of the basic earnings per share. Weighted number of shares for 2011 In 2010, the payment of the interest claims of the TSS holders against the Basic: NRS II are taken in the weighted number of shares for 365 days. Company in cash (definitively extinguishing these interest claims - for NRS II C converted into shares are taken in the weighted number of further details, see note 22.4) in an amount of €25 million and which was shares for one day in the denominator. registered as a reduction of equity, has been included as a reduction of income of €21 million (net of tax) in the numerator. Diluted: NRS II C converted into shares are taken in the weighted number of shares for 364 days and those not yet converted for 365 days. NRS IIC, because of the optional payment in cash or shares at Technicolor’s option, have been considered as potential shares and Weighted number of shares for 2010 included in the calculation of diluted earnings per share. The interests on NRS IIC have not been considered in the numerator because they Basic: NRS I and NRS II were issued on May 26, 2010 and are taken in have not impacted the result (see note 22.2). the weighted number of shares for only 219 days. DPN converted into shares account only for one day in the denominator. The DPN are financial debts convertible into shares and have been considered in the calculation of diluted earnings per share from the date Diluted: NRS II C and DPN are taken in the weighted number of shares of issuance (May 26, 2010) until December 31, 2010 and the interest has for 219 days and 218 days, respectively. been included in the numerator net of tax. NRS I and NRS II, including the accrued interest, are equity instruments (see note 22.2), and have therefore been considered as outstanding
Diluted earnings (loss) per share The calculation of the diluted earnings (loss) per share from continuing operations attributable to the ordinary equity holders of the parent presented is as follows:
2011 2010 NUMERATOR:
Adjusted profit (loss) from continuing operations attributable to ordinary shareholders (in € millions) (302) 147 DENOMINATOR (*) (WEIGHTED SHARES IN THOUSANDS) 225,828 146,493 Of which NRS IIC (1) 18,894 11,315 DPN (2) - 29,863 Stock options (3) 77 498
(*) Weighted average number of share for basic earnings is 206,857 thousands shares in 2011 and 104,817 thousands shares in 2010. For computation of the diluted earnings (loss) per share, weighted number of NRS IIC, DPN (in 2010) and stock options are added. (1) This weighted amount of shares includes 17,959 thousands new shares issued on December 30, 2011 and 985 thousand shares that could be issued for the NRS IIC whose conversion is deferred until December 31, 2012 if not redeemed in cash. (2) DPN were redeemed in cash for an amount equal to the net sale proceeds of certain non strategic assets and in new ordinary shares on December 31, 2010 for the remaining part up to the maximum of 50,000,000 shares. (3) In 2011 and 2010, mainly the MIP has a dilution impact. Due to Technicolor’s share price during 2011 and 2010 all other stock option plans except free share plans have no dilution impact. Some of these plans could have dilution impact in the future depending on the stock price evolution (see details of these plans in note 29).
216 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
Profit (loss) from continuing operations is adjusted by the following items:
(in € millions) 2011 2010 Profit (loss) from continuing operations (303) 156 Profit (loss) from continuing operations attributable to ordinary shareholders (302) 156 Interests claim paid on TSS subordinated notes (net of tax) - (21) Profit (loss) from continuing operations attributable to ordinary shareholders for basic earnings per share (302) 135 Interests on DPN (net of tax) -12 Adjusted profit (loss) from continuing operations attributable to ordinary shareholders for diluted earnings (302) 147 per share
The calculation of the diluted earnings (loss) per share from discontinued operations attributable to the ordinary equity holders of Technicolor is as follows:
2011 2010 NUMERATOR:
Adjusted profit (loss) from discontinuing operations attributable to ordinary shareholders (in € millions) (21) (225) DENOMINATOR (weighted shares in thousands) 225,828 146,493
NOTE 32 INFORMATION ON EMPLOYEES The geographical breakdown of the number of employees of the Group at the end of the year is as follows:
2011 2010 Continuing Continuing Total Group operations Total Group operations Europe 5,766 5,766 6,424 5,675 North America 6,497 6,497 7,473 7,401 Asia (1) 1,975 1,975 1,797 1,775 Other countries (2) 2,704 2,704 2,164 2,160
TOTAL NUMBER OF EMPLOYEES 16,942 16,942 17,858 17,011
Number of employees in entities accounted for under the equity method 232 232 252 252 (1) Including People’s Republic of China including Hong Kong 568 568 606 597 (2) Including Mexico 1,608 1,608 1,435 1,435
TECHNICOLOR I ANNUAL REPORT 2011 I 217 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
The total “Employee benefits expenses” (including only people employed in the consolidated entities) is detailed as follows:
(in € millions) 2011 2010 Discontinued Continuing Discontinued Continuing Total Group operations operations Total Group operations operations Wages and salaries 833 9 824 934 145 789 Social security costs 114 3 111 140 32 108 Compensation expenses linked to share options granted to 1-11-1 Directors and employees (1) Pension costs - defined benefit plans (2) 21 - 21 22 - 22 Termination benefits and other long-term benefits (3) 79 (1) 80 93 53 40
TOTAL EMPLOYEE BENEFITS EXPENSES 1,048 11 1,037 1,190 230 960 (EXCLUDING DEFINED CONTRIBUTION PLANS) (4) Pension costs - defined contribution plans 22 - 22 25 6 19
(1) See note 29. (2) See note 27. (3) These costs were presented in restructuring expenses within continuing operations and in net loss from discontinued operations in the consolidated statement of operations (see note 28). (4) The defined contribution expenses paid within a legal and mandatory social regime are included in Employee benefits expenses shown above.
NOTE 33 ACQUISITIONS, DISPOSALS AND OTHER CASH OPERATIONS IMPACTING THE CONSOLIDATED STATEMENTS OF CASH FLOWS (a) Cash impact of debt restructuring
(€ in millions) note 2011 2010 Share capital increase by shareholders with preferential subscription rights (22) - 203 (*) Fees paid for debt and capital restructuring (1) (9) (9) (51) Payment of the interests claims of TSS holders (22.4) - (25) Reimbursement of DPN to creditors (2) (22.2) - (96) Reimbursement of borrowings to creditors (25) (51) (203) (*)
TOTAL CASH IMPACT OF DEBT RESTRUCTURING (60) (172)
(*) In accordance with the Sauvegarde Plan, the cash proceeds from exercise of the preferential subscription rights were used to reimburse the debt. (1) The €9 million and €51 million costs directly linked to the restructuring and paid in 2011 and 2010 respectively have been classified as financing cash flows as they relate to the debt and capital restructuring of the Group. (2) Of which €48 million paid on May 26, 2010.
(b) Acquisition of subsidiaries, associates and investments
(in € millions) 2011 2010 Business acquisition from Laser Pacific (6) - Technicolor Digital Cinema LLC (deferred payment) (2) (1) Other (4) (3) Acquisition of investments (12) (4) Less: cash position of companies acquired --
ACQUISITION OF INVESTMENTS, NET (12) (4)
218 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
(c) Disposal of subsidiaries, activities
(in € millions) 2011 2010 Disposals on continuing activities ContentGuard 18 - Videocon -40 Other disposal and cash of companies disposed of (4) (3) Net cash impact in continuing activities 14 37 Disposals of discontinued activities Grass Valley activities (27) (32) Screenvision US -43 Convergent Media System Corporation -5 Other disposal and cash of companies disposed of (5) (13) Net cash impact of discontinued activities (32) 3
TOTAL CASH IMPACT OF DISPOSALS (18) 40
(d) Changes in working capital and other assets The Group provides certain guarantees to third parties (financial and liabilities institutions, customers, partners and government agencies) to ensure the fulfilment of contractual obligations by Technicolor and its consolidated Starting in 2011 the French tax authorities reimburse the Research Tax subsidiaries in the ordinary course of their business. The guarantees Credit (CIR) after a three-year period (instead of a one year period for are not shown in the table below as they do not increase the Group’s previous years’ CIR). Therefore in 2011 Technicolor decided to sell to a commitments in relation to the initial commitments undertaken by the bank its 2010 CIR for €17 million in cash. entities concerned. Performance guarantees granted contractually, in particular for our Broadcast Services within Digital Delivery segment is not included in this table. NOTE 34 CONTRACTUAL OBLIGATIONS AND OTHER In the normal course of its activity, the Entertainment Services Division COMMITMENTS may provide guarantees to its customers on the products stored and then distributed against any risk or prejudice that may occur during The following table provides information regarding the aggregate manufacturing, storage or distribution. Such guarantees provided are maturities of contractual obligations and commercial commitments as of covered by insurance and are therefore excluded from the table below. December 31, 2011 for which the Group is either obliged or conditionally Guarantees provided by entities of the Group for securing debt, capital obliged to make future cash payments (contractual obligation related leases, operating leases or any other obligations or commitments of to the debt restructuring agreement is detailed in note 25). This table other entities of the Group are not included as the related obligations includes firm commitments that would result in unconditional or are already included in the table below. conditional future payments, but excludes all options since the latter are not considered as firm commitments or obligations. When an obligation leading to future payments can be cancelled through a penalty payment, the future payments included in the tables are those that management has determined most likely to occur.
TECHNICOLOR I ANNUAL REPORT 2011 I 219 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
Unconditional and conditional future payments Amount of commitments by maturity Less than More than (in € millions) 2011 1 year 1 – 3 years 3 – 5 years 5 years Unconditional future payments On-balance sheet obligations: Financial debt excluding finance leases (1) 1,493 78 212 180 1,023 Finance leases (2) 77--- Payables on acquisition and disposal of companies 3 - 1 2 - Off-balance sheet obligations: Operating leases (3) 369 77 117 71 104 Purchase obligations (4) 110110--- Other unconditional future payments (5) 40 29 9 2 -
TOTAL UNCONDITIONAL FUTURE PAYMENTS (*) 2,022 301 339 255 1,127 Conditional future payments Off-balance sheet obligations: Guarantees given (6) 70 22 11 - 37 Other conditional future payments (7) 8242-
TOTAL CONDITIONAL FUTURE PAYMENTS (*) 78 24 15 2 37
(*) “Total Unconditional future payments” and “Total Conditional future payments” as of December 31, 2010 amounted respectively to €2,023 million and €53 million on continuing entities. Contractual obligations and commercial commitments taken by discontinued entities, unconditional and conditional, amounted to €18 million as of December 31, 2010. (1) Financial debt is reported here at its nominal value for its principal amount and accrued interest (IFRS value reported in the consolidated statement of financial position is €1,327 million see note 25). Future interest expense and the impact of interest rate swaps are not reported in this table. Currency swaps, hedging operations and foreign exchange options are described below in a separate table. (2) The main finance leases relate to the Digital Delivery segment (€5 million in the UK and €2 million in the Netherlands). (3) Operating leases are described below in this note. (4) These include in particular commitments to acquire minimum volumes from Asian suppliers for €108 million. (5) Other unconditional future payments relate in particular to (i) licensing agreements within the Digital Delivery and Entertainment Services segments and (ii) other contractual advances. (6) These guarantees comprise: n Guarantees given to lessors for €37 million; n Guarantees given for disposal of assets for €2 million; n Guarantees for customs duties and legal court proceedings for €12 million, comprising mainly duty deferment guarantees required by the customs administrations to benefit from customs duty deferments. Imported goods are normally taxed when they enter the territory. In the case of regular import flows, customs may grant an economic regime, under which a cumulated duty payment is made after a determined one-month credit period. The carrying value of this guarantee is to cover the duties to be paid during the credit period; n Various operational guarantees granted to customs administrations in order to be exempt from duties goods transiting through customs warehouses for re-exportation, and transit guarantees in order that taxes are paid on goods only at their final destination in the import country. The maturity of these bank guarantees match the one-month renewable term of the agreements. (7) Conditional obligations mainly include contingent earn out payments for €8 million related to past acquisitions.
Additional information: n Guarantees and commitments received amount to €117 million as of December 31, 2011. This amount is mainly related to the royalties from licensees (patents, trademarks) within the Technology segment; n The above table is only related to continuing entities. Contractual obligations and commercial commitments taken by discontinued entities, unconditional and conditional, amount to €13 million as of December 31, 2011.
220 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
Commitments related to financial instruments Commitments related to financial instruments held by the Group generate both future cash payments and receipts. Therefore they have not been disclosed in the table above. These commitments are disclosed in the following table as follows: n Forward exchange contracts, swaps and options: for their related cash inflow and outflow amounts; n Interest rate swaps: for the underlying nominal debt amounts.
(in € millions) 2011 Currency swaps 18
TOTAL COMMITMENTS GIVEN 18 Currency swaps 18
TOTAL COMMITMENTS RECEIVED 18
Operating leases At December 31, 2011, commitments related to future minimum and non-cancellable lease payments are detailed below:
Future lease payments Net value of future lease (in € millions) Minimum future lease payments (1) commitments received (2) commitments 2012 78 (5) 73 2013 68 (3) 65 2014 49 - 49 2015 38 - 38 2016 32 - 32 After 5 years 104 - 104
TOTAL 369 (8) 361
(1) Minimum operating lease payments shown are not discounted. (2) Includes mainly operating lease payments from customers of our Broadcast Services activities within the Digital Delivery segment.
The main operating leases relate to the office buildings in Issy-les- The net operating lease expense of the Group in 2011 was €75 million Moulineaux and Indianapolis: (€82 million in rental expense and €7 million in rental income). n On April 22, 2008, Technicolor signed a commitment for a new operating lease for its headquarters in France in Issy-les-Moulineaux Guarantees granted by subsidiaries and security near Paris for a duration of 9 years from November 2009. Under the interests granted to secure the Reinstated Debt lease agreement, Technicolor can elect to move in December 2012 A security package consisting of share pledges, pledges of certain without penalties if an eligible lessee is proposed by Technicolor to receivables under material customer contracts, pledges of material the lessor. In that case, Technicolor would not have further obligation. intra-group loans and pledges of material cash-pooling accounts Accordingly, the lease obligation of Issy-les-Moulineaux was was put in place to secure the obligations of the borrower’s and each mentioned only for 3 years (until 2012) in the previous consolidated guarantor’s obligations under the Credit Agreement and Note Purchase financial statements. However due to the deterioration of the market Agreement. These assets will remain pledged until the final payment of conditions in 2011, the Group does not consider it anymore probable all the amounts due by the Group to its creditors. to find an eligible lessee in December 2012, the lease obligation is therefore mentioned until 2018; To secure its obligations under the Reinstated Debt, certain subsidiaries of the Company have agreed, severally and not jointly, irrevocably and The U.S. office building (administration and technical services n unconditionally to guarantee the Company’s and each other guarantor’s buildings) was sold in March 2000 and subsequently leased back obligations of payment and performance under the Reinstated Debt. from the purchaser until 2012. All material group Members as defined in the Credit Agreement are required to provide such guarantee.
TECHNICOLOR I ANNUAL REPORT 2011 I 221 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
In addition, the guarantor coverage must represent at least 90% of NOTE 35 CONTINGENCIES Covenant Group EBITDA and/or 70% of consolidated assets and/or 50% of consolidated revenue. In the normal course of the business, the Group is involved in various legal proceedings and is subject to tax, customs and administrative New material group Members and additional guarantors must accede regulation. The Group’s general policy is to accrue a reserve when a as guarantors in order to maintain the guarantor coverage on the basis risk represents a contingent liability towards a third-party and when the of the annual audited accounts for the year ended December 31, 2010 probability of a loss is probable and it can be reasonably estimated. and each financial year-end thereafter. Significant pending legal matters include the following: As of the closing date of the Reinstated Debt, the guarantors under the Credit Agreement and the Note Purchase Agreement comprised TSS appeal (pourvoi en cassation) against 18 entities mainly located in UK, France and USA. In 2011, 8 additional the Sauvegarde Plan subsidiaries have granted guarantees to secure the Reinstated Debt. On February 17, 2010, the Nanterre commercial court approved the Sauvegarde Plan which is now binding on all of Company’s creditors. Shares of subsidiaries pledged An appeal against the decision of the Nanterre commercial court was Technicolor SA and the main guarantors, which include Technicolor brought by certain holders of Titres Super Subordonnés (“TSS”) in International SAS (formerly Thomson Multimedia Sales International the Versailles Court of appeal. As no temporary stay of the Nanterre SAS), Technicolor Delivery Technologies SAS, Technicolor Inc. and decision was filed, Technicolor implemented the Sauvegarde Plan in Technicolor USA, Inc. (formerly Thomson Inc.) have pledged the shares May 2010. On November 18, 2010, the Versailles Court of appeal of 38 of their subsidiaries to secure part of the Reinstated Debt. dismissed the claims of the TSS holders and confirmed the validity of Technicolor’s Sauvegarde Plan. The holders of TSS have appealed on Receivables from material contracts pledged February 14, 2011 to the Cour de cassation (pourvoi en cassation) against the decision of the Versailles Court of appeal. This appeal was rejected Receivables of Thomson Licensing SAS were pledged under a Patent by the Cour de cassation on February 21, 2012. Licensing Agreement dated December 23, 2009 with Koninklijke Philips Electronics N.V. Any risk related to the termination of the Sauvegarde Plan, the capital markets transactions which implemented the Sauvegarde Plan in May Cash pooling accounts pledged 2010 and the issuance of the new shares issued in December 2010 and Pursuant to six different Cash Pooling Pledge Agreements, the cash December 2011 for the redemption of the NRS and the DPN is now pooling accounts of Technicolor SA and Technicolor USA, Inc were eliminated. pledged. The Cash Pooling Agreements relate to the domestic and international centralization of Group Treasury, a bilateral target Appeals before the Juge-Commissaire balancing agreement, an automatic dollar transfer agreement, a North Appeals have been brought before the Juge-Commissaire of the American target balancing agreement for multiple legal entities and a Commercial Court of Nanterre by certain creditors who contest the domestic UK cash concentration daily sweep arrangement. treatment of their claims by Technicolor’s Mandataires Judiciaires.
