Final Results

SMG PLC 10 March 2005 Thursday 10th March 2005 SMG plc Preliminary Results for the 12 months ended 31 December, 2004 FINANCIAL HIGHLIGHTS 2004 2003 % change Group Turnover (like-for-like**) £201.2m £188.2m + 7% Group Turnover (total) £201.2m £209.2m - 4% Total Operating Profit* (like-for-like**) £29.3m £28.5m + 3% Total Operating Profit £17.7m £10.9m + 62% Profit Before Tax* (like-for-like**) £17.5m £16.0m + 9% Statutory Profit Before Tax £25.3m (£0.3m) --- Basic Earnings per Share* 5.0 pence 4.9 pence +2% Statutory Basic Earnings per Share 7.7 pence 0.5 pence --- EBITDA* (like-for-like**) £35.7m £34.3m + 4% Full year Dividend 2.5 pence 2.5 pence --- * Before exceptional items and goodwill amortisation ** Like for like excludes the publishing business, and stakes in GMTV and SRH and their related interest cost benefits, in addition to the effects of FRS17 interest cost changes, penalty interest and interest rate movements. OPERATIONAL HIGHLIGHTS • Strong television performance with Scottish TV and Grampian TV outperforming both ITV and commercial television market • Virgin Radio increases digital listening but is impacted by national advertising market and audience figures • Out of Home Division sees return to sales growth while continuing investment in outdoor panels • Balance sheet strengthened - debt reduced by 66% since 2002 • Encouraging prospects for revenue growth and business development Andrew Flanagan, Chief Executive of SMG, said: 'The recovery in advertising markets, a strengthened balance sheet and a return to revenue growth made 2004 an important year for SMG. With the advertising recovery now established, our strong media brands can capitalise on their healthy market positions to accelerate growth. We've already seen encouraging revenue trends in 2005 so far and the excellent business development opportunities we've identified are set to further boost SMG's growth.' Chris Masters, Chairman of SMG, said: 'Against this encouraging background, I am confident that SMG has the potential to flourish in 2005, delivering growth in revenues, improving performance and increasing shareholder value.' Further enquiries: SMG Andrew Flanagan, Chief Executive 020 7882 1199 George Watt, Group Finance Director on 10 March, or Callum Spreng, Corporate Affairs Director 0141 300 3300 thereafter Brunswick James Hogan/Simon Sporborg/James Crampton 020 7404 5959 2004 Preliminary Results CHAIRMAN'S STATEMENT OVERVIEW As advertisers returned to television and cinema screens and we continued to see strong growth in outdoor campaigns in 2004, like for like Group Turnover increased by 7% to £201.2m (2003: £188.2m). Adjusted for disposals and FRS17 interest charges, this resulted in growth of 9% in like for like Pre-Tax Profits. The conversion of turnover to profit was somewhat lower than we would normally anticipate due to the lag effect of the investment in our outdoor portfolio, coupled with the effects of lower margins from the phasing of new contracts in cinema and the slower radio market. Consequently, Pre-Tax Profits (including discontinued businesses but before exceptionals and goodwill amortisation) grew to £17.5m (2003: £17.0m). Earnings per share (before exceptionals and goodwill amortisation) increased to 5.0p (2003: 4.9p). During 2004, we successfully completed the sale of our minority holdings in Scottish Radio Holdings plc ('SRH') and GMTV Limited ('GMTV'). The gains on sales from these disposals resulted in an increase in Pre-Tax Profits (after exceptionals and goodwill amortisation) to £25.3m (2003: £0.3m loss). In line with the Group's dividend policy, the Board is recommending a final dividend of 1.5p, resulting in a full year dividend for 2004 of 2.5p (2003: 2.5p). The disposal of our interests in SRH and GMTV, coupled with internal cash generation, allowed us to reduce Net Debt by over £100m during the course of the year yielding a significant saving in interest charges. Net Debt at 31 December 2004 amounted to £134.8m (31 Dec 2003: £242.5m). SMG is now strongly positioned to deliver future growth and increasing shareholder value. In addition to benefiting from the current recovery in national advertising, the Group's powerful brands have considerable development potential as we move into the multi-channel digital environment. Since joining SMG in June of last year I have been impressed by the depth and quality of the management, the strength of our brands and their market positions and the opportunities for self-financing organic growth throughout the Company. Our businesses are well managed, have good cash generating characteristics and operate efficiently and effectively within their individual markets while at the same time benefiting