EMI's convertible bond issue - Vernimmen

This Offering Circular comprises listing particulars given in compliance with the listing rules made underSection 74 of the Financial Services and Markets Act 2000 by the Financial Services Authority in its capacity ascompetent authority under the Financial Services and Markets Act 2000 (the “UK Listing Authority”) relating tothe issue of US$243,343,000 5.25% Guaranteed Convertible Bonds due 2010 (the “Bonds”) by EMI GroupFinance (Jersey) Limited (the “Issuer”) which will be convertible into fully paid 5.25% ExchangeableRedeemable Preference Shares of the Issuer (the “Preference Shares”) which will be exchanged immediatelyupon issue for Ordinary Shares (the “Ordinary Shares”) in EMI Group plc (the “Parent”). The Issuer’sobligations under the Bonds and the Preference Shares are to be guaranteed by the Parent and Capitol Records,Inc. (“Capitol” and, together with the Parent, the “Guarantors”). This Offering Circular provides information onthe Issuer, the Guarantors, the Parent together with its subsidiaries and subsidiary undertakings taken as a whole(the “Group”) and the Bonds, and has been approved by the UK Listing Authority and delivered to the Registrarof Companies for registration as required by Section 83 of that Act.Application has been made to the UK Listing Authority for the Bonds to be admitted to the Official List of theUK Listing Authority. Application has also been made to London Stock Exchange plc (the “London StockExchange”) for the Bonds to be admitted to trading on the London Stock Exchange’s market for listed securities.The Issuer and the Parent accept responsibility for the information contained in this Offering Circular. To thebest of the knowledge and belief of each of the Issuer and the Parent (each of which has taken all reasonable careto ensure that such is the case), the information contained in this Offering Circular is in accordance with the factsand does not omit anything likely to affect the import of such information.Capitol accepts responsibility for the information contained in this Offering Circular (on pages 1, 108, 119, 128,141 and 142) that relates to Capitol. To the best of the knowledge and belief of Capitol (having taken allreasonable care to ensure that such is the case), the information contained in this Offering Circular that relates toCapitol is in accordance with the facts and does not omit anything likely to affect the import of such information.This Offering Circular does not constitute an offer of, or an invitation by or on behalf of, the Issuer, the Parent orthe Managers (as defined in “Subscription and Sale”) to subscribe or purchase any of the Bonds, the PreferenceShares or the Ordinary Shares. The distribution of this Offering Circular and the offering of the Bonds, thePreference Shares or the Ordinary Shares in certain jurisdictions may be restricted by applicable law. Persons inreceipt of this Offering Circular are required by the Issuer, the Parent and the Managers to inform themselvesabout and to observe any such restrictions. For a description of certain further restrictions on offers and sales ofthe Bonds, the Preference Shares or the Ordinary Shares and distribution of this Offering Circular, see“Subscription and Sale”.The Managers have agreed not to direct their selling efforts in respect of the Bonds at natural persons or persons(other than financial institutions) who are resident in Jersey.A copy of this document has been delivered to the Jersey registrar of companies in accordance with Article 5 ofthe Companies (General Provisions) (Jersey) Order 2002, and he has given, and has not withdrawn, his consentto its circulation. The Jersey Financial Services Commission has given, and has not withdrawn, its consent underArticle 4 of the Control of Borrowing (Jersey) Order 1958 to the issue of the Bonds and the Preference Shares bythe Issuer. It must be distinctly understood that, in giving these consents, neither the Jersey registrar ofcompanies nor the Jersey Financial Services Commission takes any responsibility for the financial soundness ofany schemes or for the correctness of any statements made, or opinions expressed, with regard to them.Ordinary Shares to be issued on exchange of the Preference Shares issued on conversion of the Bonds will beissued in uncertificated form through the dematerialised securities trading system operated by CRESTCoLimited, known as CREST, unless the holder of such Bonds elects to hold the Ordinary Shares in certificatedregistered form or, at the time of issue, the Ordinary Shares are not a participating security in CREST.The Ordinary Shares are listed on the Official List of the UK Listing Authority and trade on the London StockExchange’s market for listed securities. The Preference Shares will not be listed on any stock exchange.The Bonds and the guarantees to be provided by the Guarantors in respect of the Bonds (the “Deed ofGuarantee”) and the guarantee by way of deed poll to be provided by the Guarantors in respect of the PreferenceShares (the “Deed Poll” and, together with the Deed of Guarantee, the “Guarantees”), the Preference Shares and1

the Ordinary Shares have not been and will not be registered under the US Securities Act of 1933, as amended(the “Securities Act”), or with any securities regulatory authority of any other jurisdiction and subject to certainexceptions, may not be offered, sold or, in the case of Bonds in bearer form, delivered within the United States orto, or for the account or benefit of, US persons (as defined in Regulation S under the Securities Act (“RegulationS”). The Bonds in bearer form are subject to US tax law requirements.No person is authorised to give any information or to make any representation not contained in this OfferingCircular in connection with the issue or sale of the Bonds, the Preference Shares or the Ordinary Shares, and anyinformation or representation not so contained must not be relied upon as having been expressly or implicitlyauthorised by or on behalf of the Issuer, the Guarantors or the Managers. Neither the delivery of this OfferingCircular nor any offer, sale or delivery made in connection with the issue of the Bonds shall, under anycircumstances, constitute a representation that there has been no change or development likely to involve achange in the condition (financial or otherwise) of the Issuer, the Guarantors or the Group since the date hereofor create any implication that the information contained herein is correct as of any date subsequent to the datehereof or the date as of which that information is stated herein to be given.The Managers and the Trustee have not separately verified the information contained herein. Accordingly, norepresentation, warranty or undertaking, express or implied, is made and no responsibility or liability is acceptedby the Managers, the Trustee or any of them as to the accuracy or completeness of the information contained inthis Offering Circular or any other information provided by the Issuer, the Parent or the Guarantors in connectionwith the Bonds or their distribution.This Offering Circular is not intended to provide the basis of any credit or other evaluation and should not beconsidered as a recommendation by the Issuer, the Guarantors or the Managers that any recipient of this OfferingCircular should purchase, subscribe for or invest in any of the Bonds, the Preference Shares or the OrdinaryShares. Potential investors should not construe anything in this Offering Circular as legal, business or tax advice.None of the Issuer, the Guarantors or the Managers is providing any advice or recommendation in this OfferingCircular on the merits of the purchase of, subscription for, or investment in, the Bonds, the Preference Sharesand/or the Ordinary Shares or the exercise of any rights conferred by the Bonds, the Preference Shares and/or theOrdinary Shares. Each investor contemplating purchasing Bonds should make its own independent investigationof the financial condition and affairs, and its own appraisal of the creditworthiness, of the Issuer, the Guarantorsand the Group, including the merits and risks involved.Prior to making an investment decision, all prospective purchasers of the Bonds should carefully consider theinvestment considerations set out herein under “Risk Factors” in addition to other information contained in thisOffering Circular.This Offering Circular has been prepared on the basis that any purchaser of the Bonds is a person or entity havingsuch knowledge and experience of financial matters to be capable of evaluating the merits and risks of suchpurchase. If any prospective purchaser is in any doubt about the contents of this Offering Circular he shouldconsult a stockbroker, bank manager, solicitor, accountant or other financial advisor.The Bonds will be represented initially by a single temporary global bond (the “temporary Global Bond”) inbearer form, without interest coupons, which will be deposited with a common depositary for Euroclear BankS.A./N.V., as operator of the Euroclear system, (“Euroclear”) and Clearstream Banking, société anonyme(“Clearstream, Luxembourg”). The temporary Global Bond will be exchangeable on or after 11 November 2003(the “Exchange Date”) for a permanent global bond (the “permanent Global Bond”) in bearer form, withoutinterest coupons, upon certification as to non-US beneficial ownership in the form set out in the temporaryGlobal Bond. The permanent Global Bond will be exchangeable, in whole but not in part, for definitive Bonds inbearer form in the denomination of US$1,000 only in certain limited circumstances described herein. See thesection headed “Summary of the Provisions relating to the Bonds while in Global Form”.In connection with the issue of the Bonds, J.P. Morgan Securities Ltd. or any person acting for it may from timeto time over-allot or effect transactions with a view to supporting the market price of the Bonds and/or theOrdinary Shares at a level higher than that which might otherwise prevail for a limited period. However, theremay be no obligation on J.P. Morgan Securities Ltd. or any of its agents to do this. Such stabilising, ifcommenced, may be discontinued at any time, and must be brought to an end after a limited period.It should be remembered that the price of securities and the income from them can go down as well as up.2

The investments described in this document do not constitute a collective investment fund for the purposeof the Collective Investment Funds (Jersey) Law 1988, as amended, on the basis that they are investmentproducts designed for financially sophisticated investors with specialist knowledge of, and experience ofinvesting in, such investments, who are capable of fully evaluating the risks involved in making suchinvestments and who have an asset base sufficiently substantial to enable them to sustain any loss that theymight suffer as a result of making such investments. These investments are not regarded by the JerseyFinancial Services Commission as suitable investments for any other type of investor.Any individual intending to invest in any investment described in this document should consult hisprofessional adviser and ensure that he fully understands all the risks associated with making such aninvestment and has sufficient financial resources to sustain any loss that might arise from it.In this Offering Circular, references to “Sterling” and “£” are to pounds sterling, references to “euro” and “€” areto the currency introduced at the start of the Third Stage of European economic and monetary union pursuant tothe Treaty establishing the European Community, as amended from time to time, and references to “dollars”,“US dollars” or “US$” are to the lawful currency of the United States.3

TABLE OF CONTENTSPageForward-Looking Statements .............................................................. 5Industry and Related Data ................................................................ 6Summary.............................................................................. 7Risk Factors ........................................................................... 15Terms and Conditions of the Bonds ......................................................... 23Summary of Provisions relating to Bonds while represented by the Global Bonds .................... 57Use of Proceeds ........................................................................ 59Description of the Issuer .................................................................. 60Description of the Issuer’s Share Capital and the Preference Shares ................................ 63Management’s Discussion and Analysis of Financial Condition and Results of Operations ............. 67Capitalisation and Indebtedness ............................................................ 83Description of the Parent ................................................................. 85Description of Capitol ................................................................... 108Description of the Deed Poll .............................................................. 109Taxation .............................................................................. 111Subscription and Sale .................................................................... 117Additional Information ................................................................... 119Financial Information .................................................................... 1434

FORWARD-LOOKING STATEMENTSSome statements made in this Offering Circular are forward-looking statements. All statements with respect tothe Issuer, the Parent or the Group, the Issuer’s, the Parent’s or the Group’s corporate plans, future financialcondition, future results of operations, future business plans, strategies, objectives and beliefs and otherstatements that are not historical facts are forward-looking. Statements containing the words “may”, “will”,“expect”, “anticipate”, “intend”, “estimate”, “continue”, “plan”, “project”, “target”, “on track to”, “strategy”,“aim”, “seek”, “will meet” or other similar words are also forward-looking. These statements are based onassumptions and beliefs of the management of the Parent in light of the information available to them. Theseassumptions involve risks and uncertainties which may cause the actual results, performance or achievements tobe materially different from any future results, performance or achievements expressed or implied by suchforward-looking statements.The Issuer and the Parent wish to caution readers, and others to whom forward-looking statements are addressed,that any such forward-looking statements are not guarantees of future performance and that actual results maydiffer materially from estimates in the forward-looking statements. Neither the Issuer nor the Parent undertakesany obligation to revise these forward-looking statements to reflect events or circumstances after the date hereof.Important factors that may cause results to differ from expectations include, for example:ŠŠŠŠŠŠŠŠŠŠŠthe impact of heightened and intensive competition in the recorded music and music publishingbusinesses, including competition from other forms of entertainment and leisure activities;the impact of music distribution on the Internet or the introduction of other new music distributionformats;our ability to continue to grow our recorded music and music publishing businesses and successfullytake advantage of new business opportunities, such as marketing secure digital music on the Internet;our ability to identify, sign, retain and promote artists and songwriters that satisfy the fragmentationof the market and changing tastes of consumers;the impact of music piracy and other forms of copyright infringement on the music industry;our ability and the ability of our joint venture partners to operate satisfactorily our existing jointventures;our ability to successfully implement our operating strategies;our ability to attract and retain qualified personnel;changes in the economic conditions;fluctuation of exchange rates; andchanges in law and government regulations.These and other factors are discussed in “Risk Factors” and elsewhere in this Offering Circular.Since the investment considerations referred to in this Offering Circular could cause actual results or outcomes todiffer materially from those expressed in any forward-looking statements made in this Offering Circular by theIssuer or Parent or on their behalf, undue reliance should not be placed on any of these forward-lookingstatements. Further, any forward-looking statement speaks only as of the date on which it is made, and neitherthe Issuer nor the Parent undertakes any obligation to update forward-looking statements to reflect events orcircumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.New factors will emerge in the future, and it is not possible to predict which factors they will be. In addition, theimpact of each factor on the business or the extent to which any factor, or combination of factors, may causeactual results to differ materially from those described in any forward-looking statements cannot be assessed.Additional factors that could cause actual results, performance or achievements to differ materially include, butare not limited to, those discussed under “Risk Factors”.5

INDUSTRY AND RELATED DATAIndustry data and certain industry forecasts used in this Offering Circular were obtained from internal surveys,market research, publicly available information and industry publications such as those issued by theInternational Federation of the Phonographic Industry (the “IFPI”). Industry publications generally state that theinformation contained therein has been obtained from sources believed to be reliable, but that the accuracy andcompleteness of such information is not guaranteed. Similarly, internal surveys, industry forecasts and marketresearch, while believed to be reliable, have not been independently verified, and neither we nor the Managersmake any representation or warranty as to the accuracy or completeness of the industry and related data set forthin this Offering Circular.6

SUMMARYThis summary highlights information contained elsewhere in this Offering Circular. Because it is a summary, itdoes not contain all of the information that you should consider before investing. You should read the entireOffering Circular carefully including the “Risk Factors” section, our consolidated financial statements and thenotes to those financial statements. Unless the context otherwise requires, all references to the “Company” refersolely to the Parent on an unconsolidated basis, and all references to “the Group,” “we,” “us,” or “our” referto the Parent and its subsidiaries on a consolidated basis.Company OverviewWe are the world’s leading independent music company and one of the largest and most profitable musiccompanies in the world. Our business is comprised of two divisions: Recorded Music and Music Publishing.Our Recorded Music business is the third largest in the world based on turnover. We have one of the world’smost extensive catalogues of recordings, with over three million individual tracks. Of these tracks, approximately600,000 are currently in active release on over 50,000 albums. Our record labels include EMI, Virgin, Capitol,Parlophone, Chrysalis, Mute, Blue Note and EMI Classics and are home to a diverse roster of over 1,300 artistswho encompass a wide range of musical genres from classical, jazz, country and Christian music to alternative,rock, pop, rap/urban and dance music. For the financial year ended 31 March 2003, our Recorded Music businessgenerated turnover of £1,774.2 million and adjusted EBITDA of £188.6 million.Our Music Publishing business is the world’s largest music publisher in terms of turnover, with rights to over onemillion copyrights in musical compositions. Our roster of approximately 800 songwriters is responsible for manyof the hit songs of today. For the year ended 31 March 2003, our Music Publishing business generated turnoverof £401.2 million and adjusted EBITDA of £108.4 million.We are a global company, with revenues balanced across all geographic regions of the world. With over 90companies active in 50 countries, we provide our artists and songwriters, who come from a wide range ofnational backgrounds, with access to the world’s most important music markets. This strong local presence hasbeen increasingly important as the popularity of music originating from a country’s own language and culture hasincreased in recent years. Our mix of national and international recording artists and songwriters provides asignificant degree of diversification for our music portfolio. Our balanced portfolio of international businessesalso creates a more stable platform for us, as macroeconomic trends in one country are balanced and mitigated bytrends in other parts of the world.Market PositionOur Recorded Music and Music Publishing businesses each have consistently held leading positions in theirrespective industries, demonstrating their ongoing ability to attract high quality talent and to market and promotetheir creative output.Throughout most of the 1990s, our core industry of recorded music experienced strong growth as legitimatedemand for music was driven by broad acceptance of the CD and music distribution expanded into new retailchannels. That changed markedly at the end of the decade, however, and the industry has declined progressivelyover the last three years, due to a combination of factors, including economic weakness, growth in competingentertainment products, the availability of attractive products, and, most importantly, increases in piracy.StrengthsWe believe we benefit from a number of strengths, including:Š A deep and diverse portfolio of music assets generating strong results on a consistent basis. Wehave built an extensive bank of content in terms of international scope, breadth of musical styles andgenre and quality. This portfolio of music recordings and musical compositions enjoys strongdemand each year.Š Our Recorded Music business has a catalogue of music recordings consisting of over threemillion tracks including classics by the Beatles, the Rolling Stones, Pink Floyd, Frank Sinatra,7

Queen and the Beach Boys, as well as newer releases by artists including Robbie Williams, KylieMinogue, Coldplay and Norah Jones. Our historic catalogue contains hit recordings that continueto produce strong cash flows year after year with limited incremental marketing costs. Forexample, Pink Floyd’s “Dark Side of the Moon” sold over 675,000 copies in financial year 2003,almost 30 years following its initial release.Š Our Music Publishing business has the world’s largest and most extensive catalogue of musicalcompositions with over one million copyrights owned, controlled or administered. Our historiccatalogue includes classics such as “New York, New York,” “Wild Thing,” “Imagine,” “Over theRainbow,” “Singin’ in the Rain,” “My Girl,” “Maggie May,” “Louie Louie,” “Stop! In the Nameof Love,” “We are the Champions,” and “I Heard It Through the Grapevine.” The catalogue alsoincludes songs from newer songwriters such as Sting, Norah Jones, Enya and Diane Warren.Both our historic and current catalogues consistently generate high levels of uses and producestable cash flows year after year. Through this portfolio, our Music Publishing business has beenable to generate average adjusted EBITDA of £103.9 million over the past five years.Both our Recorded Music and Music Publishing businesses are continuously adding content to ourcatalogues to ensure they remain dynamic and growing resources.Š Proven ability to attract, develop and retain recording artists and songwriters with long-termstaying power. We have demonstrated a disciplined and effective approach to developing ourportfolio of artists and songwriters.ŠOur Recorded Music business has developed a strong roster of recording artists that combinesinternational superstars with local artists and promising new talent. This balanced portfolioenhances stability and allows us to effectively serve diverse markets and meet the ongoing shiftsin the demand for music. Our artists from around the world who have developed a large base ofloyal fans and released multiple successful albums include Robbie Williams, Norah Jones, KylieMinogue, Sir Paul McCartney, Coldplay, Radiohead, Blur, Blue, Atomic Kitten, Air, Daft Punk,Lenny Kravitz, Rachelle Ferrelle, Renaud, Hevia, Utada Hikaru, Axelle Red, Tiziano Ferro,Vasco Rossi, Manu Chao, Ringo Sheena, Yumi Matsutoya and Herbert Grönemeyer.Š Our Music Publishing business’ strong creative approach, global reach and proactive marketingallows us to effectively market the talents of our songwriters and generate additional uses fortheir copyrights in local and international markets. This enables us to attract some of the world’sbest songwriters, including Aerosmith, Enya, Matchbox Twenty, Sting, Alicia Keys, NorahJones, Jamiroquai, Blur, Simply Red, Rod Stewart, Jewel, Texas, Third Eye Blind, White Stripes,Ms Dynamite, Pink, Diane Warren, Dallas Austin, Pharrell Williams, Rodney Jerkins, ErosRamazzotti and Enrique Iglesias.Š Proven ability to manage our cost base. From financial year 2001 to financial year 2003, wereduced our fixed costs before acquisitions by approximately £100 million, our staff byapproximately 1,900 and our Recorded Music artist roster by approximately 25%. As a result of theseactions, combined with a strong focus on the development of profitable sales, adjusted EBITA of ourRecorded Music business increased by more than 80% in financial year 2003 compared to the prioryear. Our Music Publishing business has consistently maintained a low cost base as evidenced by itsstrong operating margins (25.8% in each of the last two financial years). Our cost base ischaracterised by a high proportion of variable and semi-variable costs which, together with the abilityto further shift costs from fixed to variable through outsourcing, allows us to respond quickly toindustry changes.Š Strong and experienced management team. We enjoy great depth of management expertise at boththe corporate and the operating level. The management of our Recorded Music and Music Publishingbusinesses are widely regarded as among the best in the music business. Alain Levy, CEO of ourRecorded Music business, who built PolyGram (now part of Universal Music Group) into theindustry leader in recorded music, and Martin Bandier, CEO of our Music Publishing business, whoco-founded SBK Entertainment World Inc. in 1986, which now forms the core of our MusicPublishing business, each have a strong track record of success and, collectively, have over 60 yearsof experience in the music business.8

StrategyOur business is music, and it is our aim to remain focused on music. We are committed to providing consumerswith the music they want, the way they want and at a value they find compelling. To that end, we continue towork with retailers, distributors and technology companies to seek new opportunities and improve the valueproposition we offer to our customers.We believe that our business strategy will not only help to stabilise the music industry over the medium term, butwill also facilitate our return to sales growth. The primary elements of this strategy are to:Š Maximise value from our portfolio of music assets through traditional channels. We will seek tocontinue to exploit, through a wide array of opportunities, our high quality catalogues of recordingsand musical compositions to generate profitable sales.ŠŠOur Recorded Music business continually focuses on generating sales and creating brands, bothby developing superstar artists and by compiling successful recordings into new works withstrong consumer appeal such as the Beatles album, “1,” which has sold over 24 million copiesworldwide, as well as the “Now” series of current hit compilations (currently one of the bestselling compilations in the world).Our Music Publishing business continually seeks new ways to promote our song catalogue toartists, record companies, film and television producers, event organisers, advertising agenciesand multimedia producers, including through sampling (the use of samples of existing songs innew recordings), such as Sean “P. Diddy” Combs’s use of the Sting song “Every Breath YouTake,” cover versions of older hit songs, such as Geri Halliwell’s version of “It’s Raining Men,”and in computer games, such as “Grand Theft Auto” in which 22 of our copyrights were used.Š Continue to improve our portfolio by focusing on artists and songwriters with long-termpotential. We seek to enhance the quality of our musical offerings by continuing to identify artistswith long-term potential, whose debut albums are well received on release, whose subsequent albumsare eagerly anticipated by fans and whose music will continue to generate sales as part of ourcatalogue on an ongoing basis. We will continue to seek to identify and develop songwriters whoseproduct will become the hits of today and the classics of tomorrow. To ensure that our marketing andsales efforts are focused on our most promising talent, we will continue to actively manage ourexisting roster of artists and songwriters. We are also pursuing innovative arrangements with ourartists and songwriters to generate additional revenue streams.Š Exploit opportunities presented by new technologies and changing music consumption. TheInternet and digital distribution are driving a vast increase in the demand for music. While today thedemand is largely in the form of piracy, we believe that the development of a legitimate channel formusic on-line holds promise for the industry. We seek to exploit the Internet and new technologiessuch as DVD audio, mobile phone ring tunes, Internet radio and other wireless applications as furtherdistribution channels for our content.Š Continue to act to contain physical and digital piracy. Containing piracy is a priority for ourbusiness and, accordingly, we:Š have appointed an anti-piracy officer in each of our recorded music businesses around the worldwho report to a worldwide Senior Vice President for Anti-Piracy. We have also created an officeof governmental affairs, through which we continually lobby governments for the creation ofnew laws and the enforcement of existing laws relating to the protection and extension ofcopyright. Additionally, we are actively pursuing litigation, on our own and with industryassociations, to combat copyright infringements; andŠ are applying new technologies (such as copy protection on CDs) to help mitigate the piracyproblem and are encouraging the development of attractive alternative legitimate on-line productofferings.Š Continue to actively manage our cost structure and improve the effectiveness of our business. Wecontinue to focus on reducing costs while seeking to expand our business through new and evolvingchannels. As part of our efforts to reduce costs, we may undertake business combinations orparticipate in joint ventures or other strategic alliances. We are committed to improving ourprocesses, increasing our efficiencies and managing our resources more effectively. We are intent on9

creating and maintaining a structure that is both scaled appropriately to the size of the music industryand flexible enough to take advantage of opportunities that arise. Our aim is to improve the financialcharacteristics of our business by actively managing our business and, when necessary, exitingunprofitable operations and reducing our cost base, as we have recently undertaken over the past twoyears with the reorganisation of our Recorded Music business and the reduction of fixed costs beforeacquisitions.Company HistoryEMI is a successor of the Gramophone Company, a company founded in London in 1897 and initially engaged inthe manufacture of gramophones. In 1931, the Gramophone Company merged with Columbia GraphophoneCompany to form Electric and Musical Industries, which later changed its name to EMI Limited. In 1979, EMIwas acquired by Thorn Electrical Industries Limited, a leading UK manufacturer and distributor of consumerelectric and electronic appliances and a television rental company.Beginning in 1985, THORN EMI embarked on a strategy to rationalise its businesses, disposing of over 60 noncorebusinesses and making a series of key acquisitions, including the music publishing company SBKEntertainment World in the United States in 1989, Virgin Music Group in the United Kingdom in 1992 and amajority interest in its long standing Japanese joint venture, Toshiba-EMI, in 1994. In 1996, THORN EMI spunoffits consumer rental business through a demerger and changed its name to EMI Group plc. In May 2002, theshares of our then retail joint venture formerly known as HMV Media Group (“HMV Group”), began trading onthe London Stock Exchange in connection with a global public offering, and EMI reduced its stake to 14.5%. InNovember 2002, EMI sold its remaining interest in HMV Group to institutional investors.10

Summary of the Principal Features of the BondsThe following is a summary of the principal features of the Bonds and is qualified in its entirety by the detailedinformation appearing elsewhere in this Offering Circular and, in particular, “Terms and Conditions of theBonds”. Potential purchasers of the Bonds are urged to read this Offering Circular in its entirety. Terms used inthis summary and not otherwise defined shall have the meanings given to them in “Terms and Conditions of theBonds”.Issuer .........................EMIGroupFinance(Jersey) Limited, a wholly-owned subsidiary ofEMI Group plc.Parent ........................ EMIGroupplc.Guarantors .................... EMIGroupplcandCapitolRecords,Inc.TheBonds will also benefitfrom additional guarantees if any member of the Group issues publicdebt securities with the benefit of additional guarantees within 12months of the Issue Date.Bonds ......................... US$243,343,000 5.25% Guaranteed Convertible Bonds due 2010which will be convertible into fully paid Preference Shares of theIssuer which will be guaranteed by the Guarantors and which will beexchangeable immediately upon issue for fully paid Ordinary Sharesin the Parent.The Offering ................... TheBonds are being offered by the Managers outside of the UnitedStates in compliance with Regulation S.Issue Date ..................... 2October2003Issue Price .....................Interest ........................100%oftheprincipalamount of the Bonds.TheBonds will bear interest at a rate of 5.25% per annum from andincluding 2 October 2003 (the “Issue Date”). Interest will be payableon the Bonds semi-annually in arrears on 2 April and 2 October ofeach year. The first interest payment will be made on 2 April 2004.Payments on the Bonds will be made subject to deduction for or onaccount of taxes imposed or levied by any jurisdiction.Interest will cease to accrue in respect of Bonds which are convertedfrom the interest payment date immediately preceding the relevantConversion Date or, if none, the Issue Date (save in the limitedcircumstances provided for in Condition 4 of the Bonds).Lock Up .......................TheParent has undertaken that it will not and will ensure that none ofits subsidiaries, affiliates or any holding company will, prior to theexpiry of 90 days following the Issue Date without the prior writtenconsent of the Managers, such consent not to be unreasonablywithheld or delayed, (i) directly or indirectly, issue, offer, sell,contract to issue or sell, issue or sell any option or contract topurchase, purchase any option or contract to issue or sell, grant anyoption, right or warrant to purchase or otherwise transfer or disposeof, directly or indirectly (or publicly announce any intention of doingso) any Ordinary Shares or (ii) enter into any swap or any other11

agreement or any transaction that transfers, in whole or in part,directly or indirectly, any of the economic consequences of ownershipof Ordinary Shares, whether any such swap or transaction describedin paragraph (i) or (ii) above is to be settled by delivery of OrdinaryShares or other securities, in cash or otherwise, except in certainlimited circumstances, as more fully described in “Subscription andSale”.Maturity ...................... Unless previously redeemed, converted or purchased and cancelled,the Bonds will be redeemed at 100% of their principal amount plusaccrued interest on 2 October 2010 (the “Maturity Date”).Form and Denomination ......... The Bonds will be issued in bearer form in denominations ofUS$1,000 or integral multiples thereof. The Bonds will berepresented initially by the temporary Global Bond without interestcoupons which is to be deposited with a common depositary on behalfof Euroclear and Clearstream, Luxembourg, on 2 October 2003.Interests in the temporary Global Bond will be exchangeable forinterests in the permanent Global Bond without interest coupons on orafter a date which is expected to be 11 November 2003 uponcertification as to non-US beneficial ownership. Conversion Rightsmay not be exercised in respect of any interest in the temporaryGlobal Bond. The permanent Global Bond will be exchangeable fordefinitive Bonds in bearer form in denominations of US$1,000 onlyin the limited circumstances set out therein. See “Summary ofProvisions Relating to the Bonds while Represented by the GlobalBonds”.Ordinary Shares to be issued on exchange of the Preference Sharesissued on conversion of the Bonds will be issued in uncertificatedform through the dematerialised securities trading system operated byCRESTCo Limited, known as CREST, unless the beneficial holderelects to hold the Ordinary Shares to be issued in exchange for thePreference Shares in certificated registered form or, at the time ofissue, the Ordinary Shares are not a participating security in CREST.Ranking of the Bonds ............Ranking of the Guarantees ........Certain Covenants ...............Conversion and Exchange ........TheBonds will be unsubordinated and unsecured indebtedness of theIssuer.The obligations of the Issuer under the Bonds and the PreferenceShares will be unconditionally and irrevocably guaranteed on anunsubordinated and unsecured basis by the Guarantors under theTrust Deed, the Deed Poll and the Deed of Guarantee.TheIssuer will issue the Bonds pursuant to the terms of a Trust Deedto be entered into by the Issuer, the Guarantors and The LawDebenture Trust Corporation p.l.c. as Trustee. The Trust Deed willprohibit the Guarantors from amending the terms of the Deed Poll andthe Deed of Guarantee without the consent of the Trustee or theapproval of an Extraordinary Resolution of Bondholders and willcontain certain other covenants.Unless previously redeemed, purchased and cancelled or converted,the Bonds will be convertible into Preference Shares of the Issuer atany time on or after 11 November 2003 up to close of business on theseventh day prior to the relevant date fixed for redemption. EachUS$1,000 principal amount of a Bond is convertible into onePreference Share of a paid up value of US$1,000. The Preference12

Shares will, in turn, be immediately exchanged for Ordinary Shares inthe Parent all as described in “Terms and Conditions of the Bonds –Conversion”. The number of Ordinary Shares for which a PreferenceShare will be exchanged will be determined by dividing the paid-upvalue of the Preference Share (translated into pounds sterling at thefixed rate of US$1.5957 = £1.00) by the Exchange Price in effect onconversion and rounding down to the nearest whole number ofOrdinary Shares. The initial Exchange Price will be 193.38 pence perOrdinary Share. The Exchange Price is subject to adjustment asprovided in “Terms and Conditions of the Bonds – Conversion” andin the event of a change of control constituting a Relevant Event, theExchange Price will be adjusted for a specified period as described in“Terms and Conditions of the Bonds – Conversion”.Preference Shares ...............Ordinary Shares ................Final Redemption ...............Preference Shares of the Issuer will be issued upon conversion of theBonds credited as fully paid at US$1,000 per Preference Share. ThePreference Shares will, following their issue, immediately beexchanged for fully paid Ordinary Shares at the Exchange Price at thetime of such exchange.OrdinaryShares allotted on exchange of the Preference Shares will beissued credited as fully paid having, on the date hereof, a nominalvalue of 14 pence each and will rank pari passu in all respects with allfully paid Ordinary Shares in issue on the relevant Conversion Date,save as provided in “Terms and Conditions of the Bonds –Conversion”.Subject to the Issuer’s Share Settlement Option, unless previouslyredeemed or converted or purchased and cancelled, the Bonds will beredeemed at their principal amount together with unpaid accruedinterest, if any, on the Final Maturity Date.Redemption at the Option of theIssuer .........................Subject to the Issuer’s Share Settlement Option, the Issuer mayredeem all, but not some only, of the Bonds for the time beingoutstanding at their principal amount together with unpaid, accruedinterest, if any, to the date fixed for redemption:(i)(ii)at any time on or after 16 October 2007, if the average of theVolume Weighted Average Price per Ordinary Share on at least20 dealing days in any period of 30 consecutive dealing daysending on the fifth dealing day prior to the giving of the notice ofredemption divided by the prevailing Exchange Price has been atleast 1.3; orat any time if 85% or more of the aggregate principal amount ofthe Bonds originally issued shall have been previously purchasedand cancelled, redeemed or converted.See “Terms and Conditions of the Bonds – Redemption andPurchase”.Issuer’s Share Settlement Option . .The Issuer may, in the circumstances referred to above at its option,and in lieu of redeeming the principal amount of the bonds in cash,deliver to the Bondholders one Preference Share of a paid-up value ofUS$1,000 per US$1,000 principal amount of such Bond, which13

Preference Shares will, in turn, be exchanged immediately for suchnumber of Ordinary Shares of the Parent as is determined by dividingthe paid-up value of the Preference Share (translated into poundssterling at the fixed rate of US$1.5957 = £1.00) by the ExchangePrice in effect on the due date for redemption and rounded down tothe nearest whole number of Ordinary Shares, plus, if applicable, anamount in cash per Bond equal to the amount by which the principalamount payable on the redemption of such Bond exceeds the MarketValue of the Ordinary Shares to be so delivered. See “Terms andConditions of the Bonds – Redemption and Purchase”.Withholding taxes ...............Paymentsinrespect of the Bonds will be made subject to withholdingor deduction for or on account of taxes as is required by law. Neitherthe Issuer nor the Guarantors will be required to pay any additional orfurther amounts to Bondholders in respect of any such withholding ordeduction. See “Terms and Conditions of the Bonds – Taxation”.Events of Default ............... Foradescription of certain events that will permit acceleration of theBonds, see “Terms and Conditions of the Bonds – Events of Default”.Upon acceleration for any such event, the Bonds will becomeimmediately due and repayable at their principal amount togetherwith unpaid accrued interest (if any).Negative Pledge .................TheBonds will have the benefit of a negative pledge. See “Terms andConditions of the Bonds – Negative Pledge”.Cross-Default .................. TheBonds will be subject to a cross default provision, as described in“Terms and Conditions of the Bonds – Events of Default”.Governing Law .................Trustee ........................TheBonds, the Trust Deed constituting the Bonds, the Deed Poll andthe Deed of Guarantee will be governed by English law.TheLawDebentureTrustCorporationp.l.c.Principal Paying, Conversion andExchange Agent ................ HSBCBankplc.Listing and Trading .............The Issuer has applied for the Bonds to be admitted to the OfficialList of the UK Listing Authority and application has been made to theLondon Stock Exchange for the Bonds to be admitted to trading onthe London Stock Exchange’s market for listed securities. TheOrdinary Shares trade on the London Stock Exchange’s market forlisted securities.The Preference Shares will not be listed on any stock exchange.14

RISK FACTORSAn investment in the Bonds involves risks. Before investing in the Bonds, you should carefully consider thefollowing risk factors and all information contained in this Offering Circular. Additional risks and uncertaintiesof which we are not aware or that we believe are immaterial may also adversely affect our business, financialcondition, liquidity, results of operations or prospects. If any of these events occur, our business, financialcondition, liquidity, results of operation or prospects could be materially and adversely affected. If that happens,we may not be able to pay interest or principal on the Bonds when due and you could lose all or part of yourinvestment.Risks Relating to Our OperationsThe recorded music industry has been declining and may continue to declineEconomic recession, physical piracy, CD-R piracy and illegal downloading of music from the Internet andgrowing competition for consumer discretionary spending and shelf space are all contributing to a decliningrecorded music industry. Additionally, the period of growth in recorded music sales driven by the introductionand penetration of the CD format has ended. While DVD audio, super audio CD (SACD) and the Internet arethought to represent potential new formats, no significant new legitimate format has yet emerged to take theplace of the CD. Worldwide sales were down as the music industry witnessed an estimated decline of 8.1% in2002. The US, the UK and Japan, three of our most significant territories, witnessed estimated declines of 9.4%,3.7% and 9.9%, respectively, in 2002. Although we believe that the recorded music industry is set to improveover the coming years, there are no assurances that the industry will not continue to decline and there are noassurances as to the timing or the extent of any improvement in the industry. A declining recorded music industryis likely to lead to reduced levels of revenue and operating income generated by our Recorded Music business.Additionally, a declining recorded music industry is also likely to have a negative impact on our MusicPublishing business, which generates a significant portion of its revenues from mechanical royalties, primarilyfrom the sale of music in CD and other recorded music formats.We have been losing, and are likely to continue to lose, sales due to organised physical piracyThe global organised commercial pirate trade is a significant threat to the music industry. Worldwide, physicalpirated music (which encompasses unauthorised physical copies manufactured for sale but does not includeInternet downloads or home CD burning) is estimated to have generated over $4.6 billion in revenues in 2002,according to the IFPI. IFPI estimates that 1.8 billion pirated units were manufactured in 2002, equivalent toapproximately 40% of all CDs and cassettes sold globally. According to IFPI estimates, approximately 33% ofall CDs sold in 2002 were pirated, up from approximately 28% in 2000. Unauthorised copies and piracycontributed to the decrease in the volume of legitimate sales and put pressure on the price of legitimate sales.They have had, and may continue to have, an adverse effect on our business.We may have difficulty addressing the threats to our business associated with home copying and InternetdownloadingThe decreasing cost of electronic and computer equipment and related technology such as CD burners and theconversion of music into digital formats have made it easier for consumers to create unauthorised versions ofaudio products such as compact discs and MP3 files. A substantial portion of our revenue comes from the sale ofaudio products that are potentially subject to unauthorised consumer copying. Similarly, advances in Internettechnology have increasingly made it possible for computer users to share unauthorised digital versions of musicrecordings without the permission of the copyright owners and without paying royalties to holders of applicableintellectual property or other rights. While accurate measurements of such activities are not available, it isestimated that an equal number of tracks are downloaded illegally each year as are sold through legitimatephysical albums and singles. A large portion of our content is potentially subject to widespread dissemination onthe Internet without an economic return for us. We are working to control this problem by lobbying governmentsfor new, stronger copyright protection laws and more stringent enforcement of current laws. In addition, weemploy technology in an attempt to protect our music from unauthorised copying. See “Industry Overview –Combating Piracy”. If we fail to obtain appropriate relief through the judicial process or the completeenforcement of judicial decisions issued in our favour, if we are unsuccessful in our efforts to lobby governmentsto enact and enforce stronger legal penalties for copyright infringement or if we fail to develop effective meansof protecting our intellectual property or entertainment-related products or services, our results of operations andfinancial position may suffer.15

Our financial results may be adversely affected if we fail to identify, sign and retain artists and songwriters, bythe existence or absence of superstar releases and by changing industry issuesWe are dependent on identifying, signing and retaining artists with long-term potential, whose debut albums arewell received on release, whose subsequent albums are anticipated by consumers and whose music will continueto generate sales as part of our catalogue for years to come. We are also dependent on signing and retainingsongwriters who will write the hit songs of today and the classics of tomorrow. Our financial results may beadversely affected if we are unable to identify, sign and retain such artists and songwriters. Our financial resultsmay also be affected by the existence or absence of superstar releases during a particular period. Some musicindustry observers believe that the number of superstar acts with long-term appeal, both in terms of cataloguesales and future releases, has declined in recent years. Additionally, our financial results are generally affected bythe overall growth or decline in the music industry along with the general economic and retail environment of thecountries in which we operate, as well as the appeal of our recorded music repertoire and our music publishingcatalogue.Because of the nature of our business, our results of operations and cash flows may fluctuate significantlyfrom period to periodOur turnover, like that of other companies in the music business, is driven by the number and quality of albumsthat we release, and, more importantly, the consumer demand for these releases. We also make non-returnableadvance payments to artists and songwriters, which impact our operating cash flows. The timing of albumreleases and advance payments is largely based on business considerations and other reasons without regard tothe timing of the release of our financial results. We report results of operations semi-annually, and our results ofoperations and cash flows in any reporting period may be materially affected by the timing of releases andadvance payments, which may result in significant fluctuations from period to period.We may suffer reduced profits as a result of intense competitionThe industry in which we operate is highly competitive and requires substantial human and capital resources. Wecompete with other recorded music companies and music publishers to identify and sign new artists andsongwriters and to renew agreements with established artists and songwriters. In addition, our competitors mayfrom time to time reduce their prices in an effort to expand market share and introduce new services, or improvethe quality of their products or services. We may lose business if we are unable to sign important artists orsongwriters, or to match the prices, or the quality of products and services, offered by our competitors. OurRecorded Music business also faces competition from other forms of entertainment and leisure activities, such ascable and satellite television, pre-recorded films on videocassettes and DVD, the Internet and computer andvideo games. Our Music Publishing business competes not only with other music publishing companies, but alsowith songwriters who publish their own works. Other products, like mobile phones, are also competing for thedisposable income of consumers.Our business operations in some countries are subject to additional risksWe conduct business around the world. The risks associated with conducting business internationally, and inparticular in some countries outside of Western Europe, the US and Canada, can include, among other risks:ŠŠŠŠŠŠŠlimited legal protection and enforcement of intellectual property rights;restrictions on the repatriation of capital;differences and unexpected changes in regulatory environment, including environmental, health andsafety, local planning, zoning and labour laws, rules and regulations;varying tax regimes which could adversely affect our results of operations or cash flows, includingregulations relating to transfer pricing and withholding taxes on remittances and other payments bysubsidiaries and joint ventures;exposure to different legal standards and enforcement mechanisms and the associated cost ofcompliance;difficulties in attracting and retaining qualified management and employees or rationalising ourworkforce;tariffs, duties, export controls and other trade barriers;16

ŠŠŠŠlonger accounts receivable settlement cycles and difficulties in collecting accounts receivable;recessionary trends, inflation and instability of the financial markets;higher interest rates; andpolitical instability.We may not be able to insure or hedge against these risks and we may not be able to ensure compliance with allof the applicable regulations without incurring additional costs. Furthermore, financing may not be available incountries with less than investment-grade sovereign credit ratings. As a result, it may be difficult to create ormaintain profit-making operations in developing countries.In addition, our results can be affected by trends, developments and other events in individual countries. Forexample, in the first quarter of financial year 2004, there was an unusually high level of product returns byretailers across the industry in Japan. In our July 2003 statement on our trading outlook, we highlighted the factthat this level of returns would have an adverse impact on our 2004 half-year results. Certain country-specificpractices in Japan resulted in a higher cost of returns than would generally be the case elsewhere. There can be noassurance that in the future, other country-specific trends, developments or other events will not have such asignificant adverse effect on our results.We conduct some of our operations through joint venturesWe currently have interests in a number of joint ventures, and may in the future enter into further joint venturesas a means of conducting our business. We cannot fully control the operations and the assets of our jointventures, nor can we make major decisions with respect to our joint ventures unless our joint venture partnersagree. Accordingly, although we have the ability to veto decisions with respect to our joint ventures, we are notin a position to make unilateral decisions. This may constrain the ability of our joint ventures to take action. Inaddition, we structure certain of our relationships with artists and songwriters as joint ventures.A widespread legitimate channel for on-line distribution of our creative content may not develop and if onedoes develop, it may result in less profitable salesWe have taken steps to position ourselves to take advantage of the Internet as a sales distribution channel andbelieve that the development of a legitimate channel for on-line music distribution holds promise for us.However, if piracy continues unabated and a legitimate on-line distribution channel fails to gain consumeracceptance, our results of operations could be harmed. Additionally, any legitimate on-line distribution channelthat does develop may result in less profitable sales for us.Unfavourable currency exchange rate fluctuations could adversely affect our results of operationsOur reporting currency for our financial statements is Sterling. We have substantial assets, liabilities, revenuesand costs denominated in currencies other than Sterling. To prepare our consolidated financial statements wemust translate those assets, liabilities, revenues and expenses into Sterling at then-applicable exchange rates.Consequently, increases and decreases in the value of Sterling versus other currencies will affect the amount ofthese items in our consolidated financial statements, even if their value has not changed in their originalcurrency. These translations could result in significant changes to our results of operations from period to period.In addition, to the extent that we incur expenses that are not denominated in the same currency as the relatedrevenues, exchange rate fluctuations could cause our expenses to increase as a percentage of net sales, affectingour profitability and cash flows. See also “Management’s Discussion and Analysis of Financial Condition andResults of Operations – Foreign Currency and Interest Rate Fluctuations.”We may have to fund our pension plans through cash contributions over timeWe maintain a number of defined benefit plans around the world, the largest of which is our UK pension plan. Asat 31 March 2002, our UK plan had a surplus of £68 million, as calculated pursuant to Financial ReportingStandard (“FRS”) 17. With the decline in share prices to 31 March 2003, the asset value of the fund has fallen.Therefore, as calculated pursuant to the FRS 17 accounting standard, the fund would show a deficit as at31 March 2003 of £116 million, or £81.2 million net of deferred tax. Our German and Japanese plans also haddeficits of £30.1 million and £14.5 million, respectively, as at 31 March 2003. Pension funding requirements are17

dependent upon various factors, including interest rate levels, asset returns, regulatory requirements for fundingpurposes and changes to pensions plan benefits. Absent favourable changes to these factors, we will have tosatisfy the underfunded amounts of our plans through cash contributions over time.We are dependent on key personnelOur success and the success of our business units depends upon the continuing contributions of our executiveofficers and other key operating personnel. If for any reason, these officers or key employees do not remain withus, our operations could be adversely affected until suitable replacements with appropriate experience can befound. See “Management.”If we acquire or invest in other businesses, we will face certain risks inherent in such transactionsWe may acquire, make investments in, or enter into strategic alliances or joint ventures with, companies engagedin businesses that are similar or complementary to ours. If we make such acquisitions or investments or enter intostrategic alliances, we will face certain risks inherent in such transactions. For example, gaining regulatoryapproval for significant acquisitions or investments could be a lengthy process and there can be no assurance of asuccessful outcome. We could face difficulties in managing and integrating newly-acquired operations.Additionally, such transactions would divert management resources and may result in the loss of artists orsongwriters from our rosters. We cannot assure you that if we make any future acquisitions, investments,strategic alliances or joint ventures that they will be completed in a timely manner, that they will be structured orfinanced in a way that will enhance our creditworthiness or that they will meet our strategic objectives orotherwise be successful. Failure to effectively manage any of these transactions could result in material increasesin costs or reductions in expected revenues, or both.We will be obligated to adopt new accounting standards in 2005 that may have a material impact on ourfinancial statementsIn June 2002, the Council of the European Union (“EU”) adopted a regulation requiring all listed EU companies,including us, to apply International Financial Reporting Standards (“IFRS”) (previously known as InternationalAccounting Standards or “IAS”) in their consolidated financial statements for financial years commencing on orafter 1 January 2005. The adoption of IFRS may have a material impact on a number of important financialitems, including, among others, the timing of recognition of sales and other revenues, accounting for share-basedcompensation and employee benefit plans, goodwill and intangibles, marketable securities and derivativeinstruments. The adoption of IFRS may also affect the classification of certain balance sheet items as debt orequity and have a significant impact on the reporting of business segments. The adoption of IFRS will thereforeaffect the valuation methods that analysts use to measure and evaluate our performance. IFRS could also have aneffect on our debt covenants and other contractual obligations. In particular, our covenants linked to balancesheet ratios and income statement measures could be significantly affected by the adoption of the IFRS in waysthat are difficult to predict at this time.Risks Relating to the BondsBondholders have no shareholder rights before conversionAn investor in a Bond will not be a shareholder in the Issuer or the Parent. No Bondholder will have any votingrights, any right to receive dividends or other distributions or any other rights with respect to any OrdinaryShares until such time, if any, as he or she converts his or her Bond and becomes registered as the holder ofOrdinary Shares.We have substantial indebtedness and may not be able to service our indebtednessWe have incurred substantial indebtedness in the past. As of 31 March 2003, on a pro forma basis after givingeffect to the issue of the Bonds and the contemplated issue of €425,000,000 Senior Notes due 2013 (the “SeniorNotes”), the expected borrowings under a new senior revolving credit facility and application of the proceeds asdescribed in “Use of Proceeds”, we had £693.1 million in shareholders’ equity and £1,181.9 million in liabilities(excluding accrued liabilities and deferred liabilities), of which 100% was interest-bearing debt. Pro forma forthe issuance of the Bonds, the issuance of the Senior Notes, the expected borrowings under a new seniorrevolving credit facility and the application of proceeds of the offerings and borrowings, assuming the Bonds and18

the Senior Notes had been issued on 1 April 2002, we would have had a net interest expense for the year ended31 March 2003 of approximately £89.1 million based on an increase in net interest expense of £13.0 million dueto the higher interest rates on the Senior Notes as compared to historical rates on existing credit facilities. Weexpect to incur further debt under the amended revolving credit facility and possible future credit arrangements inorder to finance possible future acquisitions and for general corporate purposes.Our ability to service the Bonds and our other indebtedness will depend upon future operating performance,which is subject to:ŠŠŠŠŠthe successful implementation of our business strategy;the rate of overall growth or decline in the music industry;prevailing economic conditions;levels of interest rates; andfinancial, business and other factors, many of which are beyond our control.Our leverage and debt-service obligations could also have important consequences, including the following:ŠŠŠŠour ability to obtain additional financing for future working capital needs or for possible futureacquisitions or other purposes may be limited;a substantial portion of our cash flow from operations will be dedicated to the payment of principaland interest on our indebtedness, thereby reducing funds available for other purposes;we may be more vulnerable to adverse economic conditions than our competitors and thus may belimited in our ability to withstand competitive pressures; andwe may be more highly leveraged than certain of our competitors, which may place us at acompetitive disadvantage.In addition, our leverage could make us vulnerable to:ŠŠŠŠa substantial downturn in the operating performance of our Recorded Music business or our MusicPublishing business;larger than normal fluctuations or volatility in our cash flow;a significant downturn in general economic conditions; orbecause borrowings under our new senior revolving credit facility will bear interest at rates whichfluctuate, increases in interest rates on borrowings under the facility.If our cash flow were not sufficient to meet our debt service requirements or payment of principal, we could berequired to sell additional equity securities to refinance our obligations or to dispose of assets in order to makesuch scheduled payments. There can be no assurance that we would be able to effect any such transactions or doso on favourable terms.Restrictions and other provisions in our debt instruments may limit our ability to make payment on the Bonds,operate our business and access liquidityCertain of our existing debt instruments contain restrictive covenants and our new senior revolving credit facilitywill contain additional covenants. Certain of our existing debt instruments require, and the new senior revolvingcredit facility that we expect to enter into will require, us to maintain specific financial ratios and to satisfycertain financial condition tests. Our ability to meet these financial ratios and financial condition tests can beaffected by events beyond our control and there can be no assurance that we will meet them. The breach of anyof these covenants could result in a default under the new senior revolving credit facility or such other existingdebt obligations. In the event of a default under the new senior revolving credit facility or such other debtobligations, the lenders could seek to declare all amounts outstanding under the new senior revolving creditfacility and such other obligations, together with accrued unpaid interest, if any, to be immediately due andpayable. This could result in cross-defaults under our other indebtedness. If the indebtedness under the newsenior revolving credit facility, the Senior Notes, or certain other existing debt obligations were to be accelerated,there can be no assurance that our assets would be sufficient to repay in full that indebtedness or any of our otherindebtedness.19

The right of Bondholders to receive payment on the Bonds is effectively subordinated to the rights of futuresecured creditorsHolders of any secured obligations we may incur will have claims that are prior to your claims as Bondholders tothe extent of the value of the assets securing those other obligations. The Bonds are effectively subordinated tosecured indebtedness to the extent of the value of the collateral. In the event of any distribution of our assets orpayment in any foreclosure, dissolution, winding-up, liquidation, reorganisation or other bankruptcy, the assetssecuring the claims of secured creditors will be available to satisfy the claims of those creditors, if any, beforethey are available to unsecured creditors, including the Bondholders. In any of the foregoing events, we cannotassure you that there will be sufficient assets to pay amounts due on the Bonds. As a result, the Bondholders mayreceive less, ratably, than holders of the secured obligations.The Bonds will be structurally subordinate to the indebtedness of our non-guarantor subsidiariesGenerally, claims of the creditors of a subsidiary, including trade creditors, secured creditors and creditorsholding indebtedness and guarantees issued by the subsidiary, will have priority with respect to the assets andearnings of the subsidiary over the claims of the creditors of the Parent. Accordingly, the Bonds will beeffectively subordinated to all creditors, including trade creditors, of our subsidiaries, other than the Issuer andthe Guarantors. As of 31 March 2003, our subsidiaries, other than the Guarantors, had trade creditors, royaltiesand fees payable, and indebtedness of approximately £550 million to which the Bonds would effectively rankjunior. Any right we have to receive assets of any subsidiary upon the liquidation or reorganisation of thesubsidiary (and the consequent rights of the Bondholders to participate in those assets) will be effectivelysubordinated to the claims of the subsidiary’s creditors, except to the extent that we are recognised as a creditor,in which case our claims would still be subordinated with respect to any assets of the subsidiary pledged tosecure other indebtedness and any indebtedness of the subsidiary senior to that held by us.We may not be able to obtain enough funds to redeem your Bonds if a change of control takes placeA “change of control” may be a Relevant Event (defined in the Conditions of the Bonds) which includes certainchanges in ownership of or voting rights with respect to us and certain disposals of assets by us. If a change ofcontrol occurs, you may require us to purchase any or all of your Bonds at their principal amount together withaccrued and unpaid interest. We may not have enough money, however, to purchase your Bonds upon a changeof control and also may not be able to raise the money to do so. Our credit facilities and certain of our other debtinstruments have a similar change of control provision, which will obligate us to make payments to other lendersto the extent they elect to cause us to repay the indebtedness they extended to us.The change of control provisions may not protect you in a transaction in which we incur a large amount of debt,including a reorganisation, restructuring, merger or other similar transaction, because that kind of transactionmay not involve any shift in voting power or beneficial ownership or disposition of assets, or may not involve ashift large enough to trigger a change of control.An active liquid trading market for the Bonds may not developPrior to the offer, there has been no public market for the Bonds. The Bonds are a new class of securities whichhave never been traded. We have applied to admit the Bonds to the Official List of the UK Listing Authority andto trading on the London Stock Exchange’s market for listed securities. However, we cannot assure you that theBonds will be listed on any exchange at any time. The Managers have informed us that they intend to make amarket in the Bonds. However, they are not obligated to do so, and may discontinue such market making at anytime without notice. There can be no assurance as to the liquidity of any trading market for the Bonds or that anactive trading market for the Bonds will develop, or if one does develop, that it will be sustained.Historically, the market for non-investment grade debt has been highly volatile in terms of price. It is possiblethat the market for the Bonds will also be volatile. This volatility in price may affect your ability to resell yourBonds or the timing of their sale. The Bonds could trade at prices that may be higher or lower than the Issue Pricedepending on many factors, including prevailing interest rates, operating results of the Group and the market forsimilar securities.20

In addition, the Bonds and the Preference Shares are denominated in US dollars while the Exchange Price isquoted in Sterling. The number of Ordinary Shares for which a Preference Share will be exchanged will bedetermined by dividing the Paid-up Value of the Preference Share (translated into Sterling at a fixed rate ofUS$1.5957 = £1.00) by the Exchange Price in effect on the Conversion Date and rounding down to the nearestwhole number of Ordinary Shares. Accordingly, any devaluation of Sterling against the US dollar could have anadverse impact on the market price, in US dollar terms, of the Bonds.Volatility of the market for the Bonds and the Ordinary SharesThe market price of the Ordinary Shares has been subject to volatility and fluctuations in the market price of theOrdinary Shares may affect the market price of the Bonds. The market price of the Bonds and the OrdinaryShares could be subject to wide fluctuations in response to numerous factors, many of which are beyond thecontrol of the Issuer and the Guarantors. These factors include, among other things, actual or anticipatedvariations in operating results, earnings releases by the Group and its competitors, changes in financial estimatesby securities analysts, market conditions in the industry and the general state of the securities markets,governmental legislation or regulation, currency and exchange rate fluctuations, as well as general economic andmarket conditions, such as recessions.Transfer of the Bonds and the Ordinary Shares will be restrictedNeither the Bonds nor the Ordinary Shares have been registered under the securities laws of the United States orany state securities laws, and may not be offered or sold except pursuant to an exemption from the registrationrequirements of the Securities Act and applicable state securities laws, or pursuant to an effective registrationstatement.The Bonds will initially be held in book-entry form and you must therefore rely on the procedures of therelevant clearing systems to exercise any rights and remediesUnless and until definitive Bonds are issued in exchange for book-entry interests in the Bonds, owners of thebook-entry interests will not be considered owners or holders of the Bonds. Instead, the common depositary, orits nominee, will be the sole Bondholder.Unlike Bondholders themselves, owners of book-entry interests in Bonds will not have the direct right to actupon solicitations for consents or requests for waivers or other actions from Bondholders. Instead, if you own abook-entry interest, you will be permitted to act only to the extent you have received appropriate proxies to do sofrom Euroclear and/or Clearstream, Luxembourg, or, if applicable, from a participant. We cannot assure you thatprocedures implemented for the granting of such proxies will be sufficient to enable you to vote on any requestedactions on a timely basis.Insolvency and administrative laws could adversely affect your ability to enforce your rights under the BondsUnder English law, if we go into liquidation, the maximum you will be able to recover is the principal amount ofthe Bonds and any interest on the Bonds accruing up to the date of liquidation. You will not be able to recoverany interest payable under the Bonds after we go into liquidation, unless there is a surplus remaining afterpayment of all of our other debts.Upon liquidation, the order of priorities is such that the debts due to any holder of a fixed charge are paid first tothe extent they are secured by that charge. Then preferential debts will be paid. Such debts may include:ŠŠŠŠcertain amounts owed to the UK Inland Revenue;certain amounts owed to the UK Customs and Excise;amounts owed in respect of occupational pension obligations; andcertain amounts owed to employees.Then, the debts owing to any holder of a floating charge will be paid to the extent they are secured by thatcharge. Unsecured debts, which are not preferential debts, are paid after those prior liabilities.21

Under English insolvency law, a liquidator or administrator of a company has certain powers to challengetransactions entered into by a company if the company is insolvent (as defined in the Insolvency Act 1986) at thetime of the transaction or if the company becomes insolvent as a result of the transaction and the transactiontakes place up to two years prior to the administration or liquidation. A transaction might be challenged in thisway if it involved a gift by the company or the company received significantly less value than it gave in return. Acourt generally will not intervene, however, if the company entered into the transaction in good faith for thepurposes of carrying on its business and if, at the time it did so, there were reasonable grounds for believing thetransaction would benefit the company, a court could intervene. We cannot be sure that the issuance of the Bondswould not be challenged by a liquidator or administrator or that a court would uphold the transaction as valid.No tax gross-upNeither the Issuer nor the Guarantors is obliged to make any additional payments to Bondholders in the eventthat any payment in respect of the Bonds or the Guarantees is required by applicable law to be withheld ordeducted for taxation. None of the Issuer, the Guarantors or the Bondholders has any right to require redemptionof the Bonds in the event of such a withholding or deduction. See “Terms and Conditions of theBonds – Taxation”.Share Settlement OptionCondition 7 of the Bonds provides that the Issuer may in the circumstances described in Condition 7(b)(Redemption at the Option of the Issuer) on or after 16 October 2007 redeem Bonds by delivering SettlementShares and, if applicable, making payment of a Cash Settlement Amount (as such terms are defined in Condition7(g)) in each case on the relevant due date for redemption. Bondholders will be required to deliver a ShareSettlement Notice to a Paying, Conversion and Exchange Agent (as described in Condition 7(g)(1)). Failure to doso by the tenth Business Day in the place of delivery prior to the relevant redemption date will result in the Issuermaking payment of the Cash Settlement Amount, if applicable, and delivering the relevant Settlement Shares tothe Trustee who will sell such Settlement Shares and distribute the proceeds to the relevant Bondholders, afterdeducting any costs (including any capital, stamp, issue or registration duties (if any)) incurred by the Trustee inconnection with the allotment and sale thereof. Accordingly, the amount of such net proceeds of sale, plus theCash Settlement Amount (if any) and any accrued interest shall be treated for all purposes as the full amount duefrom the Issuer in respect of Bonds which are the subject of the exercise of the Share Settlement Option.22

TERMS AND CONDITIONS OF THE BONDSThe following, subject to amendment and save for the paragraphs in italics, are the Terms and Conditions of theBonds, substantially as they will appear on the reverse of the Bonds in definitive form (if issued):The issue of the US$243,343,000 5.25% Guaranteed Convertible Bonds due 2010 (the “Bonds”, whichexpression shall include, unless the context otherwise requires, any further bonds issued pursuant to Condition 18and consolidated and forming a single series therewith) of EMI Group Finance (Jersey) Limited (the “Issuer”)was authorised by a resolution of the Board of Directors of the Issuer passed on 27 September 2003. The givingof the Guarantees (as defined below) was authorised by a resolution of the Board of Directors of EMI Group plc(the “Parent”) passed on 20 June 2003 and resolutions of a committee of the Board of Directors of the Parentpassed on 10 September 2003 and 29 September 2003, and resolutions of the Board of Directors of CapitolRecords, Inc. (being, together with the Parent, the “Guarantors”) passed on 26 September 2003.The Bonds are constituted by a trust deed dated 2 October 2003 (the “Trust Deed”) between the Issuer, the Parentand The Law Debenture Trust Corporation p.l.c. (the “Trustee”, which expression shall include all persons whofor the time being are trustee or trustees under the Trust Deed) as trustee for the holders of the Bonds (the“Bondholders”). These Terms and Conditions (these “Conditions”) include summaries of, and are subject to, thedetailed provisions of the Trust Deed, which includes the forms of the Bonds (in both global and definitive form)and the interest coupons appertaining to the Bonds (the “Coupons”). The Bondholders and the holders of theCoupons (whether or not attached to the relevant Bonds) (the “Couponholders”) are entitled to the benefit of, arebound by and are deemed to have notice of, all the provisions of the Trust Deed and are deemed to have notice ofthose provisions applicable to them in the Paying, Conversion and Exchange Agency Agreement dated 2 October2003 (the “Agency Agreement”) relating to the Bonds between the Issuer, the Parent, the Trustee and HSBCBank plc (the “Principal Paying, Conversion and Exchange Agent”, which expression shall include any successoras principal paying, conversion and exchange agent under the Agency Agreement) and the paying, conversionand exchange agents for the time being (such parties, together with the Principal Paying, Conversion andExchange Agent, being referred to as the “Paying, Conversion and Exchange Agents”, which expression shallinclude their successors as paying, conversion and exchange agents under the Agency Agreement), the Articlesof Association of the Issuer (the “Articles of the Issuer”), the deed poll (the “Deed Poll”) executed and deliveredby each of the Guarantors on 2 October 2003 and the deed of guarantee (the “Deed of Guarantee”) executed anddelivered by EMI Group plc and Capitol Records, Inc. on 2 October 2003.Copies of each of the Trust Deed, the Agency Agreement, the Articles of the Issuer, the Deed Poll and the Deedof Guarantee are available for inspection during normal business hours by the Bondholders at the registeredoffice for the time being of the Trustee (being at the date of issue of the Bonds at Fifth Floor, 100 Wood Street,London EC2V 7EX) and at the specified offices for the time being of the Paying, Conversion and ExchangeAgents.The Bonds are convertible into fully paid 5.25% exchangeable redeemable preference shares in the Issuer (the“Preference Shares”) having a paid-up value of US$1,000 each (the “Paid-up Value”), comprising a nominalvalue of US$1 and a premium of US$999 per Preference Share. Payments in respect of the Preference Shares areguaranteed by the Guarantors pursuant to the Deed Poll. The Preference Shares will be issued subject to, and inaccordance with, these Conditions and the Articles of the Issuer.The Preference Shares will, following their issue, immediately be exchanged for fully paid ordinary shares in theParent having at the date hereof a nominal value of 14 pence each (the “Ordinary Shares”), in accordance withthese Conditions, the provisions of the Articles of the Issuer and the Deed Poll. The price at which any suchexchange will be made (the “Exchange Price”) will, subject to adjustment in certain circumstances as set out inthe Articles of the Issuer, be 193.38 pence per Ordinary Share. The number of Ordinary Shares for which aPreference Share will be exchanged will be determined by dividing the Paid-up Value (translated into poundssterling at the fixed rate of US$1.5957 = £1.00) by the Exchange Price in effect on the Conversion Date (asdefined below).Words and expressions not otherwise defined in these Conditions shall have the meaning given to them inCondition 21 or in the Trust Deed, unless the context otherwise requires.23

1. Form, Denomination and TitleThe Bonds are in bearer form, serially numbered, in the denomination of US$1,000 each with Coupons attached,and title thereto and to the Coupons will pass by delivery. The holder of any Bond or Coupon will (except asotherwise required by law or as ordered by a court of competent jurisdiction) be treated as its absolute owner forall purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it, anywriting on it, or its theft or loss) and no person will be liable for so treating the holder.The Bonds will be represented initially by a single temporary global bond (the “temporary Global Bond”),without Coupons or Conversion Rights (as defined in Condition 6(a)), which is expected to be deposited with acommon depositary for Euroclear Bank S.A./N.V., as operator of the Euroclear System (“Euroclear”) andClearstream Banking, société anonyme (“Clearstream, Luxembourg”) on or about 2 October 2003 for creditagainst payment to the accounts designated by the relevant subscribers with Euroclear or Clearstream,Luxembourg. The temporary Global Bond will be exchangeable on or after a date which is expected to be 11November 2003 for a permanent global bond in bearer form (the “Global Bond”) without Coupons attached,upon certification that the beneficial owners of the relevant interests in the temporary Global Bond are not USpersons or persons who have acquired such interests for resale to any US person. The Global Bond will beexchangeable for definitive Bonds in bearer form, with Coupons attached, in the limited circumstances set out inthe Global Bond.Unless, upon due presentation of the temporary Global Bond for exchange, delivery of interests in the GlobalBond is improperly withheld or refused, and such withholding or refusal is continuing at the relevant due datefor payment thereof or the relevant Conversion Date, interests in the Global Bond must be obtained beforepayments of principal and interest can be collected in respect of the relevant Bonds and before ConversionRights can be exercised in respect thereof.Bonds and Coupons will bear the following legend: “Any United States person who holds this obligation will besubject to limitations under the United States income tax laws, including the limitations provided in Sections165(j) and 1287(a) of the United States Internal Revenue Code”.2. Status of the Bonds and the Guarantees(a) The BondsThe Bonds and the Coupons are direct, unconditional, unsubordinated and (subject to the provisions of Condition3) unsecured obligations of the Issuer and rank and will rank pari passu among themselves and (subject asaforesaid and save for certain obligations required to be preferred by law) equally with all other present andfuture unsecured and unsubordinated obligations of the Issuer from time to time outstanding.(b) The GuaranteesThe Guarantors have jointly and severally, unconditionally and irrevocably guaranteed the due and punctualpayment of all sums expressed to be payable by the Issuer under the Trust Deed and the Bonds (the“Guarantees”). The obligations of each Guarantor are direct, unconditional, unsubordinated and unsecuredobligations of such Guarantor and (subject as aforesaid and save for certain obligations required to be preferredby law) rank pari passu with all other present and future unsecured and unsubordinated obligations of each suchGuarantor from time to time outstanding.3. Negative PledgeSo long as any of the Bonds remain outstanding (as defined in the Trust Deed), each of the Issuer and the Parentwill not, and will procure, as far as it can by the proper exercise of voting and other rights or powers of controlexercisable by it in relation to Subsidiaries, that no Principal Subsidiary shall:(a) create or permit to subsist any mortgage, charge, lien, pledge or other equivalent or similar security interest(each a “Security Interest”) upon any of its assets to secure payment of any present or future Indebtedness ofany person or to secure any guarantee given by the Issuer, the Parent or any Principal Subsidiary of anyIndebtedness of any person, without at the same time according to the Bonds, the Coupons and all amountspayable under the Trust Deed, to the satisfaction of the Trustee, either the same Security Interest as iscreated or subsisting to secure such Indebtedness or guarantee or such other Security Interest or otherarrangement (whether or not involving the creation of a Security Interest) as the Trustee shall in its absolutediscretion deem not materially less beneficial to the interests of the Bondholders; or24

