Preliminary Results

11th Mar 2009 07:00



Johnston Press plc

FOR IMMEDIATE RELEASE

11 March 2009

RESULTS FOR THE YEAR ENDED 31 DECEMBER 2008

Johnston Press plc, one of the leading multi-platform community media groups in the UK and Ireland, announces results for the year ended 31 December 2008.

KEY FINANCIALS

	2008	2007	%Change
	£'m	£'m
Revenue	531.9	607.5	-12.4
Operating profit before non-recurring items	128.4	178.1	-27.9
Profit before tax and non-recurring items	98.8	137.4	-28.1
(Loss)/ profit before taxation (after all non-recurring items)	(429.3)	124.7
Earnings per share	pence	pence
- Underlying (before non-recurring items)*	13.41	25.08	-46.5

 

 

Commenting on priorities and prospects, recently appointed CEO John Fry said:

"……we need to plan for the turn of the cycle, which will undoubtedly happen".

"…..advertising markets remain very depressed with advertising revenues to date in 2009 35.9% below those for 2008. However, we are benefiting from the full effects of the 2008 cost reduction programme with more initiatives in place which will drive further efficiencies. Costs for the first two months of 2009 are running 15.7% down on the same period in 2008. In the short term there is little prospect of a turn in the advertising cycle and our expectation is for 2009 to be a very challenging year with revenues significantly below 2008 levels and only partially offset by lower costs.

Johnston Press will continue to develop its traditional print operations in a cost effective way whilst at the same time enhancing and upgrading the digital publishing platforms. We will remain an invaluable source of news, information and entertainment in local markets which will enable us to be the business partner of choice for local advertisers as we have been for many years".

For further information please contact:

Johnston Press John Fry, Chief Executive Officer Stuart Paterson, Chief Financial Officer	020 7466 5000 (today) or  0131 225 3361 (thereafter)
Buchanan Communications Richard Oldworth/Richard Darby/Christian Goodbody	020 7466 5000

* Shares in issue have increased following the placing of shares and 1 for 1 Rights Issue in June 2008.

Johnston Press plc

Chairman's Statement

The past year has been a particularly challenging one for the regional press. Local publishing companies experienced a very significant and rapid decline in advertising revenues. 

This was driven by the credit crisis and the consequent economic downturn. It is manifest by the major decline in the volume of advertising in respect of property and recruitment in particular but also by significant declines across all other categories. The Board recognises and regrets that 2008 has been an especially painful year for our shareholders who have suffered a substantial loss in value.

Johnston Press has faced the same difficult market conditions as other publishers. In addition, we entered the year with a relatively high level of debt, incurred as a result of earlier acquisitions, primarily in 2005. Much of the past year has been about addressing these problems, a process which remains ongoing.

Results

During 2008 total revenues were £531.9 million, a reduction of 12.4% compared to 2007 (£607.5 million). This decline reflects the very challenging market conditions referred to above which resulted in overall advertising revenues, in print and digital, falling by £75.2 million or 17.1% from 2007 with a significantly worsening trend as the year progressed, as summarised on page 12. The only areas of revenue growth were in our digital operations, up by 31.1% to £19.8 million (2007 £15.1 million) and contract printing which grew by 2.6% to £35.9 million (2007 £35.0 million), reflecting additional revenues from News International following completion of the new press installation in Portsmouth.

At £128.4 million, operating profit before non-recurring items was 27.9% down with an operating margin of 24.1%. This was only 5.2% lower than 2007 as a result of substantial cost savings implemented during the course of the year and reflects the extent to which our business has responded to the challenges which it faces.

Underlying earnings per share, adjusted by the discount element of the Rights Issue were 13.41p compared to 25.08p in 2007, a reduction of 46.5%. 

Net debt at 31 December 2008, as summarised in note 10, was £476.8 million, a reduction of £214.9 million from the start of the year. This was achieved primarily as a result of a fund raising exercise in the first half, which netted proceeds of £205 million after the deduction of fees, through a combination of a subscription of shares by Usaha Tegas Sdn. Bhd. and a 1 for 1 Rights Issue. In addition the Group continues to generate cash with a net inflow from operations during 2008 of £126.9 million. Net debt was adversely affected by the deterioration in the value of sterling against the euro, especially towards the end of 2008. Had this weakening not occurred net debt would have been £41.0 million lower. 

The loss for the year before taxation was £429.3 million, of which a profit of £98.8 million related to trading before non-recurring items. The balance related to non-recurring costs of £528.1 million. The majority related to the impairment of goodwill and the value of publishing titles, together with an intangible adjustment explained later, collectively totalling £511.4 million. The balance related to a fundamental restructuring of a number of our businesses and operations as part of a continuing exercise to align our costs more closely to the current economic environment. This included a non-cash item amounting to £7.0 million, being the accelerated depreciation on the press at Northampton closed during the year. 

Dividend

Reflecting the position at the Interim Results, and in line with the intentions regarding the dividend policy as expressed in the Rights Issue prospectus, the Board has decided to recommend no final dividend payment. The Board continues to believe that the most important use of available cash in the current environment is to reduce the Group's indebtedness.

 Business Operations

Classified advertising in local newspapers is a lead indicator of economic activity. Through movements in advertising revenues they anticipate more general changes in the wider economy. Indications of a deteriorating climate were seen very early in 2008 and this enabled the management team to anticipate a tough year ahead. As a result plans were put in place to undertake a radical restructuring of costs and also to bring down the total level of net debt through the fund raising exercise as outlined above. Both initiatives proved timely and well judged. However the severity of the advertising slump in the second half of 2008 turned out to be far worse than we anticipated.

 

The principal cost saving initiatives have focused on using technology to streamline and rationalise our operations. With our new press centres in Dinnington, in Yorkshire, and Portsmouth exceeding our expectations we have also been able to close several of our older printing operations. Whilst the majority of our headcount savings have come from these areas, we have also reduced numbers to a lesser extent in both advertising and editorial functions. Towards the end of 2008 we initiated a more radical restructuring of our editorial organisation by changing the approach to content production. Similarly in advertising, we embarked on a rationalisation of our tele-sales functions to create a smaller number of regional call centres. Both initiatives will result in significant additional savings during the course of 2009.

Comparing December 2008 with December 2007, the Group's full-time equivalent headcount has fallen from 7,538 to 6,408 and, as an illustration, operating costs for the month of December 2008 were £29.4 million which were 16.9% lower than in December 2007. We anticipate further cost savings during the course of 2009 with a number of plans to achieve this already in place as outlined above.

Notwithstanding the pressures under which we are having to operate, we continue to invest in our digital platforms. The result has been revenue growth of 31.1% in 2008 to reach a total of £19.8 million (2007: £15.1 million). Similarly strong growth has been achieved in unique users up by 48.8% and page impressions which increased by 167.5%. We have ambitious plans for further developments in 2009.

The result of these initiatives, coupled with continuing efforts to grow our total print audience through targeted niche product launches, has resulted in a significant expansion in total reach. Research undertaken by Survey Interactive in the autumn of 2008 indicates that our websites have extended our audience reach by 27% in the UK. 

Reflecting the efforts of our local management teams, we have been rewarded with a number of awards for our print publications and our websites. The most noteworthy amongst these included Scottish weekly newspaper of the year to the Falkirk Herald; Scottish weekly paid-for newspaper of the year to the Southern Reporter; 'How do' media awards website of the year to the Lancashire Evening Post; and a number of individual awards to employees. These included the Baron Trophy for a lifetime achievement in Journalism in the Highlands and Islands to Donnie Macinnes after 40 years with the Stornoway Gazette; NCTS trainee sports reporter of the year to Jonathan Jurejko at the Doncaster Free Press and Scottish Newspaper Society Journalist of the year to Richard Elias at Scotland on Sunday.

Strategy

The Board of Johnston Press has been consistent in believing that the strength of the Company lies in its focus on providing local communities with news, information and entertainment, thereby building large local audiences which advertisers are keen to access. The Board has also long recognised that a reliance on print alone is insufficient and that a multi-platform approach which embraces digital channels is central to a successful long term strategy. Whilst this accepts that the business does face structural challenges to which it must respond, there is an equally strong belief that print will remain a vital part of the media mix for the long term. As a result of this, we have an ongoing programme of investment to develop our digital publishing platforms which build on our existing print franchises. Whilst this period of extreme economic weakness adds to the challenge of pursuing this strategy, we are committed to doing so.

During the year only one very small acquisition was made being a small weekly free distribution newspaper, South Tipp Today, which circulates in County Tipperary in the Republic of Ireland. The title is performing well and ahead of expectations at the time of acquisition. 

More generally, we continue to believe that industry consolidation is very beneficial to readers and advertisers alike and that in the longer term, further developments in this direction are likely. The extent to which this will be possible remains substantially dependent on the application of merger regulations. An easing of the narrow view of market definition in assessing newspaper mergers is long overdue.

 

 Employees

2008 has been a year of extreme difficulty for our management and employees. It is to their collective credit that the business has responded so effectively to the tough challenges it faces, especially as we have unfortunately found it necessary to reduce the total number of people we employ. The Board thanks them for their efforts.

Board Changes

There have been significant changes to the Board of Johnston Press. During the year we appointed two new Non-Executive Directors, Gavin Patterson, who is a Director of BT Group plc and Chief Executive of BT Retail, and Ralph Marshall, an Executive Director of Usaha Tegas, our new major shareholder. Gavin accepted the position before his promotion to the role of CEO of BT Retail and, with the new additional calls on his time in the current economic climate, sadly Gavin has decided not to stand for election at the Annual General Meeting in April. Ralph brings to the Board a considerable breadth of business experience.

Simon Waugh, who has been a Non-Executive Director since 2003 and was Chairman of the Remuneration Committee, stood down in January 2009 following his appointment by the Government as the first Chief Executive of the new National Apprenticeship Service. Peter Cawdron, who was planning to stand down at the AGM in 2009, has agreed to stay on until the AGM in 2010. He will take on the Remuneration Committee chairmanship until that time. 

Given the changes above, during 2009 a number of new independent Non-Executive Directors will be recruited to the Board.

Our long serving Chief Executive, Tim Bowdler, stepped down on 31 December 2008 after 15 years with the 

Company. He will remain available for a limited period to assist in a smooth handover to John Fry who has succeeded him after spending six years as Chief Executive of Archant, the UK's seventh largest regional newspaper publisher. 

John was for nine years President of the information company Dun & Bradstreet for UK, Europe, Middle East and Africa, after four years as a consultant with Bain & Company. He started his career with Procter & Gamble. 

As CEO, Tim led the remarkable growth of Johnston Press by successfully acquiring numerous other regional newspaper publishing businesses. Under his leadership Johnston Press has grown from a relatively small business to become the UK's second largest regional newspaper publisher and the largest publisher of weekly newspapers in the Republic of Ireland. During much of his tenure the Company achieved significant growth in profits and earnings per share. It is unfortunate in all respects that he leaves the business after the recent sharp decline in the share price which reflects the seriousness of the current downturn and concern over the level of debt currently on the balance sheet.

