IFRS release

SMG PLC 23 June 2005 SMG plc Restatement of financial information for financial year 2004 under International Accounting Standards and International Financial Reporting Standards Highlights SMG will be publishing its Interim 2005 results for the six month period to 30 June 2005 under International Accounting Standards (IAS) for the first time in September 2005. This report sets out the impact of IAS on SMG's 2004 financial statements together with an explanation of the changes from UK GAAP. In summary these are:- â€¢ Share based payments (IFRS 2) Introduction of profit and loss charge of Â£0.9m for share based payments â€¢ Goodwill Under IAS there is no annual amortisation of goodwill. This increases profit before tax by Â£14.8m â€¢ Virgin Radio carrying value Unchanged at 31 December 2004 UK GAAP value of Â£163.8m â€¢ Capitalised development costs Previously capitalised costs of Â£0.4m now expensed under IAS â€¢ Dividends Timing of recognition moves from an accruals basis to a declared basis â€¢ No material impact from IAS19. IAS32/IAS39 to be implemented in 2005 â€¢ All changes are NON-CASH in nature The indicative impact on 2005 based on 2004 results and including the impacts of IAS 32 and IAS 39 to be adopted in 2005 are:- Share based payments - IFRS 2 Â£0.9m CULS - IAS32 Â£0.4m Capitalised development costs Â£0.4m ----- Â£1.7m ----- â€¢ Under IAS there is no annual amortisation of goodwill. The indicative impact in 2005 will be to increase profit before tax by Â£14.8m. Introduction SMG currently prepares its primary financial statements under UK Generally Accepted Accounting Practice (UK GAAP). From 2005 onwards the Group will be required to prepare its consolidated financial statements in accordance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). This change applies to all financial reporting for accounting periods beginning on or after 1 January 2005 and, consequently, SMG's first IFRS results will be its interim results for the six months ended 30 June 2005. The Group's first annual report under IFRS will be for the year ended 31 December 2005. The date for transition to IFRS for SMG is 1 January 2004, this being the start of the earliest period of comparative information. To explain how SMG's reported performance and financial position are affected by this change, information previously published under UK GAAP is restated under IFRS in the attached appendices as follows: â€¢ Appendix I Reconciliations between IFRS and UK GAAP:- - at the transition date of 1 January 2004 - six months ended 30 June 2004 - for the financial year ended 31 December 2004 â€¢ Appendix II June 2004 interim accounts restated for IFRS â€¢ Appendix III December 2004 accounts restated for IFRS â€¢ Appendix IV Fair values of share options As noted below, these financial statements have been prepared on the basis of IFRSs expected to be applicable at 31 December 2005. These are subject to ongoing review and endorsement by the EU or possible amendment by interpretative guidance from the IASB and are therefore still subject to change. In particular, the EU is yet to endorse the amendment to IAS 19 (Employee Benefits). SMG has assumed that the amendment to IAS 19 is endorsed and intends to adopt it for its 2005 financial reporting. We will update our restated information for any such changes when they are made. Basis of preparation The financial information has been prepared in accordance with IFRS. The accounting policies applied are set out in the restated IFRS accounts for the year ended 31 December 2004 (Appendix III). Overview of impact Year ended 31 December 2004 IFRS UK GAAP Change % Â£m Â£m Â£m Statutory Profit before tax 37.6 25.3 12.3 iii 49% EPS (pence) 12.0 7.7 4.3 56% Headline Operating profit * 28.0 29.3 (1.3) i -4% Profit before tax ** 15.0 17.5 (2.5) ii -14% EPS (pence) ** 4.7 5.0 (0.3) -6% Net assets 398.9 370.3 28.6 8% * before goodwill, exceptional items and associates. ** before goodwill and exceptional items. i. IFRS 2 charge Â£0.9m and capitalised costs Â£0.4m. ii. IFRS 2 charge Â£0.9m, capitalised costs Â£0.4m and associated tax reclassified Â£1.2m iii. Reverse goodwill Â£14.8m offset by associate tax reclassified Â£1.2m, IFRS 2 charge Â£0.9m and capitalised costs Â£0.4m. The most significant impacts, all non-cash in nature, from the transition to International Accounting Standards are: â€¢ Impact on operating profit of 4% for 2004 due mainly to the IFRS 2 charge in respect of share based payments to employees (Â£0.9m) â€¢ The cessation of annual goodwill amortisation of Â£14.8m â€¢ Virgin Radio's carrying value unchanged at the 31 December 2004 UK GAAP value (Â£163.8m) â€¢ Reclassification of tax on associates into profit before tax, which reduces profit before tax in 2004. This will not recur in 2005 as all associate holdings were sold in 2004 Transitional arrangements The rules for first time adoption of IFRS are set out in IFRS 1 'First-time Adoption of International Financial Reporting Standards'. In general a company is required to determine its IFRS accounting policies and apply these retrospectively to determine its opening balance sheet under IFRS. The standard allows a number of exceptions to this general principle to assist companies as they move to reporting under IFRS. Where SMG has taken advantage of these exemptions, they are noted below. Changes in accounting policies The changes in financial information noted above are as a result of SMG changing its accounting policies to comply with the requirements of IFRS. Significant changes in policy, together with associated transitional arrangements, are set out below. The IFRS accounting policies applied are set out in the restated IFRS accounts for the year ended 31 December 2004 (Appendix III). The resultant changes by standard are quantified in Appendix I for the opening balance sheet at 1 January 2004, the six months ended 30 June 2004 and for the year ended 31 December 2004. IFRS 2 Share based payments In accordance with IFRS 2, SMG has recognised a charge to income representing the fair value of outstanding employee share options granted to approximately 320 employees. The fair value has been calculated using both a Black & Scholes valuation model and, for awards where a market condition is attached, a Monte Carlo valuation model. The charge to income is recognised over the relevant option vesting periods, adjusted to reflect actual and expected levels of vesting. SMG has not adopted the IFRS 1 optional transitional exemption. As SMG has previously publicly disclosed the fair value of equity schemes, IFRS 2 has been fully applied retrospectively to all options granted, but not fully vested, at the relevant reporting date. As a result, the share-based payment charge for 2004 includes all options granted and not fully vested at 31 December 2004, rather than only the value of options granted since 7 November 2002 (the effective date of IFRS 2). This approach is encouraged in the standard and gives a better indication of how past and future results are affected by IFRS 2. The operating profit impact in 2004 is a charge of Â£0.9m, offset by a deferred tax credit of Â£0.2m. The basis of calculation for deferred taxation is the difference between market price at the date of the financial statements and the option exercise price. As a result, the tax effect does not correlate to the charge at the Group's effective tax rate. IAS 19 Employee benefits As SMG has previously applied FRS I7 there is no material impact from the transition to IAS 19 in 2004. SMG has elected to take the optional transitional exemption, and has recognised all cumulative actuarial gains and losses in respect of employee benefit schemes at the date of transition to IFRS. This is consistent with the Group accounting policy adopted under the amendment to IAS 19 issued on 16 December 2004 whereby actuarial gains and losses are recognised in full in the period in which they arise in the statement of recognised income and expenditure. The only balance sheet impact of this policy is the separate disclosure of the deferred tax asset in relation to the pension liability. IFRS 3 Business Combinations IFRS 3 prohibits the amortisation of goodwill. The standard requires goodwill to be carried at cost with impairment reviews, both annually and when there are indications that the carrying value may not be recoverable. Under the transitional arrangements of IFRS 1 a company has the option of applying IFRS 3 prospectively from the transition date to IFRS. SMG has chosen this option rather than restate all previous business combinations. The impact of IFRS 3 and associated transitional arrangements on SMG are as follows: â€¢ all prior business combination accounting is frozen at the transition date â€¢ the carrying value of Virgin Radio was reassessed at 1 January 2004. Its value was then adjusted downwards by Â£10.9m back to the 31 December 2004 UK GAAP value of Â£163.8m. The carrying value of Virgin Radio is therefore unchanged at 31 December 2004 under IAS and UK GAAP â€¢ the value of goodwill is frozen at 1 January 2004 and the amortisation previously reported under UK GAAP for 2004 is removed for IFRS restatements The operating profit impact in 2004 is a reduction in the amortisation charge of Â£14.8m. IAS 32 and IAS 39 Financial Instruments IAS 32 and IAS 39 address the accounting for, and financial reporting of, financial instruments. IAS 32 covers disclosure and presentation, whilst IAS 39 covers recognition and measurement. SMG has taken the exemption from applying IAS 32 and IAS 39 to the comparative information to be presented in the Group's first IFRS financial statements and will adopt IAS 32 and IAS 39 with effect from 1 January 2005. As such the 2004 information relating to financial instruments continues to be presented under the current UK GAAP basis. Certain financial instruments ('compound instruments') are regarded under IAS 32 as having both a debt and an equity component. IAS 32 requires that the component parts be accounted for and presented separately according to their substance. The allocation between debt and equity is made at issuance and is not revised for subsequent changes in market interest rates, share prices, or other events. The equity component is assigned the residual value after deducting from the fair value of the instrument as a whole the value separately determined for the debt component on its own. SMG issued Â£23.3m of Convertible Unsecured Loan Stock ('CULS') in 1997 to part-finance the acquisition of Grampian Television. The CULS are convertible on 30 April each year into SMG shares on the basis of 50.2808 SMG shares per Â£100 nominal value. The CULS are unsecured, earn interest at 6.5% per annum and are repayable in October 2007. At 31 December 2004, Â£22.8m of CULS remained outstanding. The CULS are therefore a compound instrument. However, the accounting for IAS 32 will not be applied until 2005 as IAS 39 has not been applied to 2004. The general principle of IAS 39 is that financial assets should be recognised at fair value and financial liabilities should be recognised at amortised cost, although the IASB version has an option to fair value financial liabilities. Accounting for the movements in fair value is dependent on the designation of the relevant financial instrument. IAS 32 and IAS 39 will be introduced in 2005. The 2005 impact of IAS39 is not material, while the IAS32 impact related to the CULS results in a charge to profit of Â£0.4m and an opening reserves adjustment to create an equity reserve of Â£2.5m. IAS 10 Dividends Dividends to shareholders declared after the balance sheet date, but before the financial statements are authorised for issue, are not recognised as a liability at the balance sheet date but disclosed separately in the notes. Under UK GAAP, dividends for the accounting year were recognised as a liability at the balance sheet date. The effect of the change is an increase in equity at 31 December 2004 of Â£4.7m (Â£7.9m as of 1 January 2004) and a decrease in profit attributable to shareholders of Â£3.2m for 2004. IAS 12 Income Taxes IAS 1 requires separate disclosure of deferred tax assets and liabilities on the Group's balance sheet. This has resulted in the reclassification of the deferred tax element of retirement benefit obligations. (Â£28.9m at 1 January 2004, Â£28.0m at 30 June 2004 and Â£31.0m at 31 December 2004). IAS 16 Property, Plant and Equipment Certain types of previously capitalised expenditure, such as development and training costs are required to be expensed under IAS. The impact of these adjustments is to charge these costs to profit in 2004 (Â£0.4m). Recognition of acquired programming rights Under UK GAAP, SMG had a policy of recognising, within the cost of programming rights in stock, contractual commitments in relation to acquired programming rights where these were not yet available for transmission (e.g. film rights). Under IFRS, acquired programming rights are recognised at the level of payments made until the asset is available for transmission, whereupon the full cost of the rights is recognised within programming rights in current assets. This policy is in line with that of ITV plc and resulted in a reduction to programming rights held on the balance sheet, with a corresponding reduction in trade payables, of Â£5.2m at 31 December 2004 (Â£2.6m at 1 January 2004). Presentation of associate results IAS 1 requires that associate results be disclosed net of tax on the face of the income statement. As such, Â£1.1m has been reclassified to share of associate's results at 31 December 2004 (Â£0.1m at 30 June 2004). Conclusion The IFRS information in this release has been prepared under the basis of preparation set out above and, in particular, is subject to the completion of the EU endorsement process. The most significant impacts of the transition to IFRS upon the restated financial information is the charge for share-based payments not previously recognised under the UK GAAP and the cessation of goodwill amortisation. However, these changes, and the other IFRS changes are all non-cash in nature. Net assets are impacted as a result of these non-cash changes, but there is no impact upon the underlying cash balances within the business. George Watt Group Finance Director 23 June 2005 The financial information presented in the impact report and related appendices contains details of the transitional adjustments required to restate the Group's financial information under IFRS. Future presentation of restated financial information may be in a different format. The transitional adjustments presented have been calculated on the basis of the specific facts of the transaction and should not be used as indicators of future adjustments between UK GAAP and IFRS that will be required, due to the risk and uncertainty surrounding events in the future. Appendix I RECONCILIATIONS BETWEEN IFRS AND UK GAAP The following reconciliations provide a quantification of the effect of the transition to IFRS. The reconciliation below provides an overview of the impact on total equity of the transition at 1 January 2004, 30 June 2004 and 31 December 2004. There follows a further five reconciliations which provide details of the impact of the transition on: â€¢ Equity at 1 January 2004 â€¢ Equity at 30 June 2004 â€¢ Equity at 31 December 2004 â€¢ Net income for the six months ended 30 June 2004 â€¢ Net income for the year ended 31 December 2004 Summary of equity reconciliations 1 Jan 2004 30 June* 2004 31 Dec 2004 Â£m Note Â£m Note Â£m Note Total equity under UK GAAP 66.8 65.6 77.1 Goodwill impairment (10.9) a (10.9) a (10.9) a Goodwill not amortised after date of transition - 7.4 b 14.8 c 2003 final dividend not recognised as liability until declared 7.9 d - - 2004 interim dividend not recognised as a liability until declared - 3.1 e - 2004 final dividend not recognised as liability until declared - - 4.7 f Capitalised costs (1.5) g (1.7) g (1.9) g IFRS 2 opening adjustment and charge to income statement (4.3) h (4.7) h (5.2) h IFRS 2 reserve cerated 4.3 h 4.7 h 5.2 h Deferred tax adjustments 0.6 i 0.6 i 0.8 i ----- ----- ----- Total equity under IFRS 62.9 64.1 84.6 ------ ------ ------ * Restated for the UK GAAP prior year adjustment of Â£2.8m already reflected in the 1 January 2004 and 31 December 2004 results. Notes to the summary equity reconciliation (a) Goodwill impairment writedown of Virgin Radio goodwill to reflect the 31 December 2004 UK GAAP carrying value. (b) Adjustment to goodwill amortised after date of transition (ie goodwill between 1 January 2004 and 30 June 2004). (c) Adjustment to goodwill amortised after date of transition (ie goodwill between 1 January 2004 and 31 December 2004). (d) Adjustment for 2003 proposed final dividend not recognised as a liability as not declared until after 31 December 2003. (e) Adjustment for 2004 interim dividend not recognised as a liability as not declared until after 30 June 2004. (f) Adjustment for 2004 proposed final dividend not recognised as a liability as not declared until after 31 December 2004. (g) Adjustment for capitalised costs. (h) Adjustment for IFRS 2 share based payments. (i) Deferred tax relating to adjustments (g) - (h). Reconciliation of equity at 1 January 2004 Effect of Previous transition Note GAAP to IFRS IFRS Â£m Â£m Â£m ASSETS Non-current assets Goodwill a 233.0 (10.9) 222.1 Property, plant and equipment b 34.8 (0.8) 34.0 Investments 87.3 - 87.3 Deferred tax asset c,e - 32.7 32.7 ------- ------- -------- 355.1 21.0 376.1 ------- ------- -------- Current assets Deferred tax asset c 3.2 (3.2) - Inventories d 22.7 (2.6) 20.1 Trade and other receivables b 46.5 (0.7) 45.8 Short term bank deposit 10.0 - 10.0 ------- ------- -------- 82.4 (6.5) 75.9 ------- ------- -------- Total assets 437.5 14.5 452.0 ------- ------- -------- EQUITY Capital and reserves attributable to equity shareholders Called up share capital 7.8 - 7.8 Share premium account 58.8 - 58.8 Merger reserve 173.4 - 173.4 Other reserves e - 4.3 4.3 Retained earnings a,b,e,f (173.2) (8.2) (181.4) ------- ------- -------- Total equity 66.8 (3.9) 62.9 ------- ------- -------- LIABILITIES Non-current liabilities Borrowings 198.4 - 198.4 Convertible unsecured loan 22.8 - 22.8 stock Retirement benefit obligation c 62.8 28.9 91.7 Other non-current liabilities d 2.1 (1.0) 1.1 Provisions 0.3 - 0.3 ------- ------- -------- 286.4 27.9 314.3 ------- ------- -------- Current Liabilities Borrowings 30.2 - 30.2 Trade and other payables d 35.4 (1.6) 33.8 Tax liabilities 9.1 - 9.1 Provisions 1.7 - 1.7 Proposed dividend f 7.9 (7.9) - ------- ------- -------- 84.3 (9.5) 74.8 ------- ------- -------- Total liabilities 370.7 18.4 389.1 ------- ------- -------- Total equity and liabilities 437.5 14.5 452.0 ------- ------- -------- Notes to the reconciliation of equity at 1 January 2004 a) Goodwill was tested for impairment at 1 January 2004 and a decision made to writedown Virgin Radio goodwill to Â£163.8m. b) Capitalised costs of Â£0.8m within Property, plant and equipment and Â£0.7m within Trade and other receivables were written off. c) Reclassification of deferred tax asset and deferred tax asset element of retirement benefit obligations. d) Derecognition of film stock and associated creditor Â£2.6m. e) IFRS 2 share based payments (and related deferred tax). f) 2003 proposed final dividend not recognised as a liability until declared. Reconciliation of equity at 30 June 2004 Effect of Previous Transition to IFRS Note GAAP* Opening** Other IFRS Â£m Â£m Â£m Â£m ASSETS Non-current assets Goodwill a 225.6 (10.9) 7.4 222.1 Property, plant and b 29.6 (0.8) (0.1) 28.7 equipment Investments 8.2 - - 8.2 Deferred tax asset c,d - 32.7 (1.5) 31.2 -------- --------- -------- -------- 263.4 21.0 5.8 290.2 -------- --------- -------- -------- Current assets Deferred tax asset c 2.6 (3.2) 0.6 - Inventories e 26.7 (2.6) 1.9 26.0 Trade and other receivables b 56.1 (0.7) (0.1) 55.3 Short term bank deposit 7.5 - - 7.5 -------- --------- -------- -------- 92.9 (6.5) 2.4 88.8 -------- --------- -------- -------- Total assets 356.3 14.5 8.2 379.0 -------- --------- -------- -------- EQUITY Capital and reserves attributable to equity shareholders Called up share capital 7.8 - - 7.8 Share premium account 58.8 - - 58.8 Merger reserve 173.4 - - 173.4 Other reserve d - 4.3 0.4 4.7 Retained earnings a,b,d,f (174.4) (8.2) 2.0 (180.6) -------- --------- -------- -------- Total equity 65.6 (3.9) 2.4 64.1 -------- --------- -------- -------- LIABILITIES Non-current liabilities Borrowings 144.5 - - 144.5 CULS 22.8 - - 22.8 Retirement benefit obligation c 62.1 28.9 (0.9) 90.1 Other non-current e 2.1 (1.0) 0.3 1.4 liabilities -------- --------- -------- -------- 231.5 27.9 (0.6) 258.8 -------- --------- -------- -------- Current Liabilities Borrowings 2.8 - - 2.8 Trade and other payables e 37.3 (1.6) 1.6 37.3 Tax liabilities 7.3 - - 7.3 Provisions 0.8 - - 0.8 Proposed dividend f 11.0 (7.9) 4.8 7.9 -------- --------- -------- -------- 59.2 (9.5) 6.4 56.1 -------- --------- -------- -------- Total liabilities 290.7 18.4 5.8 314.9 -------- --------- -------- -------- Total equity and 356.3 14.5 8.2 379.0 liabilities -------- --------- -------- -------- * Restated for the UK GAAP prior year adjustment of Â£2.8m reflected in the 31 December 2004 financial statements. ** Opening adjustments detailed in the Reconciliation of equity at 1 January 2004. Notes to the reconciliation of equity at 30 June 2004 a) Goodwill not amortised after date of transition Â£7.4m. b) Capitalised costs of Â£0.1m within property, plant and equipment and Â£0.1m within trade and other receivables written off. c) Reclassification of deferred tax asset and deferred tax asset element of retirement benefit obligations. d) IFRS 2 share based payments - income charge for six months to 30 June 2004. e) Derecognition of film stock and associated creditor of Â£0.7m. f) 2004 interim dividend of Â£3.1m not recognised and 2003 proposed final dividend of Â£7.9m recognised as a liability. Reconciliation of equity at 31 December 2004 Effect of Previous Transition to IFRS Note GAAP Opening* Other IFRS Â£m Â£m Â£m Â£m ASSETS Non-current assets Goodwill a 218.2 (10.9) 14.8 222.1 Property, plant and b 32.2 (0.8) (0.2) 31.2 equipment Deferred tax asset c,d - 32.7 0.6 33.3 -------- -------- -------- -------- 250.4 21.0 15.2 286.6 -------- -------- -------- -------- Current assets Deferred tax asset c 1.5 (3.2) 1.7 - Inventories e 30.7 (2.6) (2.6) 25.5 Trade and other b 59.7 (0.7) (0.2) 58.8 receivables Cash and cash 20.5 - - 20.5 equivalents Short term bank deposit 7.5 - - 7.5 -------- -------- -------- -------- 119.9 (6.5) (1.1) 112.3 -------- -------- -------- -------- Total assets 370.3 14.5 14.1 398.9 -------- -------- -------- -------- EQUITY Capital and reserves attributable to equity shareholders Called up share capital 7.8 - - 7.8 Share premium account 58.8 - - 58.8 Merger reserve 173.4 - - 173.4 Other reserve d - 4.3 0.9 5.2 Retained earnings a,b,d,f (162.9) (8.2) 10.5 (160.6) -------- -------- -------- -------- Total equity 77.1 (3.9) 11.4 84.6 -------- -------- -------- -------- LIABILITIES Non-current liabilities Borrowings 139.0 - - 139.0 CULS 22.8 - - 22.8 Retirement benefit c 69.2 28.9 2.1 100.2 obligation Other non-current e 4.5 (1.0) (2.5) 1.0 liabilities -------- -------- -------- -------- 235.5 27.9 (0.4) 263.0 -------- -------- -------- -------- Current Liabilities Trade and other payables e 41.0 (1.6) (0.1) 39.3 Tax liabilities 8.6 - - 8.6 Provisions 0.3 - - 0.3 Proposed dividend f 7.8 (7.9) 3.2 3.1 -------- -------- -------- -------- 57.7 (9.5) 3.1 51.3 -------- -------- -------- -------- Total liabilities 293.2 18.4 2.7 314.3 -------- -------- -------- -------- Total equity and 370.3 14.5 14.1 398.9 liabilities -------- -------- -------- -------- * Opening adjustments detailed in the Reconciliation of equity at 1 January 2004. Notes to the reconciliation of equity at 31 December 2004 a) Goodwill not amortised after date of transition Â£14.8m. b) Capitalised costs of Â£0.2m within property, plant and equipment and Â£0.2m with trade and other receivables written off. c) Reclassification of deferred tax asset and deferred tax asset element of retirement benefit obligations. d) IFRS 2 share based payments - income charge for year to 31 December 2004 of Â£0.9m and related deferred tax of Â£0.2m. e) Derecognition of film stock and associated creditor of Â£5.2m. f) 2004 proposed final dividend of Â£4.7m not recognised and 2003 proposed final dividend of Â£7.9m recognised as a liability. Reconciliation of net income for six months ended 30 June 2004 Effect of Previous transition Note GAAP to IFRS IFRS Â£m Â£m Â£m Revenue 88.5 - 88.5 Net operating expenses b,c (76.6) (0.6) (77.2) -------- ------- -------- Operating profit 11.9 (0.6) 11.3 Share of associates e 1.7 (0.1) 1.6 -------- ------- -------- Profit from operations 13.6 (0.7) 12.9 Net finance costs (excluding (8.1) - (8.1) exceptionals) -------- ------- -------- Profit before tax and exceptionals 5.5 (0.7) 4.8 Goodwill amortisation a (7.4) 7.4 - Goodwill amortisation on associates d (0.2) 0.2 - Gain on disposal of subsidiary (2.5) - (2.5) undertaking Gain on disposal of associate d 10.1 (0.2) 9.9 undertaking Net finance costs on exceptionals (3.6) - (3.6) -------- ------- -------- Profit before tax 1.9 6.7 8.6 -------- ------- -------- Tax e - 0.1 0.1 -------- ------- -------- Profit after tax 1.9 6.8 8.7 -------- ------- -------- Earnings per share (pence) 0.6p 2.8p Headline Profit before tax 5.5 (0.7) 4.8 EPS 1.6p 1.4p Notes to the reconciliation of profit for the six months ended 30 June 2004 a) Goodwill not amortised after date of transition Â£7.4m. b) Share based payments charge to income of Â£0.4m for the six months ended 30 June 2004. c) Capitalised costs of Â£0.2m written off for the six months ended 30 June 2004. d) Goodwill on associates not amortised after date of transition Â£0.2m. e) Share of associates tax of Â£0.1m reclassified (share of associates now disclosed net of tax). Reconciliation of net income for year ended 31 December 2004 Effect of Previous transition Note GAAP to IFRS IFRS Â£m Â£m Â£m Revenue 201.2 - 201.2 Net operating expenses b,c, (171.9) (1.3) (173.2) -------- ------- -------- Operating profit 29.3 (1.3) 28.0 Share of associates e,f 3.5 (1.1) 2.4 -------- ------- -------- Profit from operations 32.8 (2.4) 30.4 Net finance costs (excluding f (15.3) (0.1) (15.4) exceptionals) -------- ------- -------- Profit before tax and exceptionals 17.5 (2.5) 15.0 Goodwill amortisation a (14.8) 14.8 - Goodwill amortisation on associates d (0.3) 0.3 - Gain on disposal of property 1.0 - 1.0 Gain on disposal of subsidiary (2.5) - (2.5) undertaking Gain on disposal of associate d 31.1 (0.3) 30.8 undertaking Net finance costs on exceptionals (6.7) - (6.7) -------- ------- -------- Profit before tax 25.3 12.3 37.6 -------- ------- -------- Tax b,c,e (1.2) 1.4 0.2 -------- ------- -------- Profit after tax 24.1 13.7 37.8 -------- ------- -------- Earnings per share (pence) 7.7p 12.0p Headline Profit before tax 17.5 (2.5) 15.0 EPS 5.0p 4.7p Notes to the reconciliation of profit for the year ended 31 December 2004 a) Goodwill not amortised after date of transition Â£14.8m. b) Share based payments charge to income of Â£0.9m for the year ended 31 December 2004 and related deferred tax Â£0.2m. c) Capitalised costs of Â£0.4m written off for the year ended 31 December 2004. d) Goodwill on associates not amortised after date of transition Â£0.3m. e) Share of associates tax reclassified Â£1.2m (share of associates now disclosed net of tax). f) Share of associates interest reclassified Â£0.1m. Appendix II JUNE 2004 INTERIM ACCOUNTS RESTATED FOR IFRS Consolidated income statement for the six months ended 30 June 2004 6 months 2004 Note Â£m Continuing Operations Revenue 2 88.5 Net operating expenses (77.2) ------- Operating profit 11.3 Share of result of associates 1.6 ------- Profit from operations 2 12.9 Gain on disposal of subsidiary undertaking 4 (2.5) Gain on disposal of associate undertaking 4 9.9 ------- Profit before finance costs 20.3 ------- Net finance costs 5 (11.7) ------- Profit before tax 8.6 Tax 6 0.1 ------- Profit for the period attributable to equity shareholders 10 8.7 ------- Earnings per ordinary share - basic 8 2.8p Headline Operating profit 11.3 Profit before tax 4.8 Earnings per share 1.4p There are no recognised income and expenses for the six months ended 30 June 2004 other than those already dealt with in the income statement above. Consolidated balance sheet at 30 June 2004 Note 30 June 2004 Â£m ASSETS Non-current assets Goodwill 222.1 Property, plant and equipment 28.7 Investments 9 8.2 Deferred tax asset 31.2 --- -------- 290.2 --- ------- Current assets Inventories 26.0 Trade and other receivables 55.3 Short term bank deposit 7.5 --- ------- 88.8 --- ------ Total assets 379.0 ------- EQUITY Capital and reserves attributable to the Company's equity holders Called up share capital 7.8 Share premium 58.8 Merger reserve 173.4 Other reserve 4.7 Retained earnings (180.6) --- ------- Total equity 10 64.1 --- ------- LIABILITIES Non-current liabilities Borrowings 144.5 Convertible unsecured loan stock 22.8 Retirement benefit obligation 90.1 Other non-current liabilities 1.4 --- ------- 258.8 --- ------- Current Liabilities Borrowings 2.8 Trade and other payables 37.3 Tax liabilities 7.3 Provisions 0.8 Proposed dividend 7.9 --- ------- 56.1 --- ------- Total liabilities 314.9 ------- Total equity and liabilities 379.0 ------- Consolidated cash flow statement for