20-F 1 eps6885.htm EROS INTERNATIONAL PLC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
   

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2016

OR
   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
   
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-32945

 

EROS INTERNATIONAL PLC
(Exact name of Registrant as specified in its charter)
 
Not Applicable
(Translation of Registrant’s name into English)
 
Isle of Man
(Jurisdiction of incorporation or organization)
 
550 County Avenue
Secaucus, New Jersey 07094
Tel: (201) 558 9001
(Address of principal executive offices)
 
Oliver Webster
Fort Anne, South Quay
Douglas, Isle of Man
Tel: (44) 1624 638 300
Email: law@cains.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class   Name of each exchange on which registered
A ordinary share, par value GBP 0.30 per share   The New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

None
(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act

 

None
(Title of Class)

 

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

At March 31, 2016, 32,949,314 ‘A’ ordinary shares and 24,960,654 ‘B’ ordinary shares, each at par value GBP 0.30 per share, were issued and outstanding.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes    No

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    Accelerated filer    Non-accelerated filer 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP    International Financial Reporting Standards as issued
by the International Accounting Standards Board
  Other 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item 17    Item 18

 

If this report is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No

 

 

 

TABLE OF CONTENTS

 

EROS INTERNATIONAL PLC

 

      Page
PART I      
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE   1
ITEM 3. KEY INFORMATION   1
ITEM 4. INFORMATION ON THE COMPANY   27
ITEM 4A. UNRESOLVED STAFF COMMENTS   61
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS   62
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES   79
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS   92
ITEM 8. FINANCIAL INFORMATION   96
ITEM 9. THE OFFER AND LISTING   97
ITEM 10. ADDITIONAL INFORMATION   98
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   107
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES   108
PART II      
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES   109
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS   109
ITEM 15. CONTROLS AND PROCEDURES   109
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT   110
ITEM 16B. CODE OF ETHICS   110
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES   110
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES   111
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS   111
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT   111
ITEM 16G. CORPORATE GOVERNANCE   111
ITEM 16H. MINE SAFETY DISCLOSURE   111
PART III      
ITEM 17. FINANCIAL STATEMENTS   112
ITEM 18. FINANCIAL STATEMENTS   112
ITEM 19. EXHIBITS   113
SIGNATURES     115
INDEX TO EROS INTERNATIONAL’S CONSOLIDATED FINANCIAL STATEMENTS   F-1

 

i

 

 

CONVENTIONS USED IN THIS ANNUAL REPORT

 

Unless otherwise indicated or required by the context, as used in this annual report, the terms “Eros,” “we,” “us,”, “the Group”, “our” and the “Company” refer to Eros International Plc and all its subsidiaries that are consolidated under International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board. Our fiscal year ends on March 31 of each year. When we refer to a fiscal year, such as fiscal 2016 or FY 2016, we are referring to the fiscal year ended on March 31 of that year. The “Founders Group” refers to Beech Investments Limited, Kishore Lulla and Vijay Ahuja. “$” and “dollar” refer to U.S. dollars.

 

“High budget” films refer to Hindi films with direct production costs in excess of $8.5 million and regional films with direct production costs in excess of $7.0 million, in each case translated at the historical average exchange rate for the applicable fiscal year. “Low budget” films refer to Hindi and regional films with less than $1.0 million in direct production costs, in each case translated at the historical average exchange rate for the applicable fiscal year. “Medium budget” films refer to Hindi, Tamil and Telugu films within the remaining range of direct production costs. With respect to low budget films, references to “film releases” refer to theatrical releases or, for films that we did not theatrically release, to our initial DVD, digital or other non-theatrical exhibition.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report contains “forward-looking statements” that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “project,” “seek,” “should” and similar expressions. Those statements include, among other things, the discussions of our business strategy and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources, tax assessment orders and future capital expenditures. We caution you that reliance on any forward-looking statement inherently involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be materially incorrect. These risks and uncertainties include but are not limited to:

·anonymous letters, to regulators or business associates or anonymous allegations on social media regarding our business practices, accounting practices and/or officers and directors; we are party to class action lawsuits in the U.S.
·our ability to successfully defend class action law suits we are party to in the U.S.;
·our ability to successfully and cost-effectively source film content;
·delays, cost overruns, cancellation or abandonment of the completion or release of our films;
·our ability to predict the popularity of our films, or changing consumer tastes;
·our dependence on our relationships with theater operators and other industry participants to exploit our film content;
·our ability to maintain existing rights, and to acquire new rights, to film content;
·our dependence on the Indian box office success of our Hindi and high budget Tamil and Telugu films;
·Eros Now has limited operating history and may incur operating losses and negative cash flow in future periods
·our ability to recoup the full amount of box office revenues to which we are entitled due to underreporting of box office receipts by theater operators;
·our ability to mitigate risks relating to distribution and collection in international markets;
·fluctuation in the value of the Indian Rupee against foreign currencies;
·our ability to compete in the Indian film industry;
·the impact of a new amendment to accounting standards for the recognition of revenue from contracts with customers;
·our ability to combat piracy and to protect our intellectual property;
·contingent liabilities that may materialize, including our exposure to liabilities on account of unfavorable judgments/decisions in relation to legal proceedings involving us or our subsidiaries and certain of our directors and officers;
·our ability to successfully respond to technological changes;

ii

 

 

·regulatory changes in the Indian film industry and our ability to respond to them.
·the monetary and fiscal policies of India and globally, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices; and
·our ability to respond to the challenges relating to international distribution of our films and related products.

 

These and other factors are more fully discussed in “Part I — Item 3. Key Information — D. Risk Factors,” “Part I — Item 5. Operating and Financial Review and Prospects” and elsewhere in this annual report. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans, objectives or projected financial results referred to in any of the forward-looking statements. Except as required by law, we do not undertake to release revisions of any of these forward-looking statements to reflect future events or circumstances.

 

iii

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A. Selected Financial Data

 

The table set forth below presents our selected historical consolidated financial data for the periods and at the dates indicated. The selected historical consolidated statement of income data for each of the three years ended March 31, 2016, 2015 and 2014 and the selected statement of financial position data as of March 31, 2016 and 2015 have been derived from and should be read in conjunction with “Part I — Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements included elsewhere in this Annual Report on Form 20-F. The selected historical consolidated statement of income data for each of the two years ended March 31, 2013 and 2012 and the selected historical statement of financial position data as of March 31, 2014, 2013 and 2012 have been derived from audited consolidated financial statements not included in this Annual Report on Form 20-F.

 

   Year ended March 31, 
   2016   2015   2014   2013   2012 
   (in thousands, except net income per share and weighted average number of ordinary shares) 
Selected Statement of Income Data                         
Revenue  $274,428   $284,175   $235,470   $215,346   $206,474 
Cost of sales   (172,764)   (155,777)   (132,933)   (134,002)   (117,044)
Gross profit   101,664    128,398    102,537    81,344    89,430 
Administrative costs   (64,019)   (49,546)   (42,680)   (26,308)   (27,992)
Operating profit   37,645    78,852    59,857    55,036    61,438 
Net finance costs   (8,010)   (5,861)   (7,517)   (1,469)   (1,009)
Other losses   (3,636)   (10,483)   (2,353)   (7,989)   (6,790)
Profit before tax   25,999    62,508    49,987    45,578    53,639 
Income tax expense   (12,711)   (13,178)   (12,843)   (11,913)   (10,059)
Net income (1)  $13,288   $49,330   $37,144   $33,665   $43,580 
                          
Net income per share                         
Basic  $0.07   $0.74   $0.66   $0.69   $0.96 
Diluted  $0.05   $0.72   $0.65   $0.69   $0.94 
                          
Weighted average number of ordinary shares                         
Basic   57,732    54,278    45,590    39,439    39,076 
Diluted   59,036    54,969    45,607    39,456    39,138 
                          
Other non-GAAP measures                         
EBITDA (2)  $36,294   $70,066   $58,871   $48,765   $56,201 
Adjusted EBITDA (2)  $70,852   $101,150   $80,284   $56,320   $66,984 

 

1 

 

 

 

   Year ended March 31, 
   2016   2015   2014   2013   2012 
   (in thousands) 
Selected Statement of Financial Position Data:                         
Cash and cash equivalents  $182,774   $153,664   $145,449   $107,642   $145,422 
Goodwill   1,878    1,878    1,878    1,878    1,878 
Total assets   1,246,639    1,149,533    906,011    798,657    765,966 
                          
Debt:                         
Current portion   219,275    96,397    92,879    79,902    68,527 
Long-term portion   92,630    218,273    165,254    165,898    180,768 
Total liabilities   437,545    393,478    327,970    312,481    311,718 
                          
Equity attributable to Eros International Plc   740,332    697,334    527,691    438,578    416,165 
Equity attributable to non-controlling interests   68,762    58,721    50,350    47,598    38,083 
Total equity  $809,094   $756,055   $578,041   $486,176   $454,248 

 

_______________

(1) References to “net income” in this document correspond to “profit for the period” or “profit for the year” line items in our consolidated financial statement appearing elsewhere in this document.

 

(2) We use EBITDA and Adjusted EBITDA as supplemental financial measures. EBITDA is defined by us as net income before interest expense, income tax expense and depreciation and amortization (excluding amortization of capitalized film content and debt issuance costs). Adjusted EBITDA is defined as EBITDA adjusted for impairments of available-for-sale financial assets, profit/loss on held for trading liabilities (including profit/loss on derivatives), transactions costs relating to equity transactions, and share based payments. EBITDA, as used and defined by us, may not be comparable to similarly-titled measures employed by other companies and is not a measure of performance calculated in accordance with GAAP. EBITDA should not be considered in isolation or as a substitute for operating income, net income, cash flows from operating investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. EBITDA and Adjusted EBITDA provide no information regarding a company’s capital structure, borrowings, interest costs, capital expenditures and working capital movement or tax position.

 

The following table sets forth the reconciliation of our net income to EBITDA and Adjusted EBITDA:

 

   Year ended March 31, 
   2016   2015   2014   2013   2012 
   (in thousands) 
Net income  $13,288   $49,330   $37,144   $33,665   $43,580 
Income tax expense   12,711    13,178    12,843    11,913    10,059 
Net finance costs   8,010    5,861    7,517    1,469    1,009 
Depreciation   1,154    1,089    789    1,003    1,275 
Amortization(a)   1,131    608    578    715    278 
EBITDA   36,294    70,066    58,871    48,765    56,201 
Impairment of available-for-sale financial assets       1,307            1,230 
Transaction costs relating to equity transactions       61    8,169         
Net loss/(gain) on held for trading financial liabilities   3,566    7,801    (5,177)   5,667    4,264 
Share based payments   30,992    21,915    18,421    1,888    5,289 
Adjusted EBITDA(b)  $70,852   $101,150   $80,284   $56,320   $66,984 

_______________

(a)Includes only amortization of intangible assets other than intangible content assets.

 

(b)Consists of compensation costs, recognized with respect to all outstanding plans and all other equity settled instruments.

 

2 

 

 

Our management team believes that EBITDA and Adjusted EBITDA are useful to an investor in evaluating our results of operations because these measures:

·are widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;
·help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure; and
·are used by our management team for various other purposes in presentations to our Board of Directors as a basis for strategic planning and forecasting.

 

However, there are significant limitations to using EBITDA and Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss, the lack of comparability of results of operations of different companies and the different methods of calculating EBITDA and Adjusted EBITDA reported by different companies.

 

Exchange Rate Information

 

Our reporting currency is the U.S. dollar. Transactions in foreign currencies are translated at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated into U.S. dollars at the exchange rates at the date of the applicable statement of financial position. For the purposes of consolidation, all income and expenses are translated at the average rate of exchange during the period covered by the applicable statement of income and assets and liabilities are translated at the exchange rate prevailing on the date of the applicable statement of financial position. When the U.S. dollar strengthens against a foreign currency, the value of our sales and expenses in that currency converted to U.S. dollars decreases. When the U.S. dollar weakens, the value of our sales and expenses in that currency converted to U.S. dollars increases. Recently, there have been periods of higher volatility in the Indian Rupee and U.S. dollar exchange rate. This volatility is illustrated in the table below for the periods indicated:

 

   Period End  Average(1)  High  Low
Fiscal Year            
2011  44.54  45.46  47.49  43.90
2012  50.89  48.01  53.71  44.00
2013  54.52  54.36  57.13  50.64
2014  60.35  60.35  68.80  53.65
2015  62.58  61.15  63.70  58.46
2016  66.25  65.39  68.84  61.99
             
Months            
April 2015  63.52  62.72  63.59  62.23
May 2015  63.83  63.73  64.26  63.47
June 2015  63.59  63.78  64.21  63.43
July 2015  63.87  63.60  64.24  63.24
August 2015  66.39  65.10  66.80  63.67
September 2015  65.50  66.17  66.70  65.50
October 2015  65.40  65.03  65.57  64.70
November 2015  66.43  66.10  66.86  65.46
December 2015  66.19  66.50  67.10  66.00
January 2016  67.87  67.33  68.08  66.49
February 2016  68.21  68.24  68.84  67.57
March 2016  66.25  66.89  67.75  66.25
April 2016  66.39  66.42  66.70  66.05
May 2016  66.96  66.88  67.59  66.36
June 2016  67.51  67.27  67.92  66.51

 

(1) Represents the average of the U.S. dollar to Indian Rupee exchange rates on the last day of each month during the period for all fiscal years presented, and the average of the noon buying rate for all days during the period for all months presented.

 

3 

 

 

B. Capitalization and Indebtedness

 

Not Applicable.

 

C. Reason for the Offer and the Use of Proceeds

 

Not Applicable.

 

D. Risk Factors

 

This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those described in the following risk factors and elsewhere in this annual report. If any of the following risks actually occur, our business, financial condition and results of operations could suffer and the trading price of our A ordinary shares could decline.

 

Risks Related to Our Business

 

Anonymous letters to regulators or business associates or anonymous allegations on social media regarding our business practices, accounting practices and/or officers and directors could have a resultant material adverse effect on our business, financial condition and results of operations and could negatively impact the market price for our A ordinary shares; we are party to class action lawsuits in the U.S. and an adverse ruling could have a material adverse effect on our business, financial condition and results of operations and could negatively impact the market price of our A ordinary shares.

 

In the past, when we have publicly filed a report relating to a proposed transaction in either the United Kingdom, India or the United States, we have received anonymous letters sent either to us, a banker, and/or the regulator, making allegations about our business practices and/or officers and directors. Every time we have received such a letter we have undertaken what we believe to be a reasonably prudent review, such as extensive due diligence to investigate the allegations, and where necessary our board of directors has engaged third party professional firms to report to them directly and cleared the matter from a corporate governance point of view. Having conducted these investigations, in each instance we found the allegations were without merit.

 

There were a series of anonymous allegations on social media targeted at the Company’s accounting practices and disclosures in October 2015 following which the market price for our A ordinary shares dropped materially with the lowest being $5.59 per share. The Company’s Audit Committee subsequently appointed Skadden Arps Slate Meagher & Flom LLP to assist them in conducting an independent internal review. With the assistance of Skadden Arps Slate Meagher & Flom LLP, the Company's Audit Committee conducted the internal review which commenced in November 2015 and completed in March 2016, and did not result in any recommendations for restatements to prior year financials.

 

Beginning on November 13, 2015, the Company was named a defendant in five substantially similar putative class action lawsuits filed in federal court in New Jersey and New York by purported shareholders of the Company. The three actions in New Jersey were consolidated, and, on May 17, 2016, were transferred to the United States District Court for the Southern District of New York where they were then consolidated with the other two actions on May 27, 2016. In general, the plaintiffs alleged that the Company, and in some cases also the Company’s management, violated federal securities laws by overstating the Company’s financial and business results, enriching the Company’s controlling owners at the expense of other stockholders, and engaging in improper accounting practices. On April 5, 2016, a lead plaintiff and lead counsel were appointed in the now-consolidated New York action. A single consolidated amended complaint was filed on July 14, 2016. The Plaintiffs have alleged that the Company and certain individual defendants -- Kishore Lulla, Jyoti Deshpande, Andrew Heffernan, and Prem Parameswaran -- have violated the federal securities laws, specifically Sections 10(b) and 20(a) of the Exchange Act. The amended consolidated complaint does not assert certain claims that had been asserted in prior complaints including (1) claims for violations of Sections 11 and 15 of the Securities Act and (2) claims against certain individual defendants, who are not now named defendants. The claims principally arise out of allegations that the Company and the individual defendants made material misrepresentations about the success, size, and financial performance of Eros Now, our streaming video service, and our film library.

 

We are unable to predict how long such proceedings will continue, but we anticipate that we will continue to incur significant costs in connection with these matters to the extent not covered by our insurance policy and that these proceedings, investigations and inquiries will result in a substantial distraction of management’s time, regardless of the outcome.

 

If we receive similar letters, in the future or are unsuccessful in defending the class action lawsuits it could result in a diversion of management resources, time and energy, significant costs, a material decline in the market price for our A ordinary shares, increased share price volatility, an increased directors and officers liability insurance premiums and could have a material adverse effect upon our business, financial condition and results of operations, and ability to access the capital markets.

 

We may fail to source adequate film content on favorable terms or at all through acquisitions or co-productions, which could have a material and adverse impact on our business.

 

We generate revenues by exploiting Indian film content that we primarily co-produce or acquire from third parties, and then distribute through various channels. We have also set up Trinity Pictures as a studio to develop and produce franchise films in-house and create our own intellectual property. Our ability to successfully enter into co-productions and to acquire content depends on, among other things our ability to maintain existing relationships, and form new ones, with talent and other industry participants.

 

4 

 

 

The pool of quality talent in India is limited and as a result, there is significant competition to secure the services of certain actors, directors, composers and producers, among others. Competition can increase the cost of such talent, and hence the cost of film content. These costs may continue to increase, making it more difficult for us to access content cost-effectively and reducing our ability to sustain our margins and maximize revenues from distribution and exploitation. Further, we may be unable to successfully maintain our long-standing relationships with certain industry participants and continue to have access to content and/or creative talent and may be unable to establish similar relationships with new leading creative talent. This is also dependent on relationships with various writers and talent and has execution risk associated with it. If any such relationships are adversely affected, or we are unable to form new relationships or our Trinity Pictures initiative fails or our access to quality Indian film content otherwise deteriorates, or if any party fails to perform under its agreements or arrangements with us, our business, prospects, financial condition and results of operations could be materially adversely affected.

 

Our business involves substantial capital requirements, and our inability to maintain or raise sufficient capital could materially adversely affect our business.

 

Our business requires a substantial investment of capital for the production, acquisition and distribution of films and a significant amount of time may elapse between our expenditure of funds and the receipt of revenues from our films. This may require us to fund a significant portion of our capital requirements from our credit facilities or other financing sources. Any capital shortfall could have a material adverse effect on our business, prospects, financial condition, results of operations and liquidity.

 

Delays, cost overruns, cancellation or abandonment of the completion or release of films may have an adverse effect on our business.

 

There are substantial financial risks relating to film production, completion and release. Actual film costs may exceed their budgets and factors such as labor disputes, unavailability of a star performer, equipment shortages, disputes with production teams or adverse weather conditions may cause cost overruns and delay or hamper film completion. When a film we have contracted to acquire from a third party experiences delays or fails to be completed, we may not recover advance monies paid for the proposed acquisition. When we enter into co-productions, we are typically responsible for paying all production costs in accordance with an agreed upon budget and while we typically cap budgets in our contracts with our co-producer, given the importance of ongoing relationships in our industry, longer-term commercial considerations may in certain circumstances override strict contractual rights and we may feel obliged to fund cost over-runs where there is no contractual obligation requiring us to do so.

 

Production delays, failure to complete projects or cost overruns could result in us not recovering our costs and could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

The popularity and commercial success of our films are subject to numerous factors, over which we may have limited or no control.

 

The popularity and commercial success of our films depends on many factors including, but not limited to, the key talent involved, the timing of release, the promotion and marketing of the film, the quality and acceptance of other competing programs released into the marketplace at or near the same time, the availability of alternative forms of entertainment, general economic conditions, the genre and specific subject matter of the film, its critical acclaim and the breadth, timing and format of its initial release. We cannot predict the impact of such factors on any film, and many are factors that are beyond our control. As a result of these factors and many others, our films may not be as successful as we anticipate, and as a result, our results of operations may suffer.

 

We depend on our relationships with theater operators and other industry participants to exploit our film content. Any disputes with multiplex operators in India could have a material adverse effect on our ability or willingness to release our films as scheduled.

 

We generate revenues from the exploitation of Indian film content in various distribution channels through agreements with commercial theater operators, in particular multiplex operators, and with retailers, television operators, telecommunications companies and others. Our failure to maintain these relationships, or to establish and capitalize on new relationships, could harm our business or prevent our business from growing, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

We have had disputes with multiplex operators in India that required us to delay our film releases and disrupted our marketing schedule for future films. These disputes were subsequently settled pursuant to settlement agreements that expired in June 2011. We now enter into agreements on a film-by-film and exhibitor-by-exhibitor basis instead of entering into long-term agreements. To date, our film-by-film agreements have been on commercial terms that are no less favorable than the terms of the prior settlement agreements; however, we cannot guarantee such terms can always be obtained. Accordingly, without a long-term commitment from multiplex operators, we may be at risk of losing a substantial portion of our revenues derived from our theatrical business. We may also have similar future disruptions in our relationship with multiplex operators, the operators of single-screen theaters or other industry participants, which could have a material adverse effect on our business, prospects, financial condition and results of operations. Further, the theater industry in India is rapidly growing and evolving and we cannot assure you that we will be able to establish relationships with new commercial theater operators.

 

5 

 

 

The success of our business depends on our ability to consistently create and distribute filmed entertainment that meets the changing preferences of the broad consumer market both within India and internationally.

 

Changing consumer tastes affect our ability to predict which films will be popular with audiences in India and internationally. As we invest in a portfolio of films across a wide variety of genres, stars and directors, it is highly likely that at least some of the films in which we invest will not appeal to Indian or international audiences. Further, where we sell rights prior to release of a film, any failure to accurately predict the likely commercial success of a film may cause us to underestimate the value of such rights. If we are unable to co-produce and acquire rights to films that appeal to Indian and international film audiences or to accurately judge audience acceptance of our film content, the costs of such films could exceed revenues generated and anticipated profits may not be realized. Our failure to realize anticipated profits could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Our ability to exploit our content is limited to the rights that we acquire from third parties or otherwise own.

 

We have acquired over 90% of our film content through contracts with third parties, which are primarily fixed-term contracts that may be subject to expiration or early termination. Upon expiration or termination of these arrangements, content may be unavailable to us on acceptable terms or at all, including with respect to technical matters such as encryption, territorial limitation and copy protection. In addition, if any of our competitors offer better terms, we will be required to spend more money or grant better terms, or both, to acquire or extend the rights we previously held. If we are unable to renew the rights to our film library on commercially favorable terms and to continue exploiting the existing films in our library or other content, it could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Based on our agreements in effect as of March 31, 2016, if we do not otherwise extend or renew our existing rights, we anticipate the rights we currently license in Hindi and regional languages, will expire as summarized in the table below.

 

Term Expiration Dates   Hindi
Film Rights
  Regional
Film Rights(1)
    (approximate percentage of films whose
licensed rights expire in the
period indicated)
Prior to December 31, 2020     42 %     54 %
2021-2025     37       13  
2026-2030     6       1  
2031-2045     3       1  
Perpetual(2)     12       31  

 

(1) Excludes the Kannada digital rights library for which we have perpetual rights subject to applicable copyright law.
(2) Subject to limitations imposed by Indian copyright law, which restricts the term to 60 years from the beginning of the calendar year following the year in which the film is released.

 

In addition, we typically only own certain rights for the exploitation of content, which limits our ability to exploit content in certain media formats. In particular, we do not own the audio music rights to the majority of the films in our library and to certain new releases. See “Part I—Item 4. Information on the Company — Our Film Library” for detail regarding our rights. To the extent we do not own the music or other media rights in respect of a particular film, we may only exploit content through those channels to which we do own rights, which could have an adverse effect on our ability to generate revenue from a film and recover our costs from acquiring or producing content.

 

We may face claims from third parties that our films may be infringing on their intellectual property.

 

Third parties may claim that certain of our films misappropriate or infringe such third parties’ intellectual property rights with respect to previously developed films, stories, characters, other entertainment or intellectual property. We may receive in the future claims of infringement or misappropriation of other parties’ proprietary rights. Any such assertions or claims may impact our rights to exploit the related films. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and diversion of resources in defending against them. If any claims or actions are asserted against us, we may seek to settle such claim by obtaining a license from the plaintiff covering the disputed intellectual property rights. We cannot provide any assurances, however, that under such circumstances a license, or any other form of settlement, would be available on reasonable terms or at all. Any of these occurrences could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

6 

 

 

Our business involves risks of liability claims for media content.

 

As a producer and distributor of media content, we may face potential liability for:

defamation;
invasion of privacy;
negligence;
copyright or trademark infringement; and
other claims based on the nature and content of the materials distributed.

 

These types of claims have been brought, sometimes successfully, against producers and/or distributors of media content. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business and financial condition.

 

We depend on the Indian box office success of our Hindi and high budget Tamil and Telugu films from which we derive a significant portion of our revenues.

 

In India, a relatively high percentage of a film’s overall revenues are derived from theater box office sales and, in particular, from such sales in the first week of a film’s release. Indian domestic box office receipts are also an indicator of a film’s expected success in other Indian and international distribution channels. As such, poor box office receipts in India for our films, even for those films for which we obtain only international distribution rights, could have a significant adverse impact on our results of operations in both the year of release of the relevant films and in the future for revenues expected to be earned through other distribution channels. In particular, we depend on the Indian box office success of our Hindi films and high budget Tamil and Telugu films.

 

We may not be paid the full amount of box office revenues to which we are entitled.

 

We derive revenues from theatrical exhibition of our films by collecting a specified percentage of box office receipts from multiplex and single screen theater operators. The Indian film industry continues to lack full exhibitor transparency. There is limited independent monitoring of such data in India or the Middle East, unlike the monitoring services provided by Rentrak in the United Kingdom and the United States. We therefore rely on theater operators and our sub-distributors to report relevant information to us in an accurate and timely manner.

 

While the multiplex and single-screen operators have now moved to a digital distribution model that provides greater clarity on the number of screenings given to our films, many still do not have computerized tracking systems for box office receipts which can be tracked independently by a third party and we are reliant on box office reports generated internally by these multiplex and single screen operators which may not be entirely accurate or transparent.

 

Because we do not have a reliable system to determine if our box office receipts are underreported, box office receipts and sub-distribution revenues may be inadvertently or purposefully misreported or delayed, which could prevent us from being compensated appropriately for exhibition of our films. If we are not properly compensated, our business, prospects, financial condition and results of operations could be negatively impacted.

 

Eros Now has limited operating history and we may incur operating losses and negative cash flow in future periods.

 

While Eros Now was soft launched in 2012, and as of March 31, 2016 we have over 44 million registered users, a vast majority of them are free users. Less than 1% of the Eros Now user base are paid subscribers as we have only recently begun efforts towards monetization. We therefore consider this OTT (Over The Top) business to be in its early stages of development. We must continue to grow and retain subscribers in India (one of our key markets) where they are currently used to traditional channels for content consumption as well as grow our subscriber base in markets outside of India. Our ability to attract and retain subscribers will depend in part on our ability to consistently provide our subscribers a high quality experience with respect to content and features and the quality of data connectivity (either WiFi, broadband, 3G or 4G mobile data) in India.

 

To achieve and sustain profitability for our Eros Now business, we must accomplish numerous objectives, including substantially increasing the number of paid subscribers to our service and retaining them, without which our revenues will be adversely affected. We cannot assure you that we will be able to achieve these objectives due to any of the factors listed below, among other factors:

·our ability to maintain an adequate content offering
·our ability to maintain, upgrade and develop our service offering on an ongoing basis
·our ability to successfully distribute our service across multiple mobile, internet and cable platform worldwide

7 

 

 

·our ability to secure distribution across various platforms including telecom operators and original equipment manufacturers
·our ability to convert free registered users into paid subscribers and retain them
·our ability to compete effectively against other Indian and foreign OTT services
·our ability to manage technical glitches or disruptions
·our ability to attract and retain our employees
·any changes in government regulations and policies
·any changes in the general economic conditions specific to the Internet and the movie industry

 

We incur significant costs to protect electronically stored data and if our data is compromised despite this protection, we may incur additional costs, business interruption, lost opportunities and damage to our reputation.

 

We collect and maintain information and data necessary for conducting our business operations, which information includes proprietary and confidential data and personal information of our customers and employees. Such information is often maintained electronically, which includes risks of intrusion, tampering, manipulation and misappropriation. We implement and maintain systems to protect our digital data, but obtaining and maintaining these systems is costly and usually requires continuous monitoring and updating for technological advances and change. Additionally, we sometimes provide confidential, proprietary and personal information to third parties when required in connection with certain business and commercial transactions. For instance, we have entered into an agreement with a third party vendor to assist in processing employee payroll, and they receive and maintain confidential personal information regarding our employees. We take precautions to try to ensure that such third parties will protect this information, but there remains a risk that the confidentiality of any data held by third parties may be compromised. If our data systems, or those of our third party vendors and partners, are compromised, there may be negative effects on our business including a loss of business opportunities or disclosure of trade secrets. If the personal information we maintain is tampered with or misappropriated, our reputation and relationships with our partners and customers may be adversely affected, and we may incur significant costs to remediate the problem and prevent future occurrences.

 

A downturn in the Indian and international economies or instability in financial markets, including a decreased growth rate and increased Indian price inflation, could materially and adversely affect our results of operations and financial condition.

 

Global economic conditions may negatively impact consumer spending. Prolonged negative trends in the global or local economies can adversely affect consumer spending and demand for our films and may shift consumer demand away from the entertainment we offer. For example, the results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business, financial condition and results of operations. In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last two years after the government of the United Kingdom formally initiates a withdrawal process. However, the referendum has created uncertainty about the future relationship between the United Kingdom and the European Union. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal. These developments have had and may continue to have an adverse effect on global economic conditions and the stability of global financial markets.

 

According to the International Monetary Fund’s World Economic Outlook Database, published in April, 2016, the GDP growth rate of India is projected to increase from approximately 7.5% in 2016 and 2017 to 7.6% in 2018. The Central Statistics Office has estimated that the growth rate in GDP in the 12 months period ended March 31, 2016 was 7.6% (Source: Press release dated May 31, 2016 on “Provisional Estimates of Annual National Income, 2015-16 and Quarterly Estimates of Gross Domestic Product, 2015-16” released by the Ministry of Statistics and Programme Implementation, Government of India).

 

A decline in attendance at theaters may reduce the revenues we generate from this channel, from which a significant proportion of our revenues are derived. If the general economic downturn continues to affect the countries in which we distribute our films, discretionary consumer spending may be adversely affected, which would have an adverse impact on demand for our theater, television and digital distribution channels. Economic instability and the continuing weak economy in India may negatively impact the Indian box office success of our Hindi, Tamil and Telugu films, on which we depend for a significant portion of our revenues.

 

Further, a sustained decline in economic conditions could result in closure or downsizing by, or otherwise adversely impact, industry participants on whom we rely for content sourcing and distribution. Any decline in demand for our content could have a material adverse effect on our business, prospects, financial condition and results of operations. In addition, global financial uncertainty has negatively affected the Indian financial markets.

 

8 

 

 

Continued financial disruptions may limit our ability to obtain financing for our films. For example, any adverse revisions to India’s credit ratings for domestic and international debt by domestic or international rating agencies may adversely impact our ability to raise additional financing and the interest rates and other commercial terms at which such additional financing is available. Any such event could have a material adverse effect on our business, prospects, financial condition and results of operations. India has recently experienced fluctuating wholesale price inflation compared to historical levels. An increase in inflation in India could cause a rise in the price of wages, particularly for Indian film talent, or any other expenses that we incur. If this trend continues, we may be unable to accurately estimate or control our costs of production. Because it is unlikely we would be able to pass all of our increased costs on to our customers, this could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Fluctuation in the value of the Indian Rupee against foreign currencies could materially and adversely affect our results of operations, financial condition and ability to service our debt.

 

While a significant portion of our revenues are denominated in Indian Rupees, certain contracts for our film content are or may be denominated in foreign currencies. Additionally, we report our financial results in U.S. dollars and most of our debt is denominated in U.S. dollars. We expect that the continued volatility in the value of the Indian Rupee against foreign currency will continue to have an impact on our business. The Indian Rupee experienced an approximately 6.3% drop in value as compared to the U.S. dollar in fiscal 2016. In fiscal 2015 the drop was 3.7%. Changes in the growth of the Indian economy and the continued volatility of the Indian Rupee, may adversely affect our business.

 

Further, at the end of fiscal 2016, $163.2 million, or 52% of our debt, was denominated in U.S. dollars, and we may not generate sufficient revenue in U.S. dollars to service all of our U.S. dollar-denominated debt. Consequently, we may be required to use revenues generated in Indian Rupees to service our U.S. dollar-denominated debt. Any devaluation or depreciation in the value of the Indian Rupee, compared to the U.S. dollar, could adversely affect our ability to service our debt. See “Item 3. Key Information — C. Selected Financial Data — Exchange Rates” for historical exchange rates between Indian Rupees and U.S. dollars.

 

Although we have not historically done so, we may, from time to time, seek to reduce the effect of exchange rate fluctuations on our operating results by purchasing derivative instruments such as foreign exchange forward contracts to cover our intercompany indebtedness or outstanding receivables. However, we may not be able to purchase contracts to insulate ourselves adequately from foreign currency exchange risks. In addition, any such contracts may not perform effectively as a hedging mechanism. See “Item 5. Operating and Financial Review and Prospects — Exchange Rates” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk — Foreign Currency Risk.”

 

We face increasing competition with other films for movie screens, and our inability to obtain sufficient distribution of our films could have a material adverse effect on our business.

 

A substantial majority of the theater screens in India are typically committed at any one time to a limited number of films, and we compete directly against other producers and distributors of Indian films in each of our distribution channels. If the number of films released in the market as a whole increases it could create excess supply in the market, in particular at peak theater release times such as school and national holidays and during festivals, which would make it more difficult for our films to succeed.