 

Despite the recent collapse of the advertising markets, Tim leaves Johnston Press as a well run, cash generative business. On behalf of the Board and shareholders, I would like to thank him for his long and distinguished period of leadership. We wish him well for the future.

Lastly, after 12 years on the Board, eight of which as Chairman, I have decided to step down from the Board at the AGM in April. I gave an undertaking to the Board that I would take the responsibility of leading the process to recruit the right candidate to succeed Tim Bowdler. In appointing John Fry to the post, I am confident that I have met that undertaking and now seems the right time to resign from the Board and let a new team take the Company forward. Led by Peter Cawdron as the Senior Independent Director, the Board has appointed Ian Russell as Chairman elect and Ian will take over as Chairman effective from 12 March 2009. I will remain on the Board until the AGM when I will not be seeking re-election. I wish Johnston Press every success in the future.

Roger Parry

Chairman

11 March 2009

  Chief Executive Officer

Having joined Johnston Press at the beginning of January, I want to take this opportunity to set out what I see as the priorities for 2009 and the immediate prospects for the business.

Firstly, on behalf of all members of the Board, I would like to express our sincere appreciation to Roger for his contribution during the last 12 years, especially the eight years as Chairman, a period which has seen the substantial expansion of the Company to become the second largest regional newspaper publisher in the UK and the largest publisher of weekly newspapers in the Republic of Ireland. He has led this Company with great distinction. We wish him well with his future ventures.

Priorities

These are the key objectives that I believe are important for the company over the coming months.

1. Reducing debt by continuing to focus on cost control and seeking to maximise the cash generation of the businesses in what will be a very difficult trading year in 2009.

 

All of the above are essentially aimed at improving shareholder value over a period of time.

Immediate Prospects 

At the time of writing, advertising markets remain very depressed which means advertising revenues to date in 2009 are 35.9% below those for 2008. However, we are benefiting from the full effects of the 2008 cost reduction programme with more initiatives in place which will drive further efficiencies. Costs for the first two months of 2009 are running 15.7% down on the same period as 2008. In the short term there is little prospect of a turn in the advertising cycle and our expectation is for 2009 to be a very challenging year with revenues significantly below 2008 levels and only partially offset by lower costs. 

Johnston Press will continue to develop its traditional print operations in a cost effective way whilst at the same time enhancing and upgrading the digital publishing platforms. We will remain an invaluable source of news, information and entertainment in local markets which will enable us to be the business partner of choice for local advertisers as we have been for many years.

John Fry

Chief Executive Officer

11 March 2009

  Business Review

The speed and severity of the collapse in advertising revenues that we suffered during 2008 has been beyond the collective experience of the entire industry and even the longest serving of those who work in it. 

To comment on the results for 2008 it is essential to understand the dynamics of the changing environment in which we operate. It is also important to do so in assessing the actions we are taking to address the various impacts on our business.

Local newspapers have always provided a good lead indicator of the emerging state of the broader economy. 2007, after a difficult start to the year, saw a flattening of advertising revenues in the latter months, but unfortunately the start of 2008 brought renewed decline, led by falling property advertising which failed to recover fully from the Christmas break. A further downward adjustment in general advertising volumes was experienced over the Easter period in March. Thereafter, the trends continued to worsen month by month such that by the end of 2008, we were suffering year-on-year print advertising revenue declines in excess of 30%. 

A detailed analysis of advertising trends by category is included in the Performance Review.

Short Term Actions

The performance of Johnston Press, in common with the remainder of the regional newspaper sector, is primarily dependent upon print advertising revenues which comprised 65.9% of total Group turnover in 2008. Newspaper publishing is a high fixed cost business which means that a large percentage of the lost advertising revenues flows through the trading results to impact on the operating profit line. For Johnston Press there is also the added burden of a relatively high level of debt which at the year end stood at £476.8 million. Whilst the Group operated well within its bank covenants at the 2008 year end test, media analysts and others have expressed concerns about our ability to do so through 2009 and beyond in the event of a continued significant worsening of advertising revenues. This risk is discussed later in this Review on page 17.

The Group recognised these growing challenges early in 2008. The actions already taken and those in contemplation are directly aimed at addressing the short term issues facing the Group, but at the same time have been carefully assessed to ensure that they will not damage the Group's longer term ability to develop its business successfully. These actions are outlined below under three distinct and separate categories: costs, cash and debt.

1.  Cost Management 

Given the high fixed cost nature of the business, it is essential to address this element of the cost base whilst at the same time controlling variable costs as closely as possible. The key actions we have taken are outlined below:

 

2.  Cash Conservation

The importance of managing cash is well understood throughout the Group and over the course of 2008 even greater focus has been placed on the following areas:

3.  Debt Management

Johnston Press entered 2008 with £691.7 million of net debt. The trends we witnessed in the early months of the year and the marked deterioration since then have resulted in various actions including the following:

Strategy

The considerable impact on the Group of the recession and the associated collapse in advertising revenues has necessitated a change in our activities during 2009. As detailed above our focus has shifted towards tight management of costs, conservation of cash and reduction in our debt. 

Although we do not intend to change radically the portfolio of assets we hold, we are proposing to sell our Republic of Ireland business with a consequent reduction in debt. 

While there is no intention to use cash for acquisitions there are still benefits from industry consolidation. Contacts with other industry players are therefore being maintained to ensure that the Group and, in particular shareholders, can benefit from any activity within the sector.

 

The business vision continues to be focused on communities which are primarily locally based. Our mission is to serve those communities as the leading provider of news, information and advertising services through a variety of media channels. The four key elements of our strategy to deliver this business vision, are as follows:

1. Maintaining the core strength of our newspaper publishing activities by:

 

  2. Developing a fully integrated multi-channel publishing capability by:

 

3. Extending our audience reach and advertiser response by:

 4. Ensuring that we have the organisational capability and competence to deliver our strategy and vision by:

 

Business Risks

The business risks facing Johnston Press have undoubtedly increased during the course of 2008, reflecting the worsening economic environment and the implications this carries for both short and long term performance.

The most immediate risk is the need to renegotiate our borrowing facilities. Given the existing state of financial markets, the difficult trading environment, our current levels of debt and the problems faced by the major banks, this is likely to be a challenging process which undoubtedly has risk associated with it. We will certainly face the prospect of increased margins in the new facility which will result in higher borrowing costs for the Company. While the Board and its advisers believe there will be a successful outcome to these negotiations, this cannot be guaranteed. This is discussed in more detail under the heading of liquidity on page 17. 

The macro-economic environment has deteriorated rapidly during the course of 2008 with a consequent collapse across all categories of advertising revenues. The depth and duration of the current recession has a direct link to future advertising trends. Expectations for the economy are for declining GDP at least throughout 2009 and thus in the near term, advertising revenues are expected to suffer further significant decline. As well as remaining focused on maximising revenues, as outlined earlier, the Group has taken, and will continue to take, the necessary actions to manage its cost base in response to these challenges.

The downturn will undoubtedly result in some advertisers trying alternative media channels, particularly the internet, to save money and therefore there is a real risk that the eventual cyclical upswing will not be accompanied by a commensurate rise in advertising revenues as a proportion of our advertisers may remain with these alternative channels. Currently, there is no hard evidence as yet to suggest that this is happening on a significant scale and it is therefore difficult to assess the level of any potential permanent loss. A related risk is that the current downturn, when associated with the competitive threat of the internet, could result in downward pressure on advertising rates in print. Again, as yet there is no current evidence of this happening on a widespread basis. 

More generally, the regional press does continue to face increased competition from the internet, particularly for classified advertising revenues. With internet usage growing, there is evidence to suggest that some revenue migration is occurring particularly in the classified markets. Packaging advertising across our own print and digital platforms is an important part of our strategy to address this threat.

Quite apart from the challenge of the internet, we are also faced with structural changes in parts of our customer base. One of the most obvious of these is the consolidation of motor dealers into larger groupings, resulting in a reduced reliance on local newspaper advertising in their media mix. Another is in the active steps being taken by Government to reduce spend on print advertising both in terms of jobs and public notices. The industry is lobbying the Government to ensure that it understands the implications for local newspapers and for local communities in which significant numbers of people may not have ready online access. The homogenisation of the 'High Street' is another risk to local newspaper advertising as the national retail chains rely much less on local newspapers. A continuation of this trend could have adverse consequences for display advertising though the process is one which has already occurred on a significant scale.

Its clear that one of the greatest current challenges to advertising revenues remains competition from other print publications. This continues to be a feature of our markets and 2008 was no exception. The greatest incidence of this is with property advertising and the market pressures being experienced by estate agents may exacerbate this. We remain very cogniscent of such risks and continue to focus on providing advertisers and readers with good service and the delivery of quality publications.

The decline in newspaper sales, particularly of our daily titles, poses a growing risk to advertising revenues which are inextricably linked to audience reach. In response to this, and quite apart from ongoing efforts to address the problem, our strategy is to offer packages to advertisers across a number of print and digital platforms in order to extend reach accordingly. We expect the paid-for newspaper, both daily and weekly, to remain an important part of the local media mix.

Our largest costs are those related to staff. In view of the serious reduction in advertising revenues, we have announced a six month deferment of all 2009 pay reviews. When coupled with restructuring exercises to seek ongoing improvements in operating efficiency, this could pose an increased risk of industrial relations problems. We counter this by ensuring good internal communications and through fostering constructive relations with trade union officials both locally and nationally. Our contingency plans have also been reviewed.

The second most substantial element of cost is newsprint which has increased significantly from the beginning of 2009, in part due to the weakness of sterling. The financial performance of the newsprint producers is poor and there is a risk that further increases ahead of inflation could be experienced in coming years. We have taken steps to mitigate the 2009 increase but this will only be partially offset. Ways of achieving further mitigation are under consideration. 

Publishing Activities

As already stated, 2008 was an extremely difficult year. However, despite the current difficulties, our business still has a number of inherent strengths. 

Johnston Press remains a profitable, cash generative business. Despite a significant reduction in revenues, the 2008 operating margin was 24.1% producing an EBITDA (earnings before interest, tax, deprecation, amortisation and pre non-recurring items) of £153.2 million and free cash flow (cash from operating activities, less tax and interest) of £94.7 million. 

The focus on local community publishing remains central to our strategy and "Life is Local" still evokes a clear sense of direction for the Group. This ensures a cohesive approach amongst the management team and has resulted in a business which remains the leading publisher in almost all of the local communities which we serve. 

Despite falling circulations, Johnston Press still reaches a total readership of 12.5 million people. Locally, the print audience continues to deliver a strong advertiser response and it still represents the most effective means for many of our customers to promote their goods and services to those communities.

The rapid growth of our online audience continues and, although there is an estimated 24% overlap between readers and online visitors, the combination of channels has expanded our market reach very considerably. We actively package this capability for advertisers to enhance the response they receive. We also use our online presence to encourage people to buy the newspaper and increasingly use interactive online content to enrich our news pages.

