Final Results

SMG PLC 14 March 2006 SMG plc Preliminary Results 2005 PRESS RELEASE Financial Highlights 2005 2004 Change Revenues £210.0m £201.2m + 4% Operating Profit (Underlying)* £31.2m £28.0m + 11% Profit Before Tax (Underlying)* £20.0m £13.7m + 46% Profit Before Tax (Statutory) £18.8m £37.6m - 50% Basic Earnings per Share (Underlying)* 4.9p 3.9p + 26% Basic Earnings per Share (Statutory) 4.6p 12.0p - 62% Full Year Dividend 2.9p 2.5p + 16% * Underlying results exclude net associate contribution and exceptional items, and include additional IAS32 Convertible Unsecured Loan Stock ('CULS') interest costs. Operational Headlines • Television revenues grew by 3% and operating profits by 19% (exc. reorg costs) • Our Television business outperformed ITV1 in airtime revenues and in peak-time audience share • Virgin Radio produced a market-beating performance with revenues up 11% and operating profits jumping by 23% • Primesight outpaced the outdoor market, growing revenues by 12% and operating profits (exc. reorg costs) by 7% • Pearl & Dean grew revenues, but posted a small operating loss Andrew Flanagan, Chief Executive, said: 'Overall, this has been a solid trading result for SMG, coupled with some positive regulatory outcomes, which has resulted in a year of strong progress. Alongside this we have made significant headway in developing new revenue streams in response to the changing UK media environment.' Chris Masters, Chairman, said: 'The Group's encouraging overall operational performance and strong profit growth, coupled with its significant progress in new business initiatives, has underpinned the Board's confidence in the Group's long term prospects.' 14 March 2006 Further enquiries: SMG plc Andrew Flanagan, Chief Executive Tel: 020 7882 1199 George Watt, Group Finance Director Callum Spreng, Corporate Affairs Director Brunswick Group LLP James Hogan Tel: 020 7404 5959 Simon Sporborg Anisha Patel SMG plc 2005 Preliminary Results CHAIRMAN'S STATEMENT OVERVIEW SMG's record of profitable growth continued in 2005 with underlying pre-tax profits growing 46% to £20.0m (2004: £13.7m). This was driven by increased revenue, up 4% to £210.0m (2004: £201.2m), reduced operating costs and favourable regulatory settlements that resulted in lower television licence fees and reduced public service broadcasting commitments. Underlying results exclude net associate contribution and exceptional items, and include CULS interest costs under IAS32. Earnings per share (on the same underlying basis) grew by 26% to 4.9 pence (2004: 3.9 pence). Our businesses are strongly branded and well-positioned and they again outperformed in their respective markets, growing revenues and market share. Alongside this strong operational performance, we made significant progress in developing our position in a number of strategically important areas, most notably in the digital and online environments. Advertising markets remain more volatile than has traditionally been the case and, after a strong first quarter in 2005, advertisers reverted to more short term, selective booking, resulting in a slowing down of advertising markets over the remainder of the year. The Group has made good progress in its drive to increase margins, with television and radio showing good year-on-year improvement. Outdoor's margins were held back in 2005 by our continued investment in panel development, whilst we are confident that cinema margins can be restored in 2006 and have identified opportunities to extend the Pearl & Dean brand which will be developed over the course of the coming year. Furthermore, our stated aim of capitalising on existing growth opportunities and identifying and developing new ones is beginning to bear fruit. We have two exceptional items: a provision for staff reductions of £3.5m; partially offset by a gain on the disposal of our stake in Heart of Midlothian plc of £2.3m. During the course of the year, following the retirement of Calum MacLeod and Donald Waters, we strengthened the Board with the appointment of MT Rainey, the former Chairman of Rainey Kelly Campbell Roafe/Y&R, the sixth largest advertising agency in the UK; Martyn Smith, Finance Director of Avis Europe and Tim Gardam, previously Director of Television and of Programmes at Channel 4. The strength of our consumer brands - Virgin Radio, STV and Pearl & Dean - results in SMG being well-placed to capitalise on the growth in digital platforms. Furthermore, the Group has a long established reputation as a producer of high quality original programming, and is an efficient and successful channel manager. Our strategy going forward is to continue to build on these strengths by: • Using our consumer brand strength in television, radio and cinema to expand our digital output both in terms of programme content and interactive services. • Growing our television production and services