the six months ended 30 June 2004 Note 6 months 2004 Â£m OPERATING ACTIVITIES Cash used by operations 11 (4.9) Interest paid (6.4) Income taxes paid (0.2) Payment to Caledonian Publishing Pension (2.8) Scheme -------- Net cash used in operating activities (14.3) --------- INVESTING ACTIVITIES Interest received 0.1 Dividends received from associate 2.2 undertakings Disposal of associate undertaking 89.0 Proceeds from sale of property, plant and 5.1 equipment Purchase of property, plant and equipment (3.3) -------- Net cash from investing activities 93.1 -------- FINANCING ACTIVITIES Repayment of existing bank (83.9) borrowings Release of cash on deposit 2.5 -------- Net cash used in financing activities (81.4) -------- Movement in cash and bank overdrafts (2.6) Bank overdraft at beginning (0.2) of period ------- Net cash and bank overdrafts (2.8) at end of period ------- Reconciliation of movement in net debt 6 months 2004 Â£m Opening net debt (242.5) Movement in cash and bank overdrafts in the period (2.6) Net decrease in debt financing 81.4 Closing net debt (163.7) Notes to the interim statement for the six months ended 30 June 2004 1. Basis of preparation The interim financial report has been prepared in accordance with International Financial Reporting Standards (IFRSs). The accounting policies set out below have been applied consistently in presenting this financial information and in preparing an opening IFRS balance sheet at 1 January 2004 for the purpose of transition to IFRS, and at 31 December 2004. 2. Business segments For management purposes the Group is currently organised into three operating divisions - Television, Out of Home and Radio. These divisions are the basis on which the Group reports its primary segment information. 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. Out of Home - the provision of advertising solutions across various out of home media. Segment information about these businesses is presented below. Six months ended Television Radio Out of Home Group 30 June 2004 2004 2004 2004 2004 Â£m Â£m Â£m Â£m REVENUE External sales 58.0 10.2 20.2 88.4 Inter-segment sales 0.1 - - 0.1 ------- ------- ------- ------- Total revenue 58.1 10.2 20.2 88.5 ------- ------- ------- ------- PROFIT Segment result 8.1 2.3 2.0 12.4 ------- ------- ------- ------- Unallocated pension costs (1.1) Share of associates (i) 1.6 ------- Profit from operations 12.9 Loss on disposal of subsidiary undertaking (ii) (2.5) Gain on disposal of associate undertaking (iii) 9.9 Finance costs (11.7) -------- Profit before tax 8.6 Tax 0.1 -------- Profit after tax 8.7 -------- i) Attributable to Television segment ii) Publishing division discontinued in 2003 iii) Attributable to Radio segment 3. Operations in the interim period Owing to the nature of the Group's operations, it is not anticipated that there are any external factors which will significantly alter the results in the second half of the financial year, nor any seasonal effects which will result in a material increase or decrease in revenues and profits in that period. 4. Exceptional items i) Gain on disposal of subsidiary undertaking In 2003, the disposal of the Company's Publishing division resulted in a provisional gain on sale of Â£33.0m. In line with the sale and purchase agreement final agreement was reached with Gannet in July 2004 on the completion account's net assets. This resulted in a net payment due to Gannet and the provisional gain on sale was adjusted by Â£2.5m during the first half of 2004. ii) Gain on disposal of associate undertaking The disposal of the Company's investments in Scottish Radio Holdings ('SRH') on 16 January 2004 resulted in a gain on disposal of Â£9.9m (see note 9). iii) Finance costs Â£3.6m of unamortised bank facility arrangement fees relating to the Group's current facility have been offset against the gain on sale of SRH following the reduction of the Group's bank debt and facilities from the proceeds of this sale. 5. Net finance costs 6 months 2004 Â£m Interest expense: Bank borrowings 6.7 CULS and loan note interest 0.8 ----- 7.5 Interest income (0.6) ------ Net interest payable 6.9 Pension finance cost 1.2 ------ Net finance costs excluding exceptional items 8.1 Exceptional finance costs 3.6 ------- Net finance costs 11.7 ------- 6. Tax 6 months 2004 Â£m The charge for tax is as follows: Tax on profit on ordinary activities excluding exceptional items at 10% 0.4 Tax credit on exceptional items (0.5) ------- (0.1) ------- 7. Dividends 6 months 2004 Â£m Amounts recognised as distributions to equity holders in the period: Final dividend for the year ended 31 December 2003 of 2.5p per share 7.9 ----- The proposed interim dividend is subject to approval by the Board and has not been included as a liability in these financial statements. 8. Earnings per share Basic earnings per share (EPS) excluding exceptional items is calculated as follows: 6 months 2004 Â£m Attributable profit for the financial period 8.7 (including exceptional items) Effect of exceptionals (4.3) ------- Attributable profit for the financial period 4.4 ------- Weighted average number of shares in issue 314.3m Earnings per ordinary share 1.4p ------- Basic EPS inclusive of exceptional items in the six months to 30 June 2004 is 2.8p. There is no difference between basic and diluted EPS as there is no impact from dilutive share options. 9. Investments On 16 January 2004 the Group sold its 27.8% shareholding in SRH to Emap plc. The sale of 9,729,361 ordinary shares in SRH raised cash proceeds of Â£90.5m, or 930p per share, resulting in a net gain on disposal of Â£9.9m after disposal costs of Â£2.1m. 10. Reconciliation of movements in equity shareholders' funds 6 months 2004 Â£m Profit for the period 8.7 Dividends (7.9) ------- Retained profit for the period 0.8 Movement in reserve for share based payments 0.4 ------- Net movement in shareholders' funds 1.2 ------- Opening shareholders' funds 66.8 IFRS opening balance adjustments (3.9) ------- Opening shareholders' funds as restated 62.9 ------- Closing equity shareholders' funds 64.1 ------- 11. Notes to cash flow statement 6 months 2004 Â£m Operating profit (before exceptional items) 11.3 Adjustments for: Depreciation and other non-cash items 3.8 ------- Operating cash flows before movements in working capital 15.1 Increase in inventories (4.0) Increase in trade and other receivables (12.1) Decrease in trade and other payables (2.8) Development costs, onerous contracts and reorganisation costs (1.1) ------- Cash used by operations (4.9) ------- 12. Retirement benefit obligations 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 30 June 2004 Â£m Equities 7.3% 133.8 Bonds 4.5% 85.1 -------- Fair value of schemes' assets 218.9 Present value of defined benefit obligations (309.0) -------- Deficit in the schemes (90.1) -------- A related offsetting deferred tax asset of Â£28.0m is shown under non-current assets. Therefore the net pension scheme deficit amounts to Â£62.1m. Appendix III 2004 GROUP ACCOUNTS RESTATED FOR IFRS Consolidated income statement for the year ended 31 December 2004 Note 2004 Â£m Continuing Operations Revenue 3 201.2 Net operating expenses 4 (173.2) ------- Group operating profit 28.0 Share of result of associates 7 2.4 ------- Profit from operations 3 30.4 Gain on disposal of property 6 1.0 Gain on disposal of subsidiary undertaking 6 (2.5) Gain on disposal of associate undertakings 6,24 30.8 ------- Profit before finance costs 59.7 Net finance costs 6,8 (22.1) ------- Profit before tax 37.6 Tax 9 0.2 ------- Profit for the period attributable to equity shareholders 27 37.8 ------- Earnings per ordinary share - basic 11 12.0p Headline Operating profit 28.0 Profit before tax 15.0 Earnings per share 4.7p Consolidated statement of recognised income and expense for the year ended 31 December 2004 2004 Â£m Actuarial loss recognised in the pension schemes (8.6) Deferred tax arising thereon 2.6 ------- Net income recognised directly in equity (6.0) Profit for the period 37.8 ------- Total recognised income and expense for the period 31.8 ------- Balance sheet as at 31 December 2004 Note 2004 Â£m ASSETS Non-current assets Goodwill 12 222.1 Property, plant and equipment 13 31.2 Deferred tax asset 23 33.3 ------ 286.6 ------ Current assets Inventories 15 25.5 Trade and other receivables 16 58.8 Cash and cash equivalents 17 20.5 Short term bank deposit 17 7.5 ------ 112.3 ------ Total assets 398.9 ------ EQUITY Capital and reserves attributable to the Company's equity holders Called up share capital 26 7.8 Share premium account 26 58.8 Merger reserve 27 173.4 Other reserve 27 5.2 Retained earnings 27 (160.6) ------- Total Equity 84.6 ------- LIABILITIES Non-current liabilities Borrowings 19 139.0 Convertible unsecured loan stock 20 22.8 Retirement benefit obligation 34 100.2 Other non-current liabilities 21 1.0 ------- 263.0 ------- Current Liabilities Trade and other payables 18 39.3 Tax liabilities 8.6 Provisions 25 0.3 Proposed dividend 10 3.1 ------- 51.3 ------- Total liabilities 314.3 ------- Total equity and liabilities 398.9 ------- Consolidated cash flow statement for the year ended 31 December 2004 Note 2004 Â£m OPERATING ACTIVITES Cash generated from operations 28 16.6 Interest paid (13.9) Income taxes received 1.6 Payment to Caledonian Pension Scheme (2.8) ------- Net cash used in operating activities 1.5 ------- INVESTING ACTIVITIES Interest received 1.6 Dividends received from associate undertakings 2.9 Disposal of associate undertakings 24 118.7 Disposal of subsidiary undertaking (1.9) Proceeds from sale of property, plant and equipment 4.0 Purchase of property, plant and equipment (7.4) ------- Net cash used in investing activities 117.9 ------- FINANCING ACTIVITIES Dividends paid (7.9) Repayment of existing bank borrowings (232.2) Net borrowings drawn 139.0 Release of cash on deposit 2.5 Net