 

Where we are unable to ensure a wide release for our films to maximize screenings in the first week of a film’s release, it may have an adverse impact on our revenues. Further, failure to release during peak periods, or the inability to book sufficient screens, could cause us to miss potentially higher gross box-office receipts and/or affect subsequent revenue streams, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

We face increasing competition from other forms of entertainment, which could have a material adverse effect on our business.

 

We also compete with all other sources of entertainment and information delivery, including television, the internet and sporting events such as the Indian Premier League, for cricket.

 

Technological advancements such as VOD, mobile and internet streaming and downloading have increased the number of entertainment and information delivery choices available to consumers and have intensified the challenges posed by audience fragmentation. The increasing number of choices available to audiences including crossover from our Eros Now online entertainment service could negatively impact consumer demand for our films, and there can be no assurance that occupancy rates at theaters or demand for our other distribution channels will not fall.

 

9 

 

 

Competition within the Indian film industry is growing rapidly, and certain of our competitors are larger, have greater financial resources and are more diversified.

 

The Indian film industry’s rapid growth is changing the competitive landscape, increasing competition for content, talent and release dates. Growth in the Indian film industry has attracted foreign industry participants and competitors, such as, Viacom Inc., The Walt Disney Company, 21st Century Fox and Sony Pictures many of which are substantially larger and have greater financial resources, including competitors that own theaters and/or television networks. These larger competitors may have the ability to spend additional funds on production of new films, which may require us to increase our production budgets beyond what we originally anticipated in order to compete effectively. In addition, these competitors may use their financial resources to gain increased access to movie screens and enter into exclusive content arrangements with key talent in the Indian film industry. Unlike some of these major competitors that are part of larger diversified corporate groups, we derive substantially all of our revenue from our film entertainment business. If our films fail to perform to our expectations we are likely to face a greater adverse impact than would a more diversified competitor. In addition, other larger entertainment distribution companies may have larger budgets to exploit growing technological trends. If we are unable to compete with these companies effectively, our business prospects, results of operations and financial condition could suffer. With generally increasing budgets of Hindi, Tamil and Telugu films, we may not have the resources to distribute the same level of films as competitors with greater financial strength.

 

Piracy of our content, including digital and internet piracy, may adversely impact our revenues and business.

 

Our business depends in part on the adequacy, enforceability and maintenance of intellectual property rights in the entertainment products and services we create. Motion picture piracy is extensive in many parts of the world and is made easier by technological advances and the conversion of motion pictures into digital formats. This trend facilitates the creation, transmission and sharing of high quality unauthorized copies of motion pictures in theatrical release on DVDs, CDs and Blu-ray discs, from pay-per-view through set top boxes and other devices and through unlicensed broadcasts on free television and the internet.

 

Although DVD and CD sales represent a relatively small portion of Indian film and music industry revenues, the proliferation of unauthorized copies of these products results in lost revenue and significantly reduced pricing power, which could have a material adverse effect on our business, prospects, financial condition and results of operations. In particular, unauthorized copying and piracy are prevalent in countries outside of the United States, Canada and Western Europe, including India, whose legal systems may make it difficult for us to enforce our intellectual property rights and in which consumer awareness of the individual and industry consequences of piracy is lower. With broadband connectivity improving, 3G internet penetration increasing and with the advent of 4G in India, digital piracy of our content is an increasing risk.

 

In addition, the prevalence of third-party hosting sites and a large number of links to potentially pirated content make it difficult to effectively monitor and prevent digital piracy of our content. Existing copyright and trademark laws in India afford only limited practical protection and the lack of internet-specific legislation relating to trademark and copyright protection creates a further challenge for us to protect our content delivered through such media. Additionally, we may seek to implement elaborate and costly security and anti-piracy measures, which could result in significant expenses and revenue losses. Even the highest levels of security and anti-piracy measures may fail to prevent piracy.

 

Litigation may also be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Regardless of the legitimacy or the success of these claims, we could incur costs and diversion of resources in enforcing our intellectual property rights or in defending against such claims, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

We may be unable to adequately protect or continue to use our intellectual property. Failure to protect such intellectual property may negatively impact our business.

 

We rely on a combination of copyrights, trademarks, service marks and similar intellectual property rights to protect our name and branded products. The success of our business, in part, depends on our continued ability to use this intellectual property in order to increase awareness of the Eros name. We attempt to protect these intellectual property rights through available copyright and trademark laws. Despite these precautions, existing copyright and trademark laws afford only limited practical protection in certain countries, and the actions taken by us may be inadequate to prevent imitation by others of the Eros name and other Eros intellectual property. In addition, if the applicable laws in these countries are drafted or interpreted in ways that limit the extent or duration of our rights, or if existing laws are changed, our ability to generate revenue from our intellectual property may decrease, or the cost of obtaining and maintaining rights may increase.

 

10 

 

 

Further, many existing laws governing property ownership, copyright and other intellectual property issues were adopted before the advent of the internet and do not address the unique issues associated with the internet, personal entertainment devices and related technologies, and new interpretations of these laws in response to emerging digital platforms may increase our digital distribution costs, require us to change business practices relating to digital distribution or otherwise harm our business. We also distribute our branded products in some countries in which there is no copyright or trademark protection. As a result, it may be possible for unauthorized third parties to copy and distribute our branded products or certain portions or applications of our branded products, which could have a material adverse effect on our business, prospects, results of operations and financial condition. If we fail to register the appropriate copyrights, trademarks or our other efforts to protect relevant intellectual property prove to be inadequate, the value of the Eros name could be harmed, which could adversely affect our business and results of operations.

 

We may be unable to continue to use the domain names that we use in our business, or prevent third parties from acquiring and using domain names that infringe on, are similar to or otherwise decrease the value of our brand or our trademarks or service marks.

 

We have registered several domain names for websites that we use in our business, such as erosplc.com, erosentertainment.com, erosnow.com and although our Indian subsidiaries currently own over 55 registered trademarks, we have not obtained a registered trademark for any of our domain names. If we lose the ability to use a domain name, whether due to trademark claims, failure to renew the applicable registration or any other cause, we may be forced to market our products under a new domain name, which could cause us to lose users of our websites, or to incur significant expense in order to purchase rights to such a domain name. In addition, our competitors and others could attempt to capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered in the United States, India and elsewhere.

 

We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to or otherwise decrease the value of our brand, trademarks or service marks. Protecting and enforcing our rights in our domain names may require litigation, which could result in substantial costs and diversion of management’s attention.

 

Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Regardless of the validity or the success of the assertion of any claims, we could incur significant costs and diversion of resources in enforcing our intellectual property rights or in defending against such claims, which could have a material adverse effect on our business and results of operations. Our services and products could infringe upon the intellectual property rights of third parties.

 

Other parties, including our competitors, may hold or obtain patents, trademarks, copyright protection or other proprietary rights with respect to their previously developed films, characters, stories, themes and concepts or other entertainment, technology and software or other intellectual property of which we are unaware. In addition, the creative talent that we hire or use in our productions may not own all or any of the intellectual property that they represent they do, which may instead be held by third parties. Consequently, the film content that we produce and distribute or the software and technology we use may infringe the intellectual property rights of third parties, and we frequently have infringement claims asserted against us. Any claims or litigation, justified or not, could be time-consuming and costly, harm our reputation, require us to enter into royalty or licensing arrangements that may not be available on acceptable terms or at all or require us to undertake creative changes to our film content or source alternative content, software or technology. Where it is not possible to do so, claims may prevent us from producing and/or distributing certain film content and/or using certain technology or software in our operations. Any of the foregoing could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Our ability to remain competitive may be adversely affected by rapid technological changes and by an inability to access such technology.

 

The Indian film entertainment industry continues to undergo significant technological developments, including the ongoing transition from film to digital media. We may be unsuccessful in adopting new digital distribution methods or may lose market share to our competitors if the methods that we adopt are not as technologically sound, user-friendly, widely accessible or appealing to consumers as those adopted by our competitors. For example, our on-demand entertainment portal accessible via internet-enabled devices, Eros Now, may not achieve the desired growth rate.

 

Further, advances in technologies or alternative methods of product delivery or storage, or changes in consumer behavior driven by these or other technologies, could have a negative effect on our home entertainment market in India. If we fail to successfully exploit digital and other emerging technologies, it could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

11 

 

 

We rely on the proper and efficient functioning of our computer and database systems, and a large-scale malfunction could result in disruptions to our business.

 

Our ability to keep our business operating depends on the proper and efficient operation of our computer and database systems, which are hosted, third-party provider solutions. Though third-party hosted solutions have extremely strong redundancies and back-up capabilities, computer and database systems are susceptible to malfunctions and interruptions (including those due to equipment damage, power outages, computer viruses and a range of other hardware, software and network problems), and we cannot guarantee that we will not experience such malfunctions or interruptions in the future. A significant or large-scale malfunction or interruption of one or more of our computer or database systems could adversely affect our ability to keep our operations running efficiently. Any malfunction that results in a wider or sustained disruption to our business could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

We are currently migrating to an SAP ERP system, which could substantially disrupt our business, and our failure to successfully integrate our IT systems across our international operations could result in additional costs and diversion of resources and management attention.

 

We are currently in the process of migrating to an SAP ERP system to replace several of our existing IT systems. We have completed this accounting migration in India, but the process is ongoing in the rest of the world and the implementation has been delayed.

 

Also we have not yet integrated supporting modules into the SAP ERP system, such as a module to manage our film library. This integration and migration may lead to unforeseen complications and expenses, and our failure to efficiently integrate and migrate our IT systems could substantially disrupt our business. We will implement further modules within SAP ERP once the initial worldwide integration has been completed. The SAP ERP system will be implemented globally in our different office locations and will need to accommodate our multilingual operations, resulting in further difficulties in such implementation. Our failure to successfully integrate our IT systems across our international operations could result in substantial costs and diversion of resources and management attention, which could harm our business and competitive position.

 

The music industry is highly competitive and many of our competitors in the music industry focus more exclusively on music distribution and have greater resources than we have.

 

The music industry, including the market for music licensing and related services in the film and broadcast industry, is intensely competitive. Many companies focus exclusively on music distribution and have greater resources and a larger depth and breadth of library, distribution capabilities and current repertoire than we do. We expect competition to persist and to intensify as the markets for Indian music continue to develop and as additional competitors enter the Indian music industry. To remain competitive, we may be forced to reduce our prices and increase costs which may have a negative impact on our financial condition and results of operations.

 

Our business and activities are regulated by the Competition Act.

 

The Competition Act, 2002, or the Competition Act, prohibits practices that could have an appreciable adverse effect on competition in India. Under the Competition Act, any arrangement, understanding or action, whether formal or informal, which causes or is likely to cause an appreciable adverse effect on competition in India is void and may result in substantial penalties and compensation to be paid to persons shown to have suffered losses. Any agreement among competitors which directly or indirectly determines purchase or sale prices, results in bid rigging or collusive bidding, limits or controls production, supply, markets, technical development, investment or the provision of services, or shares the market or source of production or provision of services in any manner, including by way of allocation of geographical area or types of goods or services or number of customers in the market, is presumed to have an appreciable adverse effect on competition. Further, the Competition Act prohibits the abuse of a dominant position by any enterprise either directly or indirectly, including by way of unfair or discriminatory pricing or conditions in the sale of goods or services, using a dominant position in one relevant market to enter into, or protect, another relevant market, and denial of market access, and such practices are subject to substantial penalties and may also be subject to compensation for losses and orders to divide the enterprise.

 

If we or any member of our group, including Eros International Media Limited (“Eros India”), are further affected, directly or indirectly, by the application or interpretation of any provision of the Competition Act, or any enforcement proceedings initiated by, or claims made to the Competition Commission of India or any other similar authority, our business, results of operations and reputation may be materially and adversely affected.

 

Acquisitions, mergers and amalgamations which exceed certain revenue and asset thresholds require prior approval by the Competition Commission of India. Any such acquisitions, mergers or amalgamations which have an appreciable adverse effect on competition in India are prohibited and void. There can be no assurance that we will be able to obtain approval for such future transactions on satisfactory terms, or at all.

 

12 

 

 

Our financial condition and results of operations fluctuate from period to period due to film release schedules and other factors and may not be indicative of results for future periods.

 

Our financial condition and results of operations for any period fluctuate due to film release schedules in that period, none of which we can predict with reasonable certainty. Theater attendance in India has traditionally been highest during school holidays, national holidays and during festivals, and we typically aim to release big-budget films at these times. This timing of releases also takes account of competitor film releases, Indian Premier League cricket matches and the timing dictated by the film production process. As a result, our quarterly results can vary from one year to the next, and the results of one quarter are not necessarily indicative of results for the next or any future quarter. Additionally, the distribution window for the theatrical release of films, and the window between the theatrical release and distribution in other channels, have each been compressing in recent years and may continue to change. Further shortening of these periods could adversely impact our revenues if consumers opt to view a film on one distribution platform over another, resulting in the cannibalizing of revenues across distribution platforms. Additionally, because our revenue and operating results are seasonal in nature due to the impact of the timing of new releases, our revenue and operating results may fluctuate from period to period, and which could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flows.

 

Our accounting practices and management judgments may accentuate fluctuations in our annual and quarterly operating results and may not be comparable to other film entertainment companies.

 

For first release film content, we use a stepped method of amortization and a first 12 months amortization rate based on management’s judgment taking into account historic and expected performance, typically amortizing 50% of the capitalized cost for high budget films released during or after fiscal 2014, and 40% of the capitalized cost for all other films, in the first 12 months of their initial commercial exploitation, and then the balance evenly over the lesser of the term of the rights held by us and nine years. Our management has determined to adjust the first-year amortization rate for high budget films because of the high contribution of theatrical revenue. Similar management judgment taking into account historic and expected performance is used to apply a stepped method of amortization on a quarterly basis within the first 12 months, within the overall parameters of the annual amortization.

 

Typically 25% of capitalized cost for high budget films released during or after fiscal 2014, and 20% of capitalized cost for all other films, is amortized in the initial quarter of their commercial exploitation. In fiscal 2009 and fiscal years prior to 2009, the balance of capitalized film content costs were amortized evenly over a maximum of four years rather than nine. Because management exercises its judgment regarding amortization amounts, our amortization practices may not be comparable to other film entertainment companies. In the case of film content that we acquire after its initial exploitation, commonly referred to as library, amortization is spread evenly over the lesser of ten years after our acquisition or our license period. At least annually, we review film and content rights for indications of impairment in accordance with IAS 36: Impairment of Assets, an International Accounting Standard, or IAS.

 

The amount of revenue which we report may be impacted by a new accounting standard dealing with revenue from customers.

 

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”). This standard provides a single, principle-based five-step model to be applied to all contracts with customers. Guidance is provided on topics such as the point at which revenue is recognized, accounting for variable consideration, costs of fulfilling and obtaining a contract and various other related matters. IFRS 15 also introduced new disclosure requirements with respect to revenue.

 

IFRS 15 is effective for fiscal years beginning on or after January 1, 2018 wherein earlier adoption is permitted. The Company is currently evaluating the impact that this new standard will have on its consolidated financial statements. Because the amendment to IFRS 15 has not yet been implemented widely, we cannot yet predict how it will impact our revenues under the new standard. The amendment to IFRS 15 affects all IFRS reporting companies. When the amendment becomes effective, it may have an impact on our consolidated financial statements and results of operations. See also “Item 5. Operating and Financial Review and Prospects – D. Trend Information – New accounting pronouncements issued but not yet effective” for information on accounting standards which may impact our financial condition and results of operation.

 

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If we fail to achieve or maintain an effective system of internal control over financial reporting, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected.

 

When we cease to qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we will become subject to additional requirements under the Sarbanes-Oxley Act (“SOX Act”), including Section 404(b) of the SOX Act which will require our independent registered public accounting firm attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting. However, because we qualify as an “emerging growth company” under the JOBS Act, these attestation requirements do not apply to us for up to five years after November 18, 2013, the date of our initial public offering in the U.S., unless we cease to qualify as an “emerging growth company.” Our management has provided a report on the effectiveness of our internal control over financial reporting with this Annual Report on Form 20-F. Our management may conclude in future years, that our internal controls are not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may disagree and may decline to attest to our management’s assessment or may issue an adverse opinion. If we identify control deficiencies as a result of the assessment process in the future, we may be unable to conclude that we have effective internal controls over financial reporting, which are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting and certify the same in a timely manner, could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the market price of our A ordinary shares.

 

Our revenue is subject to significant variation based on the timing of certain licenses and contracts we enter into that may account for a large portion of our revenue in the period in which it is completed, which could adversely affect our operating results.

 

From time to time, we license film content rights to a group of films pursuant to a single license that constitutes a large portion of our revenue for the fiscal year in which the revenue from the license is recognized. The timing and size of similar licenses subjects our revenue to uncertainties and variability from period to period, which could adversely affect our operating results. We expect that we will continue to enter into licenses with customers that may represent a significant concentration of our revenues for the applicable period and we cannot guarantee that these revenues will recur.

 

We have entered into certain related party transactions and may continue to rely on our founders for certain key development and support activities.

 

We have entered, and may continue to enter, into transactions with related parties. We also rely on the Founders Group, which consists of Beech Investments, Kishore Lulla and Vijay Ahuja and associates and enterprises controlled by certain of our directors and key management personnel for certain key development and support activities. While we believe that the Founders Group’s interests are aligned with our own, such transactions may not have been entered into on an arm’s-length basis, and we may have achieved more favorable terms had such transactions been entered into with unrelated parties. If future transactions with related parties are not entered into on an arm’s-length basis, our business may be materially harmed.

 

Further, because certain members of the Founders Group are controlling shareholders of, or have significant influence on, both us and our related parties, conflicts of interest may arise in relation to dealings between us and our related parties and may not be resolved in our favor. For further information, see “Part I — Item 7. Major Shareholders and Related Party Transactions.”

 

We may encounter operational and other problems relating to the operations of our subsidiaries, including as a result of restrictions in our current shareholder agreements.

 

We operate several of our businesses through subsidiaries. Our financial condition and results of operations significantly depend on the performance of our subsidiaries and the income we receive from them. Our business may be adversely affected if our ability to exercise effective control over our non-wholly owned subsidiaries is diminished in any way. Although we control these subsidiaries through direct or indirect ownership of a majority equity interest or the ability to appoint the majority of the directors on the boards of such companies, unanimous board approval is required for major decisions relating to certain of these subsidiaries. To the extent there are disagreements between us and our various minority shareholders regarding the business and operations of our non-wholly owned subsidiaries, we may be unable to resolve them in a manner that will be satisfactory to us. Our minority shareholders may:

·be unable or unwilling to fulfill their obligations, whether of a financial nature or otherwise;
·have economic or business interests or goals that are inconsistent with ours;
·take actions contrary to our instructions, policies or objectives;
·take actions that are not acceptable to regulatory authorities;
·have financial difficulties; or
·have disputes with us.

 

Any of these actions could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

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In Fiscal 2016, our subsidiary, Eros India, acquired 100% of the shares and voting interest in Universal Power Systems Private Limited (“Techzone”) to utilize Techzone’s billing integration and distribution across major telecom operators in India, in order to complement our Eros Now services. There can be no assurance that such acquisition will be successfully integrated into our business or that the intended benefits from such acquisition will be achieved.

 

Additionally, we have entered into shareholder agreements with third party shareholders of two of our non-wholly-owned subsidiaries, Big Screen Entertainment, and Ayngaran International Limited (“Ayngaran”), and have signed a term sheet with Colour Yellow Productions. These agreements contain various restrictions on our rights in relation to these entities, including restrictions in relation to the transfer of shares, rights of first refusal, reserved board matters and non-solicitation of employees by us. We may also face operational limitations due to restrictive covenants in such shareholder agreements. In addition, under the terms of our shareholder agreement in relation to Big Screen Entertainment, disputes between partners are required to be submitted to arbitration in Mumbai, India. These restrictions in our current shareholder agreements, and any restrictions of a similar or more onerous nature in any new or amended agreements into which we may enter, may limit our control of the relevant subsidiary or our ability to achieve our business objectives, as well as limiting our ability to realize value from our equity interests, any of which could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

The interests of the other shareholders with respect to the operation of Big Screen Entertainment, Colour Yellow Productions and Ayngaran may not be aligned with our interests. As a result, although we own a majority of the ownership interest in each of Big Screen Entertainment, Ayngaran and 50% of the shareholding of Colour Yellow Productions, taking actions that require approval of the minority shareholders (or their representative directors), such as entering into related party transactions, selling material assets and entering into material contracts, may be more difficult to accomplish.

 

We depend on the services of senior management.

 

We have, over time, built a strong team of experienced professionals on whom we depend to oversee the operations and growth of our businesses. We believe that our success substantially depends on the experience and expertise of, and the longstanding relationships with key talent and other industry participants built by, our senior management. Any loss of our senior management, any conflict of interest that may arise for such management or the inability to recruit further senior managers could impede our growth by impairing our day-to-day operations and hindering development of our business and our ability to develop, maintain and expand relationships, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

 

In recent years, we have experienced additions to our senior management team, and our success depends in part on our ability to successfully integrate these new employees into our organization. Since 2012, we have hired several members of senior management and have added new directors. In May 2015 we announced the departure of Andrew Heffernan, who was our Group Chief Financial Officer since 2006, from the Company and the joining of Prem Parameswaran as Group Chief Financial Officer and President North America operations. We anticipate the need to hire additional members in senior management in connection with the expansion of our digital business. While some members of our senior management have entered into employment agreements that contain non-competition and non-solicitation provisions, these agreements may not be enforceable in Isle of Man, India or the United Kingdom, whose laws govern these agreements or where our members of senior management reside. Even if enforceable, these non-competition and non-solicitation provisions are for limited time periods.

 

To be successful, we need to attract and retain qualified personnel.

 

Our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, technical and managerial personnel. Competition for the caliber of talent required to produce and distribute our films continues to increase. We cannot assure you that we will be successful in identifying, attracting, hiring, training and retaining such personnel in the future. If we were unable to hire, assimilate and retain qualified personnel in the future, such inability would have a material adverse effect on our business and financial condition.

 

Some viewers or civil society organizations may find our film content objectionable.

 

Some viewers or civil society organizations in India or other countries may object to film content produced or distributed by us based on religious, political, ideological or any other positions held by such viewers. This applies in particular, to content that is graphic in nature, including violent or romantic scenes and films that are politically oriented or targeted at a segment of the film audience. Viewers or civil society organizations, including interest groups, political parties, religious or other organizations may assert legal claims, seek to ban the exhibition of our films, protest against us or our films or object in a variety of other ways. Any of the foregoing could harm our reputation and could have a material adverse effect on our business, prospects, financial condition and results of operations. The film content that we produce and distribute could result in claims being asserted, prosecuted or threatened against us based on a variety of grounds, including defamation, offending religious sentiments, invasion of privacy, negligence, obscenity or facilitating illegal activities, any of which could have a material adverse effect on our business, prospects, financial condition or results of operations.

 

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Our films are required to be certified in India by the Central Board of Film Certification.

 

Pursuant to the Indian Cinematograph Act, 1952, or the Cinematograph Act, films must be certified for adult viewing or general viewing in India by the Central Board of Film Certification, or CBFC, which looks at factors such as the interest of sovereignty, integrity and security of the relevant country, friendly relations with foreign states, public order and morality. There may be similar requirements in the United Kingdom, Canada and Australia, among other jurisdictions. We may be unable to obtain the desired certification for each of our films and we may have to modify the title, content, characters, storylines, themes or concepts of a given film in order to obtain any certification or a desired certification for broadcast release that will facilitate distribution and exploitation of the film. Any modification or receipt of an undesirable certification could reduce the appeal of any affected film to our target audience and reduce our revenues from that film, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Litigation and negative claims about us or the Indian film entertainment industry generally could have a material adverse impact on our reputation, our relationship with distributors and co-producers and our business operations.

 

We and certain of our directors and officers are subject to various legal proceedings in India. We are also subject to certain tax proceedings in India, including service tax claims aggregating to approximately $59 million and value added tax claims aggregating to approximately $3 million. In addition, there have been certain public allegations made against the Indian film entertainment industry generally, as well as against certain of the entities and individuals currently active in the industry about purported links to organized crime and other negative associations. As our success in the Indian film industry partially depends on our ability to maintain our brand image and corporate reputation, in particular in relation to our dealings with creative talent, co-producers, distributors and exhibitors, any such proceedings or allegations, public or private, whether or not routine or justified, could tarnish our reputation and cause creative talent, co-producers, distributors and exhibitors not to work with us.

 

In addition, the nature of our business and our reliance on intellectual property and other proprietary rights subjects us to the risk of significant litigation. Litigation, or even the threat of litigation, can be expensive, lengthy and disruptive to normal business operations, and the results of litigation are inherently uncertain and may result in adverse rulings or decisions. We may enter into settlements or be subject to judgments that may, individually or in the aggregate, have a material adverse effect on our business, prospects, financial condition or results of operations.

 

Our performance in India is linked to the stability of its policies, including taxation policy, and the political situation.

 

The role of Indian central and state governments in the Indian economy has been and remains significant. Since 1991, India’s government has pursued policies of economic liberalization, including significantly relaxing restrictions on the private sector. The rate of economic liberalization could change, and specific laws and policies affecting companies in the media and entertainment sector, foreign investment, currency exchange rates and other matters affecting investment in our securities could change as well. A significant change in India’s economic liberalization and deregulation policies, and in particular, policies in relation to the film industry, could disrupt business and economic conditions in India and thereby affect our business.

 

Taxes generally are levied on a state-by-state basis for the Indian film industry. Recently, there has been interest in rationalizing the industry’s taxes by instituting a uniform set of entertainment taxes administered by the Indian government. Such changes may increase our tax rate, which could adversely affect our financial condition and results of operations. Furthermore, in certain states, theater multiplexes have enjoyed entertainment tax benefits that may be disrupted or discontinued if India moves to a uniform entertainment tax system. This could slow the construction of new multiplexes, and may impact single screen theaters in tier 2 and tier 3 cities converting their 1,000 seater theatres into multiplexes with 2 or 3 screens with seating capacity of 300 seats or less, which we believe is a key driver for domestic theatrical revenue growth. Separately, there are certain deductions available to film producers for expenditures on production of feature films released during a given year. These tax benefits may be discontinued and impact current and deferred tax liabilities. In addition, the government of India has issued and may continue to issue tariff orders setting ceiling prices for distribution of content on cable television service charges in India.

 

Other proposed changes in the Indian law and policy environment include the following:

 

The Government of India has proposed a national goods and services tax or GST regime, which would replace most of the indirect taxes on goods and services, such as central excise duty, service tax, countervailing duty of customs duty, special additional duty of customs, central sales tax, state value added tax, surcharge and excise, entry tax, state level entertainment taxes currently being levied and collected by the central and state governments in India. However, the basic duty of customs would continue to be levied. The Government of India has recently released a model GST law.

 

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Additionally, the General Anti Avoidance Rules or GAAR will come into effect from April 1, 2017. GAAR provisions are intended to restrict “impermissible avoidance arrangements,” which would be any arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and which satisfy at least one of the following tests: (i) creation of rights, or obligations, not ordinarily created between persons dealing at arm’s-length; (ii) resulting, directly or indirectly, in misuse or abuse of provisions of the Income Tax Act, 1961; (iii) lacking, or is deemed to be lacking, commercial substance, in whole or in part; or (iv) is entered into or carried out by means, or in a manner, not ordinarily employed for bona fide purposes. If GAAR provisions are invoked, Indian tax authorities would have wider powers, including denial of tax benefit or a benefit under a tax treaty.

 

The effects of these proposed changes in the taxation system on us cannot be determined at present and there can be no assurance that such effects would not adversely affect our business and future financial performance.

 

In relation to transfer pricing, pursuant to the Finance Act, 2016, a three tiered transfer pricing documentation structure was introduced in India, consisting of a master file, a local file and a country-by-country report. Such a structure is in line with the recommendations contained in the action plan on the Base Erosion and Profit Shifting (BEPS) project issued by the Organization of Economic Cooperation and Development or OECD in October 2015.

 

Further, an equalization levy or EL in respect of e-commerce transactions has been introduced in India with effect from June 1, 2016. EL is to be deducted in respect of payments towards “specified services” (in excess of INR 100,000). A “specified service” means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified. Deduction of EL at the rate of six per cent (on a gross basis) is the responsibility of Indian residents / non-residents having a permanent establishment or PE in India on payments to non-residents (not having a PE in India). Consequently, if a non-resident (not having a PE in India) earns income towards a “specified service” which is chargeable to EL, then the same would be exempt in the hands of non-resident company.

 

The concept of Place of Effective Management or POEM has also been introduced with effect from April 1, 2017 for the purpose of determining the tax residence of overseas companies in India. The POEM is defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made. This could have significant impact on the foreign companies holding board meeting(s) in India, having key managerial personnel located in India, having regional headquarters located in India, etc. In the event the POEM of a foreign company is considered to be situated in India and consequently, it becomes tax resident in India, its global income would be taxable in India (even if it is not earned in India).

 

Pursuant to the Finance Act, 2015, the central government is empowered to levy a Swachh Bharat Cess or SBC, on all or any of the taxable services at the rate of 2% of the value of taxable services. Pursuant to a notification by the central government, an SBC of 0.5% of the value of the taxable services is to be levied on all taxable services with effect from November 15, 2015. Further, according to the frequently asked questions in connection with SBC issued by Central Board of Excise and Customs, since SBC is not integrated in the CENVAT credit chain, the credit of SBC will not be permitted. Further, SBC cannot be paid by utilizing credit of any other duty or tax and will have to be paid in cash. Accordingly, SBC will be a cost to taxpayers. Pursuant to the Finance Act, 2016, the central government has also imposed a new levy by way of Krishi Kalyan Cess or KKC with effect from June 1, 2016, on all or any of the taxable services at the rate of 0.5% of the value of taxable services. The credit of KKC paid on input services is permitted to be used for payment of the proposed cess leviable on taxable services provided by a service provider. The levy of SBC along with KKC has increased the effective rate of service tax to 15% with effect from June 1, 2016.

 

Our business and financial performance could be adversely affected by unfavorable changes in or applications or interpretations of existing, or the promulgation of new, laws, rules and regulations applicable to us and our business. Such unfavorable changes could decrease demand for our products, increase costs and/or subject us to additional liabilities.

 

In addition, tax increases could place pricing pressures on cable television service providers and broadcasters, which may, among other things, restrict the ability and willingness of cable television broadcasters in India to pay for content acquisition, including for our films. Any of the foregoing could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Natural disasters, epidemics, terrorist attacks and other acts of violence or war could adversely affect the financial markets, result in a loss of business confidence and adversely affect our business, prospects, financial condition and results of operations.

 

Numerous countries, including India, have experienced community disturbances, strikes, terrorist attacks, riots, epidemics and natural disasters. These acts and occurrences may result in a loss of business confidence and could cause a temporary suspension of our operations, for example, local authorities close theaters and could have an adverse effect on the financial markets and economies of India and other countries. Such closures have previously and could in the future impact our ability to exhibit our films and have a material adverse effect on our business, prospects, financial condition and results of operations. In addition, travel restrictions as a result of such events may interrupt our marketing and distribution efforts and have an adverse impact on our ability to operate effectively.

 

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Our insurance coverage may be inadequate to satisfy future claims against us.

 

While we believe that we have adequately insured our operations and property in a way that we believe is customary in the Indian film entertainment industry and in amounts that we believe to be commercially appropriate, we may become subject to liabilities against which we are not adequately insured or against which we cannot be insured, including losses suffered that are not easily quantifiable and cause severe damage to our reputation. Film bonding, which is a customary practice for U.S. film companies, is rarely used in India. Even if a claim is made under an existing insurance policy, due to exclusions and limitations on coverage, we may not be able to successfully assert our claim for any liability or loss under such insurance policy. In addition, in the future, we may not be able to maintain insurance of the types or in the amounts that we deem necessary or adequate or at premiums that we consider appropriate. The occurrence of an event for which we are not adequately or sufficiently insured including any class action litigation, the successful assertion of one or more large claims against us that exceed available insurance coverage, the successful assertion of claims against our co-producers, or changes in our insurance policies could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

Our Indian subsidiary, Eros India, from which we derive a substantial portion of our revenues, is publicly listed and we may lose our ability to control its activities.

 

Our Indian subsidiary, Eros India, from which we derive a substantial portion of our revenues, is publicly listed on the Indian stock exchanges. As such, under Indian law, minority stockholders have certain rights and protections against oppression and mismanagement. Further, as of June 30, 2016 we own approximately 73.54% of this entity. Over time, we may lose control over its activities and, consequently, lose our ability to consolidate its revenues.

 

Eros India is subject to the provisions of the Indian Companies Act, 2013 which has significantly changed the Indian company law framework. Also, the Securities and Exchange Board of India (the “SEBI”), the securities market regulator in India, introduced the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the “Listing Regulations”) that has subjected us to enhanced compliance requirements and increased our compliance costs.

 

A majority of the provisions and rules under the Indian Companies Act, 2013 (the “New Companies Act”) have come into effect, resulting in the corresponding provisions of the Indian Companies Act, 1956 ceasing to have effect. The New Companies Act and the rules thereunder have brought into effect significant changes to the Indian company law framework, such as in the provisions related to issue of capital (including provisions in relation to issue of securities on a private placement basis), disclosures in offer documents, corporate governance norms, accounting policies and audit matters, related party transactions, introduction of a provision allowing the initiation of class action suits in India against companies by shareholders or depositors, a restriction on investment by an Indian company through more than two layers of subsidiary investment companies (subject to certain permitted exceptions), prohibitions on loans to directors, insider trading and restrictions on directors and key managerial personnel from engaging in forward dealing.

 

Eros India is required to spend, in each financial year, at least 2% of the average net profits during the three immediately preceding financial years towards corporate social responsibility activities (otherwise disclose the reasons why it has not done so) and disclose its corporate social responsibility policies and activities on its website. Further, the New Companies Act imposes greater monetary and other liability on Eros India and its subsidiaries and the directors of Eros India for any non-compliance. To ensure compliance with the requirements of the New Companies Act, Eros India may need to allocate additional resources, which may increase our regulatory compliance costs and divert management attention.