business. • Extending the reach of our outdoor advertising operation. The Group's encouraging overall operational performance and strong profit growth, coupled with its significant progress in new business initiatives, has underpinned the Board's confidence in the Group's long term prospects. As a result, the Board has decided to recommend a final dividend of 1.7 pence resulting in a full year dividend for 2005 up 16% to 2.9 pence (2004: 2.5 pence). PROSPECTS Advertising markets have remained uncertain and short term in the first quarter of 2006. With tough comparables against the same period last year, which benefited from an early Easter and accelerated Government spending, we are seeing somewhat lower revenues in the early months of 2006. In addition, as previously reported, the UGC cinema contract came to an end in January 2006. In addition as previously reported, the UGC cinema contract came to an end in January 2006. To provide a proper representation of performance, and to overcome some of this distortion, we are providing year-to-date like-for-like comparatives for the first four months of 2006 as follows: YTD April TV airtime -7% Radio +6% Outdoor +14% Cinema -10% This performance is, however, in line with our projections and we continue to outperform in our markets. We anticipate a much stronger second quarter, aided by Easter and the World Cup, and we expect to benefit from improving confidence amongst advertisers. The Group's overall performance is benefiting from the cost reduction initiatives already undertaken and from the new, rapidly growing, digital revenue streams. Our television businesses, SMG Network Productions and SMG Solutions, have made a particularly good start to the year with strong order books. We remain optimistic that we can continue to deliver profitable growth across the Group in 2006 and we look to the future with confidence. Chris Masters Chairman SMG plc 14 March 2006 CHIEF EXECUTIVE'S REVIEW TELEVISION Television grew its revenues by 3% to £137.0m (2004: £133.5m). The impact of Contract Rights Renewal (CRR), which reduced airtime revenues by 3%, was more than offset by strong growth in programme sales and revenues from our facilities hire and channel management businesses. This revenue growth and tight cost control allied to new, favourable licence terms resulted in Operating Profit, excluding reorganisation costs of £2.7m, growing by 19% to £24.1m (2004: £20.3m). Our Television business marginally outperformed ITV1 as a whole, with airtime revenue declining by 3.0% against the ITV Network's 3.2% fall. Consequently our share of Net Advertising Revenue (NAR) grew slightly to 6.55% (2004: 6.51%). The reduction in airtime revenue was as a direct result of the CRR mechanism, which has the effect of more directly linking audience to revenues, coupled with a weak Scottish market, caused primarily by a significant cut in Scottish Executive spending in the first half of 2005 and reduced spend by retailers in Q4. The increasing penetration of multichannel television results in an inevitable erosion of audience on the main channels. In 2005, the higher take-up of digital terrestrial in particular saw ITV1's all time audience share falling by 5.8% to 21.3%. Scottish and Grampian TV outperformed the Network with a drop of 4.8% to 21.8%. However, in the important peak-time day part - during which most advertising is sold - our share of viewing was 30.8% (2004: 31.1%). Significantly, compared to the UK average, we continue to outperform our nearest competitor, BBC1 Scotland, by some six percentage points in peak-time. OFCOM, which regulates our television business, delivered two important conclusions during the course of 2005 which had a positive effect for us. The review of our television licence terms resulted in a reduction in our licence fees of around £4.5m in 2005. Further reductions, totalling some £1.0m, will be effected gradually as digital penetration continues to increase through to digital switchover which, for our licences, is likely to be in 2010. Additionally, OFCOM's review of public service broadcasting (PSB) resulted in a reduction in our local programming obligations of over 200 hours per year, including an immediate reduction in hard-to-schedule peak-time Gaelic programming of 20 hours and its ultimate removal from the schedule by 2011. OFCOM also accepted our proposals for enhancing local news coverage and these will be implemented during 2007. As a result of our reduced PSB hours, combined with the impact of our imminent move to new, state of the art studios in Glasgow, we reviewed the staffing levels required for our broadcast television operation. This resulted in the identification of 55 roles which are no longer required to meet our future business needs. Consequently, the headcount of our television business will fall over the coming months, almost entirely