repayment of loan notes/stock (0.1) ------- Net cash used in financing activities (98.7) ------- Movement in cash and bank overdrafts 20.7 Bank overdraft at beginning of period (0.2) ------- Net cash and bank overdrafts at end of period 20.5 ------- Reconciliation to movement in net debt 2004 Â£m Opening net debt (242.5) Non-cash bank arrangement fees written off (3.8) Movement in cash and bank overdrafts in the period 20.7 Net cash outflow from decrease in debt financing 90.8 ------- Closing net debt 29 (134.8) ------- Notes to the financial statements for the year ended 31 December 2004 1. General information SMG plc is a company incorporated in the United Kingdom under the Companies Act 1985. The address of the registered office is 200 Renfield Street, Glasgow, G2 3PR. The nature of the Group's operations and its principal activities are set out in note 3. The accounting policies set out below have been applied consistently in preparing this financial information and in preparing the IFRS Balance Sheet at 1 January 2004 for the purposes of transition to IFRS. 2. Significant accounting policies Basis of accounting The financial statements have been prepared on the historical cost basis, except for the revaluation of certain television studio properties. The principal accounting policies adopted are set out below. The profit and loss account is shown including and excluding exceptional items in order to provide a fuller understanding of the underlying operations and performance of the Group. Basis of consolidation The consolidated financial statements incorporate the financial statements of SMG plc ('the Company') and entities controlled by the Company (its subsidiaries) up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired is credited to the profit and loss in the period of acquisition. The interest in minority shareholders is stated at the minority's proportion of the fair values of the assets and liabilities recognised. Subsequently, any losses applicable to the minority interest in excess of the minority interest are allocated against the interests of the parent. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. As permitted under Section 230 of the Companies Act 1985, no separate income statement for the holding company is presented. Investments in associates An associate is an entity over which the Group is in a position to exert significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting except when classified as held-for-sale (see below). Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments. Losses of the associates in excess of the Group's interest in those associates are not recognised. Any excess of the cost of acquisition over the Group's share of the fair values of the identifiable net assets of the associate at the date of acquisition is recognised as goodwill. Any deficiency of the cost of acquisition below the Group's share of the fair values of the identifiable net assets of the associate at the date of acquisition is credited in profit and loss in the period of acquisition. Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity or business at the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at least annually or whenever there is an indicator of impairment. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. On disposal of a subsidiary, associate or jointly controlled entity or business, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRSs has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been restated and is not included in determining any subsequent profit or loss on disposal. Impairment Assets that have an indefinite useful life are not subject to amortisation and are tested at least annually or whenever there is an indicator of impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by which the asset's carrying value exceeds its recoverable amount. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses in respect of goodwill are not reversed. Property, plant and equipment Land and buildings are stated in the balance sheet at cost less accumulated depreciation. Plant, technical equipment and other assets are stated at cost less accumulated depreciation and recognised impairment loss. Depreciation is charged so as to write off the cost or valuation to residual value of fixed assets over their estimated useful lives, using the straight-line method, on the following bases: Freehold buildings between 2% and 4% Plant and technical equipment between 5% and 20% Furniture and fittings between 10% and 20% Outdoor panels between 10% and 33% Computers and computer related equipment 20% Vehicles 25% No depreciation is provided with respect to freehold land. Assets held under finance leases (including leasehold buildings) are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the lease. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Rates of capitalisation depend on whether a specific loan has been taken out (when the actual interest rate and interest paid are used) or whether the construction has been financed by general borrowings (when a weighted average is calculated on all non-specific borrowings). All other borrowing costs are recognised in the income statement in the period in which they arise. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group's general policy on borrowing costs (see above). Costs in respect of operating leases are charged to the income statement on a straight-line basis over the lease term. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. Cost comprises direct materials, and where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less estimated costs of completion and the estimated selling costs. Film rights, recorded programmes and films Acquired film rights are valued at direct cost less appropriate provisions and are written off at 70% on first transmission and 30% on subsequent transmission. For acquired film rights an asset is recognised as payments are made and in full when the acquired programming is available for transmission. Recorded programmes are valued at direct cost including labour and overheads, less appropriate provisions, and are written off after the first transmission or sale. Programming made for third parties is valued at cost, less appropriate provisions, and is charged to the income statement against related income. Foreign currencies Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts and VAT. Revenue from the sale of goods is recognised when the Group has transferred the significant risks and rewards of ownership and control of the goods sold and the amount of revenue can be measured reliably. Key classes of revenue are recognised on the following basis: Airtime revenue on transmission Sponsorship evenly over the life of the contract Programme production on delivery Revenue on barter transactions is recognised only when the goods or services being exchanged are of a dissimilar nature. Taxation The tax expense represents the sum of tax current and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary differences arise from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Retirement benefit costs Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. For defined benefit retirement benefit schemes, the cost of providing benefits is determined using the projected unit method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised in full directly in retained earnings in the period in which they occur and presented in the statement of recognised income and expense. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. Financial risk factors The Group's activities expose it to a variety of financial risks: currency risk, credit risk, liquidity risk and cash flow interest rate risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. The Group uses derivative financial instruments to hedge certain risk exposures. Risk management is carried out by a central treasury department (Group Treasury) under policies approved by the Board of Directors. Group Treasury identifies, evaluates and hedges financial risks in close co-operation with the Group's operating divisions. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of financial instruments and investing excess liquidity. (a) Currency risk The Group operates almost wholly within the UK and is exposed to minimal foreign exchange risk. Foreign exchange risk arises primarily with respect to the Euro, US dollar and the Swiss franc. Foreign exchange risk arises from future commercial transactions and trade assets and liabilities in foreign currencies. (b) Credit risk The Group has no significant concentration of credit risk. It has policies in place to ensure that sales are made to customers with an appropriate credit history. Derivative transaction counterparties are limited to high-credit-quality financial institutions. (c) Liquidity risk Prudent liquidity management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the nature of the underlying business, Group Treasury aims to maintain flexibility in funding by keeping committed credit lines available. (d) Cash flow interest rate risk As the Group has no significant interest bearing assets, the Group's income and operating cash flows are substantially independent of changes in market interest rates. The Group's interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Group policy is to maintain between 40% and 60% of its borrowings in fixed rate instruments. At 31 December 2004, 50% of borrowings were at fixed rates. The Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowing from floating rates to fixed rates. Generally, the Group raises long term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the Group borrowed at fixed rate directly. Under the interest rate swaps, the Group agrees with other parties to exchange, at specific intervals (mainly quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts. Financial