 

The New Companies Act has introduced certain additional requirements which do not have corresponding equivalents under the Companies Act, 1956. Accordingly, Eros India may face challenges in interpreting and complying with such provisions due to limited jurisprudence on them. In the event, our interpretation of such provisions of the New Companies Act differs from, or contradicts with, any judicial pronouncements or clarifications issued by the Government in the future, Eros India may face regulatory actions or we may be required to undertake remedial steps. Additionally, some of the provisions of the New Companies Act overlap with other existing laws and regulations (such as the corporate governance norms and insider trading regulations issued by the SEBI). Recently, the SEBI issued the Listing Regulations which came into effect from December 1, 2015.

 

Pursuant to the Listing Regulations, Eros India will be required to, inter alia, maintain a functional website containing the prescribed details and ensure compliance with the prescribed corporate governance norms. Eros India may face difficulties in complying with any such requirements. Further, the impact of provisions of the New Companies Act or the Listing Regulations has led to an increase in compliance requirements or in compliance costs which may have an adverse effect on our business and results of operations.

 

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Dividend distributions by our subsidiaries are subject to certain limitations under local laws, including Indian and Dubai law and other contractual restrictions.

 

As a holding company, we rely on funds from our subsidiaries to satisfy our obligations. Dividend payments by our subsidiaries, including Eros India and Eros Worldwide FZ-LLC, or Eros Worldwide, are subject to certain limitations under local laws. For example, under Indian law, dividends other than in cash are not permitted and cash dividends are only permitted to be paid out of distributable profits. Dubai law imposes similar limitations on dividend payments. An Indian company paying dividends is also liable to pay dividend distribution tax at an effective rate of 20.3% including cess and surcharge. In addition, the Shareholders Agreement of Ayngaran, limits the ability of that entity to pay dividends without shareholders approval.

 

The Relationship Agreement with our subsidiaries may not reflect market standard terms that would have resulted from arm’s length negotiations among unaffiliated third parties and may include terms that may not be obtained from future negotiations with unaffiliated third parties.

 

The 2009 Relationship Agreement between Eros India and Eros Worldwide FZ LLC (“Eros Worldwide”) and other Eros entities (the “Relationship Agreement”), exclusively assigns to Eros Worldwide certain intellectual property rights and all distribution rights for Indian films (other than Tamil films) held by Eros India or any of its subsidiaries other than Ayngaran and its subsidiaries, or the Eros India Group, in all territories other than India, Nepal, and Bhutan, the rights for which are retained by Eros India and its subsidiaries. In return, Eros Worldwide provides a lump sum minimum guarantee fee for each assigned film to the Eros India Group plus certain additional contingent amounts.

 

The Relationship Agreement may not reflect terms that would have resulted from arm’s length negotiations among unaffiliated third parties, and the Eros’s future operating results may be negatively affected if it does not receive terms as favorable in future negotiations with unaffiliated third parties. Further, as Eros does not own 100% of Eros India, it may lose control over its activities and, consequently, its ability to ensure its continued performance under the Relationship Agreement.

 

The transfer pricing arrangements in the Relationship Agreement are not binding on the applicable taxing authorities, and may be subject to scrutiny by such taxing authorities. Accordingly, there may be material and adverse tax consequences if the applicable taxing authorities challenge these arrangements, and they may adjust our income and expenses for tax purposes for both present and prior tax years, and assess interest on the adjusted but unpaid taxes.

 

Our indebtedness could adversely affect our operations, including our ability to perform our obligations, fund working capital and pay dividends.

 

As of March 31, 2016, we had $311.9 million of borrowings outstanding of which $136.8 million is repayable within one year. We may also incur substantial additional indebtedness. Our indebtedness could have important consequences to you, including the following:

·we may be unsuccessful in refinancing our revolving credit facility;
·we could have difficulty satisfying our debt obligations, and if we fail to comply with these requirements, an event of default could result;
·we may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the cash flow available to fund working capital, capital expenditures and other general corporate activities or to pay dividends;
·in order to manage our debt and cash flows, we may increase our short-term indebtedness and decrease our long-term indebtedness which may not achieve the desired results;
·covenants relating to our indebtedness may restrict our ability to make distributions to our shareholders;
·covenants relating to our indebtedness may limit our ability to obtain additional financing for working capital, capital expenditures and other general corporate activities, which may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
·lenders are able to require us to repay certain secured loans to each of Eros India and Eros International Limited prior to their maturity, which as of March 31, 2016, represented $60.5 million of the outstanding indebtedness of Eros India and $15.52 million of the outstanding indebtedness of Eros International Limited;
·certain Eros India loan agreements are subject to annual renewal, and until these renewals are obtained, the lenders under these loan agreements may at any time require repayment of amounts outstanding. As at March 31, 2016 no loan agreements were pending annual renewal;
·we may be more vulnerable to general adverse economic and industry conditions;
·we may be placed at a competitive disadvantage compared to our competitors with less debt; and
·we may have difficulty repaying or refinancing our obligations under our senior credit facilities on their respective maturity dates.

 

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If any of these consequences occur, our financial condition, results of operations and ability to pay dividends could be adversely affected. This, in turn, could negatively affect the market price of our A ordinary shares, and we may need to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital.

 

We cannot assure you that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds that may be realized from those sales, or that additional financing could be obtained on acceptable terms, if at all.

 

Our ability to incur debt and the use of our funds could be limited by the restrictive covenants in the loan agreement for our revolving credit facility as well as our GBP denominated London Stock Exchange listed bond (“UK Retail Bond”).

 

The loan agreement for our revolving credit facility and the UK Retail Bond contain restrictive covenants, as well as requirements to comply with certain leverage and other financial maintenance tests. These covenants and requirements could limit our ability to take various actions, including incurring additional debt, guaranteeing indebtedness and engaging in various types of transactions, including mergers, acquisitions and sales of assets. These covenants could place us at a disadvantage compared to some of our competitors, who may have fewer restrictive covenants and may not be required to operate under these restrictions. Further, these covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, mergers and acquisitions or other opportunities.

 

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.

 

Based on interest rates as of March 31, 2016, and assuming no additional borrowings or principal payments on our revolving credit facilities and the UK Retail Bond until their maturities, we would need approximately $232.1 million over the next year, and $41.1 million over the next five years, to meet our principal and interest payments under our debt agreements. Our ability to satisfy our debt obligations will depend upon, among other things:

·our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control;
·our ability to refinance our debt as it becomes due, which will be affected by the cost and availability of credit; and
·our future ability to borrow under our revolving credit facilities, the availability of which depends on, among other things, our compliance with the covenants in our revolving credit facilities.

 

There can be no assurance that our business will generate sufficient cash flow from operations, or that we will be able to refinance debt as it comes due or draw under our revolving credit facilities in an amount sufficient to fund our liquidity needs. If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, or seek additional capital. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. If we are unable to generate sufficient cash flow, refinance our debt on favorable terms or sell additional debt or equity securities or our assets, it could have a material adverse effect on our financial condition and on our ability to make payments on our indebtedness.

 

We face risks relating to the international distribution of our films and related products.

 

We derive a significant percentage of our net revenues from customers located outside of India. We derived 42.1% of our fiscal 2016 net revenue from the exploitation of our films in territories outside of India. We do not track revenues by geographical region other than based on our company or customer domicile and not necessarily the country where the rights have been exploited or licensed. As a result, revenue by customer location may not be reflective of the potential of any given market. As a result of changes in the location of our customers, our revenues by customer location may vary year to year. Further, we may enter into a number of our contracts for international markets that have longer payment cycles that may extend up to a year from the date of the contract creating a mismatch in revenue and cash received.

 

We are currently in the process of entering the China market and estimate contributing to the budgets in excess of $20 million to at least two Indo-Chinese co-productions. If we are unsuccessful in the production, distribution and exploitation of films not only in India but also in the international markets including China, we may suffer losses and it may materially affect our growth prospects.

 

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Our business is subject to risks inherent in international trade, many of which are beyond our control. These risks includes:

·fluctuating foreign exchange rates;
·laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and withholding taxes and changes in these laws;
·differing cultural tastes and attitudes, including varied censorship laws;
·differing degrees of protection for intellectual property;
·financial instability and increased market concentration of buyers in other markets;
·the increased day sales outstanding and difficulty of collecting trade receivables across multiple jurisdictions;
·the instability of other economies and governments; and
·war and acts of terrorism.

 

Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-Indian sources, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

 

We may pursue acquisition opportunities, which could subject us to considerable business and financial risk.

 

We evaluate potential acquisitions of complementary businesses on an ongoing basis and may from time to time pursue acquisition opportunities. We may not be successful in identifying acquisition opportunities, assessing the value, strengths and weaknesses of these opportunities or consummating acquisitions on acceptable terms. Future acquisitions may result in near term dilution to earnings, including potentially dilutive issuances of equity securities or issuances of debt. For instance, in Fiscal 2016, our subsidiary, Eros India acquired 100% of the shares and voting interest in Techzone, to utilize Techzone’s billing integration and distribution across major telecom operations in India, in order to complement our Eros Now services. Acquisitions may expose us to particular business and financial risks that include, but are not limited to:

·diverting of financial and management resources from existing operations;
·incurring indebtedness and assuming additional liabilities, known and unknown, including liabilities relating to the use of intellectual property we acquire;
·incurring significant additional capital expenditures, transaction and operating expenses and non-recurring acquisition-related charges;
·experiencing an adverse impact on our earnings from the amortization or impairment of acquired goodwill and other intangible assets;
·failing to successfully integrate the operations and personnel of the acquired businesses;
·entering new markets or marketing new products with which we are not entirely familiar; and
·failing to retain key personnel of, vendors to and clients of the acquired businesses.

 

If we are unable to address the risks associated with acquisitions, or if we encounter expenses, difficulties, complications or delays frequently encountered in connection with the integration of acquired entities and the expansion of operations, we may fail to achieve acquisition synergies and may be required to focus resources on integration of operations rather than on our primary business activities. In addition, future acquisitions could result in potentially dilutive issuances of our A ordinary shares, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition.

 

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Risks Related to our A Ordinary Shares

 

Our A ordinary share price may be highly volatile and, as a result, shareholders could lose a significant portion or all of their investment or we could become subject to securities class action litigation.

 

Prior to November 12, 2013, our ordinary shares had been admitted on the Alternative Investment Market of the London StockExchange (“AIM”) since 2006 and our ‘A’ ordinary shares have been traded on the New York Stock Exchange (“NYSE”) since our initial public offering. The trading price of our ordinary shares on AIM and the NYSE has been highly volatile. For example, the highest price that our ordinary shares traded in the period beginning November 12, 2012 and ending November 12, 2013 was $4.48 per share and the lowest price was $2.96 per share, prior to giving effect to the one-for-three reverse stock split effectuated on November 12, 2013. Since the listing of our A ordinary shares on the NYSE, the highest closing price of the A ordinary shares, in the period beginning November 12, 2013 and ending May 31, 2016, was $39.01 per share and the lowest price was $5.59 per share. The market price of the A ordinary shares on the NYSE may fluctuate as a result of several factors, including the following:

·attacks from short sellers;
·variations in our quarterly operating results;
·adverse media report about us or our directors and officers;
·changes in financial estimates or publication of research reports by analysts regarding our A ordinary shares, other comparable companies or our industry generally;
·volatility in our industry, the industries of our customers and the global securities markets;
·risks relating to our business and industry, including those discussed above;
·strategic actions by us or our competitors;
·adverse judgments or settlements obligating us to pay damages;
·actual or expected changes in our growth rates or our competitors’ growth rates;
·investor perception of us, the industry in which we operate, the investment opportunity associated with the A ordinary shares and our future performance;
·addition or departure of our executive officers;
·trading volume of our A ordinary shares;
·sales of our ordinary shares by us or our shareholders;
·domestic and international economic, legal and regulatory factors unrelated to our performance; or
·the release or expiration of lock-up or other transfer restrictions on our outstanding A ordinary shares.

 

These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions or interest rate changes may cause the market price of ordinary shares to decline.

 

In addition, some companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have also recently become the subject of securities class action litigation against us. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could adversely impact our business and affect the market price of our A ordinary shares.

 

Additional equity issuances will dilute your holdings, and sales by the Founders Group could adversely affect the market price of our A ordinary shares.

 

Sales of a large number of our ordinary shares by the Founders Group, as defined in “Part I — Item 4. Information on the Company — C. Organizational Structure” could adversely affect the market price of our A ordinary shares. Similarly, the perception that any such primary or secondary sale may occur; could adversely affect the market price of our A ordinary shares. Any future issuance of our A ordinary shares by us may dilute the holdings of our existing shareholders, causing the market price of our A ordinary shares to decline. In addition, any perception by potential investors that such issuances or sales might occur could also affect the trading price of our A ordinary shares.

 

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The Founders Group, which includes our Chairman, Kishore Lulla, holds a substantial interest in and, through the voting rights afforded to our B ordinary shares and held by the Founders Group, will continue to have the ability to exercise a controlling influence over our business, which will limit your ability to influence corporate matters.

 

Our B ordinary shares have ten votes per share and our A ordinary shares, which are trading on the NYSE, have one vote per share. As of June 30, 2016, the Founders Group collectively owns 46.68% of our issued share capital in the form of 2,075,071 A ordinary shares, representing 0.73% of the voting power of our outstanding ordinary shares, and 24,960,654 B ordinary shares, representing all of our B ordinary shares and 88.34% of the voting power of our outstanding ordinary shares.

 

Due to the disparate voting powers attached to our two classes of ordinary shares, the Founders Group continues to have significant influence over management and affairs and over all matters requiring shareholder approval, including our management and policies and the election of our directors and senior management, the approval of lending and investment policies, revenue budgets, capital expenditure, dividend policy, significant corporate transactions, such as a merger or other sale of our company or its assets and strategic acquisitions, for the foreseeable future. In addition, because of this dual class structure, the Founders Group will continue to be able to control all matters submitted to our shareholders for approval unless and until they come to own less than 10% of the outstanding ordinary shares, when all B ordinary shares held by the Founders Group will automatically convert into A ordinary shares on a one-for-one basis.

 

This concentrated control could delay, defer or prevent a change in control of our Company, impede a merger, consolidation, takeover or other business combination involving our company, or discourage a potential acquirer from making a tender offer, initiating a potential merger or takeover or otherwise attempting to obtain control of the Company even though other holders of A ordinary shares may view a change in control as beneficial. Many of our directors and senior management also serve as directors of, or are employed by, our affiliated companies, and we cannot guarantee that any conflicts of interest will be resolved in our favor. As a result of these factors, members of the Founders Group may influence our material policies in a manner that could conflict with the interests of our shareholders. As a result, the market price of our A ordinary shares could be adversely affected.

 

We will continue to incur substantial costs as a result of being a U.S. public company.

 

We became a U.S. public company in November 2013. As a U.S. public company, we incur significant legal, accounting and other expenses and these expenses will likely increase after we no longer qualify as an “emerging growth company.” Being a U.S. public company increased our legal and financial compliance costs and make some activities more time-consuming and costly. In addition it has made it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage in the future. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.

 

As a foreign private issuer, we are subject to different U.S. securities laws and NYSE governance standards than domestic U.S. issuers. This may afford less protection to holders of our A ordinary shares, and you may not receive corporate and company information and disclosure that you are accustomed to receiving or in a manner in which you are accustomed to receiving it.

 

As a foreign private issuer, the rules governing the information that we disclose differ from those governing U.S. corporations pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act. Although we intend to report quarterly financial results and report certain material events, we are not required to file quarterly reports on Form 10-Q or provide current reports on Form 8-K disclosing significant events within four days of their occurrence and our quarterly or current reports may contain less information than required under U.S. filings. In addition, we are exempt from the Section 14 proxy rules, and proxy statements that we distribute will not be subject to review by the SEC. Our exemption from Section 16 rules regarding sales of ordinary shares by insiders means that you will have less data in this regard than shareholders of U.S. companies that are subject to the Securities Exchange Act. As a result, you may not have all the data that you are accustomed to having when making investment decisions. For example, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder with respect to their purchases and sales of our A ordinary shares.

 

The periodic disclosure required of foreign private issuers is more limited than that required of domestic U.S. issuers and there may therefore be less publicly available information about us than is regularly published by or about U.S. public companies. See “Part I — Item 10. Additional Information — H. Documents on Display.”

 

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As a foreign private issuer, we are exempt from complying with certain corporate governance requirements of the NYSE applicable to a U.S. issuer, including the requirement that a majority of our board of directors consist of independent directors. Although we are in compliance with the current NYSE corporate governance requirements imposed on U.S. issuers, with the exception of our Audit Committee currently having two rather than three members, our charter does not require that we meet these requirements.

 

As the corporate governance standards applicable to us are different than those applicable to domestic U.S. issuers, you may not have the same protections afforded under U.S. law and the NYSE rules as shareholders of companies that do not have such exemptions. It is also possible that the significant ownership interest of the Founders Group could adversely affect investor perception of our corporate governance.

 

We are an “emerging growth company” and if we decide to comply only with reduced disclosure requirements applicable to emerging growth companies, our A ordinary shares could be less attractive to investors and our share price may be more volatile.

 

We are an “emerging growth company,” as defined in the JOBS Act, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the SOX Act. We will cease to be an “emerging growth company” upon the earliest of (1) the first fiscal year following the fifth anniversary of our initial public offering, November 12, 2013, (2) the first fiscal year after our annual gross revenue is $1 billion or more, (3) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities or (4) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our A ordinary shares less attractive if we choose to rely on these exemptions. If some investors find our A ordinary shares less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our A ordinary shares and our share price may be more volatile.

 

You may be subject to Indian taxes on income arising through the sale of our A ordinary shares.

 

The Indian Income Tax Act, 1961 has been amended to provide that income arising directly or indirectly through the sale of a capital asset, including shares of a company incorporated outside of India, will be subject to tax in India, if such shares derive, directly or indirectly, their value substantially from assets located in India, whether or not the seller of such shares has a residence, place of business, business connection, or any other presence in India, if, on the specified date, the value of such assets (i) represents 50% of the value of all assets owned by the company or entity, or and (ii) exceeds the amount of 100 million rupees.

 

If the Indian tax authorities determine that our A ordinary shares derive their value substantially from assets located in India you may be subject to Indian income taxes on the income arising, directly or indirectly, through the sale of our A ordinary shares. However, the impact of the above indirect transfer provisions would need to be separately evaluated under the tax treaty scenario of the country of which the shareholder is a tax resident. For additional information, see “Part I—Item 10. Additional Information—E. Taxation.”

 

We are an Isle of Man company and, because judicial precedent regarding the rights of shareholders is more limited under Isle of Man law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.

 

Our constitution is set out in our memorandum and articles of association, and we are subject to the Isle of Man Companies Act 2006, as amended, — see “Part II — Item 4. Information on the Company — Government Regulations” and Isle of Man common law. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Isle of Man law are to an extent governed by the common law of the Isle of Man. The common law of the Isle of Man is derived in part from comparatively limited judicial precedent in the Isle of Man as well as from English common law, which has persuasive, but not binding, authority on a court in the Isle of Man. The rights of our shareholders and the fiduciary responsibilities of our directors under Isle of Man law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Isle of Man has a less developed body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Isle of Man. Furthermore, shareholders of Isle of Man companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. As a result, shareholders may have more difficulties in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as shareholders of a U.S. company.

 

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Our board of directors may determine that a shareholder meets the criteria of a “prohibited person” and subject such shareholder’s shares to forced divestiture.

 

Our articles of association permit our board of directors to determine that any person owning shares (directly or beneficially) constitutes a “prohibited person” and is not qualified to own shares if such person is in breach of any law or requirement of any country and, as determined solely by our board of directors, such ownership would cause a pecuniary or tax disadvantage to us, another shareholder or holders of our other securities. If our board of directors determines that a shareholder meets the above criteria of a “prohibited person,” they may direct such shareholder to transfer all A ordinary shares such shareholder owns to another person. Under the provisions of our articles of association, such a determination by our board of directors would be conclusive and binding on such shareholder.

 

If our board of directors directs such shareholder to transfer all A ordinary shares such shareholder owns, such shareholder may recognize taxable gain or loss on the transfer. See “Part I — Item 10. Additional Information — E. Taxation” for a more detailed description of the tax consequences of a sale or exchange or other taxable disposition of such shareholders A ordinary shares.

 

Judgments obtained against us by our shareholders may not be enforceable.

 

We are an Isle of Man company and substantially all of our assets are located outside of the United States. A substantial part of our current operations are conducted in India. In addition, substantially all of our directors and executive officers are nationals and residents of countries other than the United States and we believe that a substantial portion of the assets of these persons may be located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors. Moreover, the courts of India would not automatically enforce judgments of U.S. courts obtained in such actions against us or our directors and officers, or entertain actions brought in India against us or such persons predicated solely upon United States federal securities laws. Further, the U.S. has not been declared by the Government of India to be a reciprocating territory for the purposes of enforcement of foreign judgments, and there are grounds upon which Indian courts may decline to enforce the judgments of United States courts. Some remedies available under the laws of United States jurisdictions, including remedies available under the United States federal securities laws, may not be allowed in Indian courts if contrary to public policy in India. Since judgments of United States courts are not automatically enforceable in India, it may be difficult for you to recover against us or our directors and officers based upon such judgments. There is uncertainty as to whether the courts of the Isle of Man would recognize or enforce judgments of United States courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. In addition, there is uncertainty as to whether such Isle of Man courts would be competent to hear original actions brought in the Isle of Man against us or such persons predicated upon the securities laws of the United States or any state.

 

If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our share price and trading volume could decline.

 

The trading market for our ordinary shares depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We may be unable to sustain coverage by well-regarded securities and industry analysts. If either none or only a limited number of securities or industry analysts maintain coverage of our company, or if these securities or industry analysts are not widely respected within the general investment community, the trading price for our ordinary shares would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who cover us downgrade our ordinary shares or publish inaccurate or unfavorable research about our business, our share price would likely decline. We have experienced such downgrade from two of our analysts in fiscal 2016 during the period of anonymous short seller attack on our stock. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, or fail to maintain a favourable outlook on the company, it may cause investor sentiment to be weak, demand for our ordinary shares could decrease, which might cause our share price and trading volume to decline.

 

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We do not currently intend to pay dividends on our ordinary shares. Our ability to pay dividends in the future will depend upon satisfaction of the Isle of Man 2006 Companies Act solvency test, future earnings, financial condition, cash flows, working capital requirements and capital expenditures.

 

We currently intend to retain any future earnings and do not expect to pay dividends on our ordinary shares. The amount of our future dividend payments, if any, will depend upon our satisfaction of the solvency test contained in the 2006 Companies Act, our future earnings, financial condition, cash flows, working capital requirements and capital expenditures. The 2006 Companies Act provides that a company satisfies the solvency test if: (i) it is able to pay its debts as they become due in the normal course of the company’s business: and (ii) the value of the company’s assets exceeds the value of its liabilities. There can be no assurance that we will be able to pay dividends. Additionally, we are restricted by the terms of certain of our current debt financing facilities and may be restricted by the terms of any future debt financings in relation to the payment of dividends.

 

We may be classified as a passive foreign investment company, or PFIC, under United States tax law, which could result in adverse United States federal income tax consequences to U.S. investors.

 

Based upon the past and projected composition of our income and valuation of our assets, we do not believe we will be a PFIC for our taxable year ending December 31, 2016, and we do not expect to become one in the future, although there can be no assurance in this regard. The determination of whether or not we are a PFIC for any taxable year is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, we will be classified as a PFIC for United States federal income tax purposes if either:

·75% or more of our gross income in a taxable year is passive income, or
·50% or more of the average quarterly value of our gross assets in a taxable year is attributable to assets that produce passive income or are held for the production of passive income.

 

The calculation of the value of our assets will be based, in part, on the then market value of our A ordinary shares, which is subject to change. We cannot assure you that we were not a PFIC for the 2013, 2014 and 2015 taxable years or that we will not be a PFIC for this or any future taxable year. Moreover, the determination of our PFIC status is based on an annual determination that cannot be made until the close of a taxable year and involves extensive factual investigation. This investigation includes ascertaining the fair market value of all of our assets on a quarterly basis and the character of each item of income we earn, which cannot be completed until the close of a taxable year, and, therefore, our U.S. counsel expresses no opinion with respect to our PFIC status.

 

If we were to be or become classified as a PFIC, a U.S. Holder (as defined in “Part I — Item 10. Additional Information — E. Taxation”) may be subject to burdensome reporting requirements and may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the shares and on the receipt of distributions on the shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules. Further, if we were a PFIC for any year during which a U.S. Holder held our shares, we would continue to be treated as a PFIC for all succeeding years during which such U.S. Holder held our shares. Each U.S. Holder is urged to consult its tax advisors concerning the United States federal income tax consequences of acquiring, holding and disposing of shares if we are or become classified as a PFIC. See “Part I — Item 10. Additional Information — E. Taxation” for a more detailed description of the PFIC rules.

 

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ITEM 4. INFORMATION ON THE COMPANY

 

A. History and Development of our Company

 

Eros International Plc was incorporated in the Isle of Man as of March 31, 2006 under the Companies Act 1931 commonly known as the 1931 Act — see “Part II — Item 4. Information on the Company — Government Regulations,” as a public company limited by shares. Effective as of September 29, 2011, the Company was de-registered under the 1931 Act and re-registered as a company limited by shares under the 2006 Act. We maintain our registered office at Fort Anne, Douglas, Isle of Man IM15PD; our principal executive office in the U.S. is at 550 County Avenue, Secaucus, New Jersey 07094; and our telephone number is +1(201) 558-9021. We maintain a website at www.erosplc.com. Information contained in our website is not a part of, and is not incorporated by reference into, this annual report.

 

Our capital expenditures in fiscal 2016, 2015 and 2014 were $211.3 million, $276.2 million and $163.2 million, respectively. Our principal capital expenditures were incurred for the purposes of purchasing intangible film rights and related content. We expect our capital expenditure needs in fiscal 2017 to be approximately $225.0 million, a significant amount of which we expect to be used for the acquisition of further intangible film rights and related content.

 

B. Business Overview

 

Eros International Plc is a leading global company in the Indian film entertainment industry, which co-produces, acquires and distributes Indian language films in multiple formats worldwide. We are one of the oldest companies in the Indian film industry to focus on international markets and we believe we are pioneers in our business. Our success is built on the relationships we have cultivated over the past 39 years with leading talent, production companies, exhibitors and other key participants in our industry. Leveraging these relationships, we have aggregated rights to over 3,000 films in our library,including recent and classic titles that span different genres, budgets and languages. Eros Now has rights to over 5,000 films across Hindi and regional languages from Eros’s internal library as well as third party aggregated content which we believe makes it one of the largest Indian movie offering platforms around the world.

 

Eros Now, our digital over-the-top entertainment service is increasingly focused on offering quality content including Indian films, music and original shows, opening new markets, delivering consumer-friendly product features such as offline viewing and subtitles and adopting a platform agnostic distribution strategy on Android and iOS platforms across mobile, tablets, cable or internet, including deals with original equipment manufacturers (“OEMs”). Eros Now has garnered over 44 million registered users across WAP, APP and Web at the end of fiscal 2016. While a majority of users are from India, Eros Now has registered users in 135 different countries. Eros Now has rights to over 5,000 films, and 250,000 music tracks from 13 different labels. Eros Now service is integrated with Bharti Airtel and Idea, India’s leading telecom operators and has struck deals with LeEco and Micromax to pre-bundle Eros Now in smart phones to be sold in India. The focus for Eros Now is monetization and it has a target to convert at least one million users into paid subscribers by the end of fiscal 2017.

 

Our portfolio of films over the last three completed fiscal years comprised 197 films. In fiscal 2016 we released 63 films in total either in India, overseas or both. These comprised 33 Hindi films, 19 Tamil films and 11 regional language films. The Company’s strong portfolio of films drove theatrical, television and digital/ancillary revenues worldwide with Bajrangi Bhaijaan, Bajirao Mastani and Tanu Weds Manu Returns taking No. 1, No. 3 and No. 4 positions on the box office charts with other major films such as Welcome Back, Singh is Bling (Overseas), Gabbar is back (Overseas) and Dil Dhadakne Do (Overseas), giving Eros a total of seven out of the Top 15 box office films in Calendar Year 2015 (according to www.bollywoodhungama.com). In addition to this, Srimanthudu was the second highest Telugu grossing film of all time, according to www.123telugu.com For fiscal 2016, our aggregate revenues were $274.4 million and were derived from theatrical, television syndication and digital and ancillary distribution channels, globally.

 

We won over 150 awards including Best Studio of the Year and Excellence in International Distribution. Further our films won Best Film, Best Director, Best Story, Best Actor, Best Music, Best Special Effects awards, to name a few. Bajrangi Bhaijaan won 37 awards including the 63rd National Film Award for Popular Film. Bajirao Mastani won over 75 award titles including National Award for Best Director. Tanu Weds Manu Returns won 18 awards including National Award for best female Actor in a leading role, Hero won 7 awards and Badlapur won 7 awards. The Company’s Malayalam film Pathemari also won a national award for Best Malayalam Film.

 

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Indian films have a global appeal and their popularity has been increasing in many countries that consume dubbed and subtitled foreign content in local languages. These markets includes Germany, Poland, Russia, France, Italy, Spain, Indonesia, Malaysia, Japan, South Korea, the Middle East, Latin America among others. In all these markets it is the locals who are neither English nor Hindi speaking who view Bollywood content in a dubbed or subtitled version in their language, just as they view Hollywood content. China is increasingly becoming an important market and we expect to release select films from our slate for wider release into China. One of our box office hits of fiscal 2016, Bajirao Mastani is expected to be released in China in September 2016 in across 6,000 screens, one of the widest ever releases for an Indian film in China. As per PwC Outlook 2016, China is expected to overtake the US box office next year. China box office grew 49% in 2015 to $6.3 billion and is expected to grow to $10.3 billion next year. In comparison the US box office is expected to contract from $10.3 billion to $10 billion next year. Hollywood’s share of Chinese box office has slipped to 38.4% in 2015 from 45.5% in 2014. In early 2014 China had just under 19,000 screens and by end of 2015 that number grew to almost 32,000. Overall China is propelling Asia-Pacific’s growth (including Indonesia, Malaysia) with box office revenue across Asia-Pacific expected to grow to $21.11 billion in 2020 and this continues to emerge as important growth markets for Bollywood.

 

We set up Trinity Pictures in fiscal 2015 as what we believe to be one of India’s first dedicated franchise studio that develops valuable intellectual property in the form of franchise films with at least four films that will go into production during fiscal 2017 and expected to release in fiscal 2018. The first Indo-China film “The Zookeeper” (working title) written and developed in-house by Trinity Pictures to be co-produced with Chinese studio Peacock Mountain Culture & Media Ltd will be directed by Kabir Khan who also directed Bajrangi Bhaijaan and will be shot simultaneously in both languages. Another Indo-China film will be co-produced with Huaxia Film Distribution Co Ltd and which is currently titled, ‘Love in Beijing” (working title) will be directed by Siddharth Anand and will be shot in both languages. Both films are expected to release in Fiscal 2018. Other projects include a children’s action franchise, live action elephant film and a buddy cop film. Trinity Pictures is in discussions with third parties to create a digital comic book series, online gaming, animation series and merchandise for these franchise films.

 

Our distribution capabilities enable us to target a majority of the 1.3 billion people in India, our primary market for Hindi language films, where, according to bollywoodhungama.com, we participated in four, three and four films of the top ten grossing films in India, in calendar year 2015, 2014 and 2013 respectively. Our distribution capabilities further enable us to target consumers in over 50 countries internationally, including markets with large South Asian populations, such as the United States and the United Kingdom, where Rentrak reported our market share (as an average over the preceding five calendar years to 2015) as 35% of all theatrically released Indian language films in the United Kingdom, based on gross collections — including releases by Ayngaran, our majority-owned subsidiary, and 34% in the United States on the same basis. Other international markets that exhibit significant demand for subtitled or dubbed Indian-themed entertainment include Europe and South East Asia. Depending on the film, the distribution rights we acquire may be global, international or India only. Recently, as demand for regional film and other media has increased in India, our brand recognition in Hindi films has helped us to grow our non-Hindi film business by targeting regional audiences in India and beyond. With our distribution network for Hindi and Tamil films and additional distribution support through our majority owned subsidiary, Ayngaran, we believe we are well positioned to expand our offering of non-Hindi content.

 

We distribute our film content globally across the following distribution channels: theatrical, which includes multiplex chains and stand-alone theaters; television syndication, which includes satellite television broadcasting, cable television and terrestrial television; and digital and ancillary, which includes primarily music, inflight entertainment, home video, internet protocol television, or IPTV, video on demand, or VOD, and internet channels and Eros Now.

 

Our total revenues for fiscal 2016 decreased to $274.4 million from $284.2 million in fiscal 2015, our net income decreased to $13.3mn for fiscal 2016 from $49.3 million in fiscal 2015, EBITDA decreased to $36.3 million in fiscal 2016 from $70.1 million in fiscal 2015 and Adjusted EBITDA decreased to $70.9 million from $101.2 million in fiscal 2015.

 

The tables below set forth, for the periods indicated, revenue by primary geographic area based on customer location, and the percentage share of total revenue.

 

   Year ended March 31, 
   2016   2015   2014 
   (in thousands) 
India  $158,843   $109,513   $117,647 
Europe   24,367    27,146    22,245 
North America   19,865    19,052    14,017 
Rest of the world   71,353    128,464    81,561 
Total revenues  $274,428   $284,175   $235,470 

 

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   Year ended March 31, 
   2016   2015   2014 
India   57.9    38.5    50.0 
Europe   8.9    9.6    9.4 
North America   7.2    6.7    6.0 
Rest of the world   26.0    45.2    34.6 
Total revenues   100.0%    100.0%    100.0% 

 

Our Competitive Strengths

 

We believe the following competitive strengths position us as a leading global company in the Indian film entertainment industry.

 

Leading co-producer and acquirer of new Indian film content, with an extensive film library.

 

As one of the leading participants in the Indian film entertainment industry we believe our size, scale and market position will continue contributing to our growth in India and internationally. We have established our size and scale by aggregating a film library of over 3,000 films. We have demonstrated our leading market position by releasing, internationally or globally, Hindi language films which were among the top grossing films in India in calendar years 2015, 2014 and 2013. We believe that we have strong relationships with the Indian creative community and a reputation for quality productions. We set up Trinity Pictures to become what we believe to be one of India’s first dedicated franchise studio that develops valuable intellectual property in the form of franchise films and have already commissioned two Indo-Chinese co-production films under the Trinity Pictures.