from additional synergies as a result of their common ownership. The Board and the executive management team are totally committed to delivering sustainable growth in shareholder value by: • Maintaining a sharp focus on increasing margins across all our operations. • Capitalising on growth opportunities already identified - either planned or currently under way in each of our businesses. • Seeking out new growth opportunities in response to changes in the media environment. • Remaining alert to other opportunities to maximise shareholder value. TELEVISION As anticipated, Television bounced back strongly in 2004 as advertisers returned to the small screen. Scottish TV and Grampian TV grew advertising revenues by 8%, outperforming both ITV as a whole (+3%) and the commercial television market (+6%). As a result, our share of ITV Net Advertising Revenues (NAR) increased to 6.5% (2003: 6.2%). This strong performance resulted from a return of traditional advertisers who focus on UK national campaigns, rather than weighting their advertising spend to the South East of the UK. This was supported by continued strong growth in the Scottish advertising market (+14%). Combined with increased network programme sales and the initial benefits of the Setanta production contract, total television turnover grew by 10% to £133.5m (2003: £121.2m). The high operational gearing of this business converted this strong revenue performance into a 28% increase in television operating profits to £23.0m (2003: £18.0m). Operating margins increased from 15% in 2003 to 17% for 2004. SMG's stations continue to enjoy a unique relationship with their viewers, retaining a 32% peak-time audience share - outperforming ITV (31%) and BBC1 Scotland (25%). As audiences further fragment and become increasingly elusive for advertisers, our strength in offering the only route to quickly accessing a mass audience in Scotland is increasingly being understood and valued by advertisers. In order to further underpin our relationship with viewers, we are exploring with our regulator, Ofcom, the possibility of enhancing our news coverage at a local level, while also ensuring that our national and international news is prioritised appropriately for the Scottish audience. Ofcom is currently consulting on these proposals alongside its own suggestions for Public Service Broadcasting (PSB) in Scotland. An important element within Ofcom's conclusions will be its plans for the funding of PSB programming in Scotland and the extent to which this is reflected in our new licence terms when they are announced in June. The settlement we achieved with ITV plc in 2004 - the effect of which was to underpin our national airtime revenues and cap our network programme costs at inflation - was not invoked in 2004, but this important safeguard continues to provide significant protection for our television business going forward. Our network programme production business, SMG TV Productions, has focused sharply on extending its customer base beyond ITV in recent years and now lists the BBC, C4, Five and a number of channels on the Sky platform among its customers. The business had a number of important successes in 2004 including: Taggart (ITV1); Missing (ITV1); Our Daughter Holly (ITV1); 25 Years of The Comedy Store (BBC1); Extreme Health (C4); Woolamaloo (Five); So You Think You're Safe (Sky1); High School Project USA (Living TV). We also produced the first drama for the mobile phone market - CJAC, a 10 episode series of 90-second instalments. However, while it grew revenues by 11%, the mix of factual and other programmes with lower margins resulted in profits being pegged at close to 2003 levels. SMG TV Productions stands to gain from the increasing requirement for regulated broadcasters to commission more network programming from outside London and the ongoing growth of multichannel television presents the opportunity for us to further grow both volume and the customer base. SMG Broadcast & Event Solutions, our production facilities business, saw revenues grow by over 200% in 2004, principally as a result of winning the contract for Setanta, who own the subscription rights to Scottish Premier League football. This contract alone will generate revenues of £10.0m over its four-year life and we are currently looking at other similar opportunities. As demand for production facilities increases with the emergence of a growing number of television channels, we expect this part of SMG's television operation to expand accordingly. RADIO As one of only three national commercial stations in the UK, Virgin Radio's performance is dependent on two external factors: national advertising markets; and audience. In 2004, erratic conditions in both