Recent investments have resulted in a business which is well equipped for the modern publishing environment. The bulk of our printing capacity is relatively new with the major presses in Dinnington and Portsmouth representing state of the art with little capital expenditure required for some years. We have built a sophisticated IT infrastructure which has brought increasing commonality of processes across the Group. This has facilitated the rationalisation of the key functional areas of our operations with consequent savings and improved efficiencies. Our programme to develop a data warehouse is gathering pace and will provide greater knowledge of readers, online visitors and advertisers. If this can be harnessed effectively, it will provide a number of new revenue opportunities including such things as affinity marketing.

  Operational Review

IT systems are at the heart of the Group's approach to improving efficiency and customer service and further progress was made in 2008 in adopting standard business processes in advertising, editorial and finance. There is a continuous process of improvement to maximise the use of technology and provide consistent service levels for our customers.

IT Systems

During the year, we commenced installation of modern hardware into purpose built third party co-location centres in order to make our systems more resilient, efficient and to further standardise our financial and operational reporting. The transfer of data and applications to these centres is largely complete, enhancing the operational management of IT systems and at the same time significantly reducing power consumption as the server consolidation ratio is 8:1. Updating IT infrastructure with new high speed fibre optic links at every major Group site has also provided a better real time response for customers and staff.

As part of the integration of digital activities, the Group's online development team and application specialists were brought together to form a new unit charged with developing technology solutions for internal and customer facing systems. This unit has established relationships with third party software development organisations and potential partners to update our online technology. This will consequently improve the user experience for our classified search engines while creating new revenue opportunities particularly in the online jobs marketplace. Improvements to the self-serve aspect of our online advertisement booking system are also under way with a new version at an advanced level of testing. Using third party solutions, and particularly best of breed online applications, forms a major part of our strategy going forward.

Perhaps the most exciting venture during the year was the evaluation of new content management systems to improve the way in which text, pictures, audio and video content is captured and utilised in print, online and for mobile devices. The technology was successfully trialled in the Northwest division and demonstrated the potential to improve story gathering and develop content on other media and publish it in a timely way. The trial findings are currently being evaluated, after which we expect the technology to be rolled out across the Group.

Organisational Structure

Technology now enables us to interact with customers from any part of the organisation without losing the localness of the relationship. For the most part, interaction will remain at a local level, but the structure of advertising telephone sales teams was reviewed during the year and resulted in bringing disparate teams into single units to cover larger geographical areas. This will improve the standard of service to customers, eliminate the long-standing disadvantages of small widely spread advertising departments and provide better supervision and control.

As a result of these changes, it was decided during the latter part of 2008 to consolidate a number of operating companies into larger units, whilst retaining the local company status: Tweeddale Press based in Berwick and the Borders now forms part of The Scotsman Publications Ltd; Central Counties Newspapers covering the heart of 

England around Aylesbury, Banbury and Rugby has been integrated into Premier Newspapers Ltd based at Milton Keynes; our titles in Lincolnshire are managed by the management teams in Anglia and East Midlands; and T R Beckett Ltd in Eastbourne and Hastings has been consolidated into Sussex Newspapers Ltd at Horsham and Chichester.

The review reinforced the need for our companies to be well represented in their local communities and, as "Life is Local" is central to our organisation, for senior management to take an active part in these communities.

Audience Delivery

We have further increased our knowledge of the different audiences that use our products. Working with a number of other regional newspaper companies and advertising industry bodies we helped develop a standard process to audit and research our combined newspaper and online audience.

We also released data on digital audiences which was audited by the industry body (ABCe). This independently certified data covers our network of local newspaper branded internet sites. The audit which will now take place every six months shows monthly, weekly and daily unique users and provides potential customers with a confidence to advertise. This audit also gives an independent assurance that our websites are attracting substantial audiences. Year-on-year unique users have grown by 48.8% and page impressions by 167.5%.

These percentage increases are based on calculations using Webtrends 6. From 1 January 2009 the Group intends to move the internal measurement of online viewers to Webtrends 8, a tool that provides a more accurate metric as it disregards the automated viewing of web pages by search engines. Again, this gives advertisers confidence they are reaching a more targeted audience than before.

We also undertook an independent online survey which, when combined with the ABCe audit figures, provides the most comprehensive knowledge of our overall audience to date. The research confirmed that the website audience tends to be both younger and a more affluent demographic than the newspaper readership. 55% of our website visitors are under the age of 44 compared to 39% of our newspaper readers, whilst 65% of website visitors in Britain fall into the ABC1 profile, compared with 51% of our print audience. The development of the websites means the company now reaches new audiences, with 45% of our website visitors only accessing our content online and this has extended our reach into the geographic markets we serve, typically by around 24%.

The development of our paid-for newspapers continues although sales remain difficult as key reader attractions such as property advertising have reduced considerably. The average decline for our daily newspapers was 6.9%. The best performing titles in the year were the Portsmouth News and the Ulster News Letter with declines of 3%. This reflected a series of strong news and sports stories, demonstrating that local communities do turn to the local newspaper for important issues. Nine of our weekly newspapers have seen sales increase, most notably the Worthing Herald and the Morpeth Herald.

Against a background of changing media consumption habits we also conducted research to understand better our newspapers' current brand image and consumer affinity. This has helped reaffirm the strength of our proposition and the potential to use the newspaper brand to sell other services and products. As a result of this research we have started to build new fledgling revenue from travel and home contents insurance, book publishing, music and DVD downloads.

Customer Relationship Management 

The development of the Group's marketing database continued in 2008, following a decision in 2007 to rebuild our CRM database in order to improve delivery of our services. We now have a comprehensive database of over 4 million customer records which is helping us to better understand our customers' behaviour, provide them with news and information relating to their interests, and make them aware of offers and promotions that match their needs.

Print Division

The downturn in the economy and the subsequent reduction in advertising pages, coupled with an influx of additional print capacity in the industry, created the need for the Group's print division to re-evaluate likely press hall capacity. As a result a significant amount of consolidation of printing and rescheduling has taken place to improve efficiencies and reduce costs of production. Printing at the Northampton site ceased in September and titles, including the two daily newspapers (the Northants Chronicle and Kettering Evening Telegraph), were moved to Peterborough and other sites in the division. Earlier in the year daytime production at the Leeds print site was closed with the Yorkshire Evening Post transferring to Dinnington where it is produced at high speed and in full colour on the new triple width press. The Leeds press hall continues to print the Yorkshire Post and the Financial Times under contract.

A number of weekly titles have been moved to print sites closer to their circulation areas and have benefited from improved quality and product enhancements including online inserting, stitching and trimming.

The new press hall at Carn in Northern Ireland was completed and a refurbished single width press was transferred from Portsmouth where it had become surplus to capacity following the introduction of a much larger press in 2007. The reconfigured press at Carn can produce up to 96 pages in full colour and competes on a like-for-like basis with other contract printing press installations in the region. All Group titles in Northern Ireland, including the News Letter, are now being printed in-house.

The existing press at Carn was also refurbished and additional colour units added. The press is now capable of printing up to 64 pages, 56 in full colour. This satisfies the contract to print the Guardian and Observer, which has recently been extended. Both presses feed into a new mailroom with off and online inserting, stitching and trimming, all to enhance product presentation and give revenue growth opportunities.

Contract printing has been an area of business growth in the print division and customers include News International, Times Educational Supplement, Garnett Dickinson, Bauer (formerly EMAP), Farmer's Guardian, IPC, the Financial Times, the Mirror Group and Motor Sports News. The continued commitment to quality and service has been rewarded by "Printer of the Year" and "Best Quality Publication" at several industry recognised award ceremonies.

  Staff Development and Welfare

The staff engagement survey trialled in 2007 was rolled out across every company in 2008 with over 60% of staff responding to the questionnaire. This has given a valuable insight into the motivation, commitment and views of our employees, something we have used to shape our management approach. Results have been encouraging with over 50% of staff satisfied with their development and two thirds content with their involvement and happy with the recognition they receive. Overall the Group engagement level was above the UK norm. All companies have received feedback at a departmental level with areas for improvement agreed and now monitored.

Another area for focus has been customer care and the introduction of a consistent business process to ensure customer service levels are at the required standard. To facilitate this we undertook over 1,000 courses for sales management and provided 700 delegates with training as well as side by side coaching. The continuous improvement of customer care is vital to our success and we appointed Intersperience Research Limited, an independent research organisation, to assess and analyse our performance in this area by conducting customer surveys and mystery shopping on our behalf. The results are benchmarked against Intersperience's database of other organisations in order to measure performance and identify areas for development. In 2008 our overall score improved by 20% with the most significant progress occurring in sales skills and email handling. This result can be directly attributed to the investments made in sales training, systems and procedures.

  Performance Review

In 2008 the Company suffered the greatest fall in revenues in its history. The recession and financial crisis in the UK and the Republic of Ireland hit every category of advertising. We expect 2009 to be an equally challenging year. Throughout 2008 we have been working hard to reduce our cost base such that, when the recession ends, the costs of the business will be appropriate for the future revenue streams.

The table below illustrates the worsening trend in advertising revenues during the year. The figures exclude the small number of titles acquired and sold during 2008 and 2007 to provide a fair comparison.

UK revenues fell by 16.8% and 22.6% in the Republic of Ireland. Reliable category analysis in Ireland has only been available since the introduction of new systems in the second half of 2007 and, therefore, the analysis by category that follows covers the UK only.

The greatest fall has been in property advertising which has reduced by 32.4% over the course of the year and now accounts for 15.7% of total advertising revenues. The exit rate of decline over the last quarter was 54.8%. This is a direct reflection of the collapse of the property market both for second-hand homes and new build. Despite this, estate agents continue to advertise in our newspapers, albeit with heavily reduced volumes. The collapse of property advertising is overwhelmingly a result of the cyclical downturn and we expect that as markets recover there will be a return, though almost certainly not to the record levels of advertising we enjoyed in the recent past.

Advertising Revenue - Print & Digital by quarter (like-for-like)

Year to 31 December 2008

Year/Quarters		YEAR			March			June			Sept			Dec
	2008	2007	%	2008	2007	%	2008	2007	%	2008	2007	%	2008	2007	%
	£'m	£'m	Change	£'m	£'m	Change	£'m	£'m	Change	£'m	£'m	Change	£'m	£'m	Change
UK
Employment	82.0	101.9	(19.5)	26.5	28.8	(7.8)	24.5	26.4	(7.3)	18.6	26.0	(28.6)	12.3	20.6	(40.0)
Property	54.3	80.3	(32.4)	18.5	20.6	(10.2)	17.2	22.7	(24.3)	11.3	20.9	(45.9)	7.3	16.1	(54.8)
Motors	31.9	40.4	(21.2)	9.3	11.2	(17.2)	8.6	10.3	(16.3)	8.2	10.8	(23.8)	5.7	8.2	(29.5)
Other Classified	69.2	73.4	(5.7)	18.2	18.9	(3.5)	17.8	18.7	(4.7)	17.1	18.3	(6.1)	16.1	17.6	(8.4)
Display	109.2	120.4	(9.3)	29.7	30.2	(1.9)	27.5	30.0	(8.1)	26.0	29.2	(11.1)	26.1	31.0	(16.0)
UK Total	346.6	416.4	(16.8)	102.2	109.7	(6.9)	95.6	108.1	(11.5)	81.2	105.2	(22.8)	67.5	93.5	(27.8)
Republic of Ireland	18.6	24.0	(22.6)	5.2	6.1	(14.8)	5.1	6.2	(18.6)	4.3	5.6	(24.5)	4.0	6.0	(32.9)
Group Total	365.2	440.4	(17.1)	107.4	115.8	(7.3)	100.7	114.3	(11.9)	85.5	110.8	(22.9)	71.5	99.5	(28.1)

Although holding up for longer, employment advertising, which represents 23.7% of total advertising revenue, began to display a significant weakening from the month of March with growing deficits as the year progressed. Within an overall reduction of 19.5% for the year, the last quarter fell by 40.0%. Employment advertising is a particularly strong lead indicator and the falls reflect reduced vacancies together with growth in unemployment. Expectations are that the figures will worsen well into 2009. Whilst there is no doubt that over time more jobs are being advertised online rather than in print, local newspapers still reach a large audience and for many jobs they continue to provide an excellent response. Our expectation is for a recovery in employment advertising revenues as economic conditions begin to improve but that competition from the internet will result in some erosion of share with potentially increased pressure on advertising rates. 

