Pyramid Saimira Theatre Ltd Merged Management Discussions

PYRAMID SAIMIRA THEATRE LIMITED ANNUAL REPORT 2008-2009 MANAGEMENT DISCUSSION AND ANALYSIS The management wishes to share with the members problems/concerns and plans for the company with the members. Therefore this section consists of the following: A. The reproduction of additional disclosure the company made to exchanges on 25.10.2009. B. SEBI order on employee quota allotment. C. Impact of income tax attachment to the business of the company D. Growth/decline/business model and revival plan for the company A) Additional Disclosure on accounts: The company in its declaration on 5th quarter results along with annual results made the following additional disclosures on 25.10.2009 which was available in BSE/NSE website. The same is being reproduced here since it summarizes the status of the group holistically: Detailed Notes and Additional Disclosures pertaining to Annual Accounts: This Additional Notes to Accounts is given as a matter of better Corporate Governance practice This note covers Business Model, Subsidiaries and their status and specific problems faced by the Group 1. The company suffered drastic reduction in its top line during the last three quarters. The following table shows quarter-wise screens operated and results. (INR Million) Quarters Screens Topline EBIDTA 1. 30.09.2007 487 1,465.10 226.40 2. 31.12.2007 655 2,329.48 371.00 3. 31.03.2008 765 2470.01 309.74 4. 30.06.2008 802 2502.78 134.97 5. 30.09.2008 745 2523.92 176.07 6. 31.12.2008 252 1379.68 92.07 7. 31.03.2009 248 807.01 75.78 8. 30.06.2009 190 573.28 96.67 2. The company commenced operations with merely four screens and grew to be a giant in the above manner and later on downsized the number of screens due to viability and management factors. The company also started expanding its operations into Western and Northern India, Malaysia, Singapore, USA, etc., Apart from that, the company also backwardly integrated into Distribution, Production and laterally expanded into allied fields as well. 3. The attachment of all bank accounts and all theatre receivables of the company by the Income Tax Department has resulted in stoppage of cash receipts into the system from the exhibition centers for about 7 months in the accounting period. All theatre collections have since been used for content and theatre disbursements locally in order to keep the theatres running. Also due to break down of systems and process machinery due to lack of adequate staff, receipt of Daily Collection Reports (DCR) has become irregular and such DCRs are required to be collected from over 350 theatres. Hence, based on memorandum reports from theatres, such income and expenditure from theatres has been accounted. The company is in the process of collecting DCRs from all regions. The process is expected to be completed within 3 months. 4. The company, based on the experience of growth and subsequent problems, has now started implementing a wholesome change of the business model and restructuring of business operations. Broadly: * The company was originally operating on a fixed rental model. The company is moving from this to Revenue Share and profit share model whereby the Fixed Cost component in terms of rent will come down and part of the risk will also be borne by the theatre owners. * The company is also moving away from purchasing the entire rights of the film into selective rights and also some of the films on revenue share basis, which are expected to reduce the risk elements of film failures, though the margin of profit might also reduce. * Previously the groups business of combined Distribution and Exhibition meant that there is no risk mitigation at all. Now the company is moving away from full exhibition of our films by inducting Distribution partners for the respective territory and also by inducting Third Party Exhibitors as well. This will expand the base of the company and reduce the overall risk of film failures. * The company previously operated all canteens on its own and the company could not achieve system efficiency and there were leakages in the F&B Division of the company. The company is now moving towards outsourced canteen services where the company will get a Fixed Rate per ticket sold, which is much easier to monitor, control and will be more profitable. * The company so far has not integrated its cinema marketing with exhibition though the company has a Cine Marketing Company called Dimples Cine Advertising Company Pvt. Ltd., which had 15yrs of track record. The company is now integrating the operations to bring more revenues. * The company previously had more than one screen in the same locality which had resulted in over capacity. The company is evaluating the theatre density and reducing the capacity appropriately. 5. All these measures will reduce the Fixed Cost exposure; create risk mitigation at each level and over all improvement of efficiency cycle and operating cycle which will translate into tight Working Capital deployment. 