(b)conduct any Securitisations,save that the Issuer, the Parent or any Principal Subsidiary may create or permit to subsist a Permitted SecurityInterest (without the obligation to accord as aforesaid) or conduct a Permitted Securitisation.4. Interest(a) Interest RateThe Bonds bear interest from (and including) 2 October 2003, (the “Issue Date”) at the rate of 5.25% per annumcalculated by reference to the principal amount thereof (the “Interest Rate”) (subject to the withholding ordeduction of any taxation required by law to be withheld or deducted at source) payable semi-annually in arrearin equal installments on 2 April and 2 October in each year (each an “Interest Payment Date”) commencing2 April 2004.The amount of interest payable in respect of a Bond for any period which is not an Interest Period shall becalculated on the basis of a 360 day year consisting of 12 months of 30 days each and in the case of anincomplete month, the number of days elapsed, where “Interest Period” means the period beginning on (andincluding) the Issue Date and ending on (but excluding) 2 April 2004 (the “First Interest Payment Date”) andeach successive period beginning on (and including) an Interest Payment Date and ending on (but excluding) thenext succeeding Interest Payment Date.(b) Accrual of InterestEach Bond will cease to bear interest (i) where the Conversion Right attached to it shall have been exercised, orthe Trustee shall have exercised its rights of conversion with respect to it pursuant to Condition 6(c), from (andincluding) the Interest Payment Date immediately preceding the relevant Conversion Date or, if none, the IssueDate, (subject in any such case as provided in Condition 6(d) and as provided in the Articles of the Issuer) or (ii)where such Bond is to be redeemed or repaid pursuant to Condition 7(a), 7(b), 7(c) or 11, from (and including)the due date for redemption or the due date for repayment thereof unless, upon due presentation and surrender ofthe relevant Bond, payment of the full amount due is improperly withheld or refused or, following any electionby the Issuer to exercise its Share Settlement Option, the Issuer or the Parent, as the case may be, fails duly toperform its obligations to deliver the Settlement Shares and/or Cash Settlement Amount (if any) in accordancewith Condition 7(g), in which events such Bond shall continue to bear interest at the rate of 5.25% per annum(both before and after judgment) until (but excluding) whichever is the earlier of (A) the day on which all sumsand (as appropriate) Settlement Shares due in respect of such Bond up to that day are received by or on behalf ofthe relevant Bondholder, and (B) the day which is seven calendar days after that on which the Trustee or thePrincipal Paying, Conversion and Exchange Agent has notified Bondholders of receipt of all sums and (asappropriate) Settlement Shares due in respect of all the Bonds up to such seventh calendar day (except to theextent that there is failure in the subsequent payment and/or the delivery of the Settlement Shares (as appropriate)to the relevant Bondholders under these Conditions).5. Payments(a) Method of PaymentPayments in respect of principal on the Bonds or the net proceeds of sale of Ordinary Shares pursuant toCondition 6(c) or any Cash Settlement Amount or any amount payable to the Bondholders pursuant to Condition7(g)(3) and payment of any interest due on an Interest Payment Date (other than interest payable pursuant toCondition 7(g)(3)(i)) or on a repayment of the Bonds pursuant to Condition 11 will be made against presentationand surrender (or, in the case of a part payment only, endorsement) of Bonds and payment of any interest due onan Interest Payment Date will be made against presentation and surrender (or, in the case of partial payment,endorsement) of Coupons at, in each case, the specified office of any of the Paying, Conversion and ExchangeAgents. Payment of interest due in respect of any Bond, other than on an Interest Payment Date, shall be madeonly against presentation and either surrender or endorsement (as appropriate) of the relevant Bond in the mannerdescribed above.Each such payment will be made by US dollar cheque drawn on a branch of a bank in New York City or, at theoption of the relevant Bondholder, by transfer to a US dollar denominated account specified by the payee andmaintained with a bank in New York, subject in all cases to any fiscal or other laws and regulations applicable inthe place of payment, but without prejudice to the provisions of Condition 8.25

(b) Payments Subject to Fiscal LawsAll payments are subject to any fiscal or other laws and regulations applicable thereto in the place of payment.Subject to Condition 7(g)(7), no commissions or expenses shall be charged to the Bondholders or Couponholdersin respect of such payments.(c) Surrender of Unmatured CouponsEach Bond should be presented for payment together with all unmatured Coupons relating to it, failing which theamount of any such missing unmatured Coupon (or, in the case of payment not being made in full, thatproportion of the amount of such missing unmatured Coupon which the sum of the amount so paid in respect ofthe relevant Bonds bears to the total amount due in respect of the relevant Bonds) will be deducted from the sumdue for payment. Each amount so deducted will be paid in the manner mentioned above against surrender of therelevant missing Coupon not later than five years after the Relevant Date for the relevant payment in respect ofthe relevant Bonds.For the purposes hereof and save as otherwise provided herein, “unmatured Coupons” means Coupons maturingafter the due date for redemption of the Bonds to which they pertain.(d) Non-Business DaysIf any date for payment is not a Business Day in the place where the relevant Bond or Coupon is presented forpayment, such payment shall not be made until the immediately following day which is such a Business Day, anda holder shall not, except as provided in Condition 4, be entitled to any further interest or other payment inrespect of any such delay.(e) FractionsWhen making payments to Bondholders, if the relevant payment is not of an amount which is a whole multiple ofthe smallest unit of the relevant currency in which such payment is to be made, such payment will be roundeddown to the nearest unit.6. Conversion(a) Conversion RightThe holder of each Bond shall have the right (the “Conversion Right”) to convert (“conversion”) each US$1,000principal amount of a Bond into one fully-paid Preference Share allotted and issued at a price equal to the PaidupValue and to require the Issuer forthwith to procure that such Preference Share be exchanged immediately,pursuant to the Articles of the Issuer and the terms and conditions of the Deed Poll and as provided in theseConditions, for Ordinary Shares of the Parent, issued and credited as fully paid, at any time (subject to anyapplicable fiscal or other laws or regulations and as hereinafter provided) on or after 11 November 2003(provided it is holding an interest in the Global Bond or a Bond in definitive form) to the close of business (at theplace where the relevant Bond is deposited for conversion) on the seventh calendar day prior to the Maturity Date(both days inclusive) or, if such Bond shall have been called for redemption pursuant to Condition 7(b), then upto the close of business (at the place aforesaid) on the seventh calendar day prior to the date fixed for redemptionthereof or, if notice requiring redemption has been given by the holder of such Bond pursuant to Condition (7(c))then up to the close of business (at the place aforesaid) on the calendar day prior to the giving of such noticeunless, in any such case, there shall be default in making payment and/or delivery of the Settlement Shares (asappropriate) in respect of such Bond on any such date fixed for redemption, in which event the Conversion Rightshall extend (unless the Trustee shall have already exercised the relevant rights of conversion pursuant toCondition 6(c)) up to the close of business (at the place aforesaid) on the date on which the full amount of suchpayment and (as appropriate) Settlement Shares becomes available for settlement and notice of such availabilityhas been duly given in accordance with Condition 15 or, if earlier, the Maturity Date; provided that in each caseif the final such date for the exercise of Conversion Rights is not a Business Day in such place, then the right toexercise Conversion Rights shall end on the immediately preceding Business Day in such place.Conversion Rights may not be exercised in respect of a Bond if the Bondholder shall have exercised its right torequire the Issuer to redeem such Bond pursuant to Condition 7(c). Conversion Rights may not be exercisedfollowing the giving of notice by the Trustee pursuant to Condition 11. A Conversion Right may only beexercised in respect of the total principal amount of a Bond.26

By exercising a Conversion Right, a Bondholder (or, in the case of the exercise of Conversion Rights by theTrustee pursuant to Condition 6(c), the Trustee) will be deemed, subject to and in accordance with the Articles ofthe Issuer, to have made a Share Exchange Call applicable to the Preference Shares arising on the exercise ofsuch Conversion Right, and the Issuer will procure that such Preference Shares are immediately, following theissue of such Preference Shares to the Bondholder or his nominee (or to the Trustee or as the Trustee directs, asthe case may be), exchanged, in accordance with the Articles of the Issuer, for Ordinary Shares on or as at therelevant Conversion Date (without any further action being required to be taken by any Bondholder or theTrustee). Each of the Issuer and the Parent is entitled (at its own expense) to do all such things and make all suchentries in the Issuer’s and the Parent’s respective register of members and execute all such documents, whetheron behalf of the relevant Bondholders or otherwise (including the execution of such instruments of transfer onbehalf of the relevant Bondholders), as may be necessary to effect such exchange of Preference Shares forOrdinary Shares.Provisions as to Share ExchangeThe following is a summary of the provisions of the Preference Shares relating to Share Exchange Calls ascontained in the Articles of the Issuer. The Articles of the Issuer are separate from, and do not form part of, thisdocument.(A) The number of Ordinary Shares which the Issuer is required to procure are issued on the making of a ShareExchange Call shall be determined by dividing the paid-up value of the relevant Preference Shares having apaid-up value of US$1,000 each (the “Paid-up Value”) (translated into pounds sterling at the fixed rate ofUS$1.5957 = £1.00) by the exchange price (the “Exchange Price”) in effect on the relevant ConversionDate. The initial Exchange Price is 193.38 pence per Ordinary Share and the Exchange Price shallthereafter be subject to adjustment in the circumstances described in the Articles of the Issuer assummarised in paragraph (B) below. Fractions of Ordinary Shares will not be issued on exchange and nocash adjustment will be made. However, if a Share Exchange Call in respect of more than one PreferenceShare shall be deemed to be made at any one time by the holder of Preference Shares, where the OrdinaryShares to be issued on exchange are to be registered in the same name, the number of such Ordinary Sharesto be issued in respect thereof shall be calculated on the basis of the aggregate Paid-up Value of suchPreference Shares being so exchanged (rounded down to the nearest whole number). Where the Trusteeshall have exercised its rights pursuant to Condition 6(c), all relevant Bonds and Preference Shares shall,for the purpose of the immediately preceding sentence, be deemed to be held by one person. OrdinaryShares to be issued on exchange will be deemed to be registered as of the relevant Conversion Date in thename of the holder of the relevant Preference Shares or his nominee or, where they are to be issued to theTrustee pursuant to Condition 6(c), the Trustee or its nominee or agent on behalf of the relevantBondholders.(B) Adjustments to the Exchange PriceUpon the happening of any of the events described below, the Exchange Price will be adjusted in relation tosubsequent exchanges of Preference Shares as follows:(i)Consolidation, Reclassification or Subdivision: If and whenever there shall be an alteration to the nominalvalue of the Ordinary Shares as a result of consolidation, reclassification or subdivision, the ExchangePrice shall be adjusted by multiplying the Exchange Price in force immediately prior to such alteration bythe following fraction:where:A is the nominal amount of one Ordinary Share immediately after such alteration; andB is the nominal amount of one Ordinary Share immediately before such alteration.Such adjustment shall become effective on the date the alteration takes effect.AB(ii)Capitalisation of Profits or Reserves: If and whenever the Parent shall issue any Ordinary Shares creditedas fully paid to the holders of Ordinary Shares (“Shareholders”) by way of capitalisation of profits or27

eserves (including any share premium account or capital redemption reserve) other than Ordinary Sharesissued instead of the whole or any part of a cash dividend which the Shareholders concerned would or couldotherwise have received, the Exchange Price shall be adjusted by multiplying the Exchange Price in forceimmediately prior to such issue by the following fraction:where:A is the aggregate nominal amount of the issued Ordinary Shares immediately before such issue; andB is the aggregate nominal amount of the issued Ordinary Shares immediately after such issue.Such adjustment shall become effective on the date of issue of such Ordinary Shares.AB(iii) Capital Distribution: If and whenever the Parent shall pay or make any Capital Distribution (as definedbelow) to Shareholders, the Exchange Price shall be adjusted by multiplying the Exchange Price in forceimmediately prior to such Capital Distribution by the following fraction:where:ABAABis the Current Market Price (as defined below) of one Ordinary Share on the dealing day immediatelypreceding the date on which the Ordinary Shares are traded on the Relevant Stock Exchange (as definedbelow) ex-the relevant Capital Distribution; andis the portion of the Fair Market Value (as defined below) (as determined as at the date of announcement ofthe relevant Capital Distribution) of the Capital Distribution attributable to one Ordinary Share, with suchportion being determined by dividing the Fair Market Value of the aggregate Capital Distribution by thenumber of Ordinary Shares entitled to receive the relevant Capital Distribution (or, in the case of apurchase of Ordinary Shares by or on behalf of the Parent, by the number of Ordinary Shares issued andoutstanding immediately prior to such purchase).Such adjustment shall become effective on the date on which such Capital Distribution is paid.As used herein:“Capital Distribution” means the extent to which the Fair Market Value of a Dividend per Ordinary Share,together with the Fair Market Value per Ordinary Share of the aggregate of any other Dividend or Dividends onthe Ordinary Shares in respect of the same Financial Year as such Dividend (disregarding for such purposes anyamount previously determined to be a Capital Distribution in respect of that Financial Year), exceeds 8 pence. Inmaking any such calculation, such adjustments (if any) shall be made as are determined by an IndependentFinancial Adviser to be appropriate to reflect any alteration to the nominal value of the Ordinary Shares or anychange in the financial year of the Parent;“Dividend” means any dividend, or distribution, whether of cash, assets or other property, and whenever paid ormade and however described (and for these purposes a distribution of assets includes without limitation an issueof shares or other securities credited as fully or partly paid up), provided that:(a) where a cash Dividend is announced which is to be, or may at the election of a Shareholder or Shareholdersbe, satisfied by the issue or delivery of Ordinary Shares or other property or assets, then, for the purposes ofthe above formula, the Dividend in question shall be treated as a Dividend of the cash Dividend soannounced or, if the Fair Market Value of such Ordinary Shares or other property or assets is greater thanthe cash Dividend so announced, the Fair Market Value, on the date of announcement of such Dividend, ofthe Ordinary Shares or other property or assets to be issued or delivered in satisfaction of such Dividend(or which would be issued if all Shareholders elected therefor, regardless of whether any such election ismade);(b) for the purposes of the definition of Capital Distribution, any issue of Ordinary Shares falling within subparagraphB(ii) shall be disregarded; and28

(c)a purchase or redemption of share capital by the Parent shall not constitute a Dividend unless, in the caseof purchases of Ordinary Shares, the weighted average price (before expenses) of purchases by or on behalfof the Parent of Ordinary Shares on any one day exceeds by more than 5% the closing price of the OrdinaryShares on the immediately preceding dealing day on the Relevant Stock Exchange, as derived from, orpublished by, the Relevant Stock Exchange at the opening of business either (1) on that date, or (2) wherean announcement (excluding for the avoidance of doubt for these purposes any general authority for suchpurchases or redemptions approved by a general meeting of Shareholders or any notice convening such ameeting of Shareholders) has been made of the intention to purchase Ordinary Shares at some future date ata specified price, on the dealing day immediately preceding the date of such announcement and, if in thecase of either (1) or (2), the relevant day is not a dealing day, the immediately preceding dealing day, inwhich case such purchase shall be deemed to constitute a Dividend to the extent that the aggregate pricepaid (before expenses) in respect of such Ordinary Shares purchased by the Parent exceeds the product of105% of the closing price of the Ordinary Shares determined as aforesaid and the number of OrdinaryShares purchased by the Parent;“Fair Market Value” means, with respect to any property on any date, the fair market value of that property asdetermined by an Independent Financial Adviser, provided that (1) the fair market value of a cash Dividend paidor to be paid shall be the amount of such cash Dividend; (2) where options, warrants or other rights are publiclytraded in a market of adequate liquidity (as determined by an Independent Financial Adviser), the fair marketvalue of such options, warrants or other rights shall equal the arithmetic mean of the daily closing prices of suchoptions, warrants or other rights during the period of five dealing days on the relevant market commencing onthe first such trading day such options, warrants or other rights are publicly traded, or such shorter period assuch options, warrants or other rights are publicly traded; (3) where options, warrants or other rights are notpublicly traded (as aforesaid), the fair market value of such options, warrants or other rights will be asdetermined by an Independent Financial Adviser on the basis of a commonly accepted market valuation methodand taking account of such factors as it considers appropriate, including the market price per Ordinary Share,the dividend yield of an Ordinary Share, the volatility of such market price, prevailing interest rates and theterms of such options, warrants or other rights, including as to the expiry date and exercise price (if any) thereof,and (4) in the case of (1) converted into pounds sterling (if declared or paid in a currency other than poundssterling) at the rate of exchange used to determine the amount payable to Shareholders who were paid or are tobe paid the cash Dividend in pounds sterling; and in the absence of such a stated rate of exchange, and in thecase of (2) and (3), converted into pounds sterling (if expressed in a currency other than pounds sterling) at suchrate of exchange as determined by an Independent Financial Adviser to be the spot rate ruling at the close ofbusiness on that date (or if no such rate is available on that date the equivalent rate on the immediatelypreceding date on which such a rate is available); provided that for the purposes of determining Fair MarketValue under sub-paragraph (B)(v), references in this definition to options, warrants or other rights shall bedeemed to be to the entitlement to such options, warrants or other rights as the case may be;“Financial Year” means a period of 12 months ending on (and including) 31 March in any year;“Independent Financial Adviser” means an investment bank, bank or financial adviser of international reputeappointed by the Parent for the relevant purpose and approved in writing by the Trustee (such approval not to beunreasonably withheld or delayed having regard to the interests of the Bondholders) and acting as an expert or,if the Parent shall not have appointed such an adviser within 21 calendar days after becoming aware of the needfor such appointment hereunder and the Trustee is indemnified to its satisfaction against the costs, fees andexpenses of such adviser, appointed by the Trustee following notification to the Parent; and“Relevant Stock Exchange” means at any time, in respect of the Ordinary Shares, the Official List of the UnitedKingdom Financial Services Authority in its capacity as competent authority under the Financial Services andMarkets Act 2000 and/or, as the context requires, the market for listed securities of London Stock Exchange plcor, if the Ordinary Shares are not at that time so listed, the principal stock exchange or securities market onwhich the Ordinary Shares are then listed or quoted or dealt in.(iv) Rights Issues of Ordinary Shares or Options over Ordinary Shares: If and whenever the Parent shall issueOrdinary Shares to Shareholders as a class by way of rights, or issue or grant to Shareholders as a class byway of rights, options, warrants or other rights to subscribe for or purchase or otherwise acquire anyOrdinary Shares, in each case at a price per Ordinary Share which is less than 95% of the Current MarketPrice (as defined below) per Ordinary Share on the dealing day last preceding the date of theannouncement of the terms of the issue or grant of such Ordinary Shares, options, warrants or other rights,29

the Exchange Price shall be adjusted by multiplying the Exchange Price in force immediately prior to suchissue or grant by the following fraction:A+BA+Cwhere:A is the number of Ordinary Shares in issue immediately before such announcement;B is the number of Ordinary Shares which the aggregate amount (if any) payable for the Ordinary Sharesissued by way of rights, or for the options or warrants or other rights issued by way of rights and for thetotal number of Ordinary Shares deliverable on the exercise thereof, would purchase at such CurrentMarket Price per Ordinary Share; andC is the number of Ordinary Shares issued or, as the case may be, deliverable on the exercise of such options,warrants or other rights.Such adjustment shall become effective on the first date on which the Ordinary Shares are traded ex-rights, exoptionsor ex-warrants on the Relevant Stock Exchange.(v)Rights Issues of other Securities: If and whenever the Parent shall issue any securities (other than OrdinaryShares or options, warrants or other rights to subscribe for or purchase or otherwise acquire any OrdinaryShares) to Shareholders as a class by way of rights or grant to Shareholders as a class by way of rights anyoptions, warrants or other rights to subscribe for or purchase or otherwise acquire any securities (otherthan Ordinary Shares or options, warrants or other rights to subscribe for or purchase Ordinary Shares),the Exchange Price shall be adjusted by multiplying the Exchange Price in force immediately prior to suchissue or grant by the following fraction:A BAwhere:A is the Current Market Price of one Ordinary Share on the dealing day immediately preceding the date onwhich the terms of such issue or grant are publicly announced; andB is the Fair Market Value, on the date of such announcement, of the portion of the rights attributable to oneOrdinary Share.Such adjustment shall become effective on the first date on which the Ordinary Shares are traded ex-rights, exoptionsor ex-warrants on the Relevant Stock Exchange.(vi) Issues at less than Current Market Price: If and whenever the Parent shall issue (otherwise than asmentioned in sub-paragraph (B)(ii), (iii) and (iv) above) wholly for cash any Ordinary Shares (other thanSettlement Shares issued pursuant to the Conditions of the Bonds or Ordinary Shares issued on the makingof a Share Exchange Call or on the exercise of any other rights of conversion into, or exchange orsubscription for or purchase of, Ordinary Shares), or grant (otherwise than as mentioned in sub-paragraph(B)(ii), (iii), (iv), (v), (vii) or (x)) wholly for cash or for no consideration any options, warrants or otherrights to subscribe for or purchase or otherwise acquire any Ordinary Shares (other than the Bonds, whichterm shall exclude any further Bonds issued pursuant to Condition 18 of the Bonds and forming a singleseries with the Bonds), in each case at a price per Ordinary Share which is less than 95% of the CurrentMarket Price per Ordinary Share on the dealing day immediately preceding the date of announcement ofthe terms of such issue or grant, the Exchange Price shall be adjusted by multiplying the Exchange Price inforce immediately prior to such issue by the following fraction:A+BA+Cwhere:A is the number of Ordinary Shares in issue immediately before the issue of such additional Ordinary Sharesor the grant of such options, warrants or rights;30

BCis the number of Ordinary Shares which the aggregate consideration (if any) receivable for the issue of suchadditional Ordinary Shares or, as the case may be, for the issue of such options, warrants or rights and theOrdinary Shares to be issued or otherwise made available upon the exercise of any such options, warrantsor rights would purchase at such Current Market Price per Ordinary Share; andis the number of Ordinary Shares to be issued pursuant to such issue of such additional Ordinary Shares orthe maximum number of Ordinary Shares to be issued upon exercise of such options, warrants or rightscalculated as at the date of issue of such options, warrants or rights.Such adjustment shall become effective on the date of issue of such additional Ordinary Shares or, as the casemay be, the grant of such options, warrants or rights.(vii) Other Issues at less than Current Market Price: If and whenever the Parent or any Subsidiary of the Parentor (at the direction or request of or pursuant to any arrangements with the Parent or any Subsidiary of theParent), any other company, person or entity (otherwise than as mentioned in sub-paragraphs (B)(iv),(B)(v) or (B)(vi) above) shall issue wholly for cash or for no consideration any securities (other than theBonds, (which term shall for this purpose exclude, any further Bonds issued pursuant to Condition 18 of theBonds and forming a single series with the Bonds) and the Preference Shares) which by their terms of issuecarry (directly or indirectly) rights of conversion into, or exchange or subscription for, or purchase of, orotherwise to acquire, Ordinary Shares issued or to be issued by the Parent (or shall grant any such rights inrespect of existing securities so issued) or securities which by their terms might be redesignated as OrdinaryShares, and the consideration per Ordinary Share receivable upon conversion, exchange, subscription,purchase, acquisition or redesignation is less than 95% of the Current Market Price per Ordinary Share onthe dealing day last preceding the date of announcement of the terms of issue of such securities (or the termsof such grant), the Exchange Price shall be adjusted by multiplying the Exchange Price in force immediatelyprior to such issue (or grant) by the following fraction:A+BA+Cwhere:A is the number of Ordinary Shares in issue immediately before such issue or grant (but where the relevantsecurities carry rights of conversion into, or rights of exchange or subscription for, or purchase oracquisition of, Ordinary Shares which have been issued by the Parent for the purposes of, or in connectionwith, such issue, less the number of such Ordinary Shares so issued);B is the number of Ordinary Shares which the aggregate consideration (if any) receivable for the OrdinaryShares to be issued or otherwise made available upon conversion or exchange or upon exercise of the rightof subscription or purchase or acquisition attached to such securities or, as the case may be, for theOrdinary Shares to be issued or to arise from any such redesignation would purchase at such CurrentMarket Price per Ordinary Share; andC is the number of Ordinary Shares to be issued or otherwise made available upon conversion or exchange ofsuch securities or the maximum number of Ordinary Shares to be issued upon the exercise of such rights ofsubscription or purchase or acquisition attached thereto at the initial conversion, exchange or subscriptionprice or rate or, as the case may be, the maximum number of Ordinary Shares to be issued or to arise or bemade available from any such redesignation in each case calculated as at the date of such conversion,exchange, exercise of such rights of subscription or purchase or acquisition, or such redesignation.Such adjustment shall become effective on the date of issue or grant of such securities.(viii) Modification of Rights of Conversion, etc.: If and whenever there shall be any modification of the rights ofconversion, exchange, subscription, purchase or acquisition attaching to any such securities as arementioned in sub-paragraph (B)(vii) (other than in accordance with the terms (including terms as toadjustment) applicable to such securities) so that following such modification the consideration perOrdinary Share receivable is less than 95% of the Current Market Price per Ordinary Share on the dealingday immediately preceding the date of announcement of the proposals for such modification, the ExchangePrice shall be adjusted by multiplying the Exchange Price in force immediately prior to such modificationby the following fraction:A+BA+C31

where:A is the number of Ordinary Shares in issue immediately before such modification (but where the relevantsecurities carry rights of conversion into, or rights of exchange or subscription for or purchase oracquisition of, Ordinary Shares which have been issued by the Parent for the purposes of, or in connectionwith, such issue, less the number of such Ordinary Shares so issued);B is the number of Ordinary Shares which the aggregate consideration (if any) receivable for the OrdinaryShares to be issued or otherwise made available upon conversion or exchange or upon exercise of the rightof subscription or purchase or acquisition attached to the securities so modified would purchase at suchCurrent Market Price per Ordinary Share or, if lower, the existing conversion, exchange, subscription orpurchase price of such securities; andC is the maximum number of Ordinary Shares to be issued or otherwise made available upon conversion orexchange of such securities or upon the exercise of such rights of subscription, purchase or acquisitionattached thereto at the modified conversion, exchange, subscription or purchase price or rate but givingcredit in such manner as determined by an Independent Financial Adviser to be appropriate for anyprevious adjustment under this sub-paragraph (B)(viii) or sub-paragraph (B)(vii) above.Such adjustment shall become effective on the date of modification of the rights of conversion, exchange,subscription, purchase or acquisition attaching to such securities.(ix) Other Offers to Shareholders: If and whenever the Parent or any of its Subsidiaries or (at the direction orrequest of or pursuant to any arrangements with the Parent or any of its Subsidiaries) any other company,person or entity shall offer any securities in connection with which offer Shareholders as a class are entitledto participate in arrangements whereby such securities may be acquired by them (except where theExchange Price falls to be adjusted under any other sub-paragraph of (B) (or would fall to be so adjusted ifthe relevant issue or grant was at less than 95% of the Current Market Price per Ordinary Share on therelevant dealing day)) the Exchange Price shall be adjusted by multiplying the Exchange Price in forceimmediately before the making of such offer by the following fraction:A BAwhere:A is the Current Market Price of one Ordinary Share on the dealing day immediately preceding the date onwhich the terms of such offer are publicly announced; andB is the Fair Market Value on the date of such announcement of the portion of the relevant offer attributableto one Ordinary Share.Such adjustment shall become effective on the first date on which the Ordinary Shares are traded ex-rights on theRelevant Stock Exchange.(x) Exchange Price upon Change of Control: If an offer is made to all (or as nearly as may be practicable all)Shareholders (or all (or as nearly as may be practicable all) such Shareholders other than the offeror and/or any associate of the offeror (as defined in Section 430E(4) of the Companies Act 1985, or anymodification or re-enactment thereof)), to acquire the whole or a majority of the issued ordinary sharecapital of the Parent or if any person proposes a scheme with regard to such acquisition and (such offer orscheme having become or been declared unconditional in all respects) the Parent becomes aware that,other than in circumstances constituting an Excluded Relevant Event, the right to cast more than 50% of thevotes which may ordinarily be cast on a poll at a general meeting of the Parent has or will becomeunconditionally vested in the offeror and/or such associates as aforesaid (a “Relevant Event”), the Parentand/or the Issuer shall give written notice thereof to Bondholders (which shall include notice of theExchange Price applicable as a consequence of the occurrence of the Relevant Event as set out below)within 14 calendar days of the first day on which it becomes so aware, which notice shall contain astatement informing the Bondholders of their entitlement to exercise their Conversion Rights as provided inthe Conditions of the Bonds. Upon any exercise of Conversion Rights within 60 calendar days following aRelevant Event or, if later, 60 calendar days following the date on which notice thereof is given, theExchange Price shall be adjusted by dividing the Exchange Price in force immediately prior to suchRelevant Event by a figure calculated in accordance with the formula and subsequent proviso set out below:A× C Bwhere:A is the arithmetic average of the historic median values of the mid of the daily bid and offer prices quoted byeach of three leading market makers in the Bonds selected by the Parent and approved by the Trustee (suchapproval not to be unreasonably withheld or delayed having regard to the interests of the Bondholders) andexpressed as a percentage of the nominal amount thereof for each day during the Calculation Period;32

issued or otherwise made available upon the exercise of rights of subscription attached to any securities orupon the exercise of any options, warrants or rights shall be deemed to be that part (which may be thewhole) of the consideration received or receivable for such securities or, as the case may be, for suchoptions, warrants or rights which is attributed by the Parent to such rights of subscription or, as the casemay be, such options, warrants or rights or, if no part of such consideration is so attributed, the FairMarket Value of such rights of subscription or, as the case may be, such options, warrants or rights as at thedate of the announcement of the terms of issue of such securities or, as the case may be, such options,warrants or rights, plus in the case of each of (1) and (2) above, the additional minimum consideration (ifany) to be received upon the conversion or exchange of such securities, or upon the exercise of such rightsof subscription attached thereto or, as the case may be, upon exercise of such options, warrants or rights,and (3) the consideration per Ordinary Share receivable upon the conversion or exchange of, or upon theexercise of such rights of subscription attached to, such securities or, as the case may be, upon exercise ofsuch options, warrants or rights shall be the aggregate consideration referred to in (1) or (2) above (as thecase may be) converted into pounds sterling if such consideration is expressed in a currency other thanpounds sterling at such rate of exchange as is determined by an Independent Financial Adviser to be thespot rate ruling at the close of business on the date of announcement of the terms of issue of such securities,and divided by the number of Ordinary Shares to be issued upon such conversion or exchange or exercise atthe initial conversion, exchange or subscription price or rate.On any adjustment, the resultant Exchange Price, if not an integral multiple of £0.01, shall be rounded down tothe nearest whole £0.01. No adjustment shall be made to the Exchange Price where such adjustment (roundeddown if applicable) would be less than 1% of the Exchange Price then in effect. Any adjustment not required tobe made, and any amount by which the Exchange Price has been rounded down, shall be carried forward andtaken into account in any subsequent adjustment but such subsequent adjustment shall be made on the basis thatthe adjustment not required to be made has been made at the relevant time. Notice of any adjustments shall begiven to the Trustee and the Bondholders (in accordance with Condition 15 of the Bonds) by the Issuer as soonas practicable after the determination thereof.No adjustment will be made to the Exchange Price where Shares or other securities (including rights, warrantsor options) are issued, offered, exercised, allotted, appropriated, modified or granted to, or for the benefit of,employees or former employees (including directors holding or formerly holding executive office) of the Parentor any Subsidiary or any associated company of the Parent pursuant to any employees’ share scheme (as definedin Section 743 of the Companies Act 1985 or any modification or re-enactment thereof) or long-term incentivescheme (as defined in the Listing Rules of the UK Listing Authority).The Exchange Price may not be reduced so that, on the making of a Share Exchange Call, Ordinary Shareswould fall to be issued at a discount to their nominal value.Where more than one event which gives or may give rise to an adjustment to the Exchange Price occurs withinsuch a short period of time that, in the opinion of a firm of accountants or of an Independent Financial Adviser, amodification to the operation of the adjustment provisions is required in order to give the intended result, suchmodification shall be made to the operation of the adjustment provisions as may be advised by such accountantsor Independent Financial Adviser to be in their opinion appropriate to give such intended result.Where the circumstances giving rise to any adjustment pursuant to this sub-paragraph (B) have already resultedor will result in an adjustment to the Exchange Price or where the circumstances giving rise to any adjustmentarise by virtue of any other circumstances which have already given or will give rise to an adjustment to theExchange Price, such modification shall be made to the operation of the provisions of this sub-paragraph (B) asmay be advised by a firm of accountants or an Independent Financial Adviser to be in their opinion appropriatein the circumstances.If any doubt shall arise as to the appropriate adjustment to the Exchange Price, a certificate of a firm ofaccountants or of an Independent Financial Adviser shall be conclusive and binding on all concerned, save inthe case of manifest or proven error.As used above:“Bonds” means the US$243,343,000 5.25% Guaranteed Convertible Bonds due 2010 and any further Bondsissued pursuant to Condition 18 of the Bonds and consolidated and forming a single series therewith;“Current Market Price” means, in respect of an Ordinary Share at a particular date, the simple average of theVolume Weighted Average Prices published by, or derived from, the Relevant Stock Exchange for one OrdinaryShare for the five consecutive dealing days ending on the dealing day immediately preceding such date; provided34

that if at any time during the said five day period the Ordinary Shares shall have been quoted ex-dividend andduring some other part of that period the Ordinary Shares shall have been quoted cum-dividend then:(a)(b)if the Ordinary Shares to be issued do not rank for the dividend in question, the quotations on the dates onwhich the Ordinary Shares shall have been quoted cum-dividend shall for the purpose of this definition bedeemed to be the amount thereof reduced by an amount equal to the amount of that dividend per OrdinaryShare (excluding any associated tax credit and less the tax (if any) falling to be deducted on paymentthereof to a resident of the United Kingdom);if the Ordinary Shares to be issued do rank for the dividend in question, the quotations on the dates onwhich the Ordinary Shares shall have been quoted ex-dividend shall for the purpose of this definition bedeemed to be the amount thereof increased by such similar amount,provided that if the Volume Weighted Average Price is not available on one or more of the said five dealing days,then the average of such Volume Weighted Average Prices which are available in that five dealing day periodshall be used (subject to a minimum of two such Volume Weighted Average Prices) and if only one or no suchVolume Weighted Average Price is available in the relevant period the Current Market Price shall be determinedin good faith by an Independent Financial Adviser and provided further that if the Ordinary Shares on each ofthe said five dealing days have been quoted cum-dividend in respect of a dividend which has been declared orannounced but the Ordinary Shares to be issued do not rank for that dividend the quotations on each of suchdates shall for the purposes of this definition be deemed to be the amount thereof reduced by an amount equal tothe amount of that dividend per Ordinary Share (excluding any associated tax credit and less the tax (if any)falling to be deducted on payment thereof to a resident of the United Kingdom);“dealing day” means a day on which the Relevant Stock Exchange is open for business and shares may be dealtin on the Relevant Stock Exchange;“London Stock Exchange” means London Stock Exchange plc;“Official List” means the official list of the UK Listing Authority;“Relevant Stock Exchange” means at any time, in respect of the Ordinary Shares, the Official List and/or, as thecontext requires, the market for listed securities of the London Stock Exchange or, if the Ordinary Shares are notat that time so listed, the principal stock exchange or securities market on which the Ordinary Shares are thenlisted or quoted or dealt in;“securities” includes, without limitation, shares in the share capital of the Parent;“Subsidiary” means any subsidiary or subsidiary undertaking (within the meaning of Section 258 of theCompanies Act 1985); and“UK Listing Authority” means the Financial Services Authority in its capacity as competent authority under theFinancial Services and Markets Act 2000.If the Conversion Date in relation to any Bond shall be after the record date for any such issue, distribution,grant or offer (as the case may be) as is mentioned in sub-paragraphs (B)(ii) to (B)(v) and sub-paragraph(B)(ix), or any such issue as is mentioned in sub-paragraph (B)(vi) and (B)(vii) which is made to theShareholders or any class of them, but before the relevant adjustment becomes effective under this subparagraph(B), the Parent shall (conditional upon the relevant such adjustment becoming effective) procure thatthere shall be issued to the converting Bondholder, in accordance with the instructions contained in theConversion Notice or, as the case may be to the Trustee or as directed by the Trustee (subject, in each such case,to any applicable exchange control or other laws or other regulations), such additional number of OrdinaryShares (if any) (the “Additional Shares”) as, together with the Ordinary Shares issued or to be issued onconversion of the relevant Bond and exchange of the related Preference Share, is equal to the number ofOrdinary Shares which would have been required to be issued on conversion of such Bond and exchange of therelated Preference Share if the relevant adjustment (more particularly referred to in the provisions of this subparagraph(B)) to the Exchange Price had in fact been made and become effective immediately after the relevantrecord date. Such Additional Shares will be allotted within one month after the relevant Conversion Date or, iflater, within one month after the date of issue of Ordinary Shares or other securities if the adjustment resultsfrom the issue of Ordinary Shares. Any such Additional Shares will be issued in uncertificated form through thedematerialised securities trading system operated by CRESTCo Limited, known as CREST, unless an election ismade to hold such Additional Shares in certificated registered form, or at the time of issuance, the OrdinaryShares are not a participating security in CREST.35

References to any issue or offer to Shareholders “as a class” or “by way of rights” shall be taken to bereferences to an issue or offer to all or substantially all Shareholders other than Shareholders to whom, byreason of the laws of any territory or requirements of any recognised regulatory body or any other stockexchange in any territory or in connection with fractional entitlements, it is determined not to make such issue oroffer.(b) Procedure for ConversionThe Conversion Right attaching to any Bond may be exercised by delivering the relevant Bond to the specifiedoffice of any Paying, Conversion and Exchange Agent during its usual business hours, accompanied by a dulycompleted and signed notice of conversion (a “Conversion Notice”) in the form (for the time being current)obtainable from any Paying, Conversion and Exchange Agent. Delivery as aforesaid shall not be required in thecase of the Trustee exercising rights of conversion pursuant to Condition 6(c).Conversion Rights shall be exercised subject in each case to any applicable fiscal or other laws or regulationsapplicable in the jurisdiction in which the specified office of the Paying, Conversion and Exchange Agent towhom the relevant Conversion Notice is delivered is located.Each Bond delivered in respect of the exercise of Conversion Rights attaching thereto should be delivered withall unmatured Coupons relating to it, failing which, the relevant Bondholder will be required to pay the fullamount of any such missing Coupon. Each amount so paid will be repaid in the manner specified in Condition 5against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant missingCoupon at any time after the relevant Conversion Date and before the expiry of 10 years after the Relevant Datein respect of the relevant Bond (whether or not a Coupon would otherwise have become void pursuant toCondition 10), but not thereafter. Upon the Conversion Date in respect of any Bond, unmatured Coupons relatingto such Bond (whether or not attached) shall become void.A Bondholder may not transfer any Bond which is the subject of a Conversion Notice following delivery of suchConversion Notice to a Paying, Conversion and Exchange Agent. A Conversion Notice shall only be valid to theextent that a Paying, Conversion and Exchange Agent has not received conflicting prior instructions in respect ofthe Bond(s) which is/are the subject of the Conversion Notice.Failure to deliver properly and completely a Conversion Notice may result in such notice being treated as nulland void. Any determination as to whether such notice has been properly and completely delivered as providedabove shall be made by the relevant Paying, Conversion and Exchange Agent and shall be conclusive andbinding on the Issuer and the relevant Bondholder.The conversion date in respect of a Bond (the “Conversion Date”) shall be the Business Day immediatelyfollowing the date of delivery of a duly completed and signed Conversion Notice and, if later and if applicable,the making of any payment to be made or indemnity given under these Conditions in connection with theexercise of such Conversion Right or, in the case of the Trustee exercising rights of conversion pursuant toCondition 6(c), the relevant redemption date, save that for the purposes of calculating the amount of interestpayable in such circumstances pursuant to Condition 6(c), the Conversion Date shall mean the date which wouldhave been the Conversion Date had Conversion Rights been exercised by holders of the relevant UnexercisedBonds (as defined in Condition 6(c)) on the last day of the relevant period for exercise of Conversion Rights bysuch holders pursuant to Condition 6(a). A Conversion Notice, once delivered, shall be irrevocable.Any Bondholder exercising a Conversion Right or the Trustee exercising its rights of conversion under Condition6(c) must pay (in the case of the Trustee by means of deduction from the net proceeds of sale referred to inCondition 6(c)) any taxes and capital, stamp, issue and registration duties arising on the relevant conversion and/or exchange (except any taxes or capital duties or stamp duties payable in Jersey or the United Kingdom by theIssuer or the Parent in respect of the allotment and issue of Ordinary Shares or the Preference Shares onconversion and exchange or on transfer of the Preference Shares to the Parent on exchange which shall be paidby the Issuer or the Parent, as the case may be (or in the case of the Issuer, by the Parent if the Issuer fails to doso), provided that this exception shall not apply and neither the Issuer nor the Parent shall be liable to pay anystamp duty or stamp duty reserve tax that arises under Sections 67, 70, 93 or 96 of the Finance Act 1986 of theUnited Kingdom as a result of the issue of the Preference Shares or the Ordinary Shares in contravention of thenext following paragraph) and such Bondholder or the Trustee (as the case may be) must pay (in the case of theTrustee, by way of deduction from the net proceeds of sale as aforesaid) all, if any, taxes arising by reference toany disposal or deemed disposal of a Bond or Preference Share in connection with such conversion.36

Neither the Preference Shares nor the Ordinary Shares will be available for issue (i) to, or to a nominee for,Euroclear or Clearstream, Luxembourg or any other person providing a clearance service within the meaning ofSection 96 of the Finance Act 1986 of the United Kingdom (or other person falling within Sections 70(6), (7) or(8) of that Act) or (ii) to a person, or nominee or agent for a person, whose business is or includes issuingdepositary receipts within the meaning of Section 93 of the Finance Act 1986 of the United Kingdom (or otherpersons falling within Sections 67(6), (7) or (8) of that Act), in each case at any time prior to the “abolition day”as defined in Section 111(1) of the Finance Act 1990 of the United Kingdom.Ordinary Shares to be issued on exchange of the Preference Shares arising on conversion of the Bonds will beallotted and issued in uncertificated form by the Parent through the dematerialised securities trading systemoperated by CREST, unless the Bondholder elects to hold the Ordinary Shares in certificated registered form or,at the time of issue, the Ordinary Shares are not a participating security in CREST. Where Ordinary Shares are tobe issued through CREST, they will be delivered to the account specified by the relevant Bondholder in therelevant Conversion Notice or, as the case may be, as specified by the Trustee by not later than seven BusinessDays following the relevant Conversion Date. Certificates for Ordinary Shares issued on conversion (if OrdinaryShares are in certificated form) will be dispatched by mail free of charge (but uninsured and at the risk of theperson entitled thereto) within one month after the relevant Conversion Date to an address specified by theperson entitled thereto.(c) Automatic Conversion on RedemptionThe Trust Deed provides that the Trustee may (other than in circumstances where the Issuer has elected toexercise the Share Settlement Option in accordance with Condition 7(g)), at its absolute discretion (and withoutany responsibility for any loss occasioned thereby), within the period commencing on the date six calendar daysimmediately prior to, and ending at the close of business on, the Business Day immediately prior to, the datefixed for redemption from time to time of any of the Bonds (including any redemption pursuant to Conditions7(a) or (b)), elect (on behalf of the relevant Bondholders) by notice in writing to the Issuer to convert theaggregate principal amount of Bonds due for redemption on such date and in respect of which Conversion Rightshave not been exercised and which have not been duly presented for redemption by the holder thereof before thedate of such election (“Unexercised Bonds”) into Preference Shares on the applicable Conversion Date if allnecessary consents (if any) have been obtained and the Trustee is satisfied or is advised by an independentinvestment bank of international repute in London appointed by the Trustee that the net proceeds of animmediate sale of the Ordinary Shares arising on the exchange of such Preference Shares at the Exchange Priceon the applicable Conversion Date (disregarding any liability (other than a liability of the Trustee) to taxation orthe payment of any capital, stamp, issue or registration duties consequent thereon) would be likely to exceed by5% or more the aggregate amount of principal and interest which would otherwise be payable on the date fixedfor redemption in respect of such Unexercised Bonds.Save as provided in Condition 6(d), no interest shall accrue from (and including) the Interest Payment Dateimmediately preceding the Conversion Date (or, if such date falls before the First Interest Payment Date, from(and including) the Issue Date) in respect of such Unexercised Bonds in respect of which the Trustee’sconversion election as aforesaid shall have been made.All of the Ordinary Shares issued on such conversion and exchange of the Unexercised Bonds shall be sold by, oron behalf of, the Trustee as soon as practicable, and (subject to any necessary consents in relation to such salebeing obtained and to the deduction by the Trustee of any amount which it determines to be payable in respect ofits liability to taxation and the payment of any capital, stamp, issue or registration duties (if any) and any costsincurred by the Trustee in connection with the allotment and sale thereof and the exercise of its election underthis Condition 6(c)) the net proceeds of sale together with accrued interest (if any) in respect of such UnexercisedBonds shall, if not in US dollars, be converted into US dollars in such manner and at such rates as the Trusteeshall consider appropriate and shall be held by the Trustee and distributed rateably to the holders of suchUnexercised Bonds in accordance with Condition 5 and the Trust Deed (for this purpose, treating any Couponexpressed to be payable on the date fixed for redemption of such Unexercised Bonds as an unmatured Coupon).If the date fixed for redemption in respect of such Unexercised Bonds falls during a period commencing on anInterest Payment Date and ending on the date falling seven calendar days after such Interest Payment Date (bothdates inclusive) a sum equal to the interest payable on that Interest Payment Date in respect of such UnexercisedBonds and which has been paid to the holders thereof will be deducted from the net proceeds of sale payable tothe relevant holder and shall be paid to the Issuer. The amount of such net proceeds of sale payable to a holder ofUnexercised Bonds pursuant to this Condition 6(c) shall be treated for all purposes as the full amount due fromthe Issuer in respect of the Unexercised Bonds.37

The Trustee shall have no liability in respect of the exercise or non-exercise of its discretion pursuant to thisCondition 6(c) or the timing of such exercise or, where relevant, in respect of any sale of Ordinary Shares orconversion of any amounts into US dollars, whether for the timing of any such sale or conversion or the price atwhich any such Ordinary Shares are sold or the rate at which any such amounts are converted into US dollars, orthe inability to sell any such Ordinary Shares or make such conversion or otherwise.(d) Interest on ConversionIf any notice requiring the redemption of any Bonds is given pursuant to Condition 7(b) on or after the fifteenthBusiness Day prior to a record date which has occurred since the last Interest Payment Date (or, in the case of thefirst Interest Period, since the Issue Date) (whether such notice is given before, on or after such record date) inrespect of any dividend or distribution payable in respect of the Ordinary Shares where such notice specifies adate for redemption falling on or prior to the date which is 14 calendar days after the Interest Payment Date nextfollowing such record date, interest shall accrue on Bonds in respect of which Conversion Rights are exercisedfollowing the giving of the redemption notice referred to above or in respect of which the Trustee shall haveexercised its rights of conversion pursuant to Condition 6(c) and in any such case in respect of which theConversion Date falls after such record date and on or prior to the Interest Payment Date next following suchrecord date, in each case from (and including) the preceding Interest Payment Date (or, if such Conversion Datefalls before the first Interest Payment Date, from the Issue Date) to (but excluding) such Conversion Date.Any such interest shall be paid by the Issuer not later than 14 calendar days after the relevant Conversion Date inaccordance with Condition 5 as specified by the relevant Bondholder or, in the case of the exercise of such rightsby the Trustee, the Trustee.(e) Change of ControlFollowing the occurrence of a Relevant Event the Issuer shall give written notice thereof to Bondholders inaccordance with Condition 15 (which shall include notice of the Exchange Price applicable as a consequence ofthe occurrence of the Relevant Event, as adjusted where appropriate under the provisions of the Articles of theIssuer) within 14 calendar days of the first day on which it becomes so aware, which notice shall contain astatement informing the Bondholders of their entitlement to exercise their Conversion Rights as provided inCondition 7(c). Upon any exercise of Conversion Rights within 60 calendar days following a Relevant Event or,if later, 60 calendar days following the date on which notice thereof is given, the Exchange Price shall be asdetermined in accordance with the Articles of the Issuer, but in each case adjusted, if appropriate, under theprovisions of the Articles of the Issuer.(f)(g)Ordinary Shares(i) The Parent undertakes that it will procure that Ordinary Shares allotted and issued on exchange forthe Preference Shares will be fully paid and will rank pari passu in all respects with the fully paidOrdinary Shares in issue on the Conversion Date, except that the Ordinary Shares so allotted andissued will not rank for any dividend or other distribution declared, paid or made by reference to arecord date for the payment of a dividend or other distribution with respect to the Ordinary Sharesprior to such Conversion Date.(ii) Save as provided in Condition 6(d), no payment or adjustment shall be made on conversion andexchange for any interest which otherwise would have accrued on the relevant Bonds from (andincluding) the Interest Payment Date immediately preceding the Conversion Date relating to suchBonds (or, if such Conversion Date falls before the First Interest Payment Date, from (and including)the Issue Date).Preference Shares(i) Preference Shares allotted and issued pursuant to these Conditions and the Articles of the Issuer willbe fully paid and will rank pari passu with all (if any) fully paid Preference Shares in issue on theConversion Date.(ii) Preference Shares will be allotted and issued immediately prior to the allotment of the OrdinaryShares for which they are exchangeable and will be allotted and issued as of the relevant ConversionDate and will be allotted and issued (1) to the Bondholder completing the relevant ConversionNotice or his nominee, or (2) to the Trustee or as the Trustee may direct (in the case of an exerciseby the Trustee of its rights pursuant to Condition 6(c).38

7. Redemption and Purchase(a)Final RedemptionUnless previously purchased and cancelled, redeemed or converted as herein provided, the Issuer will redeem theBonds on the Maturity Date at their principal amount. The Bonds may not be redeemed at the option of the Issuerprior to the Maturity Date other than in accordance with this Condition 7.The Issuer may elect that, instead of redeeming the Bonds under this Condition 7(a), it will exercise its ShareSettlement Option with respect to all, but not some only, of the Bonds then outstanding as described in Condition7(g). To exercise its Share Settlement Option, the Issuer shall give a notice to such effect (the “Share SettlementOption Notice”) to the Trustee and to the Bondholders in accordance with Condition 15 not less than 30 calendardays prior to the Maturity Date.(b)Redemption at the Option of the IssuerOn giving not less than 30 nor more than 90 calendar days’ notice to the Trustee and the Bondholders inaccordance with Condition 15, the Issuer:(i)(ii)may, at any time on or after 16 October 2007, redeem all, but not some only, of the Bonds for thetime being outstanding at their principal amount together with interest accrued to the date fixed forredemption, provided that, within any period of 30 consecutive dealing days ending on the fifthdealing day prior to the date on which the relevant Redemption Notice (as defined below) is given toBondholders (as provided below), the average, in respect of at least 20 dealing days within such 30dealing day period, of the amount resulting from: (1) the Volume Weighted Average Price of anOrdinary Share on each such dealing day, divided by (2) the prevailing Exchange Price (as adjustedif necessary or appropriate) on such dealing day, shall have been equal to at least 1.3; ormay, at any time, redeem all, but not some only, of the Bonds for the time being outstanding at theirprincipal amount together with interest accrued to the date fixed for redemption if, prior to the dateof such notice, Conversion Rights shall have been exercised and/or purchases (and correspondingcancellations) have been effected in respect of 85% or more in principal amount of the Bondsoriginally issued and any further bonds issued pursuant to Condition 18 and consolidated andforming a single series therewith.The Issuer may elect that, instead of redeeming the Bonds under this Condition 7(b), it will exercise its ShareSettlement Option with respect to all, but not some only of, the Bonds then outstanding as described in Condition7(g). To exercise its Share Settlement Option, the Issuer shall give a Share Settlement Option Notice to theTrustee and to the Bondholders in accordance with Condition 15 not less than 30 calendar days prior to theOptional Redemption Date referred to below.For the purposes of the above, if on any dealing day in such period of 30 consecutive dealing days as mentionedabove the Ordinary Shares shall have been quoted cum-dividend then the Volume Weighted Average Price oneach dealing day on which the Ordinary Shares shall have been quoted “cum-dividend” shall be deemed to be theamount thereof reduced by an amount equal to the amount of that dividend per Ordinary Share (excluding anyassociated tax credit and less the tax (if any) falling to be deducted on payment thereof to a resident of the UnitedKingdom).A notice given by the Issuer under this Condition 7(b) (a “Redemption Notice”) shall be irrevocable and shallspecify (1) the date (the “Optional Redemption Date”) when the relevant redemption will take place, (2) whetherthe Issuer is electing to exercise its Share Settlement Option in connection with such redemption, (3) theExchange Price, (4) the closing price quoted for the Ordinary Shares as derived from the Relevant StockExchange at the close of business and the aggregate principal amount of the Bonds outstanding, in each case as atthe latest practicable date prior to the publication of the Redemption Notice and (5) the last day on whichConversion Rights may be exercised by Bondholders.(c)Redemption at the Option of the BondholdersFollowing the occurrence of a Relevant Event, the holder of each Bond will have the right to require the Issuer toredeem that Bond on the Relevant Event Put Date (as defined below) at its principal amount together withaccrued interest. To exercise such right, the holder of the relevant Bond must present such Bond, together with all39

unmatured Coupons relevant thereto, to the specified office of any Paying, Conversion and Exchange Agenttogether with a duly completed and signed notice of exercise, in the form for the time being current, obtainablefrom the specified office of any Paying, Conversion and Exchange Agent (“Relevant Event Put Exercise Notice”)by not later than 60 calendar days following a Relevant Event or, if later, 60 calendar days following the dateupon which notice thereof is given to Bondholders by the Issuer or the Parent pursuant to Condition 6(e) and inaccordance with Condition 15. The “Relevant Event Put Date” shall be the seventh calendar day after the expiryof such period of 60 calendar days as referred to above. Payment in respect of any such Bond shall be made bytransfer to the US dollar account with a branch of a bank in New York City specified in the applicable RelevantEvent Put Exercise Notice. A Relevant Event Put Exercise Notice, once delivered, shall be irrevocable and theIssuer shall redeem all Bonds the subject of Relevant Event Put Exercise Notices delivered as aforesaid on theRelevant Event Put Date. The Trustee shall not be required to take any steps to ascertain whether a RelevantEvent or any event which could lead to the occurrence of a Relevant Event has occurred. The Issuer shall givewritten notice to Bondholders in accordance with Condition 15 and the Trustee by not later than 14 calendar daysfollowing the first day on which it becomes aware of the occurrence of a Relevant Event, which notice shallspecify the procedure for exercise by holders of their rights to require redemption of the Bonds pursuant to thisCondition 7(c).(d) PurchaseSubject to the requirements (if any) of the London Stock Exchange, the UK Listing Authority and any other stockexchange on which the Bonds may be listed at the relevant time, the Issuer or the Parent or any Subsidiary of theIssuer or the Parent or any holding company of the Issuer or the Parent (within the meaning of Section 736 of theCompanies Act 1985) may at any time purchase Bonds (provided that all unmatured Coupons relating to themare purchased therewith or attached thereto) in the open market or otherwise at any price and such Bonds may beretained for the account of the relevant purchaser or resold or otherwise dealt with at its discretion. Any purchaseby tender shall be made available to all Bondholders alike. The Bonds so purchased, while held by or on behalfof the Issuer, the Parent or any such Subsidiary or holding company, shall not entitle the holder to vote at anymeetings of the Bondholders and shall not be deemed to be outstanding for the purposes of calculating quorumsat meetings of the Bondholders or for the purposes of Conditions 11, 12 or 16.(e) CancellationAll Bonds redeemed or converted will be cancelled forthwith (together with all unmatured Coupons attachedthereto or surrendered therewith) and may not be reissued or resold. All Bonds purchased by or on behalf of theIssuer or the Parent or any Subsidiary or holding company of the Issuer or the Parent as aforesaid may besurrendered for cancellation, by surrendering each such Bond to the Principal Paying, Conversion and ExchangeAgent and, if so surrendered, shall be cancelled forthwith (together with all unmatured Coupons attached theretoor surrendered therewith) and may not be reissued or resold and upon such cancellation the obligations of theIssuer and the Guarantors in respect of any such Bonds shall be discharged.(f) Multiple NoticesIf more than one notice of redemption is given pursuant to this Condition 7, the first of such notices to be givenshall prevail.(g) Share Settlement OptionSubject to the Ordinary Shares being of a class of share admitted to the Official List and admitted to trading onthe London Stock Exchange’s market for listed securities (or to any successor listing authority or other listing asthe Trustee may approve) on the due date for redemption of a Bond, the Issuer may, in the circumstances referredto in Conditions 7(a) and 7(b) (but not otherwise), elect (the “Share Settlement Option”) by delivery of a ShareSettlement Option Notice in the manner described in Condition 7(a) or Condition 7(b) (as appropriate) thatinstead of redeeming such Bonds in cash it shall:(i) convert the Bonds by issuing and allotting to the relevant Bondholder (or as the relevant Bondholdermay direct in the Share Settlement Notice (as defined below) one fully paid Preference Share allottedat a price equal to the Paid-up Value for each US$1,000 principal amount of such Bond andprocuring that such Preference Shares shall be exchanged immediately for such number of OrdinaryShares as is determined by dividing the Paid-up Value (translated into pounds sterling at the fixedrate of US$1.5957 = £1.00) by the Exchange Price prevailing on the Valuation Date (as definedbelow) and delivering such Ordinary Shares (the “Settlement Shares”) to the relevant Bondholder (oras the relevant Bondholder may direct in the Share Settlement Notice);40

(ii)make payment of an amount (the “Cash Settlement Amount”) equal to the amount (if any) by whichthe principal amount of such Bond exceeds the product of the Market Value (as defined below) of anOrdinary Share on the date (the “Valuation Date”) falling three dealing days prior to the due date forredemption of such Bond multiplied by the whole number of Ordinary Shares deliverable inaccordance with Condition 7(g)(i) above in respect of such Bond; and(iii) make payment in cash of any accrued and unpaid interest up to, but excluding, the date fixed forredemption.Fractions of Ordinary Shares will not be issued and no cash payment will be made in lieu thereof.However, if a Share Settlement Notice is delivered in respect of more than one Bond held by aBondholder where the Ordinary Shares to be issued are to be registered in the same name, the number ofsuch Ordinary Shares to be issued in respect thereof shall be calculated on the basis of the aggregatenumber of such Bonds (rounded down to the nearest whole number).Where Ordinary Shares are to be delivered to the Trustee pursuant to paragraph (3) below, the number ofOrdinary Shares so to be delivered shall be calculated on the basis of the aggregate principal amount ofBonds in respect of which delivery is to be made.As used above, the “Market Value” of an Ordinary Share on the Valuation Date shall mean the CurrentMarket Price with the substitution in the definition thereof of (1) a reference to 20 consecutive dealingdays for the reference therein to periods of five consecutive dealing days and (2) a reference to a 20 dayperiod for the reference therein to a five day period, translated into US dollars at the US dollar/poundssterling exchange rate at noon appearing on or derived from Bloomberg on the Valuation Date (or, if nosuch rate is available on that date, the equivalent rate on the immediately preceding date on which suchrate is available).If the Issuer does not deliver a relevant Share Settlement Option Notice in the manner and by the timereferred to in this Condition 7(g), the relevant Bonds shall be redeemed for cash in accordance with theprovisions of Condition 7(a) or Condition 7(b), as appropriate, and payment in respect thereof shall bemade in accordance with Condition 5.If the Issuer exercises the Share Settlement Option, the following provisions shall apply:(1) In order to obtain delivery of the relevant Settlement Shares, the relevant Bondholder must deliver toany Paying, Conversion and Exchange Agent at least 10 Business Days prior to the relevantredemption date (the “Notice Cut-off Date”), a duly completed notice substantially in the form setout in the Agency Agreement (the “Share Settlement Notice”), a copy of which may be obtainedfrom the specified office of any Paying, Conversion and Exchange Agent, together in each case withthe relevant Bonds. Each Bond should be delivered together with all Coupons relating to it whichmature after the due date for redemption failing which the relevant holder will be required to pay thefull amount of any such missing Coupon. Each amount so paid will be repaid in the manner specifiedin Condition 5 against presentation and surrender (or, in the case of part payment only, endorsement)of the relevant missing Coupon at any time after the due date for redemption of the relevant Bondand not later than 10 years after the Relevant Date for the relevant payment in respect of the relevantBond (whether or not a Coupon would otherwise have become void pursuant to Condition 10), butnot thereafter.(2) Subject as provided herein, the relevant Settlement Shares will be delivered in accordance with theinstructions given in the Share Settlement Notice and the Cash Settlement Amount (if any) and, ifthe due date for redemption is not an Interest Payment Date, any accrued and unpaid interest will bepaid in accordance with instructions contained in the relevant Share Settlement Notice, and, if thedue date for redemption is an Interest Payment Date any accrued and unpaid interest will be paid inaccordance with Condition 5, in each case on the due date for redemption of such Bonds, providedthe Share Settlement Notice and the relevant Bonds are delivered not later than the Notice Cut-offDate.(3) If the Share Settlement Notice and relevant Bonds are not delivered to a Paying, Conversion andExchange Agent on or before the Notice Cut-off Date, then (i), if the due date for redemption of theBonds is an Interest Payment Date, any accrued and unpaid interest will be paid in accordance withCondition 5 on the due date for redemption of such Bonds and (ii) the relevant Settlement Shareswill be delivered, the Cash Settlement Amount (if any) and, if the due date for redemption is not an41

Interest Payment Date, any accrued and unpaid interest will be paid to the Trustee or as the Trusteemay direct on such due date for redemption. All of such Settlement Shares shall be sold by, or onbehalf of, the Trustee as soon as practicable, and (subject to any necessary consents being obtainedand to the deduction by the Trustee of any amount which it determines to be payable in respect of itsliability to taxation and the payment of any capital, stamp, issue or registration duties (if any) andany costs incurred by the Trustee in connection with the allotment and sale thereof) the net proceedsof sale shall, if not in US dollars, be converted into US dollars in such manner and at such time andat such rates as the Trustee shall consider appropriate, and shall, together with the Cash SettlementAmount (if any) and any interest in respect of the Bonds paid to the Trustee be held by or on behalfof the Trustee and distributed rateably to the holders of the relevant Bonds or in such other manneras the Trustee shall determine and notify to Bondholders in accordance with Condition 15. Theamount of such net proceeds of sale, the Cash Settlement Amount (if any) and any interest payableto a holder pursuant to this sub-paragraph (3) as aforesaid shall be treated for all purposes as the fullamount due from the Issuer in respect of the relevant Bonds.(4) The Trustee shall have no liability in respect of the performance of its duties pursuant to subparagraph(3) above, including the exercise or non-exercise of any discretion pursuant to subparagraph(3) above in respect of any sale of Settlement Shares or conversion of any amounts intoUS dollars, whether for the timing of any such sale or the price at which any such Settlement Sharesare sold or the rate at which any such amounts are converted into US dollars, or the inability to sellany such Settlement Shares or otherwise.(5) Any Share Settlement Option Notice and any Share Settlement Notice shall be irrevocable. Failureproperly to complete and deliver a Share Settlement Notice and deliver the relevant Bonds mayresult in such notice being treated as null and void and the Issuer shall be entitled to effect settlementin accordance with sub-paragraph (3) above. Any determination as to whether such notice has beenproperly completed and delivered as provided in the Conditions shall be made by the Issuer in itssole and absolute discretion and shall be conclusive and binding on the relevant Bondholders.(6) Ordinary Shares to be delivered pursuant to this Condition 7(g) shall be deemed to be issued andallotted as of the due date for redemption of the relevant Bond.(7) A Bondholder or the Trustee must pay (in the case of the Trustee by means of deduction from the netproceeds of sale referred to in sub-paragraph (3) above or from amounts otherwise available for thepurpose) any taxes and capital, stamp, issue and registration duties arising on the relevant delivery ofthe Settlement Shares (except any taxes or capital duties or stamp duties payable in Jersey or theUnited Kingdom by the Issuer or the Parent in respect of the allotment and issue of the SettlementShares or Preference Shares on conversion and exchange or on transfer of the Preference Shares tothe Parent on exchange pursuant to this Condition 7(g), which shall be paid by the Issuer or theParent, as the case may be (or in the case of the Issuer, by the Parent if the Issuer fails to do so)provided that this exception shall not apply and neither the Issuer nor the Parent shall be liable to payany stamp duty or stamp duty reserve tax that arises under Sections 67, 70, 93 or 96 of the FinanceAct 1986 as a result of the issue of the Settlement Shares or the Preference Shares in contraventionof the next following paragraph) and such Bondholder or the Trustee (as the case may be) must pay(in the case of the Trustee, by way of deduction from the net proceeds of sale as aforesaid or fromamounts otherwise available for the purpose) all, if any, taxes arising by reference to any disposal ordeemed disposal of a Bond or Preference Share by a Bondholder in connection with such conversion.(8) Neither the Preference Shares nor the Settlement Shares will be available for issue (i) to, or to anominee for, Euroclear or Clearstream, Luxembourg, or any other person providing a clearanceservice within the meaning of Section 96 of the Finance Act 1986 of the United Kingdom (or otherperson falling within Sections 70(6), (7) or (8) of that Act) or (ii) to a person, or nominee or agentfor a person, whose business is or includes issuing depositary receipts within the meaning of Section93 of the Finance Act 1986 of the United Kingdom (or other persons falling within Sections 67(6),(7) or (8) of that Act), in each case at any time prior to the “abolition day” as defined in Section111(1) of the Finance Act 1990 of the United Kingdom.(9) Settlement Shares to be issued on exchange of the Preference Shares issued on conversion of theBonds will be issued in uncertificated form by the Parent through CREST, unless the Bondholder or,as the case may be, the Trustee, elects to receive the Settlement Shares in certificated registered formor, at the time of issue, the Ordinary Shares are not a participating security in CREST. WhereSettlement Shares are to be issued through CREST, they will be delivered to the account specified bythe relevant Bondholder in the relevant Share Settlement Notice or, as the case may be, as specified42

y the Trustee, on the due date for redemption. Where Settlement Shares are to be issued incertificated form, a certificate in respect thereof will be dispatched by mail free of charge (butuninsured and at the risk of the relevant recipient) to the relevant Bondholder or as it may direct inthe relevant Share Settlement Notice or, where Relevant Settlement Shares are to be delivered to theTrustee pursuant to sub-paragraph (3) above, as directed by the Trustee (in each case uninsured andat the risk of the relevant recipient) within 28 days following the date for redemption of the relevantBonds.(10) The Settlement Shares will be fully paid and not subject to any further calls on holders thereof andwill rank pari passu in all respects with the fully paid Ordinary Shares in issue on the relevantredemption date of the relevant Bond (except for any right excluded by mandatory provisions oflaw), except that the Ordinary Shares so allotted will not rank for any rights, distributions orpayments the record date or other due date for the establishment of entitlement to which falls prior tothe due date for redemption.8. TaxationAll payments of principal and interest in respect of the Bonds, the Coupons, the Guarantees, the Deed Poll andthe Deed of Guarantee by or on behalf of the Issuer or the Guarantors will be made without withholding ordeduction for or on account of any present or future taxes, duties, assessments or governmental charges ofwhatever nature imposed or levied by or on behalf of any jurisdiction or any political subdivision thereof or anyauthority thereof or therein having power to tax unless such withholding or deduction is required by law. Neitherthe Issuer nor the Guarantors will be required to pay any additional or further amounts in respect of suchwithholding or deduction.9. Undertakings(a) Deed PollWhilst any Bond remains outstanding, each Guarantor will, save with the approval of an ExtraordinaryResolution of the Bondholders (as defined in the Trust Deed) or the prior written approval of the Trustee where,in the Trustee’s opinion, it is not materially prejudicial to the interests of the Bondholders to give such approvalor, in the case of an amendment to the Deed Poll in respect of which they are Guarantors, unless the amendmentis agreed by the Trustee as provided in Condition 16, perform all of its obligations under, and not make anyamendment to, the Deed Poll executed by it.(b) Undertakings of the ParentWhilst any Bond remains outstanding the Parent will, and the Deed Poll provides that while any Share ExchangeCall remains to be satisfied, the Parent will, save with the approval of an Extraordinary Resolution of theBondholders or with the approval of the Trustee where, in its opinion, it is not materially prejudicial to theinterests of the Bondholders to give such approval:(i) at all times keep available for issue free from pre-emptive rights (if and to the extent any wouldotherwise be applicable) out of its authorised but unissued capital such number of Ordinary Shares aswould enable the obligation of the Issuer to procure that Preference Shares be exchanged forOrdinary Shares pursuant to the making of a Share Exchange Call and all rights of subscription andexchange for and conversion into Ordinary Shares to be satisfied in full and to take all actionsnecessary to effect the issue and allotment of Ordinary Shares at the times and in the manner set outin the Articles of the Issuer;(ii) not, other than in circumstances constituting an Excluded Relevant Event, issue or pay up anysecurities, in either case by way of capitalisation of profits or reserves, other than (1) by the issue offully paid Ordinary Shares to the Shareholders and other holders of shares in the capital of theParent, if any, which by their terms entitle the holders thereof to receive Ordinary Shares on acapitalisation of profits or reserves, or (2) by the issue of Ordinary Shares paid up in full out ofprofits or reserves (in accordance with applicable law) and issued wholly, ignoring fractionalentitlements, in lieu of the whole or part of a cash dividend, or (3) by the issue of fully paid equityshare capital (other than Ordinary Shares) to the holders of equity share capital of the same class andother holders of shares in the capital of the Parent, if any, which by their terms entitle the holdersthereof to receive equity share capital (other than Ordinary Shares) on a capitalisation of profits orreserves, unless in any such case, the same gives rise (or would, but for the fact that the adjustment43

would be less than 1% of the Exchange Price then in effect, give rise) to an adjustment of theExchange Price in accordance with the terms of the Articles of the Issuer;(iii) not in any way modify the rights attaching to the Ordinary Shares with respect to voting, dividends orliquidation nor issue any other class of equity share capital carrying any rights which are morefavourable than such rights but so that nothing in this Condition 9(b)(iii) shall prevent (1) the issueof any equity share capital to employees or former employees (including directors holding orformerly holding executive office) whether of the Parent or any of its Subsidiaries or any of theParent’s associated companies by virtue of their office or employment pursuant to any scheme, orplan approved by the Parent in general meeting or which is established pursuant to such a scheme orplan which is or has been so approved, or any other employee share scheme (as defined in Section743 of the Companies Act 1985 or any modification or re-enactment thereof) or any long termincentive scheme (as defined in the Listing Rules of the UK Listing Authority), or (2) anyconsolidation or subdivision of the Ordinary Shares or the conversion of any Ordinary Shares intostock or vice versa, or (3) any modification of such rights which is not determined by an IndependentFinancial Adviser to be materially prejudicial to the interests of the holders of the Bonds, or (4)without prejudice to any rule of law or legislation (including regulations made under Section 207 ofthe Companies Act 1989 or any other provision of that or any other legislation), the conversion ofOrdinary Shares into, or the issue of any Ordinary Shares in, uncertificated form (or the conversionof Ordinary Shares in uncertificated form into certificated form) or the amendment of the Articles ofAssociation of the Parent to enable title to securities of the Parent (including Ordinary Shares) to beevidenced and transferred without a written instrument or any other alteration to the Articles ofAssociation of the Parent made in connection with the matters described in this Condition 9 or whichis supplemental or incidental to any of the foregoing (including any amendment made to enable orfacilitate procedures relating to such matters and any amendment dealing with the rights andobligations of holders of securities, including Ordinary Shares, dealt with under such procedures), or(5) any issue of equity share capital where the issue of such equity share capital results or would, butfor the fact that the adjustment would be less than 1% of the Exchange Price then in effect or that theconsideration per Ordinary Share receivable therefore (as described in the Articles of the Issuer) is atleast 95% of the Current Market Price per Ordinary Share, otherwise result in an adjustment of theExchange Price, or (6) any issue of equity share capital or modification of rights attaching to theOrdinary Shares where prior thereto the Parent shall have instructed a firm of accountants (acting asexperts) selected by it and approved in writing by the Trustee (such consent not to be unreasonablywithheld or delayed having regard to the interests of the Bondholders) or an Independent FinancialAdviser to determine what (if any) adjustments should be made to the Exchange Price as being fairand reasonable to take account thereof and such firm of accountants or Independent FinancialAdviser shall have determined in accordance with the Articles of the Issuer either that no adjustmentis required or that an adjustment resulting in a reduction of the Exchange Price is required and, if so,the new Exchange Price as a result thereof and the basis upon which such adjustment is to be madeand, in any such case, the date on which the adjustment shall take effect (and so that the adjustmentshall be made and shall take effect accordingly);(iv) procure that no securities (whether issued by the Parent or any of its Subsidiaries or procured by theParent or any of its Subsidiaries to be issued) issued without rights to convert into, or exchange orsubscribe for, Ordinary Shares shall subsequently be granted such rights exercisable at aconsideration per Ordinary Share which is less than 95% of the Current Market Price per OrdinaryShare at close of business on the last dealing day preceding the date of the announcement of theproposed inclusion of such rights unless the same gives rise (or would, but for the fact that theadjustment would be less than 1% of the Exchange Price then in effect, give rise) to an adjustment ofthe Exchange Price and that at no time shall there be in issue Ordinary Shares of differing nominalvalues, save where such Ordinary Shares have the same economic rights;(v) not make any issue, grant or distribution or take any other action if the effect thereof would be that,on the conversion of Bonds and the exchange of the Preference Share issued and allotted inconnection therewith, Ordinary Shares would (but for the provisions of the Articles of the Issuer)have to be issued at a discount to their nominal value or otherwise could not, under any applicablelaw then in effect, be legally issued as fully paid;(vi) not reduce its issued share capital, share premium account or capital redemption reserve or anyuncalled liability in respect thereof except (1) pursuant to the terms of issue of the relevant sharecapital, or (2) by means of a purchase or redemption of share capital of the Parent to the extentpermitted by applicable law or which would not constitute a capital distribution as permitted by44