Motors advertising has been in long term decline with its share of our advertising revenue mix falling again in 2008. During the year, this category was 21.2% down with a reduction of 29.5% in the last quarter. Whilst the emergence of strong online competition has been a factor in the decline of motors advertising in newspapers, an even more important cause has been the trend of dealer consolidation. This has resulted in bigger franchises with larger geographic footprints which in turn has precipitated a broadening of their marketing mix away from local print. The current difficult marketplace for car sales has exacerbated these trends, although we do expect a modest improvement in advertising performance when car sales recover.

  The 'Other Classifieds' category, now 20.0% of total advertising, comprises entertainments, public notices, birth marriage and death announcements plus trade and personal advertisements. These have historically produced a relatively resilient revenue stream and, with a decline of 5.7% during the year and 8.4% in the final quarter, this was again evident when compared to other advertising categories. The reduction was worsened by 2.0% due to our decision in late 2007 to tighten the conditions which apply to the Group's acceptance of "personal services" advertising. 

Our expectation is for this category to remain more resilient than most though there continues to be Government pressure, opposed by the industry, to remove or weaken statutory requirements for newspapers to be used to carry certain types of public notices.

Our largest single category, with a 31.5% share of total advertising, is display. In the year, total revenues were down by 9.3% with reductions in both national and local markets. In the last quarter, the year-on-year performance worsened with a 16.0% fall. This performance reflects weakening consumer confidence and the well publicised difficulties being faced by retailers generally. Display advertising has not been helped by the gradual homogenisation of the 'High Street' as national chains replace independent shopkeepers. Their use of media relies less on local newspapers than the diversity of smaller businesses which used to characterise the retail sector. Partially offsetting this trend, we have been successful in winning new areas of display advertising in business sectors such as health, leisure, education and travel. Whilst we are confident that local newspapers will remain an important advertising medium for display, short term prospects, especially in the early months of 2009, look challenging.

The table below summarises the revenues and total costs of the Group for 2008 compared with 2007.

Newspaper sales revenues decreased by 1.0%. Circulations for our daily papers decreased on average by 6.9% and our weekly titles saw declines of 5.8%. These declines were substantially offset by increased cover prices across most of our paid-for titles. We believe that the circulation decreases were higher than recent underlying trends for two principal reasons. Firstly the general economic climate leading to a squeeze on consumer spending and secondly the reduction in property advertising and interest in the property market.

Performance summary for 2008 and 2007

	2008	2007
	£'m	£'m
Print advertising	350.6	425.8
Newspaper sales	101.4	102.4
Digital	19.8	15.1
Printing	35.9	35.0
Other	24.2	29.2
Total revenues	531.9	607.5
Costs*	403.5	429.4
Operating profit*	128.4	178.1
Operating margin %*	24.1	29.3

* Pre non-recurring items

Digital revenues, as a result of some of the initiatives mentioned earlier, have continued to grow, up 31.1% on 2007. However, the pace of growth declined as the year progressed due to the negative impact of the reduction in employment related revenues (which make up almost 50% of our digital revenues) offsetting growing revenues for new initiatives such as iAnnounce and Local Pages. Growth in the last quarter of the year was only 2.0%.

Contract printing revenues showed a marginal increase year-on-year with the full year benefit of both of our 15 year News International contracts offsetting the lost revenues from the Naas commercial print operation sold in 2007 and lost third party revenues at the presses closed.

Other revenues, of which almost 50% relates to leaflets, were down 17.1%. Leaflet revenues historically have trended in line with display revenues and 2008 was no different where the decline was 13.3%. This decline was larger than the decline in display advertising due to an overall reduction in our distribution of free newspapers as part of our cost saving programmes. In the half year to December 2008 the total distribution of free newspapers was 4% lower than the comparative period. There were also declines in premium lines, reader holidays and sale of photographs but these were offset by good growth in exhibitions and awards, sponsorship and syndication of news stories.

In total, revenues were 12.4% down on last year.

The total costs in the business pre non-recurring items reduced by £25.9 million from 2007 to 2008. There were cost reductions in almost every category despite significant inflationary pressures in the year. Specific points to note are as follows:

 

In total, costs adjusted for price changes (favourable in newsprint and unfavourable elsewhere) were down by £32.3 million year-on-year, a 7.5% reduction. 

As a result of these cost saving activities the impact of the 12.4% drop in total revenues was to some extent mitigated. The overall operating profit margin pre non-recurring items dropped from 29.3% to 24.1%.

The only acquisition made in the year was a small weekly free paper in South Tipperary. This was acquired for £1.5m and has performed ahead of expectations.

The factors that are most likely to influence the performance of the Group in the future have not changed significantly from what was reported last year. However, we have seen a marked deterioration in the general economic condition of the markets in which we operate. This is evidenced by:

• Decline in Gross Domestic Product

• Increase in unemployment rate

• Reduced number of property transactions

• Fewer new car sales and

• Falling levels of consumer confidence

All of these measures currently illustrate the cyclical downturn we are experiencing and are exerting the greatest influence over the trading performance of the Group. In addition to these major factors there are other factors listed below which we have more influence over but unfortunately, in the short term, these have a much lesser impact than the economic factors noted above.

 

Non-Recurring Items

In addition to the trading results detailed above and earlier in the Business Review there have been significant non-recurring items in the year. There are four distinct elements behind these charges and these are as follows:

Under IAS 36 the Group is required to test the carrying value of all of its intangible assets, namely publishing titles and goodwill, against the present value of anticipated discounted future cash flows from the Cash Generating Units associated with those assets. Due to the significant economic downturn and the impact that it is expected to have on the cash flows, an impairment charge against these intangible assets of £417.5 million has been recorded to reduce them to the present value of the future anticipated cash flows. Under IFRS rules goodwill must be written off before publishing titles and £144.4 million of this amount relates to goodwill. The balance of £273.1 million, being the impairment of publishing titles, has a tax implication due to the provisions of IAS 12 and the related tax credit amounts to £93.9 million. The Group has previously commented on the requirements to provide deferred tax on the value of its publishing titles because, in commercial terms, it is highly unlikely that this tax charge will ever crystallise. 

The original tax provision created when the titles were acquired had an equal and opposite effect in goodwill. Consequently, given that the goodwill has already been written off as noted above, in addition to the £93.9 million tax credit, there is an equal and opposite intangible adjustment which is also reported in non-recurring items. To comply with IFRS, the Group has no alternative but to reflect these entries in the accounts. None of these items have any cash or debt impact on the Group. Greater detail can be found in the notes to the accounts, numbers 5 and 9.

In September 2008 as a result of a combination of reduced advertising levels and increased efficiency of our new printing presses, the decision was made to close our printing operations in Northampton. The market for second hand equipment is currently depressed therefore the Group has taken an accelerated depreciation charge against these assets of £7.0 million.

As noted above, in an effort to reduce the cost base of the Group, there has been significant restructuring and reorganisation activity during the course of the year amounting to £9.7 million.

There is also a deferred tax charge of £8.2 million in respect of the changes to Industrial Buildings Allowances enacted by the Finance Act 2008.

It should be noted that the only non-recurring items which involved cash outflows for the business in 2008 were the restructuring and redundancy charges.

Finance Income/Costs

Net finance income on pension assets/liabilities was £3.5 million as the expected return on our pension fund assets exceeded the interest cost on our pension liabilities by that amount. Finance costs for the year were £34.0 million with a blended effective interest rate of 6.1%. These costs suffered in the early part of the year from the high margin between LIBOR (London Inter Bank Offer Rate), on which the Group's borrowing costs are based, and base rate. The reduction in interest rates in the second half only marginally benefited the Group as a large percentage of the borrowings post the Rights Issue are hedged. However, the reduced borrowings post the Rights Issue resulted in a lower interest cost in the second half.

Tax Rate

The Group tax rate for the year, excluding non-recurring items, was 26.9% with the UK rate of 28.5% being the blended rate of 30% for the first quarter and 28% for quarters 2-4. The UK rate is reduced proportionately by the businesses in the Republic of Ireland and the Isle of Man where Corporation Tax rates are considerably lower at 12.5% and zero respectively.

Earnings Per Share/Dividends

Basic earnings per share are negative 68.0p, significantly down on 2007 for three reasons:

a) Underlying deterioration in trading.

b) Non-recurring beneficial tax adjustments in 2007.

c) Impairment and other non-recurring charges in 2008 detailed above.

Excluding these non-recurring items, earnings per share at the basic level was 13.4p, down 46.5% on 2007, reflecting the trading environment in the year.

There will be no dividend paid relating to 2008. This reflects the Group's desire to further reduce its outstanding debt combined with the uncertainty around the length of the current recession. It is also unlikely that there will be any dividend paid relating to 2009 unless the economy sees a significant upturn in the coming months.

Finance Strategy/Net Debt

As the recession started to impact our business in the first half of 2008, it became obvious that there was a considerable risk that the levels of debt the Group was carrying might not be supportable. To address this the Group successfully raised £212 million of equity through a placing and a Rights Issue. Net of fees the sum raised was £205 million. These funds were entirely used to repay both current bank and loan note facilities. 

As has been the case in prior years, the Group's policy continues to be that borrowings, where possible, should be arranged at the lowest possible cost and with covenants within which the Group can comfortably operate. The increasing severity of the downturn during the year impacted the level of cash generation and debt, adding pressure to the covenant calculations going forward. As a result, together with the fact that our current bank facilities expire in September 2010, we will seek to renegotiate our borrowing arrangements in 2009 to address this. The liquidity section to follow discusses this further.

Our treasury policy requires that a minimum of 50% of the debt should be hedged against potential movements in interest rates, whilst the balance is kept under constant review. As a result of the significant reduction in debt following the Rights Issue and the hedging arrangements that were in place at that time, the Group now has approximately 73.9% of its net debt hedged for an average period of 2.4 years. This has had the benefit of protecting the Group for the majority of the LIBOR increases over 2008 but has also meant we are not currently benefiting from the lower base rates.