 

We believe that these factors, along with our worldwide distribution platform, will enable us to continue to attract talent and film projects of a quality that we believe is one of the best in our industry, and build what we believe is a strong film slate for fiscal 2017 with some of the leading actors and production houses with whom we have previously delivered our biggest hits. We believe that the combined strength of our new releases and our extensive film library positions us well to build new strategic relationships.

 

Established, worldwide, multi-channel distribution network with entry proposed into China.

 

We distribute our films to the Indian population in India, the South Asian diaspora worldwide and to non-Indian consumers who view Indian films that are subtitled or dubbed in local languages. Internationally, our distribution network extends to over 50 countries, such as the United States, the United Kingdom and throughout the Middle East, where we distribute films to Indian expatriate populations, and to Germany, Poland, Russia, Romania, Indonesia, Malaysia, Taiwan, Japan, South Korea, China and Arabic speaking countries, where we release Indian films that are subtitled or dubbed in local languages. China is increasingly becoming an important market and we expect to release selected successful films from our slate for wider release into China. One of our box office hits of fiscal 2016, Bajirao Mastani is expected to be released in China in September 2016 in across 6,000 screens, one of the widest ever releases for an Indian film in China. We are also planning the release of our Indo-Chinese co-productions in fiscal 2018 in India, China and the rest of the world. Through this global distribution network, we distribute Indian entertainment content over the following primary distribution channels — theatrical, television syndication and digital platforms. Our primarily internal distribution network allows us greater control, transparency and flexibility over the regions in which we distribute our films which we believe results in the direct exploitation of our films without the payment of significant commissions to sub-distributors.

 

Diversified revenue streams and pre-sale strategies mitigate risk and promote cash flow generation.

 

Our business is driven by three major revenue streams:

·theatrical distribution;
·television syndication; and
·digital distribution and ancillary products and services, including Eros Now.

 

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In fiscal 2016, revenues from theatrical distribution accounted for nearly 50.4% of our aggregate revenues, revenues from television syndication accounted for 26.3% and digital distribution and ancillary revenues accounted for 23.3%, reflecting our diversified revenue base that reduces our dependence on any single distribution channel. We bundle library titles with new releases to maximize cash flows and we also utilize a pre-sale strategy to mitigate new production project risks by obtaining contractual commitments to recover a portion of our capitalized film costs through the licensing of television, music and other distribution rights prior to a film’s completion.

 

Television pre-sales in India are an important factor in enhancing revenue predictability for our business and are part of our diversification strategy to mitigate risks of cash flow generation. For fiscal 2017 we have pre sales visibility from sale of satellite television rights for among others Housefull 3, Dishoom, Baar Baar Dekho, Rock On 2, Banjo, Ki & Ka along with some regional films. In fiscal 2016, for our three high budget Hindi films we recouped 34% to 57% of the direct production cost through television and other pre-sales. We recouped 98% and 103% of our direct production cost of the two Tamil films released through contractual commitments prior to the film’s releases, and we recouped 91% our direct production cost of one Telugu film released through contractual commitments prior to the film’s release.

 

In addition, we further seek to reduce risk to our business by building a diverse film slate, with a mix of films by budget, region and genre that reduces our reliance on “hit films.” This broad-based approach also enables us to bundle old and new titles for our television and digital distribution channels to generate additional revenues long after a film’s theatrical release period is completed. We believe our multi-pronged approach to exploiting content through theatrical, television syndication and digital distribution channels, our pre-sale strategies and our portfolio approach to content sourcing and exploitation mitigates our dependence on any one revenue stream and promotes cash flow generation.

 

Strong and experienced management team.

 

Our management team has substantial industry knowledge and expertise, with a majority of our executive officers and executive directors having been involved in the film, media and entertainment industries for 20 or more years, and has served as a key driver of our strength in content sourcing. In particular, several members of our management team have established personal relationships with leading talent, production companies, exhibitors and other key participants in the Indian film industry, which have been critical to our success. Through their relationships and expertise, our management team has also built our global distribution network, which has allowed us to effectively exploit our content globally.

 

Our Strategy

 

Our strategy is driven by the scale and variety of our content and the global exploitation of that content through diversified channels. Specifically, we intend to pursue the following strategies:

 

Co-produce, acquire and distribute high quality content to augment our film library including a unique dedicated franchise studio model, Trinity Pictures.

 

We will continue to leverage the longstanding relationships with creative talent, production houses and other key industry participants that we have built since our founding to source a wide variety of content. Our focus will be on investing in future slates comprised of a diverse portfolio mix ranging from high budget global theatrical releases to lower budget movies with targeted audiences. We intend to maintain our focus on high and medium budget films and augment our library with quality content for exploitation through our distribution channels and explore new bundling strategies to monetize existing content.

 

Trinity Pictures is our new division which was set up in 2015 with the vision to be a global content studio that creates intellectual property around powerful character and plot-driven franchises and monetize these properties across films, merchandising, gaming amongst others.

 

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To promote Eros Now, our OTT platform as the preferred choice for online entertainment by consumers across digital platforms.

 

As per TRAI there are over a billion wireless subscribers in India at the end of September 2015. The number of unique users is currently at 500 million, a penetration level of 38% of the Indian population. The number of wireless internet users in India are likely to cross 790 million by 2020 with more than 60% of users accessing the internet through their mobile phones. It is expected that over the next couple of years, 3G and 4G subscribers would constitute over 40% of the wireless internet subscribers base. Initiatives such as broadband rollout and public Wi-Fi as part of the government’s Digital India campaign and the promotion of 4G data packs by leading telecoms will only help boost the quality of digital infrastructure in India.

 

Eros Now, our digital over-the-top entertainment service is increasingly focused on offering quality content including Indian films, music and original shows, opening new markets, delivering consumer-friendly product features such as offline viewing and subtitles and adopting a platform agnostic distribution strategy on Android and iOS platforms across mobile, tablets, cable or internet, including deals with original equipment manufacturers (“OEMs”). Eros Now has garnered over 44 million registered users across WAP, APP and Web at the end of fiscal 2016. While a majority of users are from India, Eros Now has registered users in 135 different countries. Eros Now has rights to over 5,000 films, and 250,000 music tracks from 13 different labels. Eros Now service is integrated with Bharti Airtel and Idea, India’s leading telecom operators and has struck deals with LeEco and Micromax to pre-bundle Eros Now in smart phones to be sold in India. The focus for Eros Now is monetization and it has a target to convert at least one million users into paid subscribers by the end of fiscal 2017. We continue to believe that Eros Now will be a significant player within the over-the-top online Indian entertainment industry, especially given the rapidly growing internet and mobile penetration within India.

 

Capitalize on positive industry trends in the Indian market.

Propelled by the economic expansion within India and the corresponding increase in consumer discretionary spending, the FICCI Report 2016 projects that the dynamic Indian media and entertainment industry will grow at a 14.3% compound annual growth rate, or CAGR, from $17.4 billion in 2015 to $34.1 billion by 2020, and that the Indian film industry will grow from $2.1 billion in 2015 to $3.4 billion in 2020. India is one of the largest film markets in the world. In 2015 the average ticket price amongst the two leading multiplex cinema chains in India was $2.73 compared to $2.63 in 2014, a 4% increase year-on-year.

 

The Indian television market is the second largest in the world after China, reaching an estimated 175 million television, or TV households in 2015, of which over 160 million were subscribing cable and satellite households. FICCI Report 2016 projects that the Indian television industry will grow from $8.2 billion in 2015 to $16.6 billion in 2020. The growing size of the TV industry has led television satellite networks to provide an increasing number of channels, resulting in competition for quality feature films for home viewing in order to attract increased advertising and subscription revenues.

 

Broadband and mobile platforms present growing digital avenues to exploit content. As per the latest Telecom Regulatory Authority of India report, there are over 1 billion wireless subscribers in India at the end of September 2015. The number of unique mobile users is currently at 500 million which is a penetration level of approximately 38% of the Indian population. It is expected to touch around 1.3 billion by 2020, over 90% of India’s total population at that point. The number of wireless internet users in India is likely to cross 790 million by 2020 with more than 60% of users accessing the internet through their mobile phones It was estimated that in 2015 there will be about 180 million smartphones in India, predominantly Android-based. The pace of smartphone penetration is growing and it is expected that by 2020, all mobile handsets being sold in India will be 4G-ready smartphones.

 

We will take advantage of the opportunities presented by these trends within India to monetize our library and distribute new films through existing and emerging platforms, including by exploring new content options for expanding our digital strategy such as filming exclusive short form content for consumption through emerging channels such as mobile and internet streaming devices.

 

Further extend the distribution of our content outside of India to new audiences.

 

We currently distribute our content to consumers in more than 50 countries, including in markets where there is significant demand for subtitled and dubbed Indian themed entertainment, such as Europe and South East Asia, as well as to markets where there is significant concentration of South Asian expatriates, such as the Middle East, the United States and the United Kingdom.

 

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Our growth from non-diaspora international markets shows a growing appetite for Bollywood content in many new markets. One of our strongest potential markets, China, with a market size of $6.3 billion and almost 32,000 screens, is projected to soon surpass Hollywood as the largest film market in the world. We believe our memorandum of understanding to collaborate with China Film Corp., Shanghai Film Group Co. Ltd. and Fudan University Press Co. Ltd. to co-produce and distribute Sino-Indian films will be an important steps in maximizing our opportunity in China. With Trinity’s launch, the studio is also expanding into new film markets, which includes entry into China. Two projects will be co-produced with a leading Chinese studio, based on stories organically weaving the socio-cultural worlds of India and China. Additionally, the films will be shot in both languages. We intend to promote and distribute our films in additional countries, and further expand in countries where we already distribute, when we believe that demand for Indian filmed entertainment exists or the potential for such demand exists. We have also entered into arrangements with local distributors in Taiwan, Japan, South Korea, and China to distribute dubbed or subtitled Eros films through theatrical release, television broadcast or DVD release. Additionally, we believe that the general population growth in India experienced over recent years may eventually lead to increasing migration of Indians to other regions, resulting in increased demand for our films internationally.

 

Expand our regional Indian content offerings.

 

We will utilize our resources, international reputation and distribution network to continue expanding our non-Hindi content offerings to reach the substantial Indian population whose main language is not Hindi. While Hindi films retain a broad appeal across India, the diversity of languages within India allows us to treat regional language markets as distinct markets where particular regional language films have a strong following. In fiscal 2016, our Tamil and Telugu releases were 21 films as compared to 19 films in fiscal 2015. In fiscal 2016, Srimanthudu was the second highest Telugu grossing film of all time. In fiscal 2016 we released a total of 30 regional language films other than Hindi.

 

In addition to Tamil and Telugu, we also work on films in other regional languages such as Marathi, Malayalam, Punjabi and Bengali. In fiscal 2016 Malayalam film Pathemari won a national award for Best Malayalam Film. We intend to use our existing distribution network across India to distribute regional language films to specific territories. Where opportunities are available and where we have the rights, we also intend to exploit re-make rights to some of our popular Hindi movies into non-Hindi language content targeted towards these regional audiences.

 

Slate Profile

 

The success of our film distribution business lies in our ability to acquire content. Each year, we focus on the acquisition and distribution of a diverse portfolio of Indian language and themed films that we believe will have a wide audience appeal. For fiscal 2016, our releases included 33 new Hindi films, of which 3 were high budget films, and 21 Tamil and Telugu language films, of which 3 were high budget films. Our typical annual slate of new releases consists of both Hindi language films as well as films produced specifically for audiences whose main language is not Hindi, primarily Tamil, and to a lesser extent other regional Indian languages. Our most expensive films are generally the high and medium budget films (mainly Hindi and a few Tamil and Telugu films) that we release globally each year. Of these Hindi, Tamil and Telugu films, we generally have four to six high budget films. The remainder of the films (mainly Hindi but also Tamil and/or Telugu) included in each annual release slate is built around these high budget films to create a slate that will attract varying segments of the audience, and typically includes five to thirteen medium budget films. The remainder of the slate consists of Hindi, Tamil, Telugu and other language films of a lower budget.

 

We have maintained our focus on high and medium budget Hindi films because these films typically have better production values and more recognizable stars that typically attract larger theatrical audiences. These high and medium budget films also typically drive higher revenues from television syndication in India. We seek to mitigate the risks associated with these higher budget films through the use of our extensive pre-sale strategies. We have increased our focus on high and medium budget Tamil and Telugu films for similar reasons. In addition, we can release a Tamil and Hindi film on the same date as they cater to different audiences, which allow us to effectively schedule releases for our film portfolio and to take a greater combined share of the box office on those release dates. Our slate contained six high budget films in fiscal 2015, of which three were Hindi, two Tamil and one was Telugu and six high budget films in fiscal 2016, of which three were Hindi, two Tamil and one was Telugu.

 

Hindi Film Content. Our typical annual slate of films is comprised of high or medium budget films in the popular comedy and romance genres, supported by lower budget films.

 

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Selected Hindi Releases in Fiscal Year 2016 (a)

 

Film   Cast/(Director)   Co-production/
Acquisition
  Genre   Actual Month 
of Release
 
                   
Bajrangi Bhaijaan   Salman Khan, Kareena Kapoor (Kabir Khan)   Acquisition   Drama   July-15  
                   
Bajirao Mastani   Ranveer Singh, Deepika Padukone, Priyanka Chopra (Sanjay Leela Bhansali)   Co-production   Romance   December-15  
                   
Tanu Weds Manu Returns   R. Madhvan, Kangana Ranaut (Anand L. Rai)   Co-production   Comedy   May-15  
                   
Welcome Back   John Abraham, Anil Kapoor, Nana Patekar, Paresh Rawal (Anees Bazmee)   Acquisition   Comedy   September-15  
                   
Singh is Bling   Akshay Kumar, Kareena Kapoor, Amy Jackson (Prabhu Deva)   Acquisition (Overseas)   Comedy   October-15  
                   
Gabbar is Back   Akshay Kumar, Kareena Kapoor     Acquisition (Overseas)   Drama   April-15  
            Drama, Comedy       
Dil Dhadakne Do   Ranveer Singh, Farhan Akhtar, Priyanka Chopra, Anushka Sharma, Anil Kapoor (Zoya Akhtar)   Acquisition (Overseas)       June-15  
            Romance, Action      
Hero   Sooraj Pancholi, Athiya Shetty (Nikhil Advani)   Acquisition   Drama   September-15  
                   
Aligarh   Rajkumar Rao, Manoj Bajpai (Hansal Mehta)   Co-production   Biographical   February-16  

 

(a) The list of films set forth in the table above is not a complete list of all the films released in the period by us and only covers selected Hindi film releases. We released a total of 63 films in fiscal 2016 of which 33 were Hindi films.

 

Tamil, Telugu and Other Regional Film Content. In order to respond to consumer demand for regional films, we have a slate of films produced in languages other than Hindi, such as Tamil, Telugu, Marathi, Malayalam and Punjabi.

 

Selected Tamil and Telugu Releases in Fiscal Year 2016 (a)

 

Film   Cast/(Director)   Co-production/
Acquisition
  Genre   Actual Month 
of Release
 
                   
Srimanthudu (Telugu)   Mahesh Babu, Shruti Haasan (Koratala Siva)   Acquisition   Drama   August-15  
                   
Uttama Villain (Tamil)   Kamal Haasan (Ramesh Aravind)   Acquisition   Comedy, Drama   May-15  
                   
Mass (Tamil)   Suriya, Nayantara, Amy Jackson (Venkat Prabhu)   Acquisition   Action, Comedy   May-15  
                   
Dictator (Telugu)   Balakrishna (Srivaas)    Co-production   Action   January-16  

 

(a) The list of films set forth in the table above is not a complete list of all the films released in the period by us and only covers selected Tamil and Telugu film releases. We released a total of 63 films in fiscal 2016 of which 30 were regional films other than Hindi.

 

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Our typical annual slate includes between 19 to 30 Tamil films, of which 10 were global Tamil and Telugu releases in fiscal 2016 compared to 6 in fiscal 2015. Tamil films are predominantly star-driven action or comedy films, which appeal to audiences distinct from audiences for more romance-focused Hindi films. We believe that a Tamil or Telugu film and a Hindi film can be released simultaneously on the same date without adversely affecting business for either film as each caters to a different audience.

 

We believe we can capitalize on the demand for regional films and replicate our success with Tamil and Telugu films for other distinct regional language films, including Marathi, Malayalam and Punjabi. Currently we have three Malayalam movies (Happy Wedding, White and Naale) in pipeline for fiscal 2017. In addition, the key Indian release dates for films, during school and other holidays, vary by region and therefore the ability to release films on different holidays in various regions, in addition to being able to release films in different regional languages simultaneously, expands the likely periods in which films can be successfully released. We intend to build up our portfolio of films targeting other regional language markets gradually.

 

Selected Major Releases in Fiscal Year 2017(a)

 

Film   Cast/(Director)   Production/
Co-Production/

Acquisition
  Genre   Actual/ Anticipated 
Quarter of Release
                 
Ki & Ka   Arjun Kapoor & Kareena Kapoor / (R. Balki)   Co Production   Drama   Released Q1 FY 2017
                 
Sardaar Gabbar Singh (Telugu)   Pawan Kalyan / (North Star / K S Ravindra)   Co Production   Action   Released Q1 FY 2017
                 
Nil Battey Sannata (The Classmate)   Swara Bhaskar / (Colour Yellow-Jar Pictures)   Co Production   Drama   Released Q1 FY 2017
                 
24 (Tamil)   Suriya, Samantha / Studio Green / Vikram Kumar   Acquisition   Science Fiction   Released Q1 FY 2017
                 
Housefull 3   Akshay Kumar, Riteish Deshmukh, Abhishek / (Nadiadwala / Sajid Farhad)   Co Production   Comedy   Released Q1 FY 2017
                 
Dishoom   John Abraham, Varun Dhawan, Jackie Fernandez / (Nadiadwala / Rohit Dhawan)   Co Production   Action   Q2 FY 2017
                 
Happy Bhag Jayegi   Diana Penty, Abhay Deol, Jimmy Shergill   Co Production   Romantic Comedy   Q2 FY 2017
                 
Banjo   Riteish Deshmukh & Nargis Fakhri / (Ravi Jadhav)   Production   Drama   Q2 FY 2017
                 
Baar Baar Dekho   Siddharth Malhotra & Katrina Kaif / (Dharma / Nitya Mehra)   Acquisition   Romantic Drama   Q2 FY 2017
                 
Rock On 2   Farhan Akhtar, Arjun Rampal / (Excel / Shujaat Saudagar)   Acquisition   Drama   Q3 FY 2017
                 
Chaar Sahibzaade 2 (Punjabi)   3D Animation / (Harry Baweja)   Co Production   Animation, History   Q3 FY 2017
                 
Guru Tegh Bahadur (Punjabi)   3D Animation / (Harry Baweja)   Acquisition   Animation, History   Q4 FY 2017

_______________

  (a) The list of films set forth in the table above is for illustrative purposes only, is not complete and only includes released and anticipated future releases. Due to the uncertainties involved in the development and production of films, the date of their completion can be significantly delayed, planned talent can change and, in certain circumstances, films can be cancelled or not approved by the Indian Central Board of Film Certification. See “Part I — Item 3. Key Information — D. Risk Factors — Risks Relating to Our Business — Our films are required to be certified in India by the Central Board of Film Certification.”

 

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Seasonality

 

Theater attendance in India has traditionally been highest during school holidays, national holidays and during festivals, and we typically aim to release big-budget films at these times. This timing of releases also takes account of competitor film releases, Indian Premier League cricket matches and the timing dictated by the film production process and as a result, our quarterly results can vary from one year to the next.

 

Content Development and Sourcing

 

We currently acquire films using two principal methods — by acquiring rights for films produced by others, generally through a license agreement, and by co-producing films with a production house, typically referred to as a banner, that is usually owned by a top Indian actor, director or writer, on a project by project basis. We regularly co-produce and acquire film content from some of the leading banners in India, including Bhansali Productions Private Limited, Colour Yellow Productions Private Limited, Nadiadwala Grandson Entertainment Private Limited, Excel Entertainment Private Limited and Salman Khan Ventures Private Limited Regardless of the acquisition method, over the past five years, we have typically obtained exclusive global distribution rights in all media for a minimum period of ten to twenty years from the Indian initial theatrical release date, although the term can vary for certain films for which we may only obtain international or only Indian distribution rights, and occasionally soundtrack or other rights are excluded from the rights acquired. On co-produced films, we typically have exclusive distribution rights for at least 20 years, co-own the copyright in such film in perpetuity and, after the exclusive distribution right period, share control over the further exploitation of the film.

 

We believe producers bring proposed films to us not only because of established relationships, but also because they want to leverage our proven distribution and marketing capabilities. Our in-house creative team also directly develops film ideas and contracts with writers and directors for development purposes. When we originate a film concept internally, we then approach appropriate banners for co-production. Our in-house creative team also participates in the selection of our slate with other members of our management through our analysis focused on the likelihood of the financial success of each project. Our management is extensively involved in the selection of our high budget films in particular.

 

Through Trinity Pictures, our franchise feature studio, we plan to launch its first slate of films during the Fiscal 2017. Trinity Pictures, we believe is one of the first Bollywood studios in India with a dedicated in-house team of writers (the ‘Trinity Writers’ Room’), has created over ten original franchises since the company’s inception, out of which we expect at least four films will go into production in fiscal year 2017 and release in fiscal year 2018. Trinity’s initial film slate lineup includes a range of character driven franchises across budgets, genres and languages. The first Indo-China film “The Zookeeper” (working title), written and developed in-house by Trinity Pictures to be co-produced with Chinese studio Peacock Mountain Culture & Media Ltd, will be directed by Kabir Khan who also directed Bajrangi Bhaijaan and will be shot simultaneously in both languages. The Company expects this film to be released in Fiscal 2018. Another Indo-China film will be co-produced with Huaxia Film Distribution Co Ltd and which is currently titled, Love in Beijing (working title), and will be directed by Siddharth Anand, and will be shot in both languages is also expected to be released in Fiscal 2018. Other projects includes a children’s action franchise, live action elephant film and a buddy cop film. Trinity Pictures is in discussions with third parties to create a digital comic book series, online gaming, animation series and merchandise for these franchise films.

 

Regardless of whether a film will be acquired or co-produced, we determine the likely value to us of the rights to be acquired for each film based on a variety of factors, including the stars cast, director, composer, script, estimated budget, genre, track record of the production house, our relationship with the talent and historical results from comparable films. Our primary focus is on sourcing a diversified portfolio of films expected to generate commercial success. We generally co-produce our high budget films and acquire rights to more medium and low budget films. Our model of primarily acquiring or co-producing films rather than investing in significant in-house production capability allows us to work on more than one production with key talent simultaneously, since the producer or co-producer takes the lead on the time intensive process of production, allowing us to scale our film slate more effectively. The following table summarizes typical terms included in our acquisition and co-production contracts.

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    Acquisition   Co-production
Film Cost   Negotiated “market value”   Actual cost of production or capped budget and 10-15% production fee
         
Rights   10 years-20 years   Exclusive distribution rights for at least 20 years after which Eros shares control over the further exploitation of the film, and co-owned copyright in perpetuity, subject to applicable copyright laws
         
Payment Terms   10-30% upon signature
Balance upon delivery or in installments between signing and delivery
  In accordance with film budget and production schedule
         
Recoupment Waterfall   “Gross” revenues
Less 10-20% Eros distribution fee (% of cost or gross revenues)
Less print, advertising costs (actuals)
Less cost of the film
Net revenues generally shared equally
  Generally same as Acquisition except sometimes Eros also charges interest and/or a production or financing fee for the cost of capital and overhead recharges

 

Where we acquire film rights, we pay a negotiated fee based on our assessment of the expected value to us of the completed film. Although the timing of our payment of the negotiated fee for an acquired film to its producer varies, typically we pay the producer between 10% and 30% of a film’s negotiated acquisition cost upon signing the acquisition agreement, and the remainder upon delivery of the completed film or in installments paid between signing and delivery. In addition to the negotiated fee, the producer usually receives a share of the film’s revenue stream after we recoup a distribution fee on all revenues, the entire negotiated fee and distribution costs, including prints and ads. After we sign an acquisition agreement, we do not exercise any control over the production process, although we do retain complete control over the distribution rights we acquire.

 

For films that we co-produce, in exchange for our commitment to finance typically 100% of the agreed-upon production budget for the film and agreed budget adjustments, we typically share ownership of the intellectual property rights in perpetuity and secure exclusive global distribution rights for all media for at least 20 years. After we recoup our expenses, we and the co-producers share in the proceeds of the exploitation of the intellectual property rights. Pending determination of the actual production cost of the film, we also agree to a pre-determined production fee to compensate the co-producer for his services, which typically ranges from 10%-15% of the total budget. We typically also provide a share of net revenues to our co-producers. Net revenues generally means gross revenues less our distribution fee, distribution cost and the entire amount we have paid as committed financing for production of the film. Our distribution fee varies from co-produced film to co-produced film, but is generally either a continuing 10% to 20% fee on all revenues, or a capped amount that is calculated as a percentage of the committed financing amount for production of the film. In some cases, net revenues also deduct an overhead charge and an amount representing an interest charge on some or all of the committed financing amount. Typically, once we agree with the co-producer on the script, cast and main crew including the director, the budget and expected cash flow through a detailed shooting schedule, the co-producer takes the lead in production and execution. We normally have our executive producer on the film to oversee the project.

 

We reduce financing risk for both acquired and co-produced films by capping our obligation to pay or advance funds at an agreed-upon amount or budgeted amount. We also frequently reduce financial risk on a film to which we have committed funds by pre-selling rights in that film.

 

Pre-sales give us advance information about likely cash flows from that particular film product, and accelerate cash flow realizable from that product. Our most common pre-sale transactions are the following:

·pre-selling theatrical rights for certain geographic areas, such as theaters outside the main theater circuits in India or certain non-Indian territories, for which we generally get nonrefundable minimum guarantees plus a share of revenues above a specified threshold;
·pre-selling television rights in India, generally by bundling releases in a package that is licensed to satellite television operators for a specified run; and

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·pre-selling certain music rights, including for movie soundtracks and ringtones.

 

From time to time we also acquire specific rights to films that have already been released theatrically. We typically do not acquire global all-media rights to such films, but instead license limited rights to distribution channels, like television, audio and home entertainment only, or rights within a certain geographic area. As additional rights to these films become available, we frequently seek to license them as well, and our package of distribution rights in a particular film may therefore vary over time. We work with producers not only to acquire or co-produce new films, but also to license from them other rights they hold that would supplement rights we hold or have previously held related to older films in our library. In certain cases, we may not hold full sequel or re-make rights or may share these rights with our co-producers.

 

Our Film Library

 

We currently own or license rights to films currently comprising over 3,000 films, including recent and classic titles that span different genres, budgets and languages. Eros Now has rights to over 5,000 films across Hindi and regional languages from Eros’s internal library as well as third party aggregated content which it believes makes it one of the largest Indian movie offering platforms around the world. In addition Eros Now showcases music from 13 Indian music labels and offers over 250,000 music tracks. Our film library has been built up over more than 39 years and includes hits from across that time period, including among others Bajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns, NH10, Badlapur, Devdas, Hum Dil De Chuke Sanam, Lage Raho Munna Bhai, Om Shanti Om, Vicky Donor, English Vinglish, Goliyon Ki Raasleela: Ram-Leela. We have acquired most of our film content through fixed term contracts with third parties, which may be subject to expiration or early termination. We own the rights to the rest of our film content as co-producers or sole producer of those films. Through such acquisition and co-production arrangements, we seek to acquire rights to 60-70 additional films each year. While we typically hold rights to exploit our content through various distribution channels, including theatrical, television and new media formats, we may not acquire rights to all distribution channels for our films. In particular, we do not own or license the music rights to a majority of the films in our library. We expect to maintain more than half of the rights we presently own through at least December 31, 2025.

 

In an effort to reach a wide range of audiences, we maintain rights to a diverse portfolio of films spanning various genres, generations and languages. More than 65% of the films in our Hindi library are films produced in the last 15 years. We own or license rights to films produced in several regional languages, including Tamil, Telugu, Kannada, Marathi, Bengali, Malayalam and Punjabi.

 

We treat our new releases as part of our film library one year from the date of their initial theatrical release. We believe our extensive film library provides us with unique opportunities for content exploitation, such as our dedicated Eros content channel carried by various cable companies outside India. Our extensive film library provides us with a reliable source of recurring cash flow after the theatrical release period for a film has ended. In addition, because our film library is large and diversified, we believe that we can more effectively leverage our library in many circumstances by licensing not just single films but multiple films.

 

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A summary of certain key features of our film library rights as of March 31, 2016 follows below.

 

    Hindi Films   Regional Language Films
(excluding Kannada films)
  Kannada Films
             
Approximate percentage of total library   31%   57%   12%
             
Approximate percentage of co-production films   1%   Less than 1%   Not applicable
             
Minimum remaining term of exclusive distribution rights for total films (approximate percentage of rights expiring at the earliest in the periods indicated)   2020 or earlier: 43%
2021-2025: 38%
2026-2030: 6%
2031-2045: 3%
Perpetual rights, subject to applicable copyright law limitations: 10%
  2020 or earlier: 54%
2021-2025: 13%
2026-2030: 1%
2031-2045: 1%
Perpetual rights, subject to applicable copyright law limitations: 31%
  Not applicable
             
Remaining term of exclusive distribution rights for co-production (approximate percentage of rights expiring earliest in the periods indicated)   2020 or earlier: 0%
2021-2025: 0%
2026-2030: 0%
2031-2045: 0%
Perpetual rights, subject to applicable copyright law limitations: 100%
  Perpetual rights, subject to applicable copyright law limitations: 100%   Perpetual rights, subject to applicable copyright law limitations: 100%
             
Date of first release (by Eros or prior rights owner)   1943-2016   1958-2016   *
             
Rights in major distribution channels   Theatrical: 23%
Television syndication: 23%
Digital: 88%
  Theatrical: 38%
Television syndication: 49%
Digital: 74%
  Digital: 100%
             
Music Rights (approximate percentage of films)   13%   19%   0%
             
Production Years (approximate percentage of films produced in the periods indicated)   1943-1965: 5%
1966-1990: 13%
1991-2016: 82%
  1958-1965: 0%
1966-1990: 3%
1991-2016: 97%
  *

 

  (*) Our Kannada digital rights library was acquired in September 2010, subsequent to the production and date of first release for these films, and consequently this information is not in our records.

 

Distribution Network and Channels

 

We distribute film content primarily through the following distribution channels:

·theatrical, which includes multiplex chains and stand-alone theaters;
·television syndication, which includes satellite television broadcasting, cable television and terrestrial television; and
·digital and ancillary. which primarily includes IPTV, VOD, music, inflight entertainment, home video, internet channels and Eros Now.

 

We generally monetize each new film we release through an initial twelve month revenue cycle commencing after the film’s theatrical release date. Thereafter, the film becomes part of our film library where we seek to continue to monetize the content through various platforms. The diagram below illustrates a typical distribution timeline through the first twelve months following theatrical release of one of our films.

 

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Film release first cycle timeline

 

Film release first cycle timeline

 

We currently acquire films both for global distribution, which includes the Indian domestic market as well as international markets and for international distribution only.

 

Certain information regarding our initial distribution rights to films initially released in the three fiscal years ended March 31, 2016, 2015 and 2014 is set forth below:

 

   Year ended March  31, 
   2016   2015   2014 
Global (India and International)               
Hindi films   27    30    23 
Regional films (excluding Tamil films)   6        3 
Tamil films   8    6    8 
International Only               
Hindi films   5    15    14 
Regional films (excluding Tamil films)       1     
Tamil films   10    13    21 
India Only               
Hindi films   1         
Regional films (excluding Tamil films)   5         
Tamil films   1         
Total   63    65    69 

 

“High budget” films refer to Hindi films with direct production costs in excess of $8.5 million and Tamil and Telugu films with direct production costs in excess of $7.0 million, in each case translated at the historical average exchange rate for the applicable fiscal year. “Low budget” films refer to Hindi, and regional films with less than $1.0 million in direct production costs, in each case translated at the historical average exchange rate for the applicable fiscal year. “Medium budget” films refer to Hindi, and regional films within the remaining range of direct production costs.

 

We distribute content in over 50 countries through our own offices located in key strategic locations across the globe, including separate offices maintained by Ayngaran for distribution of Tamil films that we do not distribute directly, and through our distribution partners. In response to Indian cinemas’ continued growth in popularity across the world, especially in non-English speaking markets, including Germany, Poland, Russia, Southeast Asia and Arabic speaking countries, we offer dubbed and/or subtitled content in over 25 different languages. We have entered into co-production deals with three Chinese film companies. In addition to our internal distribution resources, our global distribution network includes relationships with distribution partners, sub-distributors, producers, directors and prominent figures within the Indian film industry and distribution arena.

 

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Theatrical Distribution and Marketing

 

Indian Theatrical Distribution. The Indian theatrical market is comprised of both multiplex and single screen theaters which are 100% digitally equipped. In India, the cost of distributing a digital film print is lower than the cost of distributing a digital film print in the United States. Utilization of digital film media also provides additional protection against unauthorized copying, which enables us to capture incremental revenue that we believe are at risk of loss through content piracy.

 

India is divided into 14 geographical regions known as “Film Circuits” or “Film Territories” in the Indian Film Trade. We distribute our content in all of the circuits either through our internal distribution offices (Mumbai, Delhi, East Punjab, Mysore, Kerala, West Bengal and Bihar) or through sub-distributors in remaining circuits. The Film Circuits where we have direct offices comprise of a market share of up to 75% of the India theatrical revenue. Our primarily internal distribution network allows us greater control, transparency and flexibility over the core regions in which we distribute our films, and allows us to retain a greater portion of revenues per picture as a result of direct exploitation instead of using sub-distributors, which requires the payment of additional fees, sub distributor margins or revenue shares.

 

We entered into agreements with certain key multiplex operators to share net box office collections for our theatrical releases with the exhibitor for a predetermined fee of 50% of net box office collections for the first week, after which the split decreases over time.

 

We primarily enter into agreements on a film-by-film and exhibitor-by-exhibitor basis; however, we also have annual agreements with some of the top national multiplex chains.  To date, our agreements have been on terms that are no less favorable than the terms of the prior settlement agreements; however, we cannot guarantee such terms can always be obtained.