Section 130(2) of the Companies Act 1985, or (3) a reduction of the share premium account tofacilitate the writing off of goodwill arising on consolidation which requires the confirmation of theHigh Court of England and Wales (the “High Court”) and which does not involve the return, eitherdirectly or indirectly, of an amount standing to the credit of the share premium account of the Parentand in respect of which the Parent shall have tendered to the High Court such undertaking as it mayrequire prohibiting, so long as any of the Bonds remains outstanding, the distribution (except by wayof capitalisation issue) of any reserve which may arise in the books of the Parent as a result of suchreduction, or (4) where the reduction does not involve any distribution of assets and is effected byway of cancellation for the purposes of a scheme of arrangement pursuant to Section 425 of theCompanies Act 1985, or (5) solely in relation to a change in the currency in which the nominal valueof the Ordinary Shares is expressed, or (6) by way of transfer of reserves as permitted underapplicable laws, and/or (7) where the reduction results in (or would, but for the fact that theadjustment would be less than 1% of the Exchange Price then in effect, result in) an adjustment tothe Exchange Price;(vii) if any offer is made to all (or as nearly as may be practicable all) Shareholders (or all (or as nearly asmay be practicable all) such Shareholders other than the offeror and/or any associate of the offeror(as defined in Section 430E(4) of the Companies Act 1985, or any modification or re-enactmentthereof)), to acquire all or a majority of the issued ordinary share capital of the Parent, or if anyperson proposes a scheme with regard to such acquisition, give notice of such offer or scheme to theBondholders at the same time as any notice thereof is sent to its Shareholders (or as soon aspracticable thereafter) that details concerning such offer or scheme may be obtained from thespecified offices of the Paying, Conversion and Exchange Agents and, where such an offer orscheme has been recommended by the Board of Directors of the Parent, or where such an offer hasbecome or been declared unconditional in all respects, use its reasonable endeavours to procure thata like offer or scheme is extended to the holders of any Ordinary Shares issued during the period ofthe offer or scheme arising out of the exercise of the Conversion Rights and/or to the holders of theBonds;(viii) use all reasonable endeavours to ensure that the Ordinary Shares issued upon exchange of anyPreference Shares will be admitted to the Relevant Stock Exchange and will be listed, quoted ordealt in on any other stock exchange or securities market on which the Ordinary Shares may then belisted or quoted or dealt in;(ix) be the beneficial owner of the issued share capital carrying ordinary voting rights of the Issuer; and(x) procure that if, on or before 2 October 2004, any Subsidiary of the Parent gives any guarantee orindemnity in respect of Relevant Indebtedness of the Issuer or the Parent, such Subsidiary shall enterinto a deed supplemental to the Deed of Guarantee agreeing to be jointly and severally liable withthe Guarantors for the due and punctual payment of all sums expressed to be payable by the Issuerunder the Trust Deed and the Bonds and to be bound by such provisions of the Trust Deed and theBonds as are binding on the Guarantors.For the above purposes in relation to the Parent, “ordinary share capital” has the meaning ascribed to it in Section832 of the Income and Corporation Taxes Act 1988 and “equity share capital” has the meaning ascribed to it inSection 744 of the Companies Act 1985.(c) Undertakings of the Issuer and the ParentWhilst any Bond remains outstanding, the Issuer will, and the Parent will procure that the Issuer will, save withthe approval of an Extraordinary Resolution of the Bondholders or with the prior written approval of the Trusteewhere, in the Trustee’s opinion, it is not materially prejudicial to the interests of the Bondholders to give suchapproval:(i) comply with its obligations under the Articles of the Issuer and not make any amendment to theArticles of the Issuer which would vary, abrogate or modify the rights appertaining to the PreferenceShares;(ii) keep available for issue free from pre-emptive rights (if and to the extent any would otherwise beapplicable) out of its authorised but unissued capital such number of Unclassified Shares as wouldenable all the unexercised Conversion Rights and any other rights of conversion into, subscriptionfor and exchange into Preference Shares to be satisfied in full;(iii) not issue any other share capital with rights which are more favourable than the rights attaching to thePreference Shares as respects dividends or payment of the Paid-up Value thereof or on a return ofcapital or otherwise; and45

(iv) not alter the nominal value of the Preference Shares (whether by consolidation, sub-division orotherwise),provided that the creation or issue of any class of share capital ranking junior to or pari passu with the PreferenceShares as respects rights to dividends and to payment of the paid-up value thereof on a return of capital orotherwise shall be deemed not to be a variation, abrogation or modification of the rights appertaining to thePreference Shares.10. PrescriptionClaims in respect of the Bonds and Coupons will become void unless presented for payment within a period often years (in the case of principal) and five years (in the case of interest) after the Relevant Date (as defined inCondition 21).11. Events of DefaultAt any time after the happening of any of the following events, the Trustee at its absolute discretion may, and ifso required in writing by the holders of at least one-quarter in principal amount of the Bonds then outstanding orif so directed by an Extraordinary Resolution of the Bondholders shall, (subject in each case to being indemnifiedto its satisfaction) give notice to the Issuer and the Guarantors declaring the Bonds to be immediately due andrepayable, so long as at the time of such notice such event or (as the case may be) all such events shall not havebeen waived by, or remedied to the reasonable satisfaction (having regard to the interests of the Bondholders) of,the Trustee:(i)(ii)default being made in the payment of any principal or interest in respect of any of the Bonds andsuch payment being outstanding for a period of more than seven days (in the case of principal) and14 days (in the case of interest); ordefault being made by the Issuer or Parent in the performance or observance of any other covenant,undertaking, condition or provision contained in the Trust Deed or in the Bonds and (except wherethe Trustee shall have certified in writing to the Issuer or the Parent that it considers such default tobe incapable of remedy when no such notice as is hereinafter mentioned shall be required) suchdefault continues for a period of 30 days or more immediately following the service by the Trusteeon the Issuer or the Parent of a notice requiring the same to be remedied; or(iii) the repayment of any Indebtedness (as defined in Condition 21) of the Issuer, the Parent and/or anyPrincipal Subsidiary being accelerated by reason of a default or event of default (howsoeverdescribed); or the Issuer or the Parent and/or any Principal Subsidiary defaulting (after anyapplicable grace period as originally provided) in any payment of principal, premium or interest inrespect of any Indebtedness; or the security for any Indebtedness or any guarantee of anyIndebtedness becoming enforceable; or default being made by the Issuer or the Parent and/or anyPrincipal Subsidiary in making any payment due under any guarantee and/or indemnity given by it inrelation to any Indebtedness of any other person; provided that the aggregate amount of relevantIndebtedness in respect of which any one or more of the events mentioned above in this subparagraph(iii) has or have occurred is not less than £30,000,000 (or its equivalent in any othercurrency); or(iv) an order being made or an effective resolution being passed for the winding-up or dissolution of theIssuer, the Parent or any Principal Subsidiary (except, in the case of a Principal Subsidiary, for awinding-up for the purpose of a reconstruction or amalgamation the terms of which have previouslybeen approved in writing by the Trustee or by an Extraordinary Resolution of the Bondholders or avoluntary solvent winding-up or dissolution in connection with the transfer of all or the major part ofthe business, undertaking and assets of such Principal Subsidiary to the Issuer, the Parent, anotherPrincipal Subsidiary or any Subsidiary which becomes a Principal Subsidiary as a result of suchtransfer); or(v)the Issuer, the Parent or any Principal Subsidiary stopping or announcing an intention to stoppayment in respect of any binding obligations or ceasing to carry on all or substantially all of itsbusiness (except a cessation (1) in the circumstances referred to in the parentheses of sub-paragraph(iv) above or (2) consequent upon a sale by a Principal Subsidiary of all or any part of its business,either to another member of the Group, or on arm’s length terms and for fair market value (to beconclusively evidenced to the Trustee by a certificate from two Directors of the Parent)); or46

(vi) proceedings being initiated against the Issuer or the Parent under any applicable liquidation,insolvency, composition, reorganisation or other similar laws or an encumbrancer taking possessionof, or an administrative or other receiver, an administrator or any similar official being appointed inrelation to, the Issuer, the Parent or any Principal Subsidiary or in relation to the whole or a materialpart of the undertaking, property, assets or revenues of the Issuer, the Parent or any PrincipalSubsidiary or an administrative or other receiver, an administrator or any distress or execution orother legal process being levied or enforced upon or sued out against the whole or any material partof the chattels or property of the Issuer, the Parent or any Principal Subsidiary in respect of anaggregate principal amount of at least £30,000,000 (or its equivalent in any other currency), which,in any such case (other than the appointment of an administrator), is not discharged within 28 days;or(vii) the Issuer, the Parent or any Principal Subsidiary being unable to pay its debts within the meaning ofSection 123 (1) (b), (c) or (d) of the Insolvency Act 1986; or(viii) the Issuer, the Parent or any Principal Subsidiary consenting to proceedings relating to itself underany applicable bankruptcy, insolvency, composition or other similar laws (except, in the case of aPrincipal Subsidiary, for a winding-up for the purpose of a reconstruction or amalgamation the termsof which have previously been approved in writing by the Trustee or by an Extraordinary Resolutionof the Bondholders or a voluntary solvent winding-up or dissolution in connection with the transferof all or the major part of the business, undertaking and assets of such Principal Subsidiary to theParent, another Principal Subsidiary or any Subsidiary which becomes a Principal Subsidiary as aresult of such transfer) or making a conveyance or assignment for the benefit of, or entering into anycomposition with, its creditors generally, or being adjudicated or found bankrupt or Insolvent by anycompetent court; or(ix) any event occurring which under the laws of the relevant jurisdiction has or may have, in theTrustee’s opinion, an analogous effect to any of the events referred to in sub-paragraphs (iv) to (viii)above; or(x) any of the Guarantees ceasing to be, or claimed by the Issuer or the Guarantors not to be, in fullforce and effect other than in accordance with their terms; or(xi) Capitol Records, Inc. ceasing to be a Subsidiary of the Parent;and, in the case of the happening of any of the events referred to above except those set out in sub-paragraph (i),the same having been certified in writing by the Trustee to be in its opinion materially prejudicial to the interestsof the Bondholders.Upon any such declaration being made as aforesaid, the outstanding Bonds shall become immediately due andrepayable at their principal amount, together with accrued interest as provided in the Trust Deed.12. EnforcementThe Trustee may at any time after the Bonds become due and payable, at its discretion and without notice, takesuch proceedings against the Issuer, or, until the Guarantees terminate in accordance with their terms, any of theGuarantors, as it may think fit to enforce the provisions of the Trust Deed, the Bonds, the Coupons and theGuarantees, but it shall not be bound to take any such proceedings or any other action in relation to the TrustDeed, the Bonds, the Coupons or the Guarantees unless it shall have been so required in writing by the holders ofat least one-quarter in principal amount of the Bonds then outstanding or so directed by an ExtraordinaryResolution of the Bondholders and in each case indemnified to its satisfaction.No Bondholder shall be entitled to proceed directly against the Issuer or any of the Guarantors unless the Trustee,having become bound so to proceed, fails so to do within a reasonable period and such failure shall becontinuing.13. Replacement of Bonds and CouponsShould any Bond or Coupon be lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specifiedoffice for the time being of the Principal Paying, Conversion and Exchange Agent in London subject to allapplicable laws and stock exchange or other relevant authority requirements, upon payment by the claimant ofsuch costs and expenses as may be incurred in connection therewith and on such terms as to evidence andindemnity as the Issuer may reasonably require. Mutilated or defaced Bonds or Coupons must be surrenderedbefore replacements will be issued.47

14. AgentsThe names of the initial Paying, Conversion and Exchange Agents and their initial specified offices are set outbelow.The Issuer and/or the Parent are entitled (with the prior written approval of the Trustee) to vary or terminate theappointment of any Paying, Conversion and Exchange Agent and/or appoint additional or other Paying,Conversion and Exchange Agents and/or approve any change in the specified office through which any Paying,Conversion and Exchange Agent acts, provided that:(i)(ii)there will at all times be a Principal Paying, Conversion and Exchange Agent;so long as the Bonds are listed on any stock exchange, there will at all times be a Paying, Conversionand Exchange Agent (which may be the Principal Paying, Conversion and Exchange Agent) with aspecified office in such place as may be required by the rules and regulations of the relevant stockexchange, or, in the case of the London Stock Exchange, the UK Listing Authority; and(iii) there will at all times be a Paying, Conversion and Exchange Agent with a specified office in a cityapproved by the Trustee in continental Europe.Any variation, termination, appointment or change shall only take effect (other than in the case of insolvency,when it shall be of immediate effect) after not less than 21 nor more than 45 days prior notice thereof shall havebeen given to the Bondholders in accordance with Condition 15.In acting under the Agency Agreement, the Paying, Conversion and Exchange Agents act solely as agents of theIssuer and the Parent and, in certain circumstances specified therein, of the Trustee and do not assume anyobligation to, or relationship of agency or trust with, any Bondholders or Couponholders. The AgencyAgreement contains provisions permitting any entity into which any Paying, Conversion and Exchange Agent ismerged or converted or with which it is consolidated or to which it transfers all or substantially all of its assets tobecome the successor paying agent.15. NoticesAll notices regarding the Bonds will be deemed to be validly given if published in a leading English languagedaily newspaper of general circulation in London. It is expected that such publication will be made in theFinancial Times in London. The Issuer and the Parent shall also ensure that notices are duly published in amanner which complies with the rules and regulations of any stock exchange on which the Bonds are for the timebeing listed. Any such notice will be deemed to have been given on the date of the first publication or, whererequired to be published in more than one newspaper, on the date of the first publication in all requirednewspapers. If publication as provided above is not practicable, notice will be given in such other manner, andwill be deemed to have been given on such date, as the Trustee may approve. Couponholders will be deemed forall purposes to have notice of the contents of any notice given to the Bondholders in accordance with thisCondition 15.16. Meetings of Bondholders, Modifications, Substitution and Waiver(a)MeetingsThe Trust Deed contains provisions for convening meetings of Bondholders to consider any matter affecting theirinterests including the sanctioning by Extraordinary Resolution of the Bondholders of a modification of any ofthese Conditions or any provisions of the Trust Deed, the Deed Poll, the Deed of Guarantee or the Articles of theIssuer (in the case of the Articles of the Issuer only in respect of any modification which would vary, abrogate ormodify the rights appertaining to the Preference Shares). The quorum at any such meeting for passing anExtraordinary Resolution of the Bondholders will be one or more persons holding or representing at least onequarterin principal amount of the Bonds for the time being outstanding, or at any adjourned such meeting one ormore persons being or representing Bondholders whatever the principal amount of the Bonds so held orrepresented. An Extraordinary Resolution of the Bondholders passed at any meeting of Bondholders will bebinding on all Bondholders, whether or not they are present at the meeting and whether or not they vote infavour, and on all Couponholders.48

(b) Modification and WaiverThe Trustee may agree, without the consent of the Bondholders or Couponholders, to (1) any modification tothese Conditions or the Coupons or to the provisions of the Trust Deed and any trust deed supplemental thereto,the Deed Poll, the Deed of Guarantee or the Articles of the Issuer (in the case of the Articles of the Issuer whichwould vary, abrogate or modify the rights appertaining to the Preference Shares) which in its opinion is of aformal, minor or technical nature or to correct a manifest or proven error or to comply with mandatory provisionsof applicable law, or (2) any other modification which in its opinion is not materially prejudicial to the interestsof the Bondholders. The Trustee may also agree without the consent of the Bondholders or Couponholders to thewaiver or authorisation of any breach or proposed breach of any of the provisions of the Trust Deed, the DeedPoll, the Deed of Guarantee or the Articles of the Issuer or of the Conditions or determine, without any suchconsent as aforesaid, that any Event of Default or Potential Event of Default (each as defined in the Trust Deed)shall not be treated as such which in any such case in its opinion is not materially prejudicial to the interests ofthe Bondholders. For the avoidance of doubt, the consent of the Trustee or the Bondholders is not required for analteration or modification of the Articles of the Issuer in respect of the rights appertaining to the RedemptionShares, provided that any such alteration or modification does not, or does not have the effect of, varying,abrogating or modifying the rights appertaining to the Preference Shares.(c) Substitution of the IssuerThe Trust Deed contains provisions permitting the Trustee (if it is satisfied that to do so would not be materiallyprejudicial to the interests of Bondholders) to agree, if requested by the Issuer and subject to such amendment ofthe Trust Deed, the Deed Poll and the Deed of Guarantee and such other conditions as the Trustee may require,but without the consent of the Bondholders or the Couponholders, to, the substitution of any other company inplace of the Issuer, or of any previous substituted company, as principal debtor under the Trust Deed and theBonds and as party to the Agency Agreement, subject to the Bonds and the Coupons remaining unconditionallyand irrevocably guaranteed by the Guarantors as provided in these Conditions and the Trust Deed and beingconvertible mutatis mutandis as provided in these Conditions into preference shares in the substituted companywith like rights mutatis mutandis to the Preference Shares and to such preference shares being immediatelyexchangeable for Ordinary Shares mutatis mutandis as provided in the Articles of the Issuer and to theobligations of the Guarantors under the Deed Poll applying mutatis mutandis to such preference shares.(d) Notice to BondholdersAny such modification, waiver, authorisation or substitution shall be binding on all Bondholders and theCouponholders and, unless the Trustee agrees otherwise, any such modification or substitution shall be notifiedto the Bondholders in accordance with Condition 15 as soon as practicable thereafter.(e) Exercise of Powers etc.In connection with the exercise of its powers, trusts, authorities or discretions (including but not limited to thosein relation to any proposed modification, waiver, authorisation or substitution as aforesaid) the Trustee shall haveregard to the interests of the Bondholders as a class and shall not have regard to the consequences of suchexercise for individual Bondholders resulting from their being for any purpose domiciled or resident in or subjectto tax in, or otherwise connected with, or subject to the jurisdiction of, any particular territory and the Trusteeshall not be entitled to require, nor shall any Bondholder be entitled to claim from, the Issuer, any of theGuarantors or the Trustee, any indemnification or payment in respect of any tax consequence of any suchexercise upon individual Bondholders.17. Indemnification of the Trustee and its Contracting with the IssuerThe Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility,including provisions relieving it from taking action unless indemnified to its satisfaction.The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia (i) to enter intobusiness transactions with the Issuer, the Parent or any of its Subsidiaries and to act as trustee for the holders ofany other securities issued or guaranteed by, or relating to, the Issuer, the Parent or any of its Subsidiaries, (ii) toexercise and enforce its rights, comply with its obligation and perform its duties under or in relation to any suchtransactions or, as the case may be, any such trusteeship without regard to the interests of, or consequences for,the Bondholders or Couponholders, and (iii) to retain and not be liable to account for any profit made or anyother amount or benefit received thereby or in connection therewith.49

The Trustee is trustee for the holders of Bonds only and not the holders of Preference Shares or Ordinary Sharesand as such shall not at any time be responsible for the value, sufficiency or validity of any of the PreferenceShares or Ordinary Shares, delivery of the same by the Issuer or the Parent or the Exchange Price. The Trusteeshall not be obliged to exercise any voting rights or any other related rights in respect of the Preference Shares orthe Ordinary Shares issued to it pursuant to these Conditions and shall not be liable to anyone for failure to do so.The Trustee may rely without liability to Bondholders or Couponholders on a report, confirmation or certificateof any accountants, financial advisers or investment bank, whether or not addressed to it and whether theirliability in relation thereto is limited (by its terms or by any engagement letter relating thereto entered into by theTrustee or in any other manner) by reference to a monetary cap, methodology or otherwise. The Trustee shall beobliged to accept and entitled to rely on any such report, confirmation or certificate where any of the Issuer or theGuarantors procures delivery of the same pursuant to its obligation to do so under a condition hereof and suchreport, confirmation or certificate shall be binding on the Issuer, the Guarantors, the Trustee, the Bondholder andthe Couponholders in the absence of manifest or proven error.18. Further IssuesThe Issuer shall be at liberty from time to time without the consent of the Bondholders or the Couponholders tocreate and issue further bonds, notes or debentures (whether in bearer or registered form) either having terms andconditions the same as the outstanding bonds, notes or debentures of any series (including the Bonds) or the samein all respects save for the amount and date of the first payment of interest thereon and so that the same shall beconsolidated and form a single series with the outstanding bonds, notes or debentures (including the Bonds)constituted by the Trust Deed or any deed supplemental to it, or upon such terms as to interest, conversion,premium, redemption and otherwise as the Issuer may determine at the time of their issue. Any such furtherbonds, notes or debentures forming a single series with the outstanding bonds, notes or debentures of any series(including the Bonds) constituted by the Trust Deed or any deed supplemental to it shall, and any other bonds,notes or debentures may, with the consent of the Trustee, be constituted by a deed supplemental to the TrustDeed. The Trust Deed contains provisions for convening a single meeting of the Bondholders and the holders ofbonds, notes or debentures of other series in certain circumstances where the Trustee so decides.19. Contracts (Rights of Third Parties) Act 1999No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce anyterms of the Bonds, but this does not affect any right or remedy of any person which exists or is available apartfrom that Act.20. Governing Law and Jurisdiction(a) Governing LawThe Trust Deed, the Agency Agreement, the Deed Poll, the Deed of Guarantee, the Bonds and the Coupons aregoverned by, and shall be construed in accordance with the laws of England.(b) JurisdictionThe courts of England are to have jurisdiction to settle any disputes that may arise out of, or in connection with,the Bonds or the Coupons (“Proceedings”) and accordingly any legal action or proceedings arising out of, or inconnection with, any Bonds or Coupons may be brought in such courts. The Issuer and the Guarantors have inthe Trust Deed irrevocably submitted to the jurisdiction of such courts.(c) Service of ProcessThe Issuer, in accordance with the Trust Deed, has appointed the Parent, whose address is 27 Wrights Lane,London W8 5SW, to act as its agent in England to receive, for it and on its behalf, service of process in anyProceedings in England.21. DefinitionsIn these Conditions:“Bondholder”the holder of any Bond;50

“Business Day”“Cash Settlement Amount”“Clearstream, Luxembourg”“Couponholder”“Coupons”“CREST”“Current Market Price”a day (other than a Saturday or Sunday) on which commercial banksand foreign exchange banks are open for business in London and NewYork City;has the meaning ascribed to it in Condition 7(g)(ii);Clearstream Banking, société anonyme;the holder of any Coupon;the Coupons relating to the Bonds for the payment of interest;CRESTCo Limited;in respect of an Ordinary Share at a particular date, the simpleaverage of the Volume Weighted Average Price published by, orderived from, the Relevant Stock Exchange for one Ordinary Sharefor the five consecutive dealing days ending on the dealing dayimmediately preceding such date; provided that if at any time duringthe said five day period the Ordinary Shares shall have been quotedex-dividend and during some other part of that period the OrdinaryShares shall have been quoted cum-dividend then:(a)(b)if the Ordinary Shares to be issued do not rank for the dividendin question, the quotations on the dates on which the OrdinaryShares shall have been quoted cum-dividend shall for thepurpose of this definition be deemed to be the amount thereofreduced by an amount equal to the amount of that dividend perOrdinary Share (excluding any associated tax credit and less thetax (if any) falling to be deducted on payment thereof to aresident of the United Kingdom);if the Ordinary Shares to be issued do rank for the dividend inquestion, the quotations on the dates on which the OrdinaryShares shall have been quoted ex-dividend shall for the purposeof this definition be deemed to be the amount thereof increasedby such similar amount,provided that if the Volume Weighted Average Price is not availableon one or more of the said five dealing days, then the average of suchVolume Weighted Average Prices which are available in that fivedealing day period shall be used (subject to a minimum of two suchVolume Weighted Average Prices) and if only one or no suchVolume Weighted Average Price is available in the relevant periodthe Current Market Price shall be determined in good faith by anIndependent Financial Adviser and provided further that if theOrdinary Shares on each of the said five dealing days have beenquoted cum-dividend in respect of a dividend which has beendeclared or announced but the Ordinary Shares to be issued do notrank for that dividend the quotations on each of such dates shall forthe purposes of this definition be deemed to be the amount thereofreduced by an amount equal to the amount of that dividend perOrdinary Share (excluding any associated tax credit and less the tax(if any) falling to be deducted on payment thereof to a resident of theUnited Kingdom);“dealing day”a day on which the Relevant Stock Exchange is open for business andshares may be dealt in on the Relevant Stock Exchange;51

“EBITDA”“Euroclear”“Excluded Relevant Event”“Fair Market Value”in relation to a member of the Group for a period, its operating profitfor that period (a) adding back any amount attributable todepreciation or amortisation; and (b) for the avoidance of doubt,before adding or, as the case may be, deducting any amountattributable to any of the following: (i) any share in the operatingprofits or losses of associates; (ii) operating and non-operatingexceptional items; (iii) finance charges, including interest and otherfinance costs, charges and expenses, payable or received by anymember of the Group or any associates; (iv) taxation; (v)extraordinary items; and (vi) minority interests, all as calculated inaccordance with the principles applied in connection with thepreparation of the audited consolidated financial statements of theParent for the year ended 31 March 2003, and subject to that, inaccordance with accounting principles and practices generallyaccepted in the United Kingdom. If there is a dispute as to the amountof EBITDA at any time, a certificate of two directors of the Parent(whether or not addressed to the Trustee) will be, in the absence ofmanifest error, conclusive;Euroclear Bank S.A./N.V., as operator of the Euroclear System;a scheme of arrangement, or an offer made to all (or as nearly as maybe practicable all) Shareholders (or all (or as nearly as may bepracticable all) such Shareholders other than the offeror and/or anyassociate of the offeror (as defined in Section 430E(4) of theCompanies Act 1985, or any modification or re-enactment thereof)),to acquire the whole or any part of the issued ordinary share capital ofthe Parent, which:(a) upon full implementation would result in the Parent being awholly-owned subsidiary of a body corporate, more than 50% ofthe share capital having the right ordinarily to vote on a poll at ageneral meeting of which would be held by persons whoreceived such share capital pursuant to the scheme or offer intheir capacity as Shareholders; and(b) incorporates or is accompanied by arrangements pursuant towhich each Bondholder is given a reasonable opportunity toexchange the Bonds held by such Bondholder for bonds to beissued by such new holding company convertible into shares ofsuch new holding company on terms determined by anIndependent Financial Adviser to be such that the Bondholdersare not disadvantaged in comparison with the holders of theordinary share capital of the Parent;means, with respect to any property on any date, the fair market valueof that property as determined by an Independent Financial Adviser,provided that (1) the fair market value of a cash dividend paid or to bepaid shall be the amount of such cash dividend; (2) where options,warrants or other rights are publicly traded in a market of adequateliquidity (as determined by an Independent Financial Adviser), thefair market value of such options, warrants or other rights shall equalthe arithmetic mean of the daily closing prices of such options,warrants or other rights during the period of five dealing days on therelevant market commencing on the first such trading day suchoptions, warrants or other rights are publicly traded, or such shorterperiod as such options, warrants or other rights are publicly traded;(3) where options, warrants or other rights are not publicly traded (asaforesaid), the fair market value of such options, warrants or otherrights will be as determined by an Independent Financial Adviser onthe basis of a commonly accepted market valuation method and52

taking account of such factors as it considers appropriate, includingthe market price per Ordinary Share, the dividend yield of anOrdinary Share, the volatility of such market price, prevailing interestrates and the terms of such options, warrants or other rights, includingas to the expiry date and exercise price (if any) thereof, and (4) in thecase of (1) converted into pounds sterling (if declared or paid in acurrency other than pounds sterling) at the rate of exchange used todetermine the amount payable to Shareholders who were paid or areto be paid the cash dividend in pounds sterling; and in the absence ofsuch a stated rate of exchange, and in the case of (2) and (3),converted into pounds sterling (if expressed in a currency other thanpounds sterling) at such rate of exchange as determined by anIndependent Financial Adviser to be the spot rate ruling at the closeof business on that date (or if no such rate is available on that date theequivalent rate on the immediately preceding date on which such arate is available); provided that for the purposes of determining FairMarket Value under sub-paragraph (B)(v), references in thisdefinition to options, warrants or other rights shall be deemed to be tothe entitlement to such options, warrants or other rights as the casemay be;“Financial Year”“Group”“Guarantees”“Guarantors”“holder”“Indebtedness”“Independent Financial Adviser”“Interest Payment Date”“Interest Period”“Interest Rate”a period of 12 months ending on (and including) 31 March in anyyear;the Parent and its Subsidiaries and “member of the Group” shall beconstrued accordingly;has the meaning ascribed to it in Condition 2(b);EMI Group plc and Capitol Records, Inc.;the holder of any Bond or Coupon (as the case may be);any indebtedness (whether being principal, premium or interest) foror in respect of (i) any notes, bonds, debenture stock, loan stock orother securities; or (ii) any borrowed money; or (iii) any liabilityunder or in respect of any acceptance or acceptance credit; or (iv) anyleasing or hire purchase agreement which is in the nature of borrowedmoney;an investment bank, bank or financial adviser of international reputeappointed by the Parent for the relevant purpose and approved inwriting by the Trustee (such approval not to be unreasonably withheldor delayed having regard to the interests of the Bondholders) andacting as an expert or, if the Parent shall not have appointed such anadviser within 21 calendar days after becoming aware of the need forsuch appointment hereunder and the Trustee is indemnified to itssatisfaction against the costs, fees and expenses of such adviser,appointed by the Trustee following notification to the Parent;has the meaning ascribed to it in Condition 4(a);has the meaning ascribed to it in Condition 4(a);has the meaning ascribed to it in Condition 4(b);“Issue Date” 2 October 2003;53

“Issuer”“London Stock Exchange”EMI Group Finance (Jersey) Limited;London Stock Exchange plc;“Maturity Date” 2 October 2010;“Official List”“Parent”“Permitted Securitisation”“Permitted Security Interest”“Principal Subsidiary”the official list of the UK Listing Authority;EMI Group plc;means any Securitisation where (i) the relevant asset or assets wereacquired by the relevant member of the Group after 13 May 2002 or(ii) the aggregate net proceeds from all Securitisations (including therelevant Securitisation but excluding any Securitisation permittedunder sub-paragraph (i) above) do not exceed £25,000,000 at any onetime outstanding;means:(a) any Security Interest existing on 30 September 2003;(b)(c)liens arising by operation of law (or by contract having anequivalent effect) or in the ordinary course of business of musicpublishing or recorded music or business ancillary thereto;any Security Interest on assets of a company acquired by amember of the Group after 30 September 2003, provided that (i)such Security Interest was existing or agreed to be created at orbefore the time the relevant company became a member of theGroup, (ii) such Security Interest was not created incontemplation of such acquisition, (iii) the principal amount thensecured is not exceeded or increased and (iv) the then repaymentdate of the amount secured is not extended;(d) any Security Interest over the following properties in Japan: 2-2-17 Akasaka Minato-KU, Tokyo; 2-1-26 Nagatacho Chiyoda-KU,Tokyo; 985 Hodosawa, Gotemba City, Shizuoka Prefecture; and48 Jinba, Gotemba City, Shizuoka Prefecture, provided that theprincipal amount of Indebtedness secured by all such SecurityInterests does not exceed £70,000,000 or its equivalent at anyone time;(e) any Security Interest granted in relation to a PermittedSecuritisation;(f)any Security Interest securing Indebtedness incurred to refinanceother indebtedness itself secured by a Security Interest includedin sub-paragraphs (a) to (e) above, but only if the principalamount of the Indebtedness is not increased and only the sameassets are secured as were secured by the prior Security Interest;or(g) any other Security Interest, but only if the aggregateIndebtedness secured by such Security Interests permitted underthis sub-paragraph (g) does not at any time exceed £25,000,000or its equivalent;means, at any time, a Subsidiary of the Parent, the EBITDA orturnover of which, or the EBITDA or turnover of a direct or indirectSubsidiary of which, then equals or exceeds 5% of the consolidatedEBITDA or turnover of the Group. For this purpose: (a) the EBITDAor turnover of a Subsidiary of the Parent will be determined from itsfinancial information (unconsolidated if it has Subsidiaries) upon54

which the latest audited financial statements of the Group have beenbased; (b) if a Subsidiary of the Parent becomes a member of theGroup after the date on which the latest audited financial statementsof the Group have been prepared, the EBITDA and turnover of thatSubsidiary will be determined from its latest financial statements; (c)the EBITDA and turnover of the Group will be determined from itslatest audited financial statements, adjusted (where appropriate) toreflect the EBITDA and turnover of any company or businesssubsequently acquired or disposed of; and (d) if a PrincipalSubsidiary disposes of all or substantially all of its assets to anotherSubsidiary of the Parent, it will immediately cease to be a PrincipalSubsidiary and the other Subsidiary (if it is not already) willimmediately become a Principal Subsidiary; the subsequent financialstatements of those Subsidiaries and the Group will be used todetermine whether those Subsidiaries are Principal Subsidiaries ornot. If there is a dispute as to whether or not a company is a PrincipalSubsidiary, a certificate of two directors of the Parent (whether or notaddressed to the Trustee) will be, in the absence of manifest error,conclusive;“Redemption Shares”“Relevant Date”“Relevant Event”“Relevant Indebtedness”“Relevant Stock Exchange”“securities”has the meaning ascribed to it in the Articles of the Issuer;in respect of any Bond or Coupon, whichever is the later of (i) thedate on which such payment in respect of it first becomes due, and (ii)if the full amount payable has not been received by the PrincipalPaying, Conversion and Exchange Agent or the Trustee on or prior tosuch due date, the date on which, the full amount having been soreceived, notice to that effect shall have been given to theBondholders in accordance with Condition 15;an offer made to all (or as nearly as may be practicable all)Shareholders (or all (or as nearly as may be practicable all) suchShareholders other than the offeror and/or any associate of the offeror(as defined in Section 430E(4) of the Companies Act 1985, or anymodification or re-enactment thereof)), to acquire the whole or anypart of the issued ordinary share capital of the Parent or if any personproposes a scheme with regard to such acquisition and (such offer orscheme having become or been declared unconditional in all respects)the Parent becomes aware that, other than in circumstancesconstituting an Excluded Relevant Event, the right to cast more than50% of the votes which may ordinarily be cast on a poll at a generalmeeting of the Parent has or will become unconditionally vested inthe offeror and/or such associates;indebtedness in the form of, or represented by, bonds, notes or othersecurities which are, or are capable of being, quoted, listed or dealt inon any stock exchange or recognised securities market;at any time, in respect of the Ordinary Shares, the Official List of theUK Listing Authority and/or, as the context requires, the market forlisted securities of the London Stock Exchange or, if the OrdinaryShares are not at that time so listed, the principal stock exchange orsecurities market on which the Ordinary Shares are then listed orquoted or dealt in;includes, without limitation, shares in the share capital of the Parent;“Securitisation” any securitisation, asset-backed financing or like arrangement,payments under or in respect of which are secured by a SecurityInterest over or in connection with an asset or assets owned by anymember of the Group, or which were owned by any member of theGroup immediately prior to that transaction;55

“Settlement Shares”“Share Exchange Call”“Shareholders”“Subsidiary”“subsidiary undertaking”“UK Listing Authority”“Unclassified Shares”“Volume Weighted Average Price”has the meaning ascribed to it in Condition 7(g)(i);has the meaning ascribed to it in the Articles of the Issuer;the holders at any given time of Ordinary Shares;any subsidiary or subsidiary undertaking within the meaning ofSection 736 of the Companies Act 1985;shall have the meaning given to it by Section 258 of the CompaniesAct 1985 (but, in relation to the Parent, shall exclude any undertaking(as defined in the Companies Act 1985) whose accounts are notincluded in the then latest published audited consolidated accounts ofthe Parent, or (in the case of an undertaking which has first become asubsidiary undertaking of a member of the Group since the date as atwhich any such audited accounts were prepared) would not have beenso included or consolidated if it had become so on or before thatdate);the Financial Services Authority in its capacity as competent authorityunder the Financial Services and Markets Act 2000; andunclassified shares in the share capital of the Issuer.in respect of an Ordinary Share on any dealing day, the order bookvolume-weighted average price of an Ordinary Share appearing on orderived from Reuters page EMI.L (or such other source as shall bedetermined to be appropriate by an Independent Financial Adviser) onsuch dealing day, provided that if any dividend or other entitlement inrespect of the Ordinary Shares is announced on or prior to therelevant date for determining such Volume Weighted Average Pricein circumstances where the record date or other due date for theestablishment of entitlement in respect of such dividend or otherentitlement shall be on or after such relevant date and if on suchdealing day the price determined as provided above is based on aprice ex-dividend or ex-any other entitlement, then such price shall beincreased by an amount equal to the amount of any such dividend orother cash entitlement or, as the case may be, the Fair Market Valueof any entitlement or dividend (where that is other than cash) as at thedate of announcement of such entitlement or dividend per OrdinaryShare (excluding, in the case of a dividend in cash, any associated taxcredit and less the tax (if any) falling to be deducted on paymentthereof to a resident of the United Kingdom).For the purposes of Conditions 6 and 9 only, (a) references to the “issue” of Ordinary Shares shall include thetransfer and/or delivery of Ordinary Shares by the Parent or any of its Subsidiaries, whether newly issued andallotted or previously existing, and (b) Ordinary Shares held by the Parent or any of its Subsidiaries shall not beconsidered as or treated as “in issue”.56

SUMMARY OF PROVISIONS RELATING TO BONDS WHILE REPRESENTED BYTHE GLOBAL BONDSThe Bonds will be represented initially by the temporary Global Bond, in bearer form, without interest coupons,which will be deposited with a common depositary for Euroclear and Clearstream, Luxembourg. The temporaryGlobal Bond will be exchangeable on or after 11 November 2003 for the permanent Global Bond (being,together with the temporary Global Bond, the “Global Bonds”), in bearer form, without interest coupons, uponcertification as to non-US beneficial ownership in the form set out in the temporary Global Bond. The permanentGlobal Bond will be exchangeable for definitive Bonds with Coupons attached only in the limited circumstancesspecified therein.Bonds and Coupons will bear the following legend, “Any United States person (as defined in the United StatesInternal Revenue Code) who holds this obligation will be subject to limitations under the United States incometax laws, including the limitations provided in Sections 165(1) and 1287(a) of the Internal Revenue Code”.The temporary Global Bond and the permanent Global Bond contain provisions which apply to the Bonds whilethey are in global form, some of which modify the effect of the terms and conditions of the Bonds set out in thisOffering Circular. The following is a summary of certain of those provisions as they will apply to each of theBonds.1. ExchangeThe permanent Global Bond will be exchangeable in whole but not in part (free of charge to the holder) fordefinitive Bonds in bearer form, only (i) if either Euroclear or Clearstream, Luxembourg is closed for businessfor a continuous period of 14 days (other than by reason of holiday, statutory or otherwise) or announces anintention permanently to cease business or does in fact do so and in any such case, no alternative clearing systemsatisfactory to the Trustee is available; or (ii) if the Issuer would suffer a disadvantage as a result of a change inlaws or regulations (taxation or otherwise) or as a result of a change in the practice of Euroclear or Clearstream,Luxembourg which would not be suffered were the Bonds in definitive form and a certificate to such effectsigned by two Directors of the Issuer is given to the Trustee. Thereupon (in the case of (i) above) the holder ofthe permanent Global Bond, acting on the instructions of (an) Accountholder(s) (as defined below) or theTrustee, may give notice to the Issuer, and (in the case of (ii) above), the Issuer may give notice to the Trusteeand the Bondholders, of its intention to exchange the permanent Global Bond for definitive Bonds on or after theExchange Date (as defined below).On or after the Exchange Date, the holder of the permanent Global Bond may or, in the case of (ii) above, shallsurrender the permanent Global Bond to or to the order of the Principal Paying, Conversion and Exchange Agentin exchange for the permanent Global Bond, the Issuer will deliver, or procure the delivery of, an equal aggregateprincipal amount of definitive Bonds in bearer form (having attached to them all Coupons in respect of interestwhich has not already been paid on the permanent Global Bond), security printed in accordance with anyapplicable legal, listing authority or stock exchange requirements and in or substantially in the form set out in theTrust Deed. On exchange of the permanent Global Bond, the Issuer will procure that it is cancelled.“Exchange Date” means a day specified in the notice requiring exchange falling not less than 60 days after thaton which such notice is given and on which banks are open for business in the city in which the specified officeof the Principal Paying, Conversion and Exchange Agent is located and (except in the case of (ii) above) in thecity in which the relevant clearing system is located.2. PaymentsOn and after 11 November 2003, no payment will be made on the temporary Global Bond unless exchange for aninterest in the permanent Global Bond is improperly withheld or refused. Payments of principal, and interest inrespect of Bonds represented by a Global Bond will, subject as set out below, be made against presentation forendorsement and, if no further payment falls to be made in respect of the Bonds, surrender of such Global Bondto the order of the Principal Paying, Conversion and Exchange Agent or such other Paying, Conversion andExchange Agent as shall have been notified to the Bondholders for such purposes. A record of each paymentmade will be endorsed on the appropriate schedule to the relevant Global Bond by or on behalf of the PrincipalPaying, Conversion and Exchange Agent, which endorsement shall be prima facie evidence that such paymenthas been made in respect of the Bonds. Payments of interest on the temporary Global Bond will be made onlyupon certification of non-US beneficial ownership unless such certification has already been made.57

3. NoticesSo long as all of the Bonds are represented by one or both of the Global Bonds and such Global Bond(s) is/areheld on behalf of Euroclear and/or Clearstream, Luxembourg, notices to Bondholders may be given by deliveryof the relevant notice to Euroclear and/or Clearstream, Luxembourg (as the case may be) for communication tothe relevant Accountholders (as defined below) rather than by publication as required by Condition 15 providedthat, so long as the Bonds are listed by the UK Listing Authority, such authority so agrees. Any such notice shallbe deemed to have been given to the Bondholders on the second day after the day on which such notice isdelivered to Euroclear and/or Clearstream, Luxembourg (as the case may be) as aforesaid.4. AccountholdersSo long as all of the Bonds are represented by one or both of the Global Bonds and such Global Bond(s) is/areheld on behalf of Euroclear and/or Clearstream, Luxembourg, each person who is for the time being shown in therecords of Euroclear and/or Clearstream, Luxembourg as the holder of a particular principal amount of suchBonds (each an “Accountholder”) (in which regard any certificate or other document issued by Euroclear and/orClearstream, Luxembourg as to the principal amount of such Bonds standing to the account of any such personshall be conclusive and binding for all purposes) shall be treated as the holder of such principal amount of suchBonds for all purposes (including for the purposes of any quorum requirements of, or the right to demand a pollat, meetings of Bondholders) other than with respect to the payment of principal and interest on such Bonds, theright to which shall be vested, as against the Issuer, the Parent and the Trustee, solely in the bearer of the relevantGlobal Bond in accordance with and subject to its terms and the terms of the Trust Deed. Each Accountholdermust look solely to Euroclear or Clearstream, Luxembourg, as the case may be, for its share of each paymentmade to the bearer of the relevant Global Bond.5. PrescriptionClaims against the issuer in respect of principal and interest on the Bonds represented by a Global Bond will beprescribed after 10 years (in the case of principal) and five years (in the case of Interest) from the Relevant Date(as defined in Condition 21).6. CancellationCancellation of any Bond represented by a Global Bond and required by the Conditions of the Bonds to becancelled following its redemption or purchase will be effected by endorsement by or on behalf of the PrincipalPaying, Conversion and Exchange Agent of the reduction in the principal amount of the relevant Global Bond onthe relevant schedule thereto.7. Euroclear and Clearstream, LuxembourgReferences herein to Euroclear and/or Clearstream, Luxembourg shall be deemed to include references to anyother clearing system approved by the Trustee.8. Put OptionThe Bondholders’ put option in Condition 7(c) may be exercised by the holder of the Global Bond giving noticeto the Principal Paying, Conversion and Exchange Agent of the principal amounts of Bonds in respect of whichthe option is exercised and presenting the Global Bond for endorsement of exercise within the time limitsspecified in Condition 7(c).58

USE OF PROCEEDSThe net proceeds of the issue of the Bonds are expected to amount to approximately US$236 million afterdeduction of commissions and expenses incurred in connection with the issue of the Bonds. These proceeds willbe used for general corporate purposes including the repayment of existing debt, part of which was used to fundcertain acquisitions.59

DESCRIPTION OF THE ISSUERHistory and BusinessEMI Group Finance (Jersey) Limited, the Issuer, is a direct wholly-owned subsidiary of the Parent and wasincorporated as a public company with limited liability in Jersey under the Companies (Jersey) Law 1991, asamended, with registered number 85986, on 9 September 2003. The Issuer has no subsidiary undertakings. TheIssuer’s powers include the lending of monies, the issue of shares, the borrowing of monies and the issue of debtsecurities. These powers are not restricted by the Issuer’s Memorandum and Articles of Association nor by theCompanies (Jersey) Law 1991.The Issuer has not engaged in any activities other than those incidental to its formation and the authorisation ofthe issue of the Bonds, the adoption of the Memorandum and Articles of Association containing the terms of thePreference Shares and an agreement to guarantee the due and punctual payment of sums due from the Parentunder the Senior Notes, its revolving credit facility and certain other indebtedness. The Issuer’s only activitieswill be the issue of the Bonds and the lending of the proceeds of the issue of the Bonds to the Parent under a loanagreement between the Issuer and the Parent dated on or around 2 October 2003 (the “Loan Agreement”), theissue of Preference Shares upon the exercise of Conversion Rights, the exchange of such Preference Shares forOrdinary Shares, all matters reasonably incidental to the issue of the Bonds and the proposed guarantees to begiven by it.The Issuer’s registered office is located at 22 Grenville Street, St. Helier, Jersey, JE4 8PX.DirectorsThe directors of the Issuer and their respective business addresses and principal activities or business occupationsare as follows:Name Business Address FunctionDuncan John Timothy Bratchell .........................Charles Patrick Ashcroft ...............................Christopher John Ancliff ...............................27WrightsLane,London W8 5SW27WrightsLane,London W8 5SW27WrightsLane,London W8 5SWDirector, Tax and TreasuryCompany Secretary andGroup General CounselAssociate General CounselDuncan Bratchell, Charles Ashcroft and Christopher Ancliff are employees of the Parent and none of themreceive remuneration from the Issuer for their services. The directors do not hold any direct, indirect, beneficialor economic interest in any of the shares of the Issuer.The directors of the Issuer may engage in other activities and have other interests which may conflict with theinterests of the Issuer. As a matter of Jersey law, each director is under a duty to act honestly and in good faithwith a view to the best interests of the Issuer, regardless of any other directorships he may hold.60

Directors’ InterestsSave as set out below, no director has any interest in the promotion of, or any property acquired or proposed to beacquired by, the Issuer. Duncan Bratchell, Charles Ashcroft and Christopher Ancliff have beneficial interests inthe Ordinary Shares of the Parent, including interests in options under its employee share schemes, as set outbelow:Beneficially heldOrdinary SharesAwards of Ordinary Sharesunder Incentive PlansNon-contingent ContingentC J Ancliff .............................................. 3,569 0 0CPAshcroft............................................. 0 0 272,055D J T Bratchell ........................................... 7,623 0 85,336Notes:(i) The table assumes full vesting of Performance Share Awards based on the achievement of performance targets. The table also includespotential matching share awards in respect of awards of Ordinary Shares which have been or could be deferred.(ii) The Trustee of the EMI Group General Employee Benefit Trust holds 4,133,124 Ordinary Shares (less than 1% of the issued sharecapital). The Issuer’s directors are deemed to be interested in these Ordinary Shares.Date grantedExerciseprice (p)Number ofshares underoptionExerciseperiod fromExerciseperiod toC J Ancliff .......................... 10December 1999 579.300 3,883 10.12.02 9.12.0915 December 2000 565.800 2,783 15.12.03 14.12.1014 December 2001 346.650 6,310 14.12.04 13.12.1126 November 2002 160.050 25,000 26.11.05 25.11.1219 June 2003 (ii) 96.000 9,635 1.9.06 28.2.0714 July 2003 119.250 110,357 14.7.06 13.7.13CPAshcroft ........................ 6June1997 575.000 8,728 6.6.00 5.6.075 June 1998 510.000 9,324 5.6.01 4.6.0821 June 2002 243.300 369,913 21.6.05 20.6.1219 June 2003 (ii) 96.000 16,588 1.9.08 28.2.0914 July 2003 119.250 454,671 14.7.06 13.7.13D J T Bratchell ...................... 22July1994 534.000 9,600 22.7.97 21.7.0425 August 1995 747.000 8,500 25.8.98 24.8.0523 August 1996 734.500 9,860 23.8.99 22.8.066 June 1997 575.000 12,694 6.6.00 5.6.075 June 1998 510.000 5,591 5.6.01 4.6.0821 June 2002 243.300 112,207 21.6.05 20.6.1219 June 2003 (ii) 96.000 16,588 1.9.08 28.2.0914 July 2003 119.250 137,917 14.7.06 13.7.13Notes:(i) Exercise of options is normally subject to the achievement of performance criteria.(ii) Options granted under the EMI Group Savings-Related Share Option Scheme, the exercise of which is not subject to the achievement ofperformance criteria.Save as disclosed above, none of the directors of the Issuer, nor any persons connected with any of them, has anyinterest in the share capital of the Parent.Corporate AdministrationMourant & Co. Capital (SPV) Limited will act as the Issuer’s administrator (the “Issuer Administrator”).Pursuant to the terms of the Issuer Administration Agreement to be dated on or about 1 October 2003 and enteredinto between the Issuer and the Issuer Administrator, the Issuer Administrator will perform in England variouscorporate administration and secretarial functions on behalf of the Issuer, including communications with61

Bondholders until termination of the Issuer Administration Agreement. In consideration of the foregoing, theIssuer Administrator will receive various fees payable by the Issuer at rates agreed upon from time to time, plusexpenses. The terms of the Issuer Administration Agreement provide that the appointment of the IssuerAdministrator shall terminate immediately upon the happening of any of certain stated events, including anybreach by the Issuer Administrator of its obligations under the Issuer Administration Agreement which is notremedied within 30 days after service of notice requiring it to be remedied.The Issuer Administrator will be subject to the overview of the Issuer’s board of directors. The IssuerAdministration Agreement may be terminated (other than as stated above) by either the Issuer or the IssuerAdministrator giving the other 90 days’ written notice.The Issuer Administrator’s principal office is 4 Royal Mint Court, London EC3N 4HJ.The company secretary of the Issuer is Mourant & Co. Secretaries Limited of 22 Grenville Street, St Helier,Jersey JE4 8PX.Financial StatementsThe accounting reference date of the Issuer is 31 March. The Issuer’s first financial period will end on 31 March2004. Since its incorporation, no financial statements of the Issuer have been prepared. The Issuer will publishannual financial statements which will be audited and will be available for collection by Bondholders duringusual business hours at the registered office of the Issuer and the office of the Issuer Administrator. The financialstatements of the Issuer will be prepared in accordance with United Kingdom generally accepted accountingprinciples. The Issuer has appointed Ernst & Young LLP as its initial auditors.Capitalisation and IndebtednessThe table below sets out the unaudited capitalisation and indebtedness of the Issuer as at the date of thisdocument, adjusted to reflect the issue of the Bonds:Issued and fullyAuthorisedpaid-upShare capital100 Founders’ Shares issued at a nominal value of £1 each ............. £1000 £100Unclassified Shares to be issued at a nominal value of US$1 each ....... US$ 1,500,000 —IndebtednessThe Bonds (before expenses) .................................... US$243,343,000 US$243,343,000The authorised share capital of the Issuer comprises 1,000 founders’ shares (“Founders’ Shares”) of £1.00nominal value each and 1,500,000 unclassified shares (“Unclassified Shares”) of US$1.00 nominal value each.100 Founders’ Shares have been issued fully paid and are beneficially owned by the Parent. The UnclassifiedShares may be issued either as Preference Shares to be issued at an agreed price of US$1,000 each (comprising anominal value of US$1.00 and a premium of US$999) on conversion of the Bonds or may be issued asredemption shares (“Redemption Shares”) to be issued at an agreed price of US$1,000 (comprising a nominalvalue of US$1.00 and a premium of US$999) each for the purpose of providing funds for the redemption of suchPreference Shares.Since incorporation, other than entering into contracts in connection with the issue of the Bonds and anagreement to guarantee the due and punctual payment of sums due from the Parent under the Senior Notes and itsrevolving credit facility, the Issuer has not commenced business. No accounts have been prepared or approved bythe directors of the Issuer and no audit has been undertaken. No dividend has been declared or paid.Save as disclosed above, the Issuer does not have outstanding any borrowings or indebtedness in the nature ofborrowings, loan capital issued or created but unissued, term loans, bank overdrafts, liabilities under acceptancesor acceptance credits, mortgages, charges, hire purchase commitments, obligations under finance leases,guarantees or other material contingent liabilities.The Issuer is not, and has not, engaged in any legal or arbitration proceedings, nor are any such proceedingspending or threatened by or against it, which may have, or have had since its incorporation, a significant effect onthe financial position of the Issuer.Material ChangeSave as disclosed above, there has been no significant change in the financial or trading position, and no materialadverse change in the financial position or prospects, of the Issuer since the date of its incorporation.62

DESCRIPTION OF THE ISSUER’S SHARE CAPITALAND THE PREFERENCE SHARESThe terms of the Preference Shares are contained in the Articles of the Issuer. The Preference Shares will alsohave the benefit of the Deed Poll. The holders of the Preference Shares (the “Preference Shareholders”) will beentitled to the benefit of, will be bound by, and will be deemed to have notice of, all the provisions of the Articlesof the Issuer and the Deed Poll.The Preference Shares, which will be issued in registered form, will be issued upon conversion of the Bonds asdescribed in “Terms and Conditions of the Bonds – Conversion”. Words and expressions defined in “Terms andConditions of the Bonds” have the same meanings in this Description of the Issuer’s Share Capital and thePreference Shares, unless the context otherwise requires.The Articles of the Issuer contain provisions to the following effect:1. Share Capital(a)(b)The share capital of the Issuer is divided into Founders’ Shares and Unclassified Shares.The directors may, subject as provided in the Articles of the Issuer, issue any of the Unclassified Shares asPreference Shares at a nominal value of US$1.00 and a premium of US$999 each or Redemption Shares at anominal value of US$1.00 and an unlimited premium or shares of any class of share capital or, as the casemay be, shares of any other class of redeemable shares.2. Founders’ SharesFounders’ Shares shall only be issued to, or for the benefit of, the Parent or to, or for the benefit of, a personpreviously approved in writing by the Parent.3. Redemption SharesRedemption Shares shall only be issued to, or for the benefit of, the Parent or a person nominated by the Parentfor the purpose of providing funds for the redemption of redeemable shares of any class.4. Preference SharesPreference Shares shall only be issued on conversion of Bonds pursuant to the Conditions of the Bonds and theterms of the Trust Deed and shall be issued at a price, credited as fully paid, of US$1,000 per Preference Share(the “Paid-up Value”), comprising a nominal value of US$1.00 and a premium of US$999.5. Dividends(a)Each Preference Share will on allotment, and subject to the availability of distributable profits, confer on theholder thereof a right to receive a fixed cumulative dividend at the rate of 5.25% per annum of the Paid-upValue payable from the Issue Date on 2 April and 2 October in each year, starting on 2 April 2004.The dividend payable in respect of each Preference Share for any period which is not a dividend period shallbe calculated on the basis of a 360 day year consisting of 12 months of 30 days each and in the case of anincomplete month, the number of days elapsed by reference to the same rate. Such dividends shall accruefrom day to day. Each Preference Share will cease to accrue dividends from and including its due date forredemption. No account will be taken of accrued dividends on an exchange pursuant to any Share ExchangeCall (as referred to in the Conditions of the Bonds).(b)(c)The cumulative dividends payable in respect of the Preference Shares shall be paid in priority to anydividend in respect of any other class of shares in the capital of the Issuer other than any such class thatranks pari passu with the Preference Shares as respects rights to dividends.The Preference Shares shall not confer any further right of participation in the profits of the Issuer.63

(d)(e)(f)The Founders’ Shares shall confer on the holders thereof the right to receive any profits of the Issueravailable for distribution, after the payment to the holders of the Preference Shares of their fixed cumulativedividend and after payment of any other preferential dividend on any other class of shares.No dividends shall be paid on Redemption Shares.The obligations of the Issuer to pay dividends are subject to applicable law in Jersey.6. CapitalOn a winding-up of the Issuer or other return of capital (other than a purchase or redemption of any PreferenceShare or any share of any other class of redeemable shares), the assets of the Issuer available for distribution shallbe applied in the following priority:(a)(b)(c)(d)(e)first, the Preference Shares shall carry the right (the “first right”), pari passu with the shares of any classhaving the like right, to (i) payment of the Paid-up Value thereof, together with a sum equal to any arrears oraccruals of the preferential dividend due in respect of such Preference Shares to be calculated to (butexcluding) the date when payment of the return of capital is made and to be payable irrespective of whetheror not such dividend has been declared or earned and (ii) the right to such part, if any, of the amountstanding to the credit of the share premium account of the Issuer at the date of commencement of suchwinding up or return of capital as, when aggregated with the amounts payable pursuant to (i) above, is (inthe opinion of a bank or investment bank of international repute in London) such as to be reasonablycomparable with rights to repayment which are general for fixed-dividend shares listed on the Official List;secondly, the Founders’ Shares shall carry the right to payment of the nominal amount paid up thereon;thirdly, the Redemption Shares shall carry the right to payment of the nominal amount paid up thereon;any surplus assets then remaining shall be distributed pari passu among the holders of the Founders’ Shares,in proportion to the amounts paid up thereon, up to (in the case of a winding-up only) a maximum amount ofUS$1,000,000 per Founders’ Share; andin the case of a winding-up of the Issuer only, any surplus assets then remaining shall be distributed rateablyamong the holders of the Founders’ Shares and the Preference Shares according to the nominal value oftheir respective holdings of such shares in the Issuer, provided that for these purposes the nominal value ofeach Preference Share shall be treated as equal to one-thousandth of the nominal value of a Founders’ Share.7. Redemption(a)(b)(c)Subject to paragraph 8 below, the Issuer shall redeem all the Preference Shares for cash at their Paid-upValue forthwith upon their respective issue and allotment, save that, where paragraph 10(a) below applies,any Preference Shares in respect of which the Share Exchange Call has been made or is deemed to havebeen made shall not be redeemed pursuant to the foregoing but shall be redeemed at their Paid-up Value atany time after the first transfer of the same into the name of the Parent or its nominee on any date specifiedby the holder for the time being in any notice (which may be a standing notice) given by the holder to theIssuer requiring such redemption either forthwith or on any subsequent date.On redemption of a Preference Share, the Issuer will cancel the Preference Share and such Preference Sharemay not be reissued or sold as a Preference Share but shall be available as an Unclassified Share for issue inaccordance with the Articles of the Issuer.The obligations of the Issuer to redeem shares are subject to applicable law in Jersey.8. Share Exchange CallIf Conversion and Share Exchange Rights are exercised or deemed to have been exercised in respect of theBonds, the Issuer will procure that the Preference Shares issued in respect thereof will be exchanged immediatelyfor Ordinary Shares on and with effect from the Conversion Date.A summary of the provisions of the Articles of the Issuer in this respect is set out in “Terms and Conditions ofthe Bonds”.64

9. Voting and General Meetings(a)(b)Founders’ Shares and Redemption Shares shall entitle the holders thereof to receive notice of and to attendand vote at every general meeting of the Issuer. Preference Shares shall entitle the holders thereof to receivenotice of general meetings of the Issuer but not to attend or vote thereat.Whenever the holders of shares are entitled to vote at a general meeting of the Issuer, on a poll every holderof Redemption Shares who (being an individual) is present in person or by proxy or (being a corporation) ispresent by representative or by proxy shall have one vote in respect of each such share registered in thename of such holder and every holder of Founders’ Shares who (being an individual) is present in person orby proxy or (being a corporation) is present by representative or by proxy shall have one million votes inrespect of each such share registered in the name of such holder.10. Transfers(a)(b)The Issuer shall procure that any Preference Share in respect of which the Share Exchange Call has been oris deemed to have been made shall forthwith upon allotment and issue of the same be transferred to theParent or its nominee in exchange for the issue to the holder thereof of that number of fully paid OrdinaryShares to which he is entitled upon the making of the Share Exchange Call. Any such transfer shall beeffected by the Issuer (or a person appointed for this purpose by the Issuer) as agent for the holder thereofand the Issuer (or a person appointed for this purpose by the Issuer) is authorised by such holder to executeall such documents and do all such things as may be necessary properly to effect the same, without any costor liability to, or any further action required by, the holder (save as provided in Condition 7(b)).Transfer of Preference Shares shall be effected by any instrument of transfer in common or usual form orsuch other form as may be approved by the board of directors of the Issuer. The transferor shall be deemedto remain the holder of a Preference Share until the name of the transferee is entered in the register inrespect of it. All instruments of transfer may be retained by the Issuer.11. Payments(a)(b)(c)(d)Payments in respect of a Preference Share shall be made by a US dollar cheque drawn on a branch of a bankin New York City and sent to the holder (or to the first-named of joint holders) of such Preference Share athis address appearing in the register of shareholders and at his risk.All payments in respect of the Preference Shares shall be made subject to the deduction of any taxation inthe United Kingdom or Jersey required or permitted by applicable law to be withheld or deducted at source.In determining amounts to be paid to Preference Shareholders, fractions of one cent will be rounded to thenearest cent (with 0.5 of a cent being rounded upwards).Any unclaimed dividend may be invested or otherwise made use of by the directors of the Issuer for thebenefit of the Issuer until claimed and any dividend or other sum payable on any Preference Sharesunclaimed after a period of 10 years from the date when it became due for payment shall be forfeited andshall revert to the Issuer and the payment by the directors of the Issuer of any unclaimed dividend or othersum payable on or in respect of a Preference Share into a separate account shall not constitute the Issuer atrustee in respect of it.12. Variation of Rights(a)Subject to the provisions of the Companies (Jersey) Law 1991, all or any of the rights for the time beingattached to any class of shares for the time being issued may from time to time (whether or not the Issuer isbeing wound up) be varied with the consent in writing of the holders of not less than two-thirds in nominalvalue of the issued shares of that class or with the sanction of an extraordinary resolution passed at aseparate general meeting of the holders of those shares. All the provisions of the Articles of the Issuer as togeneral meetings of the Issuer shall mutatis mutandis apply to any such separate general meeting, but so thatthe necessary quorum shall be two or more persons holding or representing by proxy not less than one-thirdof the issued shares of the class, that every holder of shares of the class shall be entitled on a poll to one votefor every share of the class held by him, that any holder of shares of the class present in person or by proxymay demand a poll and that at any adjourned meeting of the holders one or more holders present in personor by proxy (whatever the number of shares held by him or them) shall be a quorum.65

(b)(c)The rights attached to the Preference Shares shall be deemed to be varied by the creation or issue of anyshares ranking in priority to them as respects rights to dividends or to the payment of the Paid-up Valuethereof in a winding-up or reduction of capital.Subject to the provisions of paragraph 12(b) above, the rights conferred upon the holders of the shares ofany class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms ofissue of the shares of that class, be deemed to be varied by the creation or issue of further shares rankingpari passu therewith.66

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONSYou should read the following together with our consolidated financial statements and the notes to thosefinancial statements. We publish consolidated financial statements prepared in accordance with accountingprinciples generally accepted in the United Kingdom (“UK GAAP”). We maintain our accounting records andpublish our statutory financial statements under the Companies Act 1985 (the “Act”) and UK corporateregulations. This discussion includes forward-looking statements which, although based on assumptions that weconsider reasonable, are subject to risks and uncertainties which could cause actual events or conditions todiffer materially from those expressed or implied by the forward-looking statements. For a discussion of some ofthose risks and uncertainties please refer to the sections entitled “Forward-Looking Statements” and “RiskFactors”.OverviewWe are one of the largest music companies in the world based on turnover. Our business comprises twodivisions: Recorded Music (81.6% of group turnover and 63.5% of adjusted EBITDA in financial year 2003) andMusic Publishing (18.4% of group turnover and 36.5% of adjusted EBITDA in financial year 2003).RevenueOur Recorded Music business derives its revenues from the sale of music made available in a variety of formats,including CDs, cassettes, mini discs, DVD audio, super audio CDs, digital downloads and streams, distributedthrough a broad range of retail and wholesale outlets, including entertainment specialty stores, supermarkets,hypermarkets, mass merchants, electronics stores and online retailers. Our Recorded Music business sells:Š new releases from our current roster of artists;Š music from our high quality catalogue of recordings; andŠ compilations of successful recordings from both our catalogue and our current roster of artists.Our Music Publishing business derives its revenues from:Š mechanical royalties, primarily from the sale of music in CD format, but also from cassettes, onlinedownloads and items such as music boxes and player pianos (53% of Music Publishing revenue infinancial year 2003);Š performance royalties paid for the performance of a song on radio or television broadcasts, webcasts,cabarets, live concerts, sporting events, shops and restaurants (25% of Music Publishing revenue infinancial year 2003);Š synchronisation royalties, derived from the use of songs in visual works such as televisionprogrammes, films, advertisements, computer games or karaoke (14% of Music Publishing revenuein financial year 2003); andŠ other uses, which include ring tones, stage productions, sheet music, merchandise and music from ourbackground library (8% of Music Publishing revenue in financial year 2003).Components of ExpensesThe principal costs associated with our Recorded Music business encompass:Š recording or origination costs, which relate to the creation of the master recording in the studio aswell as the development of artwork related to the album or single, including cover art and liner notes;Š manufacturing costs, which include raw material costs, including packaging, and the cost of pressingthe CD, cassette or vinyl product, whether produced by us or by a third party;Š distribution costs, which include the costs of distributing manufactured product to wholesale andretail distribution outlets;Š royalty costs, which are payments to recording artists and producers for their creative work;Š copyright costs, which are the mechanical royalties paid to songwriters and music publishers for theuse of their copyrighted works;67