The Group also had, at 31 December 2008, €173.6 million of euro based debt. The currency exposure of this debt is not hedged as it represented the approximate value of the investments made in the Republic of Ireland. At 31 December 2007 this debt was translated at a rate of 1.3571, however, the exchange rate dipped at 31 December 2008 to 1.0272 and this has resulted in an adverse translation impact of £41.0 million which has increased net debt. Since 31 December 2008 the exchange rate has recovered somewhat and at the time of writing £14.6 million of this translation impact would be reversed. As noted earlier in this review there was an impairment on the carrying value of the publishing titles and goodwill. £134 million of that impairment related to the Republic of Ireland operations and therefore the underlying value of the investment has been written down. The swaps on the euro denominated debt expire in the first half of 2009 and it is the Group's intention to reduce the euro based debt to a level more in line with the reduced investment value.

At 31 December 2008, the Group's largest investment in working capital was in trade debtors. Despite the difficult trading environment UK debtor days at 50 were broadly in line with those at 31 December 2007 and in gross terms trade debtors were £17.9 million lower than at that date. The management of debtors, especially in the current economic climate, is seen as a key task as it is subject to both Executive and local management review. At each of our regional debt management centres local incentive arrangements are also in place in an effort to ensure timely collection of all debts.

Inventory levels at 31 December 2008 were £2.2 million higher than the prior year as stock levels were built up in anticipation of the increased price of newsprint in 2009. At 31 December 2007 stocks were run down in anticipation of newsprint prices reducing in 2008.

Net debt at the end of year, reflecting the fixed rate of our currency hedges on the US dollar denominated loan notes and the £41.0 million adverse impact of the sterling/euro exchange rate was £476.8 million, a reduction of £214.9 million over the course of the year. This reduction was achieved primarily through the Rights Issue and share placing which raised a net £205 million but also through net cash generated from operating activities of £126.9 million. The reduction of our debt is still the key financial objective for the business and all opportunities that might contribute to this in 2009 will be examined. The Group currently continues to be financed through 5 year bank facilities put in place in 2005 and private placement loan notes which have outstanding terms between 4 and 8 years.

Liquidity

The Group's bank facilities and private placement loan notes contain certain covenant tests relating to Consolidated EBITA to Consolidated Net Borrowing Costs; Consolidated Net Borrowings to Consolidated EBITDA; and Consolidated Net Worth. The failure of a covenant test would render the facilities in default and repayable on demand at the option of the lender. The Group reports on these covenants to the providers of finance bi-annually as part of the facility agreements; as at the year end, the terms of the facilities, including covenants, were met, and hence the debt was shown as due after more than one year from the balance sheet date. The covenants are due to be tested next at 30 June 2009. The Group remains both profitable and cash generative but, due to the difficult trading conditions, it is currently paying down debt at a slower rate than had been anticipated. Within its current bank facilities, the Group continues to have significant available committed undrawn facilities, which amounted to £295m at the balance sheet date.

The Board has undertaken a recent and thorough review of the Group's forecasts and associated risks; these forecasts extend for a period beyond one year from the date of approval of these financial statements. The extent of this review reflects the uncertain economic outlook and the significant reductions and increased volatility in advertising revenues experienced across the publishing and media sectors, which has continued into the early part of 2009. The forecasts make key assumptions, based on information available to the Directors at the time of approval of the financial statements, around:

Based on these forecasts the Group would continue to operate within the covenants determined by its debt facilities. However there is particular uncertainty associated with the disposal of the Irish businesses in terms of timing, quantum and ultimate completion. Discussions to date with our advisers on the transaction are encouraging in terms of the level of interest. However, should the disposal not be successfully completed there is a strong likelihood of a breach in the Consolidated Net Borrowings to Consolidated EBITDA covenant within our borrowing facilities during the course of 2009, which would render the facilities repayable on demand at the option of the lender. There is an increased risk of this covenant being breached on the Private Placement Loan Notes as the covenants are subject to ratchets dependent on circumstances and are currently at a lower multiple than the covenants in the bank facilities. In terms of mitigation of this uncertainty, the Group has alternative committed facilities available that could be used, if required, to replace these loan notes.

In addition to the ongoing disposal in relation to the Republic of Ireland businesses, the Group has appointed advisers and discussions have begun with its current debt providers to obtain a relaxation in the debt covenants, as well as putting in place more appropriate facilities extending beyond September 2010, which is the expiry date of our current bank arrangements. The initial discussions with the Group's existing providers of bank facilities have indicated support for this process.

However, in the event that a successful disposal of the Irish businesses in terms of timing and quantum is not completed and the current intentions of the Group's bankers change in respect of the ongoing availability of the facilities, the Directors would require to supplement, renew or replace those facilities with facilities that are appropriate to the Group's ongoing requirements. 

Given the current economic circumstances and the heightened awareness around the concept of going concern the Directors have had detailed and ongoing discussions as a Board, as well as with the auditors. Following these discussions, although the Directors remain confident of either the disposal of the Republic of Ireland businesses or a successful renegotiation of the Group's debt facilities, they have concluded that the combination of these circumstances, as they are not within our gift, indicate the existence of a material uncertainty which may cast significant doubt on the Group's and Company's ability to continue as a going concern, and if this is the case the Group and Company may be unable to continue to realise assets and discharge liabilities in the normal course of business. These financial statements do not include any adjustments that would result from the going concern basis of preparation being inappropriate.

After making due enquiries and considering the uncertainties described above, the Directors and the Group have a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

Financial Reporting

In terms of impact on this report and accounts, there are no significant changes in the Financial Reporting regulations from those in force at 31 December 2007.

  Pensions

The pension deficit over the year has increased by £5.1 million. Given the declines we have seen in investment markets over the last year, the reduction in the fair value of assets of £71.9 million or 18.3% is not as bad as it could have been and justifies the position taken in 2007 to reduce the plan's exposure to equities. The plan's liabilities have also decreased by £66.8 million or 16.4%, principally due to the increased discount rate and lower inflation assumptions. The deficit at 31 December 2008 is £18.2 million. The pension fund also concluded its first scheme specific valuation as at 31 December 2007 and the Group has agreed a deficit recovery plan and future contributions with the Trustees based on this valuation. In addition to the cost of the current service accrual, the Group has agreed to pay £2.2 million per annum towards the deficit.

Control Processes

As discussed in the Corporate Governance Statement, the Group operates rigorous internal control processes that assist in the efficient operation of our businesses. Central to these processes and controls is the fact that the general ledgers, fixed asset registers, expenses, payables system and payroll are controlled through our shared services centre in Peterborough together with all cash processing for the UK being processed through a single centre in Leeds.

Johnston Press has a long track record of delivering industry leading performance and of the successful integration of acquired businesses to produce sustained operational improvement. Despite the current challenges faced by the Group it is well placed to benefit from any eventual market upturn as the recession comes to an end. Johnston Press has a proven management team which remains focused on the delivery of long term shareholder value.

  Group Income Statement 

for the year ended 31 December 2008

			2008			2007
	Notes	Before non- recurring items £'000	Non- recurring items £'000	Total £'000	Before  non- recurring items Restated £'000	Non- recurring items Restated £'000	Total Restated £'000
Revenue	4	531,899	-	531,899	607,504	-	607,504
Cost of sales		(294,787)	-	(294,787)	(311,756)	-	(311,756)
Gross profit		237,112	-	237,112	295,748	-	295,748
Operating expenses	4/5	(108,698)	(16,675)	(125,373)	(117,606)	(6,829)	(124,435)
Impairment of intangibles	5/9	-	(417,522)	(417,522)	-	-	-
Intangible adjustment	5/9	-	(93,893)	(93,893)	-	(5,874)	(5,874)
Total operating expenses		(108,698)	(528,090)	(636,788)	(117,606)	(12,703)	(130,309)
Operating profit/(loss)		128,414	(528,090)	(399,676)	178,142	(12,703)	165,439
Investment income		807	-	807	607	-	607
Net finance income on
pension assets/liabilities	6a	3,489	-	3,489	4,514	-	4,514
Finance costs	6b	(33,963)	-	(33,963)	(45,922)	-	(45,922)
Share of results of associates		85	-	85	76	-	76
Profit/(loss) before tax		98,832	(528,090)	(429,258)	137,417	(12,703)	124,714
Tax	7	(26,577)	90,365	63,788	(38,876)	27,717	(11,159)
Profit/(loss) for the year		72,255	(437,725)	(365,470)	98,541	15,014	113,555
Earnings per share (p)
Earnings per share - Basic	8	13.41	(83.84)	(67.99)	25.08	3.83	28.91
Earnings per share - Diluted	8	13.41	(83.84)	(67.99)	25.04	3.82	28.86

The above revenue and profit is derived from continuing operations. The accompanying notes are an integral part of these financial statements.

The earnings per share for 2007 has been restated to reflect the discount element of the Rights Issue.

  Group Statement of Recognised Income and Expense 

for the year ended 31 December 2008

		Hedging and
	Revaluation	Translation	Retained
	Reserve	Reserve	Earnings	Total
	£'000	£'000	£'000	£'000
Loss for the year	-	-	(365,470)	(365,470)
Actuarial loss on defined
benefit pension schemes (net of tax)	-	-	(8,785)	(8,785)
Revaluation adjustment	(63)	-	63	-
Exchange differences on
translation of foreign operations	-	19,019	-	19,019
Change in fair value of interest rate swaps	-	(11,504)	-	(11,504)
Change in fair value of cross currency swaps	-	10,687	-	10,687
Deferred taxation	-	228	(323)	(95)
Total recognised income and expense	(63)	18,430	(374,515)	(356,148)
For the year ended 31 December 2007
Profit for the year	-	-	113,555	113,555
Actuarial gain on defined
benefit pension schemes (net of tax)	-	-	16,063	16,063
Revaluation adjustment	(63)	-	63	-
translation of foreign operations	-	2,245	-	2,245
Change in fair value of interest rate swaps	-	(2,406)	-	(2,406)
Change in fair value of cross currency swaps	-	4,691	-	4,691
Deferred taxation	-	(686)	-	(686)
Change in deferred tax rate to 28%	-	175	(338)	(163)
Total recognised income and expense	(63)	4,019	129,343	133,299

The accompanying notes are an integral part of these financial statements.