6. Based on the above the company transferred 299 numbers of theatres along with Rs.93.78 Crores of Deposits and Rs.80.73 Crores of margins yet to be received from the theatres to its wholly owned subsidiary, PSCDPL. The said wholly owned subsidiary is tasked with content distribution to theatres not fully controlled by PSTL and not fully managed by PSTL. 7. The management expects to collect in due course of time all the above amounts except a few and therefore the management is of the considered opinion that no write off is necessary either in PSTL Books or in PSCDPL Books though the collection may get delayed. 8. As part of restructuring mechanism the company is doing the following: * The company is de-merging each core business separately viz., Production, Exhibition and Distribution. It may be noted PSTL previously had only Exhibition and under it, Production and Distribution were subsidiaries. These are now being de-merged. * Each of these three divisions will now have independent focus and will also induct strategic partners restricted to that line of business. Each of this business will also focus upon de-risking not only through the group companies but also through Third Parties. * Due to the effect of de-merger, Production and Distribution Companies are proposed to be listed in NSE & BSE. * The shareholders, bankers and secured creditors will receive these companies shares, free of cost, 9. All these structural measures will improve management bandwidth, infuse fresh blood into the system and bring greater focus on risk mitigation and thereby improve overall profitability of the group. 10. Based on the above restructuring exercise, the company has inducted M/s. RDB Group, Kolkatta as Co-Promoters in Production Company PSPIL. RDB group is a major infrastructure player in Eastern and Western India. At present the group is having a Turnover of Rs.5000 millions. RDB Group was founded by Shri. S.L. Dugar and having activities in Real Estate Development, Manufacturer of Cigarettes, Containers & Bags; Dealership of TATA Motors; Retail Outlets; Financial Services; Logistic Hub; Power Transmission Equipments; Educational Institutions on its own and the following through Joint Ventures like Infravision - a JV with Tantia Group for infrastructure and project development at Haldia and Siddha PSIDL - a JV with Siddha Group for development of plots at 300 acres of land at Jaipur. 11. In lieu of the above transaction, PSPIL ceases to be a subsidiary of the parent company and currently PSTL holds only 39.86% in the Production Company. It may also be noted that this also will be distributed to the shareholders/other stakeholders after the process of de-merger, free of cost. 12. Our DTH business which operated in Europe could not sustain its business operations due to worsening of Europe consumer spending power and has sustained serious losses. We are a JV partner in the company and conservatively we have decided to write off its investments from our books. (This investment was held through our wholly owned subsidiary PSEA, USA) 13. Our gaming subsidiary Aurona Technologies also underwent serious liquidity crisis and loss partially due to depreciation of pounds as compared to other currency, making operating losses in its back office including wiping out of its accumulated margins. Aurona is a gaming company involved in outsourced production of gaming software and therefore in our view could not sustain operations due to the same. The Board has also decided to write off the investment in Aurona. 14. Our Malaysian subsidiary, Pyramid Saimira Theatre Chain (Malaysia) Sdn Bhd is making cash profits. Our US subsidiary Pyramid Saimira Entertainment America is making marginal losses. 15. The Companys distribution subsidiary PSCDPL has not distributed any films during the last two quarters and will revive its activities shortly. 16. Our marketing subsidiary is marginally profitable given the tight advertisement and marketing spend in India and inordinate delay in collection due to bad credit environment. 17. PSEA, USA had acquired a company called Fun Asia during the Financial Year 2007-2008. Further, after acquisition of Fun Asia, it expanded in more locations and added distribution business to the segment. There has been a dispute in the said business acquisition and consequently on 01 st July 09, the company lost constructive control of Fun Asia. As of 30.06.09, our Company has not incurred any loss and hence no write off has been made. The company has been pursuing legal recourse and based on the report, the company may go in for a write off, should there be any need. 18. During the year under review, the company entered into a Joint Venture with Ministry of Culture of China which led to the formation of Pyramid Longzhe Culture & Theatre Company Ltd. The company is doing exhibition business and earning profits. 