Intragroup loans pledged One of these appeals concerns Banco Finantia, a Portuguese bank, Pursuant to an Intragroup Loans Receivables Pledge Agreement, whose claim in the amount of €9.9 million was contested by the Intragroup loans receivables were pledged from (i) Technicolor Mandataires Judiciaires due to a declaration outside of the legal time Trademark Management, (ii) Technicolor Europe Ltd., (iii) limit. Indeed, Banco Finantia acquired such claim from the French Technicolor Videocassette Holdings (UK) Limited and (iv) Technicolor branch of Bank of America, who held the claim at the opening of the Entertainment Services Spain, SA. Sauvegarde proceeding, and who did not declare the claim prior to the transfer to Banco Finantia. Banco Finantia declared its claim on the last day of the 4-month deadline applicable to foreign creditors under Article R. 622-24 of the French Commercial Code. Technicolor and its Mandataires Judiciaires consider that, as this claim was held by a French creditor on the date the Sauvegarde proceeding was opened (the French branch of Bank of America), it should have been declared within the two-month deadline applicable to French creditors rather than the four-month deadline applicable to foreign creditors.
222 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
On February 22, 2011, the Juge-Commissaire rendered a decision in almost all of the assessments notified by the Italian Tax authorities. The favor of Banco Finantia, holding that Banco Finantia benefited from Direct Taxes Local Office appealed this decision in December 2005. In the four-month deadline within which to file a claim. Technicolor has December 2007, the Court decided in favour of Videocolor, confirming appealed against this decision. the previous favorable judgment. In July 2008, the Direct Taxes Local Office appealed these rulings to the Supreme Court. The case will be defended in the Versailles Court of appeal at the end of March 2012 and a decision is expected at the beginning of the second In December 2003, the Direct Taxes Local Office gave notice of an half of 2012. assessment with regard to fiscal year 1998 resulting in (i) additional taxes amounting to €0.1 million and (ii) penalties amounting to €0.1 million. Italian tax litigations – Videocolor transfer prices Videocolor appealed this assessment in March 2004 before the Court of appeal which decided, in December 2005, to reject almost all of The Company’s former Italian subsidiary, Videocolor S.p.A. the assessments of the Italian Tax authorities. The Tax office appealed (Videocolor), was subject to a tax verification process in connection this decision. In April 2008, the Court decided in favor of Videocolor. with its exporting of picture tubes to Technicolor USA, Inc. (formerly In May 2009, the Direct Tax Office appealed this sentence to the Thomson Inc.) from 1993 to 1998. In its report transmitted to the Italian Supreme Court. In July 2009, Videocolor filed its memorandum against Direct Taxes Local Office in December 1999, the Guardia di Finanza the appeal of the Direct Taxes Local Office with the Supreme Court. decided to modify the valuation method of the tubes exported to Technicolor USA, Inc. and, as a consequence, increasing the taxable Technicolor sold Videocolor in February 2005, but remains responsible income of Videocolor in the amount of €31 million for the years 1993 for the possible outcome of this dispute as a result of the guarantees through 1998. given to the buyer.
In May 2003, Videocolor elected to benefit, in respect of the years 1993 and 1994 only, from the new tax amnesty, enacted by the Italian Anti-dumping on televisions manufactured Parliament in 2003. In application of this amnesty law, Videocolor paid by Technicolor’s Thailand unit a total amount of €1 million, thereby ending all disputes with regard Customs authorities in eight European countries are assessing imports to the years 1993 and 1994. Videocolor is able to use all the tax losses into the European Union by Technicolor subsidiaries of television originating from 1993 and the previous years. manufactured by Technicolor in Thailand. These proceedings relate to different periods according to the different rules in each country, With regard to the year 1995, the Direct Taxes Local Office gave notice beginning at the earliest in 1997 and ending at the latest in August 2002. in 2001 of an assessment resulting in (i) additional taxes amounting to In accordance with the relevant procedures, Technicolor received in €4 million and (ii) tax penalties amounting to €4 million (before interest). May 2004, January 2005 and February 2005 various re-assessment Videocolor successfully appealed this assessment in October 2001 but, notices relating to antidumping duties, excluding interest and any following an appeal from the tax authorities, the judgment was partially applicable penalties, in the United Kingdom, Germany, France, Italy, overturned in November 2006, with the Court of appeal confirming an Spain, Denmark, Greece and Sweden in an aggregate amount of around assessment in the amount of €2 million, including penalties. €22 million.
Videocolor filed an appeal to the Supreme Court based on the On March 24, 2005, the Provincial Tax Court of Milan (Italy) rendered argument that the assessment was not founded on OCDE transfer a decision and maintained the assessment. The assessment was pricing principles. In addition, the Court of appeal made a manifest again maintained by the Court of appeal in a judgment rendered in error of calculation in revising the assessments and added a charge of March 2008. Technicolor appealed to the Italian Supreme Court, where €1.8 million that the Company is contesting with the Supreme Court. hearing has now been scheduled on February 2, 2012.
In 2002, the Direct Taxes Local Office gave notices of two assessments The Spanish Courts rejected Technicolor’s position in July 2005 and with regard to 1996 and 1997 fiscal years resulting in (i) additional in December 2007. The appeal to the Spanish Supreme Court was not taxes amounting to €3 million and €2 million, respectively and (ii) accepted because the amount was considered as too small. Therefore tax penalties amounting to €3 million and €2 million, respectively. Technicolor paid an amount of €0.4 million and waits for the outcome Videocolor challenged the assessments with the tax court in order to of the European Court of Justice proceeding before starting new legal nullify these assessments. In November 2004, this tax court rejected proceedings in Spain before interest and penalties.
TECHNICOLOR I ANNUAL REPORT 2011 I 223 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
The French Customs Authority accepted to submit in August 2005 to Technicolor Polska continues to contest the other assessments, as it the European Commission Technicolor’s duty refund claim based on does not consider them as valid. Article 239 of the European Community’s Customs Code. In May 2007, the European Commission notified a rejection of this claim, but Taoyuan County Former RCA Employees’ recognized the good faith of Technicolor. In July 2007, Technicolor filed an appeal at the 1st Instance of the European Court of Justice, which Solicitude Association (the “Association”) rejected in September 2009 Technicolor’s position. In November 2009, In April 2004, the Association filed a purported class action under Technicolor lodged an appeal at the European Court of Justice which Article 44-1 of the Taiwan Code of Civil Procedure in the Taipei District also rejected, in June 2010, Technicolor’s position. Technicolor Court, Taiwan, Republic of China against TCE Television Taiwan Ltd. continues legal proceedings at the national courts in France, Germany (“TCETVT”) and General Electric International, Inc. The Association and the UK. In June 2011, the French Court followed Technicolor’s is alleging they were exposed to various contaminants while living request and decided to transfer the case to the European Communities and working at the facility, which allegedly (1) caused them to suffer Court of Justice. various diseases, including cancer, or (2) caused them emotional distress from fear that living and working at the facility increased their risk of Technicolor still firmly believes that it has correctly declared and paid contracting disease. The Association claims damages in the amount duty on the imported televisions concerned, and, accordingly, strongly of TWD 2.7 billion (€68.4 million at December 31, 2011 closing rate). disputes the grounds of these re-assessments. In 2005, the Association’s complaint was dismissed by the Taipei District Court based on the Association’s failure to comply with certain Poland Tax Proceedings procedural aspects of Taiwan’s class action statutes. To complete two requests for arbitrage on 2003 transfer prices between France & the UK on one side and Poland on the other side, the Polish Shortly thereafter, the Association appealed the dismissal, which was entity, Technicolor Polska, submitted in June 2009 an €8 million tax reversed by the Taiwan Supreme Court. In 2006, the case was remanded refund request to the Polish Tax Authorities. At the same time, the Polish to the Taipei District Court for further proceedings as to procedural Tax Authorities launched, in 2009, an audit on the 2003 Income Tax & compliance by the Association. The case is being vigorously defended. 2004 withholding tax returns. The parties have filed a number of briefs addressing procedural and substantive issues and the court has held several hearings. The After lengthy proceedings, the Polish Tax Authorities issued provisional Association has also attempted to add TCE Bermuda, Technicolor USA, assessments in 2010 with respect to 2003 deductibility of R&D costs Inc., Technicolor SA, and General Electric Company as defendants in & 2004 withholding taxes resulting in (i) additional taxes amounting the lawsuit. It is Technicolor’s position that General Electric Company to €10 million and (ii) interests amounting to €7 million. In between, has indemnity obligations to Technicolor with respect to certain liabilities Polish Tax Authorities had established a €17 million mortgage on resulting from activities that occurred prior to the 1987 agreement with the Company’s assets which also had as an indirect consequence the General Electric. General Electric denies the existence of any such prevention of the statute of limitations from expiring. In May 2010, the obligations to Technicolor. Polish Tax Authorities launched another audit on the 2004 corporate income tax and 2005 withholding tax returns. They issued in January 2011 provisional assessments equivalent to the previous year assessments, i.e. Pegasus Development Corporation and deductibility of 2004 R&D costs & 2005 withholding taxes, amounting Personalized Media Communications, L.L.C. €5 million in principal and €3 million in interest. In December 2000, Pegasus Development Corporation (“Pegasus”) and Personalized Media Communications, L.L.C. (“PMC”) filed suit in the In August 2011, the 1st level Administrative Court of Warsaw rejected US District Court for the District of Delaware against Technicolor USA, 98% of the 2010 assessments (on 2003 deductibility of R&D costs Inc. (formerly Thomson Inc.), DIRECTV, Inc., Hughes Electronics & 2004 withholding taxes) notified by the Polish Tax A uthorities. In Corporation, and Philips Electronics North America Corporation December 2011, this verdict became final as the Polish Tax Authorities alleging infringement with respect to seven patents relating to digital did not appeal. The Polish Tax Administration is currently reviewing the satellite signal processing. In November 2001, StarSight Telecast, Inc., final aspects of the proceedings. TVG-PMC, Inc., and Gemstar-TV Guide International, Inc. (“Gemstar”) were added as third-party defendants and filed a counterclaim.
224 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
Subsequently, Technicolor USA, Inc filed a Revised Second Amended As a result, this lawsuit was stayed as to the patents subject to re-issue Counterclaim and Amended Third-Party Complaint claiming violation proceedings. The patents subsequently reissued, and on October 2, of antitrust laws and unfair competition. 2009, the trial court formally lifted the stay of proceedings. After the sale of the Company’s Grass Valley Broadcast Business (“GVBB”) and Upon Technicolor USA, Inc.’s motion, the antitrust and unfair effective December 31, 2010, GVBB assumed the responsibility to competition claims were transferred to the US District Court for the defend and indemnify the Company in connection with this lawsuit. In Northern District of Georgia by the Judicial Panel on Multi-District furtherance of its assumption of that obligation, in March 2011, GVBB Litigation for inclusion in the coordinated or consolidated MDL-1274 elected to tender a federal rule of civil procedure 68 Offer of Judgment pre-trial proceedings occurring there involving Gemstar, Scientific in the case, offering to pay USD $700,000 in exchange for satisfaction Atlanta, Inc., Pioneer Corp., EchoStar Communications Corp., and of all claims of infringement asserted against Technicolor. On March other parties. 28, 2011, TLC accepted the Rule 68 Offer of Judgment, effectively resolving all claims of infringement against Technicolor in connection In June 2003, as part of a new commercial arrangement with Gemstar, with the lawsuit. Counsel for Technicolor and GVBB are of the opinion the Company dismissed with prejudice its antitrust and unfair competition that the accepted Offer of Judgment did not dispose of certain of claims against Gemstar and Gemstar agreed to provide the Company Technicolor’s counterclaims against TLC in connection with the case. with a limited indemnity with respect to the PMC patent litigation. In TLC, on the other hand, has taken the position that its acceptance of March 2004, the US District Court for the Northern District of Georgia the Offer of Judgment fully resolved all issues remaining in the case. remanded the antitrust and unfair competition claims back to the US The trial court ruled in favour of TLC on this issue, dismissing the case. District Court for the District of Delaware, where pursuant to an order This ruling has been appealed to the U.S. Court of appeal s for the of the US District Court for the District of Delaware in May 2003, the Federal Circuit. case was stayed pending the re-examination of the patents at issue by the US Patent and Trademark Office (“USPTO”). On November 21, 2011, the court issued an order lifting the stay of proceedings and set a Rembrandt Technologies vs Fox Entertainment scheduling conference for January 20, 2012. and NBC In December of 2006, Rembrandt Technologies filed separate lawsuits Pegasus claims damages in the form of royalties for some or all of the against Fox and NBC in the US District Court for the District of satellite integrated receivers/decoders (“IRD’s”) the Company has sold. Delaware. Each suit alleges that defendants Fox and NBC infringe US Patent 5,243,627 entitled “Signal Point Interleaving Technique” (the Through August 2, 2011 (the date of expiration of the last patent asserted “627 patent”) by transmission, or receipt and retransmission, over Fox against the Company), the Company had sold over 66 million IRD and NBC television systems, of digital terrestrial broadcast signals that units that might be impacted by this litigation, representing a significant comply with the ATSC digital television standard. Both Fox and NBC portion of the Company’s revenue. Pegasus has not yet definitively set have subsequently demanded that Technicolor defends and indemnifies forth in the litigation the per unit royalty figure or damages sum they them in each case, alleging that Rembrandt’s infringement allegations seek in the case. are in essence based upon digital television transmission equipment sold to Fox and NBC by Thales Broadcast and Multimedia, which the The USPTO has now confirmed as patentable four claims of three Company acquired in December 2005. patents asserted against the Company in the Delaware District Court litigation. However, an additional request for re-examination of one of While Technicolor has made no commitment with respect to Fox and those patents has been tendered to the USPTO, which could affect the NBC’s demands for indemnity in the event of a settlement or judgment actual claims ultimately confirmed as patentable. against them, Technicolor has agreed, subject to certain conditions and restrictions, to fund a portion of the defense costs in each case. IP Innovation and Technology Licensing Corp. On November 8, 2008, the District Court issued an order construing the On June 20, 2003, Technology Licensing Corp. (“TLC”) filed a lawsuit claims of the ‘627 patent. Rembrandt conceded that it could not prove in the US District Court for the Eastern District of California alleging that infringement of the patent under the Court’s claim construction, and certain Grass Valley Group products infringe four of TLC’s US patents. on September 7, 2011, final judgment was entered against Rembrandt. Thereafter, TLC placed two of the patents into re-issue proceedings On September 28, 2011, Rembrandt timely filed a notice of appeal to before the United States Patent and Trademark Office. In June and the United States Court of appeals for the Federal Circuit. Briefing on July 2005, the District Court granted summary judgment in favor of the appeal is now underway. Technicolor on the remaining two patents. TLC appealed that ruling to the US Court of appeal s for the Federal Circuit. In July 2006, the In conjunction with the Company sale of the Grass Valley transmission parties entered into a Settlement and License Agreement resolving all business to F4 Holding GmbH, F4 Holding GmbH has assumed the issues pertaining to the Appeal. responsibility to defend and indemnify the Company in connection with this lawsuit.