 

The largest number of screens in India that we book for a particular film are booked for the first week of theatrical release, because as a substantial portion of box office revenues are collected in the first week of a film’s theatrical exhibition. Our agreements with pan India multiplex operators is such that 100% of the entire first week of Eros share of revenues from all our films from such multiplexes is paid to us within 10 days of the release.

 

In single screens we either obtain non-refundable minimum guarantees / refundable advances and a revenue sharing arrangement above the minimum guarantee and with certain smaller multiplex chains we obtain refundable advances and a revenue sharing arrangement.

 

Pursuant to the Cinematograph Act, Indian films must be certified for adult viewing or general viewing by the Central Board of Film Certification, or CBFC, which looks at factors such as the interest of sovereignty, integrity and security of India, friendly relations with foreign states, public order and morality. Obtaining a desired certification may require us to modify the title, content, characters, storylines, themes or concepts of a given film.

 

Theatrical Distribution Outside India. Outside India, we distribute our films theatrically through our offices in Dubai, Singapore, the U.S., the United Kingdom, Australia and Fiji and through sub-distributors. In our international markets, instead of focusing on wide releases, we select a smaller number of theaters that play films targeted at the expatriate South Asian population or the growing international audiences for Indian films. We generally theatrically release subtitled versions of our films internationally on the release date in India, and dubbed versions of films in countries outside India 12-24 weeks after their initial theatrical release in India sometimes after a long gap.

 

Marketing. The pre-release marketing of a film is an integral part of our theatrical distribution strategy. Our marketing team creates marketing campaigns tailored to market and movie, utilizing print, brand tie-ups, music pre-releases, television, print and outdoor advertising, social media marketing on Facebook and Twitter and online advertising to generate momentum for the release of a film. We generally begin print media public relations as soon as a film commences shooting, with full marketing efforts commencing two to three months in advance of a film’s release date, starting with a theatrical trailer for the film promoted as part of another film currently playing in theaters. In addition, usually between six to eight weeks before the initial Indian theatrical release date, we separately release clips from the films featuring musical numbers. Those clips and the accompanying music tracks are separately available for purchase and add to consumer awareness and anticipation of the upcoming film release. We also maintain a Facebook page, which supplies background detail, chat opportunities and photos of upcoming films as well as links to our YouTube content.

 

We also use promotional agreements and integrated television marketing to subsidize marketing costs and expand our marketing reach. We partner with leading consumer companies in India which support our marketing campaigns in exchange for including their brands in promotional billboards, print ads and other marketing materials for our new film releases. Our marketing teams also work with our film stars to coordinate promotional appearances on popular television programming, timed to coincide with the marketing period for upcoming theatrical releases.

 

Our marketing efforts are primarily managed by employees located in offices across India or in one of our international offices in Dubai, Singapore, the United States, the United Kingdom, Australia and Fiji. Occasionally, sub-distributors manage marketing efforts in regions that do not have a dedicated Eros or Ayngaran marketing team, using the creative aspects developed by us for our marketing campaigns. Managing marketing locally permits us to more easily identify appropriate local advertising channels and results in more effective and efficient marketing.

 

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Television Distribution

 

India Distribution. We believe that the increasing television audience in India creates new opportunities for us to license our film content, and expands audience recognition of the Eros name and film products. We license Indian film content (usually a combination of new releases and existing films in our library), to satellite television broadcasters operating in India under agreements that generally allow them to telecast a film over a stated period of time in exchange for a specified license fee. We have, directly or indirectly, licensed content for major Indian television channels such as Colors, Sony, the Star Network and Zee TV.

 

Television pre-sales in India are an important factor in enhancing revenue predictability for our business and are part of our diversification strategy to mitigate risks of cash flow generation. Where we do pre-sales, we negotiate a set license fee which is payable over time with the last payment due on delivery of the film. For fiscal 2017 we have pre sales visibility from sale of satellite rights for among others Housefull 3, Dishoom, Baar Baar Dekho, Rock On 2, Banjo, Ki & Ka along with some regional films. In fiscal 2016, for our three high budget Hindi films we recouped 34 - 57% of the direct production cost through pre-sales. We recouped 98% and 103% of our direct production cost of the two Tamil films released through contractual commitments prior to the films’ releases, and we recouped 91% our direct production cost of one Telugu film released through contractual commitments prior to the films’ releases.

 

Our content is typically released on satellite television three to six months after the initial theatrical release. In India there are currently six direct to home, or DTH providers. We have offered some of our films through DTH service providers, but we have also licensed these rights with the satellite TV rights to satellite channel providers. As the number of DTH subscribers increase in India, we anticipate that we will have an opportunity to license directly for DTH exploitation. We have also provided content to regional cable operators. Although DTH distribution is still relatively small in India, with Indian telecom networks and DTH platforms expanding their services, we are beginning to see an increased interest for video on demand in India. We also sub-license some of our films for broadcast on Doordarshan, the sole terrestrial television broadcast network, which is government owned. We are seeing increasing growth from the Indian cable system which is predominantly digital. We believe that as the cable industry migrates towards digital technology and moves toward consolidation, cable television licensing will represent a more significant revenue stream for our business.

 

International Distribution. Outside of India, we license Indian film content for broadcasting on major channels and platforms around the world, such as Channel 4 (U.K.), CCTV (China), MBC (Middle East), TV3 (Malaysia), Bollywood Channel (Israel), RTL2 (Germany), M Channel (Thailand) and National TV (Romania) amongst others. We also license dubbed content to Europe, Arabic-speaking countries and in Southeast Asia and other parts of the world. Often such licenses include not just new releases, but films grouped around the same star, director or genre. International pre-sales of television, music and other distribution rights are an important component of our overall pre-sale strategy. We believe that our international distribution capabilities and large library of content enable us to generate a larger portion of our revenue through international distribution.

 

Digital Distribution

 

In addition to our theatrical and television distribution networks, we have a global network for the digital distribution of our content, which consists of full length films, music, music videos, clips and other video content. Through our digital distribution channel we mainly monetize music assets and distribute movies and other content primarily in IPTV, VOD (including SVOD and DTH) and online internet channels. Our film content is distributed in original language, subtitled into local languages or dubbed, in each case as driven by consumer or regional market preferences. With our large library of content and slate of new releases, we have sought to capitalize on changes in consumer demand through early adoption of new formats and services, which we believe enables us to generate a larger portion of our revenue through digital distribution than the film entertainment industry average in India.

 

With a significant portion of the Indian and international population rapidly moving toward digital technology, we are increasing our focus on providing on demand services, although the platforms and strategies differ by region. Outside of India, there is a proliferation of cable, satellite and internet services that we supply. In addition, with the proliferation of internet users, we are increasing our online distribution presence as well. These platforms enable us to continue to monetize a film in our library long after its theatrical release period has ended. In addition, the speed, ease of availability and prices of digital film distribution diminish incentives for unauthorized copying and content piracy.

 

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In fiscal 2016, we acquired a controlling stake in Techzone. Techzone is an aggregator, developer and distributor of entertainment content via mobile platforms in India. Techzone recently started aggregation in international locations. Techzone is particularly focused on the Bollywood films and music markets and has significant region-specific content in Tamil, Telugu, Malayalam, Bengali, Odisha. The company has relationships and billing integration with major telecom networks in India to distribute its content and also has its own allocated “Mobile Shortcode” 56060 by telco. Techzone makes its content available to end-users via various methods such as caller ring-back tones (CRBT), mobile radio, short message service (SMS), wireless application protocol (WAP), Over the top (OTT) and interactive voice response (IVR).

 

Techzone has an average of 25 million SMS, WAP, IVR & OTT transactions per month which is coming across from international telecom operators and major telecom operators in India for which it bills the customers directly through its billing platform. This excludes CRBT transactions which are also marketed and distributed by Techzone but billed by the telecom operators directly. In a given month, a single customer may engage in multiple transactions.

 

In North America, we have an agreement with International Networks, a subsidiary of Comcast, to provide a SVOD service fully branded as ‘Eros Now’. The service is carried on most of the major cable network providers including Comcast, Cox Communications, Cablevision and Time Warner Cable. We provide all programming for this film and music channel and share revenues with the cable providers. We also provide content to Amazon Digital and participate in a revenue share deal. This fiscal year, we have appointed Royalty Network Inc. and have granted sub-publishing rights to collect revenues. In Canada, Eros has signed a Program License Agreement for various movies with Rogers Broadcasting Limited.

 

On YouTube, where we have exceeded 4.3 billion views to date since our launch in 2007 and have over 5.4 million free subscribers as of June 2016, we sell banner and pre-roll advertisements, and share these advertising revenues with Google.

 

As per the latest TRAI report, there are over 1 billion wireless subscribers in India. The number of unique mobile users is currently at 500 million which is a penetration level of approximately 38% of the Indian population. It is expected to touch around 1.3 billion by 2020, over 90% of India’s total population at that point. The number of wireless internet users in India are likely to cross 790 million by 2020 with more than 60% of users accessing the internet through their mobile phones. It is expected that over the next couple of years, 3G and 4G subscribers would constitute over 40% of the wireless internet subscriber base. Big disruptive initiatives such as broadband rollout and public Wi-Fi as part of the government’s Digital India campaign and the aggressive promotion of 4G data packs by leading telecoms will only help boost the quality of digital infrastructure in India. It is estimated that in 2015 there are about 180 million smartphones in India, predominantly Android-based. The pace of smartphone penetration is growing and it is expected that by 2020, all mobile handsets being sold in India will be 4G-ready smartphones. 1 (Source : KPMG – FICCI, India Media and Entertainment Industry Report 2016)

 

Eros Now

 

Eros Now, our digital over-the-top entertainment service is increasingly focused on offering a world-class choice of content including Indian films, music and original shows, opening new markets, delivering consumer-friendly product features such as offline viewing and subtitles and adopting a platform agnostic distribution strategy on Android and iOS platforms across mobile, tablets, cable or internet, including deals with original equipment manufacturers (“OEMs”). The focus for ErosNow is monetization and it has a target to convert at least one million users into paying subscribers by the end of fiscal 2017.

 

Registered Users and Subscribers

·Eros Now continues to demonstrate strong growth, garnering over 44 million registered users across WAP, APP and Web at the end of fiscal 2016. While a dominant number of users are from India, Eros Now has registered users in 135 different countries.

 

·The Company’s new two-tier premium pricing in India is Rs. 49 ($0.75) and Rs. 99 ($1.51) per month and is available internationally for a $7.99 (or local currency equivalent) per month.

 

Platform Distribution and New Markets

 

Eros Now entered the Malaysian market with two partnerships with the country’s telecom operators; Maxis Berhad and U Mobile. With these partnerships, we believe Eros Now has a first mover advantage as an Indian OTT platform entering the growing Malaysian market,. As part of the partnership with Maxis, Eros Now will be included within a range of Maxis’ prepaid and post-paid data plans, offering various promotions to the telcom companies 12.3 million subscribers. The deal with U Mobile also enables the telecom’s prepaid and post-paid customers’ access to Eros Now’s premium subscriptions, including data free promotions.

 

·The popularity of VOD and OTT platforms has been growing in Malaysia, a country with high broadband penetration and cell phone adoption. Eros Now enters this market with these telco partnerships to offer consumers subscription to Eros Now for RM10 ($2.60) per month.

 

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·In India, the Company’s first telecom integration strategy for Eros Now was with Bharti Airtel, India's largest telecom operator. Bharti Airtel recently ran a co-branded marketing campaign around Bajirao Mastani powered by Eros Now on Airtel.

 

·Eros Now has entered into a platform and content deal with India’s third largest telecom service providers, IDEA Cellular (“IDEA”). IDEA has recently announced the launch of 4G services across five southern states of India, and had announced plans to expand to 750 towns in 10 service areas, by June 2016. The association with Eros Now, will enable IDEA’s 4G customers in these markets to enjoy rich premium content from a wide library of movies, originals and short form videos.

 

·Original Equipment Manufacturers (OEMs) are also an integral part of Eros Now distribution strategy. Eros Now entered into a partnership with Micromax, the second largest handset manufacturer in India and the 10th largest mobile phone player in the world. Micromax anticipates sales of approximately 1-1.5 million of it’s smartphones every month. Eros Now will be the only pre-installed entertainment app across all Micromax smartphones. Eros Now will also leverage Micromax’s presence of over 150,000 retail outlets to promote and distribute its service.

 

·Similarly, Eros Now is integrated on LeEco phones for the Indian market with a one year Eros Now subscription worth approximately $10 and $20 pre-bundled on standard and premium handsets, respectively. LeEco smart phones, LeMax and Le1S are being exclusively sold through e-commerce portal Flipkart and LeEco is running an aggressive marketing campaign in India.

 

·Eros Now has expanded availability of the service to the Apple TV media platform and is now showcasing across Apple TV’s presence in 80 key countries including the U.S., UK, India, Canada, Australia, and Malaysia. Subscribers can download the Eros Now app through the Apple TV App Store.

 

·Eros Now is also available on Amazon Fire TV to users across the U.S., UK and Western Europe. Eros Now’s content can be viewed on TV, mobile, tablet and web via Fire TV. The app, which can be easily accessed via the Amazon Store allows users to customize content by creating personal watch lists and utilize video progression, allowing users to continue watching content from where they previously left off. In addition, Amazon will be co-marketing the Eros Now service and promoting the app across all relevant geographies with Amazon Fire TV. Eros Now is also integrated for the Chromecast platform.

 

·Eros Now has extended to Android platforms via Android TV, one of the fastest growing smart TV platforms. Earlier in the year the Company completed the integration of the Eros Now app on to the Google Nexus Player and other 2015 Android TV platforms like Sony, Sharp and Phillips with Apple, Android and Samsung platforms, Eros Now is present across three of the top four streaming devices in the world.

 

Product Features

·Eros Now continues to implement and introduce new and exciting product features. In fiscal 2016, Eros Now launched its “Portability” feature which allows users to access their accounts and watch content across up to eight different devices. Eros Now also launched its “video progression” feature, where the platform is able to remember the point at which a user has paused or stopped viewing their content piece, and allows them to resume viewing from this point when they return, even on a different device. Eros Now content is available on High Definition quality video with multi language subtitles.

 

·In June, Eros Now also launched offline viewing or download features across Android and iOS platforms that enable subscribers to access content even when they are not connected to the internet.

 

Content

·Eros Now has rights to over 5,000 films across Hindi and regional languages from Eros’s internal library as well as third party aggregated content which it believes makes it one of the largest Indian movie offering platforms around the world. In addition, Eros Now showcases music from 13 Indian music labels and offers over 250,000 music tracks.

 

· The database of Eros Now consist of movie premieres, including new releases in theatres some which are big digital premieres. From March 2015, the Company premiered 26 new films out of 72 digital premieres. Some of the recent digital premieres include Bajrangi Bhaijaan (No. 1), Prem Ratan Dhan Payo (No. 2), Bajirao Mastani (No 3) and Tanu Weds Manu Returns (No. 4), which are the top four films of Calendar Year 2015 according to www.bollywoodhungama.com. Eros Now also premiered Piku and Mastizaade to name a few. Notably, Eros Now offers not just the content that it co-produces and acquires for its film business, but also aggregates third party content from other film studios to make it a compelling consumer proposition.

 

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·Eros Now has also added a series of short originals titled “Black & White” which ranges from interviews, tete-a-tete with leading talent from the Indian film industry shot exclusively for Eros Now. This series offers insight into the life of our customers favourite celebrities.

 

·Cool, contemporary and edgy “Originals” that target the youth of India is an important part of the Eros Now content strategy. Eros Now has shows such as Lost and Smoke (both thrillers) which are in production as well as Flip (Drama) which is a collection of independent stories and is adding Siachen, the first ever reality series to be shot on a mobile phone, to its originals’ slate. These originals are developed and follow a rigorous greenlighting process just like films, with script, screenplay, budgeting pilot episode production, market research and testing of the pilot episode and final production.

 

Physical and Other Distribution

 

We also distribute globally our film content through physical formats (DVDs and Video Compact Discs, or VCDs), in hotels and on airlines, and for use on mobile networks. We distribute and license content on physical media throughout the world, including on Blu-ray and DVDs, and in India on VCD and DVD. In India, and to service South Asian consumers internationally, we distribute to major retail chains (such as Planet-M) and internet platforms such as Amazon, as well as supplying local wholesalers and retailers. We also license content to third party distributors internationally to provide content dubbed into local languages for consumption by non-South Asian audiences. We also have direct sales to corporate customers, primarily in India, who bundle our DVDs or VCDs with their own products for promotional purposes. This aspect of our business works on a volume basis, with the low margins being offset by large confirmed orders. We have provided content for various mobile platforms such as Singtel and Shotformats Digital Productions.

 

Music

 

Music is integral to our films, and when we obtain global, all-media rights in our acquired or co-produced films music rights typically are included. Film music rights are often marketed and monetized separate from the underlying film, both before and after the release of the related films. In addition, we act as a music publisher for third party owned music rights within India. Through our internal resources and network of licensees, we are able to provide our consumers with music content directly, through third party platforms or through licensing deals. The content is primarily taken from our film content and the revenues are derived from mobile rights, MP3 tracks, sold via third party platforms such as iTunes and Rhapsody as well as streaming services such as Spotify and Rdio, digital streaming, physical CDs and publishing/master rights licensing.

 

We also exploit the music publishing and master rights we own, which involves directly licensing songs to radio and television channels in India, synchronizing of music content to film, television and advertisers globally, as well as receiving royalties from public performance of these songs when they are played at public events. Ancillary revenues from public performances in India are collected and paid over to us through Phonographic Performance Limited and The Indian Performing Rights Society, which monitor, collect and distribute royalties to their members.

 

Intellectual Property

 

As our revenue is primarily generated from commercial exploitation of our films and related content, our intellectual property rights are a critical component of our business. Unauthorized use of intellectual property, particularly piracy of DVDs and CDs, as well as on-line piracy through unauthorized downloads, is widespread in India and other countries, and the mechanisms for protecting intellectual property rights in India and such other countries are not as effective as those of the United States and certain other countries. We participate directly and through industry organizations in actions against persons who have illegally pirated our content, and we also deal with piracy by promoting a film to ensure maximum revenues early in its release and shortening the period between the theatrical release of a film and its legitimate availability on DVD and VCD. This is supported by the trend in the Indian market for a significant percentage of a film’s box office receipts to be generated in the first few weeks after release. Rapid transition of consumer preference from physical to digital modes of consumption of film and related content via on-line, mobile and digital platforms has enabled our Eros Now business to grow, but this business faces competition from sites offering unauthorized pirated content.

 

The Indian Copyright Act, 1957, or the Copyright Act, provides for registration of copyrights, transfer of ownership and licensing of copyrights and infringement of copyrights and remedies available in that respect. The Copyright Act affords copyright protection to cinematographic films and sound recordings. For cinematographic films, copyright is granted for a certain period of time, usually for a period of 60 years from the beginning of the calendar year following the year in which such film is published, subsequent to which the work falls in the public domain and any act of reproduction of the work by any person other than the author would not amount to infringement.

 

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Following the issuance of the International Copyright Order, 1999, subject to certain conditions and exceptions, certain provisions of the Copyright Act apply to nationals of all member states of the World Trade Organization, the Berne Convention and the Universal Copyright Convention.

 

The Copyright Act was amended in 2012 to allow authors of literary and musical works (which may be included as part of a cinematograph film) to retain the right to receive royalty for the utilization of such work (other than as part of the cinematograph film).

 

Although the state governments in India serve as the enforcing authorities of the Copyright Act, the Indian government serves an advisory role in assisting with enforcement of anti-piracy measures. In December 2009, the Union Information & Broadcasting Ministry established a task force to recommend measures to combat film, video and cable piracy, which submitted recommendations in September 2010, including:

 

·as a condition to licenses being granted to theaters and multiplexes by district authorities, theater and multiplex operators should be required to prohibit viewers from carrying a cam-cording device inside the theater;

 

·encouraging state governments to enact legislation providing for preventive detention of video and audio pirates and bring video pirates under the Goonda Act; and

 

·undertaking measures to ensure high fidelity in genuine DVDs to discourage the public from buying pirated versions.

 

However, these are recommendations of the task force, and there can be no assurance that any of these recommendations will be accepted and become binding law or regulation in a timely manner, or at all.

 

While copyright registration is not a prerequisite for acquiring or enforcing such rights, registration creates a presumption favoring the ownership of the right by the registered owner. Registration may expedite infringement proceedings and reduce delay caused due to evidentiary considerations. Neither we nor our Indian subsidiaries currently have any registered copyrights in India. The registration of certain types of trademark is prohibited, including where the property sought to be registered is not distinctive.

 

Recently, the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India issued the National Intellectual Property Rights Policy which aims, among other things, to stimulate intellectual property creation and protection by Indian and foreign corporates, to commercialize intellectual property rights by exploring the feasibility of creation of an IPR exchange and to enable valuation of intellectual property rights as intangible assets. The policy contemplates the review of existing intellectual property related laws, wherever necessary, and states that the Indian Cinematography Act, 1952 should be suitably amended to provide for penal provisions for illegal duplication of films.

 

We use a number of trademarks in our business, all of which are owned by our subsidiaries. Our Indian subsidiaries currently own over 55 Indian registered trademarks and domain names, which are used in their business, including the registered trademark “Eros,” “Eros International,” “Eros Music,” and “Eros Now.” However, we have not yet received Indian trademark registration for certain of our trademarks used in India. A majority of these registrations, and certain applications for registrations, are in the name of our subsidiaries Eros India, Eros Films or Eros Digital Private Limited, with whom we have an informal arrangement with respect to the use of such trademarks. The registration of any trademark in India is a time-consuming process, and there can be no assurance that any such registration will be granted.

 

The Indian Trade Marks Act, 1999, or the Trademarks Act, governs the registration, acquisition, transfer and infringement of trademarks and remedies available to a registered proprietor or user of a trademark. The registration of a trademark is valid for a period of ten years but can be renewed in accordance with the specified procedure.

 

Until recently, to obtain registration of a trademark in multiple countries, an applicant was required to make separate applications in different languages and disburse different fees in the respective countries. However, the Madrid Protocol enables nationals of member countries, including India, to secure protection of trademarks by filing a single application with one fee and in one language in their country of origin. The Trademarks Act was amended by the Trade Marks (Amendment) Act 2010, or the Trademarks Amendment Act. The Trademarks Amendment Act empowers the Registrar of Trade Marks to deal with international applications originating from India as well as those received from the International Bureau and to maintain a record of international registrations. This amendment also removes the discretion of the registrar to extend the time for filing a notice of opposition of published applications and provides for a uniform time limit of four months in all cases. Further, it simplifies the law relating to transfer of ownership of trademarks by assignment or transmission and brings the law generally in line with international practice. Pursuant to the Madrid Protocol and the Trademarks Act, we have obtained trademarks in Egypt, the European Community, United Arab Emirates, Australia and the United States.

 

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The remedies available in the event of infringement under the Copyright Act and the Trademarks Act include civil proceedings for damages, account of profits, injunction and the delivery of the infringing materials to the owner of the right, as well as criminal remedies including imprisonment of the accused and the imposition of fines and seizure of infringing materials.

 

Competition

 

The Indian film industry’s rapid growth is changing the competitive landscape. We believe we were one of the first companies in India to create an integrated business of sourcing new Indian film content through co-productions and acquisitions while building a valuable library of rights in existing content and also distributing Indian film content globally across formats.

 

Some of our direct competitors, such as The Walt Disney Company (“Disney”), 20th Century Fox Pictures and Viacom Studio 18, have moved toward similar models in addition to their other business lines within the Indian entertainment industry. We also face competition from the direct or indirect presence in India of significant global media companies, including the major Hollywood studios. Disney has acquired 100% of UTV and Viacom has ownership interests in Viacom Studio 18, while other Hollywood studios, such as News Corporation and Sony, have established local operations in India for film distribution, and have released a limited number of Indian films. Our primary competitors for Indian film content in the markets outside of India are UTV, Fox, Viacom and Yash Raj Films. We believe our experience and understanding of the Indian film market positions us well to compete with new and existing entrants to the Indian media and entertainment sector. Rentrak reported our market share (as an average over the preceding five calendar years to 2015) as 35% of all theatrically released Indian language films in the United Kingdom, based on gross collections — including releases by Ayngaran, our majority-owned subsidiary, and 34% in the United States on the same basis, and from 1980 to 2013 we had the highest market share of all theatrically released Indian language films in the United Kingdom based on gross collections in the period. Competition within the industry is based on relationships, distribution capabilities, reputation for quality and brand recognition.

 

Our Film Library

 

We currently own or license rights to films currently comprising over 3,000 films, including recent and classic titles that span different genres, budgets and languages. Eros Now has rights to over 5,000 films across Hindi and regional languages from Eros’s internal library as well as third party aggregated content which it believes makes it one of the largest Indian movie offering platforms around the world. In addition Eros Now showcases music from 13 Indian music labels and offers over 250,000 music tracks. Our film library has been built up over more than 39 years and includes hits from across that time period, including among others Bajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns, NH10, Badlapur, Devdas, Hum Dil De Chuke Sanam, Lage Raho Munna Bhai, Om Shanti Om, Vicky Donor, English Vinglish, Goliyon Ki Raasleela: Ram-Leela. We have acquired most of our film content through fixed term contracts with third parties, which may be subject to expiration or early termination.

 

We own the rights to the rest of our film content as co-producers or, sole producer of those films. Through such acquisition and co-production arrangements, we seek to acquire rights to at least 65-70 additional films each year. While we typically hold rights to exploit our content through various distribution channels, including theatrical, television and new media formats, we may not acquire rights to all distribution channels for our films. In particular, we do not own or license the music rights to a majority of the films in our library. We expect to maintain more than half of the rights we presently own through at least March 31, 2020.

 

In an effort to reach a wide range of audiences, we maintain rights to a diverse portfolio of films spanning various genres, generations and languages. More than half of our library is comprised of films first released ten or more years ago, including films released as early as the 1940s. We own or license rights to films produced in several regional languages, including Tamil, Kannada, Marathi, Telugu, Bengali Malayalam and Punjabi.

 

We treat our new releases as part of our film library one year from the date of their initial theatrical release. We believe our extensive film library provides us with unique opportunities for content exploitation, such as our dedicated Eros content channel carried by various cable companies outside India. Our extensive film library provides us with a reliable source of recurring cash flow after the theatrical release period for a film has ended. In addition, because our film library is large and diversified, we believe that we can more effectively leverage our library in many circumstances by licensing not just single films but multiple films.

 

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Litigation

 

From time to time, we and our subsidiaries are involved in various lawsuits and legal proceedings that arise in the ordinary course of business. The following discussion summarizes examples of such matters. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

Beginning on November 13, 2015, the Company was named a defendant in five substantially similar putative class action lawsuits filed in federal court in New Jersey and New York by purported shareholders of the Company.  The three actions in New Jersey were consolidated, and, on May 17, 2016, were transferred to the United States District Court for the Southern District of New York where they were then consolidated with the other two actions on May 27, 2016.  In general, the plaintiffs alleged thatthe Company, and in some cases also Company’s management, violated federal securities laws by overstating Company’s financial and business results, enriching the Company’s controlling owners at the expense of other stockholders, and engaging in improper accounting practices.  On April 5, 2016, a lead plaintiff and lead counsel were appointed in the now-consolidated New York action.  A single consolidated amended complaint was filed on July 14, 2016.  The Plaintiffs have alleged that the Company and certain individual defendants -- Kishore Lulla, Jyoti Deshpande, Andrew Heffernan, and Prem Parameswaran -- have violated the federal securities laws, specifically Sections 10(b) and 20(a) of the Exchange Act.  The amended consolidated complaint does not assert certain claims that had been asserted in prior complaints including (1) claims for violations of Sections 11 and 15 of the Securities Act and (2) claims against certain individual defendants, who are not now named defendants. The claims principally arise out of allegations that the Company and the individual defendants made material misrepresentations about the success, size, and financial performance of Eros Now, our streaming video service, and our film library.  The Company expects to move to dismiss the consolidated amended complaint.

 

Eros India and its subsidiaries are involved in ordinary course government tax audits and assessments, which typically include assessment orders for previous tax years including on account of disallowance of certain claimed deductions.

 

During the year ended March 2015, Eros received two notices from the Commissioner of Service Tax (India) to show cause why an amount aggregating to $31 million for the period April 1, 2009 to March 31, 2014 should not be levied on and paid on account of service tax arising on temporary transfer of copyright services and certain other related matters. Eros has filed its objections against the notice with the authorities. Subsequently in June 2015, Eros received assessment orders from the Commissioner of Service Tax (India) levying tax as stated above and ordering Eros to pay an additional amount of $31 million as interest and penalties in connection with the aforesaid matters. Considering the facts and nature of levies and the ad-interim protection for service tax levy for a certain period granted by the Honorable High Court of Mumbai, the Group expects that the final outcome of this matter will be favorable. Accordingly, based on the assessment made after taking appropriate legal advice, no additional liability has been recorded in Group’s consolidated financial statements.

 

During the year ended March 2015, Eros also received several assessment orders and demand notices from value added tax and sales tax authorities in India for the payment of amounts aggregating to $3 million (including interest and penalties) for certain fiscal years between April 1, 2005 and March 31, 2011. Eros has appealed against each of these orders, and such appeals are pending before relevant tax authorities. Though there uncertainties are inherent in the final outcome of these matters, the Company believes, based on assessment made after taking legal advice, that the final outcome of the matters will be favorable. Accordingly, no additional liability has been recorded in Group’s consolidated financial statements.

 

Eros is also named in various lawsuits challenging its ownership of some of its intellectual property or its ability to distribute these films in India. A number of these lawsuits seek injunctive relief restraining Eros from releasing or otherwise exploiting various films, including Om Shanti Om, Kochadaiiyaan, Bhoot Returns and Goliyon Ki Rasleela-Ram-leela, Bajrangi Bhaijaan, Welcome Back, Sardar Gabbar Singh, Aligarh, Housefull 3.

 

In India, private citizens are permitted to initiate criminal complaints against companies and other individuals by filing complaints or initiating proceedings with the police. Eros and certain executives have been named in certain criminal complaints from time to time.

 

If, as a result of such complaints, criminal proceedings are initiated by the relevant authorities in India and the Company or any of its executives are found guilty in such criminal proceedings, our executives could be subject to imprisonment as well as monetary penalties. We believe the claims brought to date are without merit and we intend to defend them vigorously.

 

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For instance, in relation to the film Goliyon Ki Rasleela-Ram-leela, certain civil and criminal proceedings had been initiated in various local courts in India in and around November 2013, including arrest warrants against Mr. Kishore Lulla and others involved in the making of this film, alleging that this film disrespected religious sensibilities and seeking to restrain its release or seeking directions for a review of its film certification. We have contested such claims in the local courts as well as by way of petitions filed by us before the Supreme Court of India. While hearings or investigations continue in some of these proceedings, we have obtained interim orders in our favor from the Supreme Court of India as well as certain of the local courts where such proceedings are being heard, including stays on all criminal proceedings against Eros India, Mr. Kishore Lulla and other persons involved in the making of the film. This film was released in November 2013.

 

Government Regulations

 

The following description is a summary of various sector-specific laws and regulations applicable to Eros.

 

Material Isle of Man Regulations

 

Companies Regime. The Isle of Man is an internally self-governing dependent territory of the British Crown. It is politically and constitutionally separate from the United Kingdom and has its own legal system and jurisprudence based on English common law principles.

 

Isle of Man company law is largely based on that of England and Wales. There are two separate codes of company law, embodied in the Companies Acts of 1931-2004 (commonly referred to as the 1931 Act as the principal Act is the Companies Act 1931) and the Companies Act 2006 (commonly referred to as the 2006 Act), respectively. Our Company was incorporated on March 31, 2006 under the 1931 Act. Effective September 29, 2011, it re-registered as a company incorporated under the 2006 Act.

 

The 2006 Act updates and modernizes Isle of Man company law by introducing a new simplified corporate vehicle into Isle of Man law. The new corporate vehicle follows the international business company model available in a number of other jurisdictions. Companies incorporated or re-registered under the 2006 Act are governed solely by its provisions and, except in relation to liquidation and receivership, are not subject to the provisions of the 1931 Act.

 

The following are some of the key characteristics of companies incorporated under the 2006 Act:

 

Share Capital. Under the 2006 Act, there is no longer the concept of authorized capital. Therefore, shares may be issued with or without par value.

 

Dividends, Redemptions and Buy-Backs. Subject to compliance with the memorandum and articles of association, the 2006 Act allows a company to declare and pay dividends, and to purchase, redeem or otherwise acquire its own shares subject only to meeting a solvency test set out in the 2006 Act. A company satisfies the solvency test if: (i) it is able to pay its debts as they become due in the normal course of business: and (ii) the value of the company’s assets exceeds the value of its liabilities.

 

Capacity and Powers. Companies incorporated under the 2006 Act have separate legal personality and perpetual existence. In addition, such companies have unlimited capacity to carry on or undertake any business or activity; this is so regardless of corporate benefit and regardless of whether or not it is in the best interests of the company to do so.

 

The 2006 Act specifically states that no corporate act is beyond the capacity of a company incorporated under the 2006 Act by reason only of the fact that the relevant company has purported to restrict its capacity in any way in its memorandum or articles or otherwise. A person who deals in good faith with a company incorporated under the 2006 Act is entitled to assume that the directors of the company are acting without limitation.

 

Miscellaneous. In addition to the foregoing, the following other points should be noted in relation to companies incorporated under the 2006 Act:

 

  (a) there are no prohibitions in relation to the company providing financial assistance for the purchase of its own shares;

 

  (b) there is no differentiation between public and private companies, but a company may adopt a name ending in the words “Public Limited Company” or “public limited company” or the abbreviation “PLC” or “plc”;

 

  (c) there are simple share offering/annual report requirements;

 

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  (d) there are reduced compulsory registry filings;

 

  (e) the statutory accounting requirements are simplified; and

 

  (f) the 2006 Act allows a company to indemnify and purchase indemnity insurance for its directors.

 

Shareholders should note that the above list is not exhaustive.

 

Exchange Controls

 

No foreign exchange control regulations are in existence in the Isle of Man in relation to the exchange or remittance of sterling or any other currency from the Isle of Man and no authorizations, approvals or consents will be required from any authority in the Isle of Man in relation to the exchange and remittance of sterling and any other currency whether awarded by reason of a judgment or otherwise falling due and having been paid in the Isle of Man.