these areas combined to impact on the station's financial performance. An encouraging first three months was followed by a poorer second quarter and a patchy third quarter. Then, as reported by a number of radio groups, the national radio market in the final quarter of 2004 was very weak. Additionally, the effects of Virgin Radio's Q4 2003 RAJAR audience figures impacted first half trading and, for the year as a whole, turnover reduced to £20.1m (2003: £23.2m). The fixed costs of this business, combined with increased digital transmission costs and the need to continue to market the station, resulted in operating profits reducing to £4.3m (2003: £7.3m). Even at this low point in the market, and before the benefits of digital listening take effect, the operating margin of this business was still a healthy 21%. In London, where Virgin Radio competes on equal terms on the FM frequency, the station has outperformed the market over the last five years and is market leader in 25-34 year old men, its core audience. We remain committed to working with RAJAR and we have met with some early successes in our joint efforts to increase the robustness of Virgin Radio's listening figures, although the possibility of future artificial volatility remains. Boosted by its considerable brand strength and the profile of its listenership, Virgin Radio's growth potential in the digital arena is excellent. Already identified as the most popular online radio station worldwide, Virgin Radio also attracts a disproportionately high level of listening on DAB (Digital Audio Broadcasting) and on digital satellite television, where listeners benefit from the uplift in quality from its national AM signal. Additionally, its sister stations - Virgin Radio Classic Rock and Virgin Radio Groove - which are currently only available online and on DAB in London, already generate more than one million listening hours, without as yet the benefit of cross-promotion from the main station. These additional listening hours are now being sold to advertisers as part of the Virgin Radio Network proposition. Buoyed by this success we have accelerated plans to establish a position on all digital platforms. We are already the first radio station in Europe to trial transmissions using the emerging DRM digital broadcasting technology and the first in the UK to broadcast onto 3G mobile phones. OUT OF HOME Our Out of Home Division - which comprises outdoor and cinema advertising - saw a return to sales growth in 2004 as our investment in panel build continued and cinema audiences resumed their upwards trend due to an improved second half movie schedule. As a result, across the year Outdoor sales grew by 14% and cinema revenues increased by 5%, leading to total turnover for the division growing by 9% to £47.6m (2003: £43.8m). However, panel development, combined with the phasing of new exhibitor contract terms, saw operating profits held back to £4.3m (2003: £5.5m). Our 6-sheet panel estate now stands at over 12,500 and Primesight occupies third place in this growing market. As the largest operator in the UK Health & Leisure sector, following our win of the David Lloyd contract earlier this year, Primesight is well positioned to continue to benefit from the ongoing growth prospects of this sector. Additionally, we have created a new business stream over the last two years with the construction of 60 (now 70) high yielding large format (48 sheet) fully illuminated Backlight panels on prominent sites across London and, more recently, in other major UK cities. We plan to continue to roll out these panels across the UK, concentrating on the larger conurbations, in 2005 and 2006. In 2004 turnover in this business doubled and we anticipate moving into profit during the course of 2005. For Pearl and Dean, our cinema advertising business, 2004 saw a welcome return to audience growth as a result of stronger movies in the second half of the year such as: Shrek 2; Spiderman 2; and Bridget Jones 2. However, although revenues increased overall, profits were held back due to the phasing of terms on major exhibitor contracts. 