TECHNICOLOR I ANNUAL REPORT 2011 I 225 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
Cathode Ray Tubes Investigations Environmental matters On November 28, 2007, Technicolor USA, Inc. (US) (formerly A certain number of Technicolor’s current and previously-owned Thomson, Inc.) received a subpoena issued on behalf of the Antitrust manufacturing sites have an extended history of industrial use. Soil and Division of the U.S. Department of Justice (“DOJ”) investigating groundwater contamination, which occurred at some sites, may occur or alleged anticompetitive conduct in the Cathode Ray Tubes (“CRT”) be discovered at other sites in the future. Industrial emissions at sites that industry, including Color Picture Tubes (“CPT”) and Color Display Technicolor has built or acquired expose the Group to remediation costs. Tubes (“CDT”) businesses. The Group has identified certain sites at which chemical contamination has required or will require remedial measures. In addition, class action law suits asserting private antitrust claims were filed in early 2008 in the United States that originally named Thomson Soil and groundwater contamination was detected at a former production and others as defendants, although Thomson/Technicolor was dropped facility in Taoyuan, Taiwan acquired in the 1987 transaction with General as a named defendant when amended complaints were filed in the spring Electric Company and Technicolor’s affiliate in Taiwan owned the facility of 2009. from approximately 1988 to 1992, when it was sold to an entity outside the Group. Soil remediation was completed in 1998. On January 9, 2008, Thomson/Technicolor received a request under art 18 (2) of Council Regulation n°1/2003 from the European In 2002, the Taoyuan Environmental Protection Bureau ordered Commission (the “EC”) also relating to the CRT industry. Thomson/ remediation of the groundwater underneath the former facility. The Technicolor received three further requests for information from the groundwater remediation process is underway. EC on January 16, 2009, January 19, 2009, and September 15, 2009 respectively. It is Technicolor’s position that General Electric Company has a contractual obligation to indemnify Technicolor with respect to certain Thomson/Technicolor sold its CPT business in 2005 and never had liabilities resulting from activities that occurred prior to the 1987 activity in the CDT business. The Company has taken measures it agreement with General Electric. General Electric denies the existence considers appropriate to investigate the background to, and respond of any such obligations to Technicolor. to, the subpoena and the EC requests. To date, TCETVT has incurred approximately U.S.$11 million in On November 25, 2009, Thomson/Technicolor received a Statement remediation costs. In the class action case referenced above under of Objections (“SO”) from the European Commission. The SO is an “Taoyuan County Former RCA Employees’ Solicitude Association”, intermediate step in the EC’s investigation and, therefore, is not in the TCETVT has incurred approximately U.S.$6.3 million to date to defend nature of a final decision by the EC. the action. It is TCETVT’s position that General Electric is responsible for most if not all of the costs incurred by TCETVT for both matters, On March 3, 2010, Thomson/Technicolor filed its written response to including all future costs and any judgment awarded. the “SO”. On May 26 and 27, 2010, Thomson/Technicolor attended an Oral Hearing together with the other parties and the European In addition to soil and groundwater contamination, the Group sells or Commission. Thomson/Technicolor stated that it played a minor role has sold in the past products which are subject to recycling requirements in the alleged anticompetitive conduct. Thomson/Technicolor also and is exposed to changes in environmental legislation affecting these informed the European Commission about its financial situation and requirements in various jurisdictions. continues to cooperate closely with the European Commission. The EC should render its decision in 2012, but the Company considers that The Group believes that the amounts reserved and the contractual the timetable for the remainder of this proceeding cannot be accurately guaranties provided by its contracts for the acquisition of certain determined. production assets will enable it to reasonably cover its safety, health and environmental obligations. However, potential problems cannot On April 29, 2010 Technicolor’s Brazilian affiliate received notice be predicted with certainty and it cannot be assumed that these reserve from the Brazilian Ministry of Justice indicating Brazilian authorities amounts will be precisely adequate. are initiating an investigation of possible cartel activity within the CRT industry in Brazil. In addition, future developments such as changes in governments or in safety, health and environmental laws or the discovery of new risks could The Board of Directors has conducted a thorough examination of the risk result in increased costs and liabilities that could have a material effect on associated with these proceedings and has determined that at this stage the Group’s financial condition or results of operations. Based on current there are too many uncertainties to assess the extent of any liability that information and the provisions established for the uncertainties described Technicolor may incur in consequence of these investigations. Given above, the Group does not believe it is exposed to any material adverse these conditions, the criteria for establishing a reserve are not satisfied. effects on its business, financial condition or result of operations arising from its environmental, health and safety obligations and related risks.
226 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
NOTE 36 RELATED PARTY TRANSACTIONS The main transactions completed with, receivable from and payable to related parties are detailed as follows:
(in € millions) 2011 2010 Balance sheet items Trade receivables SV Holdco 4- Other related parties (1) n France Telecom and its subsidiaries -4 (1) n Thalès Group and its subsidiaries -3
n The Weinstein Company 74 Trade payables (1) n France Telecom and its subsidiaries -1 (1) n ST Microelectronics 11 (1) n Thalès Group and its subsidiaries 1- Statement of operations items Revenues Screenvision Europe 15 SV Holdco 15 - Other related parties (1) n France Telecom and its subsidiaries -15 (1) n Thalès Group and its subsidiaries -6
n The Weinstein Company 32 7 (1) n ST Microelectronics 2- Expenses SV Holdco (1) - Other related parties (1) n France Telecom and its subsidiaries - (11) (1) n ST Microelectronics (9) (20) (2) n NXP - (3) (1) n Thalès Group and its subsidiaries (4) (4)
(1) Since March 2011, Mr. Lombard, Director of Technicolor, Board Member of Thalès and Member of the Supervisory Board of ST Microelectronics, is no longer Chairman of France Telecom. As a consequence, Thalès and ST Microelectronics still are related parties of Technicolor, but France Telecom is not anymore. (2) Technicolor has sold the investment in NXP in 2010.
TECHNICOLOR I ANNUAL REPORT 2011 I 227 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
Key Management Personnel Compensation The 2010 and 2011 Directors’ fees and compensation expenses (incl. Social security costs) amounted respectively to €0.7 million and €0.7 million. The amounts due to Directors who are non-resident for French tax purposes are subject to a withholding tax. Fees due to Directors and advisors in respect to fiscal year 2011 will be paid in 2012.
Compensation expenses allocated by the Group to Members of the Executive Committee (including those who left this function during 2010 and 2011), during 2011 and 2010 are shown in the table below:
(in € millions) 2011 2010 Short-term employee benefits (1) 910 Termination benefits -- Share-based payment -1
TOTAL 911
(1) In addition, as of December 2011, the Group has an obligation of €3 million in case of retirement.
The Members of the Executive Committee can benefit from severance packages in case of an involuntary termination and in absence of fault, which represent a total estimated amount of €8 million.
NOTE 37 SUBSEQUENT EVENTS the Versailles Court of appeal. As no temporary stay of the Nanterre decision was filed, Technicolor implemented the Sauvegarde Plan in Following the January 20, 2012 and February 3, 2012 rulings by the May 2010. On November 18, 2010, the Versailles Court of appeal Tribunal de Commerce in Nanterre, France, Technicolor acquired dismissed the claims of the TSS holders and confirmed the validity of postproduction activities, certain operating assets and took over 54 Technicolor’s Sauvegarde Plan. The holders of TSS have appealed on employees from the Quinta Industries group, especially from ADJ (Les February 14, 2011 to the Cour de cassation (pourvoi en cassation) against Auditoriums de Joinville), SIS (Société Industrielle de Sonorisation), the decision of the Versailles Court of appeal. This appeal was rejected Scanlab and Duboi. by the Cour de cassation on February 21, 2012. Any risk related to the termination of the Sauvegarde Plan, the capital markets transactions On February 17, 2010, the Nanterre C ommercial C ourt approved the which implemented the Sauvegarde Plan in May 2010 and the issuance Sauvegarde Plan which is now binding on all of Company’s creditors. of the new shares issued in December 2010 and December 2011 for the An appeal against the decision of the Nanterre C ommercial C ourt was redemption of the NRS and the DPN is now eliminated. brought by certain holders of Titres Super Subordonnés (“TSS”) in
228 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the consolidated financial statements
NOTE 38 LIST OF MAIN CONSOLIDATED SUBSIDIARIES The following is a list of the principal consolidated holding entities and subsidiaries:
% share held by Technicolor (% rounded to one decimal) COMPANY - (Country) 2011 2010 1) Fully consolidated Technicolor SA (France) Parent company Parent company 1-5 rue Jeanne d’Arc, 92130 Issy-les-Moulineaux – France S.A. Immobilière Le Gallo (France) 100.0 100.0 Th. multimedia Distrib.(Netherlands) BV (Netherlands) 100.0 100.0 Technicolor Disc Services International Ltd (Hammersmith) (U.K.) 100.0 100.0 Technicolor Mexicana, S. de R.L. de C.V. (Mexico) 100.0 100.0 Technicolor Export de Mexico, S. de R.L. (Mexico) 100.0 100.0 Technicolor Home Ent.Serv LLC of America (U.S.) 100.0 100.0 Comercializadora Thomson de Mexico SA de CV (Mexico) 100.0 100.0 Thomson Sales Europe (France) 100.0 100.0 Technicolor Delivery Technologies (France) 100.0 100.0 Technicolor USA Inc (U.S.) 100.0 100.0 Technicolor Delivery Technologies Mexico, S.A. de C.V. (Mexico) 100.0 100.0 Technicolor Asia Ltd (Hong-Kong) 100.0 100.0 Technicolor Delivery Technologies Australia Pty Limited (Australia) 100.0 100.0 Technicolor (China) Technology Co., Ltd. (China) 100.0 100.0 Thomson Licensing LLC (U.S.) 100.0 100.0 Thomson Angers (France) 100.0 100.0 Technicolor Brasil Midia E Entretenimento LTDA (Brazil) 100.0 100.0 Technicolor Asia Pacific Holdings Pte. Ltd (Singapore) 100.0 100.0 Technicolor Asia Pacific Investments Pte Ltd (Singapore) 100.0 100.0 Technicolor Inc (U.S.) 100.0 100.0 Technicolor Digital Cinema Inc (U.S.) (*) 100.0 Technicolor Home Entertainment Services Inc (U.S.) 100.0 100.0 Technicolor Home Entertainment Services de Mexico, S. de R.L. de C.V. (Mexico) 100.0 100.0 Technicolor Videocassette of Michigan, Inc (U.S.) 100.0 100.0 Technicolor Media Services UK Ltd. (U.K.) 100.0 100.0 Technicolor India Pvt Ltd (India) 100.0 100.0 PRN Holdings 1, LLC (U.S.) 100.0 100.0 Technicolor Creative Services US Inc (U.S.) 100.0 100.0 Technicolor Creative Service of Canada (Canada) (*) 100.0 Technicolor Holdings of Canada Inc (Canada) 100.0 100.0 Technicolor Canada Inc (Canada) 100.0 100.0 Technicolor Australia Investments Ltd (Australia) 100.0 100.0 Technicolor, Pty, Ltd (Australia) 100.0 100.0 RCA Trademark Management S.A. (France) 100.0 100.0 Technicolor Holdings Ltd (U.K.) 100.0 100.0 Technivision Ltd (U.K.) 100.0 100.0 Technicolor Videocassette Holdings Ltd (U.K.) 100.0 100.0 Technicolor Video Serv.(UK) Ltd (U.K.) 100.0 100.0 Technicolor Ltd (U.K.) 100.0 100.0 Technicolor Distribution Services France SARL (France) 100.0 100.0
TECHNICOLOR I ANNUAL REPORT 2011 I 229 8 - FINANCIAL STATEMENTS Notes to the consolidated financial statements
% share held by Technicolor (% rounded to one decimal) COMPANY - (Country) 2011 2010 Technicolor SpA (Italy) 100.0 100.0 Technicolor Entertainment Services Spain (Spain) 100.0 100.0 Technicolor (Thailand) Ltd (Thailand) 100.0 100.0 Technicolor Delivery Technologies Belgium (Belgium) 100.0 100.0 MPC The Moving Picture Company Limited (UK) (U.K.) 100.0 100.0 Technicolor Europe Ltd (U.K.) 100.0 100.0 Thomson multimedia Ltd (Canada) 100.0 100.0 Thomson multimedia Digital Holding (BVI) Limited (China) 100.0 100.0 Technicolor China investment (BVI) Ltd (China) 100.0 100.0 Technicolor Network Services UK Ltd (U.K.) 100.0 100.0 NOB NV (Netherlands) 100.0 100.0 TCE Television Taiwan Ltd (Taiwan) 100.0 100.0 Thomson Licensing SAS (France) 100.0 100.0 Technicolor International SAS (France) 100.0 100.0 Technicolor Network Services France SAS (France) 100.0 100.0 Gallo 8 SAS (France) 100.0 100.0 Thomson multimedia Sales UK Ltd (UK) 100.0 100.0 Technicolor Polska (Poland) 100.0 100.0 Sté Fr.d’Invest.et d’Arbitrage – Sofia (France) 100.0 100.0 Deutsche Thomson OHG (Germany) 100.0 100.0 2) Consolidated by pro rata method Screenvision Holdings (Europe) LTD (U.K.) (**) 50.0 Screenvision SAS (France) (**) 50.0 ContentGuard Holdings, Inc. (U.S.) (**) 25.2 Canada Cinema Distribution Inc (Canada) 50.0 50.0 Beijing Thomson CITIC Digital Technology Co., Ltd. (China) 50.0 50.0 3) Accounted for under the equity method SV HOLDCO (U.S.) 18.8 18.8 Techfund Capital Europe (France) 20.0 20.0
(*) Entity merged into one other. (**) Entity sold or liquidated.
230 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Statutory Auditors’ report on the Consolidated Financial Statements
8.3 STATUTORY AUDITORS’ REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
This is a free translation into English of the statutory auditor’s report on the consolidated financial statements issued in French and it is provided solely for the convenience of English-speaking users. The statutory auditors’ report includes information specifically required by French law in such reports. This information presented below is the audit opinion on the consolidated financial statements and includes an explanatory paragraph discussing the auditors’ assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole and not to provide separate assurance on individual account balances, transactions, or disclosures. This report also includes information relating to the specific verification of information given in the Group’s management report. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France.
To the Shareholders,
In compliance with the assignment entrusted to us by your annual general shareholders’ meetings, we hereby report to you, for the year ended December 31, 2011, on: n the audit of the accompanying consolidated financial statements of Technicolor SA; n the justification of our assessments; n the specific verification required by law. These consolidated financial statements have been approved by the Board of Directors. Our role is to express an opinion on these consolidated financial statements based on our audit.
1 - OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS We conducted our audit in accordance with professional standards applicable in France; those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures, using sampling techniques or other methods of selection, to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made, as well as the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the consolidated financial statements give a true and fair view of the assets and liabilities and of the financial position of the Group formed by the entities included in the scope of consolidation as at December 31, 2011 and of the results of its operations for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.
Without qualifying our opinion, we draw your attention to Note 3.1 to the consolidated financial statements which describes the reasons for applying the going concern assumption to approve the consolidated financial statements.
2 - JUSTIFICATION OF OUR ASSESSMENTS In accordance with the requirements of article L.823-9 of the French Commercial Code (Code de commerce) relating to the justification of our assessments, we bring to your attention the following matters: n On the basis of our work performed and based on the information obtained to date, and in the context of our assessment of the adequacy of the accounting policies used by your Company, we believe that Note 3.1 to the consolidated financial statements, discloses the appropriate information on the Company’s situation in relation to the going concern assumption applied to approve the consolidated financial statements. n Note 3 to the consolidated financial statements describes the situations where management of Technicolor SA has made assumptions and used estimates. This note describes that circumstances and actual results may differ from these assumptions and estimates. Amongst the significant estimates, there are goodwill, intangibles, deferred tax assets as well as retirement benefit obligation and provisions for risks and litigation:
TECHNICOLOR I ANNUAL REPORT 2011 I 231 8 - FINANCIAL STATEMENTS Statutory Auditors’ report on the Consolidated Financial Statements
– As described in Note 13, the Company systematically performs, each financial year, impairment tests on goodwill and assets with indefinite useful lives, and also assesses whether there is any indication of impairment of long-term assets, according to the methods described in this note. We examined the methods used to test for impairment as well as cash flow projections and assumptions used and ensured that Note 13 provides appropriate disclosures thereon. – In relation to the deferred tax assets described in Note 10, we have assessed the adequacy of the information and assumptions used as the basis for the estimates retained, reviewed the calculations performed by the Company and ensured that Note 10 provides appropriate disclosures thereon. – Note 27 describes the methods used to evaluate the retirement benefit obligations. These obligations have been evaluated by external actuaries. Our procedures have consisted in reviewing the information used, assessing the assumptions retained and ensuring that Note 27 provides appropriate disclosure thereon. – Regarding risks and litigation, we have reviewed the procedures used by the group to identify, evaluate and account for them. We have also ensured that the uncertainties identified while performing these procedures were adequately disclosed in Note 35. These assessments were made as part of our audit of the consolidated financial statements taken as a whole, and therefore contributed to the opinion we formed which is expressed in the first part of this report.
3 - SPECIFIC VERIFICATION As required by law we have also verified, in accordance with professional standards applicable in France, the information presented in the group’s management report.
We have no matters to report as to its fair presentation and its consistency with the consolidated financial statements.
