Final Results - PART 1

Future Network PLC 10 March 2004 PART 1 10 March 2004 THE FUTURE NETWORK PLC Preliminary results for the year ended 31 December 2003 The Future Network plc (LSE: FNET), the international specialist consumer magazine group, today announces its preliminary results for the year ended 31 December 2003. Financial highlights Adjusted results* Turnover £182.7m (2002: £165.3m) Up 11% Adjusted operating profit £22.5m (2002: £18.2m) Up 24% Adjusted pre-tax profit £22.7m (2002: £18.8m) Up 21% Adjusted earnings per share 4.9p (2002: 4.4p) Up 11% First dividend of 1.25p per share New Net cash balances of £13.4m (2002: £16.8m) Strong balance sheet Statutory results Turnover £182.7m (2002: £165.3m) Up 11% Operating profit £9.5m (2002: £10.1m) Down 6% Pre-tax profit £9.7m (2002: £10.7m) Down 9% Earnings per share 0.8p (2002: 1.9p) Down 58% First dividend of 1.25 p per share New Net cash balances of £13.4m (2002: £16.8m) Strong balance sheet Other highlights Circulation revenue up 12%, advertising up 9% Overall double-digit growth Games, good; computing, difficult; entertainment, strong Profitable portfolio UK business solid, US very strong, Europe better Improved in each country 23 new monthly magazines, 15 launches, 8 acquired Expansion continues Strong performance in second half-year Confirms seasonal trend Proposed change of financial year-end to 30 September Better for managing business *Definitions Adjusted results are presented to provide a better indication of overall financial performance and to reflect how the business is run on a day to day basis. The only adjustments made are to remove goodwill amortisation and other operating income. Commenting on the results, Greg Ingham, Future's Chief Executive said: 'The Future Network is an international business which has traded well in 2003. It is growing, and is in a strong position in the field of special-interest consumer magazine publishers. We have valuable consumer properties managed by a talented and motivated team. I am optimistic that our shareholders' confidence in The Future Network will continue to prove justified in the years to come.' Enquiries: The Future Network plc Greg Ingham, Chief Executive Tel: 01225 442244 John Bowman, Finance Director Hogarth Partnership James Longfield/Georgina Briscoe Tel: 020 7357 9477 Chairman's statement Summary I am delighted to report on a successful year with double-digit percentage growth in turnover, adjusted operating profits and adjusted earnings per share. The Future Network has grown by both launch and acquisition; and the Company is announcing today its first dividend. The strength of The Future Network is the focused effort and dedication of our staff. Their enthusiasm and talent continues to underpin the success and popularity of our magazines. We now have more than 1,000 people producing 98 monthly magazines. Financial results for 2003 compared with 2002 Group turnover rose by 11% to £182.7m; adjusted operating profit rose by 24% to £22.5m; and adjusted earnings per share rose 11% to 4.9 pence per share. The Future Network has again been strongly cash generative and ended the year with net cash of £13.4m. This is despite spending £18.4m on acquisition activity - the benefit of which starts to become more evident in 2004. Against this strong financial background the Board recommends a first dividend, amounting to 1.25 pence per share for the full year 2003. It is also the current intention of the Board to recommend a final-only dividend of 1.25 pence per share for the nine months to 30 September 2004, in the absence of exceptional circumstances and following our proposed change of financial year-end which I explain below. Business growth Over the last two years, we have significantly expanded our business. Since the beginning of 2002, we have launched 28 monthly magazines, acquired a further 8, and closed or sold a total of 14. This brings our portfolio of monthly special-interest consumer magazines to a total of 98 at the end of 2003. From this broader base of games, computing and entertainment titles, we have been able to drive profitability further. It is pleasing that progress has been made in each of The Future Network's four countries, most notably in the US in 2003. In seeking to develop the business further, the Board has spent time reviewing strategic priorities and the Chief Executive's review summarises our growth strategy. Board and corporate governance On 12 March 2003 John Mellon and Lisa Gordon joined the Board as independent non-executive Directors, bringing the number of independent non-executive Directors to five. John has had a successful business career in magazine publishing, including as Chairman of IPC Magazines. Lisa was the Corporate Development Director of Chrysalis Group for eight years. With effect from 16 September 2003, Colin Morrison, who was Chief Operating Officer, resigned as a Director of the Company and subsequently left the Group on 31 December 2003. Colin joined the Company in January 2001 as Chief Operating Officer and also filled the position of UK Managing Director from July 2001. The role of Chief Operating Officer has now ceased. The Board is grateful to Colin and wishes him the very best for his next challenge. We continue to note corporate governance developments. An important aspect of this is the composition of the Board and I believe that The Future Network has a good balance between executive and non-executive Directors, and that our Board is effective. I welcome observations from shareholders on any aspect of governance. Annual General Meeting 2004 Our 2004 AGM will be held on Thursday 13 May in Bath and the business for that meeting will include eleven resolutions. I should like to highlight two significant new proposals. Having paved the way last year to enable the