  

	Share Capital £'000	Share Premium £'000	Share-based Payments Reserve £'000	Revaluation Reserve £'000	Own Shares £'000	Hedging and Translation Reserve £'000	Retained Earnings £'000	Total £'000
Opening balances	29,944	332,750	8,679	2,459	(3,435)	8,131	305,247	683,775
Total recognised income and expense	-	-	-	(63)	-	18,430	(374,515)	(356,148)
Recognised directly in equity Dividends	-	-	-	-	-	-	(19,419)	(19,419)
New share capital subscribed	35,136	170,068	-	-	-	-	-	205,204
Own shares purchased	-	-	-	-	(977)	-	-	(977)
Provision for  share-based payments	-	-	1,385	-	-	-	-	1,385
Net changes directly  in equity	35,136	170,068	1,385	-	(977)	-	(19,419)	186,193
Total movements	35,136	170,068	1,385	(63)	(977)	18,430	(393,934)	(169,955)
Equity at the end of the year	65,080	502,818	10,064	2,396	(4,412)	26,561	(88,687)	513,820
For the year ended  31 December 2007
Opening balances	29,893	331,289	4,265	2,522	(1,628)	4,112	203,360	573,813
Total recognised income and expense	-	-	-	(63)	-	4,019	129,343	133,299
Recognised directly in equity
Dividends	-	-	-	-	-	-	(27,456)	(27,456)
New share capital subscribed	51	1,461	-	-	-	-	-	1,512
Provision for  share-based payments	-	-	2,607	-	-	-	-	2,607
Reclassification	-	-	1,807	-	(1,807)	-	-	-
Net changes directly  in equity	51	1,461	4,414	-	(1,807)	-	(27,456)	(23,337)
Total movements	51	1,461	4,414	(63)	(1,807)	4,019	101,887	109,962
Equity at the end of the year	29,944	332,750	8,679	2,459	(3,435)	8,131	305,247	683,775

Group Reconciliation of Shareholders' Equity 

for the year ended 31 December 2008

The accompanying notes are an integral part of these financial statements.

Group Balance Sheet 

at 31 December 2008

		2008	2007
	Notes	£'000	£'000
Non-current assets
Goodwill	9	864	130,010
Other intangible assets	9	1,057,022	1,373,614
Property, plant and equipment		260,498	273,381
Available for sale investments		2,712	2,712
Interests in associates		60	39
Trade and other receivables		18	31
Derivative financial instruments	11	36,488	4,192
		1,357,662	1,783,979
Current assets
Inventories		6,557	4,334
Trade and other receivables		149,268	89,533
Cash and cash equivalents		20,135	17,470
Derivative financial instruments	11	303	-
		176,263	111,337
Total assets		1,533,925	1,895,316
Current liabilities
Trade and other payables		54,319	77,120
Tax liabilities		99,705	17,612
Obligations under finance leases		13	-
Retirement benefit obligation	12	5,980	3,300
Borrowings	10	7,864	15,714
		167,881	113,746
Non-current liabilities
Borrowings	10	510,311	672,834
Derivative financial instruments	11	7,615	16,082
Retirement benefit obligation	12	12,231	9,843
Deferred tax liabilities		318,692	395,320
Trade and other payables		1,802	2,094
Long term provisions		1,573	1,622
		852,224	1,097,795
Total liabilities		1,020,105	1,211,541
Net assets		513,820	683,775
Equity
Share capital	13	65,080	29,944
Share premium account		502,818	332,750
Share-based payments reserve		10,064	8,679
Revaluation reserve		2,396	2,459
Own shares		(4,412)	(3,435)
Hedging and translation reserve		26,561	8,131
Retained earnings		(88,687)	305,247
Total equity		513,820	683,775

The financial statements were approved by the Board of Directors and authorised for issue on 11 March 2009.

They were signed on its behalf by:

J A Fry, Chief Executive Officer

S R Paterson, Chief Financial Officer

The accompanying notes are an integral part of these financial statements.

  Group Cash Flow Statement 

for the year ended 31 December 2008

		2008	2007
	Notes	£'000	£'000
Cash generated from operations	14	144,548	193,846
Income tax paid		(17,635)	(20,211)
Net cash from operating activities		126,913	173,635
Investing activities
Interest received		807	607
Dividends received from associated undertakings		64	70
Proceeds on disposal of property, plant and equipment		1,791	5,461
Proceeds on disposal of businesses		-	114
Purchases of property, plant and equipment		(23,221)	(31,027)
Acquisition of businesses		(1,530)	(11,413)
Net cash in businesses acquired		51	1
Net cash in subsidiaries sold		-	(10)
Net cash used in investing activities		(22,038)	(36,197)
Financing activities
Dividends paid		(19,419)	(27,456)
Interest paid		(33,053)	(46,538)
Interest paid on finance leases		(4)	(5)
Repayments of borrowings		(184,467)	(77,830)
Repayment of loan notes		-	(8,272)
Repayment of senior notes		(61,644)	-
Issue of shares		42,744	1,512
Net proceeds from rights issue		162,460	-
Purchase of own shares		(977)	-
(Decrease)/increase in bank overdrafts		(7,850)	13,985
Net cash used in financing activities		(102,210)	(144,604)
Net increase/(decrease) in cash and cash equivalents		2,665	(7,166)
Cash and cash equivalents at the beginning of year		17,470	24,636
Cash and cash equivalents at the end of year		20,135	17,470

The accompanying notes are an integral part of these financial statements.

  Notes to the Consolidated Financial Statements for the year ended 31 December 2008

1. General information

The financial information in the preliminary results announcement does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985 but has been extracted from statutory accounts. The statutory accounts for the year ended 31 December 2007 have been filed with the Registrar of Companies and those for the year ended 31 December 2008 will be filed following the Group's Annual General Meeting on 24 April 2009. The auditors' reports on the statutory accounts for the year ended 31 December 2007 and for the year ended 31 December 2008 were unqualified and do not contain a statement under Sections 237 (2) or (3) of the Companies Act 1985, however for the year ended 31 December 2008 the auditors' report included reference to matters to which the auditors drew attention by way of emphasis of matter without qualifying the report. The matters referred to in the auditors' report relating to going concern are described in the Liquidity section of the Performance Review on pages 17 and 18, these matters indicate the existence of a material uncertainty.

While the financial information included in this preliminary announcement has been prepared in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRSs. This preliminary results announcement constitutes a dissemination announcement in accordance with Section 6.3 of the Disclosure and Transparency Rules (DTR). The Company expects to publish its full financial statement for the year ended 31 December 2008 on or around 20 March 2008, and will be available on the Company's website at www.johnstonpress.co.uk and at the Company's registered office at 53 Manor Place, Edinburgh, EH3 7EG.

2. Adoption of new and revised Standards

These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and with those parts of the Companies Act 1985 applicable to Groups reporting under IRFS. These are subject to ongoing amendment by the International Accounting Standards Board (IASB) and subsequent endorsement by the European Union and are therefore subject to change. As a result, information contained herein will need to be updated for any subsequent amendment to IFRS or any new standards that the Group may elect to adopt early. The financial statements have been prepared under the historical cost convention as modified by the revaluation of freehold properties, which on transition to IFRS were deemed to be the cost of the asset, and financial instruments.

In the current year, two interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period. These are: IFRIC 11 IFRS 2 - Group and Treasury Share Transactions and IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The adoption of these interpretations has not led to any changes in the Group's accounting policies.

At the date of the authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

IFRS 1 (amended)/IAS 27 (amended)	Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate
IFRS 2 (amended)	Share-based Payment - Vesting Conditions and Cancellations
IFRS 3 (revised 2008)	Business Combinations
IFRS 8	Operating Segments
IAS 1 (revised 2007)	Presentation of Financial Statements
IAS 23 (revised 2007)	Borrowing Costs
IAS 27 (revised 2008)	Consolidated and Separate Financial Statements
IAS 32 (amended)/IAS 1 (amended)	Puttable Financial Instruments and Obligations Arising on Liquidation
IFRIC 12	Service Concession Arrangements
IFRIC 15	Agreements for the Construction of Real Estate
IFRIC 16	Hedges of a Net Investment in a Foreign Operation
Improvements to IFRSs (May 2008)

The Directors anticipate that the adoption of these Standards and the Interpretations in future periods will have no material impact on the financial statements of the Group except for:

• additional segment disclosures when IFRS 8 comes into effect for periods commencing on or after 1 January 2009;

• treatment of acquisition of subsidiaries when IFRS 3 comes into effect for business combinations for which the acquisition date is on or after the beginning of the first annual period beginning on or after 1 July 2009.

 

Notes to the Consolidated Financial Statements for the year ended 31 December 2008 continued

 

3. Business and Geographical Segments

For management purposes the Group has two business segments, newspaper publishing (in print and online) and contract printing.

The business operates in two geographical segments which are the United Kingdom and the Republic of Ireland. Revenue, profit and the carrying value of assets in the Republic of Ireland are less than 10 per cent in both the current year and prior year and so have not been disclosed separately.

4. Segmental Analysis

a) Revenue

An analysis of the Group's revenue is as follows:

	2008	2007
	£'000	£'000
Newspaper publishing	496,000	572,488
Contract printing	35,899	35,016
Revenue sub total	531,899	607,504
Investment income	807	607
Total revenue	532,706	608,111

The printing revenues excludes inter group revenue of £72 million (2007: £86 million). The revenues include £705,000 relating to the post acquisition trading of the acquisition of Clonnad Ltd.

b) Operating (loss)/profit

An analysis of the Group's operating (loss)/profit is as follows:

	2008	2007
	£'000	£'000
Newspaper publishing	(399,272)	158,060
Contract printing	(404)	7,379
	(399,676)	165,439

Operating (loss)/profit in newspaper publishing above is net of non-recurring items including an impairment of intangible assets of £417,522,000 and an intangible adjustment of £93,893,000 referred to in note 9. It also includes a profit of £205,000 relating to the post acquisition trading of the acquisition of Clonnad Ltd.

The 2008 results for contract printing were impacted by a non-recurring write down of the value of presses amounting to £7 million.

c) Cost of sales and operating expenses

	2008	2007
	£'000	£'000
Cost of sales	294,787	311,756
Operating expenses
Distribution costs	44,450	46,156
Administrative expenses before non-recurring	64,248	71,450
	108,698	117,606
Non-recurring - administrative expenses	16,675	6,829
- impairment of intangible assets (note 9)	417,522	-
- intangible adjustment (note 9)	93,893	5,874
	636,788	130,309

  Notes to the Consolidated Financial Statements for the year ended 31 December 2008 continued

5. Non-Recurring Items

Non-recurring items are as follows:

	2008	2007
	£'000	£'000
Impairment of intangible assets (note 9)	417,522	-
Intangible asset adjustment (note 9)	93,893	5,874
Restructuring costs of acquired businesses	-	502
Restructuring costs of existing business	9,675	7,361
Write down of value of presses in existing businesses	7,000	-
Profit on sale of property in existing business	-	(1,884)
Loss on disposal of businesses	-	850
	528,090	12,703

The intangible adjustment of £5,874,000 in 2007 relates to the reduction in the rate of corporation tax to 28% in the 2007 Finance Act. Deferred tax provided on the value of publishing titles in all acquisitions since 1 January 2005 has been offset by an equal and opposite entry in goodwill. With the reduction in the deferred tax provision to 28%, IAS 12 requires the tax adjustment to be flowed through the Income Statement. This leaves an unmatched goodwill balance which was only created by the original deferred taxation provision and, in line with IFRS, must be written off against operating profit. This non-recurring adjustment of £5,874,000 is offset by an equal and opposite deferred tax credit as shown in note 7. The adjustment in no way reflects any reduction in the underlying value of the Group's trading assets.