 

Material Indian Regulations

 

We are subject to other Indian and international regulations which may impact our business. In particular, the following regulations have a significant impact on our business.

 

Notification of Industry Status. The Indian film industry was conferred industry status by a press release issued by the MIB on May 10, 1998.

 

Film Certification. The Cinematograph Act authorizes the CBFC, in accordance with the Cinematograph (Certification) Rules, 1983, or the Certification Rules, for sanctioning films for public exhibition in India. Under the Certification Rules, the producer of a film is required to apply in the specified format for certification of such film, with the prescribed fee. The film is examined by an examining committee, which determines whether the film:

·is suitable for unrestricted public exhibition;
·is suitable for unrestricted public exhibition, with a caution that the question as to whether any child below the age of 12 years may be allowed to see the film should be considered by the parents or guardian of such child;
·is suitable for public exhibition restricted to adults;
·is suitable for public exhibition restricted to members of any profession or any class of persons having regard to the nature, content and theme of the film;
·is suitable for certification in terms of the above if a specified portion or portions be excised or modified therefrom; or
·that the film is not suitable for unrestricted or restricted public exhibitions, or that the film be refused a certificate.

 

A film will not be certified for public exhibition if, in the opinion of the CBFC, the film or any part of it is against the interests of the sovereignty, integrity or security of India, friendly relations with foreign states, public order, decency or morality, or involves defamation or contempt of court or is likely to incite the commission of any offence. Any applicant, if aggrieved by any order of the CBFC either refusing to grant a certificate or granting a certificate that restricts exhibition to certain persons only, may appeal to the Film Certification Appellate Tribunal constituted by the Central Government in India under the Cinematograph Act.

 

A certificate granted or an order refusing to grant a certificate in respect of any film is published in the Official Gazette of India and is valid throughout India for ten years from the date of grant. Films certified for public exhibition may be re-examined by the CBFC if any complaint is received. Pursuant to grant of a certificate, film advertisements must indicate that the film has been certified for such public exhibition.

 

The Central Government in India may issue directions to licensees of cinemas generally or to any licensee in particular for the purpose of regulating the exhibition of films, so that scientific films, films intended for educational purposes, films dealing with news and current events, documentary films or indigenous films secure an adequate opportunity of being exhibited. The Central Government in India, acting through local authorities, may order suspension of exhibition of a film, if it is of the opinion that any film being publicly exhibited is likely to cause a breach of peace. Failure to comply with the Cinematograph Act may attract imprisonment and/or monetary fines.

 

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Separately, the Cable Television Networks Rules, 1994 require that no film or film song, promotional material, trailer or film music video, album or their promotional materials, whether produced in India or abroad, shall be carried through cable services unless it has been certified by the CBFC as suitable for unrestricted public exhibition in India.

 

A draft Cinematograph Bill, 2013 has been prepared by the Ministry of Information and Broadcasting and is awaiting approval.

 

Financing. In October 2000, the Ministry of Finance, GOI notified the film industry as an industrial concern in terms of the Industrial Development Bank of India Act, 1964, pursuant to which loans and advances to industrial concerns became available to the film industry.

 

The Reserve Bank of India, or the RBI, by circular dated May 14, 2001, permitted commercial banks to finance up to 50.0% of total production cost of a film. Further, by an RBI circular dated June 8, 2002, bank financing is now available even where total film production cost exceeds approximately $1.6 million. Banks which finance film productions customarily require borrowers to assign the film’s intellectual property or music audio/video/CDs/DVDs/internet, satellite, channel, export/international rights as part of the security for the loan, such that the banks would have a right in negotiation of valuation of such intellectual property rights.

 

Labour Laws. Depending on the nature of work and number of workers employed at any workplace, various labor related legislations may apply. Certain significant provisions of such labour related laws are provided below.

 

The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, or the EPF Act, applies to factories employing 20 or more employees and such other establishments as notified by the Government from time to time. It requires all such establishments to be registered with the relevant Provident Fund Commissioner. Also, such employers are required to contribute to the employees’ provident fund the prescribed percentage of the basic wages and certain cash benefits payable to employees. Employees are also required to make equal contributions to the fund. A monthly return is required to be submitted to the relevant Provident Fund Commissioner in addition to the maintenance of registers by employers.

 

Competition Act. The Competition Act, 2002, or the Competition Act, prohibits practices that could have an appreciable adverse effect on competition in India. Under the Competition Act, any arrangement, understanding or action, whether formal or informal, which causes or is likely to cause an appreciable adverse effect on competition in India is void. Any agreement among competitors which directly or indirectly determines purchase or sale prices, results in bid rigging or collusive bidding, limits or controls production, supply, markets, technical development, investment or the provision of services, or shares the market or source of production or provision of services in any manner, including by way of allocation of geographical area or types of goods or services or number of customers in the market, is presumed to have an appreciable adverse effect on competition. Further, the Competition Act prohibits the abuse of a dominant position by any enterprise either directly or indirectly, including by way of unfair or discriminatory pricing or conditions in the sale of goods or services, using a dominant position in one relevant market to enter into, or protect, another relevant market, and denial of market access. Further, acquisitions, mergers and amalgamations which exceed certain revenue and asset thresholds require prior approval by the Competition Commission of India.

 

Under the Competition Act, the Competition Commission has powers to pass directions/impose penalties in cases of anti-competitive agreements, abuse of dominant position and combinations which are not in compliance with the Competition Act.

 

If there is a continuing non-compliance the person may be punishable with imprisonment for a term extending up to three years or with a fine or with both as the Chief Metropolitan Magistrate, Delhi may deem fit. In case of offences committed by companies, the persons responsible to the company for the conduct of the business of the company will be liable under the Competition Act, except when the offense was committed without their knowledge or when they had exercised due diligence to prevent it. Where the contravention committed by the company took place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such person is liable to be punished.

 

The Competition Act also provides that the Competition Commission has the jurisdiction to inquire into and pass orders in relation to an anti-competitive agreement, abuse of dominant position or a combination, which even though entered into, arising or taking place outside India or signed between one or more non-Indian parties, but causes or is likely to cause an appreciable adverse effect in the relevant market in India. The Competition Act was amended in 2009, and cases which were pending before the Monopolies and Restrictive Trade Practice Commission were transferred to the Competition Commission of India.

 

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Indian Takeover Regulations. The Takeover Regulations came into effect on October 22, 2011, superseding the earlier takeover regulations. The Takeover Regulations provide the process, timing and disclosure requirements for a public announcement of an open offer in India and the applicable pricing norms.

 

Pursuant to the Takeover Regulations, a requirement to make a mandatory open offer by an “acquirer” (together with persons acting in concert with it) for at least 26% of the total shares of the Indian listed company, to all shareholders of such company (excluding the acquirer, persons acting in concert with it and the parties to any underlying agreement including persons deemed to be acting in concert) is triggered, subject to certain exemptions including transfers between promoters, if an acquirer acquires shares or voting rights in the Indian listed company, which together with its existing holdings and those of any persons acting in concert with him entitle the acquirer and persons acting in concert to exercise 25% or more of the voting rights in the Indian listed company; or an acquirer that holds between 25% and the maximum permissible non-public shareholding of an Indian listed company, acquires additional voting rights of more than 5% during a financial year; or an acquirer acquires, directly or indirectly, control over an Indian listed company, irrespective of acquisition of shares or voting rights in the Indian listed company.

 

An acquisition of shares or voting rights in, or control over, any company that would enable a person to exercise or direct the exercise of such percentage of voting rights in, or control over, an Indian listed company, the acquisition of which would otherwise attract the obligation to make an open offer under the Takeover Regulations will also trigger a mandatory open offer under the Takeover Regulations. Where the primary target of the acquisition is an overseas parent of an Indian listed company and the Indian listed company represents over 80% of a specified materiality parameter (including asset value, revenue or market capitalization) of the overseas parent company, such acquisition would be treated as a “direct acquisition” of the Indian listed company.

 

Indian Companies Act. A majority of the provisions of the Companies Act, 2013 are now in effect, bringing into effect significant changes to the Indian company law framework, such as in the provisions related to issue of capital, disclosures, corporate governance norms, audit matters, and related party transactions. The Companies Act, 2013 has also introduced additional requirements which do not have equivalents under the Companies Act, 1956, including the introduction of a provision allowing the initiation of class action suits in India against companies by shareholders or depositors, a restriction on investment by an Indian company through more than two layers of subsidiary investment companies (subject to certain permitted exceptions), and prohibitions on advances to directors. Indian companies with net worth, turnover or net profits of INR 5,000 million or higher during any financial year are also required to spend 2.0% of their average net profits during the three immediately preceding financial years on activities pertaining to corporate social responsibility. Further, the Companies Act, 2013 imposes greater monetary and other liability on Indian companies, their directors and officers in default, for any non-compliance.

 

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Differences in Corporate Law

 

The following chart summarizes certain material differences between the rights of holders of our A ordinary shares and the rights of holders of the common stock of a typical corporation incorporated under the laws of the State of Delaware that result from differences in governing documents and the laws of Isle of Man and Delaware.

 

    Isle of Man Law   Delaware Law
         
General Meetings  

The 2006 Act does not require a company to hold an annual general meeting of its shareholders. Subject to anything contrary in the company’s memorandum and articles of association, a meeting of shareholders can be held at such time and in such place, within or outside the Isle of Man, as the convener of the meeting considers appropriate. Under the 2006 Act, the directors of a company (or any other person permitted by the company’s memorandum and articles of association) may convene a meeting of the shareholders of a company. Further, the directors of a company must call a meeting to consider a resolution requested in writing by shareholders holding at least 10% of the company’s voting rights. The Isle of Man Court may order a meeting of members to be held and to be conducted in such manner as the Court orders, among other things, if it is of the opinion that it is in the interests of the shareholders of the company that a meeting of shareholders is held.

 

Our articles require our Board of Directors to convene annually a general meeting of the shareholders at such time and place, and to consider such business, as the Board of Directors may determine.

  Shareholders of a Delaware corporation generally do not have the right to call meetings of shareholders unless that right is granted in the certificate of incorporation or bylaws. However, if a corporation fails to hold its annual meeting within a period of 30 days after the date designated for the annual meeting, or if no date has been designated for a period of 13 months after its last annual meeting, the Delaware Court of Chancery may order a meeting to be held upon the application of a shareholder.
         
Quorum Requirements for General Meetings   The 2006 Act provides that a quorum at a general meeting of shareholders may be fixed by the articles. Our articles provide a quorum required for any general meeting consists of shareholders holding at least 30% of the issued share capital of the Company.   A Delaware corporation’s certificate of incorporation or bylaws can specify the number of shares that constitute the quorum required to conduct business at a meeting, provided that in no event will a quorum consist of less than one-third of the shares entitled to vote at a meeting.
         
Board of Directors   Our articles provide that unless and until otherwise determined by our Board of Directors, the number of directors will not be less than three or more than twelve, with the exact number to be set from time to time by the Board of Directors. While there is no concept of dividing a board of directors into classes under Isle of Man law, there is nothing to prohibit a company from doing so. Consequently, under our articles, our Board of Directors is divided into three classes, each as nearly equal in number as possible and at each annual general meeting, each of the directors of the relevant class the term of which shall then expire shall be eligible for re-election to the Board of Directors for a period of three years.   A typical certificate of incorporation and bylaws would provide that the number of directors on the board of directors will be fixed from time to time by a vote of the majority of the authorized directors. Under Delaware law, a board of directors can be divided into up to three classes.
         

 

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    Isle of Man Law   Delaware Law
         
Removal of Directors  

Under Isle of Man law, notwithstanding anything in the memorandum or articles or in any agreement between a company and its directors, a director may be removed from office by way of shareholder resolution. Such resolution may only be passed (a) at a meeting of the shareholders called for such purposes including the removal of the director or (b) by a written resolution consented to by a shareholder or shareholders holding at least 75% of the voting rights.

 

The 2006 Act provides that a director may be removed from office by a resolution of the directors if the directors are expressly given such authority in the memorandum or articles, but our articles do not provide this authority.

  A typical certificate of incorporation and bylaws provide that, subject to the rights of holders of any preferred stock, directors may be removed at any time by the affirmative vote of the holders of at least a majority, or in some instances a supermajority, of the voting power of all of the then outstanding shares entitled to vote generally in the election of directors, voting together as a single class. A certificate of incorporation could also provide that such a right is only exercisable when a director is being removed for cause (removal of a director only for cause is the default rule in the case of a classified board).
         
Vacancy of Directors  

Subject to any contrary provisions in a company’s memorandum or articles of association, a person may be appointed as a director (either to fill a vacancy or as an additional director) by a resolution of the directors or by a resolution of the shareholders.

 

Our articles provide that any vacancy resulting from, among other things, removal, resignation, conviction and disqualification, may be filled by another person willing to act as a director by way of shareholder resolution or resolution of our Board of Directors. Any director appointed by the Board of Directors will hold office only until the next annual general meeting of the Company, when he will be subject to retirement or re-election.

  A typical certificate of incorporation and bylaws provide that, subject to the rights of the holders of any preferred stock, any vacancy, whether arising through death, resignation, retirement, disqualification, removal, an increase in the number of directors or any other reason, may be filled by a majority vote of the remaining directors, even if such directors remaining in office constitute less than a quorum, or by the sole remaining director. Any newly elected director usually holds office for the remainder of the full term expiring at the annual meeting of shareholders at which the term of the class of directors to which the newly elected director has been elected expires.
         
Interested Director Transactions   Under Isle of Man law, as soon as a director becomes aware of the fact that he is interested in a transaction entered into or to be entered into by the company, he must disclose this interest to the board of directors. Our articles provide that no director may participate in approval of a transaction in which he or she is interested.   Under Delaware law, some contracts or transactions in which one or more of a Delaware corporation’s directors has an interest are not void or voidable because of such interest provided that some conditions, such as obtaining the required approval and fulfilling the requirements of good faith and full disclosure, are met. For an interested director transaction not to be voided, either the shareholders or the board of directors must approve in good faith any such contract or transaction after full disclosure of the material facts or the contract or transaction must have been “fair” as to the corporation at the time it was approved. If board or committee approval is sought, the contract or transaction must be approved in good faith by a majority of disinterested directors after full disclosure of material facts, even though less than a majority of a quorum.
         

 

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    Isle of Man Law   Delaware Law
         
Cumulative Voting   There is no concept of cumulative voting under Isle of Man law.   Delaware law does not require that a Delaware corporation provide for cumulative voting. However, the certificate of incorporation of a Delaware corporation may provide that shareholders of any class or classes or of any series may vote cumulatively either at all elections or at elections under specified circumstances.
         
Shareholder Action Without a Meeting   A written resolution will be passed if it is consented to in writing by shareholders holding in excess of 50% or 75% in the case of a special resolution of the rights to vote on such resolution. The consent may be in the form of counterparts, and our articles provide that, in such circumstances, the resolution takes effect on the earliest date upon which shareholders holding a sufficient number of votes to constitute a resolution of shareholders have consented to the resolution in writing. Any holder of B ordinary shares consenting to a resolution in writing is first required to certify that it is a permitted holder as defined in our articles. If any written resolution of the shareholders of the company is adopted otherwise than by unanimous written consent, a copy of such resolution must be sent to all shareholders not consenting to such resolution upon it taking effect.   Unless otherwise specified in a Delaware corporation’s certificate of incorporation, any action required or permitted to be taken by shareholders at an annual or special meeting may be taken by shareholders without a meeting, without notice and without a vote, if consents, in writing, setting forth the action, are signed by shareholders with not less than the minimum number of votes that would be necessary to authorize the action at a meeting at which all shares entitled to vote were present and voted. All consents must be dated. No consent is effective unless, within 60 days of the earliest dated consent delivered to the corporation, written consents signed by a sufficient number of holders to take the action are delivered to the corporation.
         
Business Combinations   Under Isle of Man law, a merger or consolidation must be approved by, among other things, the directors of the company and by shareholders holding at least 75% of the voting rights. A scheme of arrangement (which includes, among other things, a sale or transfer of the assets of the company) must be approved by, among other things, the directors of the company, a 75% shareholder majority and also requires the sanction of the court.   With certain exceptions, a merger, consolidation or sale of all or substantially all the assets of a Delaware corporation must be approved by the board of directors and a majority (unless the certificate of incorporation requires a higher percentage) of the outstanding shares entitled to vote thereon.
         
Interested Shareholders   There are no equivalent provisions under Isle of Man law relating to interested shareholders.   Section 203 of the Delaware General Corporation Law generally prohibits a Delaware corporation from engaging in specified corporate transactions (such as mergers, stock and asset sales and loans) with an “interested shareholder” for three years following the time that the shareholder becomes an interested shareholder. Subject to specified exceptions, an “interested shareholder” is a person or group that owns 15% or more of the corporation’s outstanding voting stock (including any rights to acquire stock pursuant to an option, warrant, agreement, arrangement or understanding, or upon the exercise of conversion or exchange rights, and stock with respect to which the person has voting rights only), or is an affiliate or associate of the corporation and was the owner of 15% or more of the voting stock at any time within the previous three years.

 

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    Isle of Man Law   Delaware Law
         
        A Delaware corporation may elect to “opt out” of, and not be governed by, Section 203 through a provision in either its original certificate of incorporation or its bylaws, or an amendment to its original certificate or bylaws that was approved by majority shareholder vote. With a limited exception, this amendment would not become effective until 12 months following its adoption.
         
Limitations on Personal Liability of Directors   Under Isle of Man law, a director who vacates office remains liable under any provisions of the 2006 Act that impose liabilities on a director in respect of any acts or omissions or decisions made while that person was a director.   A Delaware corporation may include in its certificate of incorporation provisions limiting the personal liability of its directors to the corporation or its shareholders for monetary damages for many types of breach of fiduciary duty. However, these provisions may not limit liability for any breach of the duty of loyalty, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, the authorization of unlawful dividends, shares repurchases or shares barring redemptions, or any transaction from which a director derived an improper personal benefit. A typical certificate of incorporation would also provide that if Delaware law is amended so as to allow further elimination of, or limitations on, director liability, then the liability of directors will be eliminated or limited to the fullest extent permitted by Delaware law as so amended. However, these provisions would not be likely to bar claims arising under U.S. federal securities laws.
         
Indemnification of Directors and Officers  

A company may indemnify against all expenses, any person who is or was a party, or is threatened to be made a party to any civil, criminal, administrative or investigative proceedings (threatened, pending or completed), by reason of the fact that the person is or was a director of the company, or who is or was, at the request of the company, serving as a director or acting for another company.

 

Any indemnity given will be void and of no effect unless such person acted honestly and in good faith and in what such person believed to be in the best interests of the company and, in the case of criminal proceedings, had no reasonable cause to believe that the conduct of such person was unlawful.

  Under Delaware law, subject to specified limitations in the case of derivative suits brought by a corporation’s shareholders in its name, a corporation may indemnify any person who is made a party to any third party action, suit or proceeding on account of being a director, officer, employee or agent of the corporation (or was serving at the request of the corporation in such capacity for another corporation, partnership, joint venture, trust or other enterprise) against expenses, including attorney’s fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action, suit or proceeding through, among other things, a majority vote of directors who were not parties to the suit or proceeding (even though less than a quorum), if the person:
         

 

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    Isle of Man Law   Delaware Law
         
       

·     acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation or, in some circumstances, at least not opposed to its best interests; and

 

·     in a criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful.

 

Delaware law permits indemnification by a corporation under similar circumstances for expenses (including attorneys’ fees) actually and reasonably incurred by such persons in connection with the defense or settlement of a derivative action or suit, except that no indemnification may be made in respect of any claim, issue or matter as to which the person is adjudged to be liable to the corporation unless the Delaware Court of Chancery or the court in which the action or suit was brought determines upon application that the person is fairly and reasonably entitled to indemnity for the expenses which the court deems to be proper.

 

To the extent a director, officer, employee or agent is successful in the defense of such an action, suit or proceeding, the corporation is required by Delaware law to indemnify such person for reasonable expenses incurred thereby. Expenses (including attorneys’ fees) incurred by such persons in defending any action, suit or proceeding may be paid in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of that person to repay the amount if it is ultimately determined that that person is not entitled to be so indemnified.

         
Appraisal Rights   There is no concept of appraisal rights under Isle of Man law.   A shareholder of a Delaware corporation participating in certain major corporate transactions may, under certain circumstances, be entitled to appraisal rights pursuant to which the shareholder may receive cash in the amount of the fair value of the shares held by that shareholder (as determined by a court) in lieu of the consideration the shareholder would otherwise receive in the transaction.

 

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    Isle of Man Law   Delaware Law
         
Shareholder Suits  

The Isle of Man Court may, on application of a shareholder, permit that shareholder to bring proceedings in the name and on behalf of the company (including intervening in proceedings to which the company is a party). In determining whether or not leave is to be granted, the Isle of Man Court will take into account such things as whether the shareholder is acting in good faith and whether the Isle of Man Court itself is satisfied that it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.

 

Under Isle of Man law, a shareholder may bring an action against the company for a breach of a duty owed by the company to such shareholder in that capacity.

  Under Delaware law, a shareholder may bring a derivative action on behalf of the corporation to enforce the rights of the corporation, including for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. An individual also may commence a class action suit on behalf of himself or herself and other similarly situated shareholders where the requirements for maintaining a class action under Delaware law have been met. A person may institute and maintain such a suit only if such person was a shareholder at the time of the transaction which is the subject of the suit or his or her shares thereafter devolved upon him or her by operation of law. Additionally, under established Delaware case law, the plaintiff generally must be a shareholder not only at the time of the transaction which is the subject of the suit, but also through the duration of the derivative suit. Delaware law also requires that the derivative plaintiff make a demand on the directors of the corporation to assert the corporate claim before the suit may be prosecuted by the derivative plaintiff, unless such demand would be futile. In such derivative and class actions, the court has discretion to permit the winning party to recover attorneys’ fees incurred in connection with such action.
         
Inspection of Books and Records  

Upon giving written notice, a shareholder is entitled to inspect and to make copies of (or obtain extracts of) the memorandum and articles and any of the registers of shareholders, directors and charges. A shareholder may only inspect the accounting records (and make copies or take extracts thereof) in certain circumstances.

 

Our articles provide that no shareholder has any right to inspect any accounting record or other document of the company unless he is authorized to do so by statute, by order of the Isle of Man Court, by our Board of Directors or by shareholder resolution.

  All shareholders of a Delaware corporation have the right, upon written demand, to inspect or obtain copies of the corporation’s shares ledger and its other books and records for any purpose reasonably related to such person’s interest as a shareholder.

 

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    Isle of Man Law   Delaware Law
         
Amendment of Governing Documents   Under Isle of Man law, the shareholders of a company may, by resolution, amend the memorandum and articles of the company. The memorandum and articles of a company may authorize the directors to amend the memorandum and articles, but our memorandum and articles do not contain any such power. Our memorandum of association provides that our memorandum of association and articles of association may be amended by a special resolution of shareholders.   Under Delaware law, amendments to a corporation’s certificate of incorporation require the approval of shareholders holding a majority of the outstanding shares entitled to vote on the amendment. If a class vote on the amendment is required by Delaware law, a majority of the outstanding stock of the class is required, unless a greater proportion is specified in the certificate of incorporation or by other provisions of Delaware law. Under Delaware law, the board of directors may amend bylaws if so authorized in the certificate of incorporation. The shareholders of a Delaware corporation also have the power to amend bylaws.
         
Dividends and Repurchases  

The 2006 Act contains a statutory solvency test. A company satisfies the solvency test if it is able to pay its debts as they become due in the normal course of its business and where the value of the company’s assets exceeds the value of its liabilities.

 

Subject to the satisfaction of the solvency test and any contrary provision contained in a company’s articles, a company may, by a resolution of the directors, declare and pay dividends. Our articles provide that where the solvency test has been satisfied, our Board of Directors may declare and pay dividends (including interim dividends) out of our profits to shareholders according to their respective rights and interests in the profits of the company.

 

Under Isle of Man law, a company may purchase, redeem or otherwise acquire its own shares for any consideration, subject to, among other things, satisfaction of the solvency test.

 

Delaware law permits a corporation to declare and pay dividends out of statutory surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year as long as the amount of capital of the corporation following the declaration and payment of the dividend is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets.

 

Under Delaware law, any corporation may purchase or redeem its own shares, except that generally it may not purchase or redeem those shares if the capital of the corporation is impaired at the time or would become impaired as a result of the redemption. A corporation may, however, purchase or redeem capital shares that are entitled upon any distribution of its assets to a preference over another class or series of its shares if the shares are to be retired and the capital reduced.

 

Changes in Capital

 

The conditions in our articles of association governing changes in capital are not more stringent than as required under the 2006 Act. Our articles of association provide that our directors may, by resolution, alter our share capital. The 2006 Act subjects any reduction of share capital to the statutory solvency test. The 2006 Act provides that a company satisfies the solvency test if it is able to pay its debts as they become due in the normal course of the company’s business and where the value of the company’s assets exceeds the value of its liabilities.

 

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C. Organizational Structure

 

We conduct our global operations through our Indian and international subsidiaries, including our majority-owned subsidiary Eros International Media Limited, or Eros India, a public company incorporated in India and listed on the BSE Limited and National Stock Exchange of India Limited, or the Indian Stock Exchanges. Our agent for service of process in the United States is Ken Naz, located at 550 County Avenue, Secaucus, New Jersey.

 

The Founders Group holds approximately 46.68% of our issued share capital, which comprise all of our B ordinary shares and certain A ordinary shares. Beech Investments, a company incorporated in the Isle of Man, is owned by discretionary trusts that include Eros directors Kishore Lulla and Vijay Ahuja as potential beneficiaries.

 

The following diagram summarizes the corporate structure of our consolidated group of companies as of June 30, 2016:

 

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Eros Organizational Chart (as of June 2016)

 

 

 

(a) Eros India holds at least 93% of each of its Indian subsidiaries other than Big Screen Entertainment Private Limited (India) and Colour Yellow Productions Private Limited (India).
(b) Eros Digital Private Limited (India) holds the remaining 0.35% of Eros India’s Indian subsidiary Eros International Films Private Limited.
(c) Ayngaran International Limited (Isle of Man) holds 51% of Ayngaran Anak Media Private Limited (India) and 100% of each of its other subsidiaries.

 

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D. Property, Plant and Equipment

 

Our properties consist primarily of studios, office facilities, warehouses and distribution offices, most of which are located in Mumbai, India. We own our corporate and registered offices in Mumbai and rent our remaining properties in India. Five of these leased properties are owned by members of the Lulla family. The leases with the Lulla family were entered into at what we believe were market rates. See “Part I. — Item 7. Major Shareholders and Related Party Transactions” and “Part I — Item 3. Key Information — D. Risk Factors. We have entered into certain related party transactions and may continue to rely on our founders for certain key development and support activities.” We also own or lease eight properties in the United Kingdom, the United States and Dubai in connection with our international operations outside of India. Property, plant and equipment with a net carrying amount of approximately $10.1 million (2015: $9.2 million) have been pledged to secure borrowings, and we currently do not have any significant plans to construct new properties or expand or improve our existing properties.

 

The following table provides detail regarding our properties in India and globally.

 

Location   Size   Primary Use   Leased / Owned
Mumbai, India   13,992 sq. ft.   Corporate Office   Owned
Mumbai, India   2,750 sq. ft.   Studio Premises   Leased(1)
Mumbai, India   8,094 sq. ft.   Executive Accommodation   Leased(1)
Mumbai, India   17,120 sq. ft.   Office   Leased(1)
Mumbai, India   120 sq. ft.   Film Negatives Warehouse   Leased
Mumbai, India   120 sq. ft.   Film Prints Warehouse   Leased
Mumbai, India   2,750 sq. ft.   Corporate   Owned
Delhi, India   600 sq. ft.   Film Distribution Office   Leased
Kerala, India   850 sq. ft.   Film Distribution Office   Leased
Kolkata, India   640 sq. ft.   Film Distribution Office   Leased
Punjab, India   438 sq. ft.   Film Distribution Office   Leased
Mumbai, India   2,926 sq. ft.   DVD warehouse   Leased
Mumbai, India   1,600 sq. ft.   Warehouse   Leased
Mumbai, India   1,600 sq. ft.   Warehouse   Leased
Mumbai, India   5,000 sq. ft.   Office   Leased
Chennai, India   8,942 sq. ft.   Corporate Office   Leased
Delhi, India   3,915 sq. ft.   Branch Office   Leased
Mumbai, India   750 sq. ft.   Branch Office   Leased
Bangalore, India   5,100 sq. ft.   Branch Office   Leased
Dubai, United Arab Emirates   536 sq. ft.   Corporate Office   Leased
Dubai, United Arab Emirates   747 sq. ft.   Corporate Office   Leased
Secaucus, New Jersey, U.S.   10,000 sq. ft.   Corporate Office   Leased(1)
London, England   7,549 sq. ft.   DVD Warehouse   Owned
London, England   4,506 sq. ft.   Corporate Office   Leased(1)
Fujairah, United Arab Emirates   676 sq. ft.   Corporate Office   Leased
Fujairah, United Arab Emirates   676 sq. ft.   Corporate Office   Leased
San Francisco, California, U.S.   2,315 sq. ft.   Digital team   Leased

 

(1) Leased directly or indirectly from a member of the Lulla family.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

A. Operating Results

 

You should read the information contained in the table below in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this annual report. The tables set forth below with our results of operations and period over period comparisons are not adjusted for the fluctuations in exchange rates described in “Part I — Item 3. Key Information — A. Selected Financial Data.”

 

Outlook

 

Our primary revenue streams are derived from three channels: theatrical, television syndication and digital and ancillary. For the fiscal year ended March 31, 2016, the aggregate revenues from theatrical, television syndication and digital and ancillary were $138.4 million, $72.1million and $63.9 million respectively, compared to $123.1 million, $101.2 million and $59.9 million, respectively, for the fiscal year ended March 31, 2015. In fiscal 2014, the aggregate revenue from theatrical, television syndication and digital and ancillary was $107.5 million, $80.3 million and $47.7 million, respectively.

 

The contribution from these three distribution channels can fluctuate year over year based on, among other things, our mix of films and budget levels, and the size of our television syndication deals.

 

The largest component of our revenue is attributable to the theatrical distribution of our films in India. We anticipate that as additional multiplex theaters are built in India, there will be increased opportunities to exploit our film content theatrically. We expect that this multiplex theater growth coupled with the rise in ticket prices and the anticipated increase in the number of high budget Hindi and Tamil films in our slate will result in increased revenue. In addition, in India, we cannot predict the share of theatrical revenue we will receive, as we currently negotiate film-by-film and exhibitor-by-exhibitor. We set up Trinity Pictures in fiscal 2015 as a dedicated franchise studio that develops valuable intellectual property in the form of franchise films. We believe China to be a significant market opportunity for Indian films. As per PwC Outlook 2016, China is expected to overtake the US box office next year. China box office grew 49% in 2015 to $6.3 billion and is expected to grow to $10.3 billion next year. In comparison the US box office is expected to contract from $10.3 billion to $10 billion next year. Hollywood’s share of Chinese box office has slipped to 38.4% in 2015 from 45.5% in 2014. In early 2014 China had just under 19,000 screens and by end of 2015 that number grew to almost 32,000. Overall China is propelling Asia-Pacific’s growth (including Indonesia, Malaysia) with box office revenue across Asia-Pacific expected to grow to $21.11 billion by 2020 and this continues to emerge as important growth markets for Bollywood. We are exploring the release of our films in bigger markets such as China.

 

Increasing the number of Tamil and Telugu global releases in our film mix allows us to expand our audience within significant regional markets. As we expand into other regional languages such as Marathi, Bengali, Punjabi and Malayalam, we may see the composition of our film mix changing over time in order to allow us to successfully scale our business around Hindi as well as regional language content. At the same time, the distribution window for the theatrical release of films, and the window between the theatrical release and distribution in other channels, have each been compressing in recent years and may continue to change. Regional films continue to be a focus area for us. Srimanthudu was the second highest Telugu grosser of all time. Our Malayalam film Pathemari also won a national award for Best Malayalam Film. In fiscal 2016, our Tamil and Telugu releases were 21 films as compared to 19 films in fiscal 2015.

 

A substantial portion of our revenue is also derived from television syndication. Because of increased demand for Indian film content on television in India as the number of direct to home, or DTH, subscribers increase and the cable industry migrates toward digital technology, we expect a significant increase in demand for premium content such as movies and sports and a resultant increase in licensing fees payable to us by satellite and cable television operators. However, as competitors with compelling products, including international content providers, expand their content offerings in India, we expect competition for television syndication revenues to increase, and license fees for such content could decrease.

 

Currently, the remainder of our revenue is derived from digital distribution and ancillary products and services. With a significant portion of the Indian and international population moving toward adoption of digital technology, we are increasing our focus on providing on-demand services. We have expanded our digital presence with the launch of our on-demand entertainment portal Eros Now, which leverages our film and music libraries by providing ad-supported and subscription-based streaming of film and music content via internet-enabled devices. Currently Eros Now has registered users in 135 different countries. Eros Now has been increasingly focused on delivering product features, being truly platform agnostic and monetizing it’s growing registered user base. We also have an ad-supported YouTube portal site on Google that hosts an extensive collection of clips of our content. Accordingly, we anticipate that our revenue and costs associated with digital distribution are likely to increase over time.

 

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We anticipate that our costs associated with the co-production and acquisition of film content are likely to increase over time as we continue to focus more on investing in high budget Hindi films as well as high budget Tamil and Telugu films. In addition, increased competition in the Indian film entertainment industry, including from international film entertainment providers such as Disney, Twentieth Century Fox and Viacom, is likely to cause the cost of film production and acquisition to increase. In fiscal 2016, we invested $211.3 million in film content, and in fiscal 2017, we expect to invest approximately $225.0 million in film content.

 

We anticipate our administrative costs will increase as we expand our management team, especially to support the expansion of our digital businesses. In addition, our administrative costs will increase due to the costs associated with being a U.S.-listed public company. Although aggregate spending will increase, we do not anticipate that this will result in a material change in aggregate administrative costs as a percentage of revenue.

 

Critical Accounting Policies

 

Our consolidated financial statements are prepared in accordance with IFRS as issued by the IASB, which requires management to make estimates, judgments and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Management considers the following accounting policies to be critical because they are important to our financial condition and results of operations and require significant judgment and estimates on the part of management in their application. The development and selection of these critical accounting policies have been determined by our management and the related disclosures have been reviewed with the Audit Committee of our board of directors. For a summary of all our accounting policies, see Note 3 to our audited Consolidated Financial Statements appearing elsewhere in this Annual Report.