instruments Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. (a) Trade receivables Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. (b) Investments Investments are measured at reporting dates at fair value. (c) Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance costs, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accrual basis to the income statement and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. (d) Convertible unsecured loan stock (CULS) Convertible unsecured loan stock is recorded within the Balance Sheet at the historic fair value less any conversions to date. (e) Secured and unsecured loan notes Interest bearing secured and unsecured loan notes are recorded at the proceeds received. The interest expense is accounted for on an accrual basis to the income statement. (f) Trade payables Trade payables are not interest bearing and are stated at their nominal value. (g) Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. (h) Derivative financial instruments and hedge accounting The Group uses derivative financial instruments to hedge its exposures to fluctuations in interest and foreign exchange rates. Instruments accounted for as hedges are designated as a hedge at the inception of contracts. Receipts and payments on interest rate instruments are recognised on an accruals basis, over the life of the instrument. Gains and losses on foreign currency hedges are recognised on maturity of the underlying transaction. The Group aims to achieve hedge accounting treatment under IAS 39 for all swaps and all existing swaps at 1 January 2005 meet the hedge accounting requirements of IAS 39. Finance costs associated with debt issuances are charged to the profit and loss account over the life of the instruments. Share-based payments SMG have not taken the optional exemption under IFRS 1, and on the basis that SMG previously publicly disclosed the fair value of equity instruments, IFRS 2 has been fully retrospectively applied to all options granted but not fully vested at the relevant reporting date. As a result, the share-based payment charge for 2004 includes all options granted and not fully vested at 31 December 2004, rather than only the value of options granted since 7 November 2002 (the effective date of IFRS 2). This approach is encouraged in the standard and gives a better indication of how past and future results are affected by IFRS 2. The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will ultimately vest. Fair value is measured by use of the Black & Scholes model or Monte Carlo model as relevant. The expected lives used in the model have been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. 3. Business and geographical segments Business segments For management purposes, the Group is currently organised into three operating divisions - Television, Radio and Out of Home. 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 Out of Home - the provision of advertising solutions across various out of home media Segment information about these businesses is presented below. REVENUE Television Radio Out of Home Total 2004 2004 2004 2004 Â£m Â£m Â£m Â£m External sales 133.2 20.1 47.6 200.9 Inter-segment sales 0.3 - - 0.3 ------ ------ ------ ------- Total revenue 133.5 20.1 47.6 201.2 ------ ------ ------ ------- Inter segment sales are charged at prevailing market prices. ITC qualifying revenue was Â£111.7m. PROFIT Television Radio Out of Home Total 2004 2004 2004 2004 Â£m Â£m Â£m Â£m Segment result 22.2 4.1 4.0 30.3 ------ ------ ------ Unallocated pension costs (2.3) Share of associates (i) 2.4 ------ Profit from operations 30.4 Loss on disposal of subsidiary undertaking (ii) (2.5) Gain on disposal of associate undertakings (iii) 30.8 Gain on disposal of property (iv) 1.0 Finance costs (22.1) ------ Profit before tax 37.6 Tax 0.2 Profit after tax 37.8 ------ i) Attributable to Television segment ii) Publishing division discontinued in 2003 iii) Â£20.5m attributable to Television division and Â£10.3m attributable to Radio division iv) Attributable to Television segment OTHER INFORMATION Television Radio Out of Home Group 2004 2004 2004 2004 Â£m Â£m Â£m Â£m Capital additions 3.0 0.3 4.1 7.4 Depreciation (3.1) (0.3) (3.0) (6.4) BALANCE SHEET Television Radio Out of Home Group 2004 2004 2004 2004 Â£m Â£m Â£m Â£m ASSETS Segment assets 80.7 170.3 86.6 337.6 ------ ------- ------ Unallocated corporate assets 61.3 ------- Consolidated total assets 398.9 ------- LIABILITIES Segment liabilities 24.4 5.3 9.9 39.6 ------ ------ ------ Unallocated corporate liabilities 274.7 ------- Consolidated total liabilities 314.3 ------- Segment assets consist primarily of goodwill, inventories and trade and other receivables. They exclude cash and bank deposits and deferred tax assets. Segment liabilities comprise operating liabilities (including trade and other payables and provisions). They exclude group borrowings, retirement benefit obligations, tax liabilities, dividends payable and other non-current liabilities. Geographical segments All revenue originated within the United Kingdom and includes Â£1.8m in 2004 of sales to countries outside the United Kingdom. Operating profit includes Â£1.1m in 2004 arising from sales to countries outside the United Kingdom. All the net assets in 2004 were held in the United Kingdom. 4. Expenses by nature 2004 Â£m Changes in stock 1.7 Other external charges 131.7 Staff costs 30.2 Depreciation and other amounts written off tangible and intangible fixed assets 6.4 Operating lease charges - plant and machinery 0.1 - other 2.4 Other operating charges 0.7 ----- 173.2 ------ Auditors' remuneration is as follows: 2004 Â£m Audit fees - PricewaterhouseCoopers LLP 0.1 ----- Fees for other services - taxation, acquisitions and disposals Deloitte & Touche LLP 0.1 PricewaterhouseCoopers LLP 0.2 ----- 0.3 ----- The amounts paid to the auditors in relation to acquisitions, disposals and other related activities have been included in the cost of those activities as appropriate. 5. Staff costs The average monthly number of employees (including executive directors) was: 2004 Number Television Established 505 Contract 214 ----- 719 ----- Radio Established 62 Contract 3 ----- 65 ----- Out of Home Established 113 Contract 3 ----- 116 ----- Total 900 ----- 2004 Â£m Their aggregate remuneration comprised: Salaries 25.9 Social security costs 2.0 Pension costs (see note 34) 2.3 ----- 30.2 ----- 6. Exceptional items i) Gain on disposal of property The Group's property at Cowcaddens was sold during the year resulting in a gain of Â£1.0m. ii) Gain on disposal of associate undertakings The disposal of the Company's investments in Scottish Radio Holdings plc ('SRH') on 16 January 2004 and GMTV Limited ('GMTV') on 12 October 2004 resulted in gains on disposal of Â£10.3m and Â£20.5m respectively (see note 24). iii) Gain on disposal of subsidiary undertaking In 2003, the disposal of the Company's Publishing division resulted in a provisional gain on sale of Â£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 Â£2.5 million during the first half of 2004. iv) Finance costs Â£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 Â£158.0m five year revolving credit and overdraft bank facility on improved terms. This was completed in November 2004. 7. Associates Share of associates contribution includes the equity accounted results of GMTV (net of tax). 8. Net finance costs 2004 Â£m Interest expense: Bank borrowings 12.5 CULS and loan note interest 1.4 ------- 13.9 Interest income (1.2) ------- Net interest payable 12.7 Pension finance cost 2.7 ------- Net finance costs excluding exceptional items 15.4 Exceptional finance costs (see note 6 (iv)) 6.7 ------- Net finance costs 22.1 ------ 9. Tax 2004 Â£m Current tax (0.7) Deferred tax (note 23) 0.5 ----- Tax credit after exceptional items (0.2) ----- The charge for the year can be reconciled to the profit per the income statement as follows: 2004 Â£m Profit before tax 37.6 ------ Tax at the UK corporation tax rate of 30% 11.3 Tax effect of share of results of associates (0.8) Other expenses not deductible for tax purposes 1.3 Adjustments to tax charge in respect of previous periods (3.5) Non-chargeable gain on sale of subsidiary undertaking (8.5) ------- Current tax credit for the year (0.2) ------- 10. Dividends 2004 Â£m Amounts recognised as distributions to equity holders in the period: Final dividend for the year ended 31 December 2003 of 2.5p per share 7.9 Proposed interim dividend for the year ended 31 December 2004 of 1.0p per share 3.1 ----- 11.0 ----- The proposed final dividend of 1.5p per share is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. 11. Earnings per share Basic earnings per share ('EPS'), is calculated by dividing the profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the Company and held as treasury shares (before rounding for disclosure purposes). In order to calculate diluted EPS, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The Company has two types of dilutive potential ordinary shares namely share options granted to employees and convertible unsecured loan stock ('CULS'). EPS has been presented below both including and excluding exceptional items in order to provide a fuller understanding of the Group's underlying performance. 2004 Weighted average Earnings number of Per share Â£m shares (m) Pence (i) EPS excluding exceptional items: Basic EPS Attributable profit for the financial period (including exceptional items) 37.8 314.3 Effect of exceptional items (23.1) - -------- ----- ----- Adjusted earnings 14.7 314.3 4.7 -------- ----- ----- (ii) EPS including exceptional items: Basic EPS Attributable profit for the financial period (including exceptional items) 37.8 314.3 12.0 -------- ----- ----- There is no difference between basic and diluted EPS as there is no material impact from dilutive share options. 