payment of dividends, and with the strong financial performance for 2003 summarised above, the Board has recommended a first dividend, amounting to 1.25 pence per share for the full year 2003. The payment of this dividend is subject to shareholder approval at the AGM. The Board also proposes to change the financial year-end of the Group from 31 December to 30 September. The October to December period generates a significant proportion of revenues and profits and makes forecasting performance during the year a challenge. Changing the year-end will facilitate the management of the business and build in more certainty in predicting outcomes. It is also notable that within this busiest trading quarter, the business prepares detailed operating budgets for the ensuing financial year; reviews staff salaries; and monitors closely the financial implications of any deviation from budget arising in the last quarter of the financial year. By changing the financial year-end to 30 September, we believe that we will achieve a more balanced and effective management of the business internally, whilst also providing a better framework for managing the business as a public company. The Board therefore proposes to shorten the current financial reporting period by three months, so that the Company's next audited results would be for the nine months to 30 September 2004. The proposed change of financial year-end is not a matter which requires the approval of shareholders. However, consistent with our views on aspiring to best practice in corporate governance, we have decided to invite shareholders to vote in favour of this change at the 2004 AGM. Current trading and prospects Current trading for January 2004 has been in line with internal expectations and we regard our trading prospects positively. The Future Network is an international business which has traded well in 2003. It is growing, and is in a strong position in the field of special-interest consumer magazine publishers. We have valuable consumer properties managed by a talented and motivated team. I am optimistic that our shareholders' confidence in The Future Network will continue to prove justified in the years to come. Roger Parry Chairman 10 March 2004 Chief Executive's Review Overview 2003 was another successful year for The Future Network. In this report I highlight several important matters in addition to those set out in our Operating and Financial Review. I also provide an update on our corporate strategy. Management of the Group I am proud to have led the Group through a successful year. I should like to start by recording my thanks to the many creative and commercial people we employ, who together are responsible for the very good progress we have made in 2003. Last year I outlined our ambition to launch new titles in 2003 and to make further acquisitions. In both cases we have made real progress. We have expanded our portfolio by doing both: launching in each of our four countries, and acquiring in the UK, the US and in France. I am particularly pleased with the progress made overseas, led by our country Managing Directors. In the US, Jonathan Simpson-Bint has done a remarkable job in leading strong growth in circulation, revenues and profits. This underpinned our confidence to invest in the acquisition of sector-leading guitar magazines in New York in the autumn. Sari Zaimi has worked hard to ensure both operational improvements in our French business as well as effective integration of the titles we acquired last year from Hachette. Our Italian business is now in a robust state under the strong leadership of Bernardo Notarangelo. As a result of progress in both countries, in terms of adjusted operating profit our Mainland European businesses are now once more profitable. Since September I have been acting Managing Director of the UK business. Our UK results show a business with very good margins - amongst the best in our industry. From here, our task is to stimulate further growth in what has been our strongest business. It is interesting to note that The Future Network's combined international sales - owned businesses, licences and exports - exceed those in the UK, further underpinning the improved quality of the Group's earnings. Special-interest consumer magazine publisher The Future Network's publishing philosophy is based on providing quality editorial products that are defined by the depth of understanding of special-interest areas that meet the needs of defined groups of readers. The magazines are characterised by editorial authority, quality of content and high value. In a market place where readers are ever more demanding, The Future Network is recognised for the excellence of its products. Our business model is typically based on premium price, premium quality. And when the highest-priced is also the biggest-selling, then there is an even more attractive business opportunity. In turn, this creates an appealing audience for advertisers: sector-leading volumes of readers who have demonstrated their depth of interest via purchasing high-cover price magazines. Additionally, the scale of our magazines can also be attractive for non-endemic advertisers. And specialist is not a proxy for small. Our Official PlayStation 2 Magazine in the UK is the ninth-highest ranking of all UK monthly magazines in terms of consumer spend. Sectors Games We continued to drive our long-term success in the games sector in 2003. As signalled a year ago, the sector now accounts for 46% of Group revenues and 45% of Group profit (as measured by gross contribution). The Future Network is the worldwide leader in games magazines, with 2003 revenues of £85m (2002: £76m). Our largest-selling magazine is now the US Official Xbox Magazine, with current monthly sales of 403,000, and we now publish editions of the