The Statutory Auditors Paris La Défense, March 23, 2012 Courbevoie, March 23, 2012 KPMG Audit Mazars A division of KPMG SA French original signed by French original signed by Isabelle Allen Jacques Pierre Jean-Louis Simon Simon Beillevaire
232 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Technicolor sa parent company financial statements
8.4 TECHNICOLOR SA PARENT COMPANY FINANCIAL STATEMENTS 8.4.1 STATEMENTS OF OPERATIONS
Year ended December 31 (in € millions) Note 2011 2010 Revenues (3) 83 98 Other operating revenues 36 Total operating income 86 104 Wages and salaries (58) (74) Other operating expenses (68) (83) Depreciation, amortization and provisions (12) (18) Loss from operations (52) (71) Interest income 182 234 Interest expense (229) (255) Dividends from subsidiaries 277 314 Other net financial losses (580) (630) Net finance costs (4) (350) (337) Net loss after finance costs (402) (408) Capital losses on asset disposals and contributions (2) (88) Other exceptional income (expense) (1) (70) Exceptional expense (5) (3) (158) Income tax (6) 67 66
NET LOSS (338) (500)
The accompanying notes on pages 236 to 257 are an integral part of these financial statements.
TECHNICOLOR I ANNUAL REPORT 2011 I 233 8 - FINANCIAL STATEMENTS Technicolor sa parent company financial statements
8.4.2 STATEMENTS OF FINANCIAL POSITION
(in € millions) Note December 31, 2011 December 31, 2010 ASSETS Non-current assets Intangible assets 24 32 Depreciation, amortization and provisions (14) (19) Net value of intangible assets (7) 10 13 Property and Equipments 15 15 Depreciation, amortization and provisions (4) (2) Net value of Property and Equipments (7) 11 13 Shares in subsidiaries 7,467 5,638 Provisions on shares in subsidiaries (6,684) (5,415) Other shares 13 Other financial assets 81 85 Net value of financial assets (8) 865 311 Total non-current assets 886 337 Current assets Trade Receivable 46 47 Current accounts with subsidiaries 1,512 3,151 Impairment of Group company current accounts (76) (1,018) Other current assets 45 46 Cash and cash equivalents 145 71 Total current assets (9) 1,672 2,297 Prepayments and deferred charges (10) 21 31
TOTAL ASSETS 2,579 2,665
The accompanying notes on pages 236 to 257 are an integral part of these financial statements.
234 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Technicolor sa parent company financial statements
(in € millions) Note December 31, 2011 December 31, 2010 EQUITY AND LIABILITIES Equity Common stock (223,759,083 shares at December 31, 2011 at par value of €1.00) (12) 224 175 Additional paid-in capital 1,072 749 Other reserves 100 100 Retained earnings (1,841) (1,341) Net loss for the year (338) (500) Total shareholders’ deficit (12) (783) (817) Other equity (12) 520 857 Total equity (deficit) (263) 40 Provisions for losses and contingencies (14) 95 92 Financial liabilities Payable to other Group companies 1,130 853 Financial debts 1,480 1,506 Total financial liabilities (13) 2,610 2,359 Current liabilities Trade payable 19 20 Other current liabilities 107 144 Total current liabilities (15) 126 164 Deferred income 11 10
TOTAL EQUITY AND LIABILITIES 2,579 2,665
8.4.3 STATEMENTS OF CHANGES IN EQUITY
Net Additional income Common paid-in Legal Other Retained (loss) for (in € millions) Stock capital reserves reserves earnings the year Total At December 31, 2009 1,012 1,643 43 12 (3,352) (572) (1,214) Variations in 2010 Reserve for treasury shares - (88) - 88--- Appropriation of past losses - (1,555) (43) - 1,598 - - Reduction of capital (985) - - - 985 - - Allocation of 2009 balance - - - - (572) 572 - 26 May 2010 increase in capital by issuance of new shares (1) 53 286 - - - - 339 NRS I redeemed into equity (December 31, 2010) 45 300 - - - - 345 DPN redeemed into equity (December 31, 2010) 50 163 - - - - 213 Net loss of the year - - - - - (500) (500) At December 31, 2010 175 749 - 100 (1,341) (500) (817) Variations in 2011 Allocation of 2010 balance - - - - (500) 500 - NRS I, II and IIC redeemed into equity (December 30, 2011) 49 323 - - - - 372 Net loss of the year - - - - - (338) (338)
AT DECEMBER 31, 2011 224 1,072 - 100 (1,841) (338) (783)
(1) Including €9 million of fees.
The accompanying notes on pages 236 to 257 are an integral part of these financial statements.
TECHNICOLOR I ANNUAL REPORT 2011 I 235 8 - FINANCIAL STATEMENTS Notes to the Parent Company Financial Statements
8.5 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
Note 1 General information and main events ...... 237 Note 13 Financial debts ...... 249
Note 2 Summary of accounting policies ...... 237 Note 14 Provisions for losses and contingencies ...... 251
Note 3 Revenues ...... 240 Note 15 Current liabilities ...... 252
Note 4 Net finance costs ...... 240 Note 16 Accrued charges ...... 252
Note 5 Exceptional income (expense) ...... 241 Note 17 Information on average number of employees ...... 253
Note 6 Income tax ...... 241 Note 18 Contractual obligations and other off-balance commitments ...... 253 Note 7 Property, equipment and intangible assets ...... 242 Note 19 Contingencies ...... 254 Note 8 Financial assets ...... 243 Note 20 Management compensation ...... 255 Note 9 Current assets ...... 244 Note 21 Related party transactions ...... 256 Note 10 Prepayments and deferred charges ...... 244 Note 22 Fees paid to Statutory Auditors ...... 256 Note 11 Accrued income ...... 244 Note 23 Subsequent events ...... 256 Note 12 Shareholders’ equity and equity instruments ...... 245
236 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the Parent Company Financial Statements
NOTE 1 GENERAL INFORMATION AND NOTE 2 SUMMARY OF ACCOUNTING MAIN EVENTS POLICIES
1.1 General information Going concern The parent company financial statements for the year ended The Technicolor Group is a technology-driven company supporting December 31, 2010 were approved by the Board of Directors on its Media & Entertainment (“M&E”) customers in shaping their digital February 28, 2011 on the basis of going concern. future. The legal proceedings that have been initiated relating to the Sauvegarde Technicolor SA (formerly Thomson SA) is the holding company of the Plan by the TSS holders being terminated (see note 19), any risk related to Group and manages the cash of the Group’s subsidiaries. the termination of the Sauvegarde Plan, the capital markets transactions which implemented the Sauvegarde Plan in May 2010 and the issuance In accordance with the sixteenth resolution approved in the Extraordinary of the new shares issued in December 2010 and December 2011 for the General Meeting of Shareholders of January 27, 2010, the name of the redemption of the NRS and the DPN is eliminated. company was changed from Thomson to Technicolor. The Board of Directors considered the Group’s cash flow projections The financial statements were approved by the Board of Directors which support the operating performance and believes that the Group of Technicolor SA on February 23, 2012. Pursuant to French law, the can meet its expected cash requirements and address potential financial financial statements will be considered as definitive when approved by consequences of ongoing litigation, until at least December 31, 2012. Company’s shareholders at the Ordinary Shareholders’ Meeting which should take place in May 2012. Having considered the above, the Board of Directors determined that it was appropriate for these financial statements to be prepared on a 1.2 Main events of the year going concern basis. Disposal of non strategic activities Basis of preparation At end of December 2011, Technicolor finalized the disposal of all The annual financial statements are drawn up according to the residual non-strategic activities held for sale as of December 31, 2010 : accounting standards defined by the French General Chart of Accounts (Plan Comptable Général) and to the provisions contained in the French n Grass Valley businesses: o n April 4, 2011 Technicolor sold the Commercial Code. The guidelines and recommandations of the Conseil Grass Valley Transmission business to Parter Capital Group. On National de la Comptabilité, the Ordre des Experts Comptables and the May 3, 2011 Technicolor sold to the FCDE (Fonds de Consolidation Compagnie Nationale des Commissaires aux Comptes are also applied. et de Développement des Entreprises) the Grass Valley Head-end business, operating under the Thomson Video Networks brand; The valuation methods used in the 2011 financial statements are consistent with those followed last year. n Screenvision Europe was sold on July 18, 2011. Share capital increase These notes are an integral part of these annual financial statements. They contain additional information relating to the Statements of Following the redemption of 5,328,181 NRS I, 189,877,533 NRS II and Financial Position and of Operations and give a true and fair view of 112,961,194 NRS IIC at the end of 2011, the share capital of Technicolor the Company’s assets, financial position and results. Information which SA increased by 48,912,638 shares equivalent to €49 million in 2011. is not mandatory is disclosed only if material.
Recapitalization of subsidiaries Functional and presentation currency Technicolor International SAS increased its capital by €1,800 million These financial statements are presented in euro, the functional currency through debt forgiveness during the period, which brought the gross of Technicolor SA. All financial information presented in euro has been value of the shares up to €3,015 million. rounded to the nearest million, unless otherwise stated.
Technicolor USA Inc. increased its capital by €183 million during the period, which brought the gross value of the shares up to €3,595 million.
TECHNICOLOR I ANNUAL REPORT 2011 I 237 8 - FINANCIAL STATEMENTS Notes to the Parent Company Financial Statements
Use of estimates Because of the different natures of the Group’s U.S.$ exposure, especially regarding its licensing business and other segments which The process of drawing up the parent company financial statements buy components in Asia drawn up in U.S.$, the Group may hedge involves using certain estimates and assumptions to calculate the figures separately the U.S.$ licensing exposure, as well as the digital production presented in the Statements of Financial Position and of Operations. activity exposure. Apart from these exceptions, the Group manages its The Company periodically reviews its valuations and estimates based overall exposure to fluctuations in exchange risk and hedges only the on its past experience and various other factors considered reasonable net exposure with banks. and relevant for the determination of the fair estimates of the assets and liabilities’ carrying value and of the revenues and expenses. The The Group does not use derivatives instrument for any purpose other actual results could significantly differ from these estimates depending than for hedging its commercial and financial exposures. This policy does on different conditions and assumptions. not permit the Group or its subsidiaries to take speculative positions.
Translation of foreign currency transactions Derivative instruments may also be used to reduce the Group’s exposure to fluctuations in the share prices of certain listed companies in which (a) Holding activities it holds equity stakes. Foreign currency transactions are translated into euros at the exchange rate effective at the trade date or at a hedged rate if there is a foreign Forward foreign currency contracts and internal foreign currency options exchange hedge in place. Receivables and payables in foreign currency (set up between subsidiaries and the Group Treasury Department to are revalued at the rate of exchange prevailing at the balance sheet date. cover their trade exposures) as well as external transactions with banks The differences arising on the translation compared to the historical are accounted for by the Group Treasury Department. They are valued rate (or guaranteed rate) are recorded as translation adjustments in at market price at closing rate with gains and losses booked entirely in the balance sheet (a provision for exchange risk is recognized when the Statement of Operations. translation differences assets occur on un-hedged receivables or debt). Forward foreign currency contracts used to hedge trade receivables and trade payables in foreign currencies are valued at market price at the (b) Global cash management closing rate with gains and losses booked entirely into the Statement Management of the Group’s market and liquidity risks is centralized in of Operations together with the result on the underlying hedged item. its Group Treasury Department in France. Gains and losses on foreign exchange transactions are booked under Market risk is managed by Group treasury, in accordance with “Other net financial gains/(losses)”. Group procedures covering, among other aspects, responsibilities, authorizations, limits, authorized financial instruments and tracking tools. The Sauvegarde proceeding did not have a direct impact on the Group’s All financial market risks are monitored on a permanent basis. Periodic outstanding derivatives. However the 2009 events, including the reports are made to the CFO, the Executive Committee and the Audit Sauvegarde Plan, have impacted Group’s management of financial risks Committee providing details on the Group’s exposure to different risks as the Group had a limited access to the over-the-counter derivatives and the operations carried out to reduce such risks. markets and is currently only able to execute operations on a short-term basis and cash collateralized basis. To hedge against its exposure to fluctuations in interest rates, exchange rates and various commodities prices, the Group uses derivative Property and equipment instruments. To limit liquidity risk, the Group has set up long-term financing facilities consisting of debt and equity instruments. The Group Since January 1, 2005, Technicolor has applied the rules and guidelines exposure to commodities risk is limited, as the main risk regards the of the French Accounting organizations CRC and CNC concerning variation of certain metals’ prices, especially silver, and may be covered recognition of assets, particularly CRC Rule No. 2002-10 on amortization by futures contracts. and depreciation of assets, recommending a sum-of-the-parts approach, and CRC Rule No. 2004-06 on the definition, recognition and valuation of assets.
238 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the Parent Company Financial Statements
(a) Intangible assets Treasury shares Intangible assets consist mainly of capitalized IT development projects, Treasury shares are recorded at purchase cost. An impairment charge is the cost of software and use of patents. recorded when the purchase cost is higher than the average stock price for the last month of the financial period. Gains and losses on disposal Ongoing software development projects are classified under “Intangibles are booked under exceptional results. in progress”. Once development is achieved, the software is capitalized or delivered to the subsidiaries concerned. Software developed or used internally is amortized from the date of use. Other IT development costs Provisions are capitalized and amortized on a straight-line basis over a maximum Provisions are recorded at the balance sheet date when the Company of three years, with some exceptions. Minor IT expenses are amortized has an obligation as a result of a past event and when it is probable that over the financial year they are put in use. an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount Softwares acquired or developed as well as licenses are amortized on of the obligation. a straight-line basis over the duration of their protection or over their useful life, whichever is shorter. The obligation may be legal, regulatory or contractual or it may represent a constructive obligation deriving from the Company’s actions where, by (b) Property, Plant and Equipment an established pattern of past practice, published policies or a sufficiently specific current statement, the Company has indicated to other parties Tangible assets consist mainly of furniture and expenses for setting that it will accept certain responsibilities, and as a result, has created a up and remodeling the head office in Issy-les-Moulineaux. They are valid expectation on the part of those other parties that it will discharge amortized for the most part over nine years, the lease term for the those responsibilities. building, on a straight-line basis. The recorded provision represents the best estimate of the expenditure (c) Financial assets required to settle the obligation at the balance sheet date. If a reliable This item includes shares of companies which operating businesses are estimate cannot be made of the amount of the obligation, no provision complementary to those of the Group and/or companies that the Group is recorded but details of the obligation are disclosed in the notes to the intends to keep. They are valued at cost of acquisition. If that cost is financial statements. higher than the useful value, an impairment charge is recorded to reflect the difference. Provision for current accounts and loans are made if Restructuring provisions the net financial position is negative. In addition, a provision for risk Provisions for restructuring costs are recognized when the Company is set aside for the surplus over the residual net negative balance. The has a constructive obligation towards third parties, which results from value in use is equivalent to the portion of equity represented by the a decision made by the Company before the balance sheet date and shares, if applicable, adjusted to reflect its market value and potential supported by the following items: development and results. The equity value of companies consolidated under the Technicolor Group is equivalent to their consolidated n The existence of a detailed and finalized plan identifying the sites shareholders’ equity after potential adjustments. concerned, the location, the role and the approximate number of headcounts concerned, the nature of the expenses that are to be Trade receivables and other operating assets incurred and the effective date of the plan; and
Trade receivables and other current operating assets are valued at n The announcement of this plan to those affected by it. historical cost. An impairment charge is recorded when recoverable The restructuring provision only includes the costs directly linked to the value is lower than book value. plan. Restructuring costs encompass estimated shut-down costs, the impact of shorter useful life for property and equipment and the costs Securities held for sale linked to employees’ lay-off. Securities held for sale are valued at the lowest between purchase cost and market value. Post-employment obligations Since January 1, 2005, the Company has applied recommendation No. 2003-R.01 dated April 1, 2003 concerning accounting rules and valuation of post-employment retirement obligations and similar benefits.
The costs for employee retirement pensions at Technicolor are accounted for progressively as employees acquire their rights to benefits. The valuation method applied takes into account future changes in
TECHNICOLOR I ANNUAL REPORT 2011 I 239 8 - FINANCIAL STATEMENTS Notes to the Parent Company Financial Statements
payroll obligations. Post-employment benefits are accounted for when Income tax rights to benefits are acquired and payment thereof becomes probable. Under French tax law, Technicolor SA is the head company of the tax Such payments and provisions are based on the estimated salaries and integration group consisting in 15 companies. seniorities of employees at their date of departure. Due mainly to the disposal of the Tubes activity in 2005, the Company Actuarial assumptions are as follows: has tax losses to carry forward indefinitely, estimated at €2,482 million as of December 31, 2011.
n discount rate: 4.5%;
n projected long-term inflation rate: 2%; Exceptional income (expense) Exceptional items include income or charges of which the nature and n salary rate of increase: 3.5%. amount are not recurring or exceptional. The Company records its commitments for jubilee awards (médailles du travail) according to CNC bulletin (Avis) No. 2004-05. These charges are recognized separately from retirement provisions and actuarial differences are booked immediately in the Statement of Operations.