ŠŠmarketing and promotion costs, which include expenditures made to promote both the artists andtheir releases, as well as advertising, public relations and other promotional expenses, including toursupport and music video creation; andadministration costs, which include all other costs associated with the business, including generaloverhead, information technology, management and other administrative costs as well as costsassociated with our anti-piracy efforts.The principal costs associated with our Music Publishing business encompass:Š royalties paid to songwriters in respect of the income generated from the exploitation of their songcopyrights; andŠ administration costs, which include general overhead, information technology, management and otheradministrative costs.Factors affecting our resultsMarket Factors. Our results are generally impacted by the appeal of our recorded music repertoire and ourmusic publishing catalogue, together with the general economic and retail environment of the countries in whichwe operate.Factors that have recently impacted the music industry and, consequently, the financial results of our RecordedMusic business, include:Š the rate of overall growth or decline in the music industry;Š the prevalence of piracy, in both physical and digital forms;Š the quality of releases; andŠ the growth of other products that compete for the disposable income of consumers.Trends affecting the recorded music industry have a significant impact on our Music Publishing mechanicalroyalty segment as mechanical royalties are generated through the sale of soundcarrier products (such as CDs,cassettes, online downloads and other products). Mechanical royalties have traditionally accounted for asignificant portion (although less so in recent years) of the revenues of Music Publishing (53% in financial year2003; 55% in financial year 2002). Other factors that impact the financial results of our Music Publishingbusiness include:Š the popularity of our catalogue of songs;Š the diversity and quality of our portfolio of songwriters; andŠtrends that affect the end uses of our music compositions (which include uses in the radio, television,film and advertising businesses).We are a global company with strong local presences, which have become increasingly important as thepopularity of music originating from a country’s own language and culture has increased in recent years. Our mixof national and international recording artists and songwriters provides a significant degree of diversification forour music portfolio. However, our creative content does not necessarily enjoy universal appeal. As a result, ourresults can be impacted not only by general industry trends, but also by trends, developments or other events inindividual countries. For example, for financial year 2003, while we benefitted from stronger performance in ourRecorded Music business in the United Kingdom and North America, our Recorded Music business results wereimpacted by piracy, by a comprehensive restructuring in Europe, by management issues in Mexico, by severeeconomic problems in Venezuela and by the failure of local repertoire releases to perform well in Japan. Weexpect our half-year results for financial year 2004 to be adversely impacted as a result of a substantial decline inthe Japanese market, which led to an unusual level of returns across the industry in that territory. See “RiskFactors – Our business operations in some countries are subject to additional risks.”Release Schedule. Our net sales and operating income, like those of other companies in the music business, arelargely affected by our release schedule. We report results of operations semi-annually, and our results ofoperations in any reporting period may be materially affected by the timing of releases. Typically, the top sellingrelease in a year accounts for less than 5% of that year’s turnover and our ten best selling releases in a yearaccount for less than 20% of turnover in that year. Turnover generated from the exploitation of our musicpublishing catalogue tends to be relatively stable from period to period.68

Currency Fluctuations. Our results of operations are affected by fluctuations in various foreign currencyexchange rates due to the international scope of our operations, although this exposure in itself affords us adegree of natural hedging. In financial year 2003, approximately 85% of our turnover was generated incurrencies other than Sterling. The following table sets forth certain information concerning exchange rates forthe periods indicated for the major currencies in which we do business, in each case expressed in the currencyindicated per £1.00 (based on the Bloomberg Composite Rate):US Dollar ($) Euro (€) Japanese Yen (¥)Year Ended 31 March Year Ended 31 March Year Ended 31 March2001 2002 2003 2001 2002 2003 2001 2002 2003High ...................... 1.602 1.480 1.649 1.743 1.678 1.637 178.110 191.720 197.410Low....................... 1.399 1.374 1.430 1.557 1.579 1.447 149.630 166.480 179.930Average ................... 1.479 1.432 1.546 1.630 1.620 1.558 163.450 179.070 188.320Rate at end of period ......... 1.419 1.425 1.579 1.613 1.636 1.448 178.110 189.140 186.370Foreign currency exchange risk includes transaction exposure (the exposure arising from fluctuations in traderelatedcommitments denominated in foreign currencies) and translation exposure (the exposure arising from thetranslation of the reported value of consolidated turnover, expenses, assets and liabilities of world-widesubsidiaries denominated in foreign currencies to Sterling). Because most of our business is conducted at anational or regional level, our transaction exposure is relatively modest, with most revenues and the associatedcosts occurring in the same currency. Our translation exposure is mitigated by the geographically diverse natureof our global business. The spread of earnings from countries around the world serves as a natural hedge oncurrency movements. We also enter into foreign currency hedging arrangements to manage foreign currency risk.See “ – Foreign Currency and Interest Rate Fluctuations” and “Risk Factors – Unfavourable currency exchangerate fluctuations could adversely affect our results of operations.”The movement in exchange rates was a significant factor affecting the comparison of financial year 2002 andfinancial year 2003 results. In financial year 2003, the appreciation of Sterling, particularly against the US dollar,reduced turnover by approximately £64 million and resulted in an adverse translation effect of approximately£3.4 million on operating profit. In financial year 2002, exchange on translation reduced turnover by £18.5million, resulting in an adverse translation effect of £4.3 million on operating profit.Recent DevelopmentsReorganisation of Recorded Music DivisionDuring the past two years, in order to create a structure that was scaled to the smaller size of the industry and tobetter position ourselves to respond effectively and efficiently to new developments, we implemented acomprehensive reorganisation of our Recorded Music division. By streamlining our operations and consolidatingour back office functions throughout much of the world, from financial year 2001 to financial year 2003, wewere able to reduce headcount by 1,900 and generate £100 million in fixed cost savings (before acquisitions).Against a backdrop of lower sales, Recorded Music substantially improved its operating margins, driving itsunderlying profits up 81% and, for the first time in five years, generating a profit in the US Recorded Musicbusiness. Our objective was not only to reduce costs, but also to refocus on our core business by paring down ourartist roster by approximately 25% and exiting unprofitable operations and costly satellite labels.Balance Sheet RestructuringIn financial year 2003, we completed a significant balance sheet restructuring, increasing our weighted averagedebt maturity to 5.1 years, as compared to 2.7 years in the prior year, and divested passive interests in HMVGroup, Viva Media AG and other assets in order to focus on our core business. Together with the improvedoperating performance and cash management, the sale of these assets resulted in a reduction of net debt as at31 March 2002 to net debt as at 31 March 2003 of over £198 million, reducing our leverage to below three timesadjusted EBITDA, down from 4.4 times at the end of financial year 2002. Our commitment to debt reduction wasfurther evidenced by our decision to reduce our dividend by half in financial year 2002.HMV DisposalIn May 2002, the shares in our then retail joint venture, HMV Group, began trading on the London StockExchange in connection with a global public offering, and we reduced our stake to 14.5%. In November 2002, we69

sold our remaining 14.5% stake to institutional investors. Net proceeds from these sales, amounting to £209.5million, were used to reduce outstanding debt. As of May 2002, we ceased to consolidate the results of HMVGroup.Increase in Jobete StakeIn April 2003, we acquired an additional 30% in Jobete, a catalogue of hit Motown songs, for $109.3 million,bringing our total stake in the business to 80%. Under the agreement, we have granted the remaining 20%shareholder a put option on its stake in the business, which may be exercised in either April 2004 or April 2005.In the event that the remaining 20% shareholder declines to exercise its put option, we have been granted a calloption exercisable in October 2005. A price range of $75.1 million to $86.3 million will apply to either of theseoptions.Discussions with AOL Time Warner Inc.We announced on 22 September 2003 that we had entered into non-exclusive discussions with AOL TimeWarner Inc. with regard to a possible transaction involving the recorded music division of the Warner MusicGroup. Discussions are at a very preliminary stage and there is no assurance that they will result in an agreementacceptable to both parties. Any potential transaction would be subject to shareholder and regulatory approval.Critical Accounting Policies and Use of EstimatesOur discussion and analysis of financial condition and results of operations are based upon our consolidatedfinancial statements, which have been prepared in accordance with UK GAAP. The preparation of these financialstatements requires our management to make estimates and judgements that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis,we evaluate our estimates, including those related to bad debts, intangible assets, income taxes, andcontingencies and litigation. Historical experience and various assumptions that we believe to be reasonableunder the circumstances form the basis for making judgements about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differ from these estimates. We consider thatthe following critical accounting policies affect our more significant judgments and estimates used in thepreparation of our consolidated financial statements.Accounting for Advances to Artists, Writers and Repertoire OwnersOne area of judgement affecting our reported net income is management’s estimate of the recoverability ofcontractual advances on future royalties paid to artists, writers and repertoire owners. These advances are initiallycapitalised on our balance sheet to the extent our management believes them to be recoverable. This assessmentof recoverability is based upon the current and past popularity of the artists, the initial commercial acceptabilityof the product, the current and past popularity of the genre of music to which the product belongs, and projectedsales performance. Based on this information, management expenses the portion of such advances that it believesis not recoverable. Our policy is to provide at least 80% of the net account balance against all unproven artists.As sales are generated by the product against which an advance was made, we expense through cost of sales theportion of the capitalised advance which has been recouped. Management periodically reviews the recoverabilityof capitalised advances and will make a provision to the extent that it no longer believes an advance to berecoverable.Sales Returns and Uncollectible AccountsOne area of judgement affecting reported turnover and net income is management’s estimate of product sales thatwill be returned and the amount of receivables that will ultimately be collected. In determining the estimate ofproduct sales that will be returned, management analyses historical return patterns, current economic trends,changes in customer demand and acceptance of our products, as well as changes in our terms of trade. Based onthis information, management reserves a percentage of product sales that provide the customer with the right ofreturn. Similarly, management evaluates accounts receivables to determine if they will ultimately be collected. Inperforming this evaluation, significant judgements and estimates are involved, including an analysis of specificrisks on a customer-by-customer basis for larger accounts and customers, and an analysis of receivables ageingthat determines the percent that has historically been uncollected by aged category. Based on this information,management reserves an amount that is believed to be uncollectible.70

Accounting for PensionsAccounting for pensions and other post-retirement benefits involves judgement about uncertain events, including,but not limited to, discount rates, expected rate of return on plan assets, participation levels, salary increases andexpected healthcare cost trend rates.Under UK GAAP, actuarial valuations of our defined benefit pension schemes are required to be carried outevery three years. These actuarial valuations form the basis for the expense recorded in the profit and lossaccount, and are sensitive to the assumptions made by the actuaries. The latest actuarial valuation for our UKpension plan, our largest defined benefit plan, has commenced and is due to be completed by November 2003.The valuation is not expected to have a material impact on the results of operations in future years.Deferred TaxesThe determination of our obligation and expense for taxes requires an interpretation of tax law. We seekappropriate competent and professional tax advice before making any judgments on tax matters. Whilst webelieve that our judgements are prudent and appropriate, significant differences in our actual experience maymaterially affect our future tax charges. We recognise deferred tax assets and liabilities arising from timingdifferences where we have a taxable benefit or obligation in the future as a result of past events. We recorddeferred tax assets to the extent that we believe they are more likely than not to be realised. Should we determinethat we would be able to realise our deferred tax assets in the future in excess of our net recorded amount, anadjustment to the deferred tax assets would increase income in the period such determination was made.Carrying Value of Music CopyrightsMusic copyrights purchased prior to 1 April 1989 were written off against shareholders’ funds on acquisition.Copyrights acquired as a result of acquisitions on or after 1 April 1989 are capitalised as intangible assets in ourbalance sheet, and are amortised by equal annual amounts over not more than 20 years. Where a useful economiclife of up to 20 years has been adopted, copyrights are reviewed for impairment at the end of the first fullfinancial year following acquisition and in other periods if events or changes in circumstances indicate that thecarrying value may not be recoverable.Goodwill and Other Intangible Fixed AssetsUnder UK GAAP, goodwill acquired since 1 April 1998 and other intangible assets are capitalised and amortisedby equal annual amounts over not more than 20 years. At the end of the first full year following acquisition orwhere there are indications of possible impairment, we carry out a full impairment review. Any resultingimpairment loss could have a material impact on our financial condition and results of operations. The carryingvalue of goodwill and other intangible assets will continue to be reviewed annually for impairment and adjustedto the recoverable amount if required.Scope of ConsolidationOur consolidated financial statements include contributions from four types of entities:ŠŠŠŠfully consolidated entities, being entities in which we generally hold a voting interest of more than50% and include Toshiba-EMI and Jobete. Such entities are fully consolidated in our consolidatedaccounts. Third-party interests in these fully consolidated entities are reflected in minority interests;entities in which we hold an interest on a long-term basis and that are jointly controlled by us and oneor more other parties under a contractual arrangement. These entities are treated as joint ventures andare accounted for using the gross equity method. Our investment in HMV Group was the onlyinvestment to be reported in this manner in the reporting period;entities in which we have a participating interest sufficient to allow us to exercise significantinfluence are treated as associated companies and are accounted for using the equity method; andother contractual arrangements entered into with third parties for marketing purposes. Our share ofprofit is included within “Other operating income, net” in our consolidated profit and loss account.Included within this category are the collaborations entered into in certain countries to marketcompilation CDs under the “Now” brand.71

We have a significant number of inter-company transactions. The three key flows are:Š physical product manufactured by our manufacturing businesses are sold inter-company to our sellingentities who then sell on to third party customers;Š territories which sell recorded music product or songs for which the rights are owned by anothercompany in our group pay royalties inter-company to the rights owner; andŠ funding raised by a company in our group is often lent inter-company to another company in ourgroup.Consolidation entries are raised to net the offsetting balances arising from these inter-company transactions outof our consolidated accounts.Results of OperationsThe table below presents, for the periods indicated, certain statements of operations data (also expressed as apercentage of total group turnover (excluding HMV Group’s contributions)).Financial Year Ended 31 March2001* 2002 2003£ % £ % £ %(£ amounts in millions)Group Turnover (1)Recordedmusic ................................ 2,282.0 85.4 2,029.4 83.0 1,774.2 81.6Music publishing ............................... 390.7 14.6 416.4 17.0 401.2 18.4Group turnover ................................. 2,672.7 100.0 2,445.8 100.0 2,175.4 100.0Cost of sales ................................... (1,739.2) (65.1) (1,726.5) (70.6) (1,376.7) (63.3)Grossprofit.................................... 933.5 34.9 719.3 29.4 798.7 36.7Distribution costs ............................... (136.9) (5.1) (127.5) (5.2) (98.7) (4.5)Administration expenses ......................... (608.5) (22.8) (708.9) (29.0) (544.7) (25.0)Other operating income, net ....................... 49.4 1.8 16.1 0.6 31.1 1.4Group operating profit (loss) ...................... 237.5 8.9 (101.0) (4.1) 186.4 8.6Share of operating profit in joint venture ............. 34.4 1.3 34.3 1.4 0.4 0.0Share of operating profits (losses) in associatedundertakings ................................... 5.5 (0.2) (2.9) (0.1) 0.1 0.0Total operating profit (loss) ....................... (266.4) 10.0 (69.6) (2.8) 186.9 8.6Non-operating exceptional items ................... — — — — 209.7 9.6Profit(loss)beforefinancecharges ................. (266.4) 10.0 (69.6) (2.8) 396.6 18.2Finance chargesGroup (including associated undertakings) ........... (74.3) (2.8) (60.4) (2.8) (76.1) (3.5)Jointventure ................................... (29.3) (1.1) (22.8) (1.0) (1.2) (0.1)Totalfinancecharges ............................ (103.6) (3.9) (83.2) (3.4) (77.3) (3.6)Profit (loss) on ordinary activities before taxation ...... 162.8 6.1 (152.8) (6.2) 319.3 14.7Taxation on profit on ordinary activities ............. (70.9) (2.7) (38.2) (1.6) (83.2) (3.8)Profit (loss) on ordinary activities after taxation ....... 91.9 3.4 (191.0) (7.8) 236.1 10.9Minority interest ................................ (12.7) (0.5) (8.5) (0.3) (6.4) (0.3)Profit (loss) attributable to members of the HoldingCompany ..................................... 79.2 3.0 (199.5) (8.2) 229.7 10.6* Restated.(1) Excludes joint venture turnover (attributable to HMV Group) of £662.6 million, £707.9 million and £65.5 million, respectively. In May2002, we reduced our stake in HMV Group to 14.5% and ceased at that time to consolidate its results. In November 2002, we sold ourremaining stake in HMV Group.72

Financial Year Ended 31 March 2003Compared to Financial Year Ended 31 March 2002Group turnoverGroup turnover (excluding joint venture turnover) decreased from £2,445.8 million in financial year 2002 to£2,175.4 million in financial year 2003, a decline of £270.4 million, or 11.1%. The overall decrease included adecrease of £64.0 million from foreign currency translation. On a constant currency basis, the decrease wasentirely the result of a fall in sales of Recorded Music.Business segment turnoverRecorded Music turnover decreased 12.6% from £2,029.4 million in financial year 2002 to £1,774.2 million infinancial year 2003 due both to general industry forces, most notably a significant increase in both digital andphysical piracy, and specific actions undertaken in connection with our business, including the reduction of ourartist roster and exiting unprofitable operations and costly satellite labels. The decrease also reflected the shorttermdisruption in day-to-day operations caused by the extensive restructuring process, particularly inContinental Europe and at Virgin America, and by the lower than expected performance of some local repertoirereleases in Japan.The global music industry declined by almost 9% from financial year 2002 to financial year 2003. Industry sizein all geographic regions fell in the year, with the decline of 21% in Latin America the most significant. Of theten most significant countries, only France at 2.8% showed growth. Our share rose slightly in North America,Japan and in other parts of Asia, but fell in all other regions, resulting in an overall decline in world market sharefrom 13.4% in financial year 2002 to 12.6% in financial year 2003.Music Publishing turnover decreased 3.7% from £416.4 million in financial year 2002 to £401.2 million infinancial year 2003 due entirely to currency movements, particularly the weakening of the US dollar. On aconstant currency basis, music publishing turnover grew marginally. Of the Music Publishing turnover in 2003,53% (55% in 2002) was derived from mechanical royalties, 25% (24% in 2002) from performance royalties, 14%(13% in 2002) from synchronisation royalties and 8% (8% in 2002) from other uses.Geographic analysisThe following discussion of group turnover by region is based on the origin of the product. Revenue isrecognised in the region in which the business making the sale is located.The table below sets forth our turnover for financial year 2002 and financial year 2003 by region.£ amounts inmillionsFinancial Year Ended 31 March2002 2003Percentage ofgroup total£ amounts inmillionsPercentage ofgroup totalNorth America .......................... 826.3 33.8 706.1 32.5United Kingdom ......................... 338.9 13.9 330.9 15.2RestofEurope........................... 732.0 29.9 660.5 30.4Latin America ........................... 88.1 3.6 51.0 2.3Asia Pacific ............................. 439.8 18.0 409.9 18.8RestofWorld ........................... 20.7 0.8 17.0 0.8Total .................................. 2,445.8 100.0 2,175.4 100.0In North America, group turnover decreased by 14.5%. In Recorded Music, our share increased gradually overthe second half of the financial year, after a significant decline in the first half. Highlights included Norah Jones’eight Grammy awards and successful debut album releases from The Vines and Lisa Marie Presley at our Capitollabel. Music Publishing turnover on a constant currency basis was up by 2.7%, as gains in synchronisationincome were partly offset by declines in mechanical royalties.In the United Kingdom, group turnover decreased by 2.4%. The UK continues to be a major source of repertoirefor local and international exploitation and our business there has excelled in commercialising our catalogue. OurUK Music Publishing turnover grew 4.3%, reflecting an increase in both mechanical and performance incomedriven by our continued leadership position in the UK charts.73

In Continental Europe, group turnover decreased by 9.8%. Our Recorded Music business in Europe underwent acomprehensive restructuring, which took longer than anticipated to complete. Nonetheless, the businesscontinued to have strong sales and had notable successes in 2003 with a number of local repertoire releases,including albums from Renaud in France and Herbert Grönemeyer in Germany. Music Publishing performance inContinental Europe was mixed. Certain countries, notably Germany and Italy, were impacted by steep localindustry declines in recorded music. France countered that trend, reflecting the growth in its recorded musicindustry, and Benelux countries also generated revenue gains.In Latin America, group turnover decreased by 42.1%. In the Recorded Music business, Mexico experiencedsignificant setbacks resulting from piracy and poor local management, which is in the process of being replaced.In addition, our Venezuelan operations were closed because of the severe economic problems in that country. Atthe same time, however, the region’s most important country, Brazil, returned to profitability and we madeconsiderable progress in sales of Latin music in the US.In the Asia Pacific region (including Japan), group turnover decreased by 6.8%. In Japan, we had some importantRecorded Music successes, notably with Utada Hikaru’s third album Deep River, which sold over 4 millioncopies in Japan alone, but nonetheless overall results were somewhat disappointing as certain significant localrepertoire releases did not perform as well as expected, particularly in the fourth quarter. Our Music Publishingbusiness, by contrast, had a strong year in Japan. Sales increased by over 5%, in large part due to theperformance of Utada Hikaru’s Deep River. We had Recorded Music success in Asia outside of Japan as well,with our first profit in a number of years. We are pursuing an aggressive strategy to improve both our share andour profitability in this region, including a push into China with investment in local repertoire, a territory whichwe believe offers potential despite severe piracy.Cost of salesCost of sales decreased from £1,726.5 million in financial year 2002 to £1,376.7 million in financial year 2003, adecline of £349.8 million, or 20.3%. As a percentage of group turnover, cost of sales decreased year-on-year withcost of sales as a percentage of group turnover of 63.3% in financial year 2003 compared to 70.6% in financialyear 2002. This reflected increased manufacturing efficiency and tighter control over origination and marketingand promotional expenditures, as well as a reduced charge in respect of artist royalty advances, as the portfoliowas realigned towards the more proven artists, whose advances we believe are more likely to be recouped.Distribution costs and administration expensesDistribution costs decreased from £127.5 million in financial year 2002 to £98.7 million in financial year 2003, adecline of £28.8 million, or 22.6%. Distribution costs decreased slightly as a percentage of sales at 4.5% infinancial year 2003 compared to 5.2% in financial year 2002. Administration expenses decreased from £708.9million in financial year 2002 to £544.7 million in financial year 2003, a decline of £164.2 million, or 23.2%. Asa percentage of turnover, administration expenses decreased from 29.0% to 25.0%. The savings in each casewere the consequence of the reorganisation implemented in late financial year 2002 and early financial year2003. In particular, support functions across business units in the same country were in many cases combined.Group operating profit (before exceptionals and amortisation) (“adjusted EBITDA”)Adjusted EBITDA increased from £190.9 million in financial year 2002 to £254.0 million in financial year 2003(with group operating profit (loss) increasing from a loss of £101.0 million to profit of £186.4 million), resultingfrom the impact of the cost savings implemented in Recorded Music over the financial year, together withadditional margin improvements in that business and a continuing solid performance from Music Publishing.In Recorded Music, stronger performances in the United Kingdom and North America offset weaker results inContinental Europe and Asia to result in an increase in adjusted EBITDA of 81% to £150.5 million in financialyear 2003 from £83.1 million in financial year 2002. In addition to the impact of the cost saving measures, theimprovement was partially the result of our concentration on profitable, sustainable sales from artists with longtermpotential. We experienced considerable global success from such artists in 2003, including the debut albumfrom Norah Jones, Come Away With Me (about 12 million copies worldwide in financial year 2003, and 15million copies since release), A Rush Of Blood To The Head from UK band Coldplay and Robbie Williams’Escapology (almost six million copies worldwide each), and the double album of definitive greatest hits from theRolling Stones (over five million copies). In addition, we had regional successes from artists Utada Hikaru,Renaud and Herbert Grönemeyer, whose album Mensch sold over three million copies to become the highest74

selling German language album ever. A reconciliation of Recorded Music adjusted EBITA to Recorded Musicoperating profit (loss) as calculated under UK GAAP is provided below:Financial Year Ended31 March2002 2003£ £(in millions)Recorded Music adjusted EBITA ....................................... 83.1 150.5Amortisation of music copyrights ....................................... (2.5) (2.6)Amortisation of goodwill ............................................. (6.0) (3.9)Operating exceptional items ........................................... (226.6) (17.7)Recorded Music operating profit /(loss) .................................. (152.0) 126.3In Music Publishing, adjusted EBITA decreased by 4.0% from £107.8 million in financial year 2002 to £103.5million in financial year 2003. This decrease resulted from currency movements, in particular weakness in theUS dollar, and from a slight increase in corporate charges. However, on a constant currency basis, and excludingcorporate charges, Music Publishing adjusted EBITA grew marginally from £110.6 million in financial year2002 to £111.0 million in financial year 2003. A reconciliation of Music Publishing adjusted EBITA to MusicPublishing operating profit as calculated under UK GAAP is provided below:Financial Year Ended31 March2002 2003£ £(in millions)Music Publishing adjusted EBITA ....................................... 107.8 103.5Amortisation of music copyrights ........................................ (41.0) (36.2)Amortisation of goodwill .............................................. — —Operating exceptional items ............................................ (15.8) (7.2)Music Publishing operating profit ....................................... 51.0 60.1Finance chargesGroup finance charges increased by £15.7 million to £76.1 million in financial year 2003 from £60.4 million infinancial year 2002, largely reflecting higher interest rates following the restructuring of debt into longer-terminstruments, which more than offset the impact from the substantial reduction of overall debt levels.ExceptionalsIn financial year 2003, we incurred a non-cash charge of £24.9 million arising from the write-down of certainassets. The assets concerned were music copyrights (£6.5 million), goodwill (£12.1 million), current assetinvestments (£2.5 million) and investments in own shares held in the Employee Benefit Trust (£3.8 million). Thiswrite-down is reported as an operating exceptional cost. This was in contrast to financial year 2002, in which weincurred an operating exceptional charge of £242.4 million relating to restructuring and reorganisation costs,mainly within Recorded Music. In that same period, HMV Group also incurred exceptional costs, of which ourshare was £12.4 million.We benefited from a non-operating exceptional net profit of £209.7 million in financial year 2003, largely arisingfrom the disposal of our stakes in HMV Group and Viva Media, offset by modest losses relating to certain otherdisposals.TaxationThe underlying group tax rate before amortisation and exceptional items fell to 25.3% in financial year 2003from 30% in financial year 2002. This reduction is primarily related to the return to profitability of our USRecorded Music business, which has brought forward tax losses available for offset, and to a lesser extent, afavourable tax ruling relating to taxes paid for prior years as well as lower profits in Japan, our highest taxpayingterritory.75

Minority interestsThe minority interest share of profit after taxation (attributable to investments in Toshiba-EMI Ltd, Jobete MusicCo., Inc. and others) decreased from £8.5 million to £6.4 million, as a result of the decrease in profitability of ourJapanese Recorded Music business in the year.Profit (loss) attributable to members of the holding company and earnings per shareFor the reasons stated above, profits attributable to members of the holding company increased from a loss of£199.5 million in financial year 2002 to a profit of £229.7 million in financial year 2003. Adjusted dilutedearnings per share increased by 3.8p from 11.8p for financial year 2002 to 15.6p for financial year 2003. See“Selected Consolidated Historical Financial and Other Data” for a reconciliation of adjusted diluted earnings pershare to profits attributable to members of the holding company as reported under UK GAAP.Financial Year Ended 31 March 2002Compared to Financial Year Ended 31 March 2001 (restated)Group turnoverGroup turnover (excluding joint venture turnover) decreased by £226.9 million, or 8.5%, from £2,672.7 millionin financial year 2001 to £2,445.8 million in financial year 2002. The overall decrease included a decrease of£18.5 million from adverse foreign currency translation. The underlying decrease was the result of poor tradingin Recorded Music. Music Publishing generated turnover growth and showed increases in all categories ofincome.Business segment turnoverRecorded Music turnover decreased 11.1% from £2,282.0 million in financial year 2001 to £2,029.4 million infinancial year 2002 due to general industry forces, including the effects of digital and physical piracy,underperformance of key releases and significant management issues in the United States. Disruption from thefirst phase of the restructuring process in Continental Europe and at Virgin America and the postponement of anumber of significant releases in Japan from financial year 2002 to financial year 2003 also contributed to thedecline.The global music industry declined by 6% in value terms from financial year 2001 to financial year 2002, withsignificant variations in market performance around the world. The North American, Asian (outside of Japan)and European territories were down moderately, at 3.3%, 5.5% and 2.3% respectively. Japan and Latin Americaexperienced more dramatic declines at 13.4% and 24.2% respectively. Our share fell in all regions, resulting in adecline in world share from 14.1% in financial year 2001 to 13.4% in financial year 2002.Music Publishing turnover increased by 6.6% from £390.7 million in financial year 2001 to £416.4 million infinancial year 2002 based on increases in our share and strong US revenue, with growth in each of themechanical, performance and synchronisation royalties segments.Geographic analysisThe table below sets forth our turnover for financial year 2002 and financial year 2001 by region, restated toreflect more accurately the way our business is currently managed.£ amount inmillionsFinancial Year Ended 31 March2001 2002Percentage ofgroup total£ amount inmillionsPercentage ofgroup totalNorth America ............................ 886.5 33.2 826.3 33.8United Kingdom .......................... 338.8 12.7 338.9 13.9RestofEurope ............................ 753.4 28.2 732.0 29.9Latin America ............................ 132.1 4.9 88.1 3.6Asia Pacific .............................. 539.9 20.2 439.8 18.0RestofWorld ............................ 22.0 0.8 20.7 0.8Total.................................... 2,672.7 100.0 2,445.8 100.076

In North America, group turnover decreased by 6.8%. Our Recorded Music share decreased only slightly, from10.8% to 10.4%, in an industry that fell 3.3%, but our performance was nonetheless disappointing. Thisprompted changes in our North American operations, including moving Virgin to New York to create an EastCoast label presence. By contrast, Music Publishing turnover increased 6.4% in North America in financial year2002, led by strong gains in both performance and synchronisation. Highlights of the year included the success ofAlicia Keys, whose debut album Songs in A Minor sold over five million copies in the US alone.Group turnover remained flat in the United Kingdom, while decreasing by 2.8% in Continental Europe. TheEuropean recorded music industry fell 2.3% in financial year 2002, compared with a broadly flat industry infinancial year 2001. This masked significant differences within the region, with large decreases in Germany,Italy, Portugal and Eastern Europe outweighing increases in the UK, France and Sweden. Our Recorded Musicshare decreased 0.3%, with significant losses in Italy, Denmark and Spain. UK Music Publishing turnoverincreased 10.5% as a result of strong gains in most income types, particularly performance revenues, based on a28.4% chart share. Music Publishing turnover elsewhere in Europe grew 6.3%, driven principally by excellentperformance in Germany, with a 33.6% share of the German Music Publisher Charts in 2001.In Latin America, group turnover decreased by 33.3%. Widely reported and particularly deep economicdifficulties, especially in Argentina, resulted in a 24.2% decrease in the music industry. Our Recorded Musicbusiness reacted swiftly to the decline by postponing or cancelling a number of releases and cutting costs sharply,which resulted in a decrease in our share from 16.1% to 13.8%. The results of Music Publishing were alsoadversely impacted by the general fall in the music industry.In the Asia Pacific region (including Japan), group turnover decreased by 18.5%. Recorded Music had adisappointing year in Japan, with share slipping to 10.2% from 11.2% in an industry that was down 13.4%. Anumber of significant releases, including one from local superstar Ringo Sheena, were postponed to financialyear 2003. Our Recorded Music share in Asia outside Japan fell from 8.3% in financial year 2001 to 7.5% infinancial year 2002. Music Publishing experienced successes in Japan with Enya and Utada Hikaru and goodresults from South East Asia, with a significant increase in revenue coming from ring tone deals.Cost of salesCost of sales decreased slightly from £1,739.2 million in financial year 2001 to £1,726.5 million in financial year2002, a decline of £12.7 million. As a percentage of group turnover, cost of sales increased year-on-year withcost of sales as a percentage of group turnover of 70.6% in financial year 2002 compared to 65.1% in financialyear 2001. The increase in the cost of sales percentage reflected higher charges for provisions for advances andan increase in the provision for product returns. The former was the result of weak trading in financial year 2002and the latter the non-recurrence in financial year 2002 of the one-off benefit in financial year 2001, fromchanged trading terms.Distribution costs and administration expensesDistribution costs decreased from £136.9 million in financial year 2001 to £127.5 million in financial year 2002,a decrease of £9.4 million, or 6.9%. Distribution costs increased slightly as a percentage of sales at 5.2% infinancial year 2002 compared to 5.1% in financial year 2001. Administration expenses increased from £608.5million in financial year 2001 to £708.9 million in financial year 2002, an increase of £100.4 million, or 16.5%.Administration expenses increased as a percentage of turnover to 29.0% in financial year 2002 from 22.8% infinancial year 2001. This percentage increase reflected a failure to reduce the overhead base in line with fallingturnover. The reorganisation process to remedy that was implemented late in financial year 2002.Group operating profit (before exceptionals and amortisation) (“adjusted EBITA”)Adjusted EBITA decreased 42.6% from £332.5 million in financial year 2001 to £190.9 million in financial year2002 (with group operating profit (loss) decreasing from profit of £237.5 million to a loss of £101.0 million),resulting from a decline in Recorded Music operating profits, as discussed below.In Recorded Music, adjusted EBITA decreased by 63.5% to £83.1 million in financial year 2002 from £227.5million in financial year 2001 as a result of broad declines in the global music market, primarily the result ofpiracy, disappointment in key releases and significant management issues in the United States. A reconciliation77

of Recorded Music adjusted EBITA to Recorded Music operating profit as calculated under UK GAAP isprovided below:Financial Year Ended31 March2001 2002£ £(in millions)Recorded Music adjusted EBITA ....................................... 227.5 83.1Amortisation of music copyrights ....................................... (3.0) (2.5)Amortisation of goodwill ............................................. (9.5) (6.0)Operating exceptional items ........................................... (36.6) (226.6)Recorded Music operating profit/(loss) ................................... 178.4 (152.0)In Music Publishing, adjusted EBITA increased by 2.7% to £107.8 million in financial year 2002 from £105.0million in financial year 2001 based on successes in the United Kingdom, Germany and Japan. A reconciliationof Music Publishing adjusted EBITA to Music Publishing operating profit as calculated under UK GAAP isprovided below:Financial Year Ended31 March2001 2002£ £(in millions)Music Publishing adjusted EBITDA ................................... 105.0 107.8Amortisation of music copyrights ..................................... (39.6) (41.0)Amortisation of goodwill ........................................... — —Operating exceptional items ......................................... (6.3) (15.8)Music Publishing operating profit ..................................... 59.1 51.0Finance chargesTotal finance charges decreased by £20.4 million to £83.2 million in financial year 2002 from £103.6 million infinancial year 2001, largely reflecting lower interest payable on bank overdrafts and loans. Net finance chargesdecreased by £13.9 million to £60.4 million in financial year 2002 from £74.3 million in financial year 2001,principally because of the effect of lower interest rates, which more than offset the impact of higher average debtlevels.ExceptionalsIn financial year 2002, we incurred an operating exceptional charge of £242.4 million arising from ourrestructuring and reorganisation activities, primarily within Recorded Music. These costs included a significantreduction in both employee headcount (approximately 20%) and the number of artists under contract(approximately 25%). Underlying our restructuring efforts was the consolidation of the non-creative resources ofour record labels and the creation of centralised national catalogue marketing units, with a particular focus on ouroperations in Europe and the United States. In addition, the exceptional charge included costs resulting from thesubstantial economic decline in the Latin American region. Also included were costs related to the closure of anumber of loss-making satellite labels and the write-down of certain assets, in particular goodwill.In financial year 2001, we incurred an operating exceptional charge of £42.9 million relating entirely totransaction costs incurred in connection with the proposed merger with Warner Music Group at that time.TaxationThe underlying group tax rate before amortisation and exceptional items and including HMV Group increased to 30%in financial year 2002 from 27.3% in financial year 2001. The rate increase occurred despite a substantial repayment ofAdvance Corporation Tax as a result of paying Foreign Income Dividends, and was the result of an adverse movementin the geographic mix of profits towards higher tax jurisdictions, the unavailability of tax relief on certain costs arisingin the year, and the inability to mitigate the higher HMV Group profits in financial year 2002.78

Minority interests.The minority interest share of profit after taxation (attributable to investments in Toshiba-EMI Ltd, Jobete MusicCo., Inc. and others) fell from £12.7 million to £8.5 million, reflecting the significant decrease in profitability ofour Japanese Recorded Music business.Profit (loss) attributable to members of the holding company and earnings per shareFor the reasons stated above, profits attributable to members of the holding company decreased from a profit of£79.2 million in financial year 2001 to a loss of £199.5 million in financial year 2002. Adjusted diluted earningsper share decreased by 10.1p to 11.8p in financial year 2002 from 21.9p in financial year 2001.Trading OutlookWe report our financial results on a semi-annual basis and we expect to publish our results for the six monthsended 30 September 2003 in November 2003. However, on 9 July 2003, at our annual general meeting, weprovided the following information to investors concerning our performance for the three months ended30 June 2003.We announced that recorded music sales outside Japan were well up on last year’s level. During the same period,we had an especially strong performance in our US recorded music business and solid underlying performance inmusic publishing. These results were obtained in spite of continuing weakness in the global recorded musicindustry. In particular, there has been a substantial decline in the Japanese market, leading to an unusual level ofreturns across the industry in that territory, which is likely to have an adverse impact on ourhalf-year results. See “Risk Factors – Our business operations in some countries are subject to additional risks.”Those results will also reflect, in line with our budget, differences in the timing of receipts in our musicpublishing business, which we expect to reverse in the second half of financial year 2004. Overall, we believethat the strategies we have in place should deliver full year results in line with our expectations, offsetting anyfirst half shortfall.In addition, we announced that we have a strong release schedule in recorded music and that we are continuing tofocus on generating profitable sales through effective marketing, tight cost management and high qualityreleases. In music publishing, our release schedule is also strong and we are making progress in our efforts tobuild upon our varied revenue streams to mitigate the impact of a weak recorded music market.We also announced that we remain at the forefront of industry initiatives to combat piracy in all its forms and wefeel that progress is being made. We are also actively supporting the development of legitimate online musicservices and the early results are encouraging.While market conditions remain challenging, we are optimistic that industry trends will improve in due courseand that we will perform strongly within that context.Liquidity and Capital ResourcesLiquidityOur primary source of liquidity is cash generated from operations. The following table sets forth cash flowmovements for the periods indicated:Financial Year Ended 31March2001* 2002 2003£ £ £(in millions)Net cash inflow from operating activities .............................................. 314.8 211.9 117.2Dividends received from associated undertakings ....................................... 0.3 0.7 0.1Net cash outflow from returns on investments and sourcing of finance ....................... (100.8) (62.0) (11.1)Taxes paid ...................................................................... (48.5) (22.3) (38.7)Net cash outflow from capital expenditure and financial investment ......................... (45.4) (42.4) (40.1)Net cash inflow (outflow) from acquisitions and disposals ................................ (14.7) (24.0) 185.4Equity dividends paid ............................................................. (125.2) (125.3) (29.4)Net cash inflow (outflow) before management of liquid resources and financing ............... (19.5) (63.4) 183.4)Net cash inflow (outflow) from management of liquid resources and financing ................ (33.7) 5.9 (153.8)Increase (decrease) in cash ......................................................... (53.2) (57.5) 29.6)* Restated.79

Net cash inflow from operating activities in financial year 2003, after £74.9 million of trading provisionscomprised mainly of restructuring and reorganisation provisions and an increase in working capital of £104.2million, was £117.2 million. Of this working capital movement, £54.5 million related to higher advances, in partdue to the postponement into financial year 2003 of advances to artists and writers that had been delayed as aresult of the reorganisation commenced in the prior year, and £40.4 million was attributable to higher debtors, theresult of the acceleration of our sales in the fourth quarter of financial year 2003. After normalising for theseactions, which were generally one-off in nature, our net cash flow from operations would be nearly identical toour adjusted EBITDA. This normalised view of conversion from adjusted EBITDA to cash at nearly 100% isconsistent with our view of our business when it is not subject to activities such as a restructuring.Our working capital requirements (excluding advances) are almost entirely driven by the phasing of sales. Absentchanges in phasing, our annual working capital movement would be broadly neutral. However, changes inphasing, particularly in the last quarter of the financial year, can result in significant movements as at the yearend balance sheet date.Net cash outflow from returns on investments and servicing of finance decreased from £62.0 million in financialyear 2002 to £11.1 million in financial year 2003, principally as a result of a decrease in interest paid from £68.8million in financial year 2002 to £12.8 million in financial year 2003, which includes a gain on a swap unwind of£55.6 million (see “— Capital Resources” below).Net cash outflow from capital expenditure and financial investment decreased slightly in financial year 2003, to£40.1 million from £42.4 million in financial year 2002. An increase in the purchase of tangible fixed assets(£68.5 million in financial year 2003 compared with £39.2 million in financial year 2002) was partially offset bya similar increase in the proceeds from the sale of fixed asset investments (to £35.6 million in financial year 2003from £0.1 million in financial year 2002). We expect that our capital expenditures for financial year 2004 will beat similar levels as in financial year 2003. A significant amount of these expenditures are associated with a threeyearinvestment programme to upgrade our information management systems, which we commenced this year.Largely as a result of the disposal of our stake in HMV Group and a decrease in equity dividends paid from£125.3 million in financial year 2002 to £29.4 million in financial year 2003, net cash inflow before managementof liquid resources and financing increased to £183.4 million in financial year 2003, compared with an outflow of£63.4 million in financial year 2002.Net cash outflow from management of liquid resources and financing decreased to £153.8 million in financialyear 2003 from an inflow of £5.9 million in 2002 as a result of an increase in loans repaid (£757.5 million infinancial year 2003; £458.6 million in financial year 2002). The net result was an increase in cash of £29.6million in financial year 2003, compared with a decrease in cash of £57.5 million in financial year 2002.After net proceeds from acquisitions, disposals and financial investments of £204.5 million, net capitalexpenditure of £59.2 million, tax paid of £38.7 million, net interest costs of £4.6 million (including a gain on aswap unwind), dividends paid of £35.9 million (including those to minorities) and currency translation gains andother movements of £14.8 million, net debt decreased by £198.1 million to £859.8 million.Capital ResourcesOur cash requirements for needs in excess of cash generated by operations are largely funded by borrowingsunder arrangements with commercial banks and debt raised in the capital markets. In each territory in which weoperate, local cash management and funding arrangements are established as appropriate to the financing needsof the local operations. The funding arrangements provided by banks may be on a committed or uncommittedbasis to the local operations, and the borrowings thereunder are usually guaranteed by us. We seek to havesufficient facilities available to cover 110% of anticipated peak net borrowings. Our main committed bankingfacilities are provided in the United Kingdom and the United States.As part of our balance sheet restructuring, a six year Sterling bond issued in May 2002 was increased in June2002 to £325 million, and in August 2002 a further $180 million was raised from a private placement of debtwith maturities of between seven and ten years. We used the net proceeds from the HMV Group disposal of£209.5 million and £35.6 million from the sale of fixed asset investments to repay and cancel part of the £1.3billion credit facility entered into in April 2002.Also in financial year 2003, following a review of derivative positions in the prevailing market conditions, weunwound a $500 million interest rate swap position. The original swap effectively switched the 8.375% fixedcoupon on our US dollar guaranteed notes issued in August 1999 to a floating interest rate. The swap unwind80

educed our overall interest rate risk. On the unwind, we received a cash payment of $86.2 million (£55.6million), representing the present value of the expected cash savings from the swap as determined by theexpected differential between US short- and long-term interest rates, discounted at the prevailing market rate. At31 March 2002 this swap position had a fair value of £21.0 million. The gain from the unwind will be amortisedover the remaining life of these notes, thus locking in the future interest cost benefit to be obtained from theswap.On 21 January 2003, Standard & Poor’s Ratings Services reduced our debt ratings from “BBB,” with a stableoutlook to “BBB-,” with a stable outlook. On 11 March 2003, Moody’s Investors Service reduced our debtratings from “Baa2” with a negative outlook to “Ba1” with a stable outlook. These decisions had no impact onour liquidity. However, at these ratings there will be a maximum annualised increase in interest charge ofapproximately £8 million, before tax relief, for financial year years ending after 31 March 2003. On 12September 2003, Standard & Poor’s Ratings Services confirmed our debt ratings of “BBB-,” but revised theoutlook to negative. Any future rating changes could further affect our interest charge.We intend to raise approximately €425,000,000 before expenses through the issue of Senior Notes due 2013. Inaddition, we have agreed with the lenders under our existing £1.3 billion senior revolving credit facility (sincereduced to £594.5 million) to enter into a new £250 million senior revolving credit facility provided that werepay the amounts outstanding under the existing facility, at which time the existing facility will be terminated.We expect to repay the amounts outstanding under the existing senior revolving credit facility, prepay a portionof the principal amount outstanding of our senior notes due 2009, repay in full the principal amount outstandingof our senior notes due 2012 and repay amounts owed under two bilateral revolving credit facilities with theproceeds of the offerings of the Bonds and the Senior Notes and borrowings under the new senior revolvingcredit facility. At 12 September 2003, we had £453.5 million outstanding under our existing senior revolvingcredit facility and the equivalent of £25.5 million outstanding under the bilateral facilities (compared to £166.8million and £10.9 million, respectively, at 31 March 2003). In connection with the foregoing, we will haveextended the maturity under our senior revolving credit facility by two years to April 2007 and reduced thematurity of our senior notes due 2009 by two years to August 2007. See “Capitalisation and Indebtedness”.We plan to continue to pursue growth through investment in our existing businesses. Opportunities to grow thebusiness through acquisitions and joint ventures and to achieve greater operating efficiencies are also being, andwill continue to be, pursued actively.Contractual Obligations and Commercial CommitmentsWe have various contractual obligations and commercial commitments, which have been defined as items forwhich we are contractually obligated or committed to pay a specified amount at a specific point in time. Certainof these items are required to be recorded as liabilities in our consolidated financial statements, for example longtermdebt. Others, such as certain purchase commitments and other executory contracts, are not permitted to berecognised as liabilities in our consolidated financial statements, but are required to be disclosed. As at 31 March2003, we had contractual commitments and options, which are largely performance related, under which we arelikely to be required to pay advances amounting to approximately £460.9 million (31 March 2002: £418.8million) within the next five years to artists and repertoire owners.Off-Balance Sheet ArrangementsWe have no material off-balance sheet arrangements other than as disclosed in the financial statements.Foreign Currency and Interest Rate FluctuationsOur largest foreign currency exposures are to the euro, the yen and the US dollar. Balance sheet exposures arehedged to the extent that overseas liabilities, including borrowings, provide a natural hedge. Transactionexposures are hedged, where there are material items that have a high probability of occurring, with the use offorward exchange rate contracts. The impact of fluctuations in foreign currency relative to Sterling can besignificant in any given year.Exchange rate agreements held by us at 31 March 2003 were as follows:Gross notional amount purchased Value dateAustralian dollar ................................. $ 6.5million April 2003Canadian dollar .................................. $10.0 million April 200381

Our results are also affected by fluctuations in interest rates around the world commensurate with our cash andborrowings portfolio. Our main exposures to interest rates are in the United Kingdom, Europe, the United Statesand Japan. Where appropriate, we use foreign currency swaps to effectively convert sterling borrowings ordeposits into foreign currency borrowings or deposits with the objective of reducing borrowing costs and hedgingforeign cash flows. We borrow in various currencies at fixed and floating rates and use swaps, caps and collars tomanage interest rate exposure. Unless otherwise approved by the Board, Treasury policy is to keep between 25%and 75% of borrowings at fixed or capped rates. As a result of the reductions in borrowings during financial year2003 and the unwind of the US dollar swap agreement (see “ — Capital Resources” above), and as approved bythe Board, at 31 March 2003 virtually all borrowings were fixed or capped.Internal policies governing the use of financial instruments, including derivatives, are designed to ensure thatadequate funds are available to us at all times and that transactions are only undertaken for the purpose ofmanaging risks that arise from our operating and investment activities. Our policies prohibit the use of financialinstruments for speculative purposes.Interest rate agreements held by us at 31 March 2003 were as follows:Notional principalTermination dateInterest rate collars:US dollar ......................................... $400 million April 2003 to February 2004Euro ............................................. € 90 million April 2003Notional principal Termination date Fixed rateInterest rate swaps:Yen — pay fixed rate and receive floating rate ............ ¥17.5billion April 2004 0.29%82

CAPITALISATION AND INDEBTEDNESSThe table below presents, for the purposes of the UK Listing Authority’s listing rules, our consolidatedcapitalisation as at 31 March 2003. You should read this table together with our consolidated financial statementsand the notes to those consolidated financial statements, and the information under “Management’s Discussionand Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”Actual At31 March 2003£(in millions)Short-term borrowings:Loans and overdrafts .............................................................. 35.9Finance leases ................................................................... 0.7Short-term element of long-term loans ................................................ 1.9Total short-term borrowings ........................................................ 38.5Long-term borrowings:8.375% guaranteed notes due 2009 .................................................. 315.48.25% sterling bonds due 2008 ...................................................... 322.86.96% series A senior notes due 2009 ................................................ 98.18.01% series B senior notes due 2012 ................................................ 15.8Drawings under long-term committed facilities ......................................... 166.8Term loan due 2005 .............................................................. 3.5Finance leases ................................................................... 1.5Less amounts due within one year ................................................... (1.9)Total long-term borrowings ........................................................ 922.0Totalborrowings................................................................. 960.5Capital and reserves:Called up share capital ............................................................ 110.4Share premium account ........................................................... 445.8Capital redemption reserve ......................................................... 495.8Other reserves ................................................................... 256.0Profit and loss reserve (including goodwill previously written off) .......................... (2,001.1)Total equity shareholders’ funds .................................................... (693.1)Total capitalisation and indebtedness ................................................. 267.4The above table does not reflect the issuance of the Bonds or the other actions in respect of our indebtedness thatwe expect to undertake in connection with the offering of the Bonds. None of our indebtedness is guaranteed by athird party or is secured. There has been no material change in our capitalisation or indebtedness since 31 March2003, except that we have incurred additional indebtedness under our existing senior revolving credit facilitysuch that as at 12 September 2003, £453.5 million was outstanding under this facility and we incurred anadditional £8.8 million in short-term indebtedness under one of our bilateral facilities and £5.8 million of longtermdebt under a second bilateral facility. As at 31 March 2003, the Group had certain contingent liabilitiesdescribed in note 29 and note 32(i) to our consolidated financial statements. As of the date of this OfferingCircular, there has been no material change in these liabilities.83

The table below presents our consolidated capitalisation as at 31 March 2003:ŠŠon an actual basis; andon an adjusted basis to reflect the issuance of the Bonds, the issuance of the Senior Notes, theexpected borrowings under our new senior revolving credit facility and the application of theproceeds thereof.You should read this table together with our consolidated financial statements and the notes to those consolidatedfinancial statements, and the information under “Management’s Discussion and Analysis of Financial Conditionand Results of Operations – Liquidity and Capital Resources.” Unless otherwise stated, currency translationshave been effected on the basis of rates as of 31 March 2003 of £1.00 = €1.448 and £1.00 = $1.579.As at 31 March 2003As AdjustedActual (unaudited)£ £(in millions)Short-term borrowings:Bilateral facility ....................................................... 10.9 —Overdrafts ........................................................... 25.0 25.0Finance leases ........................................................ 0.7 0.7Short-term element of long-term loans ..................................... 1.9 1.9Total short-term borrowings ......................................... 38.5 27.6Long-term borrowings:8.375% guaranteed notes due 2009 ........................................ 315.4 315.48.25% sterling bonds due 2008 ........................................... 322.8 322.86.96% series A senior notes due 2009 ..................................... 98.1 78.38.01% series B senior notes due 2012 ...................................... 15.8 —5.25% convertible bond due 2010 ......................................... — 149.2Senior notes due 2013 .................................................. — 285.5Drawings under long-term committed facilities .............................. 166.8 —Drawings under new revolving credit facility ................................ — —Term loan due 2005 ................................................... 3.5 3.5Finance leases ........................................................ 1.5 1.5Less amounts due within one year ........................................ (1.9) (1.9)Total long-term borrowings ......................................... 922.0 1,154.3Totalborrowings .................................................. 960.5 1,181.9Capital and reserves:Called up share capital ................................................. 110.4 110.4Share premium account ................................................. 445.8 445.8Capital redemption reserve .............................................. 495.8 495.8Other reserves ........................................................ 256.0 256.0Profit and loss reserve (including goodwill previously written off) ............... (2,001.1) (2,001.1)Total equity shareholders’ funds ...................................... (693.1) (693.1)Total capitalisation and indebtedness .............................. 267.4 488.8None of our indebtedness is guaranteed by a third party nor is it secured.Except as set forth or contemplated above, there has been no material change in our capitalisation orindebtedness since 31 March 2003, except that we have incurred additional indebtedness under our existingsenior revolving credit facility, first to fund the acquisition in April 2003 of an additional 30% of the Jobetemusic publishing catalogue for £69.2 million and a further deferred payment of £9.5 million in respect of theacquisition of Mute, and thereafter for other uses, such that as at 12 September 2003 £453.5 million wasoutstanding, and we increased the amount outstanding under our bilateral facilities such that as at 12 September2003, the equivalent of £25.5 million was outstanding. We expect to enter into the new revolving credit facility atclosing, which will extend the maturity of our senior facility to April 2007, and to have £102.4 million initiallydrawn under such facility. The maturity of our 6.96% senior notes due 2009 will be shortened to 2007.84

DESCRIPTION OF THE PARENTIndustry OverviewOverviewThe following chart provides an overview of the music industry and illustrates certain critical relationships,including those between artists, songwriters, music publishers, recorded music companies as well as the endusers of recorded music and musical compositions:The creation of music begins with the songwriter. A songwriter, by joining lyrics to music, creates a musicalcomposition. Songwriters generally contract with music publishers who protect, administer and exploit rights inthe songwriters’ musical compositions. Music publishers, together with the songwriters, own the copyright in themusical compositions. Music publishers focus on generating uses for the musical composition, including throughradio airplay, broadcast and cable television carriage, Internet and live and recorded performances and inproductions of television programmes, film and computer games.Collection societies and associations such as The American Society of Composers, Authors and Publishers(ASCAP), in the United States, the Mechanical Copyright Protection Society/Performing Rights Society (MCPS/PRS), in the United Kingdom and The German Copyright Society (GEMA), in Germany, to name a few, arenationally focused not-for-profit organisations that represent composers, songwriters and music publishers. Theseorganisations seek to protect the rights of their members by licensing, collecting license fees and distributingroyalties for the use of their works.Recording artists, who may be songwriters themselves, contract with recorded music companies to developrepertoire that often contains their own compositions and the compositions of other songwriters. Along withproviding the recording artist with creative support, recorded music companies also manufacture and distributethe artists’ product (typically in the form of CDs, audio and video DVDs and cassettes) as well as providemarketing and promotional support for the product. The product is distributed by recorded music companies tomusic retailers.The Music IndustryRecorded Music. The recorded music industry, our core business, was characterised by strong growth throughthe 1990s driven principally by the broad acceptance of the CD and the distribution of music through new retailchannels. However, the recorded music industry has experienced a progressive contraction over the last threeyears, shrinking by 8.1% in calendar year 2002. The primary factors responsible for this decline include:85

ŠŠŠŠŠgeneral weakness of the world economy;growth in competing entertainment products, including the Internet, DVD films, computer and videogames and mobile phones;substitution from unauthorised Internet distribution and CD burning (or digital piracy);increases in physical piracy; anda lack of music in the marketplace that consumers found compelling.According to the IFPI, sales of recorded music in North America, Europe (including the UK) and Japanaccounted for approximately 90% of total recorded music sales (excluding China) in calendar year 2002. Sales inthe US, Japan and Germany were all down significantly in calendar year 2002 as compared to the prior year.These territories accounted for approximately 75% of the worldwide decline in recorded music sales. Sales in theUS, the world’s largest territory, declined by an estimated 9.4% and were characterised by falling unit sales frommajor releases (the ten most successful albums in 2002 sold 20% less than the ten most successful albums in2001). Japan experienced its fifth consecutive year of industry decline, and is now at the sales level recorded in1992. The industry in Europe, while down, was generally more stable than elsewhere, with some territoriesachieving modest growth such as France (3.6%), Italy (0.5%) and Portugal (2.1%).Notwithstanding these factors, we believe that the recorded music industry is set to improve over the comingyears. The primary factors we believe will drive this improvement include:Š the cumulative effect of ongoing actions against piracy (which is discussed below);Š improved creative output; andŠthe development of new formats and revenue sources, such as legitimate downloads (which webelieve can also provide an alternative to on-line piracy), Internet radio and DVD audio.Music Publishing. Because of the varied uses of musical compositions, the music publishing industry ischaracterised by a diverse customer base. Users of music include recording artists (for recordings and liveperformances at concerts), advertisers, film makers, theatre production companies, radio and televisionbroadcasters, toy and game makers and sporting venues. In addition, we are exploiting the Internet and newtechnologies such as DVD audio, mobile phone ring tones, Internet radio and other wireless applications asfurther distribution channels for our content. Because the recorded music business is the largest user of musicalcopyrights, trends affecting the recorded music industry have a significant impact on the music publishingindustry.The ParticipantsThe recorded music industry is comprised of major international recorded music companies such as WarnerMusic Group, Universal Music Group, Sony Music Entertainment and Bertelsmann Music Group, and asignificant number of independent music companies such as Ministry of Sound, V2, Beggars Banquet/XL,Dreamworks, Sanctuary, TVT Records, Univision, ZYX, SPV, Edel, Wagram, Avex, Victor Entertainment, PlayIt Again Sam and Vale Music.The music publishing industry is comprised of a significant number of music publishers such as WarnerChappell, Sony/ATV Music, Universal Music Publishing, Bertelsmann Music Publishing, Chrysalis, Edel, CarlinMusic, Peermusic, Music Sales, Famous Music, MPL Communications and Windswept Pacific, as well as anumber of songwriters who publish their own works.Both the recorded music and music publishing industries are characterised by intense competition. In addition,the recorded music industry, in particular, faces competition from other forms of entertainment and leisureactivities, such as cable and satellite television, pre-recorded films on videocassettes and DVD, the Internet andcomputer video games. Other products, like mobile phones, are also competing for the disposable income ofconsumers.PiracyPiracy is the most significant challenge facing the music industry. Physical piracy (also called counterfeiting),which is the unauthorised reproduction of recordings and live performances for commercial sale, existsthroughout the world and has been a growing problem for the music industry. Legitimate sales of recorded music86

in certain territories are very difficult, and some territories are virtually closed to legitimate record companiesbecause of the dominance of pirated products, which are substantially cheaper than legitimate products as a resultof lower quality standards and the absence of recording and royalty costs. According to the IFPI, physical piracyis especially problematic in Brazil, China, Greece, Mexico, Paraguay, Poland, Russia, Spain, Thailand, Taiwanand the Ukraine.The amount of revenue lost by the music industry through circumvention of copyrights is difficult to quantify.However, in July 2003, after completing an assessment of the global physical pirate trade (which does notinclude Internet downloads or home CD burning), the IFPI estimated that the physical pirate trade is worth inexcess of $4.6 billion per year compared to $32 billion for the legitimate retail trade and that two in every fivemusic carriers sold worldwide are pirate copies.Home taping, the reproduction of music cassettes for personal use, has been a common practice since the adventof music cassettes and continues to be prevalent throughout much of the developing world. The advent ofrecordable CD technology has increased the scope for copying for personal use by allowing consumers toefficiently and rapidly reproduce CDs of equal sound quality.Piracy has increased substantially as a result of the Internet. High quality digital reproductions can bedownloaded from the Internet using MP3 technology without payment to the owners of the rights. Thesedownloaded files can then be stored and played through computers or portable music devices or recorded ontoCDs. Although measurement of such activities is imprecise, it is estimated that an equal number of tracks aredownloaded illegally each year as are sold on legitimate physical albums and singles.Combating PiracyImportant steps have been taken in the fight against piracy through legal and regulatory processes, includingthrough the enactment of the World Intellectual Property Organization (“WIPO”) treaties in 1996, the DigitalMillenium Copyright Act in the US in 1998 and the Copyright Directive in the European Union in 2001. See“Business — Intellectual Property — Copyright.” We have also seen successes in the enforcement of existinglaws. Interpol recently established the Intellectual Property Crime Action Group (“IPCAG”) to increase itsefforts to fight organised piracy and has publicly linked intellectual property theft to terrorism, heightening thevisibility and priority of the issue. The World Customs Organisation has also responded, stepping up itscoordination of local customs authorities in their battle to reduce the importation of illegal goods, with aparticular emphasis on intellectual property protection. Law enforcement agencies around the world haveincreased seizures of illegal product and shutdowns of illegal production facilities dramatically. For example:Š Over 50 million pirate music discs were seized in 2002, up from 13 million in 2001.Š In 2002, 71 pirate CD manufacturing lines, representing an annual production capacity of over 300million units, were decommissioned, up from 42 the year before.Š Nearly 7,000 CD copy machines used in the pirate trade were seized by authorities in 2002,representing a 60% increase in this type of seizure. These machines had an annual productioncapacity of 250 million discs.We are also involved, acting on our own and through membership in industry associations, in legal action thattargets peer-to-peer networks and other copyright infringements. Recent court victories include:ŠŠŠA verdict against EasyInternet Café in the UK, finding that it operated to facilitate online piracy byoffering CD burning capabilities onsite and failing to block piracy uses on its computers.A decision in the US courts that peer-to-peer music services Napster and Aimster were operatingillegally.A decision by US courts to force Internet service provider Verizon to provide owners of copyrightswith identities of copyright infringers.In addition, we are appealing recent court decisions regarding KaZaA and Grokster.The Recording Industry Association of America’s (“RIAA”) most recent strategy is to aggressively pursuelitigation against the most egregious users of peer-to-peer music networks. On 8 September 2003, the RIAAannounced that its member companies had filed the first wave of civil lawsuits against major offenders who havebeen illegally distributing substantial amounts (averaging more than 1,000 copyrighted music files each) ofcopyrighted music on peer-to-peer networks.87

BusinessCompany OverviewWe are the world’s leading independent music company and one of the largest and most profitable musiccompanies in the world. Our business is comprised of two divisions: Recorded Music and Music Publishing.Our Recorded Music business is the third largest in the world based on turnover. We have one of the world’smost extensive catalogues of recordings, with over three million individual tracks. Of these tracks, approximately600,000 are currently in active release on over 50,000 albums. Our record labels include EMI, Virgin, Capitol,Parlophone, Chrysalis, Mute, Blue Note and EMI Classics and are home to a diverse roster of over 1,300 artistswho encompass a wide range of musical genres from classical, jazz, country and Christian music to alternative,rock, pop, rap/urban and dance music. For the year ended March 31, 2003, our Recorded Music businessgenerated turnover of £1,774.2 million and adjusted EBITDA of £188.6 million.Our Music Publishing business is the world’s largest music publisher in terms of copyrights owned, controlled oradministered, with rights to over one million copyrights in musical compositions. Our roster of approximately800 songwriters is responsible for many of the hit songs of today. For the year ended 31 March 2003, our MusicPublishing business generated turnover of £401.2 million and adjusted EBITDA of £108.4 million.We are a global company, with revenues balanced across all geographic regions of the world. With over 90companies active in 50 countries, we provide our artists and songwriters, who come from a wide range ofnational backgrounds, access to the world’s most important music markets. This strong local presence has beenincreasingly important as the popularity of music originating from a country’s own language and culture hasincreased in recent years. Our mix of national and international recording artists and songwriters provides asignificant degree of diversification for our music portfolio. Our balanced portfolio of international businessesalso creates a more stable platform for us, as macroeconomic trends in one country are balanced and mitigated bytrends in other parts of the world.Market PositionOur Recorded Music and Music Publishing businesses each have consistently held leading positions in theirrespective industries, demonstrating their ongoing ability to attract high quality talent and to market and promotetheir creative output.Throughout most of the 1990s our core industry of recorded music experienced strong growth as legitimatedemand for music was driven by broad acceptance of the CD and music distribution expanded into new retailchannels. That changed markedly at the end of the decade, however, and the industry has declined progressivelyover the last three years, due to a combination of factors, including economic weakness, growth in competingentertainment products, the availability of attractive product, and, most importantly, increases in piracy.StrengthsWe believe we benefit from a number of strengths, including:Š A deep and diverse portfolio of music assets generating strong results on a consistent basis. Wehave built an extensive bank of content in terms of international scope, breadth of musical styles andgenre and quality. This portfolio of music recordings and musical compositions enjoys strongdemand each year.Š Our Recorded Music business has a catalogue of music recordings comprised of over 3 milliontracks including classics by the Beatles, the Rolling Stones, Pink Floyd, Frank Sinatra, Queenand the Beach Boys, as well as newer releases by artists including Robbie Williams, KylieMinogue, Coldplay and Norah Jones. Our historic catalogue contains hit recordings that continueto produce strong cash flows year after year with limited incremental marketing costs. Forexample, Pink Floyd’s “Dark Side of the Moon” sold over 675,000 copies in financial year 2003,almost 30 years following its initial release.Š Our Music Publishing business has the world’s largest and most extensive catalogue of musicalcompositions with over one million copyrights owned, controlled or administered. Our historiccatalogue includes classics such as “New York, New York,” “Wild Thing,” “Imagine,” “Over theRainbow,” “Singin’ in the Rain,” “My Girl,” “Maggie May,” “Louie Louie,” “Stop! In the Name88

of Love,” “We are the Champions,” and “I Heard It Through the Grapevine.” The catalogue alsoincludes songs from newer songwriters such as Sting, Norah Jones, Enya and Diane Warren.Both our historic and current catalogues consistently generate high levels of use and producestable cash flows year after year. Through this portfolio, our Music Publishing business has beenable to generate average adjusted EBITDA of £103.9 million over the past five years.Both our Recorded Music and Music Publishing businesses are continuously adding content to our catalogues toensure they remain dynamic and growing resources.Š Proven ability to attract, develop and retain recording artists and songwriters with long-termstaying power. We have demonstrated a disciplined and effective approach to developing ourportfolio of artists and songwriters.ŠOur Recorded Music business has developed a strong roster of recording artists that combinesinternational superstars with local artists and promising new talent. This balanced portfolioenhances stability and allows us to effectively serve diverse markets and meet the ongoing shiftsin the demand for music. Our artists from around the world who have developed a large base ofloyal fans, releasing multiple successful albums, include Robbie Williams, Norah Jones, KylieMinogue, Sir Paul McCartney, Coldplay, Radiohead, Blur, Blue, Atomic Kitten, Air, Daft Punk,Lenny Kravitz, Rachelle Ferrelle, Renaud, Hevia, Utada Hikaru, Axelle Red, Tiziano Ferro,Vasco Rossi, Manu Chao, Ringo Sheena, Yumi Matsutoya and Herbert Grönemeyer.Š Our Music Publishing business’s strong creative approach, global reach and proactive marketingallows us to effectively market the talents of our songwriters and generate additional uses fortheir copyrights in local and international markets. This enables us to attract some of the world’sbest songwriters, including Aerosmith, Enya, Matchbox Twenty, Sting, Alicia Keys, NorahJones, Jamiroquai, Blur, Simply Red, Rod Stewart, Jewel, Texas, Third Eye Blind, White Stripes,Ms Dynamite, Pink, Diane Warren, Dallas Austin, Pharrell Williams, Rodney Jerkins, ErosRamazzotti and Enrique Iglesias.Š Proven ability to manage our cost base. From financial year 2001 to financial year 2003, wereduced our fixed costs before acquisitions by approximately £100 million, our staff byapproximately 1,900 and our Recorded Music artist roster by approximately 25%. As a result of theseactions combined with a strong focus on the development of profitable sales, adjusted EBITA of ourRecorded Music business increased by more than 80% in financial year 2003 compared to the prioryear. Our Music Publishing business has consistently maintained a low cost base as evidenced by itsstrong operating margins (25.8% in each of the last two financial year years). The cost base of eachdivision is characterised by a high proportion of variable and semi-variable costs which, together withthe ability to further shift costs from fixed to variable through outsourcing, allows us to respondquickly to industry changes.Š Strong and experienced management team. We enjoy great depth of management expertise at boththe corporate and the operating level. The management of our Recorded Music and Music Publishingbusinesses are widely regarded as among the best in the music business. Alain Levy, CEO of ourRecorded Music business, who built PolyGram (now part of Universal Music Group) into theindustry leader in recorded music, and Martin Bandier, CEO of our Music Publishing business, whoco-founded SBK Entertainment World Inc. in 1986, which now forms the core of our MusicPublishing business, each have a strong track-record of success and, collectively, have over 60 yearsof experience in the music business.StrategyOur business is music, and it is our aim to remain focused on music. We are committed to providing consumerswith the music they want, the way they want and at a value they find compelling. To that end, we continue towork with retailers, distributors and technology companies to seek new opportunities and improve the valueproposition we offer to our customers.We believe that our business strategy will not only help to stabilise the music industry over the medium term, butwill also facilitate our return to sales growth. The primary elements of this strategy are to:Š Maximise value from our portfolio of music assets through traditional channels. We will seek tocontinue to exploit, through a wide array of opportunities, our high quality catalogues of recordingsand musical compositions to generate profitable sales.89

ŠŠŠOur Recorded Music business continually focuses on generating sales and creating brands, bothby developing superstar artists and by compiling successful recordings into new works withstrong consumer appeal such as the Beatles album, “1,” which has sold over 24 million copiesworldwide, as well as the “Now” series of current hit compilations (currently one of the bestselling compilations in the world).Our Music Publishing business continually seeks new ways to promote our song catalogue toartists, record companies, film and television producers, event organisers, advertising agenciesand multimedia producers, including through sampling (the use of samples of existing songs innew recordings), such as Sean “P. Diddy” Combs’s use of the Sting song “Every Breath YouTake,” cover versions of older hit songs, such as Geri Halliwell’s version of “It’s Raining Men,”and in computer games, such as “Grand Theft Auto” in which 22 of our copyrights were used.Continue to improve our portfolio by focusing on artists and songwriters with long-termpotential. We seek to enhance the quality of our musical offerings by continuing to identify artistswith long-term potential, whose debut albums are well received on release, whose subsequent albumsare eagerly anticipated by fans and whose music will continue to generate sales as part of ourcatalogue on an on-going basis. We will continue to seek to identify and develop songwriters whoseproduct will become the hits of today and the classics of tomorrow. To ensure that our marketing andsales efforts are focused on our most promising talent, we will continue to actively manage ourexisting roster of artists and songwriters. We are also pursuing innovative arrangements with ourartists and songwriters to generate additional revenue streams.Š Exploit opportunities presented by new technologies and changing music consumption. TheInternet and digital distribution are driving a vast increase in the demand for music. While today thedemand is largely in the form of piracy, we believe that the development of a legitimate channel formusic on-line holds promise for the industry. We seek to exploit the Internet and new technologiessuch as DVD audio, mobile phone ring tunes, Internet radio and other wireless applications as furtherdistribution channels for our content.Š Continue to act to contain physical and digital piracy. Containing piracy is a priority for ourbusiness and, accordingly, we:ŠŠhave appointed an anti-piracy officer in each of our recorded music businesses around the worldwho report to a worldwide Senior Vice President for Anti-Piracy. We have also created an officeof governmental affairs, through which we continually lobby governments for the creation ofnew laws and the enforcement of existing laws relating to the protection and extension ofcopyright. Additionally, we are actively pursuing litigation, on our own and with industryassociations, to combat copyright infringements; andare applying new technologies (such as copy protection on CDs) to help mitigate the piracyproblem and are encouraging the development of attractive alternative legitimate on-line productofferings.Š Continue to actively manage our cost structure and improve the effectiveness of our business. Wecontinue to focus on reducing costs while seeking to expand our business through new and evolvingchannels. As part of our efforts to reduce costs, we may undertake business combinations orparticipate in joint ventures or other strategic alliances. We are committed to improving ourprocesses, increasing our efficiencies and managing our resources more effectively. We are intent oncreating and maintaining a structure that is both scaled appropriately to the size of the music industryand flexible enough to take advantage of opportunities that arise. Our aim is to improve the financialcharacteristics of our business by actively managing our business and, when necessary, exitingunprofitable operations and reducing our cost base, as we have recently undertaken over the past twoyears with the reorganisation of our Recorded Music business and the reduction of fixed costs beforeacquisitions.Recorded MusicOur Recorded Music businesses identify potentially successful recording artists, sign them under recordingcontracts, collaborate with them to produce recordings of their work, market the finished recordings to customersand radio, and sell the releases into the retail trade, primarily in CD format, but also on cassettes and downloadsfrom the Internet. We strive to seek a balance across genres, between new releases and catalogue, acrossdistribution channels and amongst repertoire sources.90