6. Finance Costs

	2008	2007
	£'000	£'000
a) Net finance income on pension assets/liabilities
Interest on pension liabilities	23,321	21,303
Expected return on pension assets	(26,810)	(25,817)
	(3,489)	(4,514)
b) Finance costs
Interest on bank overdrafts and loans	33,281	45,532
Interest on obligations under finance leases	1	1
Amortisation of term debt issue costs	681	389
	33,963	45,922

7. Tax

	2008	2007
	£'000	£'000
Current tax	19,459	29,849
Deferred tax
Charge for year	2,397	7,515
Charge relating to the Finance Act 2008 on abolition of IBA's	8,249	-
Deferred taxation adjustment relating to the impairment of publishing titles	(93,893)	-
Credit relating to change in tax rate on titles held on adoption of IFRS and other timing differences	-	(20,331)
Credit relating to change in tax rate on titles acquired since 1 January 2005	-	(5,874)
	(63,788)	11,159

UK corporation tax is calculated at 28.5% (2007: 30%) of the estimated assessable profit for the year. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdiction.

  Notes to the Consolidated Financial Statements for the year ended 31 December 2008 continued

7. Tax (continued)

The tax (credit)/charge for the year can be reconciled to the profit per the Income Statement as follows:

	2008		2007
	£'000	%	£'000	%
(Loss)/profit before tax	(429,258)	100.0	124,714	100.0
Tax at 28.5% (2007: 30%)	(122,339)	(28.5)	37,414	30.0
Tax effect of share of results of associate	(24)	-	23	-
Tax effect of expenses that are
non deductible in determining taxable profit	51,679	12.0	2,085	1.7
Tax effect of investment income	(1)	-	(16)	-
Effect of different tax rates of subsidiaries	(1,299)	(0.3)	(1,558)	(1.2)
Gain on sale of properties rolled over	-	-	(565)	(0.5)
Over provision in prior years	(53)	-	(19)	-
Non-recurring charge relating to 2008 Finance Act	8,249	1.9	-	-
Effect on reduction in deferred tax rate to 28%	-	-	(26,205)	(21.0)
Tax (credit)/charge for the year and effective rate	(63,788)	(14.9)	11,159	9.0

8. Earnings per Share

The calculation of earnings per share is based on the following (losses)/profits and weighted average number of shares:

	2008	2007
	£'000	£'000
Earnings
(Loss)/profit for the year	(365,470)	113,555
Preference dividend	(152)	(152)
Earnings for the purposes of basic and diluted earnings per share	(365,622)	113,403
Non-recurring items (after tax)	437,725	(15,014)
Earnings for the purposes of underlying earnings per share	72,103	98,389

		Restated
	2008	2007
	No. of shares	No. of shares
Number of shares
Weighted average number of ordinary shares
for the purposes of basic earnings per share	537,784,956	392,239,871
Effect of dilutive potential ordinary shares:
- share options	1,543,723	727,211
Number of shares for the purposes of diluted earnings per share	539,328,679	392,967,082
Earnings per share (p)
Basic	(67.99)	28.91
Underlying	13.41	25.08
Diluted - see below	(67.99)	28.86

Underlying figures are presented to show the effect of excluding non-recurring items from earnings per share.

Diluted earnings per share are presented when a company could be called upon to issue shares that would decrease net profit or increase loss per share. As it is unlikely that option holders would exercise out of the money options, which would only have the effect of reducing the loss per share, no adjustment has been made in 2008 to the diluted loss per share.

As explained in note 13, the preference shares are considered to be equity under IAS 32. In line with IAS 33, the preference dividend and the number of preference shares are excluded from the calculation of earnings per share.

In 2008, the weighted average number of shares has increased due to the placing of shares with Usaha Tegas on 30 May 2008 and the 1 for 1 Rights Issue on 23 June 2008. Further details of the movement in shares are shown in note 13. The weighted average number of shares, and therefore the earnings per share, for the previous periods in 2007 have been restated to reflect the dilution factor of the Rights Issue.

In 2008, the net non-recurring items amounted to £437.7 million of which £417.5 million related to the impairment of goodwill and publishing titles. 

Notes to the Consolidated Financial Statements for the year ended 31 December 2008 continued

9. Goodwill and Other Intangible Assets

		Publishing
	Goodwill	Titles
	£'000	£'000
Cost
Opening balance	130,010	1,373,614
Acquisition of business	289	1,448
Non-recurring adjustment - see below	-	(93,893)
Exchange movements	14,955	48,985
At 31 December 2008	145,254	1,330,154
Accumulated impairment losses
At 1 January 2008	-	-
Impairment losses for the period	(144,390)	(273,132)
At 31 December 2008	(144,390)	(273,132)
Carrying amount
At 31 December 2008	864	1,057,022
At 31 December 2007	130,010	1,373,614

Under IFRS, on acquisition of the publishing titles a deferred tax provision was created with an equal and opposite offset in goodwill. In the impairment losses above, all goodwill relating to impaired cash generating units (CGUs) has been written off.  The non-recurring adjustment of £93,893,000 is a tax credit, related to the deferred tax on the impairment of publishing titles in the UK at the rate of 28% and in the Republic of Ireland at the rate of 20%, being the local capital gains tax rate. Recording this adjustment results in the closing deferred tax provision representing the recorded value of publishing titles at the appropriate tax rates in the UK and the Republic of Ireland.

The sterling/euro exchange rate dropped significantly during 2008 to an exchange rate of 1.0272 at 31 December 2008. The exchange movement above reflects the impact of this exchange rate on the valuation of goodwill and publishing titles in the Republic of Ireland at the balance sheet date and before the impairment. It is offset by an increase in the euro borrowings.

Goodwill acquired in a business combination is allocated, at acquisition, to the CGUs that are expected to benefit from that business combination. The carrying value of goodwill and publishing titles by CGU is as follows:

	Goodwill		Publishing Titles
	2008	2007	2008	2007
	£'000	£'000	£'000	£'000
Newspaper and contract printing segment CGUs:
Scotland Newspaper Division	-	52,857	120,322	198,516
North Newspaper Division	-	107	405,128	449,138
Northwest Newspaper Division	-	-	109,183	163,000
Midlands Newspaper Division	864	864	176,592	176,592
South Newspaper Division	-	-	80,111	132,549
Northern Ireland Newspaper Division	-	33,459	71,856	115,380
Republic of Ireland Newspaper Division	-	42,723	93,830	138,439
	864	130,010	1,057,022	1,373,614

The Group tests goodwill and publishing titles every six months for impairment, or more frequently if there are indications that they might be impaired.

The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. These assumptions have been revised in the year in light of the current economic environment. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. Given the current volatility in the debt and equity markets, this has led to an increase in the cost of capital and therefore the discount rate applied to future cash flows has increased from 7.98% in 2007 to 8.85% in 2008. The growth rates assume an annual RPI increase only and no underlying growth. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.

  Notes to the Consolidated Financial Statements for the year ended 31 December 2008 continued

9. Goodwill and Other Intangible Assets (continued)

The Group prepares discounted cash flow forecasts derived from the most recent financial budgets approved by management for the next year and extrapolates cash flows for 20 years from the date of testing based on an estimated annual growth rate of 2.5%. A discounted residual value of 5 times the final year's cashflow is included in the forecast. The present value of the cash flows are then compared to the carrying value of the asset. 

Given the current difficult trading climate, and the anticipated downturn effect on the 2009 budgeted cashflows, this has resulted in an impairment charge of £417.5 million. Goodwill has been impaired by £144.4 million and publishing titles have been impaired by £273.1 million. The impairment particularly affects the recent acquisitions in the Republic of Ireland, Scotland and Northern Ireland, with £134 million, £110 million and £65 million being impaired respectively. 

The Group has conducted a sensitivity analysis on the impairment test of each CGU's carrying value. A decrease in the long term growth rate of 0.5% would result in a further impairment for the Group of £44 million, and an increase in the discount rate of 0.5% would result in a further impairment of £45 million.

The only CGU that has not been impaired is the Midlands Division. For the carrying value of the goodwill and intangibles to be impaired in this division, a decrease in the growth rate of over 0.85%, or an increase in the discount rate of over 0.8%, would be required.

 

There was no impairment charge in 2007, as the fair value of the intangibles were substantially in excess of their book value. 

10. Borrowings

	2008	2007
	£'000	£'000
Bank overdrafts	8,254	16,104
Bank loans - sterling	166,000	352,000
Bank loans - euro denominated	169,003	126,446
2003 Private placement of 10 year senior notes	101,245	117,578
2006 Private placement of 8 and 10 year senior notes	74,177	77,605
Term debt issue costs	(504)	(1,185)
Total borrowings	518,175	688,548

The borrowings are disclosed in the financial statement as:

	2008	2007
	£'000	£'000
Current borrowings	7,864	15,714
Non-current borrowings	510,311	672,834
	518,175	688,548
The Group's net debt is:
Gross borrowings as above	518,175	688,548
Finance leases	13	-
Cash and cash equivalents	(20,135)	(17,470)
Impact of currency hedge contracted rates	(21,238)	20,645
Net debt at currency hedge contracted rates	476,815	691,723

  Notes to the Consolidated Financial Statements for the year ended 31 December 2008 continued

10. Borrowings (continued)

Analysis of borrowings by currency:

At 31 December 2008

	Total	Sterling	Euros	US Dollars
	£'000	£'000	£'000	£'000
Bank overdrafts	8,254	8,254	-	-
Bank loans	335,003	166,000	169,003	-
2003 Private placement of 10 year senior notes	101,245	46,200	-	55,045
2006 Private placement of 8 and 10 year senior notes	74,177	-	-	74,177
Term debt issue costs	(504)	(504)	-	-
	518,175	219,950	169,003	129,222
At 31 December 2007
Bank overdrafts	16,104	16,104	-	-
Bank loans	478,446	352,000	126,446	-
2003 Private placement of 10 year senior notes	117,578	60,000	-	57,578
2006 Private placement of 8 and 10 year senior notes	77,605	-	-	77,605
Term debt issue costs	(1,185)	(1,185)	-	-
	688,548	426,919	126,446	135,183

Bank overdrafts

The Group's bank overdraft facility is £30 million and is repayable on demand. Interest payable is determined based on base rate plus 1%.

Bank loans

The Group has Credit Facilities with a number of banks. The total facility is £630.0 million (2007: £630.0 million) of which £295.0 million is unutilised at the balance sheet date (2007: £152.0 million). The initial principal amounts were taken out on 20 October 2005 with additional funding being taken out on 15 June 2006. Repayment of principal amounts is due in full on 30 September 2010. The loans carry interest at 1% above LIBOR, with adjustments dependent on financial ratios. Maturity intervals can be weekly, monthly, quarterly or half yearly.

In accordance with the Credit Agreements in place, the Group hedges a portion of the bank loans via interest rate swaps exchanging floating rate interest for fixed rate interest. Borrowings of £352.5 million (2007: £350.0 million) were arranged at fixed rates and expose the Group to fair value interest rate risk.

2003 Private Placement of 10 year senior notes

The 2003 Private Placement of 10 year Senior Notes is made up of £46.2 million (2007: £60.0 million) at a fixed rate of 6.3% and $79.7 million (2007: $115.0 million) at a fixed rate of 5.75%. The latter tranche has been swapped into floating sterling to hedge the Group's exposure to US dollar interest rates. A repayment was made to both tranches during the year after the Rights Issue.