NOTE 3 REVENUES
(in € millions) 2011 2010 France 58 65 E.U. (outside France) 45 Other countries 21 28
TOTAL REVENUES 83 98
Revenues consist mainly in intra-group re-invoicing (€77 million), royalties on trademarks (€1 million) and other external revenues (€5 million).
NOTE 4 NET FINANCE COSTS
(in € millions) 2011 2010 Impairment on financial investments, treasury shares, current accounts and risk provisions regarding subsidiaries, (563) (579) net of reversal (1) Reversal of impairment on financial investments, treasury shares, current accounts and provisions 230 334 for risks regarding shares sold Dividends received (2) 277 314 Net losses on foreign exchange (2) (16) Net interest expenses (44) (21) Other expenses (18) (35) Subtotal (120) (3) Transferred to exceptional result (3) (230) (334)
TOTAL NET FINANCE COSTS (350) (337)
(1) In 2011, impairment on financial investments (see paragraph 8.1(4)) and current accounts mainly applies to the subsidiaries Technicolor International SAS (€ 365 million of net impairment) and Technicolor USA, Inc. (€178 million of impairment on financial investments). In 2010, impairment on financial investments (see paragraph 8.1(4)) and current accounts mainly concerns the subsidiaries Technicolor USA, Inc. (€912 million of impairment on shares and €523 million of reversal of impairment on current account), Technicolor International SAS (€35 million of impairment on financial investments and €71 million of impairment on the current account) and Thomson Angers SAS (€44 million of impairment on financial investments and €27 million of reversal of impairment on current account). (2) Mainly from Thomson Licensing SAS (€312 million and €269 million respectively in 2010 and 2011). (3) Corresponds to transfer of charges on reversal of provisions on shares in subsidiaries and treasury shares sold or in the process of being liquidated (see note 5).
240 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the Parent Company Financial Statements
NOTE 5 EXCEPTIONAL INCOME (EXPENSE)
(in € millions) 2011 2010 Capital gains / (losses) on disposals of intangible and financial assets (1) (2) (88) Gains / (losses) on business disposals 4 (49) Cost of restructuring (accruals net of reversals and charges for the year) (6) (21) Other net exceptional charges 1-
TOTAL EXCEPTIONAL EXPENSE (2) (3) (158)
(1) In 2011, capital losses on disposals of assets and waiver of loan for €232 million, balanced by reversals of impairment on related assets for €230 (see note 4). (2) The exceptional loss for 2010 is mainly due to disposal of shares.
NOTE 6 INCOME TAX (a) Breakdown of booked income tax Technicolor SA is the head company for Group tax integration, thus the sole company to pay corporate income tax and additional expenses on the Group’s aggregate results. The tax expense is carried on by the subsidiaries exactly as if they were taxable separately on a standalone basis. In a loss-making fiscal year, Technicolor SA has no debt liability to the subsidiaries.
(in € millions) 2011 2010 Current tax booked by French subsidiaries and passed on to the holding company (1) 62 60 Subsidiaries’ research tax credit 25 19 Provision for tax-integrated companies in 2011 (2) (5) (4) Unused foreign tax credits for 2011 (1) - Other (3) (14) (9)
NET INCOME TAX 67 66
(1) Under French tax integration system, Technicolor owns a fiscal debt towards integrated French subsidiaries , in particular towards Thomson Licensing (€ 52 million). (2) The provision for the income tax expense under tax integration for 2011 will be offset against foreign tax credits in connection with Thomson Licensing. (3) Corresponds mainly to research tax credit to repay to subsidaries.
In 2011, French tax authorities repaid to Technicolor SA a tax credit of €12 million, corresponding to 2003 tax loss under tax integration carried backward to 2000 taxable profit.
In the absence of tax integration, the Company net income tax would amount to €13 million.
TECHNICOLOR I ANNUAL REPORT 2011 I 241 8 - FINANCIAL STATEMENTS Notes to the Parent Company Financial Statements
(b) Variation of deferred or latent tax bases Certain or possible tax items to carry forward are the following:
(in € millions) December 31, 2010 Variation December 31, 2011 Temporarily non-deductible expenses
n To be deducted the following year: Paid vacations 314 Restructuring costs 5 - 5 Other 91322
n To be deducted at a later date: Provisions for retirement 8 (1) 7 Provisions for subsidiary risks - 5 5 Impairment on current accounts 962 (941) 21 Other 67 (8) 59(1) To be deducted
n Tax losses carried forward 2,265 217 2,482
(1) Of which €54 million of provisions for contingencies.
NOTE 7 PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS
Property and (in € millions) equipment Intangible assets At December 31, 2010 Cost 15 32 Accumulated deprecation (2) (19)
NET 13 13 2011 Opening net amount 13 13 Acquisitions -1 Disposals - (1) Depreciation and amortization (2) (3) December 31, 2011, net 11 10 At December 31, 2011 Cost 15 24 Accumulated deprecation (4) (14)
NET 11 10
242 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the Parent Company Financial Statements
NOTE 8 FINANCIAL ASSETS
8.1 Variation of financial assets
Shares in Other financial Total financial (in € millions) subsidiaries assets (1) assets At December 31, 2010 Cost 5,638 186 5,824 Accumulated depreciation and impairment (5,415) (98) (5,513)
NET 223 88 311 2011 Opening net amount 223 88 311 Acquisitions / recapitalizations (2) 1,983 9 1,992 Disposals (3) (154) (12) (166) Impairment provisions (4) (1,423) (3) (1,426) Reversals of impairment provisions (5) 154 - 154
December 31, 2011, net 783 82 865 At December 31, 2011 Cost 7,467 183 7,650 Accumulated depreciation and impairment (6,684) (101) (6,785)
NET 783 82 865
(1) In 2011, includes €1 million of other shares held by the Company, €75 million of borrowings outside the Group, €6 million of collateral and guarantees (see due dates for these receivables in note 8.2 below). (2) Corresponds mainly to recapitalizations of subsidiaries, notably Technicolor International SAS (€1,800 million). (3) Corresponds mainly to the disposal of KCA Licensing SA (formerly Nagra Thomson Licensing) for €120 million and to the liquidation of European Audio Products (HK) ltd for €33 million. (4) In 2011, impairment on shares in subsidiaries concerns mainly the subsidiaries Technicolor International SAS (€1,235 million, partially balanced by the reversal of an impairment of current account for €870 million) and Technicolor USA, Inc. (€178 million). (5) In 2011, reversals of impairment on financial investments concern mainly the subsidiaries KCA Licensing SA (€120 million) and European Audio Products (HK) ltd (€33 million) following respectively their disposal and liquidation.
Accumulated impairment of Technicolor’s treasury shares as of December 31, 2011 amounted to €97 million.
Accumulated impairment of current accounts and loans to subsidiaries amounted to €76 million as of December 31, 2011.
8.2 Maturities of gross receivables included in other financial assets
(in € millions) 2012 2 2013 and later 83
TOTAL 85
TECHNICOLOR I ANNUAL REPORT 2011 I 243 8 - FINANCIAL STATEMENTS Notes to the Parent Company Financial Statements
8.3 Subsidiaries and investments at December 31, 2011
Gross advances, Equity before loans and Number Gross appropriation Revenues current (in € millions, except number of shares) % stake of shares value Net value of results of the year Results accounts Holding companies Technicolor USA, Inc. 100.00 1,005 3,595 46 46 1,388 (210) 687 Technicolor International SAS 100.00 87,041,097 3,015 565 565 1,789 (287) 23 Thomson Multimedia Distribution (Netherlands) BV 100.00 500 162 - (13) 87 4 47 Thomson Japan Acquisition, Inc. 100.00 61 27 - - - 75 - Industrial companies Thomson Angers SAS 100.00 4,630,001 289 - (8) 3 (11) 12 Thomson Television España SAU 100.00 9,928,478 128 - (56) - - 56 Technicolor R&D France SNC 99.90 999 15 - (5) 1 (5) - Other companies Technicolor Trademark Management SAS 100.00 9,004,000 90 50 50 - 7 143 Immobilière Le Gallo SAS 100.00 3,152,500 48 48 50 1 2 2 Thomson Licensing SAS 100.00 2,800,000 43 43 148 408 285 - RCA Trademark Management SAS 100.00 1,668,025 25 25 37 19 10 1 Thomson Investment India Ltd 51.00 51 4 2 2 - - - TECHFUND Capital Europe FCPR 20.00 500 3 3 4 - - - Thomson Sales Scandinavia AB 100.00 7,000 14 1 1 - 1 - Miscellaneous N.M. N.M. 9 - N.M. N.M. N.M. N.M.
TOTAL N.M. N.M. 7,467 783
N.M.: not meaningful When shares are those of a consolidated Technicolor sub-group, the figures correspond to those in the books of such sub-group.
NOTE 9 CURRENT ASSETS Net current assets with maturities of less than one year amount to €1,663 million. Current assets are mainly related to current accounts of Group’s subsidiaries.
NOTE 10 PREPAYMENTS AND DEFERRED CHARGES In 2011 this caption comprises essentially prepaid charges on treasury hedging instruments CAPS (see note 13) and expenses incurred for the purpose of renegotiating some terms of the debt restructuring agreement.
NOTE 11 ACCRUED INCOME
(in € millions) 2011 2010 Loans 63 Accounts receivable (primarily with related entities) 6 1 Other operating receivables 31 29
TOTAL 43 33
244 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the Parent Company Financial Statements
NOTE 12 SHAREHOLDERS’ EQUITY AND EQUITY INSTRUMENTS (a) Capital and additional paid in capital On December 31, 2011, the capital of Technicolor SA was €223,759,083 (223,759,083 shares with a par value of €1). Changes in capital were as follows:
(in € other than for number of shares) Number of shares Nominal value Capital in euros At January 1, 2010 269,890,028 3.75 1,012,087,605 Reduction of capital through reduction in the nominal value of the shares (1) 269,890,028 0.1 26,989,003 Share capital increase of May 26, 2010 (2) 526,608,781 0.1 52,660,878 Subtotal before reverse share split 796,498,809 0.1 79,649,881 Total after reverse share split 79,649,881 1.0 79,649,881 Share capital increase after NRS I redemption (3) 45,196,744 1 45,196,744 Share capital increase after DPN redemption (4) 50,000,000 1 50,000,000 SHARE CAPITAL AS OF DECEMBER 31, 2010 174,846,625 1 174,846,625 2011 Share capital increase after NRS I, II, IIC redemption (5) 48,912,458 1 48,912,458 SHARE CAPITAL AS OF DECEMBER 31, 2011 223,759,083 1 223,759,083
(1) In accordance with the fourth resolution of the Extraordinary General Meeting of Shareholders on January 27, 2010 share capital was reduced to €26,989,002.80 in 2010, by a reduction in the nominal value of the shares. (2) In accordance with the Sauvegarde Plan, on May 26, 2010, the Company carried out a capital increase of €53 million combined with an additional paid in capital of €295 million, as well as the issue of Notes Redeemable in Shares (NRS) for a total of €638 million and of Disposal Proceeds Notes (DPN) for a total of €309 million at the May 26, 2010 exchange rate (see note 1.2 for further details on the Sauvegarde Plan). (3) NRS I (with the exception of 5,328,181 NRS I whose holders deferred the conversion until 31 December 2011) and the accrued interest were redeemed into share capital of €45 million together with an issue premium of €300 million. (4) €212,750,000 of DPN (including accrued interest) were redeemed into new shares, resulting in a capital increase of €50 million together with an issue premium of €163 million. The remainder of DPN was redeemed in cash (€48 million on May 26, 2010 and €52 million including interest on December 31, 2010). (5) The NRS I whose conversion had been postponed to December 31, 2011, the NRS II and IIC including accrued interests were redeemed into new shares leading to a capital increase of €49 million plus an additional paid in capital of €323 million. The redemption upon the request of their owners of 10,191,567 NRS II and 6,189,002 NRS IIC has been postponed to December 31, 2012.
(b) Treasury shares
2011 2010
Carrying amount (in euros) (1) 699,926 2,553,996 Number of treasury shares 605,687 617,705 Of which: Allocated / sold in the year (12,018) (3)
(1) The gross value of treasury shares held at December 31, 2011 was €98,121,996, depreciated by €97,422,070.
Treasury shares are hold for the purpose of meeting the obligations under debt securities giving access to capital or stock option schemes or any other form of allocation of shares to employees and Directors of the Company.
TECHNICOLOR I ANNUAL REPORT 2011 I 245 8 - FINANCIAL STATEMENTS Notes to the Parent Company Financial Statements
(c) Stock option plan Stock options will vest on the date the Board of Directors approves the accounts for the fiscal year ended December 31, 2012 (“the first In February 2011, the Board of Directors approved the principles of a n vesting date”, estimated to be in April 2013) and become exercisable Long-Term Incentive Plan (LTI) that has been implemented during as of June 17, 2014. The duration of the plan is eight years. the first semester of 2011. As part of this plan, free performance shares may be awarded in 2012, 2013 and 2014 to some senior For France-tax domicile beneficiaries, free shares will be acquired on executives subject to and proportionally to fulfillment of specified the date the Board of Directors approves the accounts for the fiscal performance conditions based both on market performance year ended December 31, 2012 (“the first vesting date”, estimated to criteria and on Technicolor performance achieved respectively on be in April 2013) and will be subject to additional two-years holding December 31, 2011, 2012 and 2013 as approved by the Board of period. For non-French tax domiciled beneficiaries, free shares will Directors. For free performance shares that would be awarded based be acquired and exercisable on June 17, 2014. Beneficiaries need to on 2011 and 2012 performance, final vesting is still conditional to senior be continuously employed for the plan’s entire duration. executives staying in the Company at least until June 8, 2013. n The Board of Directors of the Group in June 2007 decided to launch n On June 17, 2010, the Board approved a Mid-term Incentive a Free Share Plan. According to this plan, Technicolor granted its Plan (MIP) granting non-market performance units made up of a eligible employees two Technicolor newly issued shares for free. combination of cash and, depending on Management level, either The vesting period of the shares was dependent on the country and stock options or free shares. Subject to the presence condition specific local rules. The vesting period was therefore two years for and fulfillment of specified non-market performance conditions on France and certain other European countries and four years for some December 31, 2012 as approved by the Board, the rights under the countries such as the United States. plan shall vest either partially or in full for each beneficiary in the As of December 31, 2011 the total number of outstanding stock options proportions set by the Board. amounted to a maximum of 1,588,224 options and 1,840,230 free shares granted to employees and Directors.
246 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the Parent Company Financial Statements
Retention Retention plan Retention plan (MIP) Retention (LTI) (existing plan Exisiting plan (MIP) free shares or Plan 3 Share Plan 4 Share Plan 5 Share Plan 6 Share (existing Plan 7 Share Free (Share shares to be subscription purchase purchase subscription shares) (1) subscription Shares) subscription) created) Board decision September 22, April 19, 2005 December 8, September 21, October 17, December 14, June 17, June 17, 2010 April 28, 2011 2004 2005 2006 2007 2007 2010 and June 30, 2011 Number of 574 93 390 485 124 482 62 18 63 beneficiaries Number of options 736,659 71,940 199,317 273,974 36,869 130,710 492,020 (2) 1,216,700 (2) 1,637,152 (2) granted Exercise period 50% from 50% from 50% from 50% from 50% from 50% from May 1, 2015 June 18, 2014 50% by September 22, April 19, 2008 December 8, September 21, October 17, December 14, for France June 2013 2007 2008 2008 2009 2009 and June 18, 2014 for other countries 50% from 50% from 50% from 50% from 50% from 50% from 50% by September 22, April 19, 2009 December 8, September 21, October 17, December 14, March 2014 2008 2009 2009 2010 2010 Term of plan 10 years 10 years 10 years 8 years - 8 years -- 8 years - Option price €133.00 €173.10 €147.40 €103.80 - €86.70 -- €6.60 €5.20 (average) Number of shares (408,063) (36,228) (140,961) (179,609) (36,869) (64,245) (146,060) (211,970) (142,882) cancelled since beginning of the plan Outstanding options 328,596 35,712 58,356 94,365 - (1) 66,465 345,960 1,004,730 1,494,270
(1) Assessment due to non realization of grant conditions. (2) Maximum potential number.