through voluntary redundancy. This, coupled with a single schedule across our two channel 3 franchises and the introduction of single branding for our stations, announced earlier this month, will see costs fall further in 2006. An exceptional charge to effect staff reductions of £2.7m has been taken in the results for 2005. Significant progress was made during 2005 in developing non-airtime revenue streams potentially capable of offsetting any future diminution of conventional airtime revenues. These plans are now well-developed and we are targeting to generate additional revenues from viewers through online and interactive initiatives, sponsorship, advertising-funded programming and interactive advertising. Initial results have been encouraging, particularly given the fact that such revenue sources are likely to constitute an increasing proportion of our broadcasting revenues going forward. Our network programme productions business enjoyed excellent success in 2005. Revenue from programme sales grew by 23%, with increased commissions in drama, children's and factual programming. The commissioning of two episodes of Rebus, starring Ken Stott, alongside another successful run of our evergreen police drama, Taggart, underpinned our credentials as a high quality programme producer. Our strategy of broadening our customer base beyond ITV1 made further progress, with new commissions from Sky, C4, Five and ITV2. Future growth prospects have been enhanced by increased responsibility being placed on both ITV and the BBC to increase programme commissions from the nations and regions. In addition, the BBC's own Window of Commercial Competition (WOCC) will potentially allow non-independent companies, such as SMG TV Productions and Ginger TV Productions, the opportunity to bid for up to 25% of the BBC's original commissioning budget. Any benefits from these developments will be derived from 2007 onwards. Our facilities hire and channel management business, SMG Solutions, grew revenue by 36% during the year. This reflected a full year of revenues from our contract with Setanta to support its SPL football channels and increased commercial production activities. We continue to see excellent opportunities for growth in this fragmented marketplace and have recently concluded a four year deal with BBC Scotland to provide outside broadcast facilities for their productions. RADIO Virgin Radio maintained the momentum built up earlier in 2005 with a market-beating performance that saw revenues grow by 11% to £22.4m (2004: £20.1m). This was achieved against a backdrop of a 4% decline in the UK radio market as a whole and came as a result of increased sponsorship, promotion and online revenues in addition to a growing contribution from our digital stations. This sales performance converted into Operating Profits for the year up 23% to £4.9m (2004: £4.0m), even after taking into account our increased investment in new digital stations and additional carriage costs. The lifeblood of any radio business is its listeners and 2005 saw a resurgence in Virgin Radio's performance. Listening Hours grew by 16% year on year and Reach by 3% partly reflecting the additional contribution of our growing digital stations, Virgin Radio Classic Rock, Virgin Radio Groove and the new member of the Virgin Radio family of stations, Virgin Radio Xtreme, launched in September. On our main service, a stable schedule and popular music policy have contributed to this steady progress, while our move to six monthly measurement of our AM listening by RAJAR in Q3 2005 has also helped to iron out some of the volatility that is a feature of the current diary-based measurement system. The Christian O'Connell breakfast show launched in January 2006. It has been well received by industry commentators and critics, and anecdotal evidence gained from our own tracking is encouraging. However, we anticipate that the true impact of this new show will only emerge later in 2006 as the show builds an established listener base. We remain firmly of the view that digital listening provides a range of opportunities that Virgin Radio is particularly well placed to exploit. We are seeing an accelerating migration of our listeners from AM on to digital with 23% of our audience now listening via digital platforms such as DAB, Dsat and online. We actively encourage listeners to switch to digital platforms through promotion of digital listening and have recently agreed to launch Virgin Radio on Freeview. Furthermore, our multiplatform approach has allowed us to successfully launch a family of digital-only stations. These stations form part of the Virgin Radio Network and we are already generating good levels of spot and sponsorship revenues. Digital platforms, as is the case in television, provide the opportunity to generate direct consumer revenues and we have a well developed