Official Xbox Magazine in five countries with licensed editions in a further four. Our largest-selling UK magazine is Official PlayStation 2 which sold a monthly average of 188,000 copies in 2003, and we also publish the Official PlayStation 2 magazine in France. Computing Computing titles provided 32% of our 2003 magazine revenues. The Future Network is a significant publisher of computing magazines in its four territories, with 2003 revenues of £58m (2002: £54m). Once again we have increased our total computing revenues, despite difficult market conditions. Our teams, who are highly focused, have found smart ways to develop new business and it is pleasing that some of our newer digital titles have grown strongly. There are some signs that technology markets are finally beginning to pick up again, particularly in the US, which should prove beneficial to a company with a strong technology element such as The Future Network. Although it is very early days, we are pleased with the recent launch in the US of Mobile PC, our first significant launch in the US for two years. Entertainment The Future Network's UK Entertainment portfolio comprises a number of separate special-interest magazines, ranging from music-making to film and mountain-biking, from stitching to technology and modified cars. Together with our recently acquired guitar titles in the US, they provide us with a diversified magazine portfolio. In 2003 our entertainment titles performed strongly overall and we intend to expand further in these areas, building on our long-term success in these special-interest areas of the market. The Future Network has been sector leader in guitar magazines for almost a decade in the UK. We have achieved growth once more this year, and this durable success in a familiar special-interest area encouraged us to enter the US guitar market in 2003. In two separate deals last autumn, we bought the number one and number three best selling magazines for a combined £11.5m, to become worldwide leaders of an attractive sector. UK magazine distribution The UK's largest magazine distributor, Marketforce, will be distributing our magazines with effect from May 2004. We are pleased with this appointment and believe that having the benefit of their scale and experience will help our UK business. Corporate Strategy The Board seeks to enhance shareholder value by maintaining our pace of growth, which has seen substantial growth in Group value since 2001. To this end, we have a clear strategy: • To exploit the significant growth opportunities in our core area of expertise - special-interest consumer magazines • To focus new investment on the UK and US businesses • Further to increase the diversity of our magazine portfolio, thereby reducing our dependence on any single sector • To use the Group's strong balance sheet and cash generative qualities to pursue acquisitions • To build on our established track record of launching new titles. We have been focused in 2003 on seeking to improve the business in every area. We have continued to make significant progress, which has been beneficial to shareholders and to Future people alike. We look forward with confidence. Greg Ingham Chief Executive Officer 10 March 2004 Operating and Financial Review New in 2003 • Double-digit growth in adjusted eps • First dividend Purpose of Review This review explains the financial results for 2003. It is also intended to help readers to assess the future performance of the Group by setting out the Directors' analysis of the business. Accordingly, I comment on business trends evident in 2003; on accounting policies that have required the exercise of judgement in their application, and to which the results are most sensitive; and on the measures used by the Directors as key performance indicators in managing the business. As last year, this review focuses on adjusted figures which are presented to provide a better indication of overall financial performance and to reflect how the business is managed on a day to day basis. The only adjustments made are to remove goodwill amortisation and other operating income. Looking forward, I also comment on our aspirations to achieve further growth in earnings, our dividend policy, the planned change of financial year-end in 2004, and the likely impact of International Financial Reporting Standards in 2005/ 2006. Structure and size of the Group By the end of 2003, the Group published 98 special-interest consumer magazines and operated subsidiary companies in the UK and three overseas countries: the US, France and Italy. In addition, the Group licensed local editions of its magazines in a further 31 countries. The Group's progress in comparison with 2002 can be seen from the following information. 2003 2002 Change Total turnover £182.7m £165.3m Up 11% Magazines 98 82 See table overleaf Overseas subsidiaries 3 3 No change Year end headcount 1,033 934 Up 11% Acquisition spend £18.4m £0.1m Four in 2003 Net cash £13.4m £16.8m Net outflow of £3.4m Magazine portfolio By the end of the year, the Group published 98 special-interest consumer magazines in four countries, as follows: Monthly titles At 1 January Launches/ Disposals/ At 31 December acquisitions closures UK 54 12 (5) 61 US 5 2 - 7 France 13 6 (2) 17 Italy 10 3 - 13 Total 82 23 (7) 98 The Group's magazine portfolio can be analysed by sector as follows: Monthly titles Games Computing Entertainment Total UK 15 21 25 61 US 3 2 2 7 France 8 7 2 17 Italy 6 7 - 13 Total 32 37 29 98 During the year 15 titles were launched and eight were acquired. The amount spent on magazine launches was £2.0m (as measured by losses at the gross contribution level), which is within the estimate provided by management in September. The net cash consideration paid for magazine acquisitions amounted to £18.4m. Magazine launch