The exercise prices of the various plans were set without the application n the payment of the coupon is subordinated to certain conditions such of a discount, and calculated on the basis of the average share price on as the distribution of a dividend to shareholders or the repurchase or the 20 trading days preceding the Board of Directors’ meeting, except cancellation of treasury shares in the six months preceding the issue for the MIP (the exercise price was set at €6.60). anniversary date. As a result, in accordance with French accounting principles, these notes are classified under the heading “Other In accordance with Article L. 225-184 of the French Commercial Code, Shareholders’ Equity” in the balance sheet. no option has been exercised at December 31, 2011. The notes carry an optional annual coupon of 5.75% up to the tenth year, then will switch to a rate of 3-month EURIBOR +3.625% thereafter. (d) Other Equity Interest payments not made on the payment date are definitively lost to the investor. TSS (Titres Super Subordonnés - deeply subordinated perpetual notes) These notes were included in the debt restructuring process. Pursuant On September 26, 2005, Technicolor issued deeply subordinated to the Sauvegarde Plan, in 2010, the Company paid an amount of €25 perpetual notes in a nominal amount of €500 million to investors. The million in cash to the TSS holders that definitely extingushed their claims characteristics of these notes are as follows: for interest). n the notes are not repayable other than at Technicolor’s initiative from September 2015 or as the result of specific contractually defined events;
TECHNICOLOR I ANNUAL REPORT 2011 I 247 8 - FINANCIAL STATEMENTS Notes to the Parent Company Financial Statements
NRS (Notes Redeemable in Shares) On May 26, 2010, €638 million of NRS were issued by way of set-off debts of senior creditors. The number of NRS issued was as follows:
NRS I Maturity NRS II Maturity NRS IIC Maturity 12/31/2010 12/31/2011 (1) 12/31/2011 (1) Total NRS Number of bonds issued on May 26, 2010 319,218,837 200,069,100 119,150,196 638,438,133 NRS I redeemed by issued shares on December 31, 2010 (313,890,656) - - (313,890,656)
TOTAL NRS ON DECEMBER 31, 2010 5,328,181 200,069,100 119,150,196 324,547, 477 NRS I, II, and IIC redeemed by issued shares on December 30, 2011 (5,328,181) (189,877,533) (112,961,194) (308,166,908)
TOTAL NRS ON DECEMBER 31, 2011 - 10,191,567 6,189,002 16,380,569
(1) NRS II and NRS IIC holders can defer the redemption until December 31, 2012.
The NRS I redeemed gave the right to 0.131 share in repayment of (f ) Loss of half of the share capital capital and 0.013 share in payment of the 10% coupon. Due to the accumulated losses, Technicolor SA’s shareholders’ equity NRS II and IIC will give the right to 0.131 share in repayment of capital was negative since December 31, 2008. In accordance with Article L. 225- and 0.028 share in payment of the 10% coupon. 248 of the French Commercial Code, shareholders were consulted at the Annual Ordinary and Extraordinary Shareholders’ Meeting held on At December 31, 2011, NRS I, II and IIC submitted for redemption June 16, 2009 and voted against the early dissolution of Technicolor SA. (308,166,908 notes) were repaid through an increase in shareholders’ equity for €49 million and an issue premium of €323 million. 16,380,569 As Technicolor SA is under a Sauvegarde Plan, Article L. 225-48 of the NRS remained in circulation at December 31, 2011 representing French Commercial Code (rules for Limited Liability company in case of potentially 2.6 million new shares to be issued at €7.6 with a nominal loss in excess of half of the share capital) is not applicable to Technicolor value of €1.00. SA until the end of the plan which will end on February 17, 2017(Article L. 225-248 al.5 of the French Commercial Code).
(e) Dividends and other distributions As planned under Sauvegarde Plan, the conversion of NRS notes into The Board of Directors has decided not to propose the payment of a equity improved the share capital of Technicolor SA in 2011. dividend. Under the internal rules of the Board adopted in connection with the Sauvegarde Plan, any decision to propose a dividend need to be approved by at least a two-thirds majority of the Board of Directors.
248 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the Parent Company Financial Statements
NOTE 13 FINANCIAL DEBTS Financial debt is set out below:
2011 Borrowings (see details below) 1,469 Other debt (1) 11
TOTAL 1,480
(1) Interest rate and maturity are not yet defined for this debt.
13.1 Borrowings
Currency Amount (1) (in € millions) Type of rate Nominal rate Average USD 422 Fixed 9.35% USD 346 Variable (3) 7.70% (2) GBP 21 Fixed 9.55% EUR 130 Fixed 9.00% EUR 550 Variable (3) 7.70% (2)
TOTAL 1,469
(1) Nominal values, accrued interest included. (2) Rate at December 31, 2011. (3) 3-month EURIBOR/LIBOR at a minimum rate of 2% and an average margin of 5.70%.
Under the Sauvegarde Plan, the Group completed on May 26, 2010: – the issuance of notes redeemable in cash or shares of the Company (disposal proceeds notes, or DPN), linked to the disposal proceeds n The conversion of €1.3 billion of senior debt into shares (see note 19 of certain non-core assets of the Company, reserved to the senior for more details) through: creditors in an amount of €299 million and of which €48 million were reimbursed in cash by the Company to the creditors on – a share capital increase for cash of €348 million (including the May 26, 2010; share premium) of which €203 million was subscribed by holders of preferential subscription rates and used to reimburse the debt; n The execution of a new term loan facility and the issuance of new bonds (the Reinstated Debt) allowing the repayment of senior debt – the issuance of €638 million of notes redeemable in a fixed number for a total of €1.6 billion; of shares of the Company (NRS), reserved primarily for the senior creditors; n Payment to holders of the deeply subordinated perpetual notes (TSS holders) of their accrued interest, for €25 million (thus extinguishing any liability to future payment of such interest).
TECHNICOLOR I ANNUAL REPORT 2011 I 249 8 - FINANCIAL STATEMENTS Notes to the Parent Company Financial Statements
13.2 Main features of Technicolor SA’s debt (a) By maturity
(in € millions) December 31, 2011 December 31, 2010 Current debt (under one year) Fixed-term borrowing 38 20 Bonds 25 12 Other debt to subsidiaries 973 697 Other debt to third parties 11 11 Sub-total current debt 1,047 740 Non-current debt (more than one year) Fixed-term borrowing 857 897 Bonds 548 566 Other debt to subsidiaries 158 156 Sub-total non-current debt 1,563 1,619
TOTAL DEBT 2,610 2,359
(b) Financial covenants and other limitations December 31 of each financial year, and (iii) that the Group’s total capital expenditure shall not be more than a certain amount in each financial Fixed-term loans and new bonds contain financial covenants requiring year. These financial covenants become more restrictive each year. that (i) the Group’s EBITDA(*) shall not be smaller than a given multiple of net total interest of the Group on a twelve-month basis on June 30 At December 31, 2011, Technicolor met all its covenants. and December 31 of each financial year (the “interest cover covenant”), (ii) total net debt is not more than a certain multiple of EBITDA on a trailing twelve month basis (“leverage covenant”) on June 30 and (*) EBITDA is contractually defined and includes a certain number of adjustments.
13.3 Details of Technicolor SA’s restructured debt Following the restructuring plan, Technicolor SA’s debt at December 31, 2011 was as follows:
Amount in loan Amount Interest rate (in millions) currency Currency in euros (1) type Interest rate Maturity Bonds 381 USD 294 Fixed 9.35% 2017 Bonds 12 GBP 15 Fixed 9.55% 2017 Bonds 90 EUR 90 Fixed 9.00% 2017 Fixed-term loan 383 EUR 383 Variable EURIBOR + 600bp (2) 2017 Fixed-term loan 312 USD 241 Variable LIBOR + 600bp (2) 2017 Bonds 166 USD 128 Fixed 9.35% 2016 Bonds 5 GBP 6 Fixed 9.55% 2016 Bonds 40 EUR 40 Fixed 9.00% 2016 Fixed-term loan 167 EUR 167 Variable EURIBOR +500bp (2) 2016 Fixed-term loan 136 USD 105 Variable LIBOR +500bp (2) 2016
TOTAL 1,469
(1) Exchange rate as of December 31, 2011. (2) This margin can be adjusted downwards as the outstanding debt decreases, the EURIBOR and LIBOR rates used are subject to a minimum level of 2%.
250 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the Parent Company Financial Statements
(a) Maturity of restructured debt
(in € millions) 2011 Within one year 63 1 to 2 years 93 2 to 3 years 110 3 to 4 years 119 4 to 5 years 61 More than 5 years 1,023
TOTAL DEBT 1,469
(b) Analysis of restructured debt by currency
(in € millions) 2011 Euro 680 U.S. dollar 768 Other currencies 21
TOTAL 1,469
13.4 Interest rate caps In April 2010, in anticipation of the finalization of the new Reinstated Debt, Technicolor purchased interest rate caps with a nominal value of $480 million and €270 million to protect the Group if 3-month LIBOR or EURIBOR exceeds 3%. If the reference rates exceed this cap rate, the bank counterparty will pay Technicolor the difference between the market interest rate and exercise rate of 3%. The caps mature in 2014. The fair value of these caps at December 31, 2011 was €1 million.
NOTE 14 PROVISIONS FOR LOSSES AND CONTINGENCIES
As of Usage during Reversals and As of (in € millions) December 31, 2010 Increases the period reclassifications December 31, 2011 Provisions for retirement benefit and jubilee 8 1 - (2) 7 Other provisions for contingencies n Subsidiaries and other risks - 5 - - 5 n Restructuring measures relating to employees 5 6 (6) - 5 (1) n Related to activities disposed of 78 17 (10) (9) 76 n Other 1 2 (1) - 2 Sub-total 84 30 (17) (9) 88
TOTAL PROVISIONS FOR LOSSES 92 31 (17) (11) 95 AND CONTINGENCIES
(1) Provision relating to the disposal of businesses, especially Grass Valley.
TECHNICOLOR I ANNUAL REPORT 2011 I 251 8 - FINANCIAL STATEMENTS Notes to the Parent Company Financial Statements
NOTE 15 CURRENT LIABILITIES “Current liabilities” consist of debts with a maturity of less than one year (notably tax and social security liabilities, trade payables and payables on capital expenditure).
Trade payables split by payment terms are as follows:
Not falling Above 90 As of December 31, 2011 (in € millions) due 0 to 30 days 30 to 60 days 60 to 90 days days Total Invoices impacted by the Sauvegarde proceeding ----0.50.5 French suppliers ----0.50.5 Invoices not impacted by the Sauvegarde proceeding 12.1 3.8 1.6 0.2 0.5 18.2 (including provisions) French suppliers 9.6 2.1 1.4 0.2 0.5 13.8 Foreign suppliers 2.5 1.7 0.2 - - 4.4
TOTAL (1) 12.1 3.8 1.6 0.2 1 18.7
Not falling Above 90 As of December 31, 2010 (in € millions) due 0 to 30 days 30 to 60 days 60 to 90 days days Total Invoices impacted by the Sauvegarde proceeding ----1.41.4 French suppliers ----1.21.2 Foreign suppliers ----0.20.2 Invoices not impacted by the Sauvegarde proceeding 17.4 0.3 0.4 0.2 0.3 18.6 (including provisions) French suppliers 12.2 0.3 0.3 0.1 0.1 13.0 Foreign suppliers 5.2 - 0.1 0.1 0.2 5.6
TOTAL (1) 17.4 0.3 0.4 0.2 1.7 20.0
(1) Excluding fixed assets payables.
Due to the Sauvegarde proceeding opened for the benefit of the Company on November 30, 2009, all accounts payable existing prior to the opening date were frozen. In 2010 and 2011, payments authorized by the Court have gradually decreased the balance of frozen accounts payable. As of December 31, 2011, they amount to €0.5 million compared to €1.4 million as of December 31, 2010.
In 2011, the average number of days for the payment of suppliers is 58 days.
NOTE 16 ACCRUED CHARGES
(in € millions) 2011 2010 Bond loans and loans from private institutions 1- Trade payables 78 Tax and social security liabilities 29 33 Other debts 17 45
TOTAL 54 86
252 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the Parent Company Financial Statements
NOTE 17 INFORMATION ON AVERAGE NUMBER OF EMPLOYEES
2011 2010 Engineers and managers 333 386 Employees and supervisory staff 88 97
TOTAL 421 483
NOTE 18 CONTRACTUAL OBLIGATIONS AND OTHER OFF-BALANCE COMMITMENTS Off balance-sheet contractual obligations and commercial commitments
(in € millions) December 31, 2011 December 31, 2010 Unconditional future payments Operating Leases (1) 67 19 Other unconditional future payments 19
TOTAL UNCONDITIONAL FUTURE PAYMENTS 68 28 Conditional future payments Guarantees given regarding undertakings by related entities 106 93 Other conditional future payments (1) 35
TOTAL CONDITIONAL FUTURE PAYMENTS 109 98
(1) Considering the current rental market prices, Technicolor SA cannot exercise its option to transfer its current rent agreement at the end of November 2012. As a consequence the off balance sheet statement has been revised to include all the lease payments up to November 2018.
As part of its business activities, Technicolor may issue performance guarantees for its subsidiaries as well as letters of comfort. The main performance guarantees have been made to BSkyB, Anglia TV, AstroGroup and Sainsbury’s Supermarkets Ltd.
Technicolor’s liabilities to its employees relating to Individual Training Rights were considered as non-significant on December 31, 2011.
Commitments relating to financial instruments
(in € millions) December 31, 2011 December 31, 2010 CAP (1) 641 630 Currency futures (banks and subsidiaries) 669 665
TOTAL UNDERTAKINGS GIVEN 1,310 1,295 CAP (1) 641 630 Currency futures (banks and subsidiaries) 673 667
TOTAL UNDERTAKINGS RECEIVED 1,314 1,297
(1) See note 13.4 on interest rate caps.
Guarantees received amounted to €0.3 million as of December 31, 2011.
TECHNICOLOR I ANNUAL REPORT 2011 I 253 8 - FINANCIAL STATEMENTS Notes to the Parent Company Financial Statements
Guarantees granted by subsidiaries and security interests Cash pooling accounts pledged granted to secure the Reinstated Debt Pursuant to six different Cash Pooling Pledge Agreements, the cash A security package consisting of share pledges, pledges of certain pooling accounts of Technicolor SA and Technicolor USA, Inc were receivables under material customer contracts, pledges of material pledged. The Cash Pooling Agreements relate to the domestic and intra-group loans and pledges of material cash-pooling accounts international centralization of Group Treasury, a bilateral target was put in place to secure the obligations of the borrower’s and each balancing agreement, an automatic dollar transfer agreement, a North guarantor’s obligations under the Credit Agreement and Note Purchase American target balancing agreement for multiple legal entities and a Agreement. These assets will remain pledged until the final payment of domestic UK cash concentration daily sweep arrangement. all the amounts due by the Group to its creditors. Intragroup loans pledged To secure its obligations under the Reinstated Debt, certain subsidiaries of the Company have agreed, severally and not jointly, irrevocably and Pursuant to an Intragroup Loans Receivables Pledge Agreement, unconditionally to guarantee the Company’s and each other guarantor’s Intragroup loans receivables were pledged from (i) Technicolor obligations of payment and performance under the Reinstated Debt. Trademark Management, (ii) Technicolor Europe Ltd., (iii) All material group Members as defined in the Credit Agreement are Technicolor Videocassette Holdings (UK) Limited and (iv) Technicolor required to provide such guarantee. In addition, the guarantor coverage Entertainment Services Spain, SA. must represent at least 90% of Covenant Group EBITDA and/or 70% of consolidated assets and/or 50% of consolidated revenue. NOTE 19 CONTINGENCIES New material group Members and additional guarantors must accede n On November 28, 2007, Technicolor USA, Inc. (US) (formerly as guarantors in order to maintain the guarantor coverage on the basis Thomson, Inc.) received a subpoena issued on behalf of the Antitrust of the annual audited accounts for the year ended December 31, 2010 Division of the U.S. Department of Justice (“DOJ”) investigating and each financial year-end thereafter. alleged anticompetitive conduct in the Cathode Ray Tubes (“CRT”) industry, including Color Picture Tubes (“CPT”) and Color Display As of the closing date of the Reinstated Debt, the guarantors under Tubes (“CDT”) businesses. the Credit Agreement and the Note Purchase Agreement comprised 18 entities mainly located in UK, France and USA. In 2011, 8 additional In addition, class action law suits asserting private antitrust claims subsidiaries have granted guarantees to secure the Reinstated Debt. were filed in early 2008 in the United States that originally named Thomson and others as defendants, although Thomson/Technicolor was dropped as a named defendant when amended complaints were Shares of subsidiaries pledged filed in the spring of 2009. Technicolor SA and the main guarantors, which include Technicolor International SAS (formerly Thomson Multimedia Sales International On January 9, 2008, Thomson/Technicolor received a request SAS), Technicolor Delivery Technologies SAS, Technicolor Inc. and under art 18 (2) of Council Regulation n°1/2003 from the European Technicolor USA, Inc. (formerly Thomson Inc.) have pledged the shares Commission (the “EC”) also relating to the CRT industry. Thomson/ of 38 of their subsidiaries to secure part of the Reinstated Debt. Technicolor received three further requests for information from the EC on January 16, 2009, January 19, 2009, and September 15, 2009 respectively. Receivables from material contracts pledged Thomson/Technicolor sold its CPT business in 2005 and never had Receivables of Thomson Licensing SAS were pledged under a Patent activity in the CDT business. The Company has taken measures it Licensing Agreement dated December 23, 2009 with Koninklijke Philips considers appropriate to investigate the background to, and respond Electronics N.V. to, the subpoena and the EC requests.