strategy to convert our growing digital audience to direct revenue generation - particularly through Virgin Radio's well established website. Virgin Radio's cost base has been impacted by the development costs of the new services especially carriage cost on the new digital platforms. However, we continue to examine ways to reduce our other operating costs and we will shortly enter into dialogue with OFCOM on the financial terms for the extension of Virgin Radio's national AM licence to 2012. Our licence to broadcast on 1215AM currently costs in excess of £2m per year, and given the reducing effectiveness of this spectrum we expect this fee to be reduced to reflect the increase in competition for both listeners and advertisers since it was set in 2000. OUTDOOR Our outdoor business, Primesight, grew revenues by 12% to £20.7m (2004: £18.5m) as a result of increased panels with yield levels held at their 2004 level, despite a tough market. This was converted into a 7% uplift in Operating Profit, excluding reorganisation costs of £0.4m, to £3.0m (2004: £2.8m) despite the costs of our continued investment both in 6 sheet panels and our Backlight estate. Our inventory of 6 sheet panels increased by 9% to just over 13,500 at 31 December, with a number of excellent contract wins - David Lloyd Leisure, Bestway, One Stop Shops and Spar - contributing to this growth. Our rapidly developing Backlights business grew panel numbers by 55% to 107 panels, including 24 panels from a long-term marketing deal, making Primesight the largest operator of backlit 48 sheet and Mega 4 panels in London. Having sustained a period of rapid growth and achieving market-leading positions in health & leisure and convenience retailing, alongside 3rd place position in UK roadside 6 sheets, we now plan a period of consolidation to focus on increasing our margins. Panel development will be limited to replacing churn and key selective contracts and we have reduced staffing levels accordingly. We will however continue the momentum of development on our Backlights business which we plan to extend to the UK's other major cities during 2006. CINEMA 2005 was a poor year for the blockbuster movies on which the cinema industry relies to drive audience, and movie-going fell by 4%. Pearl & Dean grew market share across the year as we won contracts ahead of the anticipated loss of the UGC contract. As a result, we increased revenues by 3% to £29.9m (2004: £29.1m) while the cinema advertising market as a whole declined by 2% across the year. However, increases in minimum rent guarantees attached to some contracts outstripped our revenue growth, resulting in Pearl & Dean posting a small Operating Loss of £0.8m (2004: £0.9m Profit), excluding reorganisation costs of £0.4m. The cinema advertising business has become increasingly tough over the last couple of years as a result of consolidation of exhibitors and aggressive price competition from our sole competitor. In a market where both advertising contractors offer the same film stock, share is not a determinant of success. We have therefore moved to reduce costs and resize this business through headcount reduction. We are also seeking to reduce our exposure to minimum guarantees going forward. The loss of the UGC contract has in itself gone some way to achieving this objective. Furthermore, we have extended our contract with our biggest exhibitor, Vue, to 2010, cementing both that relationship and our principal base for the business. With no major contracts due for renewal over the next two years, we have focused on developing our position in the independent cinemas market. Pearl & Dean now accounts for 53% of the independent UK cinemas and we have identified scope for further growth. Additionally, we plan to capitalise on the unique position that the Pearl & Dean brand occupies with cinema-goers through the development of a consumer-facing website (www.pearlanddean.com) which, in addition to compelling content, will also have the ability to generate revenues both directly from users as well as through tie-ups with third party service providers. Through the initiatives already undertaken and an improvement in the quality of film stock, we expect to restore Pearl & Dean's performance in 2006. PENSIONS In common with many UK companies, our two defined benefit pension schemes have deficits as calculated under IAS19. We have been reviewing how to manage down the schemes' liabilities to reduce risk and will be taking further action in this area during 2006. The scale of the pension deficits under IAS19 is primarily influenced by two key assumptions, bond yields and the mortality rate. Mortality rates are of particular significance to our schemes as the majority of members live in the West of Scotland, where mortality rates are significantly worse than the national average. We have now reflected these geography-specific