19. The company had dispute with the Income Tax department and the following is detailed chronologically: * Pyramid Saimira Theatre Ltd, Chennai (PSTL) filed a return of income under Section 139(1) admitting a tax liability of Rs.29,54,97,940 on 30th September 2008. * Total tax already paid is Rs.4,11,76,102. * Consequent upon non-payment of Tax, the Income Tax Department issued garnishee on receivables, investments, bank accounts of the company, etc., from 04th December 2008. * The company filed a writ and obtained a Writ of Mandamus for disproportionate attachment from the Honble High Court of Judicature at Madras on 23rd March 2009. * On 06th March 2009, the company filed a Revised Return under Section 139(5) admitting /claiming a refund of Rs.216,26,310. * The company also obtained Injunctory Relief from the Honble High Court of Judicature at Madras on 30th April 2009. * Consequent to the above and on our request, the Department withdrew the attachments on Bank Accounts on 05th June and 03rd August 2009. * The Department made a 143(1) assessment solely on the basis of original return and categorized the company as defaulter under Section 140(a) and attached remaining assets as well (but excluding OD Accounts). * The Company filed an Appeal with Commissioner (Appeals) against 143(1) assessment on 01st June 2009. * The Honble Commissioner (Appeals) ruled that only the revised return should be considered and assessment made appropriately. * Consequent to our request and the admission of an Appeal, the Assessment Officer and TRO removed the attachment done so far under Section 226(3) on 03rd August 2009. * Immediately after lifting of the aforesaid attachment, the Department attached some debtors, receivables, investments and Bank Accounts of the Company under Section 281 (b) as a presumptive attachment. It may be noted that this creates only a charge and not a recovery since as of now the company has no tax dues and assessment is pending. 20. The company has already provided the said amount as demanded by the Income-tax Department in the accounts and therefore no further provisioning is needed. 21. During December 2008 the company was targeted with a peculiar event, the sequence is as follows: * On 21st December 2008 several media reported that SEBI has ordered one of the Promoters (P.S. Saminathan, Managing Director, PSTL) to give an open offer for Rs.250/- since he had violated the take over code. * After the company announced the forgery in a press conference, on 23rd December 2008 SEBI admitted that the said letter was in fact FORGED. * SEBI ordered an investigation and came out with an Interim Report on 23rd April 2009. Strangely, in that said report SEBI also barred Mr. P S Saininathan personally from accessing the securities markets directly or indirectly, without any reason. There is neither specific nor substantiated allegation by SEBI of any pecuniary benefit accrued to Mr. P S Saminathan on account of dealing in PSTL Shares. * After Several reminders SEBI gave Mr. P S Saminathan a post decisional Personal Hearing on 11th August 2009, i.e. nearly after 4 months of passing the Interim Order. Till date SEBI is yet to come out with its final findings despite merits being in Mr. P S Saminathans favour. In fact SEBI has admitted in its subsequent orders passed against others, that Mr. P S Saminathan and the company have been the victims of the forged letter. B. SEBI Order on employee quota allotment case-(Pending in SAT, Mumbai): Brief facts of the case: The Company allotted shares reserved for its employees to seven employees during the course of its pubic issue. According to SEBI the evidentiary standards of employment for these employees were not met to its satisfaction. Consequently, SEBI has alleged that these seven persons have donned the cloak of employee to garner shares reserved for employees under the employee quota. This in turn according to SEBI has deprived the ordinary - retail share holders of a larger pool of shares for their allotment. Order of SEBI: In view of the above SEBI has held the company guilty of violating PFUTP guidelines and consequently banned the company from entering the capital markets for the next seven years on 10th Nov 2009. SEBI has not alleged that either the company or its directors have in fact profited from these transactions. [Para 10 of the order]. Similarly, SEBI has also not alleged any linkages between the company as well as its promoters and these seven employees, either in funding their purchases of shares or get back the shares from these employees. It may also be noted that share prices went up after the sale of these shares by these seven employees in the markets. Consequences of the Order of SEBI: 1. Investment of innocent shareholders, mostly retail and small shareholders are in jeopardy 2. Lending, by Public Sector Banks and international financial institutions aggregating to Rs 600 crores could turn bad 3. Company, its directors and shareholders convicted of a crime without any benefit accruing to it or its directors or to its shareholders - in effect no mens reaproved against any one at the company level. Incidentally, there are several persons who have purchased the shares from the secondary market after the alleged fraud was committed and have to now face the consequences. Important Issues leading to SEBIs order: The SCN issued by SEBI alleged sufficient links between Shri Nirmal Kotecha and these seven employees. It is for these reasons SEBI earlier proposed consent terms under which the company was to pay a sum of Rs 115 Lacs to SEBI and simultaneously extract an undertaking from Shri Nirmal Kotecha that he would not access the capital markets for a period of five years. While the company accepted the first condition, it could not for obvious reasons extract the said undertaking from Shri Nirmal Kotecha, since by then he was not in the Board. Instead, the company suggested that SEBI being the market regulator was better placed to extract the said undertaking from Shri Nirmal Kotecha. It is for these reasons that the earlier proposed consent terms failed. Why a new consent now? The company has filed consent with SEBI on 11.2.2010 1. SEBI is mandated to protect the interest of the investors-it cannot penalise the very investors it is bound to protect. 