254 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Notes to the Parent Company Financial Statements
On November 25, 2009, Thomson/Technicolor received a Statement n Appeals have been brought before the Juge-Commissaire of the of Objections (“SO”) from the European Commission. The SO is an Commercial Court of Nanterre by certain creditors who contest the intermediate step in the EC’s investigation and, therefore, is not in treatment of their claims by Technicolor’s Mandataires Judiciaires. the nature of a final decision by the EC. One of these appeals concerns Banco Finantia, a Portuguese bank, On March 3, 2010, Thomson/Technicolor filed its written response to whose claim in the amount of €9.9 million was contested by the the “SO”. On May 26 and 27, 2010, Thomson/Technicolor attended Mandataires Judiciaires due to a declaration outside of the legal time an Oral Hearing together with the other parties and the European limit. Indeed, Banco Finantia acquired such claim from the French Commission. Thomson/Technicolor stated that it played a minor role branch of Bank of America, who held the claim at the opening of the in the alleged anticompetitive conduct. Thomson/Technicolor also Sauvegarde proceeding, and who did not declare the claim prior to the informed the European Commission about its financial situation and transfer to Banco Finantia. Banco Finantia declared its claim on the continues to cooperate closely with the European Commission. The last day of the 4-month deadline applicable to foreign creditors under EC should render its decision in 2012, but the Company considers Article R. 622-24 of the French Commercial Code. Technicolor and that the timetable for the remainder of this proceeding cannot be its Mandataires Judiciaires consider that, as this claim was held by a accurately determined. French creditor on the date the Sauvegarde proceeding was opened (the French branch of Bank of America), it should have been declared On April 29, 2010 Technicolor’s Brazilian affiliate received notice from within the two-month deadline applicable to French creditors rather the Brazilian Ministry of Justice indicating Brazilian authorities are than the four-month deadline applicable to foreign creditors. initiating an investigation of possible cartel activity within the CRT industry in Brazil. On February 22, 2011, the Juge-Commissaire rendered a decision in favor of Banco Finantia, holding that Banco Finantia benefited from The Board of Directors has conducted a thorough examination of the four-month deadline within which to file a claim. Technicolor has the risk associated with these proceedings and has determined that appealed against this decision. at this stage there are too many uncertainties to assess the extent of any liability that Technicolor may incur in consequence of these The case will be defended in the Versailles Court of appeal at the investigations. Given these conditions, the criteria for establishing a end of March 2012 and a decision is expected at the beginning of reserve are not satisfied. the second half of 2012. n On February 17, 2010, the Nanterre commercial court approved the Sauvegarde Plan which is now binding on all of Company’s creditors. NOTE 20 MANAGEMENT An appeal against the decision of the Nanterre commercial court was COMPENSATION brought by certain holders of Titres Super Subordonnés (“TSS”) in the Versailles Court of appeal. As no temporary stay of the Nanterre Total compensation paid to Board Members of the Company for the decision was filed, Technicolor implemented the Sauvegarde Plan in 2011 financial year amounted to €635,000. The amounts due to non- May 2010. On November 18, 2010, the Versailles Court of appeal resident for French tax purposes are subject to a withholding tax. dismissed the claims of the TSS holders and confirmed the validity of Technicolor’s Sauvegarde Plan. The holders of TSS have appealed Compensation expenses paid to CEO of Technicolor SA amount to on February 14, 2011 to the Cour de cassation (pourvoi en cassation) € 1,674,020 in 2011. against the decision of the Versailles Court of appeal. This appeal was rejected by the Cour de cassation on February 21, 2012. The Company has no specific retirement benefits program for its Directors. Any risk related to the termination of the Sauvegarde Plan, the capital markets transactions which implemented the Sauvegarde Plan in May 2010 and the issuance of the new shares issued in December 2010 and December 2011 for the redemption of the NRS and the DPN is now eliminated.
TECHNICOLOR I ANNUAL REPORT 2011 I 255 8 - FINANCIAL STATEMENTS Notes to the Parent Company Financial Statements
NOTE 21 RELATED PARTY TRANSACTIONS Related party transactions are transactions with companies which are in the consolidation scope of Technicolor Group.
The main related party transactions and the amounts due to these companies are as follows:
(in € millions) 2011 2010 Shares in subsidiaries net of provisions 778 220 Trade receivables 44 44 Other receivables 1,436 2,134 Financial debt 1,130 853 Other debts 62 89 Financial income 455 547 Financial expense 58 115
NOTE 22 FEES PAID TO STATUTORY AUDITORS
(in € millions) Mazars KPMG 2011 2010 2011 2010 Audit services (1) 1111 Other services relating to the audit function (2) ----
TOTAL 1111
(1) Audit services include all services charged by the Statutory Auditors in completion of their audit of annual consolidated financial statements and the services provided by the Statutory Auditors in meeting the Group’s legal and regulatory requirements, including the review of interim financial statements and the audit of the Company’s financial statements. (2) Other services relating to the audit function include, for example, consultation on the accounting standards to be used in the distribution of financial information and due diligence processes conducted as part of acquisitions.
NOTE 23 SUBSEQUENT EVENTS dismissed the claims of the TSS holders and confirmed the validity of Technicolor’s Sauvegarde Plan. The holders of TSS have appealed on On February 17, 2010, the Nanterre commercial court approved the February 14, 2011 to the Cour de cassation (pourvoi en cassation) against Sauvegarde Plan which is now binding on all of Company’s creditors. the decision of the Versailles Court of appeal. This appeal was rejected An appeal against the decision of the Nanterre commercial court was by the Cour de cassation on February 21, 2012. Any risk related to the brought by certain holders of Titres Super Subordonnés (“TSS”) in termination of the Sauvegarde Plan, the capital markets transactions the Versailles Court of appeal. As no temporary stay of the Nanterre which implemented the Sauvegarde Plan in May 2010 and the issuance decision was filed, Technicolor implemented the Sauvegarde Plan in of the new shares issued in December 2010 and December 2011 for the May 2010. On November 18, 2010, the Versailles Court of appeal redemption of the NRS and the DPN is now eliminated.
256 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Parent company financial data over the five last years (under article R.225-102 of the French Commercial code)
8.6 PARENT COMPANY FINANCIAL DATA OVER THE FIVE LAST YEARS (UNDER ARTICLE R.225- 102 OF THE FRENCH COMMERCIAL CODE)
Type of information (in millions of euros except number of shares, earning per share and number of employees) 2011 2010 2009 2008 2007
I - FINANCIAL POSITION AT YEAR END a) Share capital 224 175 1,012 1,012 1,012 b) Number of shares issued 223,759,083 174,846,625 269,890,028 269,890,028 269,890,028 c) Maximum number of shares to issue in the future : Silver Lake Convertible Bond ------24,558,929 Share-based payment to employees 489.426 767.267 7,389,930 9,544,340 9,575,510 Worldwide free share plan -- 14, 700 174, 460 368, 000 440, 000 Retention plan 2,499,000 1,560,890 ------NRS 2,604,511 51,523,126 ------
II - STATEMENTS OF OPERATIONS a) Revenues (excluding VAT) 83 98 114 146 134 b) Profit (Loss) before tax, amortization and provisions (52) (265) 152 240 11 c) Income tax profit 67 66 53 45 50 d) Loss after tax, amortization and provisions (338) (500) (572) (2,327) (409) e) Dividend paid and distributions ------
III - EARNING (LOSS) PER SHARE (1) a) Profit (Loss) after tax, but before amortization and provisions 0.07 (1.14) 0.76 1.05 0.23 b) Profit (Loss) after tax, amortization and provisions (1.51) (2.86) (2.12) (8.62) (1.52) c) Dividend paid and distributions ------
IV - EMPLOYEES a) Average number of employees 421 483 542 630 650 b) Wages and salaries 41 52 54 71 67 c) Social security costs 17 23 21 24 25
(1) Before reverse share split for years 2007 to 2009.
TECHNICOLOR I ANNUAL REPORT 2011 I 257 8 - FINANCIAL STATEMENTS Statutory auditors’ report on the financial statements for the year ended December 31, 2011
8.7 STATUTORY AUDITORS’ REPORT ON THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2011
This is a free translation into English of the statutory auditors’ report on the financial statements issued in French and it is provided solely for the convenience of English speaking users. The statutory auditors’ report includes information specifically required by French law in such reports. This information pres ented below is the audit opinion on the financial statements and includes an explanatory paragraph discussing the auditors’ assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the financial statements taken as a whole and not to provide separate assurance on individual account balances, transactions, or disclosures. This report also includes information relating to the specific verification of information given in the management report and in the documents addressed to shareholders.
This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France..
To the Shareholders,
In compliance with the assignment entrusted to us by your annual general shareholders’ meetings, we hereby report to you, for the year ended December 31, 2011, on:
n the audit of the accompanying financial statements of Technicolor SA;
n the justifications of our assessments;
n the specific verifications and information required by law. These financial statements have been approved by your Board of Directors. Our role is to express an opinion on these financial statements based on our audit.
I - OPINION ON THE FINANCIAL STATEMENTS We conducted our audit in accordance with professional standards applicable in France; those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures, using sampling techniques or other methods of selection, to obtain audit evidence about the amounts and disclosures in the financial statements. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made, as well as the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the financial statements give a true and fair view of the assets and liabilities and of the financial position of the Company as at December 31, 2011 and of the results of its operations for the year then ended in accordance with French accounting principles.
Without qualifying our opinion, we draw your attention to Note 2 to the financial statements which describes the reasons for applying the going concern assumption to approve the financial statements.
II - JUSTIFICATION OF OUR ASSESSMENTS In accordance with the requirements of article L. 823-9 of the French Commercial Code (“Code de commerce”) relating to the justification of our assessments, we bring to your attention the following matters.
On the basis of our work performed and based on information obtained to date, and in the context of our assessment of the adequacy of the accounting policies used by your Company, we believe that Note 2 to the financial statements discloses, in particular, the appropriate information on the Company’s situation in relation to the going concern assumption applied to approve the financial statements.
258 I TECHNICOLOR I ANNUAL REPORT 2011 FINANCIAL STATEMENTS - 8 Statutory auditors’ report on the financial statements for the year ended December 31, 2011
Moreover, we have assessed that amongst the accounts which are subject to significant estimates and likely to have a justification of our assessment there are the financial assets and the provisions for losses and contingencies: n In relation to financial assets, for which valuation method is described in Note 2 to the financial statements, we have assessed the information and assumptions used as the basis for the estimates retained to determine the value in use, reviewed the calculations performed by the Company and reviewed the procedures used by the management to approve these estimates. n Regarding provisions for losses and contingencies described in Note 14 to the financial statements, we have reviewed the procedures used by the Company to identify them and assessed the assumptions retained to evaluate them. We have also ensured that the uncertainties identified while performing these procedures were adequately disclosed in Note 19 to the financial statements. These assessments were made as part of our audit of the financial statements taken as a whole, and therefore contributed to the opinion we formed which is expressed in the first part of this report.
III - SPECIFIC VERIFICATIONS AND INFORMATION We have also performed, in accordance with professional standards applicable in France, the specific verifications required by French law.
We have no matters to report as to the fair presentation and the consistency with the financial statements of the information given in the management report of the Board of Directors, and in the documents addressed to shareholders with respect to the financial position and the financial statements.
Concerning the information given in accordance with the requirements of article L. 225-102-1 of the French Commercial Code (“Code de commerce”) relating to remunerations and benefits received by the directors and any other commitments made in their favour, we have verified its consistency with the financial statements, or with the underlying information used to prepare these financial statements and, where applicable, with the information obtained by your Company from companies controlling your Company or controlled by it. Based on this work, we attest the accuracy and fair presentation of this information.
In accordance with French law, we have verified that the required information concerning the purchase of investments and controlling interests and the identity of the shareholders and holders of the voting rights has been properly disclosed in the management report.
The Statutory Auditors Paris La Défense, March 23, 2012 Courbevoie, March 23, 2012 KPMG Audit Mazars A division of KPMG SA French original signed by French original signed by Isabelle Allen Jacques Pierre Jean-Louis Simon Simon Beillevaire
TECHNICOLOR I ANNUAL REPORT 2011 I 259 8 - FINANCIAL STATEMENTS Statutory Auditor’s Special report on regulated agreements and commitments
8.8 STATUTORY AUDITOR’S SPECIAL REPORT ON REGULATED AGREEMENTS AND COMMITMENTS - GENERAL MEETING OF SHAREHOLDERS TO APPROVE THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2011
This is a free translation into English of the statutory auditors’ special report on regulated agreements and commitments that is issued in the French language and provided solely for the convenience of English-speaking readers. This report should be read in conjunction with, and construed in accordance with French law and professional auditing standards applicable in France. It should be understood that the agreements and commitments reported on are only those provided for by the French Commercial Code and that the report does not apply to those related-party transactions described in IAS 24 or other equivalent accounting standards.
To the Shareholders,
In our capacity as Statutory Auditors of your Company, we hereby report on the regulated agreements and commitments.
We are required to inform you, based on the information provided to us, of the principal terms and conditions of those agreements and commitments brought to our attention or discovered during our engagement, without expressing an opinion on their usefulness and appropriateness nor ascertaining whether any other agreements and commitments exist. It is your responsibility, pursuant to article R. 225-31 of the French Commercial Code (“Code de commerce”), to assess the benefits resulting from the conclusion of these agreements and commitments prior to their approval.
Moreover, it is our responsibility, if any, to give you the information specified in article R. 225-31 of the French Commercial Code (“Code de commerce”) relating to the implementation, during the past year, of agreements and commitments that have already been approved by previous shareholders’ meetings.
We conducted our work by applying the procedures we considered necessary in light of the professional standards of the French auditing body (“Compagnie Nationale des Commissaires aux Comptes”) for this type of engagement.
AGREEMENTS AND COMMITMENTS SUBMITTED TO THE APPROVAL OF THE SHAREHOLDERS’ MEETING We inform you that we were not provided with any agreement nor commitment entered into by the Company during the fiscal year to submit to the approval of the shareholders’ meeting pursuant to article L.225-38 of the French Commercial Code (“Code de commerce”).
AGREEMENTS AND COMMITMENTS ALREADY AUTHORIZED IN PREVIOUS FISCAL YEARS We inform you that we have not been advised of any agreement nor commitment already authorized by a shareholders’ meeting that would have had an effect during the fiscal year.
The Statutory Auditors Paris La Défense, March 23, 2012 Courbevoie, March 23, 2012 KPMG Audit Mazars A division of KPMG SA French original signed by French original signed by Isabelle Allen Jacques Pierre Jean-Louis Simon Simon Beillevaire
260 I TECHNICOLOR I ANNUAL REPORT 2011 REGISTRATION DOCUMENT 9 CROSS REFERENCE TABLE
Cross reference table referring to the main headings Cross reference table referring to the elements required by Annex 1 of European Commission of the Management Report ...... 266 Regulation 809/2004 ...... 262 Annual Financial Report cross-reference table ...... 267
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Under Article 28 of European Commission regulation (EC) 809/2004, n The annual accounts of the Company for the year 2010 and the the following information is incorporated by reference in the Regulation Statutory Auditor’s reports on the annual accounts are contained in Document: the chapter 9: «Financial Statements» of the Registration Document of the year 2010 (pages 265 to 292 ); and n The consolidated financial statements of the year 2010 and the The annual accounts of the Company for the year 2009 and the Statutory Auditor’s reports on the consolidated financial statements n Statutory Auditor’s reports on the annual accounts are contained in are contained in the chapter 9: «Financial Statements» of the the chapter 10: «Financial Statements» of the Registration Document Registration Document of the year 2010 (pages 158 to 263); and of the year 2009 (pages 301 to 327). n The consolidated financial statements of the year 2009 and the The Registration Document of the year 2010 was filed with the Autorité Statutory Auditor’s reports on the consolidated financial statements des marchés financiers on March 30, 2011 under No. D.11-0196. are contained in the chapter 10: «Financial Statements» of the Registration Document of the year 2009 (pages 195 to 300); and The Registration Document of the year 2009 was filed with the Autorité des marchés financiers on March 30, 2010 under No. D.10-0193.
To facilitate the reading of the Annual Report, the cross reference tables below refer to the main headings required by Annex 1 of European Commission Regulation 809/2004 implementing the “Prospectus” Directive as well as the elements of the Management Report adopted by the Board of Directors.