12. Goodwill Â£m Cost At 1 January 2004 and 31 December 2004 293.0 Accumulated amortisation and impairment At 1 January 2004 and 31 December 2004 70.9 Net book value at 1 January 2004 and 31 December 2004 222.1 ------- Goodwill comprises capitalised goodwill on acquisitions completed since 1 January 1998. An impairment writedown was made under IFRS 1, writing Virgin Radio's goodwill down to Â£163.8m, the value carried in the Group's UK GAAP financial statements at 31 December 2004. 13. Property, plant and equipment Land and Land and Plant, buildings buildings technical leasehold freehold equipment Total Â£m Â£m and other Â£m Â£m Cost or valuation At 1 January 2004 0.7 5.8 70.3 76.8 Opening balance adjustment under IFRS 1 - - (0.8) (0.8) Additions - - 7.4 7.4 Disposals - (5.8) - (5.8) ---- ----- ------ ------ At 31 December 2004 0.7 - 76.9 77.6 ---- ----- ------ ------ Accumulated depreciation and impairment At 1 January 2004 0.3 0.7 41.0 42.0 Charge for year - 0.2 6.2 6.4 Transfer during the year - 1.1 (1.1) - Disposals - (2.0) - (2.0) ---- ----- ------ ------ At 31 December 2004 0.3 - 46.1 46.4 ---- ----- ------ ------ Net book value at 31 December 2004 0.4 - 30.8 31.2 ---- ----- ------ ------ As set out in note 6 (i), 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, Â£1.1m of depreciation was reallocated from plant and technical equipment to freehold land and buildings. The opening balance adjustment under IFRS 1 represents costs previously capitalised but written off under IFRS. 14. Investments The market value of the Hearts investment as at 31 December 2004 was Â£0.9m. The Group sold its investments in both SRH and GMTV during the year, SRH for Â£90.5m and GMTV for Â£30.3m (see note 24 for details). 15. Inventories 2004 Â£m Raw material and consumables 0.9 Film rights 6.6 Recorded programmes and films 18.0 ------ 25.5 ------ 16. Trade and other receivables 2004 Â£m Trade receivables - net 34.7 Prepayments and accrued income 23.0 Other receivables 1.1 ------- 58.8 ------ 17. Cash and cash equivalents 2004 Â£m Cash at bank and in hand 20.5 ------ Short term deposits 7.5 ----- Short term bank deposit relates to Â£7.5m placed in Escrow for three years (reducing by Â£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. 18. Trade and other payables 2004 Â£m Trade and other payables 26.9 Social security and other taxes 11.0 Other payables 1.4 ----- 39.3 ------ 19. Borrowings 2004 Â£m Bank loans 139.0 ------- Total borrowings 139.0 ------- The borrowings are repayable as follows: Expiring in two to five years 139.0 ------- The weighted average interest rates were as follows: 2004 % Bank loans (floating) 6.6 Bank loans (fixed)* 6.6 *After taking into account interest rate swaps entered into by the Group. A Â£150m five year revolving credit facility was arranged on 17 November 2004 at floating interest rates with Â£60m of loans subsequently swapped to a fixed interest rate using interest rate swaps as set out in note 22. Security has been provided to the debt providers under this new facility by way of fixed and floating charges over the Group's assets. At 31 December 2004 the Group has two principal drawdowns under the revolving credit facility: a) A drawdown of Â£79.0m on 17 November 2004. The drawdown carries interest at a rate of 1.75% above LIBOR. b) A drawdown of Â£60.0m on 21 December 2004. After taking account of interest rate swaps this drawdown carries a fixed interest rate of 6.7% per annum. At 31 December 2004, the Group has available Â£10.0m of undrawn committed floating rate borrowing facilities. 20. Convertible unsecured loan stock The convertible unsecured loan stock ('CULS') was issued in 1997. The loan stock is convertible into new SMG plc shares on the basis of 50.2808 SMG plc shares per Â£100 nominal of SMG plc CULS on 30 April in each of the years 1999 to 2007 inclusive. The CULS are unsecured obligations of SMG plc and bear interest at a rate of 6.5% per annum. An immaterial amount of CULS was converted during the year (immaterial amount converted during 2003), leaving an outstanding balance at 31 December 2004 of Â£22.8m. 21. Other financial liabilities 2004 Â£m Secured loan notes 0.7 Unsecured loan notes 0.3 ----- 1.0 ----- Secured loan notes dated October 2007 amounting to Â£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 the year, Â£0.1m of loan notes were redeemed leaving an outstanding balance at 31 December 2004 of Â£0.7m. Unsecured loan notes were offered to the vendors of Grampian as part of the purchase consideration. The total value of notes issued was Â£0.8m, bearing annual interest at 1% below the six month LIBID rate and these are redeemable no later than 1 October 2007. An immaterial amount of loan notes were redeemed during the year leaving an outstanding balance at 31 December 2004 of Â£0.3m. 22. Derivative financial instruments Foreign exchange The Group has minimal exposure to foreign exchange risk and all material payments or receipts are fully hedged. At 31 December 2004 the Group had no forward foreign exchange contracts in place (2003: nil). Interest rate swaps The Group uses interest rate swaps to manage its exposure to interest rate movements on its bank borrowings. Contracts with nominal values of Â£60 million have fixed interest payments at an average rate of 4.9% for the periods up until 2007 and have floating receipts at LIBOR. The fair value liability of swaps entered into at 31 December 2004 is estimated at Â£0.2m. These amounts are based on market values of equivalent instruments at the balance sheet date. All of these interest rate swaps are designated and effective as cash flow hedges however the fair value has not been recognised and deferred in equity as at 31 December 2004 as IAS 39 has not been adopted. 23. Deferred tax The movement in deferred tax assets and liabilities during the year, taking into consideration the offsetting of balances within the same tax jurisdiction is as follows: Share based Accelerated tax Retirement Other Total payments depreciation benefit obligations Â£m Â£m Â£m Â£m Â£m At 1 January 2004 (0.6) (1.8) (28.9) (1.4) (32.7) Charge/(credit) to income (0.2) 2.3 (1.0) (0.6) 0.5 Charge/(credit) to equity - - (1.1) - (1.1) ----- ----- ------- ----- ------ At 31 December 2004 (0.8) 0.5 (31.0) (2.0) (33.3) ----- ----- ------- ----- ------ Certain deferred tax assets and liabilities have been offset. The following is the analysis of the current deferred tax balances (after offset). 2004 Â£m Deferred tax liability: Deferred tax to be recovered after more than 12 months 0.5 Deferred tax to be recovered within 12 months - ----- 0.5 ----- Deferred tax asset: Deferred tax to be recovered after more than 12 months (33.3) Deferred tax to be recovered within 12 months (0.5) ----- (33.8) ----- Net deferred tax asset (33.3) ----- Included within the Â£1.1m pension credit to equity is a charge of Â£1.5m in respect of special payments to the Caledonian Publishing Pension Scheme. This amount has been offset within equity by a credit in respect of a corporation tax deduction for the special payment made in 2004. A deferred tax asset of Â£3.5m, all of which is due to tax losses, has not been recognised as suitable income may not be available to utilise this asset in the foreseeable future. 24. Disposal of associate undertakings (i) Disposal of investment in SRH On 16 January 2004 the Group sold its 27.8% shareholding in SRH to Emap plc. The sale of 9,729,361 ordinary shares in SRH raised cash proceeds of Â£90.5m, or 930p per share, resulting in a net gain on disposal of Â£10.3m after disposal costs of Â£1.6m. (ii) Disposal of investment in GMTV On 12 October 2004, the Group announced the sale of its 25% shareholding in GMTV to ITV plc for Â£31.0m cash less a dividend of Â£0.7m, resulting in a gain on disposal of Â£20.5m after disposal costs of Â£0.5m. 25. Provisions Reorganisation Other Total Provisions provisions provisions Â£m Â£m Â£m At 1 January 2004 1.1 0.9 2.0 Utilised in the year (0.8) (0.9) (1.7) ------- ------- ------- At 31 December 2004 0.3 - 0.3 ------- ------- ------- In 2003, a provision for exceptional costs amounting to Â£2.5m was made to cover reorganisation initiatives, primarily in the Group's television operations following the move of the Aberdeen studios to new state of the art digital studios. The provisions are expected to be utilised within one year. 26. Share capital Number of shares Ordinary shares Share Total (thousands) premium Â£m Â£m Â£m At 1 January 2004 314,282 7.8 58.8 66.6 Issued during year 12 - - - ------- ----- ------ ------ At 31 December 2004 314,294 7.8 58.8 66.6 ------- ----- ------ ------ The total authorised number of ordinary shares is 11 million shares with a par value of 2.5 pence per share. All issued shares are fully paid. 27. Reserves Merger Other reserve Retained reserve earnings Â£m Â£m Â£m At 1 January 173.4 - (173.2) Opening IFRS 1 adjustments - 4.3 (8.2) ------ ----- ------ At 1 January restated 173.4 4.3 (181.4) Profit for the year - - 37.8 Dividends - - (11.0) Movement in other reserve for share based payments - 0.9 - Actuarial loss - - (8.6) Deferred tax thereon - - 2.6 ------ ----- ------ At 31 December 173.4 5.2 (160.6) ------ ----- ------ Retained earnings 2004 Â£m Retained earnings excluding pension liability (91.4) Amount relating to defined benefit pension scheme liability, net of related deferred tax (69.2) ------ (160.6) ------ Goodwill totalling Â£77.5m arising on acquisitions before 31 December 1997 has been eliminated against reserves as a matter of accounting policy. 