Our record labels specialise in popular music (including pop, dance, country, rap/urban, alternative, and rockmusic), jazz, classical and Christian music. Our key labels include widely recognised names such as EMI, Virgin,Capitol, Parlophone, Chrysalis, Mute, Blue Note and EMI Classics.We continue to develop a wide variety of local talent, focusing on major territories such as the United Kingdom,continental Europe, Japan and the United States and other regions including Latin America, South East Asia, andEastern Europe, encouraging the promotion of successful local artists to broader regional and internationalmarkets.Representative Recorded Music ArtistsRobbie Williams Norah Jones Utada HikaruRolling Stones Coldplay Ringo SheenaJanet Jackson Beastie Boys Yumi MatsutoyaSir Paul McCartney Blur AirGarth Brooks Massive Attack EnigmaLenny Kravitz Dirty Vegas Lene MarlinRadiohead Roberto Alagna Herbert GrönemeyerKylie Minogue Angela Gheorghiu Axelle RedBlue Placido Domingo HeviaChemical Brothers Sir Simon Rattle Manu ChaoAtomic Kitten Nigel Kennedy RenaudDaft Punk Sarah Brightman ThaliaN*E*R*D Bonnie Raitt Charly GarciaGorillaz Rachelle Ferrelle St. GermainRebecca Malope La Mosca ExaltasambaPhil Chang Belo Marisa MonteAmuk Jane’s Addiction Aleks SyntekMoby Chingy TribalistasWe also focus on exploiting our existing recorded music catalogue. This catalogue is a dynamic asset thatcontinues to generate a significant volume of re-releases with strong consumer appeal. For example, the Beatlesalbum, “1”, has sold over 24 million units worldwide. We have a solid platform of sales from existing,“evergreen” albums that require no significant incremental marketing expenditure. “Evergreen” albums generateapproximately 20%-25% of our Recorded Music turnover. Because marketing costs for catalogue product arelow, we are able to generate significant amounts of cash from these sales. Our catalogue includes recordingsfrom artists such as:The Beatles Maria Callas Frank SinatraRolling Stones Jacqueline du Pré Nat King ColeBeach Boys Herbert von Karajan Judy GarlandPink Floyd Sir John Barbirolli Dean MartinQueen Lord Yehudi Menuhin Fats DominoPet Shop Boys Elisabeth Schwartzkopf Al GreenSpice Girls Kiri Te Kanawa Tina TurnerCrowded House Mstislav Rostropovich UB40Bob Seger Itzhak Perlman Smashing PumpkinsBonnie Raitt Edith Piaf Joe CockerThe Band Sir Cliff Richard Iron MaidenSimple Minds Julie London BlondieSelena Robert Palmer Duran DuranOur Recorded Music business also compiles successful recordings from our catalogue and current roster into newworks on compilation releases. Compilations provide opportunities for new creative products, which can becomebrands themselves. Compilations range from “Greatest Hits” albums of major artists to concept collections, suchas “Best Air Guitar Album in the World ...Ever,” “Best Summer Album ...Ever,” “Classical Chill Out,”“Capital Gold Legends” and the “Pure Moods” series, to compilations of current hits, such as the “Now ...That’sWhat I Call Music!” series. Compilation series that are successful in one market are often replicated in others. Forexample, the “NOW” series originated in the UK, but has been rolled out in Japan and the US, compiling the hitsof those countries under the “NOW” brand.91

Although the primary sources of international popular repertoire have historically been the United Kingdom andthe United States, we are also focused on developing local repertoire that appeals to the individual country tastesof consumers in each of our local territories. We continually invest in local repertoire in all of our territories and,where there is opportunity, seek to transfer repertoire from one region to another. We believe that one of ourstrengths has been our ability to bring certain regional acts to international success. Examples include France’sManu Chao, Air and St. Germain, Spain’s Hevia, Norway’s Lene Marlin and Portugal’s Madredeus.Artists and RepertoireA key feature of the development of our record labels has been the ability, despite changing tastes, to identifyand contract recording artists who subsequently achieve success. We believe that our success in attracting andretaining successful artists derives from our management style and our policy of maintaining a high level ofpersonal contact with artists and their managers. Continued success in identifying and contracting new artists andin retaining existing artists is crucial to the long-term growth of our Recorded Music business.We have local artist and repertoire (“A&R”) teams in most every country of operation whose task it is to identifyand sign both new artists with potential appeal and established artists who will complement our existing artistroster or whose potential we believe has not been fully realised. For artists without a recording history, our A&Rstaff are often involved in selecting producers, recording studios, additional musicians and songs to be recordedas well as supervising the output of recording sessions. Consistent with our disciplined and effective approach todeveloping our portfolio of artists, our A&R teams are managed by the heads of our individual record labels whoare actively involved in identifying and contracting with promising new talent. The development of our artistroster is directly overseen by these label heads and by the management of our Recorded Music business.Artists’ ContractsWe usually contract with artists on an exclusive and worldwide basis to acquire and exploit the copyright in theirrecordings in return for a royalty to the artists on sales and other forms of exploitation of the recordings.Generally, our contracts with new artists are for a number of albums, giving us separate options to require theartist to deliver additional albums after release of the first album. However royalty rates are often increased if anoption is exercised. Typically, if an option is not exercised the artist has no obligation to deliver additionalalbums. We customarily pay the recording costs of contracted recordings. In some countries, principally NorthAmerica and the UK, these costs are treated as a pre-payment of artist royalties due in respect of any workproduced by an artist while under contract with us. In addition, we generally pay an artist non-returnableadvances which are also treated as a pre-payment against future royalties.Provisions in contracts with established artists are similar, although established artists command higher advancesand royalty rates. Contracts with established artists may require us to take delivery of a fixed number of albums,and instead of the typical lifetime copyright ownership arrangement, a very few of our major artists have enteredinto contracts whereby we retain ownership or have an exclusive licence for a fixed period after the artist’s lastalbum is released. Many of our contracts (with both new and established artists) contain a commitment from therecord company to fund videos and sometimes to provide touring funds. It is not unusual for us to renegotiatecontract terms with a successful artist during the term of an existing agreement, often in return for an increase inthe minimum number of albums that the artist is required to deliver.Recording StudiosWe own two principal recording studios: Abbey Road in London and Capitol Studios in Hollywood. We do notrequire our artists to record at our studios, although a number do, and artists who are not signed with us alsorecord at our studios.Marketing and PromotionWe have a comprehensive approach to marketing and promoting our artists and recordings. In addition togenerating sales, our marketing team is focused on creating brands, both by developing superstar artists andcompiling successful recordings into new works with strong consumer appeal. Their primary tasks include thepromotion of releases of recordings from artists on our current roster as well as the packaging and marketing ofour catalogue of historic recordings.92

In addition to collaborating with our artists on the creative aspects of their releases, we work with them toschedule releases of albums, select tracks for release as singles, design concepts for videos and promote radioand music TV airplay. We also strive to create a “buzz” surrounding our artists by coordinating publicperformances, television appearances and radio coverage for our artists, which are considered important elementsin the marketing process. Often, we also arrange for our emerging artists to perform as opening acts for moreestablished artists on tour, and may also provide financing for concert and promotional tours by such artists. See“— Artist’s Contracts.” We also use our various websites as marketing and promotional tools as well as a vehicleto directly target consumers.After release, we strive to maximise the exposure of our products in retail outlets through in-store displays,advertising and listening stations. Marketing is carried out on a territory-by-territory basis, although globalpriorities and strategies for certain artists are established centrally.Although we provide our artists and recordings with an all-inclusive package of marketing and promotionalservices, we maintain strict control of the costs of creating and marketing each release. The marketing budget inanticipation of a release’s “street date” is optimised based on the artist’s profile and his or her expected fan base.After release, marketing expenditures are carefully monitored at all levels of our organisation to ensure that theyare actually generating sales.Manufacturing and DistributionWe have four principal CD manufacturing operations, three of which are wholly-owned and one that is a jointventure. Our key manufacturing facilities are located in Jacksonville, Illinois; Uden, The Netherlands; andGotemba, Japan. A smaller manufacturing facility, which is a joint venture between us and Warner Music Group,is located in Australia. Our manufacturing facilities produced 420 million CDs in financial year 2003, supplyingapproximately 93% of our total product requirements.We have a network of distribution centres around the world. Generally, we have our own distribution services forthe storage and delivery of finished product to wholesalers and retailers, although in some territories we haveentered into distribution joint ventures with other record companies or other third parties. In certain territorieswhere we do not operate, our recordings are marketed under licenses to third parties.Opportunities to achieve greater efficiencies in our manufacturing and distribution functions, including thepotential sale of some operations, are being, and will continue to be, evaluated.SalesWe sell music from our current roster of artists and our catalogue of recordings that are made available primarilyin CD format, but also on cassettes, vinyl albums, mini discs, DVD and SACD. Substantially all of our recordsales are through a broad range of retail and wholesale outlets, including entertainment specialty stores,supermarkets, mass merchants and other traditional retailers. Some of our key retail customers offer aconsiderable range of products other than music, while others are more specialised. Our sales force works withour retail customers to achieve the best possible placement and promotion of our product within the stores.We expect that Internet sales will contribute significantly to our overall sales once a digital offering that appealsto consumers is introduced. We have taken steps to position ourselves to take advantage of the Internet as a salesdistribution channel by selling to a wide range of digital service providers on a wholesale basis. Our digitalwholesale and retail partners include the online versions of traditional retailers (fnac.com, HMV.com andmediamarkt.com, for example), Internet retailers (such as Amazon.com and CDNow.com), music servicesprovided by Internet service providers (AOL Music and Tiscali), general music websites (mtv.com andhardrock.com) and online music services and downloading programmes (like Apple iTunes and Rhapsody’sListen.com). We allow the distributor to determine the way in which it wants to offer the music (digitaldownloads, subscriptions, streams or hybrid programmes) and the consumer pricing mechanism. We are workingto make 100% of our repertoire available online.Although sales through certain outlets are made on a consignment basis, most sales represent purchases by thewholesale or retail distributor. Generally, the recorded music industry attempts to restrict the return of productsthat remain unsold to consumers. Our return policies are determined largely by industry practice, retailers’requirements, legal requirements and negotiations on a territory-by-territory and customer-by-customer basis. Wedo, however, provide limited return rights in all of our major territories.93

Music PublishingMusic publishing is the business of acquiring, protecting, administering, and exploiting rights in musicalcompositions. It is a business based on the songs themselves as distinct from the records, films, commercials orother media in which they are used. Music publishers earn their revenue from licensing the right to use theirsongs. In many cases the performer is also the songwriter. More recently the producer/songwriter has become asignificant force in music.Our publishing catalogue includes SBK (CBS Songs, MGM and United Artists), Filmtrax (Columbia Picturesand Television), Screen Gems, Virgin, Jobete (Motown) (in which we increased our stake from 50% to 80% inApril 2003), and a substantial part of the Windswept Pacific Catalogue.Music Publishing PortfolioSongwritersLeroy AndersonHarold ArlenGuy ChambersCathy DennisGerry GoffinHolland/Dozier/HollandBarry Mann & Cynthia WeilMitchell ParishNeil SedakaDiane WarrenJimmy WebbProducers /SongwritersDallas AustinAnders BaggeSean “P. Diddy” CombsJermaine DupriJam & LewisRodney JerkinsRick NowelsRuff RydersPharrell WilliamsRecording Artists / SongwritersTracy Chapman Norah Jones Eros RamazzottiCounting Crows Alicia Keys Rolling StonesPhil Collins Carole King The RomanticsBen Harper Ludacris Vasco RossiCrowded House Ozzy Osbourne Simply RedMs Dynamite Queen Snoop DoggEnrique Iglesias Jay-Z Rod StewartEnya Jamiroquai StingFoo Fighters Marilyn Manson TexasGood Charlotte Matchbox Twenty The B-52’sAlan Jackson Nirvana ToolJanet Jackson Pink TrainJewel Luther Vandross UsherWhite StripesRepresentative SongsFor Your Eyes OnlyHave Yourself a Merry Little ChristmasLeader of the PackPapa was a Rollin’ StoneSanta Claus is Coming to TownThe Tears of a ClownNever on SundayI Left My Heart in San FranciscoAin’t Misbehavin’MockingbirdTake Good Care of My BabyOver the RainbowWe are the ChampionsFrom Russia With LoveMy GirlA Natural WomanBlue MoonChattanooga Choo ChooDelta DawnDon’t It Make My Brown Eyes BlueI Heard It Through the GrapevineLady MarmaladeLouie, LouieLove is a Many Splendored ThingMy GuyShoutSingin’ in the RainStar Dust94

Representative Songs (continued)Bohemian RhapsodyYou’ve Lost That Lovin’ FeelingWild ThingImaginePower of LoveYester Me, Yester You, YesterdayYou are the Sunshine of My LifeIn the MoodNew York, New YorkThe Way We WereMy Cherie AmourStop! In the Name of LoveThe James Bond ThemeThe Things We do for LoveThree Times a LadyTracks of My TearsTubular BellsWe Will Rock YouWhat’s Going OnWhere Did Our Love GoWill You Still Love Me TomorrowYou Can’t Hurry LoveCopyright RoyaltiesCopyright conveys to writers and composers (or their estates) the exclusive legal right (in addition to otherproperty rights) to be compensated for the use of their songs. Generally, the right to receive copyright royaltiesextends for the life of the writer plus between 50 and 70 years following his or her death, depending on thejurisdiction. In general, every time a song is commercially exploited, a royalty is due to the writer or composer.We acquire copyrights or a share of the copyrights in musical compositions, or enter into agreements toadminister copyrights or a share of copyrights, and exploit the compositions by licensing them for inclusion onrecords, film, television and other media, seeking new uses for the compositions and administering and collectingthe proceeds generated. In return for promoting the songs and administering the related income arising from theuse of such songs, we are entitled to a percentage of the royalty income, which varies from contract to contract.One of the Music Publishing division’s strengths is its ability to efficiently and effectively generate and collectroyalties worldwide.Music publishing is a pure intellectual property business where the rights in music compositions are licensed tomusic users. Royalties are due to the copyright owner whenever a song is used. Examples of music uses thatgenerate royalties include:ŠŠŠŠŠŠŠŠŠŠŠŠsales of recordings;performance at concerts or in nightclubs;use in sporting events;use in advertisements;background music in bars or shops;use in computer or video games;use in television programmes;radio transmissions or television broadcasts;use in theatre productions (including, for example, Mamma Mia; We Will Rock You, Chitty ChittyBang Bang and Wizard of Oz);use in toys, novelty items and other merchandise;sales of sheet music used by orchestras, amateur musicians or students; andsales of ring tones and ring tunes for mobile phones.The principal sources of copyright owners’ and administrators’ revenues are:ŠŠŠlicensing of performing rights (i.e., the right to perform a composition, for instance on radio ortelevision, in cinemas or in nightclubs);licensing of mechanical rights (i.e., the right to replicate the performance of a composition, such ason a record);licensing of synchronisation rights (i.e., the right to create a master recording of a musicalcomposition in time to a series of visual images, such as in television advertisements); and95

Šlicensing of other rights (including ring tones, ring tunes, print rights, background library,merchandising and stage rights).Composers’ and Lyricists’ ContractsOur contracts with composers and writers vary in structure, differing primarily in the royalty amounts payable tothe particular composer or writer and the duration of the contract. Writers receive as payment from us apercentage of the royalties generated from their works. All contracts grant us the rights on an exclusive basis(within the constraints of any pre-existing arrangements), and substantially all of the contracts grant rights on aworldwide basis to every written musical composition by the songwriter during the period of the contract.Frequently, we pay a writer non-returnable advances that are recoupable from future royalties. In many of ouragreements, the grant of rights is for the life of copyright (subject to certain termination rights described below),but often, in the case of certain major songwriters or “best” current songwriters, our rights may last only for aspecified period after the expiration of the term of the contract. We also seek to gain the rights, when available,to works written by the songwriter prior to entering into a contract with us. It should be noted that US copyrightlaw permits authors and their heirs, upon the satisfaction of certain conditions, to terminate a grant of copyright(after 56 years in the case of works created before 1 January 1998, and after 35 years for later works).Marketing and PromotionWe work to develop new ways to market and promote our music publishing songs to artists, record companies,film and television producers, event organisers, advertising agencies and multimedia producers. We haveundertaken a number of initiatives to increase our ability to interact sooner and collaborate more fully on creativeprojects under development, improving the level of service we provide to our customers.In addition, we have been very active in seeking out new and incremental uses of our songs. We continue totarget traditional outlets, such as television, films and advertisements, as vehicles for our songs, but areincreasingly looking to exploit newer applications such as ring tones, ring tunes, online and wireless uses, digitalsheet music, computer games, theatre productions and merchandising as potential sources of revenue.CompetitionThe recorded music business is highly competitive. We compete with Warner Music Group, Universal MusicGroup, Sony Music Entertainment and Bertelsmann Music Group, as well as with a number of independentmusic companies such as Ministry of Sound, V2, Beggars Banquet/XL, Dreamworks, Sanctuary, TVT Records,Univision, ZYX, SPV, Edel, Wagram, Avex, Victor Entertainment, Play It Again Sam and Vale Music. Therevenues of a recorded music company depend upon public acceptance of the company’s recording artists andmusic. Although we are a large and established record company, our competitive position depends on ourcontinuing ability to attract and develop talent able to achieve a high degree of public acceptance.The recorded music business continues to be adversely affected by piracy. Piracy has traditionally included thecounterfeiting of both audio cassettes and CDs and the home taping of music on audio cassettes and CDs andnow also includes unauthorised downloads of digital sound reproductions from the Internet. See “IndustryOverview—Piracy.” In addition, the recorded music business faces competition from other forms ofentertainment and leisure activities, such as cable and satellite television, pre-recorded films on videocassettesand DVD, the Internet and computer and video games. Other products, like mobile phones, are also competingfor the disposable income of consumers.Competition in the music publishing business is also intense. We compete with every other music publishingcompany in acquiring musical compositions and in having them recorded, performed and used in productions.Our major international competitors in the music publishing business include Warner Chappell, Sony/ATVMusic, Universal Music Publishing, Bertelsmann Music Publishing, Chrysalis, Edel, Carlin Music, Peermusic,Music Sales, Famous Music, MPL Communications and Windswept Pacific, as well as a number of songwriterswho publish their own works.From time to time, we have considered opportunities to combine or acquire companies in the recorded musicand/or music publishing businesses. In 2000, we entered into arrangements to form a joint venture with WarnerMusic Group (then a part of Time Warner Inc.). This transaction was subsequently abandoned by both parties asit seemed at that time unlikely that we would be able to structure a transaction that worked both for stakeholdersand regulators. Thereafter, we explored the possibility of a business combination with the Bertelsmann Music96

Group. We announced in May 2001, that we were ending our exploratory discussions for similar reasons.Management continues to believe that a business combination with the right party on the right terms should yieldsubstantial cost savings, thus producing significant stakeholder value. There can be no assurance that anattractive opportunity will arise and that if one does, that any combination will be successful and produce theexpected benefits.We announced on 22 September 2003 that we had entered into non-exclusive discussions with AOL TimeWarner Inc. with regard to a possible transaction involving the recorded music division of the Warner MusicGroup. Discussions are at a very preliminary stage and there is no assurance that they will result in an agreementacceptable to both parties. Any potential transaction would be subject to shareholder and regulatory approval.Our competitors may, from time to time, effect changes in their pricing, products or services offered. On 3September 2003, Universal Music Group announced a pricing change in its North American business whereby itwill reduce its prices by approximately 24% while at the same time eliminating all forms of discounts offered toretailers, including co-operative advertising.Intellectual PropertyCopyrightOur business, like that of other companies involved in music publishing and recorded music, rests on our abilityto maintain ownership or administration rights of musical works and sound recordings through copyrightprotection. The period of copyright protection in musical compositions, but not in sound recordings, has beenharmonised in the European Union to the life of the author plus 70 years. In certain countries, such as the UK, theperiod of protection has recently been extended from 50 years to 70 years, which has resulted in certaincompositions in which we had rights that had lapsed becoming copyright protected once again. In the US, thecopyright period is also the life of the author plus 70 years for musical works written on or after 1 January 1978.US musical works written prior to this date generally enjoy a copyright life of 95 years. Copyright protection forsound recordings varies from country to country. For example, in the European Union, the term of copyright lastsfor 50 years from the date of release. In the US, the term of copyright for many of our recordings extends to 95years from the date of release.We are largely dependent on legislation in each territory to protect our rights against unauthorised reproduction,distribution, public performance or rental. In all territories where we operate, our products receive some degreeof copyright protection, although the period of protection varies widely. In a number of developing countries, theprotection of copyright remains inadequate.The potential growth of new delivery technologies, such as digital broadcasting, the Internet and entertainmenton-demandhas focused attention on the need to introduce new legislation that will adequately protect the rightsof producers. We actively lobby in favour of industry efforts to increase copyright protection and support theefforts of organisations such as WIPO.In December 1996, two global copyright treaties, the WIPO Copyright Treaty and the WIPO Performances andPhonograms Treaty, were signed, securing the basic legal framework for the international music industry to tradeand invest in on-line music businesses. The WIPO treaties have been ratified by the requisite number ofcountries.The European Union has implemented these treaties through the European Copyright Directive. It was adoptedby the EU in 2001 and legislation implementing the Directive in each of the member states is underway. TheDirective harmonises copyright laws across Europe and extends substantial protection for copyrights online. TheEuropean Union has also put forward legislation aimed at ensuring cross border coordination of the enforcementof laws related to counterfeit goods, including musical recordings.The United States enacted the Digital Millenium Copyright Act in 1998, creating a powerful framework for theprotection of copyrights in the digital world that covers musical compositions and recordings.Trade MarksOur trade marks and trade names are important to our business. We register our major trade marks and tradenames in each country where we believe it is necessary for the effective functioning of our business. Our major97

trade marks that are owned worldwide include EMI, Capitol, Blue Note, Hemisphere, NOW, Now That’s What ICall Music, Best. . . ....Ever!, Parlophone and Angel. The Virgin trade mark and the Virgin signature trademark have been licensed in perpetuity exclusively to us by the Virgin Group for use worldwide in connectionwith the music business. We monitor and defend against activities that might infringe or dilute our trade marksand trade names.Combating PiracyContaining piracy has become a major priority for our business. To coordinate and implement our anti-piracyprogramme internally, we have appointed an anti-piracy officer in each of our recorded music businesses aroundthe world. Those officers report through regional offices to the worldwide Senior Vice President for Anti-Piracy.We have also created an office of governmental affairs that is focused on persuading legislators and governmentofficials to pass new, stronger copyright protection legislation and to more strictly enforce existing laws. See“Industry Overview – Piracy” and “Industry Overview – Combating Piracy,” for a discussion of piracy and itsimpact on the music industry.In addition, we are using technology that we hope will reduce the incidence of both physical and online piracy.For example:ŠŠŠŠwe watermark our pre-release discs distributed for promotional and review purposes to enable us toquickly and definitively identify the sources of pirated music;we include copy control technology on many of our CDs to make copying more difficult;we are testing new digital rights management (DRM) technology which we expect will allow us toestablish usage rights for our CDs, including limiting the number of copies that may be made forpersonal use; andwe employ other technology to reduce the appeal to consumers of obtaining illegal downloads ofmusic through peer-to-peer sites.Additionally, we are encouraging the development of attractive alternative legitimate on-line product offerings.Joint VenturesJobeteIn April 2003, we acquired an additional 30% of the Jobete music publishing catalogue, bringing our total stakein the business to 80%. Jobete, one of the world’s premier music publishing catalogues, owns the musicpublishing copyrights to more than 100 number one hit songs from the Motown era, including “I Heard ItThrough The Grapevine,” “Baby Love,” “My Girl” and “You Are The Sunshine Of My Life.” Under theagreement, we have granted the remaining 20% shareholder a put option on its stake in the business, which maybe exercised in either April 2004 or April 2005. In the event that the remaining 20% shareholder declines toexercise its put option, we have been granted a call option exercisable in October 2005. A price range of $75.1million to $86.3 million will apply to either of these options.Toshiba-EMIOur Recorded Music business in Japan is carried on through Toshiba-EMI, a longstanding joint venture in whichToshiba Corporation has a 45% minority stake. The shareholders agreement relating to Toshiba-EMI containscertain restrictions on the transfer of shares in Toshiba-EMI and certain agreements as to the business,management, governance and dividend policy of Toshiba-EMI. The agreement also sets out our rights andobligations and those of Toshiba Corporation if either party wishes to sell its shares in Toshiba-EMI, if eitherparty is subject to a change of control or if we transfer more than 50% of our music business to a third party. Incertain circumstances, these provisions could result in EMI becoming obliged to acquire Toshiba Corporation’sshares in Toshiba-EMI at a price determined in accordance with a specified formula. The agreement alsocontains certain termination provisions, and certain covenants, including our covenant to provide A&R,marketing and certain other support to Toshiba-EMI on terms no less favourable than arm’s length and to licensea portion of our music repertoire as we consider appropriate to Toshiba-EMI on commercial terms. We andToshiba Corporation have agreed not to compete against Toshiba-EMI in Japan in the pure music business (theproduction and marketing of music software which consists solely of recorded music sound information).98

Joint Venture with Norman ChengIn July 2002, we entered into a joint venture agreement with Norman Cheng, who was subsequently namedChairman of EMI South East Asia. We have agreed to establish and fund, on an ongoing basis, new recordedmusic businesses in the People’s Republic of China, Hong Kong and Korea, in which Mr. Cheng has or will havean equity interest. It is envisaged that once these businesses are fully operational, Mr. Cheng will assume fullresponsibility for their management and will step down from his role as Chairman of EMI South East Asia. Wehave an obligation to buy Mr. Cheng’s equity interest in the joint venture businesses in 2009 so long as thepurchase price (which will be determined at such time by reference to an agreed formula) does not exceed $100million. If the purchase price as calculated at such time based on the agreed formula exceeds $100 million, Mr.Cheng may purchase our equity interest in the joint ventures at a price equal to 85% of the then determinedenterprise value. If Mr. Cheng does not elect to purchase our equity interest, then we must purchase his equityinterest for $100 million.PropertyWe own certain manufacturing, distribution, studio and office facilities and also lease certain facilities in theordinary course of business. Our executive offices are located at 27 Wrights Lane, London W8 5SW.Environmental MattersWe are subject to foreign, federal, state and local laws and regulations, and international agreements, governingprotection of the environment, natural resources and human health and safety, and the use, management anddisposal of hazardous substances. In particular, our operations are subject to stringent requirements for packagingcontent and recycling, air and water emissions, and waste management. We believe that we comply substantiallywith all applicable environmental requirements. Although the costs of maintaining such compliance have notmaterially affected us to date, we cannot predict the costs of complying with requirements that may be imposedin the future. In connection with our existing and former operations, we also have been, and may become again,responsible for the costs of investigating or cleaning up contaminated properties. Such costs, or related thirdparty personal injury or property damage claims, could have a material adverse affect on our business, results ofoperations or financial condition.ManagementOur Board of Directors is comprised of four Executive Directors and five Non-executive Directors. The membersof our Board of Directors and our Company Secretary are as follows:Name Age Position with the CompanyEricNicoli ................................. 52 ChairmanAlain Levy ................................. 56 Chairman and Chief Executive Officer, EMIRecorded Music and DirectorMartin Bandier ............................. 61 Chairman and Chief Executive Officer, EMIMusic Publishing and DirectorRogerFaxon ............................... 54 ChiefFinancial Officer and DirectorSir Dominic Cadbury ......................... 63 DeputyChairman and Senior Independent NonexecutiveDirectorDr. Harald Einsmann ......................... 69 Non-executiveDirectorPeter Georgescu ............................. 64 Non-executiveDirectorDavid Londoner ............................. 66 Non-executiveDirectorKathleen O’Donovan ......................... 46 Non-executiveDirectorCharles Ashcroft ............................ 51 CompanySecretary and General CounselMr. Eric Nicoli was appointed to the Board in 1993 as a non-executive director, becoming executive Chairman inJuly 1999. Until April 1999, he was Group Chief Executive of United Biscuits (Holdings) plc (UB), which hejoined from Rowntree Mackintosh in 1980. He was appointed to the UB Board in 1989 as Chief Executive,European Operations and became Chief Executive of UB in 1991. Mr. Nicoli is non-executive Chairman ofHMV Group and The Tussauds Group Ltd, Chairman of the PerCent Club and The EMI Group Archive Trust, aDeputy Chairman of Business in the Community and a Director of Caldicott Trust Ltd, Charity Projects andComic Relief Ltd.99

Mr. Alain Levy joined EMI and was appointed to the Board in October 2001. Mr. Levy joined CBS International(now Sony Music) in 1972 and, after 12 years, moved to PolyGram, where he became President and CEO in1991. In both companies he held various posts involving manufacturing, logistics, marketing and management.Mr. Levy remained with PolyGram until it was sold to Seagram in 1998. Mr. Levy is a Director of David Linley& Co. Ltd and Ilchester Investments Ltd. He also sits on the advisory board of Schroders Ventures in the US andon the European advisory board of Wharton Business School.Mr. Martin Bandier was appointed to the Board in April 1998. He joined EMI Music Publishing as its ViceChairman in 1989 upon the acquisition of SBK Entertainment World Inc. (SBK), in which he was a foundingpartner. He was appointed CEO of EMI Music Publishing in 1991 becoming, in addition, Chairman in 1998. Mr.Bandier entered the music publishing business in 1975 as a founding partner of the Entertainment MusicCompany and the Entertainment Television Company and, together with his partners, created SBK in 1986. Mr.Bandier is a Director of the National Music Publishers’ Association, the BMI Foundation, the Songwriters’ Hallof Fame, the Rock and Roll Hall of Fame and the Syracuse University Board of Trustees. He is also a member ofthe Friars Foundation and the National Academy of Recording Arts and Sciences.Mr. Roger Faxon was appointed CFO and joined the EMI Board in February 2002. He joined EMI in 1994,initially as Senior Vice President, Business Development & Strategy, EMI Music and, from April 1999, asExecutive Vice President and Chief Financial Officer, EMI Music Publishing. Prior to 1994, Mr. Faxon heldfinance, operations and general management positions. These posts included five years with Sotheby’s, latterly asManaging Director, Sotheby’s Europe and, previously, Chief Operating Officer, Sotheby’s North and SouthAmerica. This followed ten years in the motion picture business with LUCASFILM Ltd, The Mount Companyand, finally, Columbia Pictures Entertainment. Earlier, Mr. Faxon spent six years on the staff of the US Congress.Sir Dominic Cadbury joined the Board in 1998, becoming Deputy Chairman and Senior Independent NonexecutiveDirector in July 1999. He is Chairman of the Remuneration and Nomination Committees. Sir Dominicretired as Chairman of Cadbury Schweppes plc in May 2000 after seven years in that post, having joined thecompany in 1964 after graduation from Stanford University. He joined the Board of Cadbury Schweppes in 1974as Managing Director of its Foods Division and subsequently held a number of Board positions. Sir Dominic isChairman of The Economist Group and The Wellcome Trust. He is also a Director of the Teaching Awards Trustand Misys plc and was installed as Chancellor of Birmingham University in December 2002.Dr. Harald Einsmann joined the Board in 1992. He retired as Executive Vice President and a member of Procter& Gamble’s Main Board and Executive Committee in 1999. Dr. Einsmann is a Director of Tesco plc, BritishAmerican Tobacco plc and Optimad Media Systems Ltd. He is also a member of the Board of Stora-Enso OY ofFinland and he is the Executive Chairman of Findus A.B. of Sweden; both companies are members of theSwedish Wallenberg Group.Mr. Peter Georgescu joined the Board in September 2002. Mr. Georgescu is Chairman Emeritus of Young &Rubicam Inc., a network of commercial communications companies, having served as the company’s Chairmanand CEO from 1994 until January 2000. His career spans 38 years, with top management experience both in theUS and Europe. Mr. Georgescu emigrated to the US from Romania in 1954. He was educated at ExeterAcademy, received his BA with cum laude honors from Princeton University and has an MBA from StanfordBusiness School. Mr. Georgescu is a Director of Levi Strauss & Co., International Flavors & Fragrances Inc. andToys “R” Us, Inc. He is also Vice Chairman of the Directors of New York Presbyterian Hospital, serves on theBoard of Directors of the New York Philharmonic and WNET/Channel 13, and is a member of the Council onForeign Relations.Mr. David Londoner joined the Board in May 2003. Mr. Londoner is the General Partner of The North RiverCompany, L.P., a family investment partnership. He has been in the securities business his entire professional lifeand spent most of his career at Schroder & Co. Inc., joining a predecessor firm, Wertheim & Co., in 1972 andleaving when it was sold in 2000. Mr. Londoner is a director of Meredith Corp. He is also a Trustee of theAmerican Museum of the Moving Image.Ms. Kathleen O’Donovan joined the board in 1997 and has chaired the Audit Committee since 1999. Ms.O’Donovan was, until December 2002, Finance Director of Invensys plc, the global engineering servicescompany formed by the combination of BTR and Siebe in 1999. She is also a member of Court of the Bank ofEngland and a Director of Prudential plc and Great Portland Estates PLC.100

Mr. Charles Ashcroft was appointed Company Secretary in 1997, having joined EMI in November 1996 asGroup General Counsel. In March 2002 he was additionally appointed General Counsel to EMI Recorded Music.Previously, he was a partner for 16 years with London solicitors, Rowe & Maw, now part of Mayer Brown Rowe& Maw LLP.Corporate GovernanceThe BoardOur board currently comprises four Executive Directors and five Non-executive Directors. All of the NonexecutiveDirectors are considered to be independent of management and free from any business or otherrelationship that could materially interfere with the exercise of their independent judgement. The board considersthat this includes Dr Harald Einsmann who has been a Non-executive Director since 1992.Eric Nicoli is executive Chairman, which incorporates the role of chief executive officer. Day-to-day executiveresponsibility for the running of our two main businesses lies with Alain Levy, as Chairman and Chief ExecutiveOfficer, EMI Recorded Music, and Martin Bandier, as Chairman and Chief Executive Officer, EMI MusicPublishing, who each report to Eric Nicoli.In recent years, our board has concluded that we are best served by the CEOs of the Recorded Music and MusicPublishing businesses reporting to an executive chairman who complements their music industry skills. Ourboard has further concluded that the interposition of another senior executive over the business CEOs would leadto unnecessary duplication and diffusion of responsibility.Our board considers that, for the present, the structure outlined above is the most effective for us and is in thebest interests of both us and our shareholders. Furthermore, our board considers that the nature and level ofmatters reserved for decision, either to the board as a whole or to standing committees of the board, appropriatelylimit the authority of the Chairman and reflect the combination of the posts of chairman and chief executiveofficer in one person.It is our board’s policy that, so long as the Chairman is also our chief executive officer, the independent NonexecutiveDirectors should comprise a numerical majority of the board and that the senior independent Non-Executive Director should also be either sole or joint Deputy Chairman. Between 7 May and 19 July 2002 andfrom 1 September 2002 to 13 May 2003, there were four Non-executive Directors; for the short period from July19 to 1 September 2002, there were three such Directors. The number of Non-executive Directors increased tofive on 13 May 2003. Sir Dominic Cadbury is the senior independent Non-executive Director.Our board as a whole considers the appointment of Directors and executive appointments within the board, basedon recommendations from the Nomination Committee. Our Articles of Association include a requirement that allDirectors should submit themselves for re-election by the shareholders at least once every three years.Our board meets at least seven times each year, with additional meetings or contact between meetings asnecessary. The programme for each year is approved by the board. Currently, the programme includes reviews ofstrategy together with the operations and results of the two main business units, as well as the approval of annualbudgets. Our actual results and those of our individual business units are reported to all Directors each month. Atleast once each year the board meets at the premises of one of our business operations, to allow for presentationsby, and more detailed discussions with, local management.These procedures, together with other regular and ad hoc reports, are intended to ensure that our board issupplied in a timely manner with information that is appropriate to the discharge of its duties.Our board has delegated certain matters to standing committees, details of which are set out below. However, toensure its overall control of our affairs, the board has reserved certain matters to itself for decision. These includeour strategic plans and annual operating budgets, significant acquisitions or disposals of companies, businesses orassets, and significant contractual commitments or items of expenditure, together with policies relating to ourtreasury function, pensions, major litigation, employee share schemes, and environmental and ethical issues.101

All Directors have access to the services and advice of our Company Secretary. There are also procedures forDirectors, in appropriate circumstances, to obtain independent professional advice at our cost.Our Executive Directors are permitted to take external appointments as non-executive directors but usually onlyone such appointment may be of another publicly quoted company. They may retain the remuneration from suchappointments. All appointments must be approved by the board to ensure that they do not give rise to conflicts ofinterest.Board CommitteesThe principal committees of our board are the Audit, Remuneration, Nomination and Executive Committees.Reflecting the important role played by the independent Non-executive Directors in ensuring high standards ofcorporate governance, the Audit and Remuneration Committees comprise all the Non-executive Directors. Eachcommittee has written terms of reference and levels of authority and, except in the case of the RemunerationCommittee, minutes of meetings are circulated to all Directors.Audit Committee — chaired by Kathleen O’Donovan and comprising all the Non-executive Directors — makesrecommendations to the board regarding the appointment of the external auditor. Each year the Audit Committeereviews the independence and objectivity of the external auditor with a view to confirming that, in its opinion,the maintenance of objectivity on the one hand and value for money on the other have been kept appropriately inbalance. In this context, the Committee currently considers that it is appropriate for the external auditor toprovide to us tax compliance and regulatory and other assurance services, including those in connection withsupporting and reporting on financial representations in public documentation. The provision of these and otherfinancial services continues to be assessed by the Committee on a case-by-case basis.The Committee reviews our half-year and annual financial statements, with particular reference to accountingpolicies and practices, and the scope and results of the audit. It also reviews our system of internal controlincluding the risk assessment and audit plan of the Internal Audit Department and other control procedures. TheCommittee meets three times each year and its meetings are normally attended by our Chief Financial Officer,the external auditor and the Vice President, Internal Audit. At least once each year the Committee meets with theexternal auditor without the presence of Executive Directors or other management.Remuneration Committee — chaired by Sir Dominic Cadbury and comprising all the Non-executive Directors —is responsible for approving the remuneration and employment terms of the Executive Directors and certain othersenior executives, in particular, the most senior direct-line reports to the Executive Directors. In addition, theCommittee approves the operation of any of our share plans (whether executive or all-employee) including theexercise, on behalf of the board, of any authority delegated to the board under the rules of those plans. TheCommittee is also responsible for reviewing and supervising our compliance with the Combined Code publishedby the Committee on Corporate Governance (1998) and any other applicable code of practice, listing rule orother regulatory or best practice requirement relating to remuneration of executives.Nomination Committee — chaired by Sir Dominic Cadbury and comprising all the Non-executive Directors andthe Chairman - makes recommendations to the board for the appointment of Directors and the reappointment ofNon-executive Directors on the expiry of their three-year term of appointment. The Committee meets whenrequired.Executive Committee — chaired by our Chairman and comprising the chief executive officers of our two mainbusinesses, together with our Chief Financial Officer — responsible for the approval of acquisitions,divestments, capital expenditure and contractual commitments below the level that the board has reserved toitself for decision, and for certain operational, administrative and other routine matters. The Committee alsoregularly reviews and reports to the board on the performance of our businesses. The Committee meets at leastten times each year and our senior executives regularly attend meetings.102

Remuneration DetailsBaseSalary orFeesAnnual Remuneration (1)2003CompensationEmployment (2) Expenses Benefits (3) Remuneration (4) YearFor loss ofIncentive Total in2002Total inYear(£amountsinthousands)Executive Directors:E.L.Nicoli .................. 671.2 — — 67.2 340.0 1,078.4 685.5M. N. Bandier (5) ............... 1,934.3 — — 49.1 1,547.4 3,530.8 3,726.6A. M. J. I. Levy (6) ............. 680.0 — — 182.5 340.0 1,202.5 738.3R.C.Faxon .................. 495.2 — — 39.4 247.6 782.2 103.4Non-executive Directors:*Sir Dominic Cadbury .......... 57.1 — — — — 57.1 53.1H.Einsmann ................. 34.3 — — — — 34.3 32.4P. A. Georgescu (appointed1.9.02) .................... 18.8 — — — — 18.8 —K. A. O’Donovan ............. 39.5 — — — — 39.5 37.4Former Executive Directors:K. M. Berry (resigned 14.10.01) . . — 45.0 — — — 45.0 7,448.1A. J. Bates (resigned 4.2.02) ..... — — — — — — 2,276.3Former Non-executiveDirectors:M. R. Jackson (resigned 7.5.02) . . . 5.6 — — — — 5.6 32.4H R Jenkins (retired 19.7.02) .... 10.4 — — — — 10.4 32.4Total 2002 ................... 4,905.1 7,795.3 — 447.6 2,017.9 — 15,165.9Total 2003 ................... 3,946.4 45.0 — 338.2 2,475.0 6,804.6 —* On 13 May 2003, Mr. David Londoner joined our board. Mr. Londoner receives compensation commensurate with our other NonexecutiveDirectors.(1) Excludes retirement contributions and the value of share awards ceasing to be contingent, as reported in the table shown below.(2) The Chairman, CFO, CEO of Recorded Music and CEO of Music Publishing are entitled to severance payments in the event that EMIterminates their service, subject to certain exceptions. The severance payments are specific to each individual and are based on basesalary, bonus opportunity and the value of certain additional benefits.(3) The nature of the non-cash benefits provided to the Executive Directors as of 31 March 2003 was as follows:E. L. Nicoli: — provision of a Company car plus use of a Company pool car and driver;— private healthcare; and— personal accident insurance.M. N. Bandier: — car allowance of US$36,000 pa; and— participation in the Group’s US executive medical plan, life, health (hospital, major medical and dental) andaccident insurance.A. M. J. Levy: — use of a Company pool car and driver;— private healthcare; and— personal accident insurance.R. C. Faxon: — car allowance of US$25,000 pa;— participation in the Group’s US executive medical plan, life, health (hospital, major medical and dental) andaccident insurance; and— health club memberships in both New York and London.(4) The Chairman’s and the CFO’s annual bonus at target and maximum performance is 50% and 100% respectively, of base salary. TheCEO Music Publishing’s annual bonus opportunity at target and maximum performance is 50% and 80% respectively, of base salary.The CEO Recorded Music is entitled, under his service agreement, to a maximum annual cash bonus of up to 200% of base salary, basedon achieving certain operating profit margins for EMI Recorded Music.(5) Highest-paid Director.(6) In accordance with Mr. Levy’s service agreement, a payment of £138,232 was made to Ilchester Investments Ltd, a company controlled byMr. Levy and his family, to reimburse the costs of its early surrender of the lease of its office premises following Mr. Levy joining EMI.(7) This sum represents an assessment of Mr. Berry’s rent-free use of housing in California provided by the Group until its sale in July 2002.103

Remuneration From Prior-Year Share Awards Ceasing to be ContingentAwardsNo. of shares2002total value (1)AwardsNo. of shares2003total value (1)(£ in thousands)Executive Directors:E.L.Nicoli ....................................... 21,667 (2) 78.5 — —M.N.Bandier ..................................... 87,500 (2) 317.2 165,625 (2) 147.8A.M.J.I.Levy.................................... — — — —R.C.Faxon....................................... — — 44,536 39.7Former Executive Directors:K. M. Berry (resigned 14.10.01) ...................... 229,912 784.6 — —A. J. Bates (resigned 4.2.02) .......................... 75,344 273.1 — —Total 2003 ........................................ 414,423 1,453.4 210,061 187.5(1) The value is based on the share price on the date that awards ceased to be contingent.(2) Whilst in certain circumstances these restricted share awards may lapse or be released before the vesting date, a proportion of their valueis included in reported remuneration each year to match remuneration costs more accurately to the time period in which these shares areearned.Directors’ InterestsDirectors’ Interests (All Beneficial) in the Company’s Ordinary Shares (1)(2)Non-contingentShareAwards (3)Directly HeldSharesAs at 31 March 2003Total Shares HeldAs at 1 April 2002 orDate of Appointmentif LaterTotal Shares HeldExecutive Directors:E. L. Nicoli (4) ....................... 133,982 69,186 203,168 138,032M.N.Bandier ....................... — 379,760 379,760 155,060A.M.J.I.Levy...................... — 775,000 775,000 700,000R.C.Faxon ......................... 296,182 36,473 332,655 (5) 220,027Non-executive Directors:Sir Dominic Cadbury ................. — 50,000 50,000 20,000H.Einsmann ........................ — 1,800 1,800 1,800P. A. Georgescu (appointed 1.9.02) ...... — 100,000 100,000 —K. A. O’Donovan .................... — 2,000 2,000 2,000(1) The Company’s register of Directors’ Interests is available for inspection in accordance with the provisions of the Act.(2) No Director had any interest in either shares or debentures of any subsidiary of the Company.(3) Non-contingent share awards shown in this column are also included as incentive awards in the table below.(4) On 23 May 2003, Mr. Nicoli’s interests in the Company’s shares increased by 64 shares on the reinvestment of dividends and tax creditsreceived in respect of shares held by him and his wife through EMI Corporate Personal Equity Plans.(5) The total of directly held shares does not include the post-tax amount of an incentive share award of 19,518 shares and the related 2:3matching award of 13,012 shares that vested during the year, as the shares could not be delivered to Mr. Faxon until after the end of theclose period for Directors’ share dealings on 21 May 2003.104

Outstanding Awards Under Long-Term Incentive PlansAs at 1 April 2002Date ofAward Incentive (1) Performance (2) Restricted (3) AwardedDuring 2003 YearMatchingAwards Vested LapsedAs at 31 March,2003Executive Directors:E.L.Nicoli ........... 31.5.00 67,722 — — — — — — 67,72222.6.00 — 124,538 — — — — (124,538) (4) 031.5.01 66,260 — — — — — — 66,26015.6.01 — 155,297 — — — — — 155,297Total ................ 133,982 279,835 0 0 0 0 (124,538) 289,279M.N.Bandier ......... 23.8.96 — 108,214 — — — — (108,214) (4) 06.6.97 — 110,974 — — — — — 110,97428.9.01 — 1,250,000 (6) — — — — — 1,250,00028.9.01 — — 662,500 (6) — — — — 662,500Total ................ 0 1,469,188 662,500 0 0 0 (108,214) 2,023,474A.M.J.I.Levy ........ — — — — — — — 0Total ................ 0 0 0 0 0 0 0 0R.C.Faxon ........... 23.8.96 — 24,594 — — — — (24,594) (4) 06.6.97 19,518 — — — 13,012 (5) (32,530) — 06.6.97 — 19,518 — — — — — 19,51818.6.99 88,848 — — — — — — 88,84831.5.00 18,888 — — — — — — 18,88822.6.00 — 74,374 — — — (44,436) (29,938) (4) 031.5.01 56,300 — — — — — — 56,30015.6.01 — 103,803 — — — — — 103,80328.5.02 — — — 112,628 (7) — — — 112,628Total ................ 183,554 222,289 0 112,628 13,012 (79,966) (54,532) 399,985(1) Incentive share awards are not contingent on future performance and/or are no longer subject to forfeiture. Such awards, made under thecurrent Senior Executive Incentive Plan, are subject to an additional 1:3 matching award if deferred for three years from the date of theaward or an additional 2:3 matching award if deferred for six years from the date of the award.(2) Shows total potential award. The total of the eventual award depends on the achievement of Group or business unit performance againstprofit targets set by the Remuneration Committee by the end of a performance period that terminates on March 31, in the third year afterthe date of the award. For awards made prior to 1998, performance is further reassessed in each of the following three years before theaward lapses. The eventual award is subject to an additional 1:3 matching award if vesting is deferred for a further three years from thevesting date. In certain circumstances, for example upon a change of control of EMI, awards could be released before the normal vestingdate. For Mr. Nicoli, Mr. Bandier and Mr. Faxon, release of awards made up to 31 March 2001 is subject to a further performancerequirement that EMI’s Total Shareholder Return must have at least equalled the median of those companies that comprised the FTSE100 at the start of the three-year performance cycle. Mr. Nicoli has a performance share award granted on 15 June 2001 which will veston a sliding scale against three-year compound growth in earnings of between 6.1% and 22.5%. Mr. Faxon continues to participate in aperformance share award granted on 15 June 2001 based on Music Publishing’s performance, which requires the same rates ofcompound growth but related to Music Publishing’s economic profit.(3) Mr. Bandier’s restricted share award is not subject to performance criteria. A proportion of this award is included in remuneration eachyear so as to match remuneration costs more accurately to the time period in which the shares are earned. In certain circumstances, theaward could lapse or be released before the vesting date, as described in footnote (6) below.(4) Lapsed as of 31 March 2003.(5) On vesting of the base award, a 2:3 matching award of 13,012 shares was made.(6) Mr. Bandier’s outstanding share awards, which are set out in the table above, would vest, in whole or in part, if he was dismissed (otherthan for cause) or following a change of control of EMI. Both his performance share and restricted share awards will lapse if, prior to thevesting date of 31 March 2006, Mr. Bandier resigns voluntarily or his employment agreement is terminated by EMI for cause. However,if Mr. Bandier’s employment is terminated without cause by EMI, he will receive the proportion of his restricted share award which hewould have earned had he remained in employment for a further two years. Under these same circumstances, he would also receive aproportion of his performance share awards pro rated to the date of termination, subject to the achievement of the relevant performancecriteria. In the event of a change of control of EMI, all the restricted share award would vest together with a proportion of theperformance share award pro rated to the date of the change of control. Following a change of control, a pro rata proportion of hisperformance share award would vest together with an additional 625,000 shares up to the maximum award of 1.25 million shares on theearlier of one year after the date of the change of control or the termination of his employment without cause.(7) Mr. Faxon received an incentive award of 112,628 shares on 28 May 2002 when the closing mid-market share price was 267.25p.105

Related Party TransactionsTransactions with related parties, other than our subsidiary undertakings, during financial year 2003 aredescribed below.HMV and HMV GroupAs part of the sale in 1998 of the companies and assets comprising HMV and HMV Group, we acquired a 45.2%equity stake, and 50% of the Junior Preference Shares, in HMV Group for £87.5 million.An additional £25 million, in the form of deferred consideration, was to be receivable on, amongst other things, alisting of any part of the share capital of HMV Group on any recognised stock exchange, or 28 March 2003. Inaddition, an amount of up to £25 million further consideration was to be receivable if Advent InternationalCorporation and related investors achieved a specified return on their investment in HMV Group on a listing. Asa result of additional equity and preference shares issued during 1999 by HMV Group, in which we subscribed£9 million for additional ordinary and preference shares, at 31 March 2002, we owned a 42.65% (39.90% fullydiluted) equity stake in HMV Group, and 18.08% and 49.15%, respectively, of HMV Group’s Senior ‘A’Preference Shares and Junior Preference Shares. We also made available to HMV Group a £50 million workingcapital revolving credit facility (the EMI Revolving Credit Facility), no part of which was drawn during thefinancial year 2002.On 15 May 2002, HMV Group shares were admitted to listing by the UK Listing Authority and began trading onthe London Stock Exchange, pursuant to a global offer in which we sold part of our holding of ordinary shares inHMV Group. The net cash proceeds payable to us as a result of the flotation included (i) £69.4 million indeferred and contingent consideration payable to us by HMV Group on its listing under the terms of 1998 saleagreement, as described above, and proceeds from the redemption of our holding of senior preference shares, and(ii) £72.9 million for ordinary shares sold by us in the global offer.Following these transactions, we retained a residual shareholding in HMV Group of 14.5%. This holding wassubject to lock-up arrangements for six months from flotation. On 19 November 2002, we sold the remaining14.5% interest at a price of 120p per share, raising net proceeds of about £69 million.As part of the 1998 transaction, we also entered into an indemnity deed with HMV Group relating, among otherthings, to guarantees given by us on approximately 87 leases. Under the deed, HMV Group agreed to indemnifyus against any payments made under those leases and certain other guarantees and indemnities. HMV Groupundertook to use reasonable efforts to arrange for the release of those guarantees. The aggregate annual rentalpayments under the guaranteed leases are approximately £24.4 million, although they are subject to adjustmentboth up and down under certain circumstances. The guaranteed leases have terms which expire in one to 23years, and many of the leases expire in years beyond 2013.As part of the flotation arrangements, the EMI Revolving Credit Facility was cancelled. The indemnity deedremains in force in respect of the lease guarantees. HMV Group has secured those obligations pursuant to asecurity deed, under which our rights rank second behind banks that provide senior credit facilities to HMVGroup.Under the 1998 sale agreement, as from 31 May 2003, HMV Group employees ceased to be active members ofour UK pension fund but were granted the opportunity to join the HMV Group Pension Scheme and, if they soelected, to transfer their benefits in terms of accrued service to the HMV Scheme. The sale agreement providesfor a transfer payment to be made from our UK pension fund to the HMV Scheme in respect of benefits sotransferred, the transfer payment being made in accordance with actuarial assumptions but agreed as part of thesale arrangements. If the transfer payment so calculated exceeds the share of the assets of our UK pension fundattributable to the transferring members, we will be obliged to make up the shortfall. An estimate of £5 millionwas included as a non-operating exceptional item in our financial statements for financial year 2003 in respect ofour potential liability in this regard.We also assigned various trademarks to HMV (IP) Limited including the “Dog and Gramophone” trademark andHMV acronym in consideration for the payment of £2 million over a period of three years. HMV (IP) Limitedlicensed the right to use the “Dog and Gramophone” trademark on our recorded music products back to us for noconsideration.106

During that part of the year ended 31 March 2003 for which HMV Group was a joint venture, we and oursubsidiaries made sales of £2.2 million (£82.3 million in financial year 2002) to companies within HMV Group.Delabel Music Publishing and Related CompaniesPursuant to an agreement signed in July 1998, we completed the acquisition of the remaining 50% shareholdingin Delabel Editions SA, a 50% interest in Delabel Music Publishing (UK) Limited and a 17% shareholding inMawlaw 388 Limited (trading as Source UK) from Emmanuel de Buretel, Chairman and Chief Executive Officerof EMI Recorded Music Continental Europe in December 2002. Consideration for the Delabel Music Publishing(UK) Limited shares will be determined by reference to a formula based on future net publisher’s share over athree-year period, while consideration for the Source (UK) shares is an override royalty on certain net sales ofalbums released by Source (UK) artists. The consideration for the shares of Delabel Editions SA was €21.4million with a one-time future payment, to be determined by reference to a formula based on 15 times netpublisher’s share, not to exceed €1.5 million.Ilchester InvestmentsAs part of the arrangements for Alain Levy’s appointment as Chairman and Chief Executive Officer of EMIRecorded Music, we agreed to reimburse to Ilchester Investments Ltd, a company controlled by Mr. Levy and hisfamily, for rental and certain other payments due in respect of that company’s leasehold offices in centralLondon, pending the disposal of the lease. Such payments reimbursed or accrued due to Ilchester InvestmentsLtd totalled £138,232 as of 31 March 2003 (£59,400 at 31 March 2002).Joint Venture with Norman ChengIn July 2002, we entered into a joint venture agreement with Norman Cheng, who was subsequently namedChairman of EMI South East Asia. We have agreed to establish and fund, on an ongoing basis, new recordedmusic businesses in the People’s Republic of China, Hong Kong and Korea, in which Mr. Cheng has or will havean equity interest. It is envisaged that once these businesses are fully operational, Mr. Cheng will assume fullresponsibility for their management and will step down from his role as Chairman of EMI South East Asia. Wehave an obligation to buy Mr. Cheng’s equity interest in the joint venture businesses in 2009 so long as thepurchase price (which will be determined at such time by reference to an agreed formula) does not exceed $100million. If the purchase price as calculated at such time based on the agreed formula exceeds $100 million, Mr.Cheng may purchase our equity interest in the joint ventures at a price equal to 85% of the then determinedenterprise value. If Mr. Cheng does not elect to purchase our equity interest, then we must purchase his equityinterest for $100 million.107

DESCRIPTION OF CAPITOLHistory and BusinessCapitol Records, Inc. is a wholly-owned indirect subsidiary of the Parent and has approximately 100 subsidiaries(direct or indirect) of its own. Capitol is principally responsible for the Group’s Recorded Music business inNorth America. Capitol was formed on 21 September 1944 as a corporation under the laws of the State ofDelaware and as such is a limited liability entity. Its corporate powers include the lending of monies, the issue ofshares, the borrowing of monies and the issue of guarantees.The registered address of Capitol is 32 Loockerman Square, Suite L-100, Dover, Delaware 19901, United Statesof America. Capitol’s principal place of business is located at 150 Fifth Avenue, New York, New York 10011,United States of America.Capitol has an authorised and issued share capital of 100 shares, consisting of 80 common shares of par valueUS$0.01 per share and 20 voting preferred shares of par value US$0.01.DirectorsThe directors of Capitol and their respective business addresses and principal activities are as follows:Name Business Address FunctionIan Gavin150 Fifth Avenue, New York, New York President, Chief Operating10011, United States of AmericaOfficerColin FinkelsteinSusan Feingold150 Fifth Avenue, New York, New York10011, United States of America150 Fifth Avenue, New York, New York10011, United States of AmericaVice President and Treasurer,Chief Financial OfficerSecretary, Senior Vice President,Legal & Business AffairsAll of the directors of Capitol are employees of Capitol. The directors do not hold any direct, indirect, beneficialor economic interest in any of the shares of Capitol.Financial StatementsThe financial year end of Capitol is 31 March. As permitted by Delaware law, no audited financial statementshave been, or are intended to be, published by Capitol.Capitol is not, and has not, engaged in any legal or arbitration proceedings, nor are any such proceedings pendingor threatened by or against it, which may have, or have had in the last 12 months, a significant effect on Capitolgroup’s financial position.There has been no significant change in the financial or trading position, and no material adverse change in thefinancial position or prospects, of Capitol since 31 March 2003.108

DESCRIPTION OF THE DEED POLLWords and expressions defined in “Terms and Conditions of the Bonds” and “Description of the Issuer’s ShareCapital and the Preference Shares” have the same meanings in this Description of the Deed Poll, unless thecontext otherwise requires. References to particular Conditions of the Bonds shall be to the relevant Conditionset out in “Terms and Conditions of the Bonds”.The Deed Poll will contain provisions to the following effect:1. GuaranteesThe Guarantors will unconditionally and irrevocably undertake to each of the Preference Shareholders to makedue and punctual payment of all redemption monies, dividends and other amounts expressed to be payable inrespect of the Preference Shares or, if Preference Shares shall not have been issued as so required by theConditions of the Bonds, which would have been payable on such Preference Shares had the same been so issuedwhen so required, on the due date for payment, or if Preference Shares shall not have been so issued as aforesaid,on what would have been the due date for payment had such Preference Shares been so issued, to the extent thatthe same shall not be paid by the Issuer, regardless of (i) whether the profits of the Issuer justify the relevantpayment of any dividend, (ii) whether the relevant amounts shall be available for distribution or payment by theIssuer, (iii) whether payment thereof shall have been declared or approved by or on behalf of the Issuer or by theIssuer in general meeting, (iv) whether the payment thereof by the Issuer shall be prohibited by law or (v) wherePreference Shares shall not have been issued as aforesaid, the fact that for whatever reason such PreferenceShares shall not have been so issued. Such obligations will constitute direct, unconditional, unsecured andsubordinated obligations of the Guarantors.2. Payments(a)(b)(c)Any payment made or to be made pursuant to the provisions of the Deed Poll shall be made to the personsshown in the register of Preference Shareholders maintained by the Issuer at close of business on the seventhLondon business day before the due date for the relevant payment.All payments made by the Guarantors pursuant to the Deed Poll will be made subject to the withholding ordeduction of, or on account of, any taxes, duties, assessment or governmental charges of whatever natureimposed or levied by or on behalf of any jurisdiction or any political subdivision thereof or any authoritythereof or therein having the power to tax or permitted by applicable law to be withheld or deducted atsource. The Guarantors will not be required to pay any additional or further amounts in respect of suchwithholding or deduction.When making any payments to Bondholders or Preference Shareholders, fractions of one pence will berounded to the nearest pence (with 0.5 of a cent being rounded upwards).3. UndertakingsWhilst any Conversion Right remains exercisable, or any Share Exchange Call (as defined in the Articles of theIssuer) remains to be satisfied, the Guarantors will, save with the approval of an Extraordinary Resolution of theBondholders or with the approval of the Trustee where, in the Trustee’s opinion, it is not materially prejudicial tothe interests of the Bondholders to give such approval, comply with the covenants given by them in the TrustDeed and the Deed Poll. The Guarantors will, in the event of failure of the Issuer so to perform or enforce whendue, procure the performance by the Issuer of all the obligations to be performed by the Issuer and theenforcement of the rights of the Issuer in respect of the exercise of Conversion Rights, the issue of PreferenceShares on any such exercise and the exchange of the Preference Shares for Ordinary Shares pursuant to themaking of Share Exchange Calls, as referred to in the Conditions of the Bonds and as set out in the Articles of theIssuer.4. AmendmentsThe Deed Poll may be amended only by deed poll, executed by the Guarantors and expressed to be supplemental,and, for so long as any Bonds are outstanding, only with the approval of an Extraordinary Resolution and, for solong as any Share Exchange Call remains to be satisfied, the approval of an Extraordinary Resolution ofPreference Shareholders (for the purposes of which any Preference Shares held by or on behalf of the Guarantorsor any of its subsidiaries shall be disregarded and treated as not outstanding) or, with the prior written approval of109

the Trustee and without the consent of the Bondholders where, in the Trustee’s opinion, such amendment is notmaterially prejudicial to the interests of the Bondholders, is, in the Trustee’s opinion, of a formal, minor ortechnical nature or is made to correct a manifest or proven error. Any such amendment shall, unless the Trusteeagrees otherwise, be notified to the Bondholders by the Guarantors in accordance with Condition 15.The Trust Deed contains provisions for convening meetings of Bondholders to consider the modification byExtraordinary Resolution of the provisions of the Deed Poll.5. Governing LawThe Deed Poll will be governed by, and construed in accordance with, English law.110

TAXATIONUnited KingdomThe comments below are of a general nature based on the Parent’s understanding of current United Kingdom lawand practice. They are not intended to be, nor should they be construed to be, legal or tax advice and are includedsolely for information purposes. They relate only to the position of persons who are the absolute beneficialowners of their Bonds and, where relevant, Ordinary Shares. They do not necessarily apply where the income isdeemed for tax purposes to be the income of any other person and may not apply to certain classes of personssuch as dealers or certain professional investors or persons who are connected with the Issuer. Any Bondholdersor holders of Ordinary Shares who are in doubt as to their own tax position should consult their professionaladvisers.(a)(b)Interest—Withholding and Information Reporting Requirements(i) The Bonds will constitute “quoted Eurobonds” within the meaning of section 349 of the Income andCorporation Taxes Act 1988 (in this “Taxation” section, the “Act”) as long as they are and continueto be listed on a “recognised stock exchange” within the meaning of Section 841 of the Act.Securities will be treated as listed on the London Stock Exchange, which is a recognised stockexchange, if they are admitted to listing on the Official List and are admitted to trading on theLondon Stock Exchange. Accordingly, payments of interest on the Bonds may be made withoutwithholding on account of UK income tax provided the Bonds remain so listed at the time ofpayment.(ii) In all other cases an amount must be withheld on account of income tax at the lower rate (currently20%), subject to any direction to the contrary by the Inland Revenue under an applicable doubletaxation treaty, and except that the withholding obligation is disapplied in respect of payments toBondholders who the Issuer reasonably believes are either a UK resident company or a non-UKresident company carrying on a trade in the UK through a branch or agency (or through a UKpermanent establishment, as regards accounting periods commencing on or after 1 January 2003)which is within the charge to corporation tax with respect to the Bonds, or fall within variouscategories enjoying a special tax status (including charities and pension funds), or are partnershipsconsisting of such persons (in each case unless the Inland Revenue directs otherwise).(iii) The interest has a United Kingdom source and accordingly may be chargeable to United Kingdomtax by direct assessment. Where the interest is paid without withholding or deduction, the interestwill not be assessed to United Kingdom tax in the hands of holders of the Bonds who are not residentfor tax purposes in the United Kingdom, except where such persons carry on a trade, profession orvocation in the United Kingdom through a United Kingdom branch or agency (or in the case ofcorporate Bondholders through a UK permanent establishment, as regards accounting periodscommencing on or after 1 January 2003), in connection with which the interest is received or towhich the Bonds are attributable, in which case (subject to exemptions for interest received bycertain categories of agent) tax may be levied on the UK branch or agency, or UK permanentestablishment.(iv) Persons in the United Kingdom paying interest to or receiving interest on behalf of an individualmay be required to provide certain information to the United Kingdom Inland Revenue in relation tothe payment, the identity of the payee or person entitled to the interest and, in certain circumstances,such information may be exchanged with tax authorities in other countries.(v) On 3 June 2003 the Council of the European Union adopted a new Directive regarding the taxationof savings income. Subject to a number of important conditions being met, Member States will berequired from 1 January 2005 to provide to the tax authorities of another Member State details ofpayments of interest or other similar income paid by a person within its jurisdiction to or for anindividual resident in that other Member State. Exceptionally (and for a transitional period onlywhich will end after agreement on exchange of information is reached between the European Unionand certain non-European Union States) Belgium, Luxembourg and Austria will instead be requiredto withhold tax from such payments unless the Bondholder authorises the person making thepayment to report the payment or presents a certificate from the relevant taxing authorityestablishing exemption therefrom.Corporate Bondholders (within the charge to corporation tax)(i) Amounts Taxable as IncomeBondholders within the charge to United Kingdom corporation tax will be subject to tax as incomeon all interest arising in respect of the Bonds broadly in accordance with their statutory accounting111

treatment so long as the accounting treatment is in accordance with an accruals basis which is authorisedfor tax purposes. Such Bondholders will generally be charged in each accounting period by reference tointerest which, in accordance with such Bondholder’s authorised accounting method, is applicable to thatperiod. Fluctuations in value relating to foreign exchange gains and losses will also be brought intoaccount as income.(ii) Disposal (including Redemption for cash)Except in respect of amounts relating to interest and any amounts relating to foreign exchange gains andlosses which are brought into account as income as described at paragraph (b)(i) above, profits or gainson Bonds held by a Bondholder within the charge to United Kingdom corporation tax will not be subjectto tax as income under Part IV of the Finance Act 1996. The Bonds will, however, be treated as“chargeable assets” for the purposes of the United Kingdom taxation of chargeable gains. Accordingly, adisposal (including cash redemption) of Bonds may give rise to a chargeable gain or an allowable loss. Incalculating any gain or loss on disposal of a Bond, sterling values are compared at acquisition anddisposal (subject to the adjustments below). As a consequence, to the extent that such gain or loss has notbeen taken into account in computing the Company’s income profits, a taxable gain can arise even wherethe foreign currency amount received on a disposal is less than or the same as the amount paid for theBond.AdjustmentsFor the purposes of the taxation of chargeable gains, the consideration for any disposal or acquisition of aBond will be treated as adjusted so as to exclude, on a just and reasonable basis, the amount of suchconsideration which relates to interest which has accrued but has not been paid as at the date of suchdisposal or acquisition. Adjustments will also be made to the consideration for any disposal of a Bond forforeign exchange gains and losses.(iii) ConversionConversion of the Bonds into Preference Shares should not be treated as a disposal of the Bonds andshould not of itself give rise to a chargeable gain or allowable loss. Any chargeable gain or allowable lossthat would otherwise have arisen on a disposal of the Bonds will be “rolled over” into the PreferenceShares and the Preference Shares will be treated as the same asset as the Bonds, acquired at the same timeand for the same consideration as the Bonds were acquired.On conversion no adjustment is made to the acquisition cost of the Bonds in respect of accrued interest, orin respect of foreign exchange gains and losses which have accrued on the Bonds, up to the time ofconversion.(iv) ExchangeFor those holders of the Preference Shares who, either alone or together with persons connected withthem, do not hold more than 5% of any class of shares in or debentures of the Issuer, the exchange of thePreference Shares in the Issuer for the Ordinary Shares in the Parent should not be treated as occasioninga disposal of the Preference Shares and accordingly it should not give rise to a chargeable gain orallowable loss. Any chargeable gain or allowable loss which would otherwise have arisen on a disposal ofthe Preference Shares will be “rolled over” into the Ordinary Shares and the Ordinary Shares will betreated as the same asset as the Preference Shares (and in turn the Bonds), acquired at the same time andfor the same consideration as the Preference Shares were acquired or treated as acquired.A holder of Preference Shares who, either alone or together with persons connected with him, holds morethan 5% of any class of shares in or debentures of the Issuer will be treated in the manner described in thepreceding paragraph with respect to the exchange provided that the exchange is effected for bona fidecommercial reasons and does not form part of a scheme or arrangement of which the main purpose, orone of the main purposes, is avoidance of liability to capital gains tax or corporation tax. Such holders ofPreference Shares should note that an application for clearance has not been made in this regard to theInland Revenue under Section 138 of the Taxation of Chargeable Gains Act 1992.(v) Issue of Ordinary Shares pursuant to the Share Settlement MechanismTo the extent that a Bondholder who is within the charge to United Kingdom corporation tax receivesOrdinary Shares pursuant to the Share Settlement Option described in “Terms and Conditions of the112