CROSS REFERENCE TABLE REFERRING TO THE MAIN HEADINGS REQUIRED BY ANNEX 1 OF EUROPEAN COMMISSION REGULATION 809/2004
Corresponding sections and Information required under Appendix 1 of regulation (EC) 809/2004 chapters of the Annual Report Page No. 1. PERSON RESPONSIBLE 1.1 Names and positions of the persons responsible for the information Chapter 7, section 7.9.2 132 1.2 Declaration by the persons responsible Chapter 7, section 7.9.1 132 2. STATUTORY AUDITORS 2.1 Name and address Chapter 7, sections 7.7.1 and 7.7.2 130-131 2.2 Resignation or departure of Statutory Auditors N/A 3. SELECTED FINANCIAL INFORMATION 3.1 Historical financial information Chapter 1, section 1.1 6 3.2 Interim financial information N/A 4. RISK FACTORS Chapter 3 43 5. INFORMATION ABOUT THE ISSUER 5.1 History and development of the Company 5.1.1 Legal and business name Chapter 1, section 1.2.1 9 5.1.2 Place of registration and registration number Chapter 1, section 1.2.1 9 5.1.3 Incorporation date of an issuer’s length of life Chapter 1, section 1.2.1 9 5.1.4 Domicile, legal form, applicable legislation, country of incorporation, registered office’s address and Chapter 1, section 1.2.1 9 telephone number 5.1.5 Main events in the development of the Company activities Chapter 1, section 1.2.2 9 5.2 Investments 5.2.1 Principles investments realized during each year of the period covered by the historical financial Chapter 8, section 8.2 158, 173, 218, information until the date of the document Notes 4, 12, 13, 33 and 37 to the 228 consolidated financial statements 5.2.2 Major investments in progress, including the geographic distribution of these investments and their N/A financing method 5.2.3 Major investments planned by the issuer and for which the management bodies have already taken N/A a firm commitment
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Corresponding sections and Information required under Appendix 1 of regulation (EC) 809/2004 chapters of the Annual Report Page No.
6. BUSINESS OVERVIEW 6.1 Principal activities 6.1.1 Nature of transactions made by the Company and its principal activities Chapter 1, sections 1.2.3 and 1.3 10; 13 6.1.2 New products/services launched on the market Chapter 1, section 1.3 13 6.2 Principal markets Chapter 1, section 1.3 and Chapter 2, 13; 22 section 2.2 6.3 Exceptional events N/A 6.4 Dependency from certain contracts Chapter 2, section 2.10.3 and 35; 47 Chapter 3, section 3.3 6.5 Competitive position Statements regarding competitive 3 position (preambule) 7. ORGANIZATIONAL STRUCTURE 7.1 Brief description Chapter 7, sections 7.5.1 and 7.5.2 127-129 7.2 List of main subsidiaries Chapter 7, section 7.5.1 and chapter 127; 229 8, section 8.2 Note 38 to the consolidated financial statements 8. PROPERTY, PLANTS AND EQUIPMENT 8.1 Material tangible fixed assets important or planned Chapter 7, section 7.1 and chapter 8, 120; 173 section 8.2 Note 12 to the consolidated financial statements 8.2 Environmental issues potentially affecting the use of the tangible fixed assets Chapter 6, section 6.2 107 9. OPERATING AND FINANCIAL REVIEW 9.1 Financial position Chapter 2, sections 2.3, 2.9 23; 26; 34 and 2.10.3 9.2 Operating results 9.2.1 Significant factors affecting the income from operations Chapter 2, section 2.2, 2.4,2.5 and 2.9 22; 24; 26 9.2.2 Reasons for material changes in net sales or revenues Chapter 2, section 2.9 26 9.2.3 Policies or factors that have materially affected, or could materially affect, directly or indirectly, the N/A issuer’s operations 10. CASH AND CAPITAL 10.1 Information concerning capital resources (short and long term) Chapter 8, section 8.2 182 Note 22 to the consolidated financial statements 10.2 Sources, amounts and description of cash flows Chapter 2, sections 2.10.1, 2.10.2 and 33; 34; 35 2.10.3 10.3 Information on borrowing conditions and financing structure Chapter 2, section 2.10.3 35; 187 Chapter 8, section 8.2 Notes 25 and 26 to the consolidated financial statements 10.4 Restrictions on use of capital resources, having materially impact on business operations Chapter 2, section 2.10.3 35; 44 Chapter 3, section 3.1 10.5 Expected sources of financing N/A 11. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES Chapter 1, section 1.3.1, Chapter 13; 29; 164 2, section 2.9.3 and Note 7 to the consolidated financial statements 12. TREND INFORMATION 12.1 Main trends in production, sales and inventory, and in costs and selling prices, since the end of the N/A last fiscal year 12.2 Known trends, uncertainties, demands, commitments or events that might have a material effect Chapter 2, sections 2.2 and 2.11 22; 41 on prospects for the current fiscal year 13. PROFIT FORECASTS OR ESTIMATES N/A
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Corresponding sections and Information required under Appendix 1 of regulation (EC) 809/2004 chapters of the Annual Report Page No.
14. ADMINISTRATIVE, MANAGEMENT, AND SUPERVISORY BODIES AND SENIOR MANAGEMENT 14.1 Information concerning Members of the administrative and management bodies (list of mandates Chapter 4, sections 4.1.2 and 4.1.3 58; 59 performed during the last five years) 14.2 Conflicts of interest in administrative and management bodies Chapter 4, section 4.1.3.3 62 15. REMUNERATION AND BENEFITS 15.1 Remuneration paid and benefits in kind Chapter 4, sections 4.4 and 4.5.2 77; 85 15.2 Amounts of provisions booked or otherwise recognized for the payment of pensions, retirement Chapter 4, section 4.5.2 85 annuities or other benefits 16. BOARD PRACTICES 16.1 Expiry date of current terms of office Chapter 4, section 4.1.2 58 16.2 Service contracts with Members of administrative bodies Chapter 4, section 4.1.3.6 64 16.3 Information about the Audit Committee and the Remuneration Committee Chapter 4, section 4.2.1.4 67 16.4 Declaration – Corporate governance applicable in the home country of the issuer Chapter 4, section 4.2.1.1 64 17. EMPLOYEES 17.1 Number of employees Chapter 6, section 6.1.1 98 17.2 Profit sharing and stock options Chapter 4, sections 4.1.3.5 and 4.4.5 63; 81; 99 and chapter 6, sections 6.1.3 and 6.1.4 17.3 Agreements for employees’ equity stake in the capital of the issuer Chapter 6, section 6.1.2 99 18. MAJOR SHAREHOLDERS 18.1 Shareholders owning more than 5% of the share capital or voting rights Chapter 5, section 5.1.1 88 18.2 Existence of specific voting rights Chapter 7, section 7.2.3 124 18.3 Control of the Company Chapter 5, section 5.1.3 90 18.4 Agreement known to the Company which could lead to a change in control if implemented N/A 19. RELATED PARTY TRANSACTIONS Chapter 8, section 8.2 141-227 Note 36 to the consolidated financial statements 20. FINANCIAL INFORMATION CONCERNING THE ISSUER’S ASSETS AND LIABILITIES, FINANCIAL POSITION AND PROFITS AND LOSSES 20.1 Historical financial information Chapter 8, sections 8.1, 8.2, 8.4 and 134; 141; 8.5 233; 236 20.2 Pro forma financial information N/A 20.3 Financial statement Chapter 8 133 20.4 Auditing of historical annual financial information 20.4.1 Statement of audit of historical financial information Chapter 7, sections 7.9; 132; 231; 258 Chapter 8, sections 8.3 and 8.7 20.4.2 Other information contained in the registration document and not extracted from the issuer’s N/A audited financial statement 20.4.3 Financial data contained in the registration document and not extracted from the issuer’s audited N/A financial statement 20.5 Age of latest audited financial information Chapter 8, section 8.1 134 20.6 Interim and other financial information N/A 20.6.1 Quarterly or half yearly financial information established since the date of the last audited financial statement 20.6.2 Interim financial information in the event that the document was established more than nine N/A months after the end of the last audited financial year 20.7 Dividend distribution policy Chapter 5, section 5.1.9 94 20.7.1 Dividend amount per share for each year of the fiscal year covered by the historical financial Chapter 5, section 5.1.9 94 information 20.8 Legal and arbitration proceedings Chapter 3, sections 3.1and 3.4, 44; 53; Chapter 8, section 8.2 222 Note 35 to the consolidated financial statements
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Corresponding sections and Information required under Appendix 1 of regulation (EC) 809/2004 chapters of the Annual Report Page No. 20.9 Significant change in the financial or business situation N/A 21. ADDITIONAL INFORMATION Chapter 7 119 21.1 Share capital 21.1.1 Amount of issued capital Chapter 5, section 5.1 88 21.1.2 Shares not representing capital N/A 21.1.3 Shares held by the issuer itself Chapter 5, section 5.1.2 90 21.1.4 Convertible securities, exchangeable securities or securities with warrants Chapter 5, section 5.1.7 92 21.1.5 Terms of any acquisition right and/or commitment in respect of authorized but non-issued capital N/A 21.1.6 Information about the capital of any Group Member subject to an option or agreement providing N/A an option 21.1.7 History of the share capital Chapter 5, sections 5.1.5 and 5.1.6 91 21.2 Articles of incorporation and bylaws , 21.2.1 Issuer’s objects and purposes Chapter 7, section 7.2.1 124 21.2.2 Administrative, management and supervisory bodies Chapter 4, section 4.1.1 58 21.2.3 Rights, privileges and restrictions attached to shares Chapter 7, section 7.2.3 124 21.2.4 Actions necessary to change the rights of shareholders Chapter 7, section 7.2.4 124 21.2.5 Calling-up of Annual General Meetings and Extraordinary General Meetings of shareholders Chapter 7, section 7.2.5 125 21.2.6 Description of any provision that would have an effect of delaying, deferring or preventing a N/A change in control 21.2.7 Crossing thresholds Chapter 7, section 7.2.6 125 21.2.8 Changes in the shares capital N/A 22. MATERIAL CONTRACTS Chapter 7, section 7.3 125 23. THIRD-PARTY INFORMATION, STATEMENT BY EXPERTS AND DECLARATIONS OF ANY INTEREST 23.1 Information on any statement or report included in the document N/A 23.2 Information from a third party Preambule 24. DOCUMENTS ON DISPLAY Chapter 7, section 7.6 130 25. INFORMATION ON HOLDINGS N/A
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CROSS REFERENCE TABLE REFERRING TO THE ELEMENTS OF THE MANAGEMENT REPORT
Corresponding sections and Information in the Management Report chapters of the Annual Report Page No. Objective and exhaustive analysis of the business and results’ trend of the Group during the fiscal year Chapter 2, section 2.9 26 (Articles L. 225-100, L. 225-100-2 and L. 233-6 of the French Commercial Code) Report on the subsidiaries’ activity and results (Article L. 233-6 al. 2 of the French Commercial Code) Chapter 2, section 2.9 26 Objective and exhaustive analysis of the financial situation including the debt situation (Article L. 225-100 al. 3 Chapter 2, sections 2.9 and 2.10 26; 33 of the French Commercial Code) Analysis of the Company’s situation during the last fiscal year, its expected development and the important Chapter 2, sections 2.6 and 2.11 25; 41 events occurred since the closing date (Article L. 232-1-II of the French Commercial Code) Activities in research and development (Article L. 233-26 and L. 232-1-II of the French Commercial Code) Chapter 1, section 1.3.1 13; 29 Chapter 2, section 2.9.3 Non financial key performance indicators (environmental information) (Articles L. 225-100, al. 3; L. 225-102-1, Chapter 6, section 6.2 107 al. 5 and R. 225-105 of the French Commercial Code) Non financial key performance indicators (social information) (Article L. 225-100, al. 3; L. 225-102-1, al. 5 and Chapter 6, section 6.1 98 R. 225-104 of the French Commercial Code) Chairman’s report on corporate governance, internal control procedures and risk management Chapter 4, section 4.2 64 (Article L. 225-37, al.6 of the French Commercial Code) Main risks and uncertainties (Article L. 225-100 of the French Commercial Code) and indications concerning Chapter 3 43 the use of financial instruments by the Company when it’s relevant for the evaluation of its assets, its liabilities, its financial condition and its profits and losses Information on the risks in the event of interest rate fluctuation, exchange rate fluctuation and market price Chapter 3, section 3.2 46 fluctuation Table of the delegations granted to the Board of Directors by the shareholders’ meetings and the use of those Chapter 5, section 5.1.8 93 delegations (Article L. 225-129-5 of the French Commercial Code) List of Directorships or functions performed by each Director during the last fiscal year (Article L. 225-102-1, Chapter 4, section 4.1.3 59 al.4 of the French Commercial Code) Directors’ compensation and benefits in kind (Article L. 225-102-1 of the French Commercial Code) Chapter 4, section 4.4 77 Transactions executed by the executive officers on the shares of the Company (Article L. 621-18-2 Chapter 4, section 4.1.3.5 63 of the Monetary and Financial Code) Retention requirement by the Executive Directors of free shares and/or stock options which were awarded Chapter 4, section 4.4.5 81 (Article L. 225-197-1-II al. 4 and L. 225-185 al.4 of the French Commercial Code) Stock Options awarded to employees and executive officers (Article L. 225-197-1 and L. 225-185 Chapter 4, sections 4.1.3.5 and 4.4.5 63; 81; 99 of the French Commercial Code) and chapter 6, section 6.1.4 Shares held by employees (Article L. 225-102 of the French Commercial Code) Chapter 6, section 6.1.3 99 Distribution of share capital and information on the crossing thresholds declared to the Company Chapter 5, section 5.1.1 88 (Article L. 233-13 of the French Commercial Code) Amount of dividends and distribution for the last three fiscal years (Tax Code Article 243 bis) Chapter 5, section 5.1.9 94 Parent Company’s results over the last five fiscal year (Article R. 225-102 of the French Commercial Code) Chapter 8, section 8.6 257; 129 and comments on the results Chapter 7, section 7.5.2 Information on payment terms with suppliers (Article L. 441-6-1 of the French Commercial Code) Chapter 8, section 8.5 252 Note 15 to the consolidated financial statements Information on the number of treasury shares on transactions executed during the fiscal year Chapter 5, section 5.1.2 90 (Article L. 225-211, al.2 of the French Commercial Code) Elements likely to have any influence in case of a public offer (Article L. 225-100-3 Chapter 5, section 5.1.10 94 of the French Commercial Code) Information on participations acquired in the share capital of French companies (Article L. 233-6 Chapter 2, sections 2.7 and 2.8 26 of the French Commercial Code) Additional tax information (Article 34-9 and 223 quater and quinquies of the Tax Code) Chapter 7, section 7.4 126
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ANNUAL FINANCIAL REPORT CROSS-REFERENCE TABLE In application of Article 222-3 of the AMF’s General Regulations, the annual financial report referred to in paragraph 1 of Article 451-1-2 of the French Monetary and Financial Code contains the information described in the following pages of the Registration Document:
Corresponding sections and Annual financial report chapters of the Annual Report Page No.
STATEMENT OF THE PERSON RESPONSIBLE FOR THE REGISTRATION DOCUMENT Chapter 7, section 7.9.1 132
MANAGEMENT REPORT n Analysis of results, financial conditions, parent company and consolidated Group risks Chapter 2, sections 2.9 and 2.10 26; 33; 43; 93 and list of authorizations to increase the share capital (Article L. 225-100 and L. 225-100-2 Chapter 3 of the French Commercial Code) Chapter 5, section 5.1.8 n Information required by Article L. 225-100-3 of the French Commercial Code relating to factors likely Chapter 5, section 5.1.10 94 to affect the outcome of a public offer n Information about share buybacks (Article L. 225-211, paragraph 2, of the French Commercial Code) Chapter 5, section 5.1.2 90
FINANCIAL STATEMENT n Statutory financial statements Chapter 8, sections 8.4 and 8.5 233; 236 n Statutory Auditors’ report on the statutory financial statements Chapter 8, section 8.7 258 n Consolidated financial statements Chapter 8, section 8.1 and 8.2 134; 141 n Statutory Auditors’ report on the consolidated financial statements Chapter 8, section 8.3 231
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268 I TECHNICOLOR I ANNUAL REPORT 2011
Siège social : 1-5, rue Jeanne d’Arc 92130 Issy-les-Moulineaux – France E-mail : [email protected] Tel. : +33 (0)1 41 86 50 00 – Fax : +33 (0)1 41 86 58 59
Technicolor Inc. 6040 Sunset Blvd Hollywood, CA 90 028 USA Tel. : +1 (323) 817 6600 www.technicolor.com
Technicolor S.A. au capital social de 223 759 083 euros – 333 773 174 R.C.S. Nanterre