activity is discussed below and magazine acquisitions are discussed later in this report. £1.3m was spent on magazine launch activity in the UK and mainland Europe. Ten magazine titles were launched in the UK. The most expensive of these launches was Bang, an alternative music magazine, which did not achieve the required volume of sales to justify continued publication. Accordingly, this magazine was closed in December 2003. The financial performance of magazine launches in France and Italy was satisfactory. In the US, £0.7m was spent on the set-up costs of Mobile PC, which went on sale in January 2004. All staff, promotional and other expenses relating to this title incurred during 2003 were expensed against 2003 US profits. Magazines launched during 2003 Country Title UK Focus Guides UK Digital Camera Shopper UK Digital Photography Techniques UK Windows XP Answers UK Masterclass series UK Your Family Tree UK Bang UK What Guitar UK Digital Home UK Laptop magazine France Digital Foto France Kid Paddle Italy Digital Camera Italy Linux Pro Italy Videogiochi Magazines acquired during 2003 Country Title US Guitar World US Guitar One France PlayStation 2: Le Magazine Officiel France Joypad France Joystick France DVD Magazine UK PSW UK Xbox World During the last two years, the Group has launched a total of 28 magazines and acquired a further 8. Magazines closed or sold in the same period number 14. This represents net expansion of 22 magazines, and the Group plans to expand further in 2004. In relation to magazine launches, the Group anticipates a similar level of financial commitment to that incurred in 2003 (£2m of net losses as measured at the gross contribution level). This level of investment in the development of the Group's portfolio can readily be funded from the Group's cash resources. Key performance indicators used by management The Directors monitor the Group's progress by reference to circulation and advertising revenue by territory, by type and by sector. For management accounts purposes, each magazine has its own profit and loss account, detailing magazine revenues and (after deducting direct magazine-related costs) the resulting gross contribution. Any magazine which produces a negative gross contribution is considered carefully, to ensure that such a result is justified in business terms: for example, that early losses following a magazine launch are running within acceptable parameters. Overheads are reviewed as a block of expenditure on a country-by-country basis. Gross contribution less overheads (excluding goodwill amortisation) results in adjusted operating profit, which the Directors regard as the single most important performance measure in assessing the Group's profitability at the operating level. In addition, the Directors monitor central costs, financial commitments, the management of treasury risk and taxation liabilities. The Board's overall aim is to achieve growth in adjusted earnings per share. Accounting policies The Group's accounting policies remained unchanged compared with the previous year. Accordingly, no accounting policy changes had any impact on the measurement of the Group's pre-tax profits for 2003. There are however several areas within the 2003 Group accounts which required the exercise of judgement by management, notably the areas of revenue recognition, bad debt provisions and provisions in respect of onerous property leases which have reduced during the year. Revenue recognition As in previous years, circulation and advertising revenue relating to a magazine is recognised with effect from the date the issue goes on sale. For example, the results for each year include revenue relating to magazines which went on sale during December, but which did not come off sale until during January. Because magazines are distributed to retail outlets on a sale or return basis, an estimate is made of expected sales; this is later corrected to actual sales when these are known. Appropriate adjustments were made to the results for 2003 (and for each previous year) in order to update initial estimates to reflect the latest available returns information. Review of the Group profit and loss account Group turnover Group turnover for the year was £182.7m, an increase of 11% on 2002. In 2003 turnover of £7.8m was generated from acquisitions made during the year whilst the increase in turnover from continuing operations was £9.6m or 6%. All turnover was derived from the Group's principal activity, of publishing special-interest consumer magazines serving the games, computing and a number of entertainment sectors. 2003 2002 Change % £m £m % Continuing operations 96% 174.9 165.3 Up 6% Acquisitions 4% 7.8 - - Group turnover 100% 182.7 165.3 Up 11% A comparison of turnover by territory is shown below: 2003 2002 Change % £m % £m % UK 54% 100.3 58% 97.1 Up 3% US 25% 46.2 24% 40.5 Up 14% Mainland Europe 21% 38.6 18% 29.5 Up 31% Intra-group - (2.4) - (1.8) - Group turnover 100% 182.7 100% 165.3 Up 11% In constant currencies, the above comparison would show the following: 2003 2002 Change % £m % £m % UK 54% 100.3 58% 97.1 Up 3% US 27% 50.2 24% 40.5 Up 24% Mainland Europe 19% 35.1 18% 29.5 Up 19% Intra-group - (2.4) - (1.8) - Group turnover 100% 183.2 100% 165.3 Up 11% Turnover analysed by type is shown below: 2003 2002 Change % £m % £m % Circulation 69% 125.5 68% 111.9 Up 12% Advertising 29% 53.0 29% 48.6 Up 9% Other 2% 4.2 3% 4.8 Down 13% Group turnover 100% 182.7 100% 165.3 Up 11% Turnover analysed by sector is shown below: 2003 2002 Change % £m % £m % Games 46% 85.4 45% 76.3 Up 12% Computing 32% 58.4 33% 54.4 Up 7% Entertainment 22% 41.3 22% 36.4 Up 13% Intra-group - (2.4) - (1.8) - Group turnover 100% 182.7 100% 165.3 Up 11% Turnover by half year is shown below: 2003 2002 Change % £m % £m % First half 44% 80.6 45% 74.0 Up 