rates in the deficit calculations and, combined with the significant increase in the schemes' assets achieved during the year, this has seen the deficit, net of deferred tax, reduce to £36.7m at the year end (2004: £69.2m). SUMMARY Overall, this has been a solid trading result for SMG, coupled with some positive regulatory outcomes, which has resulted in a year of strong progress. Alongside this we have made significant headway in developing new revenue streams in response to the changing UK media environment. Andrew Flanagan Chief Executive SMG plc 14 March 2006 Consolidated income statement for the year ended 31 December 2005 31 December 31 December 2005 2004 Note £m £m Continuing Operations Revenue 2 210.0 201.2 Net operating expenses before reorganisation costs (178.8) (173.2) Reorganisation costs 3 (3.5) - ------- ------- Net operating expenses (182.3) (173.2) Operating profit 27.7 28.0 Share of results of associates 2 - 2.4 ------- ------- Profit from operations 2 27.7 30.4 Gain on disposal of investment 3 2.3 - Gain on disposal of property 3 - 1.0 Loss on disposal of subsidiary undertaking 3 - (2.5) Gain on disposal of associate undertakings 3 - 30.8 ------- ------ Profit before financing 30.0 59.7 Interest income 0.6 1.2 Finance costs 3,4 (11.8) (23.3) ------- ------- Profit before tax 18.8 37.6 Tax 5 (4.4) 0.2 ------- ------- Profit attributable to equity holders 14.4 37.8 ------- ------- Earnings per ordinary share - basic and diluted 7 4.6p 12.0p Underlying * Note Operating profit 31.2 28.0 Profit before tax 16 20.0 13.7 Earnings per share - basic and diluted 4.9p 3.9p * Underlying results exclude net associate contribution and exceptional items, and include additional IAS 32 convertible unsecured loan stock ('CULS') interest costs. Consolidated statement of recognised income and expense Year ended 31 December 2005 31 December 31 December 2005 2004 £m £m Actuarial gain/ (loss) recognised in the pension schemes 45.0 (8.6) Deferred tax arising thereon (13.5) 2.6 ------ ------- Net profit/ (loss) not recognised directly in income statement 31.5 (6.0) Profit for the period 14.4 37.8 ------ ------- Total recognised income for the period 45.9 31.8 ------ ------- Consolidated balance sheet at 31 December 2005 31 December 31 December Note 2005 2004 £m £m ASSETS Non-current assets Goodwill 8 222.1 222.1 Property, plant and equipment 9 36.0 31.2 Deferred tax asset 16.7 33.3 --------- --------- 274.8 286.6 --------- --------- Current assets Inventories 33.8 25.5 Trade and other receivables 56.2 58.8 Cash and cash equivalents 28.0 20.5 Short term bank deposit 10 5.0 7.5 -------- -------- 123.0 112.3 -------- -------- Total assets 397.8 398.9 -------- -------- EQUITY Capital and reserves attributable to the Company's equity holders Called up share capital 13 7.8 7.8 Share premium 13 59.0 58.8 Merger reserve 173.4 173.4 Equity reserve 13 2.5 - Other reserve 13 5.3 5.2 Hedging reserve 13 (0.5) - Retained earnings 13 (125.1) (160.6) --------- -------- Total equity 122.4 84.6 --------- -------- LIABILITIES Non-current liabilities Financial liabilities - Borrowings 149.1 139.0 - Convertible unsecured loan stock 11 22.2 22.8 - Derivative financial liability 12 0.5 - - Other non-current liabilities 0.8 1.0 Retirement benefit obligation 15 53.0 100.2 ------- ------- 225.6 263.0 ------- ------- Current Liabilities Trade and other payables 36.8 39.3 Current tax liabilities 10.0 8.6 Provisions 3.0 0.3 Dividends payable - 3.1 -------- -------- 49.8 51.3 ------- -------- Total liabilities 275.4 314.3 Total equity and liabilities 397.8 398.9 -------- -------- Consolidated cash flow statement for the year ended 31 December 2005 31 December 31 December Note 2005 2004 £m £m OPERATING ACTIVITIES Cash generated by operations 14 26.7 16.6 Income taxes received - 1.6 Interest paid (9.0) (13.9) Pension deficit funding (2.8) (2.8) ------- ------- Net cash generated by operating activites 14.9 1.5 ------- ------- INVESTING ACTIVITIES Interest received 0.3 1.6 Dividends received from associate undertakings - 2.9 Disposal of investment 2.7 - Disposal of associate undertakings - 118.7 Disposal of subsidiary undertaking - (1.9) Proceeds from sale of property, plant and equipment - 4.0 Purchase of property, plant and equipment (11.2) (7.4) ------- -------- Net cash (used) / generated by investing activities (8.2) 117.9 ------- -------- FINANCING ACTIVITIES Dividends paid (11.6) (7.9) Repayment of existing bank borrowings - (232.2) Net borrowings drawn 10.1 139.0 Release of cash on deposit 2.5 2.5 Net repayment of loan notes/stock (0.2) (0.1) ------ ------- Net cash generated by/ (used in) financing activities 0.8 (98.7) ------ -------- Movement in cash and bank overdrafts 7.5 20.7 Net cash and bank overdrafts at beginning of period 20.5 (0.2) -------- -------- Net cash and bank overdrafts at end of period 28.0 20.5 -------- -------- Reconciliation