Bonds — Redemption and Purchase” above, the tax treatment will be the same as that described inparagraphs (b)(iii) and (b)(iv) above (Conversion and Exchange). To the extent that cash is received, thetax treatment will be the same as that described in paragraph (b)(ii) above (Disposal).(c)Other Bondholders(i) InterestSee paragraph (a) above.(ii) Disposal (including Redemption for cash)A disposal of a Bond by a Bondholder who is not within the charge to corporation tax but who is residentor ordinarily resident for tax purposes in the United Kingdom or who carries on a trade, profession orvocation in the United Kingdom through a branch or agency to which the Bond is attributable may giverise to a chargeable gain or allowable loss for the purposes of the United Kingdom taxation of chargeablecapital gains. In calculating any gain or loss on disposal of a Bond, Sterling values are compared atacquisition and transfer. Accordingly, a taxable gain can arise even where the foreign currency amountreceived on a disposal is less than the amount paid for the Bond.The provisions of the accrued income scheme (the “Scheme”) may apply to the transfer of a Bond by aholder resident or ordinarily resident in the United Kingdom or a holder who carries on a trade in theUnited Kingdom through a branch or agency to which the Bond is attributable. On a transfer of a Bondwith accrued interest, the Scheme usually applies to deem the transferor to receive an amount equal to theaccrued interest and to treat the interest subsequently received by the transferee as reduced by acorresponding amount.(iii) ConversionConversion of the Bonds into Preference Shares should not be treated as a disposal of the Bonds andshould not of itself give rise to a chargeable gain or an allowable loss, as described in the final part ofparagraph (b)(iii) for Bondholders within the charge to United Kingdom corporation tax.On a conversion, interest deemed to have accrued since the last interest payment date may be chargeableto United Kingdom tax as income under the Scheme even though on conversion accrued interest may notbe payable.(iv) ExchangeThe tax treatment on the exchange of Preference Shares for Ordinary Shares will be the same as thatdescribed in paragraph (b)(iv) for Bondholders within the charge to United Kingdom corporation tax.(v) Issue of Ordinary Shares pursuant to the Share Settlement MechanismTo the extent that a Bondholder who is not within the charge to corporation tax but who is resident orordinarily resident for tax purposes in the United Kingdom or who carries on a trade, profession orvocation in the United Kingdom through a branch or agency to which the Bond is attributable receivesOrdinary Shares pursuant to the Share Settlement Option described in “Terms and Conditions of theBonds — Redemption and Purchase” above, the tax treatment will be the same as that described inparagraph (c)(iii) and (c)(iv) above (Conversion and Exchange). To the extent that cash is received, thetax treatment will be the same as that described in paragraph (c)(ii) above (Disposal).(d) Dividends on the Ordinary SharesThe United Kingdom tax treatment of dividends paid by the Parent on the Ordinary Shares should be as follows:(i) The Parent will not be required to withhold tax when paying a dividend.(ii) An individual shareholder who is resident in the United Kingdom for tax purposes and who receivesa dividend from the Parent should generally be entitled to a tax credit in respect of any such dividendwhich such shareholder may set off against his total income tax liability on the dividend as set out inthe following sub-paragraphs. The tax credit will be equal to 10% of the aggregate of the dividendreceived and the tax credit (the “gross dividend”) (or one-ninth of the net dividend received).(iii) An individual shareholder who is resident in the United Kingdom for tax purposes and who is liableto income tax at the starting or basic rate will be subject to tax on the gross dividend at the rate of113

10%, so that the tax credit will satisfy in full such shareholder’s liability to income tax on thedividend.(iv) With limited exceptions, an individual shareholder who is resident in the United Kingdom for taxpurposes and who is not liable to income tax in respect of the gross dividend will not be entitled toclaim repayment from the Inland Revenue of any part of the tax credit. However:(A) Tax credits on dividends paid by the Parent in respect of shares held in Personal Equity Plans(“PEPs”) or Individual Savings Accounts (“ISAs”) will be repayable in respect of dividendspaid on or before 5 April 2004.(B) Charities will be entitled to limited compensation in lieu of repayable tax credits until 5 April2004.(v) Other United Kingdom resident individual shareholders (i.e. those liable to higher rate income tax onthe dividend) will be subject to tax on the gross dividend at the rate of 32.5% of the gross dividend tothe extent that the gross dividend when treated as the top slice of the shareholder’s income fallsabove the threshold for higher rate tax. The tax credit will be set against but not fully match suchshareholder’s tax liability on the gross dividend and the shareholder will have to account foradditional tax equal to 22.5% of the gross dividend (that is, equal to 25% of the cash dividendreceived).(vi) A corporate shareholder resident for tax purposes in the United Kingdom will generally not besubject to corporation tax on dividends received from the Parent. Such shareholders will not be ableto claim repayment of tax credits attaching to dividends.(vii) Shareholders who are resident outside the United Kingdom for tax purposes will not generally beable to claim repayment from the Inland Revenue of any part of the tax credit attaching to dividendspaid by the Parent, although this will depend on the existence and terms of any double taxationconvention between the United Kingdom and the country in which such shareholder is resident. Ashareholder resident outside of the United Kingdom might also be subject to foreign taxation ondividend income under local law. A shareholder who is resident outside the United Kingdom for taxpurposes should consult his own tax adviser concerning his tax position on dividends received fromthe Parent.(e)(f)Disposals of Ordinary Shares(i) Holders of the Ordinary Shares who are resident or ordinarily resident for tax purposes in the UKmay, depending on their circumstances, be liable to United Kingdom taxation of chargeable gains inrespect of gains arising from a sale or other disposal of the Ordinary Shares.(ii) Holders of the Ordinary Shares who are not resident or ordinarily resident in the United Kingdomwill not generally be liable to United Kingdom taxation of chargeable gains in respect of gainsarising from the sale or other disposal of the Ordinary Shares, except where such persons carry on atrade, profession or vocation in the United Kingdom through a United Kingdom branch or agency towhich the Ordinary Shares are attributable, in which case tax may be levied on the UK branch oragency, or in relation to accounting periods beginning on or after 1 January 2003, are corporateshareholders not resident in the UK but carrying on a trade or vocation through a UK permanentestablishment.Stamp Duty and Stamp Duty Reserve Tax(i) As the Issuer is not incorporated in the United Kingdom and the Bonds are bearer bonds not held ona register which is kept by or on behalf of the Issuer in the UK, it is considered that no UK stampduty reserve tax (“SDRT”) should be payable on any of the issue, transfer or conversion of a Bond.No UK stamp duty will be payable on the issue of the Bonds, or on the transfer of the Bonds whereany transfer documents are executed and retained outside the United Kingdom, and where there isnothing done in the United Kingdom in connection with the transfer.(ii) No UK stamp duty or SDRT will be payable on the issue of the Preference Shares.(iii) No UK stamp duty or SDRT should require to be paid in respect of the transfer of such PreferenceShares in exchange for Ordinary Shares.(iv) No UK stamp duty or SDRT will be payable on the issue of Ordinary Shares in exchange forPreference Shares save where the Ordinary Shares are issued to issuers of depositary receipts or114

providers of clearance services (or their nominees or agents) in which event SDRT at 1.5% of theissue price of the relevant shares will arise unless (in the case of an issue to a clearance service) theclearance service has made an election under Section 97A of the Finance Act 1986 which applies tothe relevant shares. Under Section 97A of the Finance Act 1986, clearance services may, providedthey meet certain conditions, elect for the 0.5% rate of stamp duty or SDRT to apply to transfers ofsecurities within such services instead of the 1.5% rate applying to an issue or transfer of suchsecurities into the clearance service. Under Condition 6(b), the Ordinary Shares will not be availablefor issue (i) to, or to a nominee for, Euroclear, or Clearstream, Luxembourg or any other personproviding a clearance service within the meaning Section 96 of the Finance Act 1986 (or otherperson falling within Sections 70(6), (7) or (8) of that Act) or (ii) to a person, or nominee or agentfor a person, whose business is or includes issuing depositary receipts within the meaning of Section93 of the Finance Act 1986 (or other persons falling within Sections 67(6), (7) or (8) or 93 of thatAct), in each case prior to the “abolition day” as defined in Section 111(1) of the Finance Act 1990.Under Condition 6(b), neither the Issuer nor the Parent would be liable for stamp duty or SDRTarising as a result of issues of Ordinary Shares to persons falling within (i) or (ii) above.(v)The transfer on sale of an Ordinary Share will be liable to ad valorem stamp duty generally at therate of 0.5% of the amount or value of the consideration for the transfer rounded up to the nearest £5.The purchaser normally pays the stamp duty.(vi) An unconditional agreement to sell an Ordinary Share will generally give rise to a liability on thepurchaser to SDRT, at the rate of 0.5% of the amount or value of the consideration for the sale. If aduly stamped transfer in respect of the agreement is produced within six years of the date that theagreement is entered into or (if later) the date that it becomes unconditional, any SDRT paid isrepayable generally with interest, and any unpaid SDRT charge is cancelled.(vii) Transfer of Ordinary Shares: (1) to, or to a nominee or agent for, a person whose business is orincludes issuing depositary receipts within Section 67 or Section 93 of the Finance Act 1986 or (2)to, or to a nominee or agent for, a person providing a clearance service within Section 70 or Section96 of the Finance Act 1986, will generally be subject to stamp duty or SDRT at 1.5% of the amountor value of the consideration or, in certain circumstances, the value of the Ordinary Sharestransferred unless (in the case of a transfer to a clearance service) the clearance service has made anelection under Section 97A of the Finance Act 1986 which applies to the Ordinary Shares. UnderSection 97A of the Finance Act 1986, clearance services may, provided they meet certain conditions,elect for the 0.5% rate of stamp duty or SDRT to apply to transfers of securities within such servicesinstead of the 1.5% rate applying to an issue or transfer of such securities into the clearance service.(viii) Under the CREST system for paperless share transfers, no stamp duty or SDRT will arise on atransfer of Ordinary Shares into the system unless such transfer is made for a consideration in moneyor money’s worth, in which case a liability to SDRT (usually at a rate of 0.5%) will arise. Paperlesstransfers of ordinary shares within CREST will be liable to SDRT rather than stamp duty.JerseyThis summary is based on the law as in effect on the date of this Offering Circular and is subject to any change inlaw that may take effect after such date.The Issuer will have “exempt company” status within the meaning of Article 123A of the Income Tax (Jersey)Law 1961, as amended, for the calendar year ended 31 December 2003. The Issuer will be required to pay anannual exempt company charge that is currently £600 in respect of each subsequent calendar year during which itwishes to continue to have “exempt company” status. The retention of “exempt company” status is conditional onthe Comptroller of Income Tax being satisfied that no Jersey resident has a beneficial interest in the Issuer,except as permitted by concessions granted by the Comptroller of Income Tax, and disclosure of beneficialownership being made to the Jersey Financial Services Commission.As an “exempt company” the Issuer will not be liable to Jersey income tax other than on Jersey source income(except by concession bank deposit interest on Jersey bank accounts).Holders of Bonds or Preference Shares (other than residents of Jersey) are not subject to any tax in Jersey inrespect of the holding, sale or other disposition of Bonds or Preference Shares. Whilst the Issuer maintains its115

“exempt company” status, payments of interest on the Bonds and payments of dividends on Preference Sharesmay be made by the Issuer without withholding or deduction for or on account of Jersey income tax.No stamp duties are payable in Jersey on the acquisition, ownership, redemption, sale, exchange or other disposalof Bonds or Preference Shares. Probate or Letters of Administration may be required to be obtained in Jersey onthe death of an individual holder of Bonds or Preference Shares. Stamp duty is payable in Jersey on theregistration of such Probate or Letters of Administration on the value of the holder’s estate in Jersey.On 3 June 2003, the European Union Council of Economic and Finance Ministers reached political agreement onthe adoption of a Code of Conduct on Business Taxation (the “Code”). Jersey is not a member of the EuropeanUnion, however, the Policy & Resources Committee of the States of Jersey has announced that, in keeping withJersey’s policy of constructive international engagement, it intends to propose legislation to replace the Jerseyexempt company regime by the end of 2008 with a general zero rate of corporate tax.European Directive on the Taxation of Savings IncomeOn 3 June 2003, the European Union (“EU”) Council of Economic and Finance Ministers adopted a directive onthe taxation of savings income in the form of interest payments (the “EU Savings Tax Directive”). It is proposedthat, subject to a number of important conditions being met, each EU Member State will, from 1 January 2005,be required to provide to the tax authorities of another EU Member State details of payments of interest (or othersimilar income) paid by a person within its jurisdiction to or for the benefit of an individual resident in that otherEU Member State; however, Austria, Belgium and Luxembourg will instead apply a withholding tax system for atransitional period in relation to such payments.Jersey is not a member of the European Union and therefore is not required to implement the EU Savings TaxDirective. However, the Policy & Resources Committee of the States of Jersey has announced that, in keepingwith Jersey’s policy of constructive international engagement, Jersey, in line with steps proposed by otherrelevant third countries, proposes to introduce a withholding tax system in respect of payments of interest, orother similar income, made to an individual beneficial owner resident in an EU Member State by a paying agentsituate in Jersey (the terms “beneficial owner” and “paying agent” for this purpose are as defined in the EUSavings Tax Directive). The withholding tax system would apply for a transitional period prior to theimplementation of a system of automatic communication to EU Member States of information regarding suchpayments. During this transitional period, such an individual beneficial owner resident in an EU Member Statewill be entitled to request a paying agent not to withhold tax from such payments but instead to apply a systemby which the details of such payments are communicated to the tax authorities of the EU Member State in whichthe beneficial owner is resident.Under the current proposals in respect of the implementation of such a withholding tax system in Jersey, theIssuer would not be obliged to levy withholding tax in respect of interest payments made by it to a paying agent.The State of Jersey has not yet adopted measures to implement these proposals, but is expected to adopt suchmeasures on the same timetable as EU Member States and other relevant third countries.116

SUBSCRIPTION AND SALEBNP PARIBAS, HSBC Bank plc and J.P. Morgan Securities Ltd. (the “Joint Lead Managers”), Cazenove & Co.Ltd and UBS Limited (together with the Joint Lead Managers, the “Managers”) have, pursuant to a SubscriptionAgreement dated 30 September 2003, agreed with the Issuer and the Parent, subject to the satisfaction of certainconditions, to subscribe at 100% of their principal amount the aggregate principal amount of the Bonds.The Issuer (failing whom, the Parent) has agreed to pay to the Managers a combined management andunderwriting commission of 2.5% of the aggregate principal amount of the Bonds. In addition, the Issuer (failingwhom, the Parent) has agreed to reimburse the Managers for certain of its expenses in connection with the issueof the Bonds. The Subscription Agreement entitles the Managers to terminate it in certain circumstances prior topayment being made to the Issuer.The Parent has undertaken in the Subscription Agreement that, for a period of 90 days after the Issue Date, it willnot and will ensure that none of its subsidiaries or affiliates or any holding company will, without the priorwritten consent of the Joint Lead Managers, on behalf of the Managers, such consent not to be unreasonablywithheld or delayed, (i) directly or indirectly offer, issue, sell or otherwise dispose of (or publicly announce anintention of doing so) any Ordinary Shares or any securities exercisable or convertible into or exchangeable foror substantially similar to, Ordinary Shares or any rights arising from or attaching to any Ordinary Shares or (ii)enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly orindirectly, any of the economic consequences of ownership of Ordinary Shares, whether any such swap ortransaction described above is to be settled by delivery of Ordinary Shares or other securities, in cash orotherwise, except for: (a) the issue by the Parent of any Ordinary Shares upon the exercise of an option orwarrant or the conversion of a security outstanding on the date of the Subscription Agreement, details of whichare contained in this Offering Circular; (b) the payment of scrip dividends or capitalisation issues associated withdividends; (c) the grant or exercise of options; or other rights to acquire Ordinary Shares or rights related toOrdinary Shares under the employees share and incentive schemes of the Group, (d) the issue of the Bonds, theissue of any Ordinary Shares pursuant to the exchange of Preference Shares upon conversion of the Bonds or anypurchase of Bonds by the Parent and (e) any Ordinary Shares, securities or rights which are issued, or would beissued, as consideration for any acquisition by the Parent or any of its subsidiaries or affiliates, provided that theParent shall not, and shall ensure that none of its subsidiaries or affiliates shall, issue any such Ordinary Shares,securities or rights unless the entity to which such Ordinary Shares, securities or rights are issued, enters into anundertaking in substantially identical terms to this undertaking prior to, or simultaneously with, such issue.United StatesThe Bonds, the Guarantees, the Preference Shares and the Ordinary Shares have not been and will not beregistered under the Securities Act and may not be offered or sold within the United States or to, or for theaccount or benefit of, US persons except in accordance with Regulation S or pursuant to an exemption from theregistration requirements of the Securities Act.The Bonds are subject to US tax law requirements and may not be offered, sold or delivered within the UnitedStates or its possessions or to a US person, except in certain transactions permitted by US tax regulations. Termsused in this paragraph have the meanings given to them by the US Internal Revenue Code and regulationsthereunder.Each of the Managers has severally agreed, except as permitted by the Subscription Agreement, that it will notoffer, sell or deliver the Bonds, (i) as part of its distribution at any time, and (ii) otherwise until 40 days after thelater of the commencement of the offering of the Bonds and the Issue Date, except in accordance with Rule 903of Regulation S, and it will have sent to each distributor, dealer or person receiving a selling concession or otherremuneration to which it sells Bonds during the distribution compliance period a confirmation or other noticesetting forth the restrictions on offers and sales of Bonds in the United States or to, or for the account of orbenefit of, US persons. Terms used in this paragraph have the meanings given to them by Regulation S.In addition, until 40 days after the commencement of the offering of the Bonds, an offer or sale of Bonds withinthe United States by a dealer that is not participating in the offering may violate the registration requirements ofthe Securities Act.United KingdomThe Managers have represented, warranted and agreed that:1. they have not offered or sold and will not offer or sell any Bonds to persons in the United Kingdom priorto admission of the Bonds to listing in accordance with Part VI of the Financial Services and Markets Act117

2000 (the “FSMA”), except to persons whose ordinary activities involve them in acquiring, holding,managing or disposing of investments (as principal or agent) for the purposes of their businesses orotherwise in circumstances which have not resulted and will not result in an offer to the public in theUnited Kingdom within the meaning of the Public Offers of Securities Regulations 1995 or the FSMA;2. they have only communicated or caused to be communicated and will only communicate or cause tobe communicated any invitation or inducement to engage in investment activity (within the meaningof section 21 of the FSMA) received by them in connection with the issue or sale of any Bonds incircumstances in which section 21(1) of the FSMA does not apply to the Issuer or the Guarantors;and3. they have complied and will comply with all applicable provisions of the FSMA with respect toanything done by them in relation to the Bonds in, from or otherwise involving the United Kingdom.JerseyThe Managers have represented and agreed not to direct their selling efforts in respect of the Bonds at naturalpersons or persons (other than financial institutions) who are resident in Jersey.GeneralSave for obtaining the approval of the Offering Circular by the UK Listing Authority in accordance with Part VIof the FSMA and the admission of the Bonds to trading on the London Stock Exchange’s market for listedsecurities and obtaining the consent of the registrar of companies in Jersey, no action has been taken in anyjurisdiction by the Issuer or the Guarantors or the Managers that would permit a public offering of the Bonds inany jurisdiction where action for that purpose is required. The Bonds may not be offered or sold, directly orindirectly, nor may this Offering Circular or any other offering material or advertisements in connection with theoffer and sale of the Bonds be distributed or published in any jurisdiction except under circumstances that willresult in compliance with the applicable rules and regulations of such jurisdictions. Persons into whosepossession this Offering Circular comes are advised to inform themselves about and to observe any restrictionsrelating to the offering, sale, purchase or delivery of the Bonds or the possession or the distribution of thisOffering Circular or any other offering material relating to the Bonds, in all cases at their own expense. ThisOffering Circular does not constitute an offer to purchase or a solicitation of any offer to sell any of the Bonds inany jurisdiction in which such an offer or solicitation is unlawful.118

ADDITIONAL INFORMATION1. Responsibility1.1 The Issuer and the Parent accept responsibility for the information contained in this Offering Circular. Tothe best of the knowledge and belief of the Issuer and the Parent (each of which has taken all reasonablecare to ensure that such is the case), the information contained in this Offering Circular is in accordancewith the facts and does not omit anything likely to affect the import of such information.1.2 Capitol accepts responsibility for the information contained in this Offering Circular (on pages 1, 108, 119,128, 141 and 142) that relates to Capitol. To the best of the knowledge and belief of Capitol (having takenall reasonable care to ensure that such is the case), the information contained in this Offering Circular thatrelates to Capitol is in accordance with the facts and does not omit anything likely to affect the import ofsuch information.2. Listing2.1 The listing of the Bonds on the Official List will be expressed in US dollars as a percentage of theirprincipal amount (excluding accrued interest). Transactions will normally be effected for settlement in USdollars and, under current practice, for delivery on the third business day after the day of the transaction. Itis expected that admission of the Bonds to the Official List and admission of the Bonds to trading on theLondon Stock Exchange’s market for listed securities will be granted on or about 2 October 2003 subjectonly to the issue of the Temporary Global Bond. Prior to official listing and admission to trading, however,dealings in the Bonds will be permitted by the London Stock Exchange in accordance with its rules.3. Incorporation and Principal Objects of the Parent3.1 The Parent was incorporated on 29 March 1928 in England under the Companies Acts 1908 to 1917 withregistered number 229231 under the name The Electric Lamp Service Company, Limited. The name of theParent was changed to Thorn Electrical Industries Limited on 26 November 1936, and to THORN EMILimited on 3 March 1980. Pursuant to a resolution of the directors of the Parent (referred to below as the“Parent Directors”) the designation of the Parent was changed from THORN EMI Limited to THORN EMIplc on 5 June 1981, and the name of the Parent was changed to EMI Group plc on 19 August 1996. Theprincipal legislation under which the Parent operates is the Act.3.2 The registered and head office of the Parent is 27 Wrights Lane, London W8 5SW.3.3 The Memorandum of Association of the Parent states its principal objects to be the carrying on of thebusiness of an investment holding company; the manufacture, production, distribution and publishing,promoting, exporting and importing of compact discs, audio and video cassettes, cartridges and tapes,records and electronic, digital and other sound carriers, and other media; and the management andemployment of artists of all kinds (including musicians, singers, actors, authors, composers and arrangers).The objects of the Parent are set out in full in clause 4 of its Memorandum of Association which isavailable for inspection at the address specified in paragraph 19 below.4. Employees of the GroupThe average numbers of persons employed by the Group during the last three financial years ended 31March were as set out below:31 March 2001 31 March 2002 31 March 2003RecordedMusic ............................... 9,388 8,644 7,439Music Publishing .............................. 608 626 649Totals ....................................... 9,996 9,270 8,088119

5. Share Capital and Changes in the Issued Share Capital of the Parent5.1 The authorised and issued share capital of the Parent as the date of this Offering Circular is:AuthorisedIssued and fully paidClass Number Amount (£) Number Amount (£)Ordinary Shares of 14p each .... 1,134,206,498 158,788,909.720 788,597,933 110,403,710.62B shares of 114.5p each ........ 419,054,387 479,817,273.115 Nil NilDeferred shares of 0.0005peach ....................... 3,500,000,000,000 17,500,000.000 Nil Nil656,106,182.835 110,403,710.625.2 During the three years immediately preceding the date of this Offering Circular, there have been nochanges in the amount of the authorised share capital of the Parent.During the three years immediately preceding the date of this Offering Circular, the following issues ofOrdinary Shares were made by the Parent in connection with the operation of its employee share schemes,described in paragraph 5.5 below:Executive shareoption schemesSavings-related shareoption scheme1 July 2000 to 31 March 2001 ........................... 14,564 42,6081 April 2001 to 31 March 2002 .......................... 0 44,1821 April 2002 to 31 March 2003 .......................... 0 01 April 2003 to 31 August 2003 .......................... 0 05.3 Pursuant to an ordinary resolution passed at the annual general meeting of the Parent held on 9 July 2003,the Parent Directors are generally authorised, pursuant to Section 80 of the Act, to allot relevant securities(as defined in that Section) up to a maximum aggregate nominal value of £41,672,749, such authority toexpire on 8 October 2004 or at the conclusion of the 2004 annual general meeting, whichever is the earlier.5.4 The provisions of Section 89(1) of the Act (which, to the extent not disapplied pursuant to Section 95 ofthe Act, confer on shareholders rights of pre-emption in respect of the allotment of equity securities (whichare, or are to be paid up in cash)) apply to the authorised but unissued share capital of the Parent. A specialresolution was passed at the annual general meeting of the Parent held on 9 July 2003, granting the ParentDirectors authority to allot equity securities for cash as if Section 89(1) of the Act did not apply up to amaximum aggregate nominal value of £5,520,186, such authority to expire on 8 October 2004 or at theconclusion of the 2004 annual general meeting, whichever is the earlier.5.5 The following options to acquire Ordinary Shares have been granted to the Directors and employees of theParent under the Employee Share Schemes and the following share right awards have been granted underthe EMI Group Senior Executive Incentive Plan:(a) 1984 THORN EMI Executive Share Option Scheme (“the 1984 Scheme”)Subscription OptionsDate of grantNo. ofsharesExerciseprice (p)Exercisedates fromExercisedates to22 July 1994 .......................... 45,000 534.000 22.7.97 21.7.0422 July 1994 .......................... 26,572 421.995 22.7.97 21.7.0422 July 1994 .......................... 163,236 423.970 22.7.97 21.7.04120

(b)1995 EMI Group Executive Share Option Scheme (i) (“the 1995 Scheme”) and EMI Group SeniorExecutive Incentive Plan (“SEIP”)Subscription OptionsDate of grantNo. ofsharesExerciseprice (p)Exercisedates fromExercisedates to25 August 1995 ............................. 88,100 747.000 25.8.98 24.8.0525 August 1995 ............................. 660,530 590.315 25.8.98 24.8.0523 August 1996 ............................. 759,334 734.500 23.8.99 22.8.0620 December 1996 ........................... 38,000 734.500 20.12.99 19.12.066 June 1997 ................................ 507,514 575.000 6.6.00 5.6.075 June 1998 ................................ 190,568 510.000 5.6.01 4.6.085 June 1998 ................................ 41,614 531.500 5.6.01 4.6.083 June 1999 ................................ 285,000 440.000 3.6.02 2.6.0910 December 1999 ........................... 395,755 579.300 10.12.02 9.12.0910 December 1999 ........................... 341,037 614.000 10.12.02 9.12.0910 December 1999 (ii) ......................... 13,809 (iii) 579.300 10.12.02 9.12.0910 December 1999 (ii) ......................... 25,094 (iii) 614.000 10.12.02 9.12.0931 May 2000 ............................... 60,000 568.500 31.5.03 30.5.1015 December 2000 ........................... 437,782 568.500 15.12.03 15.12.1015 December 2000 ........................... 425,838 561.000 15.12.03 14.12.1015 October 2001 ............................ 2,613,333 300.000 15.10.04 14.10.1128 November 2001 .......................... 428,289 328.000 28.11.04 27.11.116 December 2001 ............................ 1,000,000 327.400 6.12.04 5.12.116 December 2001 ............................ 267,986 400.000 6.12.04 5.12.1114 December 2001 ........................... 815,763 346.650 14.12.04 13.12.1114 December 2001 ........................... 915,418 342.000 14.12.04 13.12.1110 January 2002 ............................. 407,822 370.850 10.1.05 9.1.1218 January 2002 ............................. 250,000 354.800 18.1.05 17.1.124 February 2002 ............................. 250,000 326.000 4.2.05 3.2.125 February 2002 ............................. 345,015 305.000 5.2.05 4.2.1226 February 2002 ............................ 200,000 311.450 26.2.05 25.2.1226 February 2002 ............................ 100,000 400.000 26.2.05 25.2.1228 May 2002 ............................... 200,000 272.650 28.5.05 27.5.1231 May 2002 ............................... 75,000 265.300 31.5.05 30.5.1221 June 2002 ............................... 2,197,566 243.300 21.6.05 20.6.1221 June 2002 ............................... 1,060,174 244.000 21.6.05 20.6.126 September 2002 ........................... 125,000 168.750 6.9.05 5.9.1226 November 2002 .......................... 210,000 160.050 26.11.05 25.11.1226 November 2002 .......................... 95,000 155.000 26.11.05 25.11.1219 December 2002 ........................... 200,000 146.050 19.12.05 18.12.1219 December 2002 ........................... 120,000 140.750 19.12.05 18.12.126 January 2003 .............................. 290,000 145.000 6.1.06 5.1.133 February 2003 ............................. 250,000 137.500 3.2.06 2.2.13Transfer Options (iii)Date of grantNo. ofsharesExerciseprice (p)Exercisedates fromExercisedates to15 October 2001 .............................. 1,886,667 300.000 15.10.04 14.10.1115 October 2001 .............................. 4,500,000 400.000 15.10.04 14.10.1115 October 2001 .............................. 3,000,000 500.000 15.10.04 14.10.1115 October 2001 .............................. 3,000,000 700.000 15.10.04 14.10.1128 November 2001 ............................ 1,321,711 328.000 28.11.04 27.11.116 December 2001 .............................. 732,014 400.000 6.12.04 5.12.112 January 2002 ................................ 3,000,000 357.300 2.1.05 1.1.1210 January 2002 ............................... 92,178 370.850 10.1.05 9.1.1210 January 2002 ............................... 500,000 400.000 10.1.05 9.1.1210 January 2002 ............................... 500,000 500.000 10.1.05 9.1.1210 January 2002 ............................... 500,000 600.000 10.1.05 9.1.125 February 2002 ............................... 154,985 305.000 5.2.05 4.2.1228 May 2002 ................................. 250,000 267.250 28.5.05 27.5.1221 June 2002 ................................. 20,000 243.300 21.6.05 20.6.1221 June 2002 ................................. 283,000 244.000 21.6.05 20.6.12121

(c)Levy, Munns and Rose Scheme (i)Subscription OptionsDate of grantNo. ofsharesExerciseprice (p)Exercisedates fromExercisedates to19 December 2002 ............................. 3,000,000 146.050 19.12.05 18.12.1219 December 2002 ............................. 1,000,000 140.750 19.12.05 18.12.1219 December 2002 ............................. 3,000,000 (iv) 19.12.06 18.12.1219 December 2002 ............................. 1,000,000 (iv) 19.12.06 18.12.1219 December 2002 ............................. 3,000,000 (iv) 19.12.07 18.12.1219 December 2002 ............................. 1,000,000 (iv) 19.12.07 18.12.1219 December 2002 ............................. 3,000,000 (iv) 19.12.08 18.12.1219 December 2002 ............................. 1,000,000 (iv) 19.12.08 18.12.12(d)Greenberg Scheme (i)Transfer Options (iii)No. of Exercise Exercise ExerciseDate of grantshares price (p) dates from dates to26 November 2001 .............................. 250,000 350.500 26.11.04 25.11.11(e)EMI Executive Share Incentive Plan (i) (“ESIP”)Subscription OptionsDate of grantNo. ofsharesExerciseprice (p)Exercisedates fromExercisedates to14 July 2003 ................................... 3,193,084 119.25 14.7.06 (v) 13.7.1314 July 2003 ................................... 1,616,711 121.50 14.7.06 (v) 13.7.13Transfer Options (iii)No. of Exercise Exercise ExerciseDate of grantshares price (p) dates from dates to14 July 2003 ................................... 2,982,123 119.25 14.7.06 (v) 13.7.13(f)1996 EMI Group Savings-Related Share Option Scheme (“the SAYE Scheme”)Subscription OptionsDate of grantNo. ofsharesExerciseprice (p)Exercisedates fromExercisedates to15 July 1998—5 year ........................... 75,482 424 1.9.03 29.02.0414 July 1999—5 year ........................... 42,026 415 1.9.04 28.02.0521 December 2000—3 year ...................... 34,558 442 1.2.04 31.7.0421 December 2000—5 year ...................... 19,843 442 1.2.06 31.7.0621 June 2001—3 year ........................... 77,356 371 1.9.04 28.02.0521 June 2001—5 year ........................... 37,730 371 1.9.06 28.02.0720 June 2002—3 year ........................... 483,017 221 1.9.05 28.02.0620 June 2002—5 year ........................... 585,399 221 1.9.07 29.02.0819 June 2003—3 year ........................... 1,409,566 96 1.9.06 28.02.0719 June 2003—5 year ........................... 1,819,687 96 1.9.08 28.02.09Notes:(i) With the exception of those options issued under the ESIP which were subject to pre-grant performance conditions, the exercise of theoptions is normally subject to the achievement of performance criteria (see (vii) below).(ii) Awards granted in the form of performance related share right awards under the SEIP which are equivalent to options under the 1995Scheme.(iii) To be satisfied by the transfer of shares from the EMI Group General Employee Benefit Trust rather than the issue of new shares.(iv) These options represent entitlements to options in respect of the three financial years up to and including, but ending on, 31 March 2006.The exercise prices for these options will only be determined when the interim results for the respective financial years have beenannounced using a five-day average share price.(v) Some grants of these options, which were subject to pre-grant performance conditions, can be exercised in four equal tranches starting onthe second anniversary of the date of grant and, therefore, the exercise date for the first tranche is 14 July 2005.(vi) All the above executive and savings-related options were granted for nil consideration.122

(vii) No performance conditions are attached to the exercise of share options issued under the 1984 Scheme and the SAYE Scheme. Optionsgranted under the 1995 Scheme and the ESIP are subject to one of three performance conditions:(A) Options granted from 25 August 1995 to 3 June 1999 inclusive:For these options, the performance requirement is for the Parent’s Total Shareholder Return (“TSR”) over the relevant calculationperiod, compared to the TSR of the companies in the FTSE 100 at 1 April prior to the date of grant, to be at least equal to themedian of that group. TSR is the percentage growth of the share price, assuming the reinvestment of any dividends paid, over thecalculation period. The initial calculation period commences on 1 April immediately preceding the date of grant and ends on 31March three years later and, thereafter, calculations are made at each quarter end for the preceding three-year period until theperformance criterion is met or the option lapses.(B) Options and performance related share right awards granted from 10 December 1999 to 13 July 2003:These options and awards are subject to a performance requirement that the Parent’s adjusted, fully diluted earnings per share(“EPS”) must grow at a rate between 2% and 3% per annum compounded more than the Retail Price Index (“RPI”) during the threeyearperiod following the date of grant (“the Vesting Period”). If the performance requirements are not achieved at the end of theVesting Period, growth in the Parent’s EPS for the three-year period ending one year after the Vesting Period will be measuredagainst the increase of the RPI for such three-year period. Such testing of the increase in the Parent’s EPS will continue annuallyuntil the earlier of the achievement of the performance requirements or the tenth anniversary of the date of grant.(C) Options granted under the ESIP on 14 July 2003:Options granted under the ESIP may have either pre-grant or pre-vesting performance requirements, although grants made toExecutive Directors will only have pre-vesting performance requirements. Options with pre-grant performance requirements may beexercised in no fewer than four annual tranches commencing on the first anniversary of the grant date.Options with pre-vesting performance requirements will normally be exercisable between three and ten years from the date of grantbut normally only to the extent that the pre-vesting targets have been satisfied. One third of the number of share options grantedmay be exercised if normalised EPS growth, over the three years following grant (with no retesting opportunities), exceeds anaverage of RPI plus 3% pa; two thirds of the number of share options granted may be exercised if normalised EPS growth exceedsan average of RPI plus 5% pa; and all share options granted may be exercised if normalised EPS growth exceeds an average of RPIplus 7% pa. To the extent that the targets have not been fully satisfied, options will lapse.5.6 As at 31 August 2003 (being the latest practicable date prior to the publication of this Offering Circular),the following awards were outstanding under the SEIP and the ESIP awards (assuming relatedperformance targets are met at their maximum levels):SchemeAwardperiod/cycleAwarddateSharesawardedMatchingshares (i)TotalsharesSEIP:— IncentiveAwards ..................... 1998/99 3.6.99 32,067 21,378 53,4451999/2000 18.6.99 88,848 59,232 148,0801999/2000 31.5.00 123,797 82,531 206,3282000/01 30.5.01 280,558 149,238 429,7962001/02 28.5.02 131,577 43,857 175,4341,013,083— Performance Share Awards (ii) ........... 1996/97 6.6.97 228,140 76,041 304,1811997/98 5.6.98 103,679 34,556 138,2352000/01 22.6.00 4,789 1,596 6,3852000/01 28.9.01 1,250,000 0 1,250,0002001/02 15.6.01 1,760,712 506,611 2,267,3232002/03 21.6.02 292,066 97,352 389,4184,355,542— Restricted Share Awards ............... n/a 30.3.01 774,725 0 774,725n/a 28.9.01 662,500 0 662,500n/a 22.5.02 32,374 0 32,374n/a 27.5.02 25,000 0 25,0001,494,599ESIP:— Performance Share Awards (ii) ........... n/a 14.7.03 2,263,516 0 2,263,516Notes:(i) Matching shares are normally only added if the release of the relevant awards is deferred for three or six years after the original vestingdate (for Incentive Awards) or three years (in the case of Performance Share Awards).(ii) Vesting of all or part of the Performance Share Awards is normally subject to the achievement of performance criteria.123

5.7 Save as disclosed herein, during the three years immediately preceding the date of this Offering Circular,there has been, and there is proposed, no issue of share capital of the Parent and no material issue of sharecapital of any of its subsidiaries (other than intra-group issues of wholly owned subsidiaries).6. Accounting Reference DateThe accounting reference date of the Parent is 31 March.7. Summary of the Memorandum and Articles of Association of the Parent7.1 Memorandum of AssociationA summary of the principal objects as stated in the Memorandum of Association is set out in paragraph 3.3above.7.2 Articles of AssociationThe following is a summary of certain of the provisions of the Articles of Association of the Parent:(a) Share rightsSubject to the provisions of the Statutes (as defined in the Articles) and without prejudice to thespecial rights attached to any existing shares or class of shares, any shares may be issued by theParent with such rights or restrictions as the Parent may by ordinary resolution determine or, subjectto or in default of such determination, as the Parent’s Board determines.Subject to the provisions of the Statutes, shares may be issued by the Parent which are to beredeemed or are to be liable to be redeemed either at the option of the Parent or the shareholder. Allunissued shares of the Parent are at the disposal of the Parent Board.(b)Voting rightsSubject to any special rights or restrictions as to voting attached to any class of shares, on a show ofhands every shareholder who is present (whether in person or by corporate representative, in the caseof a corporation) at a general meeting will have one vote and on a poll every shareholder present(whether in person, or by proxy, or by corporate representative, in the case of a corporation) willhave one vote for every share held.At any general meeting of the Parent a resolution put to a vote will be decided on a show of handsunless a poll is demanded in the manner prescribed in the Articles. In the case of equality, theChairman shall have a casting vote. No shareholder is entitled at any general meeting to exercise anyrights attaching to its shares unless all calls and other sums payable on the shares have been paid.If any shareholder (or any person appearing to be interested in shares held by such shareholder) hasfailed to comply with a notice duly served under Section 212 of the Act, requiring the shareholder todisclose certain details of its interest in shares, the Parent Directors may suspend the shareholder’sability to attend or vote at any general meeting or at any meeting of the holders of any class of sharesof the Parent for the duration of the default in respect of the shares in relation to which the defaultoccurs (the “Default Shares”).In addition, where the Default Shares represent 0.25% or more of the issued shares of the class inquestion, the Parent Directors may retain any dividend (or other money payable in respect of suchshares) and remove the shareholder’s ability to elect to receive shares in lieu of a cash dividend andmay also impose certain restrictions on transfer of the Default Shares. These restrictions cease whenthe Parent Directors are satisfied that the information required by the Section 212 notice has beenreceived, whereupon any dividends or other moneys accrued in respect of the Default Shares arepaid (without interest).(c)DividendsSubject to the provisions of the Statutes, the Parent may, by ordinary resolution, declare dividends inaccordance with the respective rights of the shareholders, provided that no such dividends shallexceed the amount recommended by the Parent Directors. Unless provided otherwise, all dividendsshall be declared and paid according to the amounts paid on the shares on which the dividend is paid,but no amount paid on a share in advance of the date on which a call is payable shall be treated forthese purposes as paid on a share.124

Unless and to the extent that rights attaching to shares provide otherwise (and to the extent that theParent Board considers the profits of the Parent justify payments), the shareholders are entitled toshare equally amongst themselves profits available for distribution and resolved to be distributed, inproportion to the numbers of shares held by them and the amounts paid up on those shares.Interim dividends may be paid if profits are available for distribution and if the Parent Directors soresolve. No dividend payable on a share will bear interest.Dividends otherwise payable on a share on which the Parent has a lien may be retained and appliedtowards the debt or liability for which the lien exists.The Parent Directors may, with the prior approval (by ordinary resolution) of the shareholders at anyannual general meeting direct the payment of a dividend in specie or offer the shareholders the rightto elect to receive further shares by way of scrip dividend, credited as fully paid, instead of cash inrespect of all or part of such dividend or dividends as may be declared or paid.The Parent Board may withhold payment from a member of any dividend in respect of DefaultShares, as set out in (b) above.Each dividend on the shares of the Parent is paid to those shareholders on the register of members onthe record date for such dividend fixed by the Parent Directors.Any dividend unclaimed after 12 years from the date when it became due for payment will beforfeited and will revert to the Parent.(d)Winding-upOn a winding-up of the Parent, the liquidator may, with the authority of an extraordinary resolutionof the Parent and any other sanction required by the Act:(i)(ii)divide up the whole or any part of the balance of the assets of the Parent available fordistribution amongst the shareholders whether in kind or in specie, in such proportions as theliquidator thinks fit and may, for that purpose, value any assets and determine how the divisionshall be carried out as between the shareholders or the different classes of shareholders; orvest the whole or any part of the balance of the assets available for distribution in trusteesupon such trusts for the benefit of the members as the liquidator thinks fit.No member will be compelled to accept any asset on which there is any liability.(e)Uncertificated sharesSubject to the provisions of the Regulations, the Parent’s Board may permit the holding of shares inany class of shares in uncertificated form and title to such shares may be transferred by means of arelevant system (as defined in the Regulations). The Parent’s Board may determine that any class ofshares will cease to be a participating security in a relevant system.(f)Transfer of sharesShareholders may effect the transfer of their certificated shares in writing in any usual or commonform, or in any other manner acceptable to the Parent Directors and permitted by the Act, the ListingRules and the LSE Admission Standards, and such transfers must be executed by or on behalf of thetransferor and unless the share is fully paid, by or on behalf of the transferee. All transfers ofuncertificated shares will be effected in accordance with the Regulations. The transferor will bedeemed to remain the holder of the share until the name of the transferee is entered onto the registerin respect of the transferred share.The Parent Directors have absolute discretion to refuse to register a transfer of a share which is notfully paid or on which the Parent has a lien without giving any reason but the transferee must beprovided with a notice of the refusal within two months of when the instrument of transfer waslodged with the Parent or the instructions of the Operator (as defined in the Regulations) werereceived, provided that the refusal does not prevent dealings in shares of that class in the Parent fromtaking place on an open and proper basis. The Parent Directors may also decline to register anytransfer of a share unless:(i)it is in respect of only one class of share;125

(g)(h)(i)(j)(ii) it is duly stamped, or adjudged or certified as not chargeable to stamp duty, and is deposited atthe Parent’s registered office, or such other place as the Parent Directors may from time totime determine, together with the relevant share certificate(s) and such other evidence of theright of the transferor to transfer as the Parent Directors reasonably require; and(iii) it is in favour of not more than four transferees.The Parent Directors may refuse to register a transfer of Default Shares, as described in paragraph(b) above.Variation of rightsSubject to the provisions of the Statutes, the special rights attaching to any class of share in theParent may be varied or abrogated with the sanction of an extraordinary resolution passed at aseparate general meeting of the holders of the relevant class, but not otherwise. Such class meetingsare subject to the same provisions which apply to general meetings, save that:(i) the quorum is members of the relevant class holding or representing in aggregate at least onethird of the nominal amount of the shares of the relevant class (other than in the case of anadjourned meeting);(ii) any person present in person or by proxy (being a holder of shares of the relevant class) maydemand a poll; and(iii) on a poll, every such holder has one vote for each share of the relevant class held by him.Whenever the share capital is divided into different classes of shares those rights will not be deemedto be varied by the creation or issue of further shares ranking equally with or subsequent to that shareor class of shares or by the purchase by the Parent of its own.Share warrantsThe Parent Board may issue share warrants to bearer in respect of any fully paid shares and provide(by coupon or otherwise) for payment of dividends or other money on the shares represented by thewarrant. The Parent Board may determine the conditions on which share warrants to bearer will beissued, replaced or surrendered and the conditions on which the bearer may (if at all) attend and voteat general meetings.Alteration of capital and purchase of own sharesThe Parent may from time to time by ordinary resolution increase its share capital, consolidate anddivide all its shares, or any of them, into shares of larger amounts, sub-divide all its shares, or any ofthem, into shares of smaller amounts and cancel any shares not taken or agreed to be taken by anyperson. Subject to and in accordance with the provisions of the Act and to any rights attached to anyshares, the Parent may also reduce its share capital or any capital redemption reserve, share premiumaccount or other undistributable reserve in any manner.The Parent may purchase any of its own shares subject to and in accordance with the provisions ofthe Act.Directors voting when materially interestedA Parent Director may not vote at a meeting of the Parent Board on any proposal (except thosedescribed below) in which, to his knowledge he (or a person connected to him) has a materialinterest otherwise than by virtue of his interests in shares, debentures or other securities or otherwisein or through the Parent. A Parent Director will not be counted in the quorum at a meeting relating toany resolution on which he is barred from voting. However, subject to the Act, a Parent Director willnot be prevented from voting solely if his material interest arises from:(i) the giving of any guarantee, security or indemnity to him for money lent or obligationsincurred by him at the request of, or for the benefit of, the Parent or any of its subsidiaries;(ii) the giving of any guarantee, security or indemnity for a debt or obligation of the Parent or anyof its subsidiaries for which he has assumed responsibility under a guarantee or indemnity orby giving security;(iii) any proposal concerning an offer of shares or debentures or other securities of the Parent orany of its subsidiaries for subscription or purchase or exchange in which offer he is or is to beinterested as a participant in the underwriting or sub-underwriting;126

(k)(l)(m)(o)(p)(iv)(v)(vi)any proposal concerning any other company in which he is interested provided that he doesnot hold an interest (as that term is used in Sections 198 to 211 of the Act) representing 1% ormore of the issued shares of any class of the equity share capital or voting rights;any proposal for the benefit of employees of the Parent which does not award him any benefitnot generally accorded to the employees to whom the contract or arrangement relates; andany proposal concerning insurance which the Parent is empowered to purchase and/ormaintain for any Parent Director.Directors’ remunerationThe Non-Executive Directors are entitled to such remuneration as the Parent Directors approve andthe Parent Directors are entitled to be repaid all reasonable expenses incurred by them properly inattending and returning from Parent Board meetings or meetings of a committee of the Parent Board.The Parent Board may, if it considers it appropriate, pay a Parent Director a further sum as additionalremuneration for services beyond his normal duties.Number and share qualification of DirectorsUnless and until otherwise determined by ordinary resolution of the Parent, the number of ParentDirectors shall not be less than three. A Parent Director is not required to hold any shares of theParent by way of qualification.Retirement and removal of DirectorsAt each annual general meeting, one third of the Parent Directors for the time being (or, if theirnumber is not a multiple of three, the number nearest to but not greater than one third) shall retirefrom office. A Parent Director who retires at an annual general meeting is eligible for re-election.Any Parent Director may, in accordance with and subject to the provisions of the Statutes, beremoved from office by ordinary resolution of the Parent of which special notice has been given. Inaddition, each Director is obliged to retire at the first AGM after appointment and at every thirdAGM thereafter.Borrowing powers exercisable by the Parent DirectorsSubject to the restrictions in the Articles of Association, the Parent Directors may exercise all of theParent’s powers to borrow money. The borrowing limit, without prior sanction of an ordinaryresolution of the Parent, is two and a half times the issued Share Capital and Consolidated Reservesas those expressions are defined in the Articles of Association. These borrowing powers can beamended by an ordinary resolution.Chairman, etc.The Parent Directors may elect from their number a Chairman and they may elect one or moreDeputy Chairmen, Vice Chairmen, Managing Directors, Chief Executives or Deputy ChiefExecutives for such periods as they shall determine. The Parent Directors may also appoint asPresident of the Parent any person who is not a Director of the Parent but who has renderedoutstanding service to the Parent.8. Dividends per Ordinary ShareThe dividend record of the Parent in respect of the three financial years ended 31 March 2003 is as follows:Total net dividend perOrdinary ShareYear ended 31 March 2001 ............................................... 16.00pYear ended 31 March 2002 ............................................... 8.00pYear ended 31 March 2003 ............................................... 8.00p127

9. Principal EstablishmentsAt the date of this Offering Circular, the principal establishments occupied by the Group, being thosewhich account for more than 10% of net turnover or production, are as follows:LocationPrincipal activityApprox Area(square feet)Freehold orleasehold2-2-17 Akasaka, Minato-ku, Tokyo 107, Japan ............ Offices 18,391 Freehold986 Hodosawa, Gotemba City, Shizuoka 412-8505, Japan . . . Manufacturingoperations 797,843 FreeholdIndustrielaan 24, 5406 XC Uden, The Netherlands .........Manufacturingoperations 753,200 Freehold27 Wrights Lane, London W8 5SW, UK ................. Offices 69,205 Leasehold43 Brook Green, London W6 7EF, UK .................. Offices 85,672 Freehold150 Fifth Avenue, New York, NY 10011, USA ........... Offices 151,732 LeaseholdCapitol Tower, 1750 North Vine Street,Hollywood, CA 90028, USA ..........................1 Capitol Way, Jacksonville, IllinoisIL6260, USA ......................................Offices /recording studio 92,366 FreeholdManufacturingoperations 854,216 Freehold10. Principal Subsidiary and Associated UndertakingsThe following table shows the principal subsidiaries of the Parent, being those that the Parent considers arelikely to have a significant effect on the assessment of the Parent’s assets and liabilities, financial position orprofits and losses:NameRegisteredofficeActivityCountry ofincorporationPercentageownedCapitol-EMI Music, Inc. ........... 1 Recordedmusic USA 100CapitolRecords,Inc .............. 1 Recordedmusic USA 100Chrysalis Records Ltd ............. 2 Recordedmusic England 100EMI Music Germany GmbH & Co.KG ............................ 3 Recordedmusic Germany 100EMI Entertainment World, Inc. ...... 1 Musicpublishing USA 100EMIGroupFinanceplc ............ 4 Corporate finance company England 100EMIGroupHoldings(UK)Ltd ...... 4 Corporate holding company England 100EMI Group International HoldingsLtd ............................ 4 Corporate holding company England 100EMI Group North America Holdings,Inc. ............................ 1 Corporate holding company USA 100EMI Group North America, Inc. ..... 1 Corporate holding company USA 100EMIGroupWorldwideLtd ......... 4 Corporate holding company England 100EMI Music Australia Pty Ltd ........ 5 Recordedmusic Australia 100EMIMusicFranceSA ............. 6 Recordedmusic France 100EMI Music Italy SpA .............. 7 Recordedmusic Italy 100EMI Music Publishing Ltd ......... 8 Musicpublishing England 100EMIRecordsLtd ................. 2 Recordedmusic England 100JobeteMusicCompany,Inc. ........ 9 Musicpublishing USA 80Priority Records, LLC ............. 10 Recordedmusic USA 100Toshiba-EMILtd ................. 11 Recordedmusic Japan 55VirginMusicGroupLtd ........... 4 Corporate holding company England 100Virgin Records America, Inc. ....... 10 Recordedmusic USA 100VirginRecordsLtd ............... 12 Recordedmusic England 100Registered Offices:(1) The Prentice-Hall Corporation System, Inc., 1013 Centre Road, Wilmington, Delaware DE19805, New Castle County(2) EMI House, 43 Brook Green, London W6 7EF(3) IM Mediapark 8, 78670 Koln(4) 27 Wrights Lane, London W8 5SW(5) 100 Glover Street, Cremorne, New South Wales 2090(6) 43 rue Camille Desmoulins, 92130 Issy-les-Moulineaux(7) Piazza San Babila 3, 20122 Milano(8) 127 Charing Cross Road, London WC2H 0EA(9) The Prentice-Hall Corporation System, Inc., 601 Abbott Road, East Lansing, Michigan MI48823, Ingham County(10) The Prentice-Hall Corporation System, Inc., 2730 Gateway Oaks Drive, Sacramento, California CA95833, Sacramento County(11) 2-17, Akasaka 2-Chome, Minato-ku, Tokyo 107(12) Kensal House, 553-579 Harrow Road, London W10 4RHAll of the above companies operate principally in their country of incorporation or registration. The Parentalso owns shares (directly and indirectly) in a number of other subsidiaries.128

11. Directors and Other Interests11.1 The names of the Parent Directors and their functions are set out below:NameEric Luciano Nicoli ..................Martin Neal Bandier .................Alain Michel Joseph Isidore Levy ......RogerConantFaxon.................Sir Dominic Cadbury ................Dr Harald Einsmann .................Peter Andrew Georgescu .............David Jay Londoner .................Kathleen Anne O’Donovan ...........FunctionChairmanChairman and Chief Executive Officer, EMI Music PublishingChairman and Chief Executive Officer, EMI MusicChiefFinancial OfficerNon-executiveDeputyChairmanNon-executiveNon-executiveNon-executiveNon-executive11.2 The business address of each of the Parent Directors is 27 Wrights Lane, London W8 5SW, UK.11.3 The interests of the Parent Directors and their immediate families (all of which are beneficial unlessotherwise stated) in the Parent issued share capital which:(a) are required to be notified by each Parent Director pursuant to Section 324 or Section 328 of the Act;(b) are required pursuant to Section 325 of the Act to be entered into the register referred to therein; or(c) are interests of a connected person (within the meaning of Section 346 of the Act) of an ParentDirector which would, if the connected person were an Parent Director, be required to be disclosedunder paragraph (a) or (b) above and the existence of which is known to or could with reasonablediligence be ascertained by that Parent Director,are as follows:Beneficially heldOrdinary SharesAwards of Ordinary Sharesunder Incentive PlansNon-contingent ContingentELNicoli ......................................... 69,250 133,982 811,677MNBandier ....................................... 379,760 — 2,204,750AMJILevy ....................................... 775,000 — —RCFaxon ......................................... 82,806 276,664 686,582Sir Dominic Cadbury ................................ 50,000 — —DrHEinsmann ..................................... 114,800 — —P A Georgescu ...................................... 100,000 — —D J Londoner ....................................... 10,000 — —K A O’Donovan .................................... 2,000 — —Notes:(i) The table assumes full vesting of Performance Share Awards based on the achievement of performance targets. The table also includespotential matching share awards in respect of awards of Ordinary Shares which have been or could be deferred.(ii) The Trustee of the EMI Group General Employee Benefit Trust holds 4,133,124 Ordinary Shares (less than 1% of the issued sharecapital). The Parent’s Executive Directors are deemed to be interested in these Ordinary Shares.129

11.4 The following Parent Directors have options over Ordinary Shares (all of which have been granted for noconsideration) under the 1995 Scheme, the SAYE Scheme and the ESIP:Date grantedExerciseprice (p)Number ofshares underoptionExerciseperiodfrom (i)Exerciseperiod toELNicoli....................... 3June1999 440.000 60,000 3.6.02 2.6.0921 June 2002 243.300 838,471 21.6.05 20.6.1219 June 2003 (ii) 96.000 16,588 1.9.08 28.2.0914 July 2003 119.250 1,030,589 14.7.06 13.7.13MNBandier..................... 25August 1995 590.315 253,084 25.8.98 24.8.0523 August 1996 734.500 60,000 23.8.99 22.8.066 June 1997 575.000 52,144 6.6.00 5.6.07AMJILevy .................... 15October2001 300.000 3,000,000 15.10.04 14.10.1115 October 2001 400.000 3,000,000 15.10.04 14.10.1115 October 2001 500.000 2,000,000 15.10.04 14.10.1115 October 2001 700.000 2,000,000 15.10.04 14.10.112 January 2002 357.300 2,000,000 2.1.05 1.1.1219 December 2002 146.050 2,000,000 19.12.05 18.12.1219 December 2002 (iii) 2,000,000 19.12.06 18.12.1219 December 2002 (iii) 2,000,000 19.12.07 18.12.1219 December 2002 (iii) 2,000,000 19.12.08 18.12.1219 June 2003 (ii) 96.000 16,588 1.9.08 28.2.09RCFaxon ...................... 23August 1996 734.500 67,500 23.8.99 22.8.066 June 1997 575.000 50,326 6.6.00 5.6.075 February 2002 305.000 500,000 5.2.05 4.2.1228 May 2002 267.250 250,000 28.5.05 27.5.1221 June 2002 244.000 283,000 21.6.05 20.6.1214 July 2003 119.250 750,511 14.7.06 13.7.13Note:(i) Exercise of options is normally subject to the achievement of performance criteria.(ii) Options granted under the EMI Group Savings-Related Share Option Scheme, the exercise of which is not subject to theachievement of performance criteria.(iii) These options represent entitlements to options in respect of the three financial years up to and including, but ending on, 31March 2006. The exercise prices for these options will only be determined when the interim results for the respective financialyears have been announced using a five-day average share price.11.5 Save as disclosed in this Offering Circular, none of the Parent Directors nor any persons connected withany of them (within the meaning of Section 346 of the Act) have any interest in the share or loan capital ofthe Parent, whether beneficial or non-beneficial.11.6 No Parent Director has or has had any interest in any transaction which is or was unusual in its nature orconditions or significant to the business of the Group and which was effected by any member of the Groupduring the current or immediately preceding financial year or during an earlier financial year to the extentthat such transaction remains in any respect outstanding or unperformed.11.7 There are no outstanding loans granted by any member of the Group to or for the benefit of any of theParent Directors.130

11.8 In so far as is known to the Parent, the following persons are directly or indirectly interested in 3% or moreof the Parent’s issued share capital:NameNo. ofOrdinary SharesPercentage ofexisting issuedshare capitalThe Capital Group Companies, Inc. ................................ 46,058,849 5.84AXA SA/AXA Investment Managers UK Limited .................... 43,798,242 5.55Schroder Investment Management Limited .......................... 39,868,983 5.06Merrill Lynch & Co. Inc./Merrill Lynch Investment Managers Limited .... 32,170,777 4.08Standard Life Investments Ltd .................................... 31,749,808 4.03Legal & General Investment Management Limited .................... 28,464,577 3.61FMR Corporation/Fidelity International Limited/Edward C. Johnson III . . . 26,571,913 3.37Prudential plc/The Prudential Assurance Company Limited/M&GInvestment Management Limited ................................ 26,393,211 3.3411.9 Save as disclosed in paragraph 11.8 above, the Parent Directors are not aware of any person who,immediately following the issue of the Bonds, will be interested, directly or indirectly, in 3% or more ofthe Parent’s issued share capital.11.10 The Parent Directors are not aware of any person who, immediately following the issue of the Bonds, willexercise, or could exercise, directly or indirectly, jointly or severally, control over the Parent.12. Parent’s Directors RemunerationThe total aggregate remuneration paid and benefits in kind granted (under any description whatsoever) to theParent Directors by members of the Group for the year ended 31 March 2003 was £9,001,842.13. Employee Share Schemes13.1 The Parent has grants and awards outstanding under the following employee share schemes:(a)(b)(c)(d)(e)(f)(g)1984 THORN EMI Executive Share Option Scheme (“the 1984 Scheme”);1995 EMI Group Executive Share Option Scheme (“the 1995 Scheme”);1996 EMI Group Savings-Related Share Option Scheme (“the SAYE Scheme”);EMI Group Senior Executive Incentive Plan (“SEIP”);EMI Executive Share Incentive Plan (“ESIP”);Levy, Munns and Rose Scheme; andGreenberg Scheme.13.2 Between 1998 and 8 July 2003, options over Ordinary Shares were granted or awards made under the 1995Scheme, the SAYE Scheme, the SEIP, the Levy, Munns and Rose Scheme and the Greenberg Scheme.From 9 July 2003 onwards, awards have been and will only be made under the SAYE Scheme and theESIP.The main provisions of each of the employee share schemes are as described in sub-paragraphs 13.3 to13.10 below.13.3 1995 Scheme(a)The 1995 Scheme was adopted on 21 July 1995 and has been approved by the Inland Revenue.Approved options to acquire Ordinary Shares were granted to UK-resident employees under the1995 Scheme. Since July 1995, the maximum value of approved options that any UK-residentindividual may have outstanding under the 1995 Scheme or any other similar Inland Revenueapproved option schemes operated by the Parent at any time is £30,000. Options in excess of thisvalue, and options granted to non-UK-resident Directors and senior executives, were granted underthe 1995 Scheme as unapproved options.131

(b)The 1995 Scheme has the following main features:(i) EligibilityThe 1995 Scheme was only available to employees or Directors of the Parent who were, fromtime to time, selected to participate by the Remuneration Committee of the Parent Directors(the “Committee”).(ii) Grant of optionsOptions under the 1995 Scheme were normally only granted within 42 days following theannouncement of the Parent’s interim or final results. No options were granted more than 10years after the adoption of the 1995 Scheme by the Parent.The price payable on the exercise of an option under the 1995 Scheme could not be less thanthe market value of an Ordinary Share on the date on which the option was granted (being theclosing middle-market price of an Ordinary Share derived from the London Stock ExchangeDaily Official List for such day), in respect of options granted to US residents, or the averageof the market value during the five trading days up to and including the date of grant in respectof other recipients, or the nominal value of an Ordinary Share (if greater).An option could not be granted under the 1995 Scheme to any employee or Director of theParent over unissued Ordinary Shares which, when aggregated with any outstanding optiongranted to such employee or Director, would result in the aggregate value of all options heldby such person exceeding four times his/her remuneration.(iii) Limits(A) The maximum number of Ordinary Shares that could be issued under the 1995 Scheme,when aggregated with the number of Ordinary Shares issued under any other employeeshare option schemes, could not exceed 10% of the issued share capital of the Parent inany 10-year period.(B) No more than 5% of the Parent’s issued ordinary share capital could be issued or becapable of issue under options granted under any discretionary scheme operated by theParent in any 10-year period.(C) Options granted under the 1995 Scheme and any other Employee Share Scheme duringthe preceding three years were not permitted to exceed 3% of the issued ordinary sharecapital of the Parent as at the date of grant.(D) The total number of shares over which options could be granted under the 1995 Schemewas not permitted to exceed 220,000,000.(iv) Exercise of optionsOptions, which were not transferable, were normally exercisable after the expiry of threeyears, but before the expiry of ten years, from the date of grant. Exercise was conditional uponthe achievement of the performance criteria set by the Committee at the time of the grant ofthe relevant options.Early exercise of options was permitted in certain circumstances (including the optionholder’sdeath, a participant’s employing company ceasing to be a subsidiary of the Parent, aparticipant ceasing employment in certain other circumstances as decided by the Committee, atake-over offer for the Parent becoming unconditional, or a winding-up of the Parent) andcould be conditional on the achievement of certain performance requirements.(v) Adjustment of optionsIn the event of certain variations of capital, the terms of existing options could be subject toadjustment. Such adjustment would be subject to the prior approval of the Inland Revenue.(vi) GeneralThe 1995 Scheme may be amended by the Committee. However, no changes to the advantageof existing or future optionholders may be made without the prior approval of the shareholdersin general meeting. Amendments to the 1995 Scheme in respect of approved options wouldalso require the prior approval of the Inland Revenue.Details of the outstanding options under the 1995 Scheme are set out in paragraph 5.5(b) above.132

13.4 SAYE Scheme(a) The SAYE Scheme was originally adopted by the Parent’s shareholders on 15 July 1994 as the 1994THORN EMI SAYE Scheme; it was readopted by the Parent’s shareholders, with its current name,on 19 July 1996 prior to the demerger of Thorn plc from the Parent.(b)Options to acquire shares in the Parent may be granted to UK employees under the SAYE Scheme,which has been approved by the Inland Revenue.The SAYE Scheme, which is administered by the Parent Board, has the following main features:(i)(ii)(iii)(iv)(v)(vi)EligibilityEmployees who have such period of continuous service as the Parent Directors determine(between one month and five years) are eligible to apply for options under the SAYE Schemeon the basis of invitations made following the announcement of the Parent’s final or interimresults.Grant of optionsOptions are granted over Ordinary Shares having an aggregate acquisition price equal to thetotal savings plus the bonus earned under the related savings contract.The acquisition price per Ordinary Share payable on the exercise of an option shall bedetermined by the Parent Board and may not be less than 80% of the market value of anOrdinary Share or the nominal value of an Ordinary Share (if greater).To be granted an option, an eligible employees must take out a savings contract under whichthey agree to contribute between £5 and £250 per month for a period of three or five years, asthey elect.No options may be granted under the SAYE Scheme more than ten years after the adoption ofthe scheme by the Parent.Limits(A)(B)The maximum number of Ordinary Shares that may be issued under the SAYE Scheme,when aggregated with the number of Ordinary Shares issued under any other employeeshare option schemes, may not exceed 10% of the issued ordinary share capital of theParent in any 10-year period.Options granted under the SAYE Scheme and any other Employee Share Scheme in anythree year period must not exceed 3% of the issued ordinary share capital of the Parentas at the date of grant.Exercise of optionsOptions under the SAYE Scheme, which are not transferable, may normally be exercisedusing the repayments of the savings during the six-month period following completion of therelated savings contract if the optionholder has remained an employee.Early exercise of options is permitted in certain circumstances (including the optionholder’sdeath, a participant’s employing company ceasing to be a subsidiary of the Parent, a take-overoffer for the Parent becoming unconditional, or a winding-up of the Parent), but only to theextent that Ordinary Shares can be acquired with repayments made, plus interest earned, underthe related savings contracts.Adjustment of optionsIn the event of certain variations of capital, the terms of existing options will be subject toadjustment. Such adjustment is subject to the prior approval of the Inland Revenue.GeneralThe SAYE Scheme may be amended by the Parent Board. However, no changes to theadvantage of existing or future optionholders may be made without the prior approval of theParent’s shareholders in general meeting. Amendments to the SAYE Scheme also require theprior approval of the Inland Revenue.Details of options outstanding under the SAYE Scheme are set out in paragraph 5.5 above.133

13.5 SEIPThe SEIP was adopted on 16 August 1996 and had the following main features:(a)EligibilityAt the discretion of the Committee, all Directors and employees of the Parent or any of itssubsidiaries who devoted substantially the whole of their time and attention to the business of theGroup (or trustees acting on behalf of such individuals) were eligible to be selected by theCommittee to participate in the SEIP. The Committee limited the application of the SEIP toexecutive Parent Directors and certain other senior executives of the Group.(b)Grant of awardsSubject to the discretion of the Committee, no awards could be granted or released unless theperformance criteria, set by the Committee had been achieved. The Committee could amendpreviously set performance criteria where, in the reasonable opinion of the Committee, theircontinued application would be inappropriate or impractical and the amended performance criteriawould be no more or less difficult to satisfy than the criteria originally imposed.Awards under the SEIP were not to be granted more than 10 years after the adoption of the SEIP bythe Parent, unless the extension of the SEIP for a further period of up to ten years is approved byshareholders.(c)Incentive AwardsAnnual cash bonuses were granted subject to the achievement of annual performance criteria set bythe Committee in respect of the Parent or individual business units. Such cash bonuses weresatisfied, at the Committee’s discretion, either in the form of an immediate award of OrdinaryShares, or cash or, at the participant’s request, a right to receive Ordinary Shares on a deferred basis(“Incentive Awards”). Any deferral was normally for not less than three years. During deferral, theshares did not earn dividends but, to encourage shares to be held, a number of matching shares couldbe awarded so that the number of shares was increased by one-third if deferred for three years and bytwo-thirds if deferred for at least six years.(d)Performance Share AwardsParticipants were also normally eligible each year for performance related share awards(“Performance Share Awards”) calculated as a percentage of base salary. Each year’s PerformanceShare Award vested at the end of a three-year performance period, the number of Ordinary Sharesreleased depending upon the Parent or business unit performance against profit targets for the threeyearperiod set by the Committee. To encourage long-term retention of the Parent’s shares,participants could defer the release of an award for a further three-year period, and a number ofmatching shares could be awarded so that the number of shares was increased by one-third at the endof the deferral period. In the event of a change of control of the Parent, awards made prior to July1998 would vest in full. Subsequent awards would be released based on performance at target oractual performance to date, whichever was the greater.For executive Parent Directors, release of the Performance Share Award was normally subject to afurther performance requirement related to the Parent’s TSR. For the award to be released, theParent’s TSR must have at least equalled the TSR performance of the median of those companiesthat comprised the FTSE 100 at the start of the three-year performance cycle.(e)Exercise of optionsIn the event that a participant was no longer employed by a member of the Group at the proposeddate of release of an award that has been deferred, such award would lapse unless the Committeedetermined otherwise.Awards under the SEIP, including those that were deferred, were normally released in the event of atake-over, reconstruction, winding-up or demerger of the Parent, or on a participant ceasing to beemployed by a member of the Group. The Committee has discretion to determine the terms andconditions relating to the release of awards. In the case of a take-over and with the agreement of theacquiring company, existing awards may be exchanged for, inter alia, awards over the shares of suchacquiring company.134