9% Second half 56% 102.1 55% 91.3 Up 12% Group turnover 100% 182.7 100% 165.3 Up 11% Group adjusted operating profit Analysis of adjusted operating profit by territory is shown below: 2003 2002 £m £m UK 17.0 16.7 US 7.5 4.6 Mainland Europe 0.7 - Central costs (2.7) (3.1) Adjusted operating profit 22.5 18.2 Adjusted operating profit by half year is as follows: 2003 2002 Change % £m % £m % First half 29% 6.5 26% 4.7 Up 38 % Second half 71% 16.0 74% 13.5 Up 19 % Adjusted operating profit 100% 22.5 100% 18.2 Up 24 % The proportion of the Group's profits, as measured by gross contribution, by sector was: 2003 2002 Games 45% 38% Computing 31% 38% Entertainment 24% 24% UK performance for year Margin 2003 Margin 2002 Change % £m % £m % Turnover 100.3 97.1 Up 3% Direct costs (60.5) (57.2) Gross profit 40% 39.8 41% 39.9 - Distribution costs (6.0) (5.3) Gross contribution 34% 33.8 36% 34.6 Overheads (16.8) (17.9) Adjusted operating profit 17% 17.0 17% 16.7 Up 2% Turnover for the year amounted to £100.3m, an increase of 3% compared with 2002. Circulation revenue increased by 3% compared with 2002 and advertising revenue increased by 3% compared with 2002. The proportion of turnover derived from circulation revenues remained the same at 73% (2002: 73%). In terms of UK sales, the split of revenue for 2003 and 2002 by sector was: 2003 2002 Games 33% 34% Computing 30% 29% Entertainment 37% 37% Turnover for the computing and entertainment sectors showed modest year-on-year increases of 5% and 6% respectively whilst games turnover has increased by 1% on the prior year. The split of gross contribution by sector is shown below: 2003 2002 % % Games 33% 32% Computing 31% 32% Entertainment 36% 36% The UK adjusted operating profit was £17.0 m, representing an adjusted operating profit margin of 17% (2002:17%). UK magazine portfolio During the year, Future launched ten monthly magazines including What Guitar, which has been added to the UK's already successful portfolio of guitar magazines; Digital Camera Shopper, supplementing Digital Camera Magazine which was launched in 2002; Windows XP Answers and Laptop magazine and the aforementioned Bang. The UK also launched a successful Masterclass series of 'bookazines', large magazine-format manuals sold at newsagents. In November, Future acquired the UK trading subsidiary of Computec Media AG for a cash consideration of £3.2m and a licensing arrangement with Computec Media in Germany. The principal magazines acquired were PSW and Xbox World and these are now published by Future in the UK. In February 2004 Future published the latest ABC audited circulation figures covering 48 titles in its UK portfolio of 60 monthly magazines. Average monthly sales in the UK for the audited titles were slightly up at 1,787,825 copies. The UK trends for Future's portfolio were (i) growth in entertainment; (ii) enhanced position within games; (iii) respectable performance for computing titles in difficult market conditions. The UK performance overall was satisfactory, and we have expanded the UK magazine portfolio by both launches and acquisitions. Export Activity The largest export markets for Future's UK magazines are the US and Australia. We are pleased to have grown total export sales from the UK to £10.9m, an increase of 12% on the £9.7m in 2002. Licensing We also significantly increased international licensing of Future's magazine portfolio by 29% during the year. The UK portfolio had licence revenues totalling £2.4m (2002: £1.8m) and the US portfolio had license revenues of £0.3m (2002: £0.3m) giving a Group total of £2.7m (2002: £2.1m). The Group licenses 103 editions of its magazines in 32 countries, in addition to those published by Group companies in the UK, US, France and Italy. T3 remains the Group's most licensed title, with local editions sold in 14 different overseas countries. US performance for year 2003 2002 Change £m £m % Turnover 46.2 40.5 14% Adjusted operating profit 7.5 4.6 63% Margin 16% 11% - Turnover for the year amounted to £46.2m, an increase of 14% (in sterling terms) compared with 2002. The increase in turnover from continuing operations was £3.6m or 9%. In September and October respectively, Future acquired Guitar World (and associated titles) and Guitar One magazines for a total consideration of £11.5m. These magazines together contributed £2.1m of turnover and £0.1m of adjusted operating loss and gave rise to goodwill amortisation of £0.7m. The average value of the dollar against the pound declined by 9% compared with 2002, so that revenue growth in dollar terms was 24% overall and 19% for continuing operations. Most of the increase in turnover came from increased circulation (up 30% in dollar terms) with advertising revenue (in dollar terms) up 19%. Adjusted operating profit for the year totalled £7.5m, representing an adjusted operating margin of 16% of turnover. In February 2004 Future published the latest circulation figures for its US magazines. Overall, US circulation increased by 23.6% year on year to 1,906,828 copies, including Guitar World and Guitar One. Future's US games magazine circulation growth has been driven by a 39% increase from Official Xbox Magazine, which is now Future's largest selling magazine of any sort at 403,222 copies per month. Of total US turnover, 51% came from circulation and 46% from advertising. Subscription revenue in the year accounted for 21% of US turnover (2002: 24%). The different business model applicable in the US is evident from the turnover splits noted above. Unlike UK magazines, most of which are sold at newsstands, over 75% of Future's magazine sales in the US are achieved by subscription. Magazine publishers estimate in advance the total number of magazine sales for a given period (known as the 'rate base') and it is on the basis of such estimates that