2. The SEBI order has the calculated effect of penalising the share holders (approximately 40,000 mostly small and retail) while allowing the perpetrators of the alleged fraud to go free. It is in the overall interest of all stakeholders the company is coming forward seeks to settle the issue through mutual consent. 3. Since Shri Nirmal Kotecha is not on the Board of the company now and that he has been banned by SEBI by its order dated 23rd April 2009, the earlier consent could be re-looked by SEBI. 4. While the SCN holds Mr Kotecha as the villain of the piece, the final order is silent on him. This is a legal anomaly. Similarly the company is legally advised that there are several legal issues in the said order of SEBI which have far reaching consequence not only for the company but also for healthy and robust working of the capital markets. 5. Two of the seven employees were allowed consent terms by SEBI and for the rest penalty also was levied. 6. Even in the Satyam case, the stated position of the Government of India has been to insulate the shareholders, company and other stakeholders from the perpetrators of fraud and allow business to be carried on unhindered. A similar approach is called for here, especially since the alleged perpetrators of fraud are no longer with the company. C) Income tax: The company suffered attachments of its receivables and bank accounts from 4/12/2008 and the same has resulted in a huge loss to the company. The following letter the company sent to the additional commissioner, Income Tax describes the full impact and the same has been reproduced here: February 05, 2010 The Additional Commissioner of Income Tax Ayakar Bhavan Uthamar Gandhi Salai Chennai 600034 Respected Sir/Madam, Sub: Pyramid Saimira Theatre Limited-Income Tax Issue-request for stay of recovery pending appeal Ref: 1. Our meeting held on 22.1.2010 2. Your proceeding No. Addl. CIT, MEDIA RANGE/2009-10 Dt. 27.01.2010 Kindly allow me to present the facts of the case in a summarized form: A. FACTS OF THE CASE: 1. Pyramid Saimira Theatre Ltd, Chennai (PSTL) filed a return of income under Section 139(1) admitting a tax liability of Rs.29, 54, 97,940 on 30th September 2008. 2. Total tax already paid is Rs.4,11,76,102 3. Consequent upon non-payment of Tax, the Income Tax Department issued garnishee on receivables, investments, bank accounts of the company, etc., from 04th December 2008. 4. On 06th March 2009, the company filed a Revised Return under Section 139(5) admitting/claiming a refund of Rs.216,26,310. 5. The company filed a writ and obtained a Writ of Mandamus for disproportionate attachment from the Honble High Court of Chennai on 23rd March 2009. 6. The company also obtained Injunctory Relief from the Honble High Court of Chennai on 30th April 2009. 7. The Company filed an Appeal with Commissioner (Appeals) against 143(1) assessment on 01st June 2009. 8. The Department made a 143( 1) assessment solely on the basis of original return and categorized the company as defaulter under Section 140(a) and attached remaining assets as well (but excluding OD Accounts).s 9. The Honble Commissioner (Appeals) ruled that only the revised return should be considered and assessment made appropriately. 10. Consequent to our request and the admission of an Appeal, the Assessment Officer and TRO removed the attachment done so far under Section 226(3) on 03rd August 2009. 11. Immediately after lifting of the aforesaid attachment, the Department without a Speaking Order on the same date again attached all debtors, receivables, investments and Bank Accounts of the Company under Section 281(b). 12. The Assessment Officer has passed an assessment for the year 08-09 on 30.10.2009 raising the total demand of Rs. 28,30,96,996/- 13. The company files a stay for recovery with the Assessment Officer on 26.11.2009 14. The company also files an appeal against the assessment with the Commissioner of Appeals on 26.11.2009 15. The Assessment Officer has passed an Order demanding 50% payment on 11.1.2010 It may kindly be noted that one way or other, the companys assets, theatres, receivables and bank accounts were under attachments right from 041 December 2008 and continuing till now. Kindly allow me to present the effects and damage caused due to the continued attachments for more than a year. BANKS: * The company had around Rs. 130 Crores of banking limits and was about to receive additional 50 Crores of bank limits in the month of December 2008. In fact the undersigned promised to pay certain installments to the IT Department once our working capital cycle become normal due to the infusion of the additional limits. Unfortunately, the department had also attached the OD Accounts which in any case will not have credit balance, (OD accounts by nature will always have debit or nil balance) and due to the attachments, the additional limits got cancelled by the banks. * After multiple pleadings with the IT department and taking a judicial route, the company received a relief that Bank Account should not be attached. But unfortunately, the department sent a letter to the Banks, removing the attachments, allowing