 

Use of estimates

 

Estimates and judgments are evaluated on a regular basis and are based on historical experience and other factors, such as expectations of future events that are believed to be reasonable under the present circumstances. We make estimates and assumptions concerning the future, and these estimates, by definition, may differ materially from actual results.

 

Revenue

 

Revenue is measured by reference to the fair value of consideration received or receivable from customers. Revenue arising from the distribution or other exploitation of films and other content produced by third parties or by us, is recognized, net of sales taxes, when persuasive evidence of an arrangement exists, the fees are fixed or determinable, the product is delivered or services have been rendered and collectability is reasonably assured. Cash received and amounts invoiced in connection with contractual arrangements for which revenue is not yet recognizable pursuant to these criteria, such as pre-sale amounts, is classified as deferred revenue. We consider the terms of each specific arrangement to determine the appropriate accounting treatment for revenue recognition. The following additional criteria apply to certain of our specific revenue streams:

·Theatrical: We recognize revenue based on our share of third party reported box office receipts for the measurement period. In instances where we have a minimum guarantee, we recognize that amount if due on or prior to the measurement date, but never prior to delivery or on the release date.
·Television: Revenues are recognized when the content is available for delivery. Royalty and other revenues from premium pay television are recognized based on reporting to us by the counterparty such as a television operator for providing programming services on mutually negotiated contractual terms.
·Digital and ancillary: Where we distribute through a sub-distributor, we recognize DVD, CD and video minimum guarantee revenues on the contract date and we recognize additional revenues as reported by third party licensees. Provision is made for returns where applicable. Digital and ancillary revenues are recognized at the earlier of when the content is accessed or reported by the contractual counterparty. Visual effects, production and other fees for services rendered by us and overhead recharges are recognized in the period in which they are earned and in certain cases, the stage of production is used to determine the proportion recognized in the period.

 

Intangible assets

 

We are required to identify and assess the income generating life of each intangible asset. Judgment is required in making these determinations and setting an amortization rate for such assets to match this life. We test annually whether there are any indications of impairment of our intangible assets in accordance with IAS 36: Impairment of Assets. Management also regularly reviews and revises its estimates when necessary, which may result in a change in the rate of amortization and/or a write down of the asset to fair value.

 

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Accounting for film content under IFRS requires management’s judgment regarding total revenues to be received on such film content and costs to be incurred throughout the income generating life of such film or its license period, whichever is the shorter. Where we make an advance to secure film content or the services of talent associated with a film product, we also consider the recoverability of such advance, or the likelihood that such advance will result in a saleable asset. Judgments are also used to determine the amortization of capitalized film content costs where management seeks to write down the capitalized cost of content in line with the expected revenues arising from the content. For first release film content, we use a stepped method of amortization based on management’s judgment taking into account historic and expected performance, writing off a significant portion of the capitalized cost for such films in the first 12 months of their initial commercial exploitation, and then the balance over the lesser of the term of the rights held by us and nine years. Similar management judgment taking into account historic and expected performance is used to apply a stepped method of amortization on a quarterly basis within the first 12 months, writing off a significant portion of the capitalized cost in the quarter of theatrical release and the subsequent quarter. In fiscal 2009 and prior fiscal years, the balance of capitalized film content costs were amortized over a maximum of four years rather than nine. In the case of film content that we acquire after its initial exploitation, commonly referred to as library, amortization is spread evenly over the lesser of ten years after our acquisition or our license period. Management’s policy is based upon factors such as historical performance of similar films, the star power of the lead actors and actresses and others.

 

Management applies this method by using its judgment to write down the capitalized cost of film content during its first 12 months of commercial exploitation and in line with the expected revenues arising from the content over its estimated useful life. Each of these calculations requires judgments and estimates to be made, and, as with goodwill, an unforeseen event could cause us to revise these judgments and assumptions affecting the value of the intangible assets. There may be instances where the useful life of an asset is shortened to reflect the uncertainty of its estimated income generating life. This is particularly the case when acquiring assets in markets that we have not previously exploited. Impairment losses on content advances are recognized when film production does not seem viable and refund of the advance is not probable.

 

Valuation of available-for-sale financial assets.

 

We follow the guidance of IAS 39: Financial Instruments: Recognition and Measurement, or IAS 39, to determine, where possible, the fair value of its available-for-sale financial assets. This determination requires significant judgment. In making this judgment, we evaluate, among other factors, the duration and extent to which the fair value of an investment is less than its cost and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow.

 

Derivative financial instruments

 

We use derivative financial instruments to reduce its exposure to interest rate movements.

 

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently re-measured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in the profit or loss depends on the nature of the hedge relationship.

 

Income taxes and deferred taxation

 

We are subject to income taxes in various jurisdictions. Judgment is required in determining the worldwide provision for income taxes, taking into account management’s analysis of future taxable income, reversing temporary differences and preparing ongoing tax planning strategies. We are subject to tax assessment in certain jurisdiction. Significant judgment is involved in determining the provision for income taxes including judgment on whether the tax positions are probable of being sustained in tax assessment. During the normal course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Judgment is also used when determining whether we should recognize a deferred tax asset and tax credit, based on whether management considers that there is sufficient certainty in future earnings to justify the carry forward of assets created by tax losses and tax credit. Judgment is also required when determining whether we should recognize a deferred tax liability on undistributed earnings of subsidiaries.

 

Where the ultimate outcome of a transaction is different than was initially recorded, there may be an impact on the income tax and deferred tax provisions.

 

64 

 

 

Share-based payments

 

The Group is required to evaluate the terms to determine whether share based payment is equity settled or cash settled. Judgment is required to do this evaluation. Further, the Group is required to measure the fair value of equity settled transactions with employees at the grant date of the equity instruments. The fair value is determined principally by using the Black Scholes model and/or Monte Carlo Simulation Models which require assumptions regarding interest free rates, share price volatility, the expected life of an employee equity instrument and other variables. For further discussion of the basis and assumptions used to determine fair value, see Note 26 to our audited consolidated financial statements appearing elsewhere in this Annual Report. The aforementioned inputs entered in to the option valuation model that we use to determine the fair value of our share awards are subjective estimates and changes to these estimates will cause the fair value of our share-based awards and related share- based compensations expense we record to vary.

 

Goodwill and trade name

 

Our management tests annually whether goodwill and our trade name has suffered impairment, in accordance with our accounting policies and practices. In respect of goodwill, in accordance with IFRS rules, the recoverable amount of cash-generating units has been determined based on value in use calculations. These calculations require estimates to be made which are based on management assumptions. However, if there is an unforeseen event which materially affects these assumptions, such event could lead to a write down of goodwill.

 

While assessing any impairment of goodwill as at March 31, 2016, the value in use was determined using a discounted cash flow method. Estimated cash flows based on internal four year forecasts were developed using internal forecasts, extrapolated for the fifth year, and a pre-tax discount rate of 17.8% and a terminal growth rate of 4.0% were applied. The assessment of impairment of the trade name was based on a value in use measurement using the relief from royalty method and by then applying a pre-tax discount rate of 21.7% and a terminal growth rate of 4.0%.

 

Basis of consolidation

 

We evaluate arrangements with special purpose vehicles in accordance with IFRS 10: Consolidated Financial Statements, or IFRS 10, to establish how transactions with such entities should be accounted for. This requires judgment over control such that it is exposed, or has rights, to variable returns and can influence the returns attached to the arrangements.

 

Year Ended March 31, 2016 Compared to Year Ended March 31, 2015

 

   Year ended March 31,     As a % of revenue
   2016  2015  Change %  2016  2015
   (in thousands)         
Revenue  $274,428   $284,175    (3.4)   100.0    100.0 
Cost of sales   (172,764)   (155,777)   10.9    63.0    54.8 
Gross profit   101,664    128,398    (20.8)   37.0    45.2 
Administrative costs   (64,019)   (49,546)   29.2    23.3    17.4 
Operating profit   37,645    78,852    (52.3)   13.7    27.7 
Net finance costs   (8,010)   (5,861)   36.7    2.9    2.1 
Other losses   (3,636)   (10,483)   (65.3)   1.3    3.7 
Profit before tax   25,999    62,508    (58.4)   9.5    22.0 
Income tax expense   (12,711)   (13,178)   (3.5)   4.6    4.6 
Net income  $13,288   $49,330    (73.1)   4.8    17.4 

 

The following table sets forth, for the period indicated, the revenue by region of domicile of Group’s operation.

 

   Year ended March 31,   
   2016  2015  Change (%)
   (in thousands)   
India  $159,855   $110,015    45.3 
Europe   34,209    29,528    15.9 
North America   14,622    10,014    46.0 
Rest of the world   65,742    134,618    (51.2)
Total revenues  $274,428   $284,175    (3.4)

 

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Revenue

In fiscal 2016, Eros film slate comprised 63 films of which 6 were high budget, 16 were medium budget and 41 were low budget as compared to very similar mix of 65 films in fiscal 2015, of which 6 were high budget, 12 were medium budget and 47 were low budget.

 

In fiscal 2016, the Company’s slate of 63 films comprised 33 Hindi films, 19 Tamil/Telugu films and 11 regional films as compared to fiscal 2015 where its slate of 65 films comprised 45 Hindi films, 19 Tamil/Telugu films and one regional film. For the twelve months ended March 31, 2016, revenue decreased marginally by 3.4% to $274.4 million, compared to $284.2 million for the twelve months ended March 31, 2015.

 

In fiscal 2016, the aggregate theatrical revenues increased by 12.4% to $138.4 million from $123.1 million in fiscal 2015. Fiscal 2016 proved to be a successful year for the Company’s films at the box office demonstrating the quality and robustness of its content with three out of the top four Hindi films and seven out of the top 15 Hindi films in Calender year 2015 being Eros films. Some of our successful global releases were Bajrangi Bhaijaan, Bajirao Mastani, Tanu Weds Manu Returns, Welcome Back, Srimanthudu and overseas releases were Dil Dhadakne Do, Singh is Bling and Gabbar is Back reinforcing the portfolio and film mix strategy.

 

The aggregate revenues from television syndication decreased by 28.8% to $72.1 million in fiscal 2016 from $101.2 million in fiscal 2015 mainly as a result of higher television sales in India offset by lower sales in territories outside of India due to the Company’s decision to forego a portion of their potential catalogue revenues that have relatively longer payment cycles, in order to improve days sales outstanding.

 

The aggregate revenues from digital, ancillary and the newly acquired “Techzone” increased 6.7% to $63.9 million in fiscal 2016 from $59.9 million in fiscal 2015. This is on account of contribution from Techzone and better realizations from other ancillary revenues such as music sales and in-flight entertainment.

 

We derived approximately 41.7% of our fiscal 2016 revenues from the exploitation of our films in territories outside of India compared to 61.3% in Fiscal 2015. This percentage is calculated (as required under International Financial Reporting Standards) based on revenue by region of domicile of Group’s operation.

 

Revenue from India increased by 45.3 % to $159.9 million in fiscal 2016, compared to $110 million in fiscal 2015. This was account of the stronger Indian box office collection of the Company’s movies and the better realizations with respect to television syndication revenues associated with these movies.

 

Revenue from Europe increased by 15.9 % to $34.2 million in fiscal 2016, compared to $29.5 million in fiscal 2015 and North America increased 46 % to $14.6 million in fiscal 2016, compared to $10 million in fiscal 2015. This was account of the stronger overseas box office collection of the Company’s movies.

 

Revenue from rest of the world decreased by 51.2 % to $65.7 million in fiscal 2016, compared to $134.6 million in fiscal 2015. This was mainly due to lower catalogue sales.

 

We also report percentage of revenue calculated (as required under International Financial Reporting Standards) based on where the customer who entered into a contract with any of its entities is based and not strictly on the geography of the rights being exploited or licensed. Accordingly, this may not be reflective of the potential of any given market because it is not necessarily reflective of where the films are actually distributed. As a result, the Company’s revenue by customer location may vary year on year. On this basis, we derived approximately 42.1% of our Fiscal 2016 revenues from the exploitation of our films in territories outside of India compared to 61.5% in Fiscal 2015.

 

Cost of sales

In fiscal 2016 cost of sales increased by 10.9% to $172.8 million compared to $155.8 million in fiscal 2015. $11.0 million out of the total $17 million increase or 65% of the increase was primarily on account of increase in film amortization costs associated with mix of the Company’s films of fiscal 2016 as compared to fiscal 2015 as well as cumulative amortization costs of its larger film library, and 35% of the increase was due to accrued overages to co-producers from hit films as well as an increase in selling and distribution expenses.

 

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Gross profit

In fiscal 2016 gross profit decreased by 20.8% to $101.7 million, compared to $128.4 million in fiscal 2015 primarily due to lower revenue from high margin catalogue sales and higher cost of sales, mainly due to increased amortization charge.

 

Net Income

In fiscal 2016 net income decreased by 73.0% to $13.3 million, compared to $49.3 million in fiscal 2015 primarily due to lower high-margin catalogue revenues, lower gross profit and higher administrative cost in fiscal 2016.

 

Adjusted EBITDA

In fiscal 2016 adjusted EBITDA decreased by 29.9% to $70.9 million compared to $101.2 million in fiscal 2015 mainly due to higher theatrical revenues being offset by proportionately higher cost of sales including film amortisation costs and relatively higher margin lower catalogue revenues.

 

Administrative costs

In fiscal 2016, administrative costs increased by 29.3% to $64 million compared to $49.5 million in fiscal 2015, which was attributable to an increase in share based payment charges by 41.6% to $31.0 million in fiscal 2016 compared to $21.9 million in fiscal 2015 as well as increased personnel cost of $2.7 million on account of expansion of the Eros Now team and newly acquired “Techzone”

 

Net finance costs

In fiscal 2016, net finance increased by 35.6% to $8 million, compared to $5.9 million in fiscal 2015. This was mainly due to the higher blended cost of debt during the year with the full year retail bond costs coming in which was only partial in the previous year.

 

Other losses

In fiscal 2016, other losses decreased by 65.7% to $3.6 million, compared to $10.5 million in fiscal 2015. This was primarily due to a decrease in the fair value of derivative liability instruments not designated in a hedging relationship and net foreign exchange losses. In fiscal 2015 there was also impairment loss on available-for-sale financial asset, while their was no such impairment in fiscal 2016

 

Income tax expense

The expense for income taxes was $12.7 million and $13.2 million for the twelve months ended March 31, 2016 and 2015, respectively. The decrease for income taxes is due to lower net profit earned in the twelve months ended March 31, 2016. Effective tax rates were 21% and 21.1% for Fiscal 2016 and 2015, respectively, excluding non-deductible share-based payment charges and net loss on held for trading financial liabilities.

 

Year Ended March 31, 2015 Compared to Year Ended March 31, 2014

 

   Year ended March 31,     As a % of revenue
   2015  2014  Change (%)  2015  2014
   (in thousands)         
Revenue  $284,175   $235,470    20.7    100.0    100.0 
Cost of sales   (155,777)   (132,933)   (17.2)   54.8    56.5 
Gross profit   128,398    102,537    25.2    45.2    43.5 
Administrative costs   (49,546)   (42,680)   16.1    17.4    18.1 
Operating profit   78,852    59,857    31.7    27.7    25.4 
Net finance costs   (5,861)   (7,517)   (22.0)   2.1    3.2 
Other losses   (10,483)   (2,353)   (345.5)   3.7    1.0 
Profit before tax   62,508    49,987    25.0    22.0    21.2 
Income tax expense   (13,178)   (12,843)   2.6    4.6    5.5 
Net income  $49,330   $37,144    32.8    17.4    15.8 

 

The following table sets forth, for the period indicated, the revenue by geographic area by customer location.

 

   Year ended March 31,   
   2015  2014  Change%
   (in thousands)   
India  $109,513   $117,647    (6.9)
Europe   27,146    22,245    22.0 
North America   19,052    14,017    35.9 
Rest of the world   128,464    81,561    57.5 
Total revenues  $284,175   $235,470    20.7 

 

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Revenue

Revenue increased by 20.7% to $284.2 million, compared to $235.5 million in fiscal 2014 (excluding the impact of foreign currency fluctuations, revenue increased 22.4%, or $52.0 million). Our revenue growth was driven by increases in our theatrical, television syndication and digital and ancillary revenues in fiscal 2015. The growth in our theatrical revenue reflected the increased number of high budget films and the performance of our globally released Tamil and Telugu films, Lingaa, Kochadaiiyaan, Aagadu and Action Jackson a Hindi film release. Television syndication revenue grew in fiscal 2015, with our high and medium budget films helping us syndicate attractive bundles of new and library films. Digital and ancillary revenue growth reflected new release and catalog performance together with contributions from production services. We released six high budget films in fiscal 2015 compared to four high budget films in fiscal 2014. In fiscal 2015 we released 12 medium budget films as compared to 21 medium budget films in fiscal 2014. In fiscal 2015 we released six high budget films of which three were Hindi and two were Tamil and one was Telugu, as compared to fiscal 2014, in which out of four high budget films, three were Hindi, and one was Telugu, and none were Tamil.

 

We derived approximately 61.5% of our fiscal 2015 revenues from customers located outside of India. This percentage is calculated (as required under International Financial Reporting Standards) based on where the customer who entered into a contract with us is located and not necessarily on the geography of the rights being exploited or licensed. To that extent, this net revenue by customer location may not be reflective of the potential of any given market. As a result of changes in the location of our customers, our revenue by customer location may vary year to year.

 

Revenue by customer location in India decreased 6.9% to $109.5 million in fiscal 2015, compared to $117.6 million in fiscal 2014, attributable to a reduction in revenue as a result of the translation impact due to exchange rate movement, together with the impact of changes in customer location for revenue related to the India market but accounted for as derived outside of India. Revenue from Europe increased 22.0% to $27.1 million in fiscal 2015, compared to $22.2 million in fiscal 2014. Revenue from North America increased 35.9% to $19.1 million in fiscal 2015, compared to $14.0 million in fiscal 2014 due to increased syndication revenues. In fiscal 2015, revenues from the rest of the world increased 57.5% to $128.5 million, compared to $81.6 million in fiscal 2014 due to increased syndication revenues and digital and ancillary revenues.

 

Cost of sales

Cost of sales increased by 17.2% or $22.8 million in fiscal 2015 to $155.8 million, compared to $132.9 million in fiscal 2014. The increase was primarily due to an increase in film amortization costs of $17.6 million driven by a higher investment in our new release slate as compared to fiscal 2014, along with the cumulative impact of amortization costs associated with our larger film library. Other costs of sales, which principally consist of advertising, overages and print costs, increased by $4.9 million in fiscal 2015, reflecting increased advertising costs associated with the increase in high budget film releases in fiscal 2015 compared to fiscal 2014, offset by reduced print and associated distribution costs due to increased usage of digital distribution methods.

 

Gross profit

Gross profit increased by 25.2% or $25.9 million in fiscal 2015 to $128.4 million, compared to $102.5 million in fiscal 2014 primarily due to our improved margins reflecting the higher than proportionate increase in revenues, relative to the lower cost of the mix of new film releases. As a percentage of revenues, our gross profit margin increased to 45.2% in fiscal 2015 from 43.5% in fiscal 2014.

 

Administrative costs

Administrative costs increased by 16.1% or $6.8 million in fiscal 2015 to $49.5 million, which was attributable to an increase of $3.5 million in share based payment charges compared to fiscal 2014, along with $3.3 million of additional overhead in fiscal 2015, which includes an increase in personnel cost of $0.3 million. Additional trade receivables provisions contributed to $1.8 million of the increase in additional overhead as compared to fiscal 2014.

 

Net finance costs

Net finance costs, excluding the impact of foreign currency fluctuations, decreased by 22.0% or $1.6 million due to an overall increase in interest income resulting from higher cash levels across the group, which was due to proceeds from the follow-on offering on the NYSE and our Retail Bond offering on the London Stock Exchange.

 

Other losses

Other losses increased by 345.5% or $8.1 million in fiscal 2015 to $10.5 million, compared to $2.4 million in fiscal 2014, due to a derivative loss as a result of changes in USD interest rate expectations of $7.8 million recognized in fiscal 2015, compared to a $5.2 million derivative gain in fiscal 2014.

 

Income tax expense

Income tax expense increased by 2.6% or $0.4 million in fiscal 2015 to $13.2 million compared to $12.8 million in fiscal 2014, and our effective tax rate was 21.1% in fiscal 2015, compared to 25.6% in fiscal 2014. Derivative gains and transaction costs relating to equity transactions are not chargeable or deductible for income tax purposes. Our income tax expense in fiscal 2015 included $7.5 million of estimated current tax expense and $5.7 million of estimated deferred tax expense. The change in effective rate principally reflects a change in the pattern of the profits subject to income tax amongst our subsidiaries as compared to fiscal 2014.

 

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Exchange Rates

 

Our reporting currency is the U.S. dollar. Transactions in foreign currencies are translated at the exchange rate prevailing at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated into U.S. dollars at the exchange rates at the date of the applicable statement of financial position. For the purposes of consolidation, all income and expenses are translated at the average rate of exchange during the period covered by the applicable statement of income and assets and liabilities are translated at the exchange rate prevailing on the date of the applicable statement of financial position. When the U.S. dollar strengthens against a foreign currency, the value of our sales and expenses in that currency converted to U.S. dollars decreases. When the U.S. dollar weakens, the value of our sales and expenses in that currency converted to U.S. dollars increases.

 

Recently, there have been periods of higher volatility in the Indian Rupee and U.S. dollar exchange rate. This volatility is illustrated in the table below for the periods indicated:

 

   Period End  Average(1)  High  Low
Fiscal Year                     
2011    44.54    45.46    47.49    43.90 
2012    50.89    48.01    53.71    44.00 
2013    54.52    54.36    57.13    50.64 
2014    60.35    60.35    68.80    53.65 
2015    62.58    61.15    63.70    58.46 
2016    66.25    65.39    68.84    61.99 
Months    63.52    62.72    63.59    62.23 
April 2015    63.83    63.73    64.26    63.47 
May 2015    63.59    63.78    64.21    63.43 
June 2015    63.87    63.60    64.24    63.24 
July 2015    66.39    65.10    66.80    63.67 
August 2015    65.50    66.17    66.70    65.50 
September 2015    65.40    65.03    65.57    64.70 
October 2015    66.43    66.10    66.86    65.46 
November 2015    66.19    66.50    67.10    66.00 
December 2015    67.87    67.33    68.08    66.49 
January 2016    68.21    68.24    68.84    67.57 
February 2016    66.25    66.89    67.75    66.25 
March 2016    66.39    66.42    66.70    66.05 
April 2016    66.96    66.88    67.59    66.36 
May 2016    67.51    67.27    67.92    66.51 
June 2016    63.52    62.72    63.59    62.23 

 

(1) Represents the average of the U.S. dollar to Indian Rupee exchange rates on the last day of each month during the period for all fiscal years presented, and the average of the noon buying rate for all days during the period for all months presented.

 

This volatility in the Indian Rupee as compared to the U.S. dollar and the increasing exchange rate has impacted our results of operations as shown in the table below comparing the reported results against constant currency comparables based upon the average rate of exchange for the year ended March 31, 2016, of INR 65.43 to $1.00. In addition to the impact on gross profit, the volatility during the year ended March 31, 2016 also led to a non-cash foreign exchange loss of $0.07 million principally on our Indian subsidiaries’ foreign currency loans in the year ended March 31, 2016 compared to $0.9 million gain in the year ended March 31, 2015.

 

The following table sets forth our constant currency revenue (a non-GAAP financial measure) for the periods indicated. Constant currency revenue is a non-GAAP financial measure. We present constant currency revenue so that revenue may be viewed without the impact of foreign currency exchange rate fluctuations, thereby facilitating period-to-period comparisons of business performance. Constant currency revenue is presented by recalculating prior period’s revenue denominated in currencies other than in US dollars using the foreign exchange rate used for the latest period. Our non-US dollar denominated revenue includes, but is not limited to, revenue denominated in Indian rupee, pound sterling and United Arab Emirates Dirham.

 

   Year ended March 31, 
   2016   2015   2014 
           (in thousands)         
   Reported   Constant
Currency
   Reported   Constant
Currency
   Reported   Constant
Currency
 
Revenue  $274,428   $274,428   $284,175   $270,845   $235,470   $232,183 
Cost of sales   (172,764)   (172,764)   (155,777)   (147,499)   (132,933)   (129,593)
Gross Profit  $101,664   $101,664   $128,398   $123,346   $102,537   $102,590 

 

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The percentage change for the data comparing the constant currency amounts against the reported results referenced in the table above:

 

   Year ended March 31,
   2016  2015  2014
Revenue   —  %   (4.9)%   (1.4)%
Cost of sales   —      (5.6)   (2.6)
Gross profit   —  %   (4.1)%   (0.1)%

 

The Indian Rupee experienced an approximately 6.3% drop in value as compared to the U.S. dollar in fiscal 2016, in fiscal 2015 the drop was 3.7%.

 

B. Liquidity and Capital Resources

 

Our operations and strategic objectives require continuing capital investment, and our resources include cash on hand and cash provided by operations, as well as access to capital from bank borrowings and access to capital markets. Management believes that cash generated by or available to us should be sufficient to fund our capital and liquidity needs for at least the next 12 months.

 

This year, while the Company continued to grow its business, the focus has also been on balance sheet and cash flow efficiencies. This was primarily on account of cash flow from operations that increased by 98.8% from $118.0 million as of March 31, 2015 to $234.6 million as of March 31, 2016 due to improved collection of receivables. Additionally cash outflows from investing activities amounted to $211.30 million as of March 31, 2016 from $279.2 million as of March 31, 2015. Further net debt reduced by $31.9 million to $129.1 million as of March 31, 2016 as compared $161.0 million as of March 31, 2015.

 

Trade accounts receivables were $169.3 million as of March 31, 2016 as compared to $197.8 million at March 31, 2015. This was primarily on account successful collection of outstanding dues from the Company’s customers. As of March 31, 2016, out of the total trade receivables 34.7% was not contractually due and only 1.7% was past due for over a year.

 

Our future financial and operating performance, ability to service or refinance debt and ability to comply with covenants and restrictions contained in our debt agreements will be subject to future economic conditions, the financial health of our customers and suppliers and to financial, business and other factors, many of which are beyond our control. Furthermore, management believes that working capital is sufficient for our present requirements.

 

   Year ended March 31,
   2016  2015  2014
   (in thousands)
Current assets  $373,482   $366,592   $258,275 
Current liabilities   290,687    128,481    128,580 
Working capital  $82,795   $238,111   $129,695 

 

The significant decrease in working capital as at March 31, 2016 as compared to March 31, 2015, principally reflects an increase in short term borrowings on account of installments due within one year on long term borrowings classified as short term borrowing.

 

Indebtedness

 

As of March 31, 2016, we had aggregate outstanding indebtedness of $311.9 million, and cash and cash equivalents of $182.8 million. At March 31, 2016, the total available facilities were comprised of (i) revolving credit facilities, secured and unsecured term loans, and vehicle loans of $191.5 million at Eros India and Eros Worldwide, (ii) secured overdraft and term loan amounting to $47.0 million at Eros International Limited. In addition, at March 31, 2016, $1.5 million of unsecured commercial paper had been issued by Eros India, and Eros International plc has debt of $71.9 million in relation to a retail bond offering for £50 million in October 2014 and unsecured term loan. As at March 31, 2016, there were undrawn amounts under our facilities of $4.4 million.

 

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   As of
March 31, 2016
   (in thousands)
Eros India     
Secured revolving credit facilities  $32,146 
Secured term loans  $28,126 
Unsecured commercial paper  $1,511 
Vehicle loans  $257 
Unsecured other loan  $786 
Total  $62,826 
Eros International plc     
Retail Bond  $70,531 
Term Loan  $1,366 
Total  $71,897 
Eros International Limited     
Secured overdraft  $15,522 
Unsecured Working Capital Loan  $31,505 
Total  $47,027 
Eros International USA Inc.     
Vehicle loans  $3 
Total  $3 
      
Eros Worldwide     
Revolving credit facility(1)  $123,750 
Interest swap financing facility  $6,402 
Total  $130,152 
Total  $311,905 

 

(1) Borrowers under the revolving credit facility are Eros International Plc, Eros Worldwide FZ LLC, Eros International Limited and Eros International USA Inc.

 

Certain of our borrowings and loan agreements, including our new credit facility, contain customary covenants, including covenants that restrict our ability to incur additional indebtedness, create or permit liens on our assets or engage in mergers and acquisitions. Such agreements also contain various customary events of default with respect to the borrowings, including the failure to pay interest or principal when due and cross default provisions, and, under certain circumstances, lenders may be able to require repayment of loans to Eros India or Eros Films prior to their maturity. If an event of default occurs and is continuing, the principal amounts outstanding, together with all accrued unpaid interest and other amounts owed may be declared immediately due and payable by the lenders. If such an event were to occur, we would need to pursue new financing that may not be on as favorable terms as our current borrowings. We are currently in full compliance with all of our agreements governing indebtedness.

 

Borrowings under our revolving credit facility maturing in 2017 bear interest at LIBOR, or in the case of future borrowings in Euros, EURIBOR, floating rates with margins between 1.9% and 2.9% plus mandatory cost. Borrowings under our term loan facilities, overdraft facility and revolving credit facilities at Eros India matures between 2017 and 2021 and bear interest at fluctuating interest rates pursuant to the relevant sanction letter governing such loans. As of March 31, 2016, our unsecured commercial paper issued by Eros India bore discount rates between 10%and 13% and has maturity dates ranging from one month to six months of the date of issuance thereof.

 

We expect to renew, replace or extend our borrowings as they reach maturity. As at March 31, 2016, we had net undrawn amounts of $4.4 million available.

 

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Sources and Uses of Cash

 

   Year Ended March 31,
   2016  2015  2014
   (in thousands)
Net cash from operating activities  $234,599   $117,955   $132,532 
Net cash used in investing activities  $(211,355)  $(279,240)  $(161,020)
Net cash from financing activities  $7,597   $177,561   $69,397 

 

Year ended March 31, 2016 Compared to Year Ended March 31, 2015

 

Net cash from operating activities in fiscal 2016 was $234.6 million, compared to $118.0 million in fiscal 2015, an increase of $116.6 million, or 98.8%, primarily due to increase in cash flow from operations, reduction in trade receivables of $28.5 million, increase in trade payables of $31.5 million due to deferred revenue from presales and accrued overages from hit films. This also included an increase in interest paid of $5.6 million and a decrease in income taxes paid of $4.5 million, from fiscal 2015. There was a decrease in working capital of $51.3 million in fiscal 2016 mainly because the revolving credit facility of $123,750 million which was part of a long term liability in fiscal 2015 was classified as a short term liability at the end of fiscal 2016.

 

Net cash used in investing activities in fiscal 2016 was $211.4 million, compared to $279.2 million in fiscal 2015, a decrease of $67.8 million, or 24.3%, reflecting the change in mix of films released in fiscal 2016 and our investment in film content in future years. Our investment in film content in fiscal 2016 was $211.3 million, compared to $276.2 million in fiscal 2015, a decrease of $64.9 million, or 23.5%. Fiscal 2015 investment in content also contained a stepped one-off investment for Eros Now content with additional funds available from the proceeds from the UK retail bond.

 

Net cash from financing activities in fiscal 2016 was $7.6 million, compared to $177.6 million in fiscal 2015, a decrease of $170 million, or 95.7%, primarily because we didn’t access the capital markets in fiscal 2016 as compared to fiscal 2015 where we had capital proceeds of $92.3 million from our follow on equity offering in 2015 and proceeds of $77.9 million on account of issuing Retail Bond.

 

Year ended March 31, 2015 Compared to Year Ended March 31, 2014

 

Net cash from operating activities in fiscal 2015 was $118.0 million, compared to $132.5 million in fiscal 2014, a decrease of $14.5 million, or 10.9%, which included a decrease in interest paid of $2.7 million and an increase in income taxes paid of $5.3 million, from fiscal 2014. There was an increase in working capital of $92.5 million in fiscal 2015 primarily due to an increase in trade receivables of $94.0 million and an increase of $1.4 million in trade payables compared to a $34.2 million increase in trade receivables and a $0.9 million increase in trade payables in fiscal 2014.

 

Net cash used in investing activities in fiscal 2015 was $279.2 million, compared to $161.0 million in fiscal 2014, an increase of $118.2 million, or 73.4%, reflecting the change in the number and mix of films released in fiscal 2014 and our investment in film content in future years. Our investment in film content in fiscal 2015 was $276.2 million, compared to $163.2 million in fiscal 2014, an increase of $113.0 million, or 69.2%, reflecting a stepped investment in Eros Now as well as future slate and opportunistic catalogue acquisitions.

 

Net cash from financing activities in fiscal 2015 was $177.6 million, compared to $69.4 million in fiscal 2014, an increase of $108.2 million, or 155.9%, primarily attributable to net share capital proceeds of $92.3 million from our follow on equity offering, net proceeds of short-term borrowings of $1.5 million and proceeds of net long-term borrowings of $63.6 million principally from our Retail Bond.

 

Capital Expenditures

 

In fiscal 2016, we invested $211.3 million in film content, and in fiscal 2017 we expect to invest approximately $225 million in film content.

 

C. Research and development

 

Not applicable

 

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D. Trend information

 

New accounting pronouncements issued but not yet effective

 

Certain new standards, interpretations and amendments to existing standards have been published that are mandatory for our accounting periods beginning on or after April 1, 2016 or later periods. Those which are considered to be relevant to Group’s operations are set out below.

 

IFRS 15 Revenue from Contracts with Customers

 

i)In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”). This standard provides a single, principle-based five-step model to be applied to all contracts with customers. Guidance is provided on topics such as the point at which revenue is recognized, accounting for variable consideration, costs of fulfilling and obtaining a contract and various other related matters. IFRS 15 also introduced new disclosure requirements with respect to revenue.