advertising bookings are sold. The most recent circulation statistics covering the six months to December 2003 show that all our titles sold at least their rate base numbers. This has been the case throughout the life of Future Network USA. The US operation had a strong year in 2003, with revenues, profits and margins all well beyond management expectations. The strength of the portfolio, the recent launch of Mobile PC and the newly acquired guitar magazines in New York means that the outlook for 2004 is promising. However, after such a strong year in 2003, the Group does not expect to achieve significant profit growth in 2004, when the loss-making phase of Mobile PC magazine will continue to impact the result. Mainland Europe performance for year 2003 2002 Change £m £m % Turnover 38.6 29.5 31% Adjusted operating profit 0.7 - - Margin 2% - - Combined turnover from France and Italy was £38.6m including £5.4m from the Hachette (HDP) titles acquired in April 2003. Excluding these, the increase in turnover was 13%. The average value of the euro against the pound strengthened by 9% compared with the previous year, so that this revenue growth in euro terms was 2%. For 2003, 75% of revenue came from circulation and 24% from advertising. Circulation revenue (excluding HDP) grew by 13% and advertising revenue by 11% compared with 2002. The adjusted operating profit of £0.7m represents an adjusted operating profit margin of 2% and is stated after (a) intra-Group licence fees for the year of £1.8m (2002:£1.4m) and (b) integration costs of HDP amounting to £0.2m. During the year, the Group acquired HDP, a subsidiary company of Hachette Filipacchi Presse S.A. for a cash consideration of £3.5m. Prior to the year-end, the legal entity of HDP was merged with Future France. The HDP titles together contributed £5.4m of turnover and £0.2m of adjusted operating profit. This is before the anticipated full year effect of cost savings which have been targeted at £0.75m. Operating profitability as measured by adjusted operating profit Apart from launches, virtually all of the Group's magazines achieved a positive gross contribution in 2003 and magazines acquired during the year also recorded a positive gross contribution. Overheads in each country remained under control throughout the year. Adjusted operating profit achieved by the UK for 2003 was £17.0m and that achieved by overseas subsidiaries was £8.2m, giving a combined total of £25.2m. After deducting Group central costs of £2.7m (2002: £3.1m), adjusted operating profit for the year was £22.5m (2002: £18.2m) on turnover of £182.7m (2002: £165.3m) representing an adjusted operating profit margin of 12% (2002: 11%) on turnover. The Group's aim is for an adjusted operating profit margin of 15% in the mid-term and the improvement achieved in 2003 is consistent with that aim. Other operating income No such income arose during 2003. During the previous year, the UK business received £2.2m from HM Customs & Excise in respect of VAT overpaid in years prior to 2001. Most of this refund related to amounts reclaimable following a review of the complex rules relating to VAT applicable to magazines featuring cover-mounts. Goodwill amortisation In respect of continuing operations, the charge for the year was £10.4m (2002: £10.3m). Goodwill amortisation charged in relation to acquisitions totalled £2.6m and this reflects particular amortisation periods, which are explained below (under 'Intangible fixed assets'). Net interest receivable and similar items Net interest receivable and similar items totalled £0.1m for the year. This represents bank interest receivable of £0.6m, exchange gains of £0.1m less other charges totalling £0.6m. Pre-tax profit The Group's pre-tax profit of £9.7m (2002: £10.7m) comprises pre-amortisation profits of £22.7m (2002: £21.0m) less goodwill amortisation of £13.0m (2002: £10.3m). Tax The tax charge for the year amounted to £7.0m on pre-amortisation profits of £22.7m, giving an effective tax rate for the year of 31% (2002: 21%). The lower rate in the prior year reflected the recognition of a deferred tax asset in the US and certain prior year tax credits. The current year rate of 31% is consistent with the estimate provided when the Group announced its half-year results. The Group's current estimate of the effective tax rate likely to apply to taxable profits for calendar year 2004 is in the region of 30%. Earnings per share Basic earnings per share for the year amounted to 0.8p, (2002:1.9p). The reduction arises as a result of the increased amortisation charge in 2003 and the fact that in 2002 the earnings benefited from £2.2m of other operating income as discussed above. Adjusted basic earnings per share reflects earnings before goodwill amortisation and other operating income. Adjusted basic earnings per share for the year amounted to 4.9p per share (2002: 4.4p per share), an increase of 11%. Dividends During 2003, we took the necessary preparatory steps to enable the payment of dividends. This involved the cancellation of the Company's share premium account, which was effected on 12 June 2003 following the approval of shareholders at the Annual General Meeting held on 15 May 2003 and Court approval. As a result, the Company now has significant distributable profits. In light of the strong financial performance for the year, the Board recommends a final dividend, payable in respect of full year 2003, of 1.25p per share. If approved at the 2004 Annual General Meeting to be held on 13 May 2004, this first dividend will be payable on 24 May 2004 to shareholders on the register as at 23 April 2004. Dividend Policy and Dividend Cover The Board's intention is that dividends should be covered at least twice by adjusted earnings per share. These amounted to 4.9p for 2003, providing more than adequate