the banks to give a loan, but mentioned, that any credit comes to the account is subject to attachment by the department. * It is humbly pointed out that banks fund current assets and when the current assets cycle is complete; the old funding is adjusted and again re- funded subject to availability of fresh current asset creation. Therefore, if the total receipts are attached, working capital cannot operate through banks and therefore banks could not and did not extend any cooperation. * On the other hand, due to the continued attachments, our working capital cycle stopped which made our account technically as a clean OD and constrained the banks to withdraw and recalled the already availed limits also. The banks are now taking legal recourse to recover the old amounts. The company pleaded with the respective officers, that the company is willing to pay the tax in installments, subject to non-attachment of bank accounts, as this would have revived the working capital cycle. In fact we have informed the Department about the specific sanctions received from the following banks. Bank Name Sanction Letter Dated Amount Sanctioned (Rs.) Jammu & Kashmir Bank 05.12.2008 Rs. 0 Crores Axis Bank 04.11.2008 Rs. 25 Crores Barclays Bank 14.08.2008 Rs. 6 Crores It is submitted that only because of the attachment of the bank accounts by the IT Department, we could not avail these limits and these sanction letters have also been given to the Income-Tax Department when we pleaded our case. Any how we are attaching herewith the respective sanction orders for your reference. It is submitted that only because of continued attachments of our bank accounts, despite of our repeated requests; our company had to suffer rigorous working capital loss, resulting in losses amounting to multiples of crores of rupees. This has neither served the company nor served the purpose of revenue to the IT Department. THEATRES: * The companys main business is to take theatres on revenue shares / lease on long term basis. The revenue source on theatres is ticket sales and food & beverages sale. Out of the box office (ticket sales), the distributors i.e. content providers, will be paid as per the terms which is approximately equal to 50 to 60% of the collection. * Generally, theatre owners are paid rent / revenue share which are approximately equal to 25% of the collection. Out of the balance, there will be expenses to be met and the margins of the company generally will be to the tune of 8 to 12% on good times. * Further, the company has got certain security deposits with theatre. * The department sent attachments of gross box office collection to the theatres. It may kindly be noted that gross box office collection does not belong to the company and only net margins belong to the company. But due to the receipt of this attachment, distributors immediately stopped giving contents to our company and we had to take huge amount of fixed cost loss. Further, unfortunately there has been a miscommunication and rumor which got spread with the theatre owners, that theatres may get attached by the Income Tax Department. The property owners, i.e. the theatre owners got highly unsecured and demanded withdrawal from our company. * Further, when the theatre owners gives a theatre to us, he receives the advance and would have probably reinvested elsewhere and also not prepared to manage their theatres on their own. These attachment orders against theatres have constrained them to hasty, take back the management, with the result, theatres had to be run in a grossly inefficient manner. The theatre owners kept on debiting our accounts for the loss, which in effect has eroded almost all our deposit paid to the theatre owners and might be to the extent of Rs.200 Crores. Though IT Department may not have done this deliberately, this loss of asset to the tune of around Rs.200 crores is solely attributable to the IT Department misconceived attachment. Had the department attached only the margins and not the gross amount, probably the department would have collected its tax and we also would not have lost this huge amount of money. DEPOSIT WITH DISTRIBUTORS/PRODUCERS/ACTORS: * The company in its normal course of business pays advances to the artistic for artistic services, producers and distributors for supplying films. The company pays in stages. Unfortunately the department attached all the above said advances and demanded refund from the concerned parties. * It may kindly be noted that though these are advances and not in the nature of a finance receivables, they are actually in the nature of work in progress, wherein the company has to pay the balance, get a product, exploit the same and enjoy the profit or suffer the losses. If a balance has not been paid, rightfully, the other party will claim non performance by the company and will not refund the same. Trade practice and convention also support this view. We repeatedly explain this to the IT Department, but unfortunately it had stuck to its-views and therefore we would have lost more than Rs.100 crores on this count. We have submitted that the company gave the list of amounts advanced to various distributors, producers and actors and we have substantial proof for the same. Unfortunately no measures have been taken to properly securitize these and the debtors