2005's film line-up appears strong and we are optimistic that audiences will continue to grow this year. The loss of the UGC contract will result in our market share reducing to 25% in 2006, however we hope to partially mitigate the effect of this through increasing our penetration in the independent cinema sector, where we have had notable successes in 2004, and through other contract wins. Looking forward, Pearl & Dean should continue to benefit from its famous name and long cinema heritage and we are currently looking at ways not only to extend the brand but also to exploit growth opportunities outside the UK. PROSPECTS With national advertising markets improving significantly, strong market positions, a focused and realistic growth plan coupled with a considerably strengthened balance sheet, SMG's prospects for the remainder of 2005 are encouraging. Advertising markets have become more predictable, booking patterns longer term and a sustained advertising recovery looks much more certain. First quarter trading has been positive across all our businesses, helped by the effects of the early Easter, which featured in Quarter 2 in 2004. First quarter television revenues have increased by 8% in 2005. Meanwhile, we await the outcome of Ofcom's review of our television licence terms in June (to be backdated to 1 January). While the effect on programming costs of the Public Service Broadcasting Review is not yet known, we anticipate a positive outcome for Scottish TV and Grampian TV. At Virgin Radio, the trading weakness of the final quarter of 2004 proved to be short-lived and we have seen a return to growth, with Q1 radio revenues expected to show an uplift of 8%. Primesight continues to perform very strongly, while Pearl & Dean is benefiting from better phasing of movies. As a result, Out of Home revenues have shown first quarter growth of 12%. Against this encouraging background, I am confident that SMG has the potential to flourish in 2005, delivering growth in revenues, improving performance and increasing shareholder value. Chris Masters Chairman 10 March 2005 Consolidated profit and loss account for the year ended 31 December 2004 Restated 2004 2003 Pre Exceptionals Results Pre exc- Exceptionals Results for exceptionals and FRS10 for year eptionals and FRS10 year and FRS10 and FRS10 £m £m £m £m £m £m Turnover Continuing operations 201.2 - 201.2 188.2 - 188.2 Discontinued operations - - - 21.0 - 21.0 ----- ----- ----- ----- ----- ----- Total turnover 2 201.2 - 201.2 209.2 - 209.2 ----- ----- ----- ----- ----- ----- Net operating expenses (171.9) (14.8) (186.7) (178.4) (15.9) (194.3) Reorganisation costs 3 - - - - (2.5) (2.5) Litigation matters 3 - - - - 3.0 3.0 Development costs 3 - - - - (3.0) (3.0) Provision for onerous contracts 3 - - - - (3.8) (3.8) Writedown of investments 3 - - - - (3.5) (3.5) ----- ----- ----- ----- ----- ----- Total operating expenses (171.9) (14.8) (186.7) (178.4) (25.7) (204.1) Operating profit Continuing operations 29.3 (14.8) 14.5 28.5 (25.7) 2.8 Discontinued operations - - - 2.3 - 2.3 ----- ----- ----- ----- ----- ----- Group operating profit 29.3 (14.8) 14.5 30.8 (25.7) 5.1 Share of associates 3 3.5 (0.3) 3.2 9.6 (3.8) 5.8 ----- ----- ----- ----- ----- ----- Total operating profit 2 32.8 (15.1) 17.7 40.4 (29.5) 10.9 Gain on disposal of property 3 - 1.0 1.0 - - - Gain on disposal of associate undertakings 3,13 - 31.1 31.1 - - - Gain on disposal of subsidiary undertaking 3 - (2.5) (2.5) - 33.0 33.0 ----- ----- ----- ----- ----- ----- Profit on ordinary activities before financing charges 32.8 14.5 47.3 40.4 3.5 43.9 Net financing charges 3,4 (15.3) (6.7) (22.0) (23.4) (20.8) (44.2) ----- ----- ----- ----- ----- ----- Profit/ (loss) on ordinary activities before taxation 17.5 7.8 25.3 17.0 (17.3) (0.3) Tax on profit on ordinary activities 5 (1.7) 0.5 (1.2) (1.7) 3.6 1.9 ---- ----- ----- ----- ----- ----- Profit on ordinary activities after taxation 15.8 8.3 24.1 15.3 (13.7) 1.6 Dividends 6 (7.8) - (7.8) (7.9) - (7.9) ----- ----- ----- ----- ----- ----- Profit/(loss) transferred to reserves 14 8.0 8.3 16.3 7.4 (13.7) (6.3) ===== ===== ====== ===== ===== ===== Earnings per ordinary share - basic 7 5.0p 7.7p 4.9p 0.5p ===== ===== ===== ===== Consolidated statement of total recognised gains and losses for the year ended 31 December 2004 Restated 2004 2003 £m £m Profit for the financial year attributable to shareholders 24.1 1.6 Actuarial loss recognised in the pension schemes (8.6) (15.5) Deferred tax arising thereon 2.6 4.6 Provision for impairment charged against revaluation reserve - (3.1) ----- ----- Total recognised gains/ (losses) for the year 18.1 (12.4) ===== Prior year adjustment 14 (2.8) ----- Total recognised gains/ (losses) since last annual report 15.3 Consolidated balance sheet at 31 December 2004 Restated Note 2004 2003 £m £m Fixed assets Intangible assets 8 218.2 233.0 Tangible assets 9 32.2 34.8 Investments 10 - 87.3 ----- ----- 250.4 355.1 ----- ----- Current assets Deferred tax asset 1.5 3.2 Stock 30.7 22.7 Debtors and prepayments 59.7 46.5 Cash at bank and in hand 11 28.0 10.0 ----- ----- 119.9 82.4 ----- ----- Creditors: amounts falling due within one year Creditors and accrued charges (41.0) (35.4) Bank loans and overdrafts - (30.2) Corporation tax (8.6) (9.1) Proposed dividend (7.8) (7.9) ----- ----- (57.4) (82.6) ----- ----- Net