cover for the proposed first dividend of 1.25p. It is also the current intention of the Board to recommend a final-only dividend of 1.25 pence per share for the nine months to 30 September 2004, in the absence of exceptional circumstances and following our proposed change in financial year-end. Proposed change of financial year-end The Board proposes to change the financial year-end of the Group from 31 December to 30 September. The October to December period generates a significant proportion of revenues and profits and makes forecasting performance during the year a challenge. Changing the year-end will facilitate the management of the business and build in more certainty in predicting outcomes. It is also notable that within this busiest trading quarter, the business prepares detailed operating budgets for the ensuing financial year; reviews staff salaries; and monitors closely the financial implications of any deviation from budget arising in the last quarter of the financial year. By changing the financial year-end to 30 September, we believe that we will achieve a more balanced and effective management of the business internally, whilst also providing a better framework for managing the business as a public company. The Board therefore proposes to shorten the current financial reporting period by three months, so that the Company's next audited results would be for the nine months to 30 September 2004. The following tables illustrate that a 31 December year-end results in a 25:75 split in adjusted operating profits (comparing H1 to H2). With a September year-end this will change to an estimated 60:40 split of adjusted operating profits (H1 compared to H2). The quarterly analysis of the performance during the year ended 31 December 2003 was as follows: Quarter ending: March June September December Total Turnover 21% 23% 24% 32% 100% Adjusted operating profit 14% 11% 29% 46% 100% The corresponding estimates in respect of the twelve months to 30 September 2003 show the following pattern: Quarter ending: December March June September Total Turnover 30% 22% 23% 25% 100% Adjusted operating profit 48% 13% 11% 28% 100% The proposed change of financial year-end is not a matter which requires the approval of shareholders. However, consistent with our views on aspiring to best practice in corporate governance, we have decided to invite shareholders to vote in favour of this change at the 2004 Annual General Meeting. If approval is given, our reporting plan will be as follows: Reporting period: Announcement in: Half year results to 30 June 2004 September 2004 Nine month results to 30 September 2004 December 2004 Half year results to 31 March 2005 June 2005 Full year results to 30 September 2005 December 2005 The next audited financial statements would be those for the nine-months to 30 September 2004. These would be accompanied by pro-forma financial statements for the twelve months to 30 September 2003 and 30 September 2004. These pro-forma financial statements would encompass the Group profit and loss account, Group cash flow statement, and notes to the financial statements concerning the Group profit and loss account. All this pro-forma financial information would be accompanied by a report prepared by the Company's auditors. Cash flow and funding Net cash position The Group started the year with net cash of £16.8m and ended the year with £13.4m. The year was significantly cash generative for the Group and the net cash inflow from operating activities was £22.6m (2002: £27.0m). The Group has maintained its bank facility, currently amounting to £27.5m and has borrowings under the facility denominated in US Dollars totalling £5.1m thereby leaving more than adequate headroom for the operational funding requirement of current activities. Hedging policy on interest rates No hedging arrangements were entered into during 2003 and none was outstanding from previous years. Hedging policy on foreign exchange rates The Group is exposed to exchange rate fluctuations in the US dollar and the Euro. The Board has developed policies in order to manage the exposures effectively. These policies include consideration being given to currencies negotiated in cross-border contracts and the use of spot and forward contracts as appropriate. No other instrument may be used without the approval of the Board. At 31 December 2003 there were no outstanding contracts with banks or other third parties in respect of foreign exchange hedging arrangements. Capital expenditure Capital expenditure amounted to £1.4m in 2003, compared with £0.7m in 2002. For 2004 capital expenditure is not expected to exceed £2.0m. Review of the Group's balance sheet The Group's net assets amounted to £111.9m (2002: £112.0m) at 31 December 2003. The most significant change in the make-up of the Group's balance sheet is the reduction in net current assets, a consequence of the £18.4m of cash spent on acquisitions during the year which is reflected in the increase in intangible fixed assets. Consequently the net current assets at 31 December 2002 of £5.8m have been reduced to net current liabilities of £7.0m (including a creditor of £4.0m for the proposed dividend). However the Group continues to have net cash, which at 31 December 2003 amounted to £13.4m (2002 £16.8m). Intangible fixed assets Intangible fixed assets at the year-end were carried on the balance sheet at £117.3m compared with £108.6m at the previous year-end. During the year, additions totalled £12.9m in respect of the titles acquired in the US, Guitar World and Guitar One; £4.7m in respect of the acquisition of HDP in France; and £3.8m in respect of the business acquired from Computec in the UK. The Group also acquired a number of smaller titles and subscriptions lists which amounted to £0.4m. The amortisation charge for the