have been allowed by the Department to deny the amounts and due to this, they have neither paid the Department nor paid us. This resulted in huge loss to the company and on the contrary also not benefited the Department. In this I draw your specific attention to our letter dated 16.02.2009. Mindful of all this, the company offered various installment schemes, and in fact offered to convert the same through a court affidavit and guarantee. The Court also advocated the same to the department which unfortunately the department did not pay heed to. Considering all the above, our present request is as follows: a. That the departments stay the recovery of the assessed tax pending the decision on appeal. b. That the department withdraws all the attachments. We would like to however assure you that the company will strive hard to revive its business; thought revival looks bleak at this junction. We may also point out that due to a non resolution of Income Tax and continued attachments, we cannot raise any funds to the company, could not recover receivables to the company, could not continue the business and consequently many banks and creditors have filed for Winding Up of the company and in one case even official liquidator was provisionally appointed but suspended. It is humbly submitted if the department do not remove the attachments immediately, winding up may happen. We are afraid that all receivables of the company will become doubtful and bad and even if some is recoverable, it may take decades. Since as per the trade practice and conventions, the counter parties of theatres and distributors have a valid case. However should the department withdraw the attachments, the company will strive to pump in capital, talk to creditors in withdrawing the Winding Up and in right earnest make effort to restart the business. The company feels that it will take 3 to 6 months for such a revival and after that the company would be in a position to pay some amounts to the department as advance tax pending decision on appeal. We would like to once again point out that the companys business have come to stand still and the company lost huge amount of money due to the continued attachments and pray your good-self in providing an opportunity for the company to revive itself, considering the economic stakes of more than 1000 employees, more than 40,000 shareholders, 15 banking institutions and creditors who have lend the company for more than Rs.600 crores. Thanking you Yours faithfully, For PYRAMID SAIMIRA THEATRE LTD PSSAMINATHAN MANAGING DIRECTOR D. Business model & Revival plan of action: 8) BUSINESS MOPELANP GROWTH OF THE COMPANY: * The company was in business of last mile access of cinema (i.e. Theatres). The company took theatres on long lease, ran the entire operations, paid rent to the theatre owners, incurred content cost and earned revenue from sale of tickets and Food & Beverages. * The company from mere four screens developed in to a giant in the following manner: Quarters Screens 31.12.2006 184 31.03.2007 265 30.06.2007 371 30.09.2007 487 31.12.2007 655 31.03.2008 765 30.06.2008 802 30.09.2008 745 31.12.2008 252 31.03.2009 248 * The company also started expanding its operations into Northern India, Malaysia, Singapore, USA, etc., Apart from that, the company also backwardly integrated into Distribution, Production and laterally expanded into allied fields as well. The companys Top Line and EBITDA is as follows: (in Rs. Million) Quarters Topline EBIDTA 31.12.2006 460.53 58.61 31.03.2007 678.01 65.75 30.06.2007 1,228.50 234.90 30.09.2007 1,465.10 226.40 31.12.2007 2,329.48 371.00 31.03.2008 2470.01 309.74 30.06.2008 2502.78 134.97 30.09.2008 2523.92 176.07 31.12.2008 1379.68 92.07 31.03.2009 807.01 75.78 b) BANKING HISTORY & REASONS FOR CURRENT DUES & ISSUES: The following were the Working Capital deployment in the company: * Working Capital required for blocking theatres by way of rental advances to theatre owners. * Working Capital for procurement of content which is roughly equivalent to 60 days of our Top Line. * Working Capital required for expenses and operations * Working Capital required for funding collection cycle in non-fully controlled theatres of the company, since these theatres will settle the amount, only when picture is terminated. Apart from the above Working Capital, the company incurred non-refundable one time canteen vacation charges in theatres (needed to vacate the existing canteen operations) and infrastructural improvement cost in theatres which are non-recoverable back and digitalization capital expenditure which can be taken back. The following table depicts the investment in Fixed Cost and the investment in Working Capital as stated above: Working Capital Deployment Rs Millions 31.3.2007 31.3.2008 31.3.20O9 Rental Advance 1537.97 Content Cost 274.60 1248.90 1201.70 Operating Expenses 51.37 233.15 253.74 Canteen Vacation Expenses 12.60 0.50 0.50 Infrastructure/Digitalization 106.88 49.42 0.31 Total 445.45 3069.94 1456.25 * We availed Working Capital limits of Rs.50 Crore initially. * Reflecting the Top Line growth, the company sought additional Working Capital limits; vide request dt. 30.07.08 from Rs.50 Crores to Rs.125 Crores. Further during the same time, we tried to form the Consortium and the following meetings on 12/03/2008,16/07/2008,25/03/2009,11/05/2009 & 16/06/2009 were held. But finally due to various reasons, the present multiple banking arrangements continued. * In the meanwhile, we could arrange additional limits from AXIS BANK for Rs.25Crores and JAMMU & KASHMIR BANK for Rs.10 Crores. The AXIS BANK had put a pari passu as the condition and JAMMU & KASHMIR BANK wanted to be a part of the Consortium for the joint documentation. Unfortunately, bankers could not come to conclusion in this regard and the JAMMU & KASHMIR BANK limits could not be availed and with regard to AXIS BANK only a part from the sanctioned limit could be availed. * As of now, the principal exposure of the banks is as per the following table: Principal outstanding-working capital limits: Rs. in Crores Name of the Bank Principal 1. UCO Bank 12.00 2. Punjab National Bank 10.00 3. Federal Bank Ltd 14.40 4. State Bank of Patiala 4.80 5. Syndicate Bank 4.80 6. Bank of Rajasthan 2.00 7. Union Bank of India 5.00 8. Indus Ind Bank Ltd 1.00 9. Axis Bank 12.50 Total 66.50 c) Present problems and the need for restructuring. The companys problem currently can be based on the following contributory parameters: * The company faced a huge loss in some films especially the film called Kuselan which is one of the hyped films in India at that time and the company lost around Rs.40Crores. Further in 2008, the success ratio of the film industry as a whole was only 8% as against to the long term average of 20%. * All film companies were impacted due to this recession. Pyramid Saimira Group being the largest content providers was impacted more. At one point of time, we were releasing 4-6 films in the month and we had lost more than Rs. 125Crores due to the low success rate of films in India. This impacted our Working Capital and unfortunately, due to Income Tax attachment in December 2008, non receipt of pari passu seeding from other banks in favour of Axis bank and non-formation of Consortium at that point of time, constrained us from bringing fresh new funds for bridging the Working Capital Flow. * As the companys model is a Fixed Cost Model where all costs are fixed and the revenue is only dependent on content availability & failure in content coupled with companys in-ability to block funds for new content has resulted in low occupancy rate, which also increased our cash gap and Working Capital necessity, that unfortunately instead of being bridged, was on the regressive mode. * The company could not raise capital due to international risk aversion which was present at that time and certain questionable exit by one of the companys external investors which brought down the credibility of the company at that time in the capital markets. * The company pleaded for little extra support from the bank which unfortunately was not forthcoming at that time and the company had to go into the reduction of business. * Now the company has finalized a revival plan and started implementing the same and the company feels restructuring the debt will go in long-way in reviving the fortunes of the company and also put the company on growth path once again. E. Revival planning: While framing the plan Company has taken the following principal parametric conditions: * The company will not ask for any Principal Sacrifice from the bankers as the company is asset covered and self-confident of revival. * The companys restructuring is structured in such a way; the implementation is self-fulfilling and has taken into account the contingencies that may arise. For the same, the company has provided for capital conversions, secured capital flows through trust etc., as additional insurance to bankers. * The company while seeking additional Working Capital, commits to bring in fresh equity capital to the system. With the above parameters in mind, the company plans to apply to CDR mechanism for the following restructuring: * The interest outstanding from (accrued less paid so far) is requested to be converted into FITL which will be serviced in four half yearly installments starting from April 2011. * The present Working Capital principal to be converted into Term Loan for which the company will service the interest once in a quarter starting from July 2010 and the repayment of the same will be once in a half year in six equal installments from April 2011 onwards. * The company seeks fresh Working Capital of Rs.20 Crores subject to the company brings additional equity capital of Rs.20 Crores in to the system. * The company proposes to restructure the Group by de-merging certain associate and subsidiary companies. As an additional comfort to Bankers, the company is willing to create the trust with one of the constituent bank acting as a trustee which will hold certain number of shares of de-merged entities. The company proposes this trust can hold the following number of shares of the respective companies. No. of Shares Pyramid Saimira Production International Limited 803246 Pyramid Saimira Content Distribution Limited 752319 * The company is also willing to pass a Shareholders Resolution and Board of Directors Resolution providing an option to the bank to convert part exposure or full exposure into equity shares of the company as per SEBI approved formulae. * The company is also willing to induct a bank nominee into the Board of Directors of the company, for a higher quality