current assets/(liabilities) 62.5 (0.2) ----- ----- Total assets less current liabilities 312.9 354.9 ----- ----- Creditors: amounts falling due after more than one year Bank loans (139.0) (198.4) Creditors and accrued charges (3.8) (1.3) Convertible unsecured loan stock 12 (22.8) (22.8) Secured loan notes 12 (0.7) (0.8) ----- ----- (166.3) (223.3) ----- ----- Provisions for liabilities and charges (0.3) (2.0) ----- ----- Net assets excluding pension liability 146.3 129.6 Pension liability 16 (69.2) (62.8) ----- ----- Net assets including pension liability 77.1 66.8 ====== ====== Capital and reserves Called up share capital 7.8 7.8 Share premium account 58.8 58.8 Merger reserve 173.4 173.4 Profit and loss account (162.9) (173.2) ----- ----- Equity shareholders' funds 14 77.1 66.8 ===== ===== Consolidated cash flow statement For the year ended 31 December 2004 Restated Note 2004 2003 £m £m Operating activities Net cash inflow from operating 15 15.0 21.1 activities ----- ----- Dividends received from associates 2.9 1.8 ----- ----- Returns on investments and servicing of finance Interest received 1.6 0.1 Interest paid (13.9) (23.6) Debt restructuring costs - (41.0) ----- ----- (12.3) (64.5) ----- ----- Taxation UK corporation tax received 1.6 7.1 ----- ----- Capital expenditure and financial investment Purchase of tangible fixed assets (7.6) (13.1) Sale of tangible fixed assets 4.0 0.4 ----- ----- (3.6) (12.7) ----- ----- Acquisitions and disposals Disposal of associate undertakings 13 118.7 - Disposal of subsidiary undertaking (1.9) 211.0 ----- ----- 116.8 211.0 ----- ----- Equity dividends paid (7.9) (7.8) ----- ----- Cash inflow before financing 112.5 156.0 ----- ----- Financing Repayment of existing bank borrowings (228.4) (169.9) New borrowings drawn 140.0 - Cash released from/ (placed on) deposit 2.5 (10.0) Increase in bank borrowings - 28.4 Net repayment of loan notes/stock (0.1) (0.3) ----- ----- (86.0) (151.8) ----- ----- Cash inflow in the period 26.5 4.2 ----- ----- Movement in net debt 2004 2003 £m £m Opening net debt (242.5) (398.9) Non-cash bank arrangement fees written off (4.8) - Cash inflow in the period 26.5 4.2 Net decrease in debt financing 86.0 151.8 Currency translation gain - 0.4 ----- ----- Closing net debt (134.8) (242.5) ===== ===== Notes to the preliminary announcement for the year ended 31 December 2004 1. Basis of preparation The financial information set out in the preliminary announcement does not constitute the Group's statutory accounts within the meaning of Section 240 of the Companies Act 1985 and has been extracted from the full accounts for the years ended 31 December 2004 and 31 December 2003 respectively. Statutory accounts for 2003 have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under either Section 237 (2) or Section 237 (3) of the Companies Act 1985. The statutory financial statements for the year ended 31 December 2004 have yet to be signed. They will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies in due course. 2. Segmental analysis The analysis of the Group's turnover and operating profit by operating division is set out below: 2004 2003 Continuing Discontinued Continuing Discontinued operations Operations Total operations Operations Total £m £m £m £m £m £m Turnover Television 133.5 - 133.5 121.2 - 121.2 Radio 20.1 - 20.1 23.2 - 23.2 Out of Home 47.6 - 47.6 43.8 - 43.8 Publishing - - - - 21.0 21.0 ----- ----- ----- ----- ----- ----- Total turnover 201.2 - 201.2 188.2 21.0 209.2 ===== ===== ===== ===== ===== ===== Turnover in 2004 includes £1.8m (2003: £1.6m) of revenues from sources outside the UK. ITC qualifying revenue was £111.7m (2003: £103.1m). Restated 2004 2003 Continuing Discontinued Continuing Discontinued operations Operations Total operations Operations Total £m £m £m £m £m £m Operating profit Television 23.0 - 23.0 18.0 - 18.0 Radio 4.3 - 4.3 7.3 - 7.3 Out of Home 4.3 - 4.3 5.5 - 5.5 Publishing - - - - 2.8 2.8 Associates 3.5 - 3.5 9.6 - 9.6 Pension costs (2.3) - (2.3) (2.3) (0.5) (2.8) ----- ----- ----- ----- ----- ----- Total operating profit excluding exceptional items and FRS10 32.8 - 32.8 38.1 2.3 40.4 Exceptional items - - - (10.9) - (10.9) Goodwill amortisation (15.1) - (15.1) (18.6) - (18.6) ----- ----- ----- ----- ----- ----- Total operating profit 17.7 - 17.7 8.6 2.3 10.9 (FRS3) ===== ===== ===== ===== ===== ===== Operating profit in 2004 includes £1.1m (2003: £1.2m) arising outside the UK. Pension costs are incurred in Television £1.9m (2003: £2.0m), Radio £0.1m (2003: £0.1m) and Out of Home £0.3m (2003: £0.2m), and, in 2003 only, Publishing (£0.5m). 