 

The five steps in the model under IFRS 15 are : (i) identify the contract with the customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contracts; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

IFRS 15 replaces the following standards and interpretations:

 

  · IAS 11 Construction Contracts

 

  · IAS 18 Revenue

 

  · IFRIC 13 Customer Loyalty Programmes

 

  · IFRIC 15 Agreements for the Construction of Real Estate

 

  · IFRIC 18 Transfers of Assets from Customers

 

  · SIC-31 Revenue - Barter Transactions Involving Advertising Services

 

When first applying IFRS 15, it should be applied in full for the current period, including retrospective application to all contracts that were not yet complete at the beginning of that period. In respect of prior periods, the transition guidance allows an option to either:

 

  · apply IFRS 15 in full to prior periods (with certain limited practical expedients being available); or

 

  · retain prior period figures as reported under the previous standards, recognizing the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at the date of initial application (beginning of current reporting period).

 

IFRS 15 is effective for fiscal years beginning on or after January 1, 2018. Earlier application is permitted. The Company is currently evaluating the impact that this new standard will have on its consolidated financial statements.

 

IAS 16 Property Plant and Equipment and IAS 38 Intangible Assets

 

In May 2014, the IASB issued two amendments with respect to IAS 16 Property, Plant and Equipment (“IAS 16”) and IAS 38 Intangible Assets (“IAS 38”) dealing with acceptable methods of depreciation and amortization.

 

The amended IAS 16 prohibits entities from using a revenue based depreciation method for items of property, plant and equipment. Further the amendment under IAS 38 introduces a rebuttable presumption that revenue is not an appropriate basis for amortization of an intangible asset. However this presumption can only be rebutted in two limited circumstances:

i)the intangible is expressed as a measure of revenue i.e. when the predominant limiting factor inherent in an intangible asset is the achievement of a contractually specified revenue threshold; or
ii)it can be demonstrated that revenue and the consumption of economic benefits of the intangible assets are highly correlated. In these circumstances, revenue expected to be generated from the intangible assets can be an appropriate basis for amortization of the intangible asset.

The amendments apply prospectively and are effective for annual periods beginning on or after January 1, 2016, with earlier application permitted. The Company does not believe that this amendment will have a material impact on its consolidated financial statements.

 

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IFRS 9 Financial Instruments

 

In July 2014, the IASB finalized and issued IFRS 9 – Financial Instruments. IFRS 9 replaces IAS 39 “Financial instruments: recognition and measurement, the previous Standard which dealt with the recognition and measurement of financial instruments in its entirety upon the former’s effective date.

 

The Key requirements of IFRS 9:

 

  · Replaces IAS 39’s measurement categories with the following three categories:

 

  fair value through profit or loss

 

  fair value through other comprehensive income 

 

  amortized cost

 

  · Eliminates the requirement for separation of embedded derivatives from hybrid financial assets, the classification requirements to be applied to the hybrid financial asset in its entirety.

 

  · Requires an entity to present the amount of change in fair value due to change in entity’s own credit risk in other comprehensive income.

 

  · Introduces new impairment model, under which the “expected” credit loss are required to be recognized as compared to the existing “incurred” credit loss model of IAS 39.

 

  · Fundamental changes in hedge accounting by introduction of new general hedge accounting model which:

 

  Increases the eligibility of hedged item and hedging instruments;

 

  Introduces a more principles–based approach to assess hedge effectiveness.

 

IFRS 9 is effective for annual periods beginning on or after January 1, 2018.

 

Earlier application is permitted provided that all the requirements in the Standard are applied at the same time with two exceptions:

 

  · The requirement to present changes in the fair value of a liability due to changes in own credit risk may be applied early in isolation;

 

  · Entity may choose as its accounting policy choice to continue to apply hedge accounting requirements of IAS 39 instead of new general hedge accounting model as provided in IFRS 9.

 

The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

 

IFRS 16 Leases

 

In January 2016, IASB has issued a new standard, IFRS 16 “Leases”. The new standard sets out the principles for recognition, measurement, presentation and disclosure of leases for both parties to a contract i.e. the lessee and the lessor. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance. IFRS 16 supersedes IAS 17 ‘Leases’ and related interpretations and is effective for periods beginning on or after 1 January 2019, with earlier adoption permitted in IFRS 15 ‘Revenue from Contracts with Customers’ has also been applied.

The Company is currently evaluating the impact that this new standard will have on its consolidated financial statements.

 

IAS 12 Income Taxes

 

In January 2016, the IASB issued amendments to IAS 12 – “Income taxes” to clarify the following:

·the carrying value of an asset does not limit the estimation of probable future taxable profits.
·estimates for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences.

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·an entity assesses a deferred tax asset in combination with other deferred tax assets. Where tax law restricts the utilization of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the same type. The amendments are effective for annual periods beginning on or after January 1, 2017. Earlier application is permitted.

 

The Company does not believe that this amendment will have a material impact on its consolidated financial statements.

 

IAS 7 Statement of Cash Flows

 

In January 2016, the IASB issued amendments in IAS 7- “Statement of Cash Flows” to clarify and improve information provided to users of financial statements about an entity’s financing activities.

The IASB requires that the following changes in liabilities arising from financing activities to be disclosed (to the extent necessary):

·changes from financing cash flows;
·changes arising from obtaining and losing control of subsidiaries or other businesses;
·the effect of changes of foreign exchange rates;
·changes in fair values; and
·other changes.

The amendments are effective for annual periods beginning on or after January 1, 2017. Earlier application is permitted. Entities need not present comparative information when they first apply the amendments.

The Company is currently evaluating the effect of this amendment on its consolidated financial statements

 

IFRS 2 Share-based Payment

 

In June 2016, the IASB issued amendments to IFRS 2 – “Share-based Payment” to clarify the accounting for certain types of share-based payment transactions:

The amendments, which were developed through the IFRS Interpretations Committee, provide requirements on the accounting for the following:

·the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments;
·share-based payment transactions with a net settlement feature for withholding tax obligations; and
·a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled

The amendments are effective for annual periods beginning on or after January 1, 2018. Earlier application is permitted.

The Company does not believe that this amendment will have a material impact on its consolidated financial statements.

 

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Quarterly Financial Information

 

The table below presents our selected unaudited quarterly results of operations for the four quarters in the fiscal year ended March 31, 2016. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. We have prepared the unaudited financial data for the quarters presented on the same basis as our audited consolidated financial statements. The historical quarterly results presented below are not necessarily indicative of the results that may be expected for any future quarters or periods.

 

   Three Months Ended
   June 30,
2015
  September 30,
2015
  December31,
2015
  March 31,
2016
   (dollars in thousands)
Selected Quarterly Results of Operations                    
Revenue  $50,043   $98,791   $60,452   $65,142 
Cost of sales   (32,956)   (53,575)   (42,911)   (43,322)
Gross profit   17,087    45,216    17,541    21,820 
Administrative costs   (12,957)   (19,064)   (17,063)   (14,935)
Operating profit   4,130    26,152    478    6,885 
Net finance costs   (2,143)   (2,549)   (2,224)   (1,094)
Other losses   4,076    (5,016)   2,761    (5,457)
(Loss)/profit before tax   6,063    18,587    1,015    334 
Income tax expense   (2,296)   (7,572)   (3,468)   625 
Net (loss)/income  $3,767   $11,015   $(2,453)  $959 
                     
OTHER NON-GAAP MEASURES                    
EBITDA(1)  $8,572   $21,656   $3,768   $2,298 
Adjusted EBITDA (1)  $11,551   $36,037   $8,889   $14,375 
                     
OPERATING DATA                    
High budget film releases(2)   2    3    1    —   
Medium budget film releases(2)   3    3    4    6 
Low budget film releases(2)   11    14    10    6 
Total new film releases(2)   16    20    15    12 

 

(1) We use EBITDA and Adjusted EBITDA as supplemental financial measures. EBITDA is defined by us as net income before interest expense, income tax expense and depreciation and amortization (excluding amortization of capitalized film content and debt issuance costs).  Adjusted EBITDA is defined as EBITDA adjusted for impairments of available-for-sale financial assets, profit/loss on held for trading liabilities (including profit/loss on derivatives), transaction costs relating to equity transactions and share based payments.  EBITDA, as used and defined by us, may not be comparable to similarly-titled measures employed by other companies and is not a measure of performance calculated in accordance with GAAP. EBITDA should not be considered in isolation or as a substitute for operating income, net income, cash flows from operating investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.  EBITDA and Adjusted EBITDA provide no information regarding a company’s capital structure, borrowings, interest costs, capital expenditures and working capital movement or tax position.  However, our management team believes that EBITDA and Adjusted EBITDA are useful to an investor in evaluating our results of operations because these measures:
·are widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;
·help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure; and
·are used by our management team for various other purposes in presentations to our board of directors as a basis for strategic planning and forecasting.

 

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There are significant limitations to using EBITDA and Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss, the lack of comparability of results of operations of different companies and the different methods of calculating EBITDA and Adjusted EBITDA reported by different companies.

 

The following table sets forth the reconciliation of our net income to EBITDA and Adjusted EBITDA:

 

   Three Months Ended
   June 30,
2015
  September 30,
2015
  December 31,
2015
  March 31,
2016
   (in thousands)
Net (loss)/income  $3,767   $11,015   $(2,453)  $959 
Income tax expense   2,296    7,572    3,468    (625)
Net finance costs   2,143    2,549    2,224    1,094 
Depreciation   179    243    288    444 
Amortization(a)   187    277    241    426 
EBITDA   8,572    21,656    3,768    2,298 
Impairment of available-for-sale financial assets   —      —      —      —   
Share based payments(b)   6,894    9,382    8,228    6,488 
Net loss/(gain) on held for trading financial liabilities   (3,915)   4,999    (3,107)   5,589 
Transaction costs relating to equity transactions   —      —      —      —   
Adjusted EBITDA  $11,551   $36,037   $8,889   $14,375 
a)Includes only amortization of intangible assets other than intangible content assets.
b)Consists of compensation costs recognized with respect to all outstanding plans and all other equity settled instruments.
2) Includes films that were released by us directly and licensed by us for release.

 

Our revenues and operating results are significantly affected by the timing, number and breadth of our theatrical releases and their budgets, the timing of television syndication agreements, and our amortization policy for the first 12 months of commercial exploitation for a film. The timing of releases is determined based on several factors. A significant portion of the films we distribute are delivered to Indian theaters at times when theater attendance has traditionally been highest, including school holidays, national holidays and the festivals. This timing of releases also takes into account competitor film release dates, major cricket events in India and film production schedules. Significant holidays and festivals, such as Diwali, Eid and Christmas, occur during July to December each year, and the Indian Premier League cricket season generally occurs during April and May of each year. The Tamil New Year, called Pongal, falls in January each year making the quarter ending March an important one for Tamil releases.

 

In the four quarters ended March 31, 2016, revenue fluctuations primarily reflected the timing of major theatrical releases, with our highest quarterly revenues of $98.8 million in the three months ended September 30, 2015 as a result of the high budget theatrical releases of three high budget films Bajrangi Bhaijaan (Hindi), Welcome Back (Hindi) and Srimanthdu (Telugu). The quarterly release schedule of new films led to the lowest quarterly revenues of $50.0 million in the three months ended June 30, 2015. The fluctuations in other losses reflect the changes in mark to market values of our interest derivative liabilities.

 

Our quarterly results can vary from one year to the next, and the results of one quarter are not necessarily indicative of results for the next or any future quarter. Our revenue and operating results are therefore seasonal in nature due to the impact on income of the timing of new releases as well as timing and quantum of catalogue revenues

 

E. Off-Balance Sheet Arrangements

 

From time to time, to satisfy our filmed content purchase contracts, we obtain guarantees or other contractual arrangements, such as letters of credit, as support for our payment obligations.

 

As of March 31, 2016, the Group has provided certain stand-by letters of credit amounting to $96.0 million (2015: $96.2 million) which are in the nature of performance guarantees issued while entering into film co-production contracts and are valid until funding obligations under these contracts are met. These guarantees, issued in connection with outstanding content commitments, have varying maturity dates.

 

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In addition, the Group issued financial guarantees amounting to $2.4 million (2015: $3.0 million) in the ordinary course of business, having varying maturity dates up to the next 12 months. The Group is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations.

 

The Group did not earn any fee to provide such guarantees. It does not anticipate any liability on these guarantees as it expects that most of these will expire unused.

 

F. Contractual Obligations

 

We have commitments under certain firm contractual arrangements, or firm commitments, to make future payments. These firm commitments secure future rights to various assets and services to be used in the normal course of our operations. The following table summarizes our firm commitments as of March 31, 2016.

 

   As of March 31, 2016
   Total  Less than
1 year
  1-3
years
  3-5
years
  More than
5 years
   (in thousands)
Recorded Contractual Obligations                         
Debt  $311,905   $219,275   $11,865   $7,135   $73,630 
                          
Unrecorded Contractual Obligations                         
Operating leases   2,023    647    1,376    —      —   
Film entertainment rights purchase obligations(1)   218,541    87,646    130,895    —      —   
Interest payments on debt (2)   37,458    12,873    12,152    9,937    2,496 
Total   258,022    101,166    144,423    9,937    2,496 

 

(1)The amounts disclosed as Film entertainment rights purchase obligations are mutually agreed terms and are presently disclosed on best estimate basis.
(2)The amounts shown in the table include future interest payments on variable and fixed rate debt at current interest rates ranging from 1.8% to 13%.

 

G. Safe Harbor

 

See “Special Note Regarding Forward-Looking Statements” at the beginning of this Annual Report on Form 20-F.

 

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A. Directors and Executive Officers

 

Our Board of Directors consists of nine directors.

 

The following table sets forth the name, age (as at June 30, 2016) and position of each of our directors and executive officers as at the date hereof.

 

Name   Age   Position/s
Directors        
Kishore Lulla   54   Director, Executive Chairman
Jyoti Deshpande   45   Director, Group Chief Executive Officer, Managing Director
Vijay Ahuja   59   Director, Vice Chairman
Sunil Lulla   52   Director, Executive Vice Chairman
Naresh Chandra(1)(2)(3)(4)   81   Director, Chairman of Remuneration Committee and Nomination Committee
Dilip Thakkar(1)(2)(3)(4)   79   Director, Chairman of Audit Committee
David Maisel(1)   54   Director
Rishika Lulla   29   Director
Rajeev Misra(1)   54   Director 
Senior Management        
Prem Parameswaran   47   President of North America & Group Chief Financial Officer
Mark Carbeck   44   Chief Corporate & Strategy Officer
Pranab Kapadia   44   President of Europe and Africa Operations
Surender Sadhwani   60   President of Middle East Operations
Ken Naz   57   President of US – Film Distributions

 

(1) Independent director
(2) Member of the Audit Committee
(3) Member of the Remuneration Committee
(4) Member of the Nomination Committee

 

Summarized below is relevant biographical information covering at least the past five years for each of our directors and executive officers.

 

Directors

 

Mr. Kishore Lulla is a director and our Chairman. Mr. Lulla received a bachelor’s degree in Arts from Mumbai University. He has over 30 years of experience in the media and film industry. He is a member of the British Academy of Film and Television Arts and Young Presidents’ Organization and also a board member for the School of Film at the University of California, Los Angeles. He has been honored at the Asian Business Awards 2007 and the Indian Film Academy Awards 2007 for his contribution in taking Indian cinema global. In 2010, Mr. Lulla was awarded the Entrepreneur of the Year at the GG2 Leadership and Diversity Awards and in 2015 was honored by the Asia Society Southern California. As our Chairman, he has been instrumental in expanding our presence in the United Kingdom, the U.S., Dubai, Australia, Fiji and other international markets. He served as our Chief Executive Officer from June 2011 until May 2012 and has served as a director since 2005. Mr. Kishore Lulla is the father of Mrs. Rishika Lulla Singh, the brother of Mr. Sunil Lulla and a cousin of Mr. Vijay Ahuja and Mr. Sadhwani.

 

Ms. Jyoti Deshpande is a director and our Group Chief Executive Officer and Managing Director. She had worked with us from 2001 until May 2011 when she resigned from our Board and served as a Consultant to the Company until November 2011 in connection with preparation for our initial public offering in the U.S. She rejoined the Company in her former Group CEO/MD position on June 22, 2012. With a degree in Commerce and Economics and an MBA from Mumbai University, Ms. Deshpande has over 23 years of experience in Indian media and entertainment across advertising, media consulting, television and film. Ms. Deshpande has been a key member of the Eros leadership team since 2001 and was instrumental in our initial public offering on AIM in 2006, Eros India’s listing on the Indian Stock Exchanges in 2010 and our initial public offering on the NYSE in November 2013. Ms. Deshpande was featured in the list of Most Powerful Women in Business by Fortune India and Business Today in 2015.

 

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Mr. Vijay Ahuja is a director and our Vice Chairman. Mr. Ahuja received a bachelor’s degree in commerce from Mumbai University. Mr. Ahuja co-founded our United Kingdom business in 1988 and has since played an important role in implementing our key international strategies, helping expand our business to its present scale by making a significant contribution to our development in the South East Asian markets, such as Singapore, Malaysia, Indonesia and Hong Kong. Mr. Ahuja has served as a director since April 2005. Mr. Ahuja is a cousin of Mr. Kishore Lulla and Mr. Sunil Lulla.

 

Mr. Sunil Lulla is a director and is Executive Vice Chairman and Managing Director of Eros India. He received a bachelor’s degree in commerce from Mumbai University. Mr. Lulla has over 21 years of experience in the media industry. Mr. Lulla has valuable relationships with talent in the Indian film industry and has been instrumental in our expansion into distribution in India as well as home entertainment and music. He has served as a director since 2005 and led our growth within India for many years before being appointed Executive Vice Chairman and Managing Director of Eros India in February 2010. Mr. Sunil Lulla is the brother of Mr. Kishore Lulla, uncle of Mrs. Lulla Singh and the cousin of Mr. Ahuja and Mr. Sadhwani.

 

Mrs. Rishika Lulla Singh is a director and the CEO of Eros Digital, which covers all of the digital initiatives for Eros including Eros Now. Mrs. Lulla Singh has been instrumental in spearheading the creation, and development distribution of Eros Now within India and internationally. She graduated from the School Of Oriental and African Studies with a BA in South Asian Studies and Management and completed a postgraduate study at the UCLA School of Theatre, Film and Television. With over five years of experience in over-the-top platforms and content, Mrs. Lulla Singh has been a key contributor in driving the growth and penetration of Eros Now, both with technological developments and relationship management to stimulate platform penetration. She was recently named Young Entrepreneur of the Year by the 2016 Asian Business Awards. Mrs. Lulla Singh is the daughter of Mr. Kishore Lulla and the niece of Mr. Sunil Lulla. She has served as director since November 2014.

 

Mr. Naresh Chandra is a director. Mr. Chandra received a master’s degree in Science from Allahabad University. A former civil servant, he joined the Indian Administrative Services in 1956 and has served as Chief Secretary in the State of Rajasthan, Commonwealth Secretariat Advisor on Export Industrialization and Policy in Colombo (Sri Lanka), Advisor to the Governor of Jammu and Kashmir and Secretary to the Ministries of Water Resources, Defense, Home and Justice in the Government of India. In December 1990, he became Cabinet Secretary, the highest post in the Indian civil service. In 1992, he was appointed Senior Advisor to the Prime Minister of India. He served as the Governor of the state of Gujarat in 1995-1996 and Ambassador of India to the United States of America in 1996-2001. In 2007, he chaired the Government of India’s Committee on Corporate Audit and Governance, the Committee on Private Companies and Limited Liability Partnerships and the Committee on Civil Aviation Policy, and he was honored with the Padma Vibhushan, a high civilian award. Mr. Chandra serves as director of seven other Indian companies and one foreign company. He has served as a director since July 2007.

 

Mr. Dilip Thakkar is a director. Mr. Thakkar received a degree in Commerce and Law from Mumbai University. A practicing chartered accountant since 1961, Mr. Thakkar has significant financial experience. He is a senior partner of Jayantilal Thakkar & Co. Chartered Accountants and a member of the Institute of Chartered Accountants in India. In 1986 he was appointed by the Reserve Bank of India as a member of the Indian Advisory Board for HSBC Bank and the British Bank of the Middle East for a period of eight years. He is the former President of the Bombay Chartered Accountants’ Society and was then Chairman of its International Taxation Committee. Mr. Thakkar serves as a non-executive director of seven other listed public limited companies in India and seven foreign companies. He has served as a director since April 2006.

 

Mr. David Maisel is a director. Mr. Maisel has been an Advisor to Rovio, the owners of Angry Birds, since 2011, and is the Executive Producer of the Angry Birds feature film which released in May 2016. Mr. Maisel is also a Director at Gaiam, a NASDAQ listed company. Prior to this he served in senior executive positions with Marvel Entertainment from 2003 until 2010, where he conceived and spearheaded the creation of Marvel Studios, the launch of the “Iron Man” franchise, and Marvel’s 2010 sale to The Walt Disney Company. At Marvel, he was Chairman of Marvel Studios and also in the Office of the Chief Executive for its parent company, Marvel Entertainment. He was also the Executive Producer of “Iron Man,” “The Incredible Hulk,” “Iron Man 2,” “Thor,” and “Captain America: The First Avenger.” Prior to Marvel, Mr. Maisel served in senior executive positions at Endeavor Talent Agency, The Walt Disney Company, Creative Artists Agency, Chello Broadband, and The Boston Consulting Group. He is a graduate of Harvard Business School and Duke University. He has served as a director since November 2014

 

Mr. Rajeev Misra is a director. Mr. Misra was recently appointed head of Strategic Finance for SoftBank group. Prior to this appointment, Mr. Misra was a Senior Managing Director at Fortress Investment Group where he was the head of European investments. Previously, he served as Group Managing Director for UBS in London and was responsible for leverage finance, global credit, commercial real estate and emerging markets. Mr. Misra also spent 17 years in various senior leadership roles at Deutsche Bank and Merrill Lynch. Mr. Misra holds an MBA from the Sloan School of Management at Massachusetts Institute of Technology and a Master’s degree in Computer Science and Bachelor’s degree in Mechanical Engineering from the University of Pennsylvania. He has served as a director since December 2014.

 

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Senior Management

 

Mr. Prem Parameswaran is our Group Chief Financial Officer and President of Eros International’s North America operations. Mr. Parameswaran joined Eros with over 23 years of experience in investment banking, advising clients in the global telecommunications, media and technology sector, including on mergers and acquisitions and public, private equity and debt financings. Mr. Parameswaran most recently served as the Global Head of Media and Telecommunications Investment Banking at Jefferies LLC. Prior to Jefferies, he was the Americas Head of Media & Telecom at Deutsche Bank and also previously worked at both Goldman Sachs and Salomon Brothers. Mr. Parameswaran graduated from Columbia University and received an MBA from Columbia Business School. Mr. Parameswaran joined us in June 2015.

 

Mr. Mark Carbeck is our Chief Corporate & Strategy Officer, with management responsibility for Investor Relations, Group M&A and Corporate Finance.  Mr. Carbeck was formerly a Director in Citigroup’s Investment Banking Division in London, having joined the firm in New York in 1997.  Most recently Mr. Carbeck led the European Media investment banking coverage efforts at Citigroup and has deep media industry knowledge and strong relationships with major United Kingdom and international media companies. Mr. Carbeck graduated from the University of Chicago in 1994 with a Bachelor’s degree in History. Mr. Carbeck joined us in April 2014.

 

Mr. Pranab Kapadia is President Marketing & Distribution of our UK, Europe and Africa Operations. Mr. Kapadia received a Master’s degree in Management Studies (MMS) from Bombay University, majoring in Finance. He has over 20 years of experience in the Indian TV & Film Industry, previously having served with Zee Network for 10 years as Head of Operations & Programming (Europe) and later as Business Head of Adlabs Films (U.K.) Limited for one year. Mr Kapadia brings with him significant insight and a strong understanding of the entertainment needs of South Asians internationally. He joined us in 2007.

 

Mr. Surender Sadhwani is our President of Middle East Operations. Mr. Sadhwani received a post graduate degree in commerce from University of Madras in 1980. He has 22 years of experience in the banking industry through his work with Andhra Bank in Chennai. In addition, Mr. Sadhwani spent several years in finance and account management for Hartmann Electronics in their Dubai office. He joined our Middle East operations in April 2004 and was promoted to President of Middle East Operations in April 2006. Mr. Sadhwani is a cousin of Mr. Kishore Lulla and Mr. Sunil Lulla.

 

Mr. Ken Naz is our President of Americas Film Distributions. Mr. Naz has over 30 years of experience in media and entertainment. Mr Naz brings with him vast experience from both Bollywood as well as Hollywood film distribution and exhibition experience. He has been a key speaker at countless events, festivals Inc Harvard University. In the early 1970s, Mr. Naz worked in the Indian film distribution and exhibition business in Canada. He obtained his business education at a Toronto University before joining Cineplex Odeon Cinemas in the business development department and later served as head of operations of “A Theater Near You.” Mr. Naz joined us in 1997 and was instrumental in setting up our U.S. office to service markets in the United States, Canada and other parts of North and South America.

 

B. Compensation

 

Compensation of senior executive officers and directors is determined by the Remuneration Committee of our Board of Directors. The Remuneration Committee reviews the performance of our directors and each of our executive officers and sets the scale and structure of their compensation. Where required, the Remuneration Committee engages the services of external companies for the purposes of benchmarking of executive remuneration or such other remuneration related matter. As part of its role of overseeing the scale and structure of the compensation paid to our executive officers, the Remuneration Committee approves their service agreements with our subsidiaries and any bonus paid by our subsidiaries to such officers. The current members of the Remuneration Committee are two of our non-executive directors, Naresh Chandra and Dilip Thakkar.

 

In determining the scale and structure of the compensation for executive directors and senior executives, the Remuneration Committee takes into account the need to offer a competitive compensation structure to attract and maintain a skilled and experienced management team. The Remuneration Committee creates competitive compensation programs by reviewing market data and setting compensation at levels comparable to those at our competitors. We believe that a compensation program with a strong performance based element is a prerequisite to obtaining our performance and growth objectives.

 

The main components of the compensation for our executive officers are a base salary, share awards, annual bonus and stock options.

 

The Remuneration Committee reviews these three compensation components in light of individual performance of the executive officers, external market data and reports provided by outside experts or advisors. For information about service contracts entered into by us, or our subsidiaries, and certain of our executives, see “Part I — Item 6. Directors, Senior Management and Employees — C. Board Practices.”

 

The compensation of our non-executive directors is set by our board of directors as a whole, after consulting with outside experts or advisors.

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The following tables and footnotes show the remuneration of each of our directors for fiscal 2016:

 

   Year ended March 31,
   2016
Salary
  2016
Director Fees
  2016
Benefits(1)
  2016
Total
  2015
Total
   (in thousands)
Kishore Lulla  $1,048   $—     $—     $1,048   $1,193 
Jyoti Deshpande   776    —      —      776    698 
Vijay Ahuja   373    —      —      373    399 
Sunil Lulla(2)   823    —      56    879    636 
Naresh Chandra   —      198    —      198    192 
DilipThakkar   —      90    —      90    97 
Michael Kirkwood(3)   —      —      —      —      67 
David Maisel   —      90    —      90    35 
Rishika Lulla Singh   276    —      6    282    108 
Rajeev Misra   —      —      —      —      —   
Total  $3,296   $378   $62   $3,736   $3,425 

 

(1) Health insurance, except for Sunil Lulla (see Note (2) below).
(2) (1) Sunil Lulla’s fiscal 2016 compensation consisted of the following (Indian Rupees translated to U.S. dollars at a rate of INR 64.5 per $1.00)

 

Particulars for Mr Sunil Lulla  INR  USD
Basic salary   1,32,00,000   $2,04,788 
Incentive compensation   58,56,400    90,857 
Reimbursements car/entertainment etc.   24,39,600    37,848 
Medical reimbursement   15,000    233 
Special pay   1,71,23,400    2,65,656 
Company rent accommodation   3,600,000    55,851 
Director’s fees   —      —   
Total India   42,234,400   $655,233 
Salary from Eros International Plc        223,819 
Total salary       $879,052 

 

(3) Michael Kirkwood ceased being a Director on December 1, 2014.

 

The total compensation paid to our executive officers in fiscal 2016 was $17.0 million (2015: $15.8 million).

 

The following table and footnotes show the cost recognized in fiscal 2016 in respect to all outstanding plans and by grant of shares, which are all equity settled instruments, to our directors is as follows:

 

   September 18,
2013
  June 5,
2014
  Option
2014
  IPO India
Plan
  JSOP  June 25,
2015
  Management
Scheme
  June 09,
2015
  Total
   (in thousands)
Kishore Lulla  $—     $342   $—     $—      —      —      —     $2,649   2,991
Jyoti Deshpande   3,817    228    —      28    —      —      —      2,118   6,191
Sunil Lulla   —      253    —      —      —      —      —      2,118   2,371
Dilip Thakkar   —      —      —      —      —      —      —      169   169
Naresh Chandra   —      —      —      —      —      —      —      169   169
David Maisel   —      —      1,214    —      —      —      —      —     1,214
Rishika Lulla Singh   —      127    —      —      360    —      —      795   1,282
Rajeev Misra   —      —      —      —      —      1,002    1,563    —     2,565
Total  $3,817   $950   $1,214   $28    360    1,002    1,563   $8,018   16,952

 

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The awards made in fiscal 2016 comprised of share and option awards. In its meeting dated June 9, 2015, the Board of Directors approved the following grants/awards:

 

580,000 ‘A’ ordinary shares were granted to certain executive directors with a fair market value of $21.34 per shares subject to continued employment, these awards with Nil exercise price vest equally over a period of three years with the first 25% vesting six months from the grant date. These shares are yet to be issued.

 

Subject to continued employment, these awards with Nil exercise price, vest over a period of three years

 

  Number of
shares
Kishore Lulla 200,000
Sunil Lulla 160,000
Jyoti Deshpande 160,000
Rishika Lulla Singh   60,000

 

500,000 'A' ordinary share options were granted to a non-executive director with a fair market value of $8.44 per option. Subject to continued employment, these options with $18.00 exercise price, vest annually in five equal tranches beginning June 9, 2016. The charge for the grant has been accrued under ‘Management Scheme’.

 

On June 25, 2015, the Company received $5,400,000 in respect of an issue of 300,000 ‘A’ ordinary shares at $18.00 per share to a non-executive director. These shares were issued on July 16, 2015.

 

On June 9, 2015, 10,000 ‘A’ ordinary shares each were awarded to two non- executive directors at fair market value of $21.34 per share. Subject to continued employment, these awards vest on June 9, 2016. These shares were issued on February 2, 2016.

 

The remuneration committee in its meeting held on June 28, 2016 recommended that the Board of Directors approve share awards of 160,000 A ordinary shares to Jyoti Deshpande, 200,000 A ordinary shares to Kishore Lulla, 160,000 A ordinary shares to Sunil Lulla and 100,000 A ordinary shares to Rishika Lulla Singh for no consideration. One third of these share awards will vest annually in tranches beginning on June 28, 2016, subject to continued employment.

 

The details of the remaining awards in the year to directors are shown in the following table:

 

Name  Plane  Date of
Grant
  Number of
shares
Granted for
Fiscal 2015
  Grant Date
Fair Value
($)
  Expiration
Date
Rajeev Misra  Management Scheme (staff share grant )  June 9, 2015  500,000  $8.44  June 9, 2020

 

Eros India Incentive Compensation

 

Pursuant to a resolution of its board of directors dated November 11, 2011 and a resolution of its shareholders dated December 29, 2011, Eros India approved payment of an incentive bonus to Kishore Lulla and Sunil Lulla for services to Eros India of up to 1% of the net profits of Eros India in accordance with applicable India law. Any such incentive bonus shall be payable only as determined by the Board of Directors of Eros India from time to time. Kishore Lulla is eligible for this incentive bonus for a period of three years, until October 31, 2017. Sunil Lulla is eligible for this incentive bonus for the remainder of his tenure in office. The Remuneration Committee will take into account any of these incentive bonuses paid to Kishore Lulla or Sunil Lulla when making compensation determinations for each of them.

 

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Share-Based Compensation Plans

 

The compensation cost recognized with respect to all outstanding plans and by grant of shares, which are all equity settled instruments, is as follows:

 

   Year ended March 31
   2016  2015  2014
   (in thousands)
IPO India Plan  $1,736   $869   $499 
JSOP Plan   2,696    1,603    1,075 
Option award scheme 2012   1,610    1,824    —   
2014 Share Plan   2,361    264    —   
2015 Share Plan   932    60    —   
Other share option awards   894    554    —   
Management scheme (staff share grant)   20,763    16,741    16,847 
   $30,992   $21,915   $18,421 

 

Joint Stock Ownership Plan

 

In April 2012, the Company established a controlled trust called the Eros International Plc Employee Benefit Trust (“JSOP Trust”). The JSOP Trust purchased 2,000,164 shares of the Company out of funds borrowed from the Company and repayable on demand. The Company’s Board, Nomination and Remuneration Committee recommends to the JSOP Trust certain employees, officers and key management personnel, to whom the JSOP Trust will be required to grant shares from its holdings at nominal price. Such shares are then held by the JSOP Trust and the scheme is referred to as the “JSOP Plan.” The shares held by the JSOP Trust are reported as a reduction in stockholders’ equity and termed as ‘JSOP reserves’.

 

On August 4, 2015, the Company’s Employee Benefit Trust entered into a Joint ownership deed (the “2015 JSOP deed”) with certain employees in respect of 380,000‘A’ ordinary shares. These options were issued at a strike price of $24.00 and fair market value of $15.66. Subject to continued employment and market conditions set out in the 2015 JSOP deed, these options vest in May 2017.

 

The movement in the shares held by the JSOP Trust is given below:

 

   Year ended March 31
   2016  2015  2014
Shares held at the beginning of the period   1,919,460    2,000,164    2,000,164 
Shares exercised/lapsed   (573,262)   (80,704)   —   
Shares held at the end of the period   1,346,198    1,919,460    2,000,164 

 

Employee Stock Option Plans

 

A summary of the general terms of the grants under stock option plans and stock awards are as follows:

 

   Range of
exercise prices
IPO India Plan   INR10 – 175 
IPO Plan – June 2006   GBP 5.28 
JSOP Plan   $11.00 – 24.00 
Option award scheme 2012   $11.00 
2014 Share Plan   $14.97 - 18.50 
2015 Share Plan   $7.40 – 33.12 
Other share option awards   $18 - $18.88 

 

Employees covered under the stock option plans are granted an option to purchase shares of the Company at the respective exercise prices, subject to requirement of vesting conditions (generally service conditions). These options generally vest in tranches over a period of one to five years from the date of grant. Upon vesti