of movement in net debt 31 December 31 December 2005 2004 £m £m Opening net debt (134.8) (242.5) Non-cash bank arrangement fees written off - (3.8) Movement in cash and bank overdrafts in the period 7.5 20.7 Net cash (inflow)/ outflow from increase/ (decrease) in debt financing (10.1) 93.2 IFRS decrease in CULS liability 0.6 - Movement in loan note liabilities 0.2 0.1 Net movement in Escrow cash (2.5) (2.5) ------- ------- Closing net debt (139.1) (134.8) ------- ------- Notes to the preliminary announcement for the year ended 31 December 2005 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 2005 and 31 December 2004 respectively. The information for the year ended 31 December 2004 does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditors' report on the financial statements was unqualified and did not include a statement under section 237(2) or (3) of the Companies Act 1985. The statutory financial statements for the year ended 31 December 2005 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. These financial statements have been prepared in accordance with the accounting policies based on International Financial Reporting Standards ('IFRS') and IFRIC interpretations endorsed by the European Union (EU) and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention as modified by the revaluation of derivative financial instruments. The 2004 comparative information has, as permitted by the exemption in IFRS 1, not been prepared in accordance with IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39, Financial Instruments: Recognition and Measurement. Instead, IAS 32 and IAS 39 have been implemented with effect from 1 January 2005. The same principle accounting policies and methods of computation are followed in this preliminary announcement as were published by the Company on 23 June 2005 (see below). The Group has elected to apply policies based on the amendment to IAS 19 issued in December 2004, which permits actuarial gains and losses to be recognised outside the Income Statement in the Statement of Recognised Income and Expense. The reconciliations of equity at 1 January 2004 and 31 December 2004 and the reconciliation of profit for the year ended 31 December 2004, as required by IFRS 1, including the significant accounting policies and full notes to 31 December 2004, have been published on the company's website www.smg.plc.uk on 23 June 2005. 2.Business segments For management purposes the Group is currently organised into four operating divisions (2004: three) - Television, Radio, Cinema and Outdoor. (In 2004, Cinema and Outdoor were reported as one division, Out of Home). These divisions are the basis on which the Group reports its primary segment information. Intersegment revenues are charged at prevailing market prices. Principal activities are as follows: Television - the production and broadcasting of television programmes and associated enterprises. Radio - the operation of commercial radio in the UK. Cinema - the provision of advertising space within cinema complexes. Outdoor - the provision of advertising solutions across various outdoor mediums. Segment information about these businesses is presented below. Year ended 31 December 2005 Television Radio Cinema Outdoor Group £m £m £m £m £m REVENUE External sales 137.0 22.4 29.9 20.7 210.0 ------- ------ ------ ------ ------- Independent Television Commission ('ITC') qualifying revenue was £109.0m. Turnover in 2005 includes £2.1m of revenues from sources outside the UK. Year ended 31 December 2005 Television Radio Cinema Outdoor Group £m £m £m £m £m PROFIT Segment result excluding reorganisation costs 24.1 4.9 (0.8) 3.0 31.2 ------ ----- ------ ----- Reorganisation costs (i) (3.5) ------ Profit from operations 27.7 Gain on disposal of investment (ii) 2.3 Financing (11.2) ------ Profit before tax 18.8 Tax (4.4) ------ Profit after tax 14.4 ------ Operating profit in 2005 includes £1.1m arising outside the UK. Year ended 31 December 2005 Television Radio Cinema Outdoor Group £m £m £m £m £m REVENUE External sales 133.5 20.1 29.1 18.5 201.2 ------- ------ ------ ------ ------- ITC qualifying revenue was £111.7m. Turnover in 2004 includes £1.8m of revenues from sources outside the UK. PROFIT Segment result 20.3 4.0 0.9 2.8 28.0 ------ ------ ----- ----- Share of associates (iii) (iv) 2.4 ----- Profit from operations 30.4 Loss on disposal of subsidiary undertaking (v) (2.5) Gain on disposal of associate undertakings (vi) 30.8 Gain on disposal of property (iii) 1.0 Financing (22.1) ----- Profit before tax 37.6 Tax 0.2 ----- Profit after tax 37.8 ----- Operating profit in 2004 includes £1.1m arising outside the UK. i) Attributable to Television segment (£2.7m), Outdoor segment (£0.4m) and Cinema segment (£0.4m) ii) Attributable to Group (unallocated by reporting segment) iii) Attributable to Television segment iv) Share