3. Exceptional items i) Associates Share of associates contribution includes the equity accounted results of GMTV Limited ('GMTV'), including related amortisation of goodwill of £0.3m (2003: £0.3m), to the date of disposal of the investment in October 2004. The results to 31 December 2003 include both the equity accounted results of Scottish Radio Holdings plc ('SRH') and GMTV, including goodwill amortisation of £3.8m. ii) Gain on disposal of property The Group's property at Cowcaddens was sold during the year resulting in a gain of £1.0m. An exceptional fixed asset provision amounting to £1.1m was made in 2003 to cover an impairment in the value of the Group's property at Cowcaddens. This reflected the Group's plans to relocate the Scottish Television business to a new purpose built facility. The total impairment to fixed assets was £4.2m, however, £3.1m was charged to the revaluation reserve as it represents a reversal of the studio property revaluation uplift in 2000. iii) Gain on disposal of associate undertakings The disposal of the Company's investments in SRH on 16 January 2004 and GMTV on 12 October 2004 resulted in gains on disposal of £10.6m and £20.5m respectively (see note 13). iv) Gain on disposal of subsidiary undertaking In 2003, the disposal of the Company's Publishing division resulted in a provisional gain on sale of £33.0m. In line with the sale and purchase agreement final agreement was reached with Gannet in July 2004 on the completion accounts' net assets. This resulted in a net payment due to Gannet and the provisional gain on sale was adjusted by £2.5 million during the first half of 2004. v) Reorganisation costs In 2003, a provision for exceptional costs amounting to £2.5m was made to cover reorganisation initiatives, primarily in the Group's television operations following the move to the Aberdeen studios to new state of the art digital studios. vi) Litigation Matters As was disclosed within the 2002 annual report, the Group had received a legal claim from Chris Evans, one of the former shareholders in Ginger Media Group Limited, pursuing the final tranche of share-based consideration which would have been payable had all of his contractual terms been met. The Group vigorously defended this matter and submitted a substantial counter-claim for damages. On 26 June 2003 the court ruled that Chris Evans had broken the terms of his contract and that the Group acted properly in terminating his contract. Mr Justice Lightman concluded that Chris Evans was not entitled to any of the share-based consideration he was claiming and dismissed his own claim for damages. The judge also ruled that the Group was entitled to seek costs and damages from Chris Evans. On 28 July 2003 the Group reached a full and final settlement with Chris Evans, which resulted in the Group receiving £6.7m covering all costs and damages in September 2003. This settlement was recognised within the 2003 results as follows: - the exceptional write off of legal and other costs incurred by the Group directly in defence of the claim of £3.7m; and - the recognition of an offsetting exceptional credit of the recovery of these costs and associated damages of £6.7m. vii) Development costs The Group is committed to developing its radio business and has to date applied for a number of new FM regional radio licences offered by the Radio Authority, and subsequently Ofcom, as part of its remit to increase the number of analogue local licences. An exceptional charge of £3.0m was made in 2003 to cover costs incurred bidding for radio licences. viii) Provision for onerous contracts In 2003, a provision of £3.8m was made with respect to an onerous sales contract covering bonus payments on sales of television airtime. This contract was reviewed following the merger of Carlton and Granada airtime sales houses and replaced on more beneficial terms. ix) Writedown of investments A provision for £3.5m was made in 2003 against the investment in Heart of Midlothian plc ('Hearts') to write off the remaining carrying value of the investment. x) Financing charges (a) £6.7m of unamortised bank facility arrangement fees have been written off during the year. The remaining unamortised balance was written off following the replacement of existing bank facilities with a new £158.0m five year revolving credit and overdraft bank facility on improved terms. This was completed in November 2004. (b) In April 2003, the Group made a payment of £35.8m to United States and United Kingdom note-holders in relation to exiting early from the high fixed rate interest charges on this debt. An exceptional provision of £15.0m was made in 2002 and the remaining exceptional cost of £20.8m was included in net financing charges during 2003. 