Corporate Governance. F. RESTRUCTURING: The company based oh the experience of growth and subsequent problems has now started implementing a wholesome rejig of the business model and restructuring of business operations. Broadly the revival package is divided into: Change in Business Model: i. The company previously was operating on a fixed rental model. The company is moving from this to Revenue Share and profit share model whereby the Fixed Cost component in terms of rent will come down and part of the risk will also be taken by the theatre owners. ii. The company is also moving away from purchasing the entire rights of the film into selective rights and also some of the films on revenue share basis, which are expected to reduce the risk elements of film failure, though the percentage profit also might reduce. iii. Previously the groups business of combined Distribution and Exhibition mean that there is no risk mitigation at all. Now the company is moving away from full exhibition of our films by inducting Distribution partners for the respective territory and also by inducting Third Party Exhibitors as well. This will expand the base of the company and reduce the overall risk of film failure. iv. The company previously operated all canteens on its own and the company could not achieve system efficiency and there were leakages in the F&B Division of the company. The company is now moving towards outsourced the canteen services where the company will get the Fixed Rate per ticket sold, which is much easier to monitor and control. v. The company so far has not integrated its cinema marketing with exhibition though the company has a Cine Marketing Company called Dimples Cine Advertising Company Pvt. Ltd., which had 15yrs of track record. The company now is integrating the operations to bring more revenues. vi. The company previously had more than one screen in the same locality which had resulted in over capacity in the sale consideration. The company is evaluating the density and reducing the capacity appropriately. All these measures will reduce the Fixed Cost exposure; create risk mitigation at each level and over all improvement efficiency cycle and operating cycle which will translate into tighter Working Capital deployment. Structural Solutions: i. The company is de-merging the each of the core business separately viz.. Production, Exhibition and Distribution. It may be noted PSTL previously had only Exhibition and under it Production and Distribution were subsidiaries. These were now being de-merged. ii. Each of these three divisions will now have separate independent focus and will also induct strategic partners restricted to that line of business and fund raising separately. Each of this business will also focus upon de- risking not through the group companies but also through Third Parties. iii. Due to the effect of de-merger these two companys Distribution and Production would be listed. iv. It may be noted that certain shares of these companies will be held in a trust for bank securitization or eventual realization as the case may be at the option of the bankers. v. The company is also going ahead with the issue of warrants to Promoters and issue of shares to QIP which will bring in fresh capital into the system (which we had proposed to bring as part of CDR) All these structural measures will improve management bandwidth, induct fresh blood into the system and bring greater focus on risk mitigation and thereby improve over all profitability of the group. Internal control system: During the period under review, due to attachments on the Bank Accounts and Receivables by Income Tax Department, the Company could not ensure 100% Internal check and control as the Company was having less access to the day to day operations of its theatres and solely depended on the Memorandum of Accounts received from the Theatres then and there. The Company has submitted a plea to IT Department and it is expected that the IT department will remove the attachments soon. Our comprehensive annual planning, financial reporting and forecasting process will re-emerge once the way is cleared by IT Dept. The implementation of our systems and procedures will be monitored by the Audit Wing to be established on clearance by IT Dept, Cautionary Statement: Statements made in the Management Discussion and Analysis Report describing the companys objectives, projections, estimates, predictions and explanations may be forward-looking statements within the meaning of applicable securities laws and regulations. Accordingly, the statements are based on certain assumptions and expectations of the future events over which the company exercises no control and therefore, it can not guarantee their accuracy nor can it warrant that the same will be realized by the company. Actual results could differ materially from those expressed or implied. Significant factors that could make a difference to the companys operations include domestic and global economic conditions affecting demand, supply and price conditions in the industry, changes in the Government Laws and Regulations, tax regimes and other statutory changes, environment standards, litigation and labor relations. Your company undertakes no obligation to publicly revise any forward looking statement to reflect future events or circumstances.