(f)GeneralEntitlements to awards under the SEIP would be met from shares purchased in the market and heldby the EMI Group General Employee Benefit Trust.The maximum number of shares due from outstanding awards under the SEIP is set out in paragraph5.5 above.13.6 ESIPThe ESIP was adopted on 9 July 2003 and has the following main features:(a) EligibilityAt the discretion of the Committee, all employees of the Parent and its subsidiaries (includingDirectors who are required to devote substantially the whole of their working time to the business ofthe Group) who are not within six months of their anticipated retirement ages will be eligible toparticipate in the ESIP.(b) Grant of AwardsAwards (the “Awards”) may be granted under Parts II to VI of the ESIP as follows:Part II – Inland Revenue approved share optionsPart III – Unapproved share optionsPart IV – US Incentive Stock OptionsPart V – Performance sharesPart VI – Restricted shares.Awards (which may relate to new and/or existing shares) may be granted within six weeks followingthe approval of the ESIP by shareholders and thereafter within six weeks following theannouncement by the Parent of its results for any period or the removal of any statutory or regulatoryrestriction which had previously prevented an Award being granted; and at other times incircumstances considered by the Committee to be exceptional.No Awards may be granted later than 10 years after the approval of the ESIP by shareholders,although the appropriateness of the ESIP will be reviewed by the Committee after five years.No payment will be required for the grant of an Award. Awards are neither transferable norpensionable.(c) Limits(A) No Awards shall be granted in any year which would, at the time they are granted, cause thenumber of shares allocated in the period of 10 years ending at that time under the ESIP, orunder any other employee share scheme adopted by the Parent, to exceed such number asrepresents 10% of the ordinary share capital of the Parent in issue at that time.(B) No Awards shall be granted in any year which would, at the time they are granted, cause thenumber of shares allocated in the period of 10 years ending at that time under the ESIP, orunder any other discretionary share scheme adopted by the Parent, to exceed such number asrepresents 5% of the ordinary share capital of the Parent in issue at that time.(d) Exercise of AwardsWith the exception of Awards made under Part II of the ESIP, the exercise of Awards may besatisfied by the transfer to the participant of a cash amount equal to the difference between themarket value of the shares on exercise and the amount payable by the participant to exercise theAward.(e) Adjustment of AwardsIn the event of any variation of share capital, adjustments considered to be appropriate may be madeto the total number of shares subject to Awards and (where relevant) the price payable on theexercise of Awards.(f) GeneralShares allotted under the ESIP will rank pari passu with all other Ordinary Shares for the time beingin issue (except for rights arising by reference to a record date prior to their allotment).135

(g)The ESIP may at any time be amended or added to by the Committee in any respect (subject tocompliance with the Listing Rules of the UK Listing Authority), provided that the prior approval ofthe Parent in general meeting must be obtained for any alteration or addition to the advantage of thepersons to whom Awards may be granted, to any of the rules governing eligibility, the limits onindividual participation and the number of shares which may be issued under the ESIP, the terms ofexercise of Awards, the rights attaching to shares acquired and the adjustment of Awards on avariation of capital, except for minor amendments to benefit the administration of the ESIP, to takeaccount of a change in legislation or to obtain or maintain favourable tax, exchange control orregulatory treatment for participants or Group companies.Awards granted under Parts II to IV(i) Types of AwardAwards granted under Parts II, III and IV take the form of share options. The Parent has obtainedUK Inland Revenue approval of Part II. Part III is not designed for Inland Revenue approval andis intended to be used primarily where executives have more than £30,000-worth of outstandingapproved options. Under Part IV, options may be granted as ‘Incentive Stock Options’ which canconfer certain tax reliefs on US participants. To comply with the US tax rules, the aggregatedmarket value (as at the date of grant) of shares in respect of which Incentive Stock Options mayfirst become exercisable by a participant each year is limited to US$100,000.Except to the extent required to obtain UK Inland Revenue or US Internal Revenue Serviceapproval, Parts II, III and IV of the ESIP are in all material respects identical.(ii) Limit on AwardsAwards granted to an individual under Parts II to IV in any year are normally limited to Awardsover shares worth (at grant) no more than 400% of base salary, unless the person has been grantedan Award under Part V in any year, in which case the limit is 300% of base salary. However,notwithstanding the above, in the first year of employment, the limit is 800% of base salary.(iii) Exercise priceThe price per share payable upon the exercise of an Award granted under Parts II to IV willnot be less than the higher of:(A) the average of the middle-market quotations of a share on the London Stock Exchangeon the three dealing days immediately prior to the grant date, provided that no suchdealing day may fall prior to the date on which the Parent last announced its results forany period; and(B) the nominal value of a share (unless the Award is expressed to relate only to existingshares).(iv) Exercise of AwardsAn Award granted under Parts II to IV with pre-vesting targets will normally be exercisablebetween three and 10 years following its grant, but normally only if and to the extent that thepre-vesting targets have been satisfied. The pre-vesting target that the Committee intends toapply to certain initial awards made under Parts II to IV relates to the Parent’s average annualcompound growth in EPS (calculated on a fully diluted and normalised basis) over the threeyearperiod following grant as follows:Average compoundEPS growth paProportion of AwardexercisableRPI+3%................ 33%RPI+5%................ 66%RPI+7%................ 100%To the extent that the pre-vesting targets are not met at the end of the three-year periodfollowing grant, the Award lapses. Therefore, there will be no ability to retest the pre-vestingtargets (which may be varied in certain circumstances following the grant so as to achievetheir original purpose).Awards granted with pre-grant but not pre-vesting conditions may become exercisable in nofewer than four annual tranches commencing on the first anniversary of the grant date. Noexecutive Parent Director will be eligible to be considered for the grant of such options.136

(v)(vi)Cessation of employmentAwards granted under Parts II to IV normally lapse on cessation of employment, unless theCommittee determines otherwise. However, Awards may become exercisable for a limitedperiod (irrespective of the period for which the Award has been held) following cessation ofemployment by reason of death, injury, ill health, disability, redundancy, where the optionholder’s employer or business unit ceases to be within the Group, or in other circumstances asthe Committee may determine.However, Awards subject to pre-vesting targets will only become exercisable to the extentprescribed by the pre-vesting targets. In these circumstances, the Committee, acting fairly andreasonably, will determine the extent to which the pre-vesting targets are satisfied, takingaccount of the performance of the Parent up to the cessation of employment. In the event ofretirement, such Awards remain unaffected and will vest to the extent prescribed by the prevestingtargets at the end of the three-year period after the grant date.In good-leaver cases, as defined in the ESIP rules, Awards subject to pre-grant but not prevestingtargets will become exercisable on cessation of employment, but only on a pro ratabasis to be calculated on the basis of the period of time elapsed between the grant date and thedate of the relevant event as a proportion of the period between the grant date and the date onwhich the Award would otherwise have become exercisable in full.Change in control, etc.Awards subject to pre-vesting targets will become exercisable in the event of anamalgamation, takeover, reconstruction or winding up of the Parent and, if the Committee sodecides, on a demerger, but not in the event of an internal reorganisation, and only to theextent prescribed by the pre-vesting targets. In these circumstances, the Committee, actingfairly and reasonably, will determine the extent to which the pre-vesting targets are satisfied,taking account of the performance of the Parent up to the relevant event.Awards subject to pre-grant but not pre-vesting targets will also become exercisable if thesecircumstances arise, but only on a pro rata basis to be calculated on the basis of the period oftime elapsed between the grant date and the date of the relevant event as a proportion of theperiod between the grant date and the date on which the Award would otherwise have becomeexercisable in full.(h)Awards granted under Part V(i) Type of AwardAwards granted under Part V take the form of rights to receive shares in the Parent in thefuture for the payment of £1 in total (i.e. not £1 for each share subject to the Award). Awardswere structured in this way to provide certainty of tax treatment and the Committee maydispense with the need to receive such nominal payments where it is not necessary to securesuch treatment.(ii) Limit on AwardsAwards granted to an individual under Part V in any year are normally limited to Awards overshares worth (at grant) no more than 200% of base salary, unless the person has been grantedan Award under Part III in any year, in which case the limit is 150% of base salary. However,notwithstanding the above, in the first year of employment, the limit is 400% of base salary.(iii) Exercise of AwardsAn Award granted under Part V will normally be exercisable three years after the grant date,but only if and to the extent that the pre-vesting target has been satisfied. The pre-vestingtarget that the Committee intends to apply to the initial awards made under Part V relates tothe Parent’s TSR performance compared with the companies in the FTSE Mid-250 Index(excluding investment trusts) on the grant date. The targets will be as follows:Percentage ofParent’s rankingAward that vestsBelowmedian................................................... 0%Median ........................................................ 25%At or above upper quartile (i.e. within the highest 20%) .................. 100%137

Awards vest on a straight-line basis between the median and upper-quintile points. To theextent that the pre-vesting targets are not met at the end of the three-year period followinggrant, the Award lapses. Therefore, there will be no ability to retest the pre-vesting targets(which may be varied in certain circumstances following the grant so as to achieve theiroriginal purpose). However, notwithstanding the Parent’s TSR performance, no Awards willbecome exercisable unless the Committee is satisfied that the Parent’s TSR performancereflects the underlying performance of the Parent.Awards will lapse six months after they become exercisable, unless the Committee determinesotherwise.(iv)Cessation of employmentAwards granted under Part V normally lapse on cessation of employment, unless theCommittee determines otherwise. However, Awards may become exercisable for a limitedperiod (irrespective of the period for which the Award has been held) following cessation ofemployment by reason of death, injury, ill health, disability, redundancy, where the optionholder’s employer or business unit ceases to be within the Group or in other circumstances asthe Committee may determine, but only to the extent prescribed by the pre-vesting targets. Inthese circumstances, the Committee, acting fairly and reasonably, will determine the extent towhich the pre-vesting targets are satisfied, taking account of the performance of the Parent upto the cessation of employment. In addition, Awards will only become exercisable in thesecircumstances on a pro rata basis to be calculated on the basis of the period of time elapsedbetween the grant date and the date of the relevant event as a proportion of the period betweenthe grant date and the date on which the Award would otherwise have become exercisable infull.In the event of retirement, Awards remain unaffected and will vest to the extent prescribed bythe pre-vesting targets at the end of the three-year period after the grant date.(v)Change in control, etc.Awards will become exercisable in the event of an amalgamation, takeover, reconstruction orwinding up of the Parent and, if the Committee so decides, on a demerger, but not in the eventof an internal reorganisation, and only to the extent prescribed by the pre-vesting targets. Inthese circumstances, the Committee, acting fairly and reasonably, will determine the extent towhich the pre-vesting targets are satisfied, taking account of the performance of the Parent upto the relevant event. In addition, Awards will only become exercisable in these circumstanceson a pro rata basis to be calculated on the basis of the period of time elapsed between the grantdate and the date of the relevant event as a proportion of the period between the grant date andthe date on which the Award would otherwise have become exercisable in full.(i)Awards granted under Part VI(i)Type of AwardAwards granted under Part VI take the form of rights to receive shares in the Parent inthe future for the payment of £1 in total (i.e. not £1 for each share subject to the Award).(ii)Limit on AwardsWhere an Award granted under Part VI is made in connection with the recruitment of anew employee or office-holder of the Group, the aggregate market value of all theshares over which such Award may be made must not normally exceed the intrinsicvalue (as determined by the Committee) of any incentive awards that had been grantedto the new employee or office-holder pursuant to, and still are subsisting immediatelyprior to the cessation of, his/her previous employment the benefit of which theindividual is foregoing by so ceasing his/her previous employment.Notwithstanding the above, the Committee may also grant an additional Award underPart VI over such number of shares whose market value is no greater than the amountby which the base salary payable to the individual over such period as the Committeedetermines is less than the base salary that the Committee reasonably determines to bethe market rate of salary for that individual for that period.138

(iii)(iv)(v)Exercise of AwardsAn Award granted under Part VI shall become exercisable on such date or dates as theCommittee may determine on the grant date.Cessation of employmentIf a participant ceases employment, the Committee shall determine the extent to which (if atall) and the period of time within which (if at all) an Award granted under Part VI may beexercised, unless the Committee has previously determined such matters on the grant date.Change in control, etc.In the event of an amalgamation, takeover, reconstruction or winding up of the Parent and, ifthe Committee so decides, on a demerger, the Committee shall determine the extent to which(if at all) and the period of time within which (if at all) an Award granted under Part VI maybe exercised, unless the Committee has previously determined such matters on the grant date.13.7 Levy, Munns and Rose SchemeThe rules of this option scheme are incorporated into option agreements between the employing companyand Messrs Levy, Munns and Rose. The features of the options granted under this scheme are similar to the1995 Scheme described above and, in respect of Alain Levy, are described in greater detail under 13.9(b)below.13.8 Greenberg SchemeThe rules of this option scheme are set out in rules adopted in 2001, the features of which do notsignificantly vary from those under the 1995 Scheme, described above.13.9 Individual awards to executive Parent Directors(a)(b)In 2001, in place of overlapping annual share awards based on three-year performance cycles,Martin Bandier was granted a one-time performance share award under the SEIP of up to 1.25mshares. The performance condition for this award requires 2% pa growth in the Music Publishingdivision’s economic profit for the entire performance period to 31 March 2006, at which level onesixthof the shares accrue, with maximum payout at 7% pa growth (with straight-line vestingbetween these two points). Mr Bandier was also granted a restricted share award under the SEIP of662,500 shares. These shares will vest no earlier than 31 March 2006. The award was in lieu ofadditional base salary and is not, therefore, subject to performance requirements. The aim of theaward was to bring Mr Bandier’s basic annual remuneration into line with competitive practice in theUS, where he is based, whilst aligning his interests more closely with those of the shareholders andproviding him with a strong incentive to remain with the Group. No further awards of this nature areenvisaged.Mr Bandier’s outstanding share awards, referred to above, would vest, in whole or in part, if he wasdismissed (other than for cause) or following a change of control of the Parent. Both his performanceshare and restricted share awards will lapse if, prior to the vesting date of 31 March 2006, MrBandier resigns voluntarily or his employment agreement is terminated by the employing companyfor cause. However, if Mr Bandier’s employment is terminated without cause by the employingcompany, he will receive the proportion of his restricted share award which he would have earnedhad he remained in employment for a further two years. Under these same circumstances, he wouldalso receive a proportion of his performance share awards pro-rated to the date of termination,subject to the achievement of the relevant performance criteria.In the event of a change of control of the Parent, all of the restricted share award would vest togetherwith a proportion of the performance share award pro-rated to the date of the change of control.Following a change of control, a pro rata proportion of his performance share award would vesttogether with an additional 625,000 shares up to the maximum award of 1.25m shares on the earlier ofone year after the date of the change of control or the termination of his employment without cause.On joining the Parent in October 2001, Alain Levy was granted options over 10m shares at exerciseprices ranging between 300p and 700p. The middle-market price of an Ordinary Share on the date ofgrant was 265.26p. He was also entitled to subsequent grants of options over 2m shares eachfollowing the announcement of the interim results for each of the four financial years up to 31 March139

13.10 1984 Scheme2006. These levels of grant reflect the fact that his base salary and potential cash bonus aresubstantially lower than for equivalent positions in other major record companies, and are designedto align his interests closely with those of shareholders.On 19 December 2002, the remaining entitlements were consolidated into a single grant under theLevy, Munns and Rose Scheme. The terms of the grant replicate those agreed on Mr Levy’s joiningand, therefore, the exercise prices will only be determined when the interim results for the respectiveyears have been announced using a five-day average share price. Similarly, the normal three-yearvesting period will only commence on the date that the exercise price is determined.Exercise of all the options is generally conditional on the Parent’s adjusted diluted EPS growing byat least RPI plus 2.5% pa over the period from 31 March 2002 to the 31 March following therelevant vesting date with retesting throughout the option’s life.It was concluded that such grants were necessary to recruit Mr Levy, bearing in mind the significantsalary sacrifice made by him and, therefore, the Parent made such grants relying on the exemption inchapter 13.13A of the UK Listing Authority’s Listing Rules. No amendments will be made to thearrangements established for Mr Levy that are to his advantage without seeking the consent of theParent’s shareholders. No benefits under these option arrangements for Mr Levy will be pensionable.The terms of Mr Levy’s contract prescribe the impact of a cessation of employment or a change ofcontrol of the Parent on the share options granted under his contract. If Mr Levy’s appointment isterminated by the Parent without cause or by Mr Levy with good reason (as defined in the contract)prior to 15 October 2003, the options over 8m shares priced from 300p to 500p will vest and may beexercised without regard to the performance conditions but all other such options will lapse. ShouldMr Levy’s appointment be terminated in such circumstances after 15 October 2003, the options overall 10m shares will vest and may be exercised without regard to the performance conditions.If Mr Levy’s appointment is terminated in the circumstances described in the preceding paragraph,the options for which the prices have been determined by the date of termination will vest and maybe exercised without regard to the performance conditions; all other options would lapse. Theexercise of options vested under the preceding paragraph must be undertaken within 12 months ofthe date of termination. On a change of control of the Parent, Mr Levy’s options will be treated as ifhis employment had been terminated by the Parent without cause with the result that they may beexercised without regard to performance conditions, but the exercise period will be limited to sixmonths. A termination resulting from Mr Levy’s death or disability will be treated in the samemanner as a termination by the Parent without cause.The 1984 Scheme was approved by shareholders on 14 September 1984. It enabled participants to begranted options over Ordinary Shares during the 10 years up to 13 September 1994. The 1984 Scheme isadministered by the Committee. The 1984 Scheme has the following main features:(a)(b)(c)EligibilityFull-time employees (including executive Directors) of the Parent, and of such of its subsidiaries asthe Parent’s Board decided should be participating companies, were eligible to be selected forparticipation in the 1984 Scheme.Grant of optionsThe price at which a participant would subscribe for an Ordinary Share on the exercise of an optionwould be the middle-market quotation of Ordinary Shares on the last business day before the optionwas granted, derived from the Daily Official List of the London Stock Exchange. This price wouldbe adjusted in the event of certain variations in the Parent’s share capital.Exercise of optionsOptions under the 1984 Scheme would normally only be exercised between three and ten years aftertheir grant.Early exercise of options may be permitted in certain circumstances (including the if the participantleaves service with the Group through death, redundancy, retirement, injury or disability, or becausethe participant’s employing company ceases to be a subsidiary of the Parent, or on a winding up ofthe Parent).140

(d) GeneralOrdinary Shares issued under the 1984 Scheme rank pari passu with other Ordinary Shares then inissue, save that they do not rank for any rights attributable to Ordinary Shares by reference to arecord date preceding the date of exercise.The Parent’s Board may amend the 1984 Scheme to obtain or maintain Inland Revenue approval, butotherwise no alterations to the benefit of optionholders may be made without the prior approval ofthe Parent’s shareholders in general meeting. Any amendments would also require the prior approvalof the Inland Revenue.Details of outstanding options under the 1984 Scheme are set out in paragraph 5.5.14. Principal InvestmentsDetails of the principal investments made by the Group in other undertakings in the three financial yearsended 31 March 2003 and the current financial year, of the principal investments currently being made andof the principal future investments on which firm commitments have already been made by the Group areas set out below. These investments were financed by a combination of external borrowings (including thesix year Sterling bond issued in May 2002 and the £1.3 billion credit facility entered into in April 2002)and internal cash resources.(a) during the financial year ended 31 March 2001 the net cash consideration for the assets acquired was£10.8m. The assets acquired included a 50% stake in the No Limit record label in the US, Relax In(a recorded music company in the Middle East) and the remaining minority interests in Monitor (aCzech Republic music company) and OctoArts (a Philippines recorded music company);(b) during the financial year ended 31 March 2002, the net cash consideration for the assets acquiredwas £22.6m. The assets acquired included Dino (a recorded music company in Holland), Poko (arecorded music company in Finland), Celebrity (a recorded music company in the US), a 60% stakein Insight (a recorded music company in the UK) and a 50% stake in Tooth and Nail (a musicbusiness in the US);(c) during the financial year ended 31 March 2003, the net cash consideration for the assets acquiredwas £22.4m. The assets acquired included Mute Limited (a recorded music and artist managementbusiness in the UK), Gold Label Limited (a recorded music business in Hong Kong), eCenturyLimited (a recorded music business in Taiwan), Rover Music NV, A&S Productions bvba (musicpublishing businesses in Belgium), an additional 50% stake in Delabel Editions SA (a musicpublishing business in France) and a 25% stake in The In Good Company Co Limited (a holdingcompany for the services and activities of the artist Robbie Williams); and(d) during the current financial year, the net cash consideration for the assets acquired up to 31 August2003 (the latest practicable date prior to the publication of this Offering Circular), was no more than£70 million. The assets acquired include an additional 30% stake in Jobete (a publishing catalogue inthe US in which the Parent already held 50%) and IO Music (a recorded music business in Korea).40% of the shares in IO Music are held on trust for Norman Cheng pursuant to a joint ventureagreement.15. Material ContractsThe following contracts directly concerning the issue of the Bonds have been entered into by a member ofthe Group within the two years immediately preceding the publication of this Offering Circular or will,shortly after the date of this Offering Circular, be entered into by a member of the Group which are or maybe material:(a) the Subscription Agreement (details of which are set out in “Subscription and Sale”);(b) the Trust Deed (details of which are set out in “Terms and Conditions of the Bonds”);(c) the Agency Agreement (details of which are set out in “Terms and Conditions of the Bonds”);(d) the Loan Agreement (details of which are set out in “Description of the Issuer”);(e) the Deed Poll (details of which are set out in “Description of the Deed Poll”); and(f) the Deed of Guarantee (details of which are set out in “Terms and Conditions of the Bonds”).141

16. LitigationNeither the Issuer nor the Parent nor any other member of the Group is or has been engaged in nor, so faras either the Issuer or the Parent or the Group is aware, has pending or threatened any legal or arbitrationproceedings which may have, or have had, during the 12 months preceding the date of this OfferingCircular, a significant effect on the Issuer or the Group’s financial position.17. No Significant Change17.1 There has been no significant change in the financial or trading position, and no material adverse change inthe financial position or prospects, of the Parent or of the Group since 31 March 2003, the date of the lastaudited financial statements of the Group.17.2 There has been no interruption in the Group’s business during the 12 months preceding the date of thisOffering Circular which may have, or has had, a significant effect on the Group’s financial position.18. General18.1 The Bonds have been accepted for clearance through Euroclear and Clearstream, Luxembourg. TheCommon Code is 017678051 and the ISIN is XS0176780517.18.2 The auditors of the Parent are Ernst & Young LLP, Registered Auditors of 1 More London Place, LondonSE1 2AF.18.3 The financial information included herein does not constitute statutory accounts of the Parent within themeaning of Section 240 of the Act. The auditors of the Group’s accounts for the years ended 31 March2002 and 31 March 2003 were Ernst & Young LLP and for the year ended 31 March 2001 were Ernst &Young. In each such year, Ernst & Young or Ernst & Young LLP, as the case may be, made reports underSection 235 of the Act in respect of each set of statutory accounts and each such report was unqualified anddid not contain a statement under Section 237(2) or (3) of the Act. Statutory consolidated accounts of theGroup for the years ended 31 March 2001, 2002 and 2003 have been delivered to the Registrar ofCompanies in England and Wales.18.4 In this Offering Circular no separate financial information is given in respect of any of the Guarantorsother than the Parent, since such information is consolidated within the Parent’s consolidated financialstatements and within its capitalisation and indebtedness statement, and the accounts of the otherGuarantors, if presented on a stand-alone basis would not provide any significant additional information.19. Documents Available for InspectionCopies of the following documents will be available for inspection during normal business hours on anyweekday (Saturdays, Sundays and public holidays excepted) at the offices of Freshfields BruckhausDeringer, 65 Fleet Street, London EC4Y 1HS for a period of 14 days from the date of publication of thisOffering Circular:(a) the Memorandum and Articles of Association of each of the Issuer and each Guarantor;(b) the Subscription Agreement;(c) a draft (subject to modification) of the Trust Deed (including the forms of the definitive Bonds,Coupons, temporary Global Bond and permanent Global Bond);(d) a draft (subject to modification) of the Paying Conversion and Exchange Agency Agreement;(e) a draft (subject to modification) of the Loan Agreement;(f) a draft (subject to modification) of the Deed Poll;(g) a draft (subject to modification) of the Deed of Guarantee; and(h) the audited consolidated accounts of the Group for the three financial years ended 31 March 2001,31 March 2002 and 31 March 2003, respectively.142

EMI Group plcIndex to Financial StatementsPageConsolidated Profit and Loss Account for the Years Ended 31 March 2003, 2002 and 2001 (as restated) ....144Consolidated Balance Sheets as of 31 March 2003, 2002 and 2001 (as restated) ........................146Consolidated Statement of Total Recognised Gains and Losses for the Years Ended 31 March 2003, 2002and 2001 (as restated) ....................................................................147Reconciliation of Movements in Consolidated Shareholders’ Funds for the Years Ended 31 March 2003,2002 and 2001 ..........................................................................147Consolidated Cash Flow Statement for the Years Ended 31 March 2003, 2002 and 2001 .................148Accounting Policies .......................................................................150Notes to the Financial Statements ............................................................154143

EMI Group plcConsolidated Profit and Loss AccountBeforeexceptionalitems andamortisationcontinuingYear ended 31 March 2003Exceptionalitems(Note 9)andamortisationcontinuingJointVentureHMVGroup plcdiscontinuedNotesTotal£m £m £m £mTurnover:Total(includingjointventure) .............................. 2,175.4 — 65.5 2,240.9Less: joint venture turnover ................................ — — (65.5) (65.5)Group turnover .............................................. 1 2,175.4 — — 2,175.4Cost of sales ................................................ 2 (1,331.2) (45.5) — (1,376.7)Grossprofit ................................................. 844.2 (45.5) — 798.7Distribution costs ............................................ 2 (98.7) — — (98.7)Administration expenses ....................................... 2 (528.9) (15.8) — (544.7)Other operating income, net .................................... 2 37.4 (6.3) — 31.1Group operating profit (loss) ................................... 1&3 254.0 (67.6) 186.4Share of operating profit in joint venture before exceptionalitems ................................................ — — 0.4 0.4Share of operating exceptional items in joint venture ............ — — — —Share of operating profit in joint venture ...................... — — 0.4 0.4Share of operating profits (losses) in associated undertakings ...... 0.2 (0.1) — 0.1Total operating profit (loss) ............................ 254.2 (67.7) 0.4 186.9Non-operating exceptional items ................................ 9 — 209.7 — 209.7Profit(loss)beforefinancecharges .............................. 254.2 142.0 0.4 396.6Finance charges:Group (including associated undertakings) ........................ (76.1) — — (76.1)Joint venture before exceptional items ............................ — — (1.2) (1.2)Joint venture – exceptional items ................................ — — — —Jointventure ................................................ — — (1.2) (1.2)Totalfinancecharges ......................................... 6 (76.1) — (1.2) (77.3)Profit (loss) on ordinary activities before taxation ................... 178.1 142.0 (0.8) 319.3Taxation on profit on ordinary activities .......................... 7 (45.1) (38.4) 0.3 (83.2)Profit (loss) on ordinary activities after taxation .................... 133.0 103.6 (0.5) 236.1Minority interests (equity) ..................................... (10.3) 3.9 — (6.4)Profit (loss) attributable to members of the Holding Company ......... 122.7 107.5 (0.5) 229.7Dividends(equity) ........................................... 8 (62.8)Transfer to (from) profit and loss reserve .......................... 166.9144

EMI Group plcConsolidated Profit and Loss AccountYear ended 31 March 2002Year ended 31 March 2001 RestatedExceptionalExceptionalBeforeexceptionalitems andamortisationcontinuingitems(Note 9)andamortisationcontinuingJointVentureHMVGroup plccontinuing TotalBeforeexceptionalitems andamortisationcontinuingitems(Note 9)andamortisationcontinuingJointVentureHMVGroup plccontinuing Total£m £m £m £m £m £m £m £m2,445.8 — 707.9 3,153.7 2,672.7 — 662.6 3,335.3— — (707.9) (707.9) — — (662.6) (662.6)2,445.8 — — 2,445.8 2,672.7 — — 2,672.7(1,592.7) (133.8) — (1,726.5) (1,696.6) (42.6) — (1,739.2)853.1 (133.8) — 719.3 976.1 (42.6) — 933.5(119.9) (7.6) — (127.5) (136.9) — — (136.9)(577.4) (131.5) — (708.9) (556.1) (52.4) — (608.5)35.1 (19.0) — 16.1 49.4 — — 49.4190.9 (291.9) — (101.0) 332.5 (95.0) — 237.5— — 44.6 44.6 — — 34.4 34.4— — (10.3) (10.3) — — — —— — 34.3 34.3 — — 34.4 34.4(1.1) (1.8) — (2.9) (3.8) (1.7) — (5.5)189.8 (293.7) 34.3 (69.6) 328.7 (96.7) 34.4 266.4— — — — — — — —189.8 (293.7) 34.3 (69.6) 328.7 (96.7) 34.4 266.4(60.4) — — (60.4) (74.3) — — (74.3)— — (20.7) (20.7) — — (29.3) (29.3)— — (2.1) (2.1) — — — —— — (22.8) (22.8) — — (29.3) (29.3)(60.4) — (22.8) (83.2) (74.3) — (29.3) (103.6)129.4 (293.7) 11.5 (152.8) 254.4 (96.7) 5.1 162.8(38.6) 7.8 (7.4) (38.2) (69.5) — (1.4) (70.9)90.8 (285.9) 4.1 (191.0) 184.9 (96.7) 3.7 91.9(15.2) 6.7 — (8.5) (16.8) 4.1 — (12.7)75.6 (279.2) 4.1 (199.5) 168.1 (92.6) 3.7 79.2(62.2) (125.2)(261.7) (46.0)145

EMI Group plcConsolidated Balance Sheets31 March2003 20022001RestatedNotes £m £m £mFixed assetsMusiccopyrights ......................................... 11 451.2 518.2 546.8Goodwill ............................................... 12 56.2 34.0 61.1Tangible fixed assets ...................................... 13 289.4 277.3 306.8Investments: joint venture (HMV Group plc) ................... 14 — — —Investments: associated undertakings ......................... 14 6.7 7.1 26.0Other fixed asset investments ............................... 14 15.5 22.4 22.6Investments: own shares ................................... 15 7.3 13.1 14.4826.3 872.1 977.7Current assetsStocks.................................................. 16 36.4 43.0 46.1Debtors: amounts falling due within one year ................... 17 816.7 763.7 868.9Debtors: amounts falling due after more than one year ........... 17 138.6 133.8 115.4Deferred taxation ......................................... 23 14.6 17.1 20.4Investments: liquid funds .................................. 18 0.5 0.7 0.7Cash at bank and in hand and cash deposits .................... 18 100.2 85.7 136.91,107.0 1,044.0 1,188.4Creditors: amounts falling due within one yearBorrowings ............................................. 18 (38.5) (771.0) (662.9)Other creditors ........................................... 21 (1,365.0) (1,297.1) (1,358.1)(1,403.5) (2,068.1) (2,021.0)Net current (liabilities) assets .............................. (296.5) (1,024.1) (832.6)Total assets less current liabilities .......................... 529.8 (152.0) 145.1Creditors: amounts falling due after more than one yearBorrowings ............................................. 18 (922.0) (373.3) (467.5)Other creditors ........................................... 22 (58.1) (27.4) (28.9)(980.1) (400.7) (496.4)Provisions for liabilities and chargesDeferred taxation ......................................... 23 (5.5) (3.4) (3.6)Otherprovisions ......................................... 24 (104.4) (173.1) (116.7)Investments: joint venture (HMV Group plc) 14Share of gross assets .................................. — 203.3 191.9Share of gross liabilities ............................... — (363.2) (360.2)— (159.9) (168.3)(109.9) (336.4) (288.6)(560.2) (889.1) (639.9)Capital and reservesCalled-up share capital .................................... 25 110.4 110.4 110.4Share premium account .................................... 25 445.8 445.8 445.6Capital redemption reserve ................................. 26 495.8 495.8 495.8Other reserves ........................................... 26 256.0 256.0 256.0Profit and loss reserve (including goodwill previously writtenoff) .................................................. 26 (2,001.1) (2,338.2) (2,084.0)Equity shareholders’ funds ................................ (693.1) (1,030.2) (776.2)Minority interests (equity) ................................ 27 132.9 141.1 136.3(560.2) (889.1) (639.9)146

EMI Group plcConsolidated Statement of Total Recognised Gains and LossesFinancial Year ended 31 March2003 20022001Restated£m £m £m £m £m £mProfit (loss) for the financial yearGroup..................................... 230.1 (202.0) 82.3Jointventure ............................... (0.5) 4.1 3.7Associated undertakings ...................... 0.1 (1.6) (4.0)Profit (loss) for the financial year – as reported ........ 229.7 (199.5) 82.0Currency translation – Group* ..................... (13.5) (6.5) (11.2)Currency translation – joint venture and associatedundertakings ................................. — 0.5 (0.6)Other recognised losses ........................... (13.5) (6.0) (11.8)Total recognised gains and losses relating to the year . . . 216.2 (205.5) 70.2Prior-yearadjustments ........................... — 12.2 —Total gains and losses since last Annual Report ........ 216.2 (193.3) 70.2* Net currency gains of £7.6m (2002: £1.5m; 2001: £13.6m ), which relate to foreign currency borrowings to finance investment overseas,and the related tax charge of £nil (2002: £nil; 2001: £5.5m), have been included within the Group currency translation movement onreserves.Reconciliation of Movements in Consolidated Shareholders’ FundsFinancial Year ended 31 March2003 20022001Restated£m £m £m £m £m £mOpening shareholders’ funds – as reported ........... (1,030.2) (788.4) (727.6)Prior-year adjustments (see Note 26) ................ — 12.2 15.0Opening shareholders’ funds – restated .............. (1,030.2) (776.2) (712.6)Profit (loss) for the financial year ................... 229.7 (199.5) 82.0Prior-yearadjustment ............................ — — (2.8)Dividends(equity) .............................. (62.8) (62.2) (125.2)Other recognised losses .......................... (13.5) (6.0) (11.8)Goodwill adjustments ............................ 183.7 9.9 (4.4)Share of joint venture reserves adjustment ............ — 3.6 (2.4)Shares issued ................................... — 0.2 1.0Net increase (decrease) in shareholders’ funds for theyear ........................................ 337.1 (254.0) (63.6)Closing shareholders’ funds ....................... (693.1) (1,030.2) (776.2)147

EMI Group plcConsolidated Cash Flow StatementFinancial Year Ended 31March2003 2002 2001Notes £m £m £mNet cash inflow from operating activities ....................... 117.2 211.9 314.8Dividends received from associated undertakings ................ 14 0.1 0.7 0.3Returns on investments and servicing of financeInterest received ............................................ 8.3 10.3 15.4Interest paid ................................................ 19(viii) (12.8) (68.8) (90.7)Interest element of finance lease payments ........................ (0.1) (0.2) (0.3)Dividends paid to minorities ................................... (6.5) (3.3) (25.2)Net cash outflow from returns on investments and servicing offinance .................................................. (11.1) (62.0) (100.8)Tax paid .................................................. (38.7) (22.3) (48.5)Capital expenditure and financial investmentPurchaseofmusiccopyrights .................................. 11 (7.6) (10.6) (6.4)Saleofmusiccopyrights ...................................... 1.2 — —Purchase of tangible fixed assets ................................ 13 (68.5) (39.2) (42.8)Sale of tangible fixed assets ................................... 9.3 10.1 17.8Purchase of investments: own shares ............................ 15 (0.8) (1.9) (1.2)Purchase of fixed asset investments ............................. 14 (10.4) — (1.2)Sale of fixed asset investments ................................. 35.6 0.1 0.4Purchase of associated undertakings ............................. 14 (1.8) (3.6) (0.8)Loans repaid by associated undertakings ......................... 14 0.7 0.8 (11.2)Disposal of associated undertakings ............................. 2.2 1.9 —Net cash outflow from capital expenditure and financialinvestment .............................................. (40.1) (42.4) (45.4)Acquisitions and disposalsPurchase of businesses net of cash acquired ....................... 31 (22.4) (22.6) (10.8)DisposalofholdinginHMVGroup ............................. 209.5 — —Deferred consideration paid ................................... (1.0) (1.4) (3.9)Disposal of subsidiary undertaking .............................. (0.7) — —Net cash inflow (outflow) from acquisitions and disposals ......... 185.4 (24.0) (14.7)Equity dividends paid ....................................... (29.4) (125.3) (125.2)Net cash inflow (outflow) before management of liquid resourcesand financing ............................................ 183.4 (63.4) (19.5)Issue of Ordinary Share capital ................................. — 0.2 1.0Management of liquid resources ................................ 20 1.1 5.1 38.9Financing:Newloans ............................................. 20 603.5 460.3 240.1Loansrepaid ........................................... 20 (757.5) (458.6) (312.5)Capital element of finance leases repaid ...................... 20 (0.9) (1.1) (1.2)Net cash (outflow) inflow from management of liquid resources andfinancing ................................................ (153.8) 5.9 (33.7)Increase (decrease) in cash ................................... 20 29.6 (57.5) (53.2)148

EMI Group plcConsolidated Cash Flow Statement—(Continued)Reconciliation of Group operating profit (loss) to net cash inflow from operating activitiesFinancial Year Ended 31March2003 2002 2001Notes £m £m £mGroup operating profit (loss) ..................................... 186.4 (101.0) 237.5Depreciation charge ............................................ 13 43.0 51.0 57.0Amortisation charge:Musiccopyrights .......................................... 11 39.0 43.5 42.6Goodwill ................................................ 12 3.7 6.0 9.5Fixed asset write-down ......................................... 13 — 1.1 —Goodwill write-down – subsidiaries ............................... 12 12.1 29.3 —Goodwill write-down – associated undertakings ...................... 14 — 8.5 —Music copyrights write-down .................................... 6.5 — —Current asset investment write-down .............................. 2.5 — —Investments: own shares write-down ............................... 3.8 — —Associated undertaking write-down ............................... 14 — 7.0 —Amounts provided ............................................. 24 9.7 107.2 14.1Provisions utilised:Disposals and fundamental reorganizations ..................... 24 (1.6) (12.5) (7.4)Other ................................................... (83.7) (16.9) (23.6)(Increase) decrease in working capital:Stock ................................................... 2.4 2.6 (4.6)Debtors.................................................. (94.8) 63.9 (104.6)Creditors................................................. (11.8) 22.2 94.3Net cash inflow from operating activities ......................... 117.2 211.9 314.8149

EMI Group plcAccounting PoliciesBasis of preparationThe consolidated financial statements are prepared under the historical cost convention and in accordance withapplicable accounting standards. The results in the period ended 31 March 2003, represent continuing operationsexcept the joint venture (HMV Group plc).Basis of consolidationThe consolidated financial statements comprise the accounts of the Company and its subsidiaries. The results ofall subsidiaries are taken from their accounts made up to 31 March. The results of subsidiaries, joint ventures andassociated undertakings disposed of or acquired during the year are included up to, or from, the date that controlpasses.In 2002 the Group revised the geographical segments shown in Note 1 to reflect more accurately the way it iscurrently managed. The 2001 amounts have been restated to reflect this.Changes in financial reporting standardsThe Accounting Standards Board issued the following Financial Reporting Standards effective for theCompany’s year ended 31 March 2002: FRS 17 – Retirement Benefits; FRS 18 – Accounting Policies; and FRS19 – Deferred Tax. The transitional arrangements for FRS 17 have been adopted with effect from 31 March 2002(see note 30).FRS 18 was adopted by the Group with effect from 1 April 2001 and has no material impact on the financialstatements. FRS 19 was adopted by the Group with effect from 1 April 2001 and the amounts for the year ended31 March 2001 have been restated where appropriate (see note 26). Significant new accounting policies arisingfrom their adoption are detailed below.Foreign currenciesTransactions denominated in foreign currencies are recorded at the rates of exchange ruling at the date of thetransaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into sterling eitherat year-end rates or, where there are related forward foreign exchange contracts, at contract rates. The resultingexchange differences are dealt with in the determination of profit for the financial year.On consolidation, average exchange rates have been used to translate the results of overseas subsidiaries, jointventures and associated undertakings. The assets and liabilities of overseas subsidiaries and associatedundertakings are translated into sterling at year-end rates.Exchange differences arising from the retranslation at year-end exchange rates of:(i)(ii)the opening net investment in overseas subsidiaries, joint ventures and associated undertakings andforeign currency borrowings in so far as they are matched by those overseas investments; andthe results of overseas subsidiaries, joint ventures and associated undertakings,are dealt with in Group reserves.TurnoverTurnover represents the invoiced value or contracted amount of goods and services supplied by the Company andits subsidiaries. Turnover excludes value added tax and similar sales-related taxesPension costsPension costs, which are determined in accordance with SSAP 24 – Accounting for Pension Costs are charged tothe profit and loss account so as to spread the cost of pensions over the working lives of the employees within theGroup. Valuation surpluses or deficits are amortised over the expected remaining working life within the Groupof the relevant employees (estimated to be eight years in respect of the UK). The amortisation of valuationsurpluses is restricted to an amount equal to the regular pension cost. Accordingly, employer expense in respectof the main scheme, which covers employees in the UK, has been taken as £nil in the period ended March 31,2003 for reasons of conservatism.150

EMI Group plcJoint ventures and associated undertakingsWhere the Group has an investment in an entity which is sufficient to give the Group a participating interest, andover which it is in a position to exercise significant influence, the entity is treated as an associated undertakingand is accounted for using the equity method. Entities in which the Group holds an interest on a long-term basisand which are jointly controlled by the Group and one or more other parties under a contractual arrangement, aretreated as joint ventures and are accounted for using the gross equity method.The results of joint ventures and associated undertakings are taken from their accounts made up to31 March or such earlier date (not prior to 31 December) which represents their financial period end, as adjustedfor material items that have occurred in the intervening period.Goodwill and other intangiblesGoodwill and catalogue intangibles arising on acquisitions made after 31 March 1998 are capitalised andamortised over their expected useful life, principally restricted to 20 years, in accordance with FRS10 – Goodwilland Intangible Assets. They are reviewed for impairment at the end of the first full financial year followingacquisition and in other periods if events or changes in circumstances indicate that the carrying value may not berecoverable.Goodwill arising on acquisitions made before 31 March 1998 has been charged directly against shareholders’funds in the year of acquisition and is included within the profit and loss reserve, yet separately identified withinthe reserves note. This goodwill will remain in reserves until, on the disposal or closure of any business, theprofit and loss account includes a charge in respect of the goodwill previously written off against shareholders’funds on the acquisition of the business.Music copyrightsMusic copyrights purchased prior to 1 April 1989 were written off against shareholders’ funds on acquisition.Copyrights acquired as a result of acquisitions on or after 1 April 1989 are capitalised as intangible assets in theGroup balance sheet, and are amortised by equal annual amounts over not more than 20 years, other than inexceptional circumstances when sufficient ongoing impairment tests can be performed to support a usefuleconomic life of over 20 years. Where a useful economic life of up to 20 years has been adopted, copyrights arereviewed for impairment at the end of the first full financial year following acquisition and in other periods ifevents or changes in circumstances indicate that the carrying value may not be recoverable.Advances to artistsAdvances to artists and repertoire owners are assessed and the value of the unrecouped portion to be included indebtors is determined by the prospects of future recoupment, based on past sales performance, current popularityand projected sales.Leased assetsAssets held under finance leases are included as tangible fixed assets at their estimated purchase cost anddepreciated over their expected useful lives, or over the primary lease period, whichever is shorter. Theobligations relating to finance leases (net of finance charges allocated to future periods) are included underborrowings due within or after one year, as appropriate. Operating lease rentals are charged to the profit and lossaccount on a straight-line basis over the lease term.Depreciation of tangible fixed assetsDepreciation of tangible fixed assets is calculated on cost at rates estimated to write off the cost, less theestimated residual value of the relevant assets, by equal annual amounts over their expected useful lives; effect isgiven, where necessary, to commercial and technical obsolescence.The annual rates used are:Freehold buildings and long-term leasehold property .......... 2%Short-term leasehold property ............................. Period of leasePlant, equipment and vehicles ............................. 10–33 1 ⁄3%151

EMI Group plcThe carrying values of tangible fixed assets are reviewed for impairment in periods if events or changes incircumstances indicate the carrying value may not be recoverable.StocksStocks and work in progress are stated at the lower of cost and net realisable value, less progress payments onuncompleted contracts and provisions for expected losses. Cost includes manufacturing overheads whereappropriate.TaxationDeferred tax is recognised in respect of all timing differences that have originated but not reversed at the balancesheet date, where transactions or events have occurred at that date that will result in an obligation to pay moretax, or right to pay less, or to receive more, tax, with the following exceptions:ŠŠŠŠProvision is made for tax on gains arising from the revaluation (and similar fair value adjustments) offixed assets, or gains on disposal of fixed assets, only to the extent that, at the balance sheet date,there is a binding agreement to dispose of the assets concerned. However, no provision is madewhere, on the basis of all available evidence at the balance sheet date, it is more likely than not thatthe taxable gain will be rolled over into replacement assets.Provision is made for gains which have been rolled over into replacement assets only to the extentthat, at the balance sheet date, there is a commitment to dispose of the replacement assets.Provision is made for deferred tax that would arise on remittance of the retained earnings of overseassubsidiaries, associates and joint ventures only to the extent that, at the balance sheet date, dividendshave been accrued as receivable.Deferred tax assets are recognised only to the extent that the Directors consider that it is more likelythan not that there will be suitable taxable profits from which the underlying timing differences canbe deducted.Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods inwhich timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balancesheet date.Financial instrumentsAny premium or discount associated with the purchase of interest rate instruments is amortised over the life ofthe transaction. Interest receipts and payments are accrued to match the net income or cost with the relatedfinance expense. No amounts are recognised in respect of future periods.If a swap is unwound early, the gain or loss is spread over the remaining life of the original instrument.New media holdingsHoldings in new media companies that arise as a consequence of licensing, distribution and other similar dealswith such companies, are carried at cost less provision for diminution in value. The carrying value at31 March 2003 was £6.4m (2002: £5.3m; 2001: £1.4m). Income from these holdings, net of costs, is onlyrecognised when received as cash and is treated as other operating income. The costs relating to theseinvestments are held within debtors until they are recognised with the related income.152

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EMI Group plcNotes to Consolidated Financial Statements1. Segmental analyses2003Operating OperatingTurnover profit assets£m £m £m No.AverageemployeesBy class of business:RecordedMusic .............................................. 1,774.2 150.5 180.6 7,439Music Publishing ............................................. 401.2 103.5 409.2 649HMVGroupplc–discontinued .................................. n/a n/a — n/aGroup* ..................................................... 2,175.4 254.0 589.8 8,088Operating exceptional items and amortisation# ...................... (67.6)Group operating profit (loss)* .................................. 186.4By origin:United Kingdom .......................................... 330.9 69.1 76.8 1,162RestofEurope ........................................... 660.5 88.6 6.5 2,510Latin America ............................................ 51.0 (2.5) 7.4 324North America ........................................... 706.1 68.3 376.9 2,573Asia Pacific .............................................. 409.9 27.6 116.2 1,382Other ................................................... 17.0 2.9 6.0 137Group* ..................................................... 2,175.4 254.0 589.8 8,088By destination:United Kingdom .......................................... 316.8RestofEurope ........................................... 675.3Latin America ............................................ 46.3North America ........................................... 707.4Asia Pacific .............................................. 406.7Other ................................................... 22.9Group* ..................................................... 2,175.4* Group turnover and operating profit (loss) excludes the Group’s share of amounts relating to the joint venture (HMV Group plc), which was discontinued on 15May 2002, and associated undertakings. Amounts relating to the joint venture have been excluded due to non-coterminous period ends.** As at 31 March 2002 the geographic segments have been revised to reflect more accurately the way the business is currently managed. The comparatives for2001 have been restated to reflect this.# Comprises operating exceptional items of £(24.9)m (2002: £(242.4)m; 2001:£(42.9)m) and amortisation of goodwill and music copyrights of £(42.7)m (2002:£(49.5)m; 2001: £(52.1)m). The split of operating exceptional items and amortisation of goodwill and music copyrights is as follows:154

EMI Group plcNotes to Consolidated Financial Statements—(Continued)2002 2001TurnoverOperatingprofitOperatingassetsAverageemployees TurnoverOperatingprofitOperatingassetsRestated**Averageemployees£m £m £m No. £m £m £m No.2,029.4 83.1 44.4 8,644 2,282.0 227.5 224.4 9,388416.4 107.8 453.9 626 390.7 105.0 516.9 608n/a n/a (162.9) n/a n/a n/a (168.3) n/a2,445.8 190.9 335.4 9,270 2,672.7 332.5 573.0 9,996(291.9) (95.0)(101.0) 237.5338.9 59.4 (113.1) 1,423 338.8 43.1 (53.2) 1,557732.0 98.7 (13.1) 2,765 753.4 113.6 6.6 2,79088.1 (2.8) 3.1 422 132.1 12.3 20.1 567826.3 (2.1) 333.7 2,923 886.5 76.5 486.3 3,138439.8 33.6 118.6 1,522 539.9 81.7 108.8 1,71720.7 4.1 6.2 215 22.0 5.3 4.4 2272,445.8 190.9 335.4 9,270 2,672.7 332.5 573.0 9,996337.4 356.3726.9 721.688.9 132.0828.6 889.3440.6 540.023.4 33.52,445.8 2,672.7155

EMI Group plcNotes to Consolidated Financial Statements—(Continued)1. Segmental analyses (continued)By class of business: 2003 2002 2001 By origin: 2003 2002 2001£m £m £m £m £m £mRecordedMusic ........... (24.2) (235.1) (49.1) United Kingdom ....... (16.3) (19.2) (9.1)Music Publishing ........... (43.4) (56.8) (45.9) RestofEurope......... (12.1) (53.3) (15.4)Group ................... (67.6) (291.9) (95.0) Latin America ......... (0.1) (22.2) (2.3)North America ......... (38.4) (176.0) (58.4)Asia Pacific ........... (0.4) (19.0) (9.3)Other ................ (0.3) (2.2) (0.5)Group ............... (67.6) (291.9) (95.0)The reconciliation of operating assets to net liabilities is as follows:Note 2003 2002 2001£m £m £mOperating assets ................................................. 589.8 335.4 573.0Tax, dividends and net interest payable ............................... (290.2) (166.6) (220.1)Capital employed ................................................ 299.6 168.8 352.9Netborrowings .................................................. 18 (859.8) (1,057.9) (992.8)Net liabilities .................................................... (560.2) (889.1) (639.9)2. Analysis of profit and loss account2003 2002 2001£m £m £mCost of sales ........................................................ 1,376.7 1,726.5 1,739.2Cost of sales is analysed as:–normal........................................................ 1,331.2 1,592.7 1,696.6– exceptional items and music copyright amortisation .................... 45.5 133.8 42.6Net operating expenses:Distribution costs ................................................. 98.7 127.5 136.9Administration expenses ........................................... 544.7 708.9 608.5Other operating income, net ........................................ (31.1) (16.1) (49.4)612.3 820.3 696.0Net operating expenses are analysed as:–normal........................................................ 590.2 662.2 643.6– exceptional items and goodwill amortisation .......................... 22.1 158.1 52.4Other operating income principally comprises the Group’s share of income from joint marketing arrangements,income from disposal of investments entered into to support distribution, manufacturing and product supplyarrangements, net patent income and income from new media investments, including in 2001 income frommusicmaker.com of £1.8m.156

EMI Group plcNotes to Consolidated Financial Statements—(Continued)3. Group operating profit (loss)2003 2002 2001£m £m £mOperating profit (loss) is stated after charging:Amortisation of music copyrights .......................................... 39.0 43.5 42.6Amortisation of goodwill ................................................ 3.7 6.0 9.5Depreciation of tangible fixed assets ....................................... 43.0 51.0 57.0Operating lease rentals:Property .......................................................... 23.6 25.3 20.0Plant, equipment and vehicles ......................................... 3.4 4.7 6.7Research and development expenditure ..................................... 0.1 0.2 0.14. Fees to auditors2003 2002 2001£m £m £mAudit fees paid to Ernst & Young .............................................. 2.2 2.1 2.4Audit fees paid to other firms ................................................. 0.1 0.1 0.2Other fees paid to Ernst & Young:UK .................................................................. 0.6 0.3 3.5Non-UK.............................................................. 0.8 1.2 1.6Total .................................................................... 3.7 3.7 7.7Other fees include £0.8m (2002: £0.7m; 2001: £0.7m) paid to Ernst & Young for tax compliance and planningservices, £0.6m (2002: £0.8m; 2001: £3.9m) for regulatory and other assurance (of which £3.7m in 2001 was inconnection with the proposed merger with Warner Music Group).5. Directors’ and employees’ costs2003 2002 2001£m £m £mWages and salaries ........................................................ 331.5 390.0 383.4Social security costs ....................................................... 46.1 52.0 48.4Other pension costs (see Note 30) ............................................ 12.8 13.9 14.5Total ................................................................... 390.4 455.9 446.3For details of directors’ remuneration, see the “Management” section of this document.6. Finance charges2003 2002 2001£m £m £m £m £m £mInterest payable on:Bank overdrafts and loans ............................... 61.8 55.9 76.4Other ............................................... 18.6 15.0 8.080.4 70.9 84.4Interest receivable on:Bank balances ........................................ (2.3) (2.7) (6.4)Other ............................................... (2.0) (7.8) (3.7)(4.3) (10.5) (10.1)Group finance charges (including associated undertakings) ......... 76.1 60.4 74.3Jointventurefinancecharges(HMVGroupplc).................. 1.2 22.8 29.3Totalfinancecharges ....................................... 77.3 83.2 103.6157

6. Finance charges (continued)EMI Group plcNotes to Consolidated Financial Statements—(Continued)In the year to 31 March 2002, other interest payable of £15.0m included a non-periodic cost of £3.6m, beingarrangement and underwriting fees paid in respect of the new £1.3bn bank facility signed on 18 March 2002.The Group holds various financial instruments in order to manage interest rate risk. Details of those financialinstruments held at the year end are given in Note 19 (viii).Finance charges for associated undertakings are £nil (2002: £nil; 2001: £nil).7. Taxation(i)(ii)2003 20022001Restated£m £m £mAnalysis of tax charge in the yearCurrent tax:UK corporation tax .............................................. 37.7 10.8 14.4Advance corporation tax written back on ordinary activities ............. — (20.6) (12.0)Double taxation relief ........................................... (4.9) (6.7) (7.5)32.8 (16.5) (5.1)Withholding tax ................................................ 8.5 12.1 15.6Other foreign tax ............................................... 49.4 36.4 58.5Adjustment in respect of prior periods ............................... (11.5) (4.3) (4.2)Jointventure................................................... (0.3) 7.4 1.4Total current tax ................................................ 78.9 35.1 66.2Deferred tax:Origination and reversal of timing differences ........................ 4.2 2.6 4.5Others:Associated undertakings ......................................... 0.1 0.5 0.2Tax on profit on ordinary activities ..................................... 83.2 38.2 70.9Factors affecting current tax charge for yearProfit (loss) on ordinary activities before tax ............................. 319.3 (152.8) 162.8Tax at weighted average rate .......................................... 118.1 (59.6) 59.5Effects of:Expenses not deductible for tax purposes ............................ 4.1 43.4 32.4Timing differences .............................................. (3.9) (6.0) 3.5Utilisation of tax losses and other credits ............................ (49.8) (36.3) (41.8)Origination of tax losses ......................................... 6.8 85.8 1.2Withholding taxes and prior year adjustments ......................... 3.6 7.8 11.4Current tax for the period ......................................... 78.9 35.1 66.2The weighted average tax rate is calculated by applying statutory tax rates to actual taxable profits and losses inthe countries of operation.(iii)Factors that may affect future tax chargesNo provision has been made for deferred tax where potentially taxable gains have been rolled over intoreplacement assets, except where there is a commitment to dispose of these assets. Such gains would onlybecome taxable if the assets were sold without it being possible to claim roll-over relief or offset existing capitallosses. The Group does not expect any tax to become payable in the foreseeable future.No deferred tax has been recognised in respect of tax on gains arising from the revaluation of fixed assets, as theGroup is not committed to the disposal of these assets. No deferred tax has been recognised in respect of theearnings of overseas subsidiaries as no dividends have been accrued.158

EMI Group plcNotes to Consolidated Financial Statements—(Continued)7. Taxation (continued)As at 31 March 2003 deferred tax assets which have not been recognised are tax losses and credits with a valueof £112.1m, depreciation in advance of capital allowances with a value of £10.1m, and other timing differenceswith a value of £100.1m, as there is insufficient certainty as to the availability of future taxable profits.8. Dividends (equity)2003 2002 2001 2003 2002 2001Per share Per share Per share £m £m £mOrdinary dividends (net):Interim ...................................... 2.00p 4.25p 4.25p 15.8 33.5 33.5Adjustment to 2003 and 2002 interim .............. — — — — (0.2) (0.3)Proposedfinal ................................ 6.00p 3.75p 11.75p 47.2 29.6 92.7Adjustment to 2002 and 2001 final ................ — — — (0.2) (0.7) (0.7)Total ........................................... 8.00p 8.00p 16.00p 62.8 62.2 125.2Subject to the approval of shareholders, the final dividend of 6.00p per share will be paid on 3 October 2003 toshareholders on the register at the close of business on 5 September 2003.9. Exceptional items(i) Operating exceptional items2003 2002 2001£m £m £mRelease of overprovision for reorganisation costs charged in prior year ............... 6.0 — —Restructuring and reorganisation costs:Headcount reduction .................................................. (6.0) (93.7) —Roster reduction ** ................................................... — (69.4) —Impact of economic downturn in Latin America*** .............................. — (16.7) —Restructuring of satellite label activity**** .................................... — (40.5) —Asset impairment and other* ................................................ (24.9) (22.1) —ProposedmergerwithWarnerMusicGroup—dealcosts ......................... — — (42.9)Total ................................................................... (24.9) (242.4) (42.9)* Including write-downs of music copyrights (£6.5m), goodwill (£12.1m), current asset investments (£2.5m) and investments own shares(£3.8m) in 2003. Including goodwill (£5.7m) and relocation and other costs (£16.4m) in 2002.** Includes £39.3m relating to the termination of the recording contract with Mariah Carey.*** Resulted in significantly increased returns and bad debts.**** Including goodwill (£23.6m) and associate investment (£15.5m) write-offs.Assets have been written down to their net realisable value or to a discounted cash flow projection. Averagediscount rates of 10% have been applied in the impairment reviews completed during the year. The discount ratesused are appropriate to the assets being valued.The attributable taxation credit relating to operating exceptional items is £nil (2002: £7.8m; 2001: £nil).(ii) Non-operating exceptional items2003 2002 2001£m £m £mProfit on sale of HMV Group plc, including goodwill of £262.5m (Note 31 (ii)) .......... 215.2 — —Loss on sale of subsidiary undertaking, including goodwill of £8.4m (Note 31 (iii)) ....... (25.2) — —Net gain (provision for loss) on sale of fixed assets* ................................ 19.7 — —Total...................................................................... 209.7 — —The attributable taxation charge relating to non-operating exceptional items is £38.4m (2002: £nil; 2001: £nil).* Including a provision for loss on disposal of £(1.8)m and a gain on sale of Viva Media AG of £28.0m.159

10. Earnings per Ordinary ShareEMI Group plcNotes to Consolidated Financial Statements—(Continued)2003 20022001RestatedBasic earnings per Ordinary Share is calculated as follows:Earnings ............................................... £229.7m £(199.5)m £ 79.2mWeighted average number of Ordinary Shares in issue ........... 784.0m 782.8m 782.3mEarningsperOrdinaryShare ............................... 29.3p (25.5)p 10.1pDiluted earnings per Ordinary Share is calculated as follows:Earnings ............................................... £229.7m £(199.5)m £ 79.2mAdjusted weighted average number of Ordinary Shares .......... 784.4m 783.6m 783.1mEarningsperOrdinaryShare ............................... 29.3p (25.5)p 10.1pAdjusted basic earnings per Ordinary Share is calculated as follows:Adjusted earnings ........................................ £122.2m £ 92.1m £171.8mWeighted average number of Ordinary Shares in issue ........... 784.0m 782.8m 782.3mAdjusted earnings per Ordinary Share ........................ 15.6p 11.8p 22.0pAdjusted diluted earnings per Ordinary Share is calculated as follows:Adjusted earnings ........................................ £122.2m £ 92.1m £171.8mAdjusted weighted average number of Ordinary Shares .......... 784.4m 783.6m 783.1mAdjusted earnings per Ordinary Share ........................ 15.6p 11.8p 21.9pAdjusted earnings are included as they provide a better understanding of the underlying trading performance ofthe Group on a normalised basis.Reconciliation of adjusted earningsYear ended31 March 2003Year ended31 March 2002Year ended31 March 2001Restated£m Per Share £m Per Share £m Per ShareEarnings/basic EPS ................................ 229.7 29.3p (199.5) (25.5)p 79.2 10.1pAdjustments:Operating exceptional items ...................... 24.9 3.2p 242.4 31.0p 42.9 5.5pNon-operating exceptional items .................. (209.7) (26.8)p — — — —Share of operating exceptional items in jointventure .................................... — — 10.3 1.3p — —Share of exceptional finance charges in jointventure .................................... — — 2.1 0.3p — —Amortisation of goodwill and music copyrights ...... 42.8 5.5p 51.3 6.5p 53.8 6.9pAttributable taxation to non-operating exceptionalitems ...................................... 38.4 4.9p (7.8) (1.0)p — —Minority interest (re music copyright amortisation) . . . (3.9) (0.5)p (4.3) (0.5)p (4.1) (0.5)pMinority interest (re operating exceptional items) ..... — — (5.3) (0.7)p — —Minority interest (re attributable taxation) ........... — — 2.9 0.4p — —Adjusted earnings/adjusted EPS ...................... 122.2 15.6p 92.1 11.8p 171.8 22.0pAdjusted dilution impact ............................ n/a — n/a — n/a (0.1)pAdjusted earnings/adjusted diluted EPS ................ 122.2 15.6p 92.1 11.8p 171.8 21.9pThe adjusted weighted average number of Ordinary Shares used in the diluted earnings per share calculations,784.4m (2002: 783.6m; 2001: 783.1m), is the weighted average number of Ordinary Shares in issue, 784.0m (2002:782.8m; 2001: 782.3m), plus adjustments for dilutive share options, 0.4m (2002: 0.8m; 2001: 0.8m).160

EMI Group plcNotes to Consolidated Financial Statements—(Continued)11. Music copyrights£mCost at 1 April 2000 ................................................................... 746.3Currency retranslation .................................................................. 82.4Acquisition of businesses ................................................................ (1.3)Additions ............................................................................ 6.4Reclassification ....................................................................... 14.5Cost at 31 March 2001 ................................................................. 848.3Currency retranslation .................................................................. (1.6)Acquisition of businesses ................................................................ 6.6Additions ............................................................................ 10.6Reclassification ....................................................................... 0.1Cost at 31 March 2002 ................................................................. 864.0Currency retranslation .................................................................. (66.6)Acquisition of businesses ................................................................ 8.6Additions ............................................................................ 7.6Disposals ............................................................................ (2.9)Reclassification ....................................................................... 0.5Cost at 31 March 2003 ................................................................. 811.2Amortisation at 1 April 2000 ............................................................ 225.3Currency retranslation .................................................................. 28.7Chargeforyear........................................................................ 42.6Reclassification ....................................................................... 4.9Amortisation at 31 March 2001 ......................................................... 301.5Currency retranslation .................................................................. (0.1)Chargeforyear........................................................................ 43.5Reclassification ....................................................................... 0.9Amortisation at 31 March 2002 ......................................................... 345.8Currency retranslation .................................................................. (30.4)Chargeforyear........................................................................ 39.0Disposals ............................................................................ (1.7)Write-down of music copyrights .......................................................... 6.5Reclassification ....................................................................... 0.8Amortisation at 31 March 2003 ......................................................... 360.0Net book values at31 March 2003 .................................................................... 451.231 March 2002 .................................................................... 518.231 March 2001 .................................................................... 546.8161

EMI Group plcNotes to Consolidated Financial Statements—(Continued)12. Goodwill (capitalised)£mCost at 1 April 2000 ................................................................... 28.2Currency retranslation ................................................................... 4.5Acquisition of businesses ................................................................ 39.8Cost at 31 March 2001 ................................................................. 72.5Goodwill written-off to exceptional items ................................................... (42.0)Acquisition of businesses ................................................................ 8.2Cost at 31 March 2002 ................................................................. 38.7Currency retranslation ................................................................... (2.2)Acquisition of businesses ................................................................ 39.8Cost at 31 March 2003 ................................................................. 76.3Amortisation at 1 April 2000 ............................................................ 1.5Currency retranslation ................................................................... 0.4Chargeforyear ........................................................................ 9.5Amortisation at 31 March 2001 .......................................................... 11.4Goodwill written-off to exceptional items ................................................... (12.7)Chargeforyear ........................................................................ 6.0Amortisation at 31 March 2002 .......................................................... 4.7Currency retranslation ................................................................... (0.4)Write-down of goodwill ................................................................. 12.1Chargeforyear ........................................................................ 3.7Amortisation at 31 March 2003 .......................................................... 20.1Net book values at31 March 2003 .................................................................... 56.231 March 2002 .................................................................... 34.031 March 2001 .................................................................... 61.1162

13. Tangible fixed assetsEMI Group plcNotes to Consolidated Financial Statements—(Continued)FreeholdpropertyLeaseholdpropertyPlant,equipmentand vehicles£m £m £m £mCost at 1 April 2000 ........................................ 250.3 33.2 338.5 622.0Currency retranslation ....................................... (5.4) 2.8 11.6 9.0Additions ................................................. 4.7 3.1 35.0 42.8Disposals ................................................. (28.8) (1.0) (34.9) (64.7)Reclassification ............................................ (0.5) 0.3 (0.2) 0.4Cost at 31 March 2001 ...................................... 220.3 38.4 350.0 608.7Currency retranslation ....................................... (7.5) — (7.4) (14.9)Acquisition of businesses .................................... — — 0.1 0.1Additions ................................................. 9.4 4.5 25.3 39.2Disposals ................................................. (8.8) (0.9) (31.1) (40.8)Write-down to exceptional items ............................... (1.2) — (2.7) (3.9)Reclassification ............................................ (3.1) (4.7) 7.4 (0.4)Cost at 31 March 2002 ...................................... 209.1 37.3 341.6 588.0Currency retranslation and reclassification ....................... 1.7 (3.8) (4.5) (6.6)Acquisition of businesses .................................... — 0.1 0.2 0.3Disposal of businesses ....................................... — — (1.1) (1.1)Additions ................................................. 5.5 37.8 25.2 68.5Disposals ................................................. (7.8) (2.8) (25.2) (35.8)Cost at 31 March 2003 ...................................... 208.5 68.6 336.2 613.3Depreciation at 1 April 2000 ................................. 47.8 18.0 219.0 284.8Currency retranslation ....................................... (0.4) 1.7 6.0 7.3Chargeforyear ............................................ 5.3 3.7 48.0 57.0Disposals ................................................. (13.4) (1.0) (32.5) (46.9)Reclassification ............................................ (1.0) 0.6 0.1 (0.3)Depreciation at 31 March 2001 .............................. 38.3 23.0 240.6 301.9Currency retranslation ....................................... (1.9) — (6.4) (8.3)Chargeforyear ............................................ 5.1 3.3 42.6 51.0Disposals ................................................. (2.9) (0.4) (27.4) (30.7)Write-down to exceptional items ............................... (0.3) — (2.5) (2.8)Reclassification ............................................ (1.7) (3.5) 4.8 (0.4)Depreciation at 31 March 2002 .............................. 36.6 22.4 251.7 310.7Currency retranslation and reclassification ....................... 2.8 (2.1) (2.9) (2.2)Disposal of businesses ....................................... — — (0.9) (0.9)Chargeforyear ............................................ 4.0 4.6 34.4 43.0Disposals ................................................. (3.2) (2.6) (22.7) (28.5)Write-down of tangible fixed assets ............................ 1.8 — — 1.8Depreciation at 31 March 2003 .............................. 42.0 22.3 259.6 323.9Net book values at31 March 2003 ......................................... 166.5 46.3 76.6 289.431 March 2002 ......................................... 172.5 14.9 89.9 277.331 March 2001 ......................................... 182.0 15.4 109.4 306.8Freehold property includes land having a cost of £89.1m (2002: £83.4m; 2001: £86.3m) which is not depreciated.Total163