4. Net financing charges 2004 2003 £m £m Interest payable: Bank loans and overdrafts 12.5 20.0 CULS and loan note interest 1.4 1.5 ----- ----- Group interest payable 13.9 21.5 Share of associates (0.1) 0.7 ----- ----- Total interest payable 13.8 22.2 Interest receivable (1.2) (0.8) ----- ----- Net interest payable 12.6 21.4 Pension finance charge 2.7 2.0 ----- ----- Net financing charges excluding exceptional items 15.3 23.4 Exceptional financing charges 6.7 20.8 ----- ----- Net financing charges 22.0 44.2 ===== ===== 5. Tax on profit on ordinary activities 2004 2003 £m £m The charge/ (credit) for taxation is as follows: Charge/ (credit) for the year excluding exceptional items and FRS10 0.5 (0.4) Share of taxation of associated undertakings 1.2 2.1 ----- ----- Tax on profit on ordinary activities excluding exceptional items and FRS10 at 10% (2003: 10%) 1.7 1.7 Tax credit on exceptional items (0.5) (3.6) ----- ----- 1.2 (1.9) ===== ===== 6. Dividends 2004 2003 £m £m Proposed interim of 1.0p per share (2003: nil) 3.1 - Proposed final of 1.5p per share (2003: 2.5p) 4.7 7.9 ----- ----- 7.8 7.9 ===== ===== The interim dividend was paid on 6 January 2005 to shareholders on the register at 3 December 2004 and it is proposed to pay the final dividend on 13 July 2005 to shareholders on the register at 10 June 2005. 7. Earnings per share Basic earnings per share (EPS), excluding exceptional items and the impact of goodwill amortisation under FRS10, is calculated as follows: 2004 Restated 2003 Attributable profit for the financial period (£m) 15.8 15.3 Weighted average number of shares in issue (m) 314.3 314.2 Earnings per ordinary share (pence) 5.0 4.9 ===== ===== Basic EPS, inclusive of exceptional items and after goodwill amortisation under FRS10, for the year was 7.7p (restated 2003: 0.5p). There is no difference between basic and diluted EPS because neither the share options nor CULS are dilutive in the year. 8. Intangible assets Total £m Cost At 1 January 2004 and 31 December 2004 293.0 ----- Amortisation At 1 January 2004 60.0 Charge for the period 14.8 ----- At 31 December 2004 74.8 ----- Net book value at 31 December 2004 218.2 ===== Net book value at 31 December 2003 233.0 ===== Goodwill comprises capitalised goodwill on acquisitions completed since 1 January 1998 and is being amortised on a straight-line basis over 20 years. 9. Tangible fixed assets Plant and Land and buildings technical Leasehold Freehold equipment Total £m £m £m £m Cost or valuation At 1 January 2004 0.7 5.8 70.3 76.8 Additions - - 7.6 7.6 Disposals - (5.8) - (5.8) ----- ----- ----- ----- At 31 December 2004 0.7 - 77.9 78.6 ----- ----- ----- ----- Depreciation At 1 January 2004 0.3 1.8 39.9 42.0 Charge for year - 0.2 6.2 6.4 Disposals - (2.0) - (2.0) ----- ----- ----- ----- At 31 December 2004 0.3 - 46.1 46.4 ----- ----- ----- ----- Net book value at 31 December 2004 0.4 - 31.8 32.2 ===== ===== ===== ===== Net book value at 31 December 2003 0.4 4.0 30.4 34.8 ===== ===== ===== ===== As set out in note 3 (ii), the Group's property at Cowcaddens was sold during the year at the expected market value, resulting in the nil net book value reflected at the end of the current year as shown above. Upon the disposal of the premises at Cowcaddens, £1.1m of depreciation was reallocated from plant and technical equipment to freehold land and buildings. 10. Investments Associated Associated Total undertakings undertakings goodwill share of net assets £m £m £m At 1 January 2004 63.8 23.5 87.3 Share of associated undertakings - 3.5 3.5 Dividends received from associated undertakings - (2.9) (2.9) Goodwill amortisation for the year (0.3) - (0.3) Disposal of associate undertakings (see note 13) (63.5) (24.1) (87.6) ----- ----- ----- At 31 December 2004 - - - ===== ===== ===== 11. Cash at bank and in hand Cash at bank and in hand includes £7.5m placed in Escrow for three years (reducing by £2.5m in each year) in respect of certain of SMG's pension related indemnity obligations given under the sale and purchase agreement of the Publishing division disposed of on 4 April 2003. 12. Loan stock and loan notes The convertible unsecured loan stock ('CULS') as at 31 December 2004 is convertible on 30 April in each of the years 1999 to 2007 inclusive. The CULS are convertible into new SMG shares on the basis of 50.2808 SMG shares per £100 nominal of SMG CULS. The CULS are unsecured obligations of SMG and bear interest at a rate of 6.5% per annum. An immaterial amount of CULS was converted on 30 April 2004 (2003: immaterial amount converted). Secured loan notes dated October 2007 amounting to £5.1m were issued to fund the acquisition of Primesight. The loan notes bear interest at a rate of 1.5% below LIBOR and are redeemable on 1 April and 1 October each year. During 2004, £0.1m of loan notes were redeemed, leaving an outstanding balance of £0.7m at 31 December 2004. 