of associate's results are reported net of tax charge of £1.1m v) Publishing division discontinued in 2003 vi) £20.5m attributable to Television division and £10.3m attributable to Radio division 3.Exceptional items i) Reorganisation costs In December 2005, the Group announced plans to reorganise the Television business in light of reduced Public Service Broadcasting licence requirements and the impact of new technology which will arise from the forthcoming move of Scottish Television to new premises in Pacific Quay, Glasgow. In the same month, the Group committed to a reorganisation of the structure of the Out of Home division, resulting in the creation of separate Outdoor and Cinema divisions. Both decisions culminate in a reduction in headcount within the organisation, resulting in the creation of a provision for exceptional costs of £3.5m. ii) Gain on disposal of investment On 20 October 2005, the Group announced the sale of its 19.9% stake in Heart of Midlothian plc ('Hearts') to Heart of Midlothian 2005 Limited, a company wholly owned by UAB Ukio Banko Investicine Grupe ('UBIG') at a consideration of £0.9m, or 35 pence per share. The Group also entered into an agreement for the disposal of its entire holding of convertible loan stock in Hearts to UBIG for a consideration of £1.8m plus accrued interest. The disposal resulted in a net gain of £2.3m to the Group. iii) Gain on disposal of property In 2004, the Group's property at Cowcaddens was sold resulting in a gain of £1.0m. 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 £2.5m during the first half of 2004. v) Gain on disposal of associate undertakings The disposal of the Group's 27.8% shareholding in Scottish Radio Holdings ('SRH') to EMAP plc on 16 January 2004 raised cash proceeds of £90.5m, resulting in a gain on disposal of £10.3m after disposal costs of £1.6m. The disposal of the Group's 25% shareholding in GMTV Limited ('GMTV') to ITV plc on 12 October 2004 for £31.0m cash less a dividend of £0.7m resulted in a gain of disposal of £20.5m after disposal costs of £0.5m. vi) Finance costs In 2004, £6.7m of unamortised bank facility arrangement fees were written off. The remaining unamortised balance was also written off following the replacement in November 2004 of existing bank facilities with a new £158.0m five year revolving credit and overdraft bank facility on improved terms. 4.Finance costs 31 December 31 December 2005 2004 £m £m Interest expense: Bank borrowings 9.3 12.5 CULS and loan note interest 1.7 1.4 ------- -------- 11.0 13.9 Pension finance cost 0.8 2.7 ------- ------- Finance costs excluding exceptional items 11.8 16.6 Exceptional finance costs (note 3 (vi)) - 6.7 ------- ------- Finance costs 11.8 23.3 ------- ------- 5.Tax 31 December 31 December 2005 2004 £m £m The charge for tax is as follows: Tax on profit on ordinary activities excluding exceptional items at 23% (2004:10%) 4.6 0.3 Tax effect of exceptional items (0.2) (0.5) ----- ------ 4.4 (0.2) ----- ------ 6.Dividends 31 December 31 December 2005 2004 £m £m Amounts recognised as distributions to equity holders in the period: Final dividend for the year ended 31 December 2003 of 2.5p - 7.9 Interim dividend for the year ended 31 December 2004 of 1.0p - 3.1 Final dividend for the year ended 31 December 2004 of 1.5p 4.7 - Proposed interim dividend for the year ended 31 December 2005 of 1.2p 3.8 - ----- ------ 8.5 11.0 ----- ------ The interim dividend of 1.2p per share was paid on 24 November 2005 to shareholders on the register at 21 October 2005. The proposed final dividend of 1.7p per share to be paid on 13 July 2006 to shareholders on the register at 9 June 2006 was approved by the Board on 10 March 2006 and has not been included as a liability as at 31 December 2005. 7.Earnings per share Basic earnings per share (EPS), excluding exceptional items is calculated as follows: 31 December 31 December 2005 2004 £m £m Attributable profit for the financial period (including exceptional items) 14.4 37.8 Effect of exceptional items 1.0 (23.1) ----- ------ Attributable profit for the financial period 15.4 14.7 ----- ------ Weighted average number of shares in issue 314.5m 314.3m Earnings per ordinary share 4.9p 4.7p ------ ------ Basic EPS, inclusive of exceptional items for the year is 4.6p (2004: 12.0p). There is no difference between basic and diluted EPS as there is no material impact from dilutive share options. 8.Goodwill £m Cost At 1 January 2005 and 31 December 2005 293.0 Accumulated amortisation At 1 January 2005 and 31 December 2005 70.9 ------ Net book value at 1 January 2005 and 31 December 2005 222.1 ------ Goodwill comprises capitalised goodwill on acquisitions completed since 1 January 1998. 