2006 Private Placement of 8 and 10 year senior notes

The Private Placement of 2006 Senior Notes is made up of $38.1 million (2007: $55.0 million) at a fixed rate of 6.18% and $69.3 million (2007: $100.0 million) at a fixed rate of 6.28%. The total amount of $107.4 million (2007: $155.0 million) has been swapped back into fixed sterling of £37.1 million (2007: £40.2 million) and floating sterling of £20.4 million (2007: £42.9 million), again to hedge the Group's exposure to US dollar interest rates. A repayment was made to both tranches during the year after the Rights Issue.

Interest rates

The weighted average interest rates paid were as follows:

	2008	2007
	%	%
Bank overdrafts	6.1	6.6
Bank loans	5.8	6.4
Guaranteed loan stock	-	5.3
2003 Private placement of 10 year senior notes	6.9	6.8
2006 Private placement of 8 and 10 year senior notes	6.5	6.1
	6.1	6.4

  Notes to the Consolidated Financial Statements for the year ended 31 December 2008 continued

11. Derivative Financial Instruments

Derivatives that are designated and effective as hedging instruments carried at fair value are as follows:

	2008	2007
	£'000	£'000
Interest rate swaps - current asset	303	-
Interest rate swaps - non current (liability)/asset	(7,615)	4,192
Cross currency swaps - non current asset/(liability)	36,488	(16,082)
	29,176	(11,890)

12. Retirement Benefit Obligation

Throughout 2008 the Group operated the Johnston Press Pension Plan (JPPP), together with the following schemes:

• A defined contribution scheme for the Republic of Ireland, the Johnston Press (Ireland) Pension Scheme. 

• Through the acquisitions in the Republic of Ireland in the second half of 2005, the Group inherited three final salary schemes. Two are industry wide schemes and the third is for a small number of employees in Limerick. There are no additional financial implications to the Group if these schemes are terminated. Consequently, the Group's obligations to these schemes is included in Long Term Provisions and the details shown below exclude these schemes.

The JPPP is in two parts, a defined contribution scheme and a defined benefit scheme. The latter is closed to new members. The assets of the schemes are held separately from those of the Group. The contributions are determined by a qualified actuary on the basis of a triennial valuation using the projected unit method. The contributions were fixed annual amounts to October 2008 and thereafter a percentage of salary with a reduced fixed amount, with the intention of eliminating the deficit within 10 years from the date of the last triennial valuation on 31 December 2007. As the defined benefit section has been closed to new members for a considerable period the last active member is scheduled to retire in 37 years with, at current mortality assumptions, the last pension paid in 57 years. On a discounted basis the duration of the pension liabilities is circa 20 years. The financial information provided below relates to the defined benefit element of the JPPP.

The composition of the trustees of the JPPP is made up of an independent Chairman, a number of member nominated (by ballot) trustees and several Company appointed trustees. Half of the trustees are nominated by members of the JPPP, both current and past employees. The trustees appoint their own advisors and the administrators of the Plan. Discussions take place with the Executive Directors of the Company to agree matters such as the contribution rates. Over the past few years the trustees have reduced the risk exposure to UK equities from a level of 75% of the Plan to 58% at 31 December 2008.

The defined contribution schemes provide for employee contributions between 2-6% dependent on age and position in the Group, with higher contributions from the Group. In addition, the Group bears the majority of the administration costs and also life cover. 

The pension cost charged to the Income Statement was as follows: 

	2008	2007
	£'000	£'000
Defined benefit schemes	2,904	3,977
Defined contribution schemes and Irish schemes	6,801	6,515
	9,705	10,492

Major assumptions:

	Valuation at	Valuation at
	2008	2007
Discount rate	6.3%	5.8%
Expected return on scheme assets	6.7%	6.9%
Expected rate of salary increases	3.3%	4.1%
Future pension increases	2.8%	3.1%
Life expectancy
Male	19.5 years	18.1 years
Female	22.4 years	21.0 years

  Notes to the Consolidated Financial Statements for the year ended 31 December 2008 continued

12. Retirement Benefit Obligation (continued)

The valuation of the defined benefits funding position is dependent on a number of assumptions and is therefore sensitive to changes in the assumptions used. The impact of variations in the key assumptions are detailed below:

 

Amounts recognised in the Income Statement in respect of defined benefit schemes:

	2008	2007
	£'000	£'000
Current service cost	2,904	3,977
Interest cost	23,321	21,303
Expected return on scheme assets	(26,810)	(25,817)
	(585)	(537)

Of the current service cost for the year, £2,178,000 (2007 - £3,080,000) has been included in cost of sales and £726,000 (2007: £897,000) has been included in operating expenses. Actuarial gains and losses have been reported in the Group Statement of Recognised Income and Expense.

Amounts included in the Balance Sheet:

	2008	2007
	£'000	£'000
Present value of defined benefit obligations	340,060	406,900
Fair value of scheme assets	321,849	393,757
Deficit in scheme	18,211	13,143
Past service cost not yet recognised in balance sheet	-	-
Total liability recognised in balance sheet	18,211	13,143
Amount included in current liabilities	(5,980)	(3,300)
Amount included in non-current liabilities	12,231	9,843

Movements in the present value of defined benefit obligations:

	2008	2007
	£'000	£'000
At 1 January	406,900	420,913
Service costs	2,904	3,977
Interest costs	23,321	21,303
Contribution from scheme members	3,730	4,949
Changes in assumptions underlying the defined benefit obligations	(80,193)	(30,179)
Benefits paid	(16,602)	(14,063)
At 31 December	340,060	406,900

Movements in the fair value of scheme assets:

	2008	2007
	£'000	£'000
At 1 January	393,757	375,474
Expected return on scheme assets	26,810	25,817
Actual return less expected return on scheme assets	(92,340)	(4,895)
Contributions from the sponsoring companies	6,494	6,475
Contributions from scheme members	3,730	4,949
Benefits paid	(16,602)	(14,063)
At 31 December	321,849	393,757

  Notes to the Consolidated Financial Statements for the year ended 31 December 2008 continued

12. Retirement Benefit Obligation (continued)

Analysis of the scheme assets and the expected rate of return:

	Expected return		Fair value of assets
	2008	2007	2008	2007
	%	%	£'000	£'000
Equity instruments	7.6%	7.8%	186,673	236,254
Debt instruments	5.4%	5.3%	90,118	98,439
Property	5.6%	6.3%	22,529	31,501
Other assets	1.5%	5.5%	22,529	27,563
	6.7%	6.9%	321,849	393,757

History of experience adjustments:

	2008	2007	2006	2005	2004
	£'000	£'000	£'000	£'000	£'000
Present value of defined benefit obligations	340,060	406,900	420,913	364,727	312,194
Fair value of scheme assets	321,849	393,757	375,474	309,538	241,608
Deficit in the scheme	18,211	13,143	45,439	55,189	70,586
Experience adjustments on scheme liabilities
Amount (£'000)	80,193	30,179	2,547	(37,623)	(15,202)
Percentage of scheme liabilities (%)	23.6%	7.4%	0.6%	(10.3%)	(4.9%)
Experience adjustments on scheme assets
Amounts (£'000)	(92,340)	(4,895)	7,828	36,454	5,073
Percentage of scheme assets (%)	(28.7%)	(1.2%)	2.1%	11.8%	2.1%

The estimated amounts of contributions expected to be paid to the scheme during 2009 is £5,980,000.

13. Share Capital

	2008	2007
	£'000	£'000
Authorised
860,000,000 Ordinary Shares of 10p each (2007 - 390,000,000)	86,000	39,000
756,000 13.75% Cumulative Preference Shares of £1 each (2007 - 756,000)	756	756
415,000 13.75% "A" Preference Shares of £1 each (2007 - 415,000)	415	415
	87,171	40,171
Issued
639,739,766 Ordinary Shares of 10p each (2007 - 288,380,658)	63,974	28,838
756,000 13.75% Cumulative Preference Shares of £1 each (2007 - 756,000)	756	756
349,600 13.75% "A" Preference Shares of £1 each (2007 - 349,600)	350	350
	65,080	29,944

During the year ended 31 December 2008, 351,359,108 Ordinary Shares of 10p each were issued and allotted as follows:

	£'000
2,237 shares under the terms of the save as you earn scheme for a consideration of £6,316	-
31,486,988 shares placed with Usaha Tegas on 30 May after shareholder approval for a consideration
of £42,743,586 (£1.3575 per share)	3,149
319,869,883 shares following a 1 for 1 Rights Issue completed on 24 June 2008 at a price of 53p per share
for a consideration of £169,531,038	31,987
Total at 31 December 2007	28,838
Total at 31 December 2008	63,974

 

  Notes to the Consolidated Financial Statements for the year ended 31 December 2008 continued

13. Share Capital (continued)

The Company has only one class of ordinary shares which has no right to fixed income. All the preference shares carry the right, subject to the discretion of the Company to distribute profits, to a fixed dividend of 13.75% and rank in priority to the ordinary shares. Given the discretionary nature of the dividend right, the preference shares are considered to be equity under IAS 32.

14. Notes to the Cash Flow Statement 

	2008	2007
	£'000	£'000
Operating profit	(399,676)	165,439
Adjustments for:
Intangible adjustment - non-recurring	93,893	5,874
Impairment of intangibles - non-recurring	417,522	-
Depreciation of property, plant and equipment	31,828	24,052
Currency differences	(80)	473
Cost of share based payments	1,385	2,607
Profit on disposal of property, plant and equipment	(730)	(2,103)
Movement on pension provision	(3,645)	(2,724)
Loss on disposal of businesses	-	850
Operating cash flows before movements in working capital	140,497	194,468
(Increase)/decrease in inventories	(2,012)	1,357
Decrease/(increase) in receivables	22,364	(6,560)
(Decrease)/increase in payables	(16,301)	4,581
Cash generated by operations	144,548	193,846

Cash and cash equivalents (which are presented as a single class of assets on the face of the Balance Sheet) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.

15. Guarantees and Other Financial Commitments

Tax assessment

In March 2004, HMRC issued a tax assessment for £86 million against one of the RIM Group companies Johnston Press acquired in 2002. The assessment which was appealed relates to the sale of the RIM companies by United Business Media Plc (UBM) in 1998. At a Special Commissioner's hearing in 2006, the Chairman ruled in favour of HMRC. This decision was appealed to the High Court and in March 2007 the Judge upheld the decision of the Special Commissioner. An appeal was lodged with the Court of Appeal and was heard earlier this year. By a majority verdict the Court of Appeal upheld the decision of the High Court and refused leave to appeal to the House of Lords. A petition to the House of Lords for the right to appeal was declined in November. As all appeal procedures have now been exhausted, the Group has provided for the estimated tax liability and the debtor due from UBM under the terms of the full tax indemnity. Although the tax assessment has not been finalised, following discussions with UBM and a review of its financial statements, an estimated tax liability of £80 million has been provided with an equal offset in debtors. In the event that the liability is proved to be a higher sum, this will be recoverable from UBM under the terms of tax indemnity. There is no impact on net assets as a result of these entries. 

ENDFR GGGMFRGNGLZM

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Related Shares:

Johnston Press PLC