year amounted to £13.0m, compared with £10.3m in the previous year. The charge reflects goodwill amortisation over different periods, appropriate to the circumstances of each case. These periods are: Total period Years Existing UK business, acquired in 1999 20 UK business acquired from Computec in 2003 3 Existing US business, acquired in 1999 10 Guitar World and Guitar One magazines, acquired in the US in 2003 5 HDP business acquired in France in 2003 2 Existing Italian business, acquired in 1999 10 As at 31 December 2003, the £117.3m may be analysed by territory as follows: £m United Kingdom 77.9 United States 25.4 France 2.6 Italy 11.4 Total 117.3 The estimated likely goodwill amortisation charge in respect of 2004 is £15.8m. Tangible fixed assets The carrying value of the Group's tangible fixed assets at the year-end increased from £3.2m to £3.3m. This net increase reflects capital expenditure of £1.4m; a depreciation charge of £1.4m; and a net exchange gain of £0.1m. Working capital The Group had stocks of paper and other raw materials at the year-end, and work-in-progress in relation to magazines scheduled for publication in 2004. The total of these amounts was £3.5m, compared with £3.6m at 31 December 2002. Group debtors at 31 December 2003 amounted to £42.4m (2002: £33.3m) and included trade debtors of £34.1m (2002: £24.5m). The majority of this increase is attributable to the increased scale of the business following the four acquisitions made during 2003. In terms of average debtor days outstanding at the balance sheet date these remained at 56 days (2002: 56 days). Net cash As at 31 December 2003 the Group's net cash position was £13.4m represented by (i) cash at bank and short-term deposits totalling £20.1m; (ii) borrowing in US dollars totalling £5.1m, and (iii) a shareholder loan of £1.6m. Provisions Leasehold property The consolidated balance sheet contains provisions totalling £1.3m (2002: £2.9m) representing provisions against onerous lease commitments in respect of property. The property provision reduced during the year mainly as a result of rental payments in respect of vacant property and the net release of other provisions amounting to £0.5m. During the year the Group paid a total of £3.6m (2002 £4.1m) in relation to leasehold property, of which £2.8m (2002 £2.7m) was in respect of occupied property and £0.8m (2002 £1.4m) was in respect of unoccupied property. By the end of 2003, all UK property was fully occupied and accordingly the Group is no longer paying for any unoccupied property in the UK. Impact of International Financial Reporting Standards We have been planning carefully the steps required to ensure that the Group will be able to comply with the introduction of International Financial Reporting Standards following these becoming mandatory in 2005. Future is a relatively straightforward business and accordingly we expect to be able to comply with IFRS in the Group's financial statements for the year ending 30 September 2006, which will be the first period to which IFRS will apply. Alongside the audited figures for that year will be comparative figures for the year ending 30 September 2005. I note below the main areas of impact to Future: Intangible assets The most significant item on Future's balance sheet is goodwill which will need to be reassessed under current IFRS proposals in order that the total carrying value should be split under the following indicative headings: • Trademarks • Non-compete • Subscription lists • Goodwill Whilst the values allocated to trademarks, non-compete and subscription lists will be amortised over the appropriate periods the goodwill element will not be amortised but will instead be subject to annual impairment testing. It is therefore possible that fluctuations to reported earnings could occur in the event of impairment reviews concluding that impairment has taken place. Share based payments Since its Initial Public Offering in June 1999, Future has issued a significant number of share options. Our initial review of the impact of IFRS on accounting for share based payments concludes that the likely charge against Group profits, in this respect will not be more that £0.5m per annum. Additional charges would arise to the extent that further share options or shares are awarded in the future. Segmental reporting Segmental reporting is potentially more extensive under IFRS than at present but we believe that we already provide comprehensive segmental analysis of the Group's business. Cash flow reporting Future is a strongly cash generative business and the Group's cash flow statement is therefore important to a proper understanding of the business. The main changes to cash flow statements envisaged by IFRS are presentational in nature. Among Future's other assets and liabilities, we do not forsee any particular reporting difficulties arising. It is worth noting that Future does not have any financial instruments or defined benefit pension schemes, both of which can give rise to particular accounting complexity. In our Annual Report 2004 we will continue to monitor developments in this area and to summarise the more significant implications for financial reporting of the Group's results. Summary We have achieved greater profitability through increased sales, improved margins, an expanded portfolio, and bolt-on acquisitions funded from surplus cash. With significant growth in adjusted earnings per share and a strong balance sheet, this is the right time for us to start paying dividends. At the same time, we will continue to seek growth both organically and by pursuing appropriate opportunities to expand. John Bowman Group Finance Director 10 March 2004 This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW FR JLMTTMMJMTJI

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