9.Property, plant and equipment Plant, Land and technical buildings equipment leasehold and other Total £m £m £m Cost or valuation At 1 January 2005 0.7 76.9 77.6 Additions 0.1 11.1 11.2 ----- ------ ------ At 31 December 2005 0.8 88.0 88.8 ----- ------ ------ Accumulated depreciation and impairment At 1 January 2005 0.3 46.1 46.4 Charge for year 0.3 6.1 6.4 ----- ----- ----- At 31 December 2005 0.6 52.2 52.8 ----- ------ ------ Net book value at 31 December 2005 0.2 35.8 36.0 ----- ------ ------ Net book value at 31 December 2004 0.4 30.8 31.2 ----- ------ ------ 10.Short term bank deposit The short term bank deposit relates to £5.0m placed in Escrow for a further two years (£10.0m in 2003 reducing by £2.5m 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. 11.Convertible unsecured loan stock The CULS as at 31 December 2005 is convertible on 30 April in each of the years 1999 to 2007 inclusive. The CULS are convertible into new SMG plc 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 during both the current and prior year. In accordance with the requirements of IAS 39, an adjustment of £0.6m was made during the year to reflect the debt to equity split of the CULS balance outstanding. As at 31 December 2005, the outstanding CULS balance was £22.2m (2004: £22.8m). 12.Derivative financial liability The derivative financial liability of £0.5m has arisen as a result of an interest rate swap. The notional principal amount of the outstanding interest rate swap contract at 31 December 2005 was £60.0m. At 31 December 2005 the fixed interest rates are 4.64% and floating rates are 4.94% (3 month LIBOR). Any net gain or loss deferred in equity will reverse during the next three years, being the life of the swap. 13.Statement of changes in shareholders' equity Share Share Equity Other Hedging Retained Capital Premium reserve reserve reserve arnings £m £m £m £m £m £m At 1 January 2004 7.8 58.8 - 4.3 - (181.4) IFRS 2 charge for share-based payments - - - 0.9 - - Net profit - - - - - 37.8 Dividends - - - - - 11.0) Actuarial loss - - - - - (8.6) Deferred tax thereon - - - - - 2.6 --- --- --- --- --- ----- At 1 January 2005 7.8 58.8 - 5.2 - (160.6) Net profit - - - - - 14.4 Dividends - - - - - (8.5) Shares issued during the period - 0.2 - - - - Equity portion of CULS created under IAS 32 - - 2.5 - - (1.9) IFRS 2 charge for share-based payments - - - 0.1 - - Actuarial gain - - - - - 45.0 Deferred tax thereon - - - - - (13.5) Fair value loss on interest rate swaps - - - - (0.5) - ----- ---- ----- ----- ----- ----- At 31 December 2005 7.8 59.0 2.5 5.3 (0.5) (125.1) ----- ---- ----- ----- ----- ----- There has been no movement in the merger reserve during the year ended 31 December 2005. 14.Notes to cash flow statement 31 December 31 December 2005 2004 £m £m Operating profit (before reorganisation costs) 31.2 28.0 Depreciation and other non-cash items 6.6 6.4 ------ ----- Operating cash flows before movements in working capital 37.8 34.4 Increase in inventories (8.3) (7.6) Decrease/ (increase) in trade and other receivables 1.7 (14.2) (Decrease)/ increase in trade and other payables (4.0) 5.7 Development and reorganisation costs (0.5) (1.7) ------ ------ Cash generated by operations 26.7 16.6 ------ ------ 15.Retirement benefit schemes The Group operates two defined benefit pension schemes. 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 2005 and updated to 31 December 2005 by a qualified independent actuary. The major assumptions used by the actuary were: At 31 December At 31 December 2005 2004 Rate of increase in salaries 3.25% 3.30% Rate of increase of pensions in payment 2.75% 2.80% Discount rate 4.80% 5.30% Inflation 2.75% 2.80% 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 2005 2004 £m £m Equities 8.0% 146.2 8.0% 131.8 Bonds 4.1 - 4.9% 109.6 4.5-5.3% 90.1 ------- ------ Fair value of schemes' assets 255.8 221.9 Present value of defined benefit obligations (308.8) (322.1) ------- ------- Deficit in the schemes (53.0) (100.2) ------- ------- A related offsetting deferred tax asset of £16.3m is included under non-current assets. Therefore the net pension scheme deficit amounts to £36.7m at 31 December 2005 (£69.2m at 31 December 2004). 16.Calculation of underlying profit before tax 31 December 31 December 2005 2004 £m £m Profit before tax 18.8 37.6 Adjusted for: Reorganisation provision 3.5 - Gain on disposals of investment and property (2.3) (1.0) Net gain on disposals of subsidiary and associate undertakings - (28.3) Unamortised bank fees written off - 6.7 Interest effect of GMTV disposal - 1.5 Share of associate's contribution - (2.4) CULS interest cost* - (0.4) ----- ------ Underlying profit before tax 20.0 13.7 ----- ------ * As IAS 39 has only been adopted from 1 January 2005, the current period additional CULS interest cost has been included within the income statement. 17.Mailing A copy of the annual report is being sent to all shareholders on 25 April 2006 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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