EMI Group plcNotes to Consolidated Financial Statements—(Continued)13. Tangible fixed assets (continued)2003 2002 2001£m £m £mThe net book values shown above include the following:Long-term leasehold property ............................................... 5.9 8.1 7.9Short-term leasehold property .............................................. 40.4 6.8 7.5Finance lease assets ...................................................... 3.0 3.5 4.8Assets in the course of construction .......................................... 19.5 7.0 11.914. Fixed asset investments2003 2002 2001£m £m £mInvestments comprise:Jointventure(HMVGroupplc) ................................... — — —Associated undertakings ......................................... 6.7 7.1 26.0Other fixed asset investments ..................................... 15.5 22.4 22.622.2 29.5 48.6Jointventure(HMVGroupplc) ....................................... — (159.9) (168.3)22.2 (130.4) (119.7)Unlisted investments ................................................ 22.2 (130.4) (119.7)22.2 (130.4) (119.7)(i)Joint venture (HMV Group plc)Net equityinvestmentGoodwillwritten offShare ofnet assetsProvisions*Net bookvalue£m £m £m £m £mAt 1 April 2000 ................................ 94.5 (262.5) (168.0) (1.0) (169.0)Prioryearadjustment# ........................... (2.4) — (2.4) — (2.4)Netprofit...................................... 3.7 — 3.7 — 3.7Exchange taken to reserves ........................ (0.6) — (0.6) — (0.6)At 31 March 2001 .............................. 95.2 (262.5) (167.3) (1.0) (168.3)Prioryearadjustment# ........................... 3.6 — 3.6 — 3.6Netprofit...................................... 4.1 — 4.1 — 4.1Exchange taken to reserves ........................ 0.7 — 0.7 — 0.7At 31 March 2002 .............................. 103.6 (262.5) (158.9) (1.0) (159.9)Netprofit...................................... (0.5) — (0.5) — (0.5)Disposal....................................... (103.1) 262.5 159.4 1.0 160.4At 31 March 2003 .............................. — — — — —* The provision of £1.0m represented the elimination of the Group’s share of unrealised profits in HMV Group plc’s stocks.# Represents the Group’s share of a prior year adjustment made in HMV Group. This adjustment refers to HMV Group’s adoption ofFRS 19 – Deferred Tax.Share of net liabilities2003 2002 2001£m £m £mFixed assets ....................................................... — 61.5 73.1Current assets ...................................................... — 141.8 118.8Total assets ........................................................ — 203.3 191.9Short-term liabilities ................................................ — (176.5) (170.2)Long-term liabilities ................................................. — (186.7) (190.0)Total liabilities ..................................................... — (363.2) (360.2)Share of net liabilities ................................................ — (159.9) (168.3)164

14. Fixed asset investments (continued)(ii) Associated undertakingsEMI Group plcNotes to Consolidated Financial Statements—(Continued)Net equityinvestmentGoodwillwritten offShare ofnet assetsCapitalisedgoodwillLoansNet bookvalue£m £m £m £m £m £mAt 1 April 2000 .......................... 46.2 (43.4) 2.8 9.7 5.5 18.0Currency retranslation ...................... (0.1) — (0.1) 1.3 0.8 2.0Additions*andnewloans................... (0.2) — (0.2) 1.0 11.2 12.0Net profits after tax ........................ (4.0) — (4.0) (1.7) — (5.7)Dividends ............................... (0.3) — (0.3) — — (0.3)At 31 March 2001 ........................ 41.6 (43.4) (1.8) 10.3 17.5 26.0Currency retranslation ...................... (0.2) — (0.2) — — (0.2)Additions*andnewloans................... 1.9 — 1.9 1.7 (0.8) 2.8Net losses after tax ........................ (1.6) — (1.6) (1.8) — (3.4)Dividends ............................... (0.7) — (0.7) — — (0.7)Disposals/ provisions ...................... (1.9) — (1.9) — — (1.9)Written-off to exceptional items .............. (7.0) — (7.0) (8.5) — (15.5)At 31 March 2002 ........................ 32.1 (43.4) (11.3) 1.7 16.7 7.1Currency retranslation ...................... 1.4 — 1.4 (0.3) (1.4) (0.3)Additions*andnewloans................... 0.4 — 0.4 1.4 — 1.8Net profits (losses) after tax ................. 0.1 — 0.1 (0.1) — —Dividends ............................... (0.1) — (0.1) — — (0.1)Disposals, provisions and loans repaid ......... 12.9 — 12.9 — (14.7) (1.8)At 31 March 2003 ........................ 46.8 (43.4) 3.4 2.7 0.6 6.7* Total consideration on purchase of associated undertakings comprises costs and loans totalling £0.4m (2002: £1.9m); 2001 £0.8m.(iii)Other fixed asset investmentsCost ofsharesProvisionsNet bookvalue£m £m £mAt 1 April 2000 ..................................................... 26.5 (6.5) 20.0Currency retranslation ................................................. 2.2 (0.4) 1.8Additions........................................................... 1.2 — 1.2Disposals and reclassifications .......................................... (0.8) 0.4 (0.4)At 31 March 2001 ................................................... 29.1 (6.5) 22.6Currency retranslation ................................................. (0.1) — (0.1)Additions........................................................... — — —Disposals and reclassifications .......................................... (0.1) — (0.1)At 31 March 2002 ................................................... 28.9 (6.5) 22.4Currency retranslation ................................................. (1.4) 0.2 (1.2)Additions........................................................... 10.4 — 10.4Disposals and reclassifications .......................................... (16.1) — (16.1)At 31 March 2003 ................................................... 21.8 (6.3) 15.515. Investments: own sharesThe EMI Group General Employee Benefit Trust (EBT) was established to hedge the future obligations of theGroup in respect of shares awarded under the Senior Executive Incentive Plan (SEIP), the EMI Music Long-Term Incentive Plan and other share-based plans. The Trustee of the EBT, EMI Group EBT (Guernsey) Limited,purchases the Company’s Ordinary Shares in the open market with financing provided by the Company, asrequired, on the basis of regular reviews of the anticipated share liabilities of the Group. The EBT has, sinceDecember 1998, waived any entitlement to the receipt of dividends in respect of all of its holding of theCompany’s Ordinary Shares. The EBT’s waiver of dividends may be revoked or varied at any time.165

EMI Group plcNotes to Consolidated Financial Statements—(Continued)15. Investments: own shares (continued)The cost of the shares expected to be awarded under each plan is amortised evenly over the period from theoriginal grant of the particular award to the time of vesting. This is normally a period of not less than three years.The carrying value of the unallocated shares held at 31 March 2003 have been written-down to £1 per share torecognise the recent fall in the share price.Shares heldin trustNominalvalue Cost AmortisationNet bookvalueNo. £m £m £m £mAt 1 April 2000 .................................. 6,471,356 0.9 29.7 (11.3) 18.4Shares purchased ................................. 199,127 — 1.2 — 1.2AwardedbytheEBT .............................. (559,873) — (2.8) 2.8 —Amortisation in the period .......................... — — — (5.2) (5.2)At 1 April 2001 .................................. 6,100,610 0.9 28.1 (13.7) 14.4Shares purchased ................................. 531,337 — 1.9 — 1.9AwardedbytheEBT .............................. (1,375,952) (0.2) (5.7) 5.7 —Amortisation in the period .......................... — — — (3.2) (3.2)At 1 April 2002 .................................. 5,265,995 0.7 24.3 (11.2) 13.1Shares purchased ................................. 295,984 — 0.8 — 0.8AwardedbytheEBT .............................. (1,129,295) (0.1) (4.8) 4.8 —Amortisation in the year ............................ — — — (2.8) (2.8)Write-down of investments: own shares ................ — — — (3.8) (3.8)At 31 March 2003 ................................ 4,432,684 0.6 20.3 (13.0) 7.3At 31 March 2003, the outstanding loan by the Company to the EBT to finance the purchase of Ordinary Shareswas £20.5m (2002: £24.6m; 2001 £29.7m). The market value at 31 March 2003 of the Ordinary Shares held inthe EBT, which are listed in the UK, was £4.0m (2002: £19.0m; 2001: £27.8m).16. Stocks2003 2002 2001£m £m £mRaw materials and consumables .............................................. 15.2 13.8 14.9Work in progress .......................................................... 2.5 2.5 0.6Finished goods ............................................................ 18.7 26.7 30.6Total.................................................................... 36.4 43.0 46.117. Debtors2003 2002 2001£m £m £mDue within one year:Tradedebtors ........................................................ 434.8 386.7 428.3Amounts owed by associated undertakings ................................. 0.6 0.3 0.1Amounts owed by joint venture (HMV Group plc) ........................... — 13.1 8.3Corporate taxation recoverable .......................................... 17.3 14.1 29.0Otherdebtors ........................................................ 63.7 104.9 115.9Prepayments and accrued income ........................................ 300.3 244.6 287.3816.7 763.7 868.9Due after more than one year:Corporate taxation recoverable .......................................... — 2.3 2.2Otherdebtors ........................................................ 6.0 23.9 18.8Prepayments and accrued income ........................................ 132.6 107.6 94.4138.6 133.8 115.4Total ................................................................... 955.3 897.5 984.3166

EMI Group plcNotes to Consolidated Financial Statements—(Continued)17. Debtors (continued)Other debtors due within one year includes £1.8m (2002: £1.5m; 2001: £0.3m) book value of listed investmentswith a market value of £2.5m (2002: £5.1m; 2001: £4.8m).18. Borrowings2003 2002 2001£m £m £mLong-term borrowingsUS$500m 8.375% Guaranteed Notes* ..................................... 315.4 350.8 467.58.25% Sterling Bonds** ................................................ 322.8 — —US$155m 6.96% Senior Notes*** and US$25m 8.01% Senior Notes**** ........ 113.9 — —Drawings under long-term committed facilities .............................. 166.8 18.4 —Termloan# .......................................................... 3.5 4.9 —Finance leases ........................................................ 1.5 2.0 2.6Less: repayable within one year .......................................... (1.9) (2.8) (2.6)Total long-term borrowings ............................................ 922.0 373.3 467.5Short-term borrowingsLoans and overdrafts ................................................... 35.9 767.4 659.0Finance leases ........................................................ 0.7 0.8 1.3Short-term element of long-term loans ..................................... 1.9 2.8 2.6Total short-term borrowings ........................................... 38.5 771.0 662.9Total borrowings ..................................................... 960.5 1,144.3 1,130.4Liquid funds:Investments: liquid funds ........................................... (0.5) (0.7) (0.7)Cash at bank and in hand and cash deposits ............................. (100.2) (85.7) (136.9)Net borrowings ...................................................... 859.8 1,057.9 992.8* Due August 2009, issued in August 1999** Due August 2008, issued in May 2002*** Due August 2009, issued in August 2002**** Due August 2012, issued in August 2002# Due April 2005Long-term borrowings include £166.8m (2002: £18.4m; 2001: £111.5m) of borrowings repayable within oneyear, which are drawings under long-term committed facilities and, therefore, have been classified as such.As at 31 March 2003 the Group has cash balances of £20.7m (2002: £11.9m; 2001: £18.3m) held with bankswithin the UK and £80.0m (2002: £74.5m; 2001: £119.3m) held with banks outside, but freely transferable to,the UK.Maturity analysis of long-term borrowings2003 2002 2001£m £m £mAmounts falling due after more than one year are repayable as follows:Between one and two years ............................................. 169.1 2.8 115.0Between two and five years ............................................. 59.6 19.7 1.9After five years:By instalments ................................................... 39.3 — —Other........................................................... 654.0 350.8 350.6Total ................................................................... 922.0 373.3 467.5The amount of debt, any of which falls due for payment after more than five years, is £693.3m (2002: £350.8m;2001: £350.6m).167

EMI Group plcNotes to Consolidated Financial Statements—(Continued)19. Derivatives and other financial instrumentsThe Group has excluded all short-term debtors and creditors from the following disclosures, other than currencyexposures.(i)Interest rate risk profile of the financial liabilities of the GroupCurrencyTotal*FloatingratefinancialliabilitiesAt 31 March 2003 At 31 March 2002 At 31 March 2001FixedratefinancialliabilitiesFinancialliabilitieson whichnointerestis paidTotal*FloatingratefinancialliabilitiesFixedratefinancialliabilitiesFinancialliabilitieson whichnointerestis paidTotal*FloatingratefinancialliabilitiesFixedratefinancialliabilitiesFinancialliabilitiesonwhich nointerestis paid£m £m £m £m £m £m £m £m £m £m £m £mSterling .............. 363.3 0.9 322.8 39.6 16.8 6.6 — 10.2 10.0 0.1 — 9.9USdollar ............ 461.8 14.4 429.3 18.1 603.9 578.6 — 25.3 563.3 518.3 — 45.0Yen................. 96.9 1.1 93.3 2.5# 141.3 46.2 92.7 2.4# 149.6 48.8 98.1 2.7#Euro ................ 76.1 76.1 — — 320.1 320.0 — 0.1 364.2 308.3 55.9 —Swedishkrona ........ — — — — 66.6 66.6 — — 84.8 84.8 — —Danishkrone.......... — — — — 1.5 1.5 — — — — — —Other ............... 22.7 22.6 — 0.1 32.1 32.1 — — 16.1 16.1 — —Total ................ 1,020.8 115.1 845.4 60.3 1,182.3 1,051.6 92.7 38.0 1,188.0 976.4 154.0 57.6* Excludes short-term creditors as permitted by FRS13.# Represents deposits from retailers. The deposits are repayable when trading ceases and therefore there is no fixed term to maturity.CurrencyAt 31 March 2003 At 31 March 2002 At 31 March 2001Fixed rate financialliabilitiesWeightedaverageinterest rateWeightedaverageperiodfor whichrate isfixedFinancialliabilities onwhich nointerest ispaidWeightedaverageperiod untilmaturityFixed rate financialliabilitiesWeightedaverageinterestrateWeightedaverageperiodfor whichrate isfixedFinancialliabilities onwhich nointerest ispaidWeightedaverageperiod untilmaturityFixed rate financialliabilitiesWeightedaverageinterestrateWeightedaverageperiodfor whichrate isfixedFinancialliabilities onwhich nointerest ispaidWeightedaverageperiod untilmaturity% Years Years % Years Years % Years YearsSterling ..................... 9.7 5.2 2.4 — — 2.2 — — 3.4US dollar .................... 8.4 5.8 4.9 — — 6.1 — — 4.4Yen ........................ 0.3 1.0 n/a* 0.4 2.0 n/a* 0.7 1.5 n/a*Euro........................ — — — — — 1.5 4.1 0.5 —* Represents deposits from retailers. The deposits are repayable when trading ceases and therefore there is no fixed term to maturity.Floating rate financial liabilities comprise bank borrowings as at 31 March 2003 and bank borrowings and theproceeds of a US$500m issue of 10-year Guaranteed Notes swapped to floating rate funding as at 31 March 2002and 31 March 2001. All floating rate financial liabilities bear interest at rates fixed in advance by reference to theapplicable bank reference rate in the relevant country for periods ranging from overnight to six months.The figures shown in the tables above take into account various interest rate and currency swaps used to manageinterest rate risk and the currency profile of financial liabilities. Further protection from interest rate movementsis provided by interest rate caps and collars. See Note 19 (viii) for further details of interest rate collars andswaps held as at 31 March 2003.168

EMI Group plcNotes to Consolidated Financial Statements—(Continued)19. Derivatives and other financial instruments (continued)(ii) Interest rate risk profile of the financial assets of the GroupCurrencyTotal*FloatingratefinancialassetsAt 31 March 2003 At 31 March 2002 At 31 March 2001FixedratefinancialassetsFinancialassets onwhich nointerestis earnedTotal*FloatingratefinancialassetsFixedratefinancialassetsFinancialassets onwhich nointerestis earnedTotal*FloatingratefinancialassetsFixedratefinancialassetsFinancialassets onwhich nointerestis paid£m £m £m £m # £m £m £m £m # £m £m £m £m #Sterling............... 91.0 20.1 — 70.9 56.8 11.0 — 45.8 49.8 17.2 — 32.6USdollar ............. 75.3 12.5 — 62.8 80.9 6.8 — 74.1 77.0 9.3 — 67.7Yen ................. 41.4 21.0 — 20.4 39.2 21.2 — 18.0 50.5 34.7 — 15.8Euro ................. 20.0 18.9 — 1.1 34.2 24.7 — 9.5 45.4 36.6 — 8.8Swedishkrona ......... 3.1 2.3 — 0.8 2.5 — — 2.5 1.4 0.1 — 1.3Danishkrone .......... 0.8 0.6 — 0.2 1.1 1.1 — — 0.1 0.1 — —Other ................ 25.8 25.3 — 0.5 32.0 21.6 — 10.4 50.6 39.6 — 11.0Total................. 257.4 100.7 — 156.7 246.7 86.4 — 160.3 274.8 137.6 — 137.2* Excludes short-term debtors as permitted by FRS13.# Financial assets on which no interest is paid represent mainly advances to artists and investments for which no meaningful average fixedperiod to maturity can be calculated.Floating rate financial assets comprise cash at bank and deposits. All floating rate financial assets earn interest atrates fixed in advance by reference to the applicable bank reference rate in the relevant country for periodsranging from overnight to six months.(iii)Currency exposuresAs explained in the Financial Review, the Group’s objective in managing currency exposures arising from its netinvestments overseas (its structural currency exposures) is to maintain appropriate levels of borrowings bycurrency to hedge partially against currency depreciation. Gains and losses arising from these structural currencyexposures are recognised in the statement of total recognised gains and losses.The table below shows the Group’s currency exposures, being those trading assets and liabilities (or nonstructuralexposures) that give rise to the net currency gains and losses recognised in the profit and loss account.Such exposures comprise the monetary assets and monetary liabilities of the Group that are not denominated inthe operating (or functional) currency of the operating unit involved, other than certain non-sterling borrowingstreated as hedges of net investments in overseas operations. These exposures were as follows:At 31 March 2003Net foreign currency monetary assets (liabilities)Functional currency of Group operationSterlingUSdollar Yen Euro Other£m £m £m £m £mSterling ............................................ n/a (3.6) 2.3 14.6 6.3US dollar ........................................... (1.6) n/a — (0.9) (0.9)Yen ............................................... (0.6) (0.2) n/a — 0.2Euro............................................... 6.3 (1.1) — n/a 1.1Other .............................................. (3.8) 0.4 (4.1) 0.1 0.4Total .............................................. 0.3 (4.5) (1.8) 13.8 7.1169

EMI Group plcNotes to Consolidated Financial Statements—(Continued)19. Derivatives and other financial instruments (continued)At 31 March 2002Net foreign currency monetary assets (liabilities)USFunctional currency of Group operationSterling dollar Yen Euro Other£m £m £m £m £mSterling ............................................. n/a 8.6 4.8 22.9 18.2US dollar ........................................... 4.9 n/a 0.1 0.1 (2.8)Yen................................................ (0.3) (0.1) n/a — 0.2Euro ............................................... 1.8 (1.1) 0.1 n/a 1.6Other .............................................. (2.8) 2.6 — (0.3) 0.9Total............................................... 3.6 10.0 5.0 22.7 18.1At 31 March 2001Net foreign currency monetary assets (liabilities)USFunctional currency of Group operationSterling dollar Yen Euro Other£m £m £m £m £mSterling ............................................ n/a 4.5 31.2 28.2 62.1US dollar .......................................... 0.7 n/a — 0.2 0.4Yen ............................................... (0.3) (0.1) n/a — 0.5Euro .............................................. 1.0 (2.0) 0.1 n/a 1.5Other.............................................. (4.4) 3.9 0.2 0.3 1.1Total .............................................. (3.0) 6.3 31.5 28.7 65.6(iv) Maturity of financial liabilitiesThe maturity profile of the Group’s financial liabilities, other than short-term creditors such as trade creditors andaccruals, was as follows:2003 2002 2001£m £m £mIn one year or less, or on demand ........................................ 38.5 771.0 662.9In more than one year but not more than two years .......................... 193.4 9.6 124.7In more than two years but not more than five years ......................... 27.3 40.4 32.3In more than five years ................................................ 761.6 361.3 368.1Total .............................................................. 1,020.8 1,182.3 1,188.0(v) Undrawn facilitiesThe Group has various borrowing facilities available to it. The undrawn committed facilities available at 31March in respect of which all conditions precedent had been met at that date were as follows:2003 2002 2001£m £m £mExpiring in one year or less ................................................. 38.2 491.9 320.8Expiring in more than one year but not more than two years ....................... 447.7 21.6 108.0Expiring in more than two years ............................................. — — 40.0Total ................................................................... 485.9 513.5 468.8On 18 March 2002 the Group signed a new bank facility. This £1.3bn multi-currency revolving credit facilitywas drawn for the first time in April 2002 and was used to repay most of the Group’s existing bank facilities. Thenew facility comprised an £800m three-year revolving credit and a £500m short-term bridging arrangement, partof which was itself refinanced during the year by the various debt issues and asset disposals.170

EMI Group plcNotes to Consolidated Financial Statements—(Continued)19. Derivatives and other financial instruments (continued)(vi) Fair values of financial assets (liabilities)Bookvalue2003 2002 2001Fairvalue*BookvalueFairvalue*BookvalueFairvalue*£m £m £m £m £m £mPrimary financial instruments held or issued to financethe Group’s operations:Short-term borrowings and current portion of longtermborrowings ............................ (38.5) (38.5) (771.0) (771.0) (662.9) (662.9)Long-term borrowings ......................... (922.0) (846.5) (373.3) (369.4) (467.5) (503.2)Liquid funds ................................. 100.7 100.7 86.4 86.4 137.6 137.6Other financial liabilities ........................ (60.3) (60.3) (38.5) (38.5) (57.6) (57.6)Derivative financial instruments held to manage theinterest rate and currency profile:Interest rate swaps ............................. n/a (0.2) n/a 20.5 n/a 23.0Interest rate caps and collars ..................... — (6.5) — (6.8) — (1.5)Currency swaps and forward foreign currencycontracts .................................. n/a — n/a — n/a 0.1Financial assets:Financial assets – listed investments ............... 1.8 2.5 1.5 5.1 0.3 4.8Financial assets – other ......................... 154.9 154.9 158.8 158.8 136.9 136.9* Market rates have been used to determine fair values.Long-term borrowings include a US$ Guaranteed Notes issue (book value £315.4m, 2002: £350.8m; 2001:£350.6m) with a fair value of £275.3m (2002: £346.9m; 2001: £386.3m), a Sterling Bond issue (book value£322.8m (2002: £nil; 2001: £nil)) with a fair value of £288.4m (2002: £nil; 2001: £nil) and a US$ PrivatePlacement (book value of £113.9m (2002: £nil; 2001: £nil)) with a fair value of £112.9m (2002: £nil; 2001: £nil).The majority of other borrowings and liquid funds are short-term in nature and book values approximate to fairvalues. The market value of listed investments is given above. For all other financial assets and liabilities, bookvalues approximate to fair values. During the year a loss of £(0.2)m was made on the sale of current assetinvestments (2002: profit of £3.3m; 2001: profit of £11.4m).171

EMI Group plcNotes to Consolidated Financial Statements—(Continued)19. Derivatives and other financial instruments (continued)(vii) HedgesThe Group’s policy is to hedge interest rate risk, using interest rate swaps, caps and collars. Unrecognised gainsand losses on instruments used for hedging, and the movements therein, are as follows:Gains LossesTotalnetgains(losses)£m £m £mUnrecognised gains and losses on hedges at 1 April 2000 .......................... 1.2 (0.4) 0.8Gains and losses arising in previous years that were recognised in 2001 .............. — (0.1) (0.1)Gains and losses arising in previous years that were not recognised in 2001 ........... 1.2 (0.3) 0.9Gains and losses arising in 2001 that were not recognised in 2001 ................... 0.2 (3.1) (2.9)Unrecognised gains and losses on hedges at 1 April 2001 .......................... 1.4 (3.4) (2.0)Gains and losses arising in previous years that were recognised in 2002 .............. 0.4 (0.8) (0.4)Gains and losses arising before 1 April 2001 that were not recognised in 2002 ......... 1.0 (2.6) (1.6)Gains and losses arising in 2002 that were not recognised in 2002 ................... (0.7) (5.0) (5.7)Unrecognised gains and losses on hedges at 1 April 2002 .......................... 0.3 (7.6) (7.3)Gains and losses arising in previous years that were recognised in 2003 .............. — (1.2) (1.2)Gains and losses arising before 1 April 2002 that were not recognised in 2003 ......... 0.3 (6.4) (6.1)Gains and losses arising in 2003 that were not recognised in 2003 ................... (0.3) (0.3) (0.6)Unrecognised gains and losses on hedges at 31 March 2002 ........................ 0.3 (7.6) (7.3)Of whichGains and losses expected to be recognised in 2002 .......................... 0.3 (0.8) (0.5)Gains and losses expected to be recognised in 2003 or later .................... 1.1 (2.6) (1.5)1.4 (3.4) (2.0)Of which:Gains and losses expected to be recognised in 2003 .......................... — (1.2) (1.2)Gains and losses expected to be recognised in 2003 or later .................... 0.3 (6.4) (6.1)0.3 (7.6) (7.3)Unrecognised gains and losses on hedges at 31 March 2003 ........................ — (6.7) (6.7)Of which:Gains and losses expected to be recognised in 2004 or later .................... — (6.5) (6.5)Gains and losses expected to be recognised in 2005 or later .................... — (0.2) (0.2)— (6.7) (6.7)(viii) Financial instrumentsInterest rate agreementsTo manage interest rate risk, the Group has entered into certain interest rate, collar and swap agreements which,as at 31 March 2003 were as follows:NotionalprincipalTerminationdateInterest rate collars:US dollar .............................................. $ 400m April 2003 to February 2004Euro.................................................. € 90m April 2003NotionalprincipalTerminationdateInterest rate swaps:Yen – pay fixed rate and receive floating rate ................. ¥17.5bn April2004 0.29%172Fixedrate

EMI Group plcNotes to Consolidated Financial Statements—(Continued)19. Derivatives and other financial instruments (continued)Swap unwind: In February 2003, following a routine review of derivative positions in the prevailing marketconditions, the Group unwound a US$500m interest rate swap position. The swap effectively switched the8.375% fixed coupon on the US$ Guaranteed Notes issued in August 1999 to a floating rate of interest. TheGroup received a cash payment of US$86.2m (£55.6m) on the unwind, representing the present value of theexpected cash savings from the swap as determined by the expected differential between US short- and long-terminterest rates, discounted at the prevailing market rate. At 31 March 2002 this swap position had a fair value of£21m. The cash payment is reported on the interest paid line of the Consolidated Cash Flow Statement. The gainfrom the unwind will be amortised over the remaining life of the Notes, thus locking in the future interest costbenefit to be obtained from the swap. The swap unwind reduces the Group’s overall interest rate risk.As at 31 March 2002 to manage interest rate risk the Group had entered into certain interest rate, collar and swapagreements which were as follows:NotionalprincipalTerminationDateInterest rate collars:US dollar ........................................... $450m March 2003 to February 2004Euro............................................... €290m February 2003 April 2003NotionalprincipalTerminationDateInterest rate swaps:Yen – pay fixed rate and receive floating rate ..................... ¥17.5bn October2002 0.65%Yen – pay fixed rate and receive floating rate (starts October 2002) .... ¥17.5bn April2004 0.29%US dollar – pay floating rate and receive fixed rate ................. $ 500m August 2009 8.38%FixedrateAs at 31 March 2001 to manage interest rate risk the Group had entered into certain interest rate, collar and swapagreements which were as follows:NotionalprincipalTerminationDateInterest rate collars:US dollar ........................................... $600m October 2001 to February 2004Euro............................................... €490m March 2002 to April 2003NotionalprincipalTerminationDateInterest rate swaps:Euro – pay fixed rate and receive floating rate .................... € 90m October 2001 4.11%Yen – pay fixed rate and receive floating rate ..................... ¥17.5bn October2002 0.65%US dollar – pay floating rate and receive fixed rate ................. $ 500m August 2009 8.38%FixedrateExchange rate agreementsTo manage exchange rate risk on intra-group funding, the Group has entered into certain currency swaps andforward foreign currency contracts which as at 31 March 2003 were as follows:Gross notionalamountpurchased Value dateAustralian dollar ...................................................... $ 6.5m April2003Canadian dollar ....................................................... $10.0m April 2003173

EMI Group plcNotes to Consolidated Financial Statements—(Continued)19. Derivatives and other financial instruments (continued)There were no outstanding exchange rate agreements as at 31 March 2002.As at 31 March 2001 currency swaps and forward foreign currency contracts were as follows:Gross notionalamountpurchased Value dateEuro ................................................................ € 164m April 2001Canadian dollar ....................................................... $ 15m April2001US dollar ............................................................ $ 0.7m April2001Yen................................................................. ¥965bn April 200120. Cash, liquid resources and financingThe following definitions have been used:Cash: Cash in hand and deposits repayable on demand if available within 24 hours without penalty, includingoverdrafts.Liquid resources: Investments and deposits, other than those included as cash, which are readily convertibleinto known amounts of cash.Financing:Borrowings, less overdrafts which have been treated as cash.Analysis of movement in the Group’s net borrowings in the year ended 31 March 2003At1 April 2002 Cash flowAcquisitions/disposalsExchangemovementAt31 March 2003£m £m £m £m £mCashatbankandinhand.................... 84.4 13.8 — 1.7 99.9Overdrafts ............................... (40.7) 15.8 — (0.1) (25.0)Cash.................................... 43.7 29.6 — 1.6 74.9Debt due after more than one year ............ (371.3) (558.4) — 9.2 (920.5)Debtduewithinoneyear ................... (729.5) 712.4 (4.3) 8.6 (12.8)Finance leases ............................ (2.8) 0.9 — (0.3) (2.2)Financing................................ (1,103.6) 154.9 (4.3) 17.5 (935.5)Investments: liquid funds ................... 0.7 (0.2) — — 0.5Cash deposits ............................. 1.3 (0.9) — (0.1) 0.3Liquid resources .......................... 2.0 (1.1) — (0.1) 0.8Total ................................... (1,057.9) 183.4 (4.3) 19.0 (859.8)Cash flow on financing of £154.9m is split between new loans of £(603.5)m, loans repaid of £757.5m and thecapital element of finance leases repaid of £0.9m.174

EMI Group plcNotes to Consolidated Financial Statements—(Continued)20. Cash, liquid resources and financing (continued)Analysis of movement in the Group’s net borrowings in the year ended 31 March 2002At1 April 2002 Cash flowAcquisitions/disposalsExchangemovementAt31 March 2003£m £m £m £m £mCashatbankandinhand.................... 130.4 (43.4) — (2.6) 84.4Overdrafts ............................... (25.6) (14.1) (1.0) — (40.7)Cash.................................... 104.8 (57.5) (1.0) (2.6) 43.7Debt due after more than one year ............ (464.9) 93.3 — 0.3 (371.3)Debtduewithinoneyear ................... (636.0) (95.0) — 1.5 (729.5)Finance leases ............................ (3.9) 1.1 — — (2.8)Financing................................ (1,104.8) (0.6) — 1.8 (1,103.6)Investments: liquid funds ................... 0.7 — — — 0.7Cash deposits ............................. 6.5 (5.1) — (0.1) 1.3Liquid resources .......................... 7.2 (5.1) — (0.1) 2.0Total ................................... (992.8) (63.2) (1.0) (0.9) (1,057.9)Cash flow on financing of £(0.6)m is split between new loans of £(460.3)m, loans repaid of £458.6m and thecapital element of finance leases repaid of £1.1m.Analysis of movement in the Group’s net borrowings in the year ended 31 March 2001At1 April 2000 Cash flowAcquisitions/disposalsExchangemovementAt31 March 2001£m £m £m £m £mCashatbankandinhand.................... 221.7 (88.0) — (3.3) 130.4Overdrafts ............................... (55.3) 34.8 — (5.1) (25.6)Cash.................................... 166.4 (53.2) — (8.4) 104.8Debt due after more than one year ............ (377.3) (48.4) — (39.2) (464.9)Debtduewithinoneyear ................... (751.7) 120.8 — (5.1) (636.0)Finance leases ............................ (4.8) 1.2 — (0.3) (3.9)Financing................................ (1,133.8) 73.6 — (44.6) (1,104.8)Investments: liquid funds ................... 1.3 (0.5) — (0.1) 0.7Cash deposits ............................. 44.9 (38.4) — — 6.5Liquid resources .......................... 46.2 (38.9) — (0.1) 7.2Total ................................... (921.2) (18.5) — (53.1) (992.8)Cash flow on financing of £73.6m is split between new loans of £(240.1)m, loans repaid of £312.5m and thecapital element of finance leases repaid of £1.2m.The Group’s net borrowings at 31 March 2003 comprised:CashLiquidresources andfinancingNetborrowings£m £m £mInvestments: liquid funds ........................................... — 0.5 0.5Cash at bank and in hand and cash deposits ............................ 99.9 0.3 100.2Borrowingsduewithinoneyear ..................................... (25.0) (13.5) (38.5)Borrowings due after more than one year .............................. — (922.0) (922.0)At 31 March 2003 ................................................ 74.9 (934.7) (859.8)At 31 March 2002 ................................................ 43.7 (1,101.6) (1,057.9)At 31 March 2001 ................................................ 104.8 (1,097.6) (992.8)175

EMI Group plcNotes to Consolidated Financial Statements—(Continued)21. Other creditors: amounts falling due within one year2003 20022001Restated#£m £m £mTrade creditors ...................................................... 186.7 181.2 168.7Royalties and fees payable ............................................. 665.1 678.5 672.6Amounts owed to associated undertakings ................................ 0.6 1.7 0.6Amounts owed to joint venture (HMV Group plc) .......................... — 0.1 —Corporate taxation ................................................... 176.5 160.2 170.3Deferred consideration payable* ........................................ 10.9 2.0 1.5Other taxes including VAT and social security costs ........................ 13.5 16.5 17.7Dividendspayable ................................................... 63.0 29.6 92.7Other creditors ...................................................... 76.6 89.8 96.4Accruals and deferred income .......................................... 172.1 139.5 137.6Total.............................................................. 1,365.0 1,297.1 1,358.1* Deferred consideration payable includes £10.5m (2002: £nil; 2001: £nil) which is not conditional upon the satisfaction of futureperformance criteria.# Reported corporate taxation as at 31 March 2001 was Group £146.3m and Company £10.8m. The restated balances include an adjustmentfor FRS 19-Deferred Tax.22. Other creditors: amounts falling due after more than one year2003 2002 2001£m £m £mDeferred consideration payable* ................................................ 39.6 10.3 9.8Accruals and deferred income .................................................. 18.5 17.1 19.1Total ...................................................................... 58.1 27.4 28.9* Deferred consideration payable includes £24.8m (2002: £nil; 2001: £nil) which is not conditional upon the satisfaction of futureperformance criteria.23. Deferred taxationGroup£mAt 1 April 2000 ....................................................................... 27.8Currency retranslation .................................................................. 0.4Charged to profit on ordinary activities ..................................................... (0.6)At 31 March 2001 ..................................................................... 27.6Restatement under FRS 19 ............................................................... (44.4)At 31 March 2001 (as restated) .......................................................... (16.8)Providedinyear ....................................................................... 2.6Exchangemovements................................................................... 0.5At 31 March 2002 ..................................................................... (13.7)Providedinyear ....................................................................... 4.2Acquisitions, disposals and transfers ....................................................... 0.4At 31 March 2003 ..................................................................... (9.1)176

EMI Group plcNotes to Consolidated Financial Statements—(Continued)23. Deferred taxation (continued)The liabilities (assets) for deferred tax provided were as follows:2003 2002 2001£m £m £mCapital allowances in advance of depreciation ................................... 5.0 4.2 4.3Other timing differences .................................................... 0.5 (0.8) (0.7)Total liabilities ............................................................ 5.5 3.4 3.6Depreciation in advance of capital allowances ................................... (2.0) (3.3) (3.1)Other timing differences .................................................... (12.6) (13.8) (17.3)Total assets ............................................................... (14.6) (17.1) (20.4)Net assets ................................................................ (9.1) (13.7) (16.8)Those categories for which no deferred tax is provided are outlined in Accounting Policies on page 154.24. Other provisions for liabilities and chargesTradingPensionsDisposal andfundamentalreorganisationAcquisitionandintegration£m £m £m £m £mAt 1 April 2000 .................................. 26.2 44.6 23.8 35.6 130.2Currency retranslation ............................. 0.6 0.4 0.1 3.4 4.5Provisions utilised ................................ (7.9) (14.0) (7.4) (1.7) (31.0)Charged against:Operating profit .............................. 8.1 6.0 — — 14.1Acquisition (disposal) of businesses .................. — — — (0.5) (0.5)Reclassification .................................. (0.6) — — — (0.6)At 31 March 2001 ................................ 26.4 37.0 16.5 36.8 116.7Currency retranslation ............................. (0.2) (0.5) — 0.5 (0.2)Provisions utilised ................................ (7.7) (8.9) (12.5) (0.3) (29.4)Charged against:Operating profit .............................. 102.2 5.0 — — 107.2Non-operating exceptional items ................. — — — — —Acquisition (disposal) of businesses .................. — — — (21.6) (21.6)Reclassification .................................. 0.4 — — — 0.4At 31 March 2002 ................................ 121.1 32.6 4.0 15.4 173.1Currency retranslation ............................. (2.3) 3.9 — (1.5) 0.1Provisions utilised ................................ (74.9) (8.0) (1.6) (0.8) (85.3)Charged against:Operating profit .............................. 4.8 4.9 — — 9.7Non-operating exceptional items ................. — — 5.0 — 5.0Disposal of businesses ............................. (0.2) — — — (0.2)Reclassification .................................. 2.0 — — — 2.0At 31 March 2003 ................................ 50.5 33.4 7.4 13.1 104.4The pension provisions arise in overseas companies in respect of state schemes and employees covered by theGroup’s unfunded schemes.Trading provisions include royalty audit and other trading provisions charged through operating profit beforeexceptional items, and restructuring and reorganisation provisions charged through operating exceptional items.Provisions utilised relating to disposals and fundamental reorganisations in the cash flow include £nil (2002:£12.5m; 2001: £nil) spent against disposal provisions set up in previous years.177Total

25. Share capital and share premium accountEMI Group plcNotes to Consolidated Financial Statements—(Continued)AuthorisedAllotted, called-up & fully paid2003 2002 2001 2003 2002 2001£m £m £m £m £m £mOrdinary Shares of 14p each ................. 158.8 158.8 158.8 110.4 110.4 110.4B Shares of 114.5p each .................... 479.8 479.8 479.8 — — —Deferred shares of 0.0005p each .............. 17.5 17.5 17.5 — — —656.1 656.1 656.1 110.4 110.4 110.4(i)Ordinary Shares in issueNumberNominalvalue Premium£m £mAt 1 April 2000 ................................................. 788,323,025 110.4 444.6Shares issued during the year on the exercise of options:ExecutiveSchemes ........................................... 14,564 — —Savings-Related Scheme ...................................... 216,162 — 1.0At 31 March 2001 ............................................... 788,553,751 110.4 445.6Shares issued during the year on the exercise of options:Savings-Related Scheme ...................................... 44,182 — 0.2At 31 March 2002 ............................................... 788,597,933 110.4 445.8Shares issued during the year on the exercise of options:Savings-Related Scheme ...................................... — — —At 31 March 2003 ............................................... 788,597,933 110.4 445.8178

EMI Group plcNotes to Consolidated Financial Statements—(Continued)25. Share capital and share premium account (continued)(ii) Share optionsOptions to subscribe for the Company’s Ordinary Shares were outstanding as follows (adjusted for the 1992rights issue, the 1996 demerger and the 1997 share capital reorganisation, where appropriate):Subscription OptionsExecutive ShareOption SchemesSavings-RelatedShare OptionScheme 1994SchemeAt 1 April 2000 .................................................. 7,009,646 1,273,446Granted ......................................................... 1,145,210 474,724Exercised ....................................................... (14,564) (216,162)Lapsed ......................................................... (635,669) (97,310)At 31 March 2001 ................................................ 7,504,623 1,434,698Granted ......................................................... 7,806,717 786,613Exercised ....................................................... — (44,182)Lapsed ......................................................... (387,497) (735,139)At 31 March 2002 ................................................ 14,923,843 1,441,990Granted ......................................................... 21,077,740 1,275,631Exercised ....................................................... — —Lapsed ......................................................... (2,539,441) (1,188,477)At 31 March 2003 ................................................ 33,462,142# 1,529,144Option price per 14p share (range) .................................... 14p-747p 221p-466pFinal exercise date* ............................................... February2013 February 2008# Of which, options over 366,559 shares were granted under the 1984 Executive Share Option Scheme.179

EMI Group plcNotes to Consolidated Financial Statements—(Continued)25. Share capital and share premium account (continued)Share options for the transfer of the Company’s Ordinary Shares were outstanding as follows:Transfer OptionsExecutiveShare OptionSchemesAt 31 March 2000 ............................................................... —Granted ........................................................................ —Exercised ....................................................................... —Lapsed ......................................................................... —At 31 March 2001 ............................................................... —Granted ........................................................................ 19,437,555Exercised ....................................................................... —Lapsed ......................................................................... —At 31 March 2002 ............................................................... 19,437,555Granted ........................................................................ 553,000Exercised ....................................................................... —Lapsed ......................................................................... —At 31 March 2003 ............................................................... 19,990,555Option price per 14p share (range) ...................................................Final exercise date* ...............................................................243.3p-700pJune2012* Options granted under the 1984 Executive Share Option Scheme are normally exercisable no earlier than three years and no later than tenyears following the date of grant, as are options granted under the 1995 Executive Share Option Scheme (which are, however, subject to theachievement of performance requirements that must be met before the options normally become exercisable). Options granted under the1994 Savings-Related Share Option Scheme are normally exercisable for a six-month period following completion of savings to either athree-year or a five-year savings contract.(iii) Share premium accountThe principal elements that make up the Company’s share premium account arose as follows :Yearsarising £mConversions to Ordinary Shares of 7% Convertible Redeemable Second .............. 1989/90Cumulative Preference Shares 1992/99 of £1 each ............................. and1990/91 56.7A placing of Ordinary Shares linked to the offer for Thames Television .............. 1990/91 78.0Issue of Ordinary Shares on exercise of subscription rights of warrants originallyattached to 7 3 ⁄8% bonds due 1992; and ...................................... 1991/92 67.1the transfer from other reserves in respect of amounts paid for thewarrants exercised ..................................................... 1991/92 10.2Issue of Ordinary Shares on conversion of Convertible Unsecured Loan Stock to fund theacquisition of Virgin Music Group .......................................... 1992/93 508.4Issue of Ordinary Shares on conversion of 5 3 ⁄4% Guaranteed Redeemable PreferenceShares 2004 of THORN EMI Capital NV .................................... 1993/94 126.0Share capital reorganisation (including issue of Redeemable Preference B Shares) ...... 1997/98 (501.2)Other issues of Ordinary Shares .............................................. 100.6Balance at 31 March 2003 ................................................. 445.8Balance at 31 March 2002 ................................................. 445.8Balance at 31 March 2001 ................................................. 445.8180

EMI Group plcNotes to Consolidated Financial Statements—(Continued)26. ReservesCapitalredemptionreserveOtherreservesProfitand lossreserve£m £m £mAs at 1 April 2000 ......................................................... 495.8 256.0 (2,034.4)Currency translation ........................................................ — — (11.8)Goodwill adjustments:Subsidiary undertakings ................................................. — — (4.4)Profit attributable to members of the Holding Company ............................ — — 82.0Equity Dividend ........................................................... — — (125.2)Share of joint venture reserves adjustment ....................................... — — (2.4)Transfer of realised reserves .................................................. — — —At 31 March 2001 – as reported ............................................. 495.8 256.0 (2,096.2)Prior-year adjustments:Deferred tax .......................................................... — — 44.4Current tax ........................................................... — — (24.0)Minority interest ....................................................... — — (8.2)At 31 March 2001 – restated ................................................ 495.8 256.0 (2,084.0)Currency translation ........................................................ — — (6.0)Goodwill adjustments:Subsidiary undertakings ................................................. — — 9.9Profit attributable to members of the Holding Company ............................ — — (199.5)Equity dividend ............................................................ — — (62.2)Share of joint venture reserves adjustment ....................................... — — 3.6Transfer of realised reserves .................................................. — — —At 31 March 2002 ......................................................... 495.8 256.0 (2,338.2)Currency translation ........................................................ — — (13.5)Goodwill adjustments:Subsidiary undertakings ..................................................... — — 8.4Profit attributable to members of the Holding Company ............................ — — 229.7Equity dividend ............................................................ — — (62.8)Share of joint venture reserves adjustment ....................................... — — 175.3Transfer of realised reserves .................................................. — — —At 31 March 2003 ......................................................... 495.8 256.0 (2,001.1)Group reserves include £(10.3)m (2002: £(3.3)m; 2001: £(9.2)m) in respect of its share of post-acquisitionretained losses of joint venture and associated undertakings.The Group profit and loss reserve includes £1,265.3m (2002: £1,449.0m; 2001: £1,458.9m) in respect ofgoodwill previously written off.27. Minority interests (equity)2003 20022001restated£m £m £mToshiba-EMI Ltd (Japan) .................................................. 69.3 69.2 65.3JobeteMusicCo.,Inc.(USA) .............................................. 59.1 66.2 69.3Other.................................................................. 4.5 5.7 1.7Total .................................................................. 132.9 141.1 136.328. Financial commitments2003 2002 2001£m £m £mCapital expenditure : Contracted ............................................ 1.4 25.6 28.2The Group has commitments, which are largely performance related, to pay advances to artists and repetoireothers amounting to £460.9m (2002: £418.8m; 2001: £363.5m). The future financial commitment regarding theacquisition of shares in Jobete Music Co., Inc. and Stone Diamond Music Corporation is detailed in Note 33.181

EMI Group plcNotes to Consolidated Financial Statements—(Continued)28. Financial commitments (continued)Annual commitments under operating leases at 31 March were as follows:2003 2002 2001£m £m £mLand and buildings:Expiring in the first year .................................................. 4.9 8.3 5.8Expiring in the second to fifth years inclusive .................................. 7.1 5.9 11.2Expiring after the fifth year ................................................ 13.7 13.6 5.7Total ...................................................................... 25.7 27.8 22.7Plant, equipment and vehicles:Expiring in the first year .................................................. 0.9 1.4 2.2Expiring in the second to fifth years inclusive .................................. 2.7 3.2 3.2Expiring after the fifth year ................................................ 0.1 0.1 —Total ...................................................................... 3.7 4.7 5.429. Contingent liabilitiesThe Directors are not aware of any significant legal or arbitration proceedings pending or threatened against anymember of the Group which may have any liability materially in excess of provisions in the financial statements.Guarantees and other contingent liabilities, other than those relating to HMV and HMV Group plc, total £21.5m(2002: £22.3m; 2001: £26.1m) for the Group, of which £7.1m (2002: £7.2m; 2001: £8.8m) relate to certaincontracts entered into by former Group companies. There are several guarantees and other contingent liabilitiesin respect of HMV and HMV Group plc (see Note 32 (i) for details).30. Pension arrangementsThe Group operates a number of pension schemes throughout the world. The main scheme, which coversemployees in the UK, is the EMI Group Pension Fund (the UK Fund). The UK Fund is of the defined benefittype and is open to all permanent employees over the age of 18 employed by the Company and certainsubsidiaries in the UK. Benefits provided by the UK Fund are based on final pensionable pay. Pensions payablefrom the UK Fund are guaranteed to increase by 5% per annum or, if a lower rate, by the increase in the cost ofliving. Members contribute to the UK Fund at the rate of 4% of pensionable pay.Aside from the UK, the Group has significant defined benefit schemes in Germany and Japan. With the exceptionof these schemes, the other defined benefit schemes operated on behalf of the Group are not material. Thecurrently agreed rates of contribution by the Group are nil for all significant defined benefit schemes.Staff engaged in other countries are covered by local arrangements which, in the case of the Group schemes, areof the defined contribution type. The assets of the Group’s pension schemes are held mainly in separate trusteeadministeredfunds.Employer contributions of £12.7m (2002: £13.8m; 2001: £14.4m) were charged to the profit and loss account inthe year. These contributions primarily related to overseas schemes and were determined in accordance withlocal practice. Other post-retirement benefit expenses of £0.1m (2002: £0.1m; 2001: £0.1m) were also charged tothe profit and loss account.Provision is made in the financial statements for the benefits accruing to members of unfunded pension schemesin accordance with the advice of independent actuaries.A triennial actuarial valuation of the UK Fund as at 31 March 2003 is currently in progress. The results of thisvaluation are expected to be available in the second quarter in the 2003/04 financial year, at which time theGroup, together with the Pension Fund Trustees, will determine the future funding strategy.182

EMI Group plcNotes to Consolidated Financial Statements—(Continued)30. Pension arrangements (continued)The latest available actuarial valuation of the UK Fund was made by a qualified actuary as at 31 March 2000using the projected unit method. At that date the market value of the assets of the UK Fund was taken to be£1,079m. The market value of the assets was sufficient to cover 117% of the value of the benefits that hadaccrued to the members, after allowing for assumed increases in earnings, on the actuarial assumptions used,treating the UK Fund as an ongoing entity. Part of the excess assets disclosed by the 2000 valuation has beenused to finance a special increase of 3% to pensions in payment and part has been allocated towards a reductionof employer contributions below the long-term rate, with the balance being carried forward as a reserve in theUK Fund.Employer expense in respect of the Fund has been calculated in accordance with SSAP24. On the basis ofactuarial advice, it is calculated that the employer expense would represent a credit to the profit and loss accounton full application of SSAP24 principles. However, for reasons of conservatism, such expense has been taken as£nil for the three years ended 31 March 2003. The long-term financial assumptions used to calculate employerexpense under SSAP24 are shown below:Growth relativeto investmentreturn% per annumRate of investment return ......................................................... 5-6Rate of pay increases ............................................................. 5Rate of pension increases ......................................................... 3Rate of price inflation ............................................................ 3These rates included allowance for the effects of the tax credit changes introduced by the Finance (No. 2) Act1997.The most recent full actuarial valuations of the other two significant defined benefit schemes were carried out asfollows:Germany on 1 April 2003 and Japan on 31 October 2000.The additional disclosures required by FRS17 are set out below.The most recent full actuarial valuations have been updated to 31 March 2003 by qualified independent actuaries.UnitedKingdom Germany Japan% % %Major assumptionsRate of general increase in salaries ...................................... 4.25 3.5 2.4-5.0Rate of increase to pensions in payment .................................. 2.25 2.0 NilRate of increase to deferred pensions ..................................... 2.25 2.0 NilDiscount rate for scheme liabilities ...................................... 5.5 5.0 1.25Inflation ........................................................... 2.25 2.0 Nil183

EMI Group plcNotes to Consolidated Financial Statements—(Continued)30. Pension arrangements (continued)On full compliance with FRS17, on the basis of the above assumptions, the amounts that would have beencharged to the consolidated profit and loss account and consolidated statement of total recognised gains andlosses for the year ended 31 March 2003 are set out below:UnitedKingdom Germany Japan£m £m £mOperating profitCurrent service cost ............................................... 11.0 0.3 2.2Past service cost .................................................. — — —Gain on curtailment ............................................... — (2.2) (2.2)Total charge (credit) to operating profit ................................ 11.0 (1.9) —Finance incomeExpected return on scheme assets .................................... (61.0) — (1.2)Interest on scheme liabilities ........................................ 45.0 1.4 1.4Net (credit) charge to finance income ................................. (16.0) 1.4 0.2Total (credit) charge to profit and loss account before taxation .......... (5.0) (0.5) 0.2Consolidated statement of total recognised gains and lossesActual return less expected return on scheme assets ...................... 196.0 (0.5) 0.6Experience gains and losses arising on the scheme liabilities ............... (12.0) 0.2 (0.5)Changes in assumptions underlying the present value of the schemeliabilities ...................................................... 5.0 3.3 6.2Actuarial loss recognisable in consolidated statement of total recognisedgains and losses ................................................ 189.0 3.0 6.3% % %Further disclosuresDifference between the expected and actual return on scheme assets expressedas a percentage of the scheme assets ................................ (28.1) 47.6 0-(1.3)Experience gains and (losses) on scheme liabilities expressed as a percentageof the present value of the scheme liabilities .......................... 1.5 (0.7) 15.5-(5.6)Total actuarial loss recognised in the consolidated statement of totalrecognised gains and losses, expressed as a percentage of the present valueof the scheme liabilities .......................................... (23.3) (10.5) (8.3)-(11.4)The market values of the assets of the three significant defined benefit schemes at 31 March 2003 and 31 March2002 were as follows:2003 2002UnitedKingdom Germany JapanUnitedKingdom Germany Japan£m £m £m £m £m £mMarket value of assets*Equities ...................................... 432.0 — — 583.0 — 3.0Bonds ....................................... 252.0 — — 279.0 — 3.2Other ........................................ 13.0 1.0 44.5 11.0 0.8 36.9Total market value of assets ...................... 697.0 1.0 44.5 873.0 0.8 43.1Present value of scheme liabilities ................. (813.0) (31.1) (59.0) (805.0) (26.1) (56.7)Deficit in the scheme ............................ (116.0) (30.1) (14.5) 68.0 (25.3) (13.6)Pension liability before deferred tax ................ (116.0) (30.1) (14.5) 68.0 (25.3) (13.6)Deferred tax ................................... 34.8 11.4 6.1 (20.4) 9.6 5.7Amount provided to cover scheme deficit ........... n/a 30.7 (2.4) n/a 26.5 1.4Impact on reserves ............................ (81.2) 12.0 (10.8) 47.6 10.8 (6.5)* The expected long-term rate of return on the assets is as follows:United Kingdom 7.0% (equities 8.4%, bonds 4.8%, other 3.8%) (2002: 7.2% (equities 8.0%, bonds 5.5%, other 4.5%))Germany 4.5% (2002: 5.5%)Japan 1.75% (2002: 2.75% (equities 5.9%, bonds 2.5%, other 2.5%))184

EMI Group plcNotes to Consolidated Financial Statements—(Continued)30. Pension arrangements (continued)Movement in surplus (deficit) during the year:UnitedKingdom Germany Japan£m £m £mSurplus (deficit) in scheme at beginning of the year .......................... 68.0 (25.3) (13.6)Exchangeadjustments.................................................. — (3.4) —Current service cost .................................................... (11.0) (0.3) (2.2)Past service cost ...................................................... — — —Gain on curtailment .................................................... — 2.2 2.2Cashcontributions..................................................... — 1.1 5.6Otherfinanceincome(expense) .......................................... 16.0 (1.4) (0.2)Actuarial loss ......................................................... (189.0) (3.0) (6.3)Deficit in scheme at end of the year ...................................... (116.0) (30.1) (14.5)31. Purchase and disposal of businesses(i) Purchase of businessesAcquisitions during financial year 2003 include Mute Limited (a recorded music business in the UK), Gold LabelLimited (a recorded music business in Hong Kong), eCentury Limited (a recorded music business in Taiwan),Rover Music NV and A&S Productions bvba (music publishing businesses in Belgium) and an additional 50%stake in Delabel Editions SA (a music publishing business in France).Book value ofassets acquiredAdjustmentsFair value to theGroup£m £m £mMusiccopyrights ........................................ — 8.6 8.6Tangible fixed assets ...................................... 0.3 — 0.3Stocks ................................................. 0.8 (0.8) —Debtors ................................................ 10.6 (4.0) 6.6Creditors ............................................... (7.6) (0.6) (8.2)Tax ................................................... 0.2 — 0.2Borrowings ............................................. (4.3) — (4.3)Net assets acquired (before cash) .......................... — 3.2 3.2Goodwill capitalised ...................................... 39.8Deferred consideration payable ............................. (20.6)Net cash consideration ................................... 22.4Satisfied by:Total consideration ................................... 43.7Deferred consideration payable ......................... (20.6)Cash consideration ................................... 23.1Net cash acquired .................................... (0.7)Net cash consideration ................................... 22.4The adjustments to book value of £3.2m were made to bring the valuation of the assets acquired in line with theGroup’s accounting policies.All acquisitions have been accounted for using the acquisition method.185

EMI Group plcNotes to Consolidated Financial Statements—(Continued)31. Purchase and disposal of businesses (continued)Acquisitions during financial year 2002 included Dino (a recorded music company in Holland), Poko (a recordedmusic company in Finland), Celebrity (a recorded music company in the US), a 60% stake in Insight (a recordedmusic company in the UK) and a 50% stake in Tooth and Nail (a music business in the US). The combined fairvalue to the Group is as follows:Book value ofassets acquiredAdjustmentsFair value to theGroup£m £m £mMusiccopyrights ........................................ — 6.6 6.6Fixed assets ............................................. 0.1 — 0.1Stocks ................................................. 0.1 — 0.1Debtors ................................................ 6.2 (0.7) 5.5Creditors ............................................... (5.4) — (5.4)Borrowings ............................................. (1.0) — (1.0)Tax ................................................... 0.2 0.1 0.3Minority interests ........................................ (0.2) (3.3) (3.5)Net assets acquired (before cash) ............................ — 2.7 2.7Goodwill capitalised ...................................... 8.9Provisions for future earnout liabilities ....................... —Net cash consideration on acquisitions during the year ........ 11.6Net cash consideration on prior years’ acquisitions .............. 11.0Net cash consideration ................................... 22.6Satisfied by:Total consideration ................................... 22.7Future earnout provisions .............................. —Cash consideration ................................... 22.7Net cash acquired .................................... (0.1)Net cash consideration ................................... 22.6The adjustments to book value of £2.7m were made to bring the valuation of the assets acquired in line with theGroup’s accounting policies.Acquisitions during 2001 include a 50% stake in the No Limit record label in the US, RelaxIn (a recorded musiccompany in the Middle East) and the remaining minority interests in Monitor (a Czech Republic music company)and OctoArts (a Philippines recorded music company). The combined fair value to the Group is as follows:Book value ofassets acquiredAdjustmentsFair value to theGroup£m £m £mMusiccopyrights ........................................ — (1.3) (1.3)Debtors ................................................ (27.5) 2.0 (25.5)Creditors ............................................... (6.5) (1.2) (7.7)Minority interests ........................................ 0.6 — 0.6Net assets acquired (before cash) ............................ (33.4) (0.5) (33.9)Goodwill capitalised ...................................... 44.2Earnout liabilities - provisions utilised ........................ 3.4Provisions for future earnout liabilities ....................... (2.9)Net cash consideration ................................... 10.8Satisfied by:Total consideration ................................... 13.8Future earnout provisions .............................. (2.9)Cash consideration ................................... 10.9Net cash acquired .................................... (0.1)Net cash consideration ................................... 10.8186

EMI Group plcNotes to Consolidated Financial Statements—(Continued)31. Purchase and disposal of businesses (continued)The adjustments to book value of £(0.5)m were made to bring the valuation of the assets acquired in line with theGroup’s accounting policies and to reflect revised estimates of consideration payable.Goodwill arising on acquisitions in the year comprises: £mTotal consideration ...................................................................... 13.8Net cash acquired ....................................................................... (0.1)13.7Fair value to the Group (before cash acquired) ................................................ 33.9Earnout provisions utilised or written back ................................................... (3.4)Goodwill .............................................................................. 44.2The goodwill includes £39.8m of capitalised goodwill and goodwill which has been written back to reserves of£4.4m relating to prior years’ acquisitions. Adjustments to goodwill written off to reserves arise on changes toestimated future earnout liabilities for prior years’ acquisitions and acquisitions of remaining minority interestsassociated with prior-years’ acquisitions.All acquisitions have been accounted for using the acquisition method.(ii) Disposal of joint venture (HMV Group plc)£mShare of gross assets less share of gross liabilities at 31 March 2002 ............................. (159.9)Share of loss for year to 31 March 2003 .................................................... (0.5)Net liabilities disposed of ............................................................... (160.4)Goodwill previously written-off .......................................................... 175.3Profitondisposal ..................................................................... 215.2Tax on prior-year unrealised profits ....................................................... (25.6)Provision for HMV pension shortfall (Note 32 (i)) ........................................... 5.0Cash inflow on disposal ............................................................... 209.5(iii) Disposal of businessesIn 2003, net cash outflow from disposal of businesses includes the disposal of Disky Communications EuropeBV (a recorded music business in Holland).£mTangible fixed assets .................................................................... 0.2Stocks ............................................................................... 5.0Debtors .............................................................................. 22.7Creditors ............................................................................. (12.7)Provisions ............................................................................ (0.2)Tax ................................................................................. 2.6Minority interest ....................................................................... (1.5)Net assets disposed of ................................................................... 16.1Goodwill previously written-off to reserves .................................................. 8.4Lossondisposal ....................................................................... (25.2)Cash outflow on disposal ............................................................... (0.7)Comprising:Cashdisposedof ................................................................... (3.2)Consideration received .............................................................. 2.5Cash outflow on disposal ............................................................... (0.7)187

32. Related party transactionsEMI Group plcNotes to Consolidated Financial Statements—(Continued)The Company has taken advantage of the exemption under FRS 8 – Related party disclosures not to discloserelated party transactions between Group subsidiary undertakings. The Group had several transactions with otherrelated parties during the year.(i)HMV and HMV Group plcAs part of the sale in 1998 of the companies and assets comprising HMV and HMV Group plc (HMV Group) theCompany acquired a 45.2% equity stake, and 50% of the Junior Preference Shares in HMV Group, for £87.5m.An additional £25m, in the form of deferred consideration, was to be receivable on (inter alia) a listing of anypart of the share capital of HMV Group on any recognised stock exchange, or 28 March 2003. In addition, anamount of up to £25m further consideration was to be receivable if Advent International Corporation and relatedinvestors achieved a specified return on their investment in HMV Group on a listing. As a result of additionalequity and preference share issues during 1999 by HMV Group, in which the Company subscribed £9m foradditional ordinary and preference shares at 31 March 2002, the Company owned a 42.65% (39.90% fullydiluted) equity stake in HMV Group, and 18.08% and 49.15% respectively of HMV Group’s Senior ‘A’Preference Shares and Junior Preference Shares. The Group also made available to HMV Group a £50m workingcapital revolving credit facility (the EMI Revolving Credit Facility), no part of which was drawn during the year.On 15 May 2002, HMV Group shares were admitted to the Official List of the UK Listing Authority and toTrading on the London Stock Exchange, pursuant to a global offer which involved the Company selling part ofits holding of ordinary shares in HMV Group. The net cash proceeds payable to the Group as a result of theflotation comprised the following elements, namely £69.4m, representing (i) the deferred and contingentconsideration payable to the Group by HMV Group on its listing under the terms of the 1998 sale agreementbetween the Group and HMV Group, as described above, and (ii) the redemption of the Company’s holding ofsenior preference shares in HMV Group, together with £72.9m in respect of ordinary shares in HMV Group soldby the Company in the global offer.Following these transactions, the Group retained a residual shareholding in HMV Group of 14.5%. This holdingwas subject to lock-up arrangements for six months from flotation. On 19 November 2002, the remaining 14.5%interest was sold at a price of 120p per share, which raised net proceeds of about £69m.As part of the 1998 transaction, the Group also entered into an indemnity deed with HMV Group relating, amongother things, to guarantees given by the Group of approximately 87 leases. Under the deed, HMV Group agreedto indemnify the Group against any payments made under those and certain other guarantees and indemnities.HMV Group undertook to use reasonable efforts to arrange for the release of these guarantees. The aggregateannual rental payments under guaranteed leases are approximately £24.4m, although they are subject toadjustment both up and down under certain circumstances. The guaranteed leases have terms which expire in oneto 23 years, and many of the leases expire in years beyond 2013.As part of the flotation arrangements, the EMI Revolving Credit Facility was cancelled. The indemnity deedremains in force in respect of lease guarantees, and HMV Group has secured those obligations pursuant to asecurity deed, the Company’s rights under which rank second behind banks which provide senior credit facilitiesto HMV Group.Under the 1998 Sale Agreement, as from 31 May 2003, HMV Group employees ceased to be active members ofthe Group’s UK Fund. They will have the opportunity to join the HMV Group Pension Scheme and, if they soelect, to transfer their Group Fund benefits in terms of accrued service to the HMV Scheme. The Sale Agreementprovides for a transfer payment to be made from the Group’s UK Fund to the HMV Scheme in respect of benefitsso transferred, the transfer payment being made in accordance with actuarial assumptions but agreed as part ofthe Sale arrangements. If the transfer payment so calculated exceeds the share of the assets of the Group’s UKFund attributable to the transferring members, the Company is obliged to make up the shortfall. An estimate of£5m was provided in the year in respect of the Company’s potential liability in this regard and charged as a nonoperatingexceptional item (see Note 9(ii) for further details).188

EMI Group plcNotes to Consolidated Financial Statements—(Continued)32. Related party transactions (continued)The Group also assigned various trademarks to HMV (IP) Limited including the ‘Dog and Gramophone’trademark and HMV acronym in consideration for the payment of £2m over a period of three years. HMV (IP)Limited has licensed back to the Group for no consideration the right to use the ‘Dog and Gramophone’trademark on its recorded music products.During that part of the year for which HMV Group plc was a joint venture, companies within the Group madesales of £2.2m (2002: £82.3m; 2001: £80.4m) to companies within HMV Group.(ii)Delabel Music Publishing and related companiesPursuant to a Heads of Agreement signed in July 1998, in December 2002, the Group completed the acquisitionfrom Emmanuel de Buretel, Chairman and Chief Executive Officer of EMI Recorded Music Continental Europe,of his 50% shareholding in Delabel Editions SA, his 50% interest in Delabel Music Publishing (UK) Limited andhis 17% shareholding in Mawlaw388 Limited (trading as Source (UK)). The consideration for the Delabel MusicPublishing (UK) Limited shares will be determined by reference to a formula based on future net publisher’sshare over a three-year period, whilst that for the Source (UK) shares is an override royalty on certain net sales ofalbums released by Source (UK) artists. The consideration for the shares of Delabel Editions SA was €21.4mwith a one-off future payment which will be determined by reference to a formula based on 15 times netpublisher’s share not to exceed €1.5m.(iii)Ilchester InvestmentsAs part of the agreements for Alain Levy’s appointment as Chairman and Chief Executive Officer of EMIRecorded Music, the Company agreed to reimburse to Ilchester Investments Ltd, a company controlled byMr. Levy and his family, rental and certain other payments due in respect of that company’s leasehold offices incentral London, pending the disposal of the lease. Such payments reimbursed or accrued due to IlchesterInvestments Ltd, as at 31 March 2003, totalled £138,232 (2002: £59,400).As part of the arrangements for the appointment of Alain Levy as Chairman and Chief Executive Officer of EMIRecorded Music, the Group agreed to acquire up to 100% of the share of Insight Music Limited, which includeda 40% shareholding by Ilchester Investments Ltd, a company controlled by Mr. Levy and his family. Theagreement was completed in December 2001 and the consideration paid by the Group to Ilchester InvestmentsLtd was £1.8m including a loan repayment of £0.72m. As part of the transaction the Group also paid the vendorshareholders’ professional fees of £114,000.Also as part of the arrangements for Mr. Levy’s appointment, the Company agreed to reimburse to IlchesterInvestments Ltd rental and certain other payments due in respect of that company’s leasehold offices in centralLondon, pending the disposal of the lease, including a sum (expected to be £25,000) in respect of leaseholdimprovements not recovered in the disposal. Rent and other payments reimbursed or accrued due by the Group toIlchester Investments as at 31 March 2002, totalled £59,400.(iv)OtherIn January 2001, the Group purchased the remaining 40% minority interest in OctoArts EMI Music, Inc., aPhilippines company, from the minority partner for PP$1m (£15,000). As part of the transaction the Group alsopaid the minority partner PP$94m (£1.5m) in support in marketing Philippines repertoire to overseas Philippinecommunities. The minority partner’s brother was the Managing Director of OctoArts EMI Music, Inc.In September 2000 the Group also purchased the remaining 49% minority interest in Monitor Records SRO, aCzech Republic company, from the minority partner for £1.2m.The management buyout of the distribution operation in Butzweilerhof, Germany (the financial effect of whichwas provided for in the Group’s accounts for the year ended 31 March 2000) was completed during the year. Thetransaction involved the sale of the assets of the Butzweilerhof operation to the management team for DM7m(£2.2m) and the continuation of distribution services to the Group for a period.189

32. Related party transactions (continued)EMI Group plcNotes to Consolidated Financial Statements—(Continued)(v) Project TyphoonIn July 2002, the Group entered into a joint venture agreement (‘Project Typhoon’) with Mr. Norman Cheng whosubsequently joined the Group as Chairman of EMI South East Asia. Pursuant to that agreement, the Groupagreed to establish and fund, on an ongoing basis, new businesses in the People’s Republic of China, Hong Kongand Korea, in which Mr. Cheng has or will have an equity interest. It is envisaged that once these businesses arefully operational, Mr. Cheng will assume full responsibility for their management and will step down from hisrole as Chairman of EMI South East Asia. The Group has an option to buy, and Mr. Cheng has an option to sell,his equity interest in the joint venture businesses in 2009 at a price determined by reference to a formula based ona multiple of earnings over a three-year period. Such a price can be limited to not more that US$100m.33. Post-balance sheet eventsOn 19 July 2002 the Group announced that it would complete the purchase of the Jobete song catalogue, one ofthe world’s premier music publishing catalogues containing the classic standards of the Motown era. The Groupacquired an initial 50% of Jobete Music Co., Inc in 1997. It acquired a further 30% on 10 April 2003 for aconsideration of US$109.3m. The minority shareholder has the right to require the Group to buy the remainingshareholding at a date not earlier than April 2004 and not later than April 2005, failing which the Group has theoption, exercisable in October 2005, to purchase the shareholding. The consideration payable for the remaining20% will be not less than US$75.1m and not more than US$86.3m.190

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REGISTERED OFFICE OF THE ISSUEREMI Group Finance (Jersey) Limited22 Grenville StreetSt. HelierJersey JE4 8PXREGISTERED OFFICE OF THE PARENTEMI Group plc27 Wrights LaneLondon W8 5SWTRUSTEEThe Law Debenture Trust Corporation p.l.c.Fifth Floor100 Wood StreetLondon EC2V 7EXPRINCIPAL PAYING, CONVERSION ANDEXCHANGE AGENTHSBC Bank plcMariner HousePepys StreetLondon EC3N 4DAPAYING, CONVERSION AND EXCHANGEAGENTDexia Banque International áLuxembourg, société anonyme69 route d’EschL-2953 LuxembourgLEGAL ADVISERSTo the Issuer and the ParentAs to English LawFreshfields Bruckhaus Deringer65 Fleet StreetLondon EC4Y 1HSAs to Jersey LawMourant du Feu & Jeune22 Grenville StreetSt HelierJersey JE4 8PXTo the Managers and the TrusteeAs to English LawLinklatersOne Silk StreetLondon EC2Y 8HQAUDITORS TO THE ISSUER AND THE PARENTErnst & Young LLP1 More London PlaceLondon SE1 2AFAUTHORISED ADVISERCazenove & Co. Ltd20 MoorgateLondon EC2R 6DA

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