28. Notes to cash flow statement 2004 Â£m Group operating profit (before exceptional items) 28.0 Adjustments for: Depreciation and other non-cash items 6.4 ----- Operating cash flows before movements in working capital 34.4 Increase in inventories (7.6) Increase in trade and other receivables (14.2) Increase in trade and other payables 5.7 Development costs, onerous contracts and reorganisation costs (1.7) ----- Cash generated by operations 16.6 ----- 29. Analysis of movement in net debt At Non-cash Cash flow At 1 January movements 31 December 2004 2004 Â£m Â£m Â£m Â£m Bank overdraft (0.2) - 0.2 - Cash at bank and in hand - - 20.5 20.5 ------ ----- ------- ------ (0.2) - 20.7 20.5 Bank borrowings (228.4) (3.8) 93.2 (139.0) Short term deposits 10.0 - (2.5) 7.5 Convertible unsecured loan (22.8) - - (22.8) stock Unsecured loan notes (0.3) - - (0.3) Secured loan notes (0.8) - 0.1 (0.7) ------ ----- ------- ------- Net debt (242.5) (3.8) 111.5 (134.8) ------ ----- ------- ------- 30. Capital commitments At 31 December 2004 the Group had no contracted for but not provided capital commitments. 31. Operating lease commitments 2004 Â£m Minimum lease payments under operating leases recognised in income for the year 2.5 ----- At 31 December 2004 the Group had minimum commitments in respect of non-cancellable operating leases for leasehold buildings as follows: 2004 Â£m Expiring within two to five years 1.3 Expiring in over five years 24.9 ------ 26.2 ------ 32. Contingent liabilities i) To facilitate the transfer at 1 March 1994 of the remaining active members of the Senior Executive Retirement Benefit Scheme to the Scottish Television Retirement Benefit Scheme, the Company has given guarantees up to a maximum of Â£1.5m relating to annual increases in the funding rate and to funding of the Retirement Benefit Scheme in the unlikely event it is wound up. ii) The Group has a 100% holding in Scottish Media Group (Holdings), which is an unlimited company. 33. Transactions with related parties There were no material transactions with any related parties during the year other than those exempted from disclosure under IAS 24 and IAS 1. 34. Retirement benefit obligations Defined contribution schemes The Group operates two money purchase schemes, the SMG Pension Scheme and the Pearl & Dean Cinemas Pension Scheme, for which the pension cost charge for the year amounted to Â£0.3m. Defined benefit schemes The Group operates two defined benefit pension schemes (during the 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 2004 Rate of increase in salaries 3.3% Rate of increase of pensions in payment 2.8% Discount rate 5.3% Inflation 2.8% Amount charged to operating profit 2004 Â£m Current service cost - defined benefit (2.0) ------- The total amount charged to profit from operations is Â£2.3m, which also includes the defined contribution charge of Â£0.3m. Actuarial gains and losses have been included in the statement of recognised income and expense. Amount charged to net finance costs 2004 Â£m Expected return on scheme assets 13.1 Interest cost (15.8) -------- (2.7) -------- Amount recognised in statement of recognised income and expenses 2004 Â£m Actual return less expected return on pension assets 8.9 Experience gains and losses (4.2) Changes in assumptions (13.3) ------- (8.6) ------- Amount included in the balance sheet arising from the Group's obligations in respect of its defined benefit retirement benefit schemes At 31 December 2004 Â£m Equities 7.4% 131.8 Bonds 4.3% 90.1 -------- Fair value of schemes' assets 221.9 Present value of defined benefit obligations (322.1) -------- Deficit in the schemes (100.2) -------- Movement in aggregate scheme deficits during the year 2004 Â£m At 1 January (91.7) Current service cost (2.0) Contributions from scheme members 4.8 Interest cost (15.8) Expected return on plan assets 13.1 Actuarial loss (8.6) ------- At 31 December (100.2) ------- A related offsetting deferred tax asset of Â£31.0m is shown under non-current assets. Therefore the net pension scheme deficit amounts to Â£69.2m. The actual return on plan assets for the year was Â£22.0m. History of experience gains and losses 2004 Difference between the expected and actual return on scheme assets: Amount (Â£m) 8.9 Percentage of scheme assets 4% Experience gains and losses on scheme liabilities: Amount (Â£m) (4.2) Percentage of the present value of scheme liabilities (1%) Total amount recognised in statement of recognised gains and losses: Amount (Â£m) (8.6) Percentage of the present value of scheme liabilities (3%) 35. Share based payments Equity settled share option plans The Group Executive and Company share option plans provide for a grant price approximately equal to the quoted market price at the date of grant. The vesting period is generally 3 years. If the options remained unexercised after a period of 7-10 years from the date of grant, the options expire. Furthermore, options are forfeited if the employee leaves the Group before the options vest. 2004 2004 Executive share Company share option option scheme scheme Options Weighted Options Weighted average average exercise exercise price (Â£) price (Â£) Outstanding at beginning 7,384,794 1.47 1,547,078 2.21 of period Granted during the period 1,337,108 1.16 62,659 1.16 Expired during the period 321,768 1.74 - - Outstanding at the end of the period 8,400,134 1.41 1,609,737 2.17 Exercisable at the end of the period 2,989,805 1,413,601 The executive scheme options outstanding at 31 December 2004 have a weighted average exercise price of Â£1.41, and a weighted average remaining contractual life of 48 months. The company scheme options outstanding at 31 December 2004 have a weighted average exercise price of Â£2.17, and a weighted average remaining contractual life of 60 months. The exercise prices for options under both schemes range from Â£0.65 to Â£3.25. The inputs into the Black-Scholes model for 2004 are as follows: 2004 Weighted average share price Â£1.16 Weighted average exercise price Â£1.16 Expected volatility 40% Expected life (years) 3 - 5 Risk free rate 4.5% Expected dividend yield 2.4 % Expected volatility was determined by calculating the historical volatility of the Group's share price over the previous 3 years. The fair value of options granted during the period was determined using the Black-Scholes model to be Â£0.44 per option. The Group recognised total expenses of Â£0.8m (net of tax) related to equity-settled share-based payment transactions in 2004 for the Executive share option scheme. Other share-based payment plans The employee sharesave plans (3 years and 5 years) are open to almost all employees and provide for a grant price approximately equal to the quoted market price at the date of grant. The shares can be purchased once or twice a year in the six-week period following announcement of the annual and interim results. The Group issued options over 511,314 ordinary shares in 2004, at a weighted average share price of Â£1.05. The exercise prices for options under both sharesave schemes range from Â£0.65 to Â£2.60. At 31 December 2004, there were 1,931,067 options outstanding under the schemes with a weighted average exercise price of Â£0.87 per option. The performance share plan is for executive directors and other senior executives. The performance criteria for this scheme are based on a combination of earnings and total shareholder growth and as such have been valued using both Black & Scholes and Monte Carlo models respectively. The Group issued options over 638,603 ordinary shares in 2004. At 31 December 2004, there were 3,101,968 options outstanding under this scheme. The deferred bonus plan is for executive directors and other senior executives. The performance criteria for this scheme is based on the members of the scheme remaining in active service with the company for a three year period from the date of award. No options under this scheme were issued by the Group in 2004. At 31 December 2004, there were 58,904 options outstanding under this scheme. APPENDIX IV IFRS 2 Disclosure - Analysis of fair values Following the introduction of IFRS 2 (Share-based Payments), companies are required to account for the cost of share-based payments made to employees. All options awarded post 7 November 2002 are required to be accounted for: any options prior to this date can only be accounted for where the fair value of the awards made has been publicly disclosed by the company. The fair value of each of the awards has been determined using the Black Scholes model or Monte Carlo model as relevant. The fair values of each of the schemes, as determined at the grant date, are detailed below. The Group Executive and Company share option plans, Sharesave scheme and Deferred Bonus plan have been valued using the Black Scholes model, the fair value for each of the awards being shown below. The vesting of awards under the Performance Share Plan is contingent upon the company achieving both Total Shareholder Return and EBITDA growth targets. Owing to this, the scheme is valued using both the Black Scholes model and the Monte Carlo model, with the fair values detailed below. Analysis of fair values: Company and Executive Share Options and Sharesave Date of award Company Share Executive Share Sharesave 3 Sharesave 5 Option Scheme Option Scheme Year Scheme Year Scheme 10 Jun 1997 22p 11 Mar 1998 32p 32p 8 Sep 1998 29p 29p 12 Mar 1999 38p 38p 6 Sep 1999 40p 40p 1 Dec 1999 70p 23 Feb 2000 56p 56p 1 May 2000 69p 22 Aug 2000 56p 56p 1 Nov 2000 55p 27 Feb 2001 90p 90p 9 Apr 2001 64p 64p 1 May 2001 43p 67p 11 Jun 2001 77p 77p 24 Sep 2001 39p 22 Oct 2001 39p 39p 19 Apr 2002 53p 53p 1 Jun 2002 53p 68p 11 Sep 2002 34p 10 Mar 2003 22p 22p 1 Jul 2003 30p 38p 12 Mar 2004 44p 44p 1 Jul 2004 39p 46p Analysis of fair values: Performance Share Plan and Deferred Bonus Plan Date of award Performance Performance Deferred Bonus Share Plan Share Plan Plan (Black Scholes) (Monte Carlo) 27 Feb 2001 226p 139p 24 Sep 2001 99p 50p 19 Apr 2002 136p 76p 10 Mar 2003 59p 30p 15 Sep 2003 107p 12 Mar 2004 109p 76p This information is provided by RNS The company news service from the London Stock Exchange

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