13. Disposal of associate undertakings On 16 January 2004, the Group sold its 27.8% shareholding in Scottish Radio Holdings plc ('SRH') to Emap plc. The sale of 9,729,361 ordinary shares in SRH raised cash proceeds of £90.5m, or 930p per share, resulting in a net gain on disposal of £10.6m after disposal costs of £1.6m. On 12 October 2004, the Group sold its 25% shareholding in GMTV to ITV plc for £31.0m cash less a dividend of £0.7m, resulting in a net gain on disposal of £20.5m after disposal costs of £0.5m. 14. Reconciliation of movements in equity shareholders' funds Restated 2004 2003 £m £m Profit for the year 24.1 1.6 Dividends (7.8) (7.9) ----- ----- Retained profit/ (loss) for the year 16.3 (6.3) Goodwill previously written off included in retained profit for the period - 57.7 Reversal of revaluation reserve - (3.1) Actuarial loss recognised (8.6) (15.5) Deferred tax thereon 2.6 4.6 ----- ----- Net movement in shareholders' funds 10.3 37.4 ----- ----- Opening shareholders' funds as previously stated 66.8 31.7 Prior year adjustment - (2.3) ----- ----- Opening shareholders funds restated 66.8 29.4 ----- ----- Closing equity shareholders' funds 77.1 66.8 ===== ===== In finalising the results for the year ended 31 December 2004, the directors became aware that a prepayment balance of £2.8m relating to pension accounting under SSAP 24 had not been adjusted following the adoption of FRS 17 in 2001. £2.3m of the prepayment balance relates to periods prior to 2003 and £0.5m relates to 2003. This fundamental error as defined under FRS3 relates to non-cash, non-trading items and has been dealt with by way of a prior year adjustment. 15. Reconciliation of operating profit to operating cash flows Restated 2004 2003 £m £m Group operating profit (before exceptional items and FRS10) 29.3 30.8 Depreciation and other non-cash items 6.4 6.8 Increase in stock (7.6) (0.5) Increase in debtors (14.3) (1.8) Increase/ (decrease) in creditors 5.7 (6.3) Net Chris Evans settlement - 4.6 Development costs, onerous contracts and reorganisation costs (1.7) (2.5) ----- ----- Net cash inflow before pension payment 17.8 31.1 Payment to Caledonian Pension Scheme (2.8) (10.0) ----- ----- Net cash inflow from operating activities 15.0 21.1 ===== ===== Net cash inflow from operating activities before pension payment comprises: Continuing operating activities 17.8 27.4 Discontinued operating activities - 3.7 ---- ---- 17.8 31.1 ==== ==== 16. Pension costs The Group operates two defined benefit pension schemes (during the prior year the Scottish Television Retirement Benefit Scheme and the Grampian Television Retirement and Death Benefit Scheme were combined to form one scheme). The schemes are trustee administered and the schemes' assets are held independently of the Group's finances. Pension costs are assessed in accordance with the advice of an independent professionally qualified actuary. The schemes are the Scottish and Grampian Television Retirement Benefit Scheme and the Caledonian Publishing Pension Scheme. They are closed schemes and therefore under the projected unit method the current service cost will increase as the members of the scheme approach retirement. A full actuarial valuation of the schemes was carried out at 1 January 2004 and updated to 31 December 2004 by a qualified independent actuary. The major assumptions used by the actuary were: At 31 December At 31 December 2004 2003 Rate of increase in salaries 3.3% 3.3% Rate of increase of pensions in payment 2.8% 2.8% Discount rate 5.3% 5.4% Inflation 2.8% 2.8% The fair value of the assets in the schemes, the present value of the liabilities in the schemes and the expected rate of return at each balance sheet date was: At 31 December At 31 December 2004 2003 £m £m Equities 7.4% 131.8 7.3% 133.8 Bonds 4.3% 90.1 4.9% 70.3 ----- ----- Total market value of assets 221.9 204.1 Present value of schemes' liabilities (322.1) (295.8) ----- ----- Deficit in the schemes (100.2) (91.7) Related deferred tax asset 31.0 28.9 ----- ----- Net pension liability (69.2) (62.8) ===== ===== Analysis of the amount charged to operating profit Restated 2004 2003 £m £m Defined benefit - current service cost 2.0 1.9 Money purchase 0.3 0.4 SSAP 24 prepayment adjustment (see note 14) - 0.5 ----- ----- Total operating profit charge 2.3 2.8 ===== ===== 17. Mailing A copy of the annual report is being sent to all shareholders on 6 May 2005 and will be available for inspection by members of the public at the Company's registered office at 200 Renfield Street, Glasgow. This information is provided by RNS The company news service from the London Stock Exchange

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