Important notice THIS OFFERING IS AVAILABLE ONLY TO INVESTORS WHO ARE EITHER (1) QUALIFIED INSTITUTIONAL BUYERS WITHIN THE MEANING OF RULE 144A UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘U.S. SECURITIES ACT’’) OR (2) NON-U.S. PERSONS OUTSIDE OF THE UNITED STATES IN ACCORDANCE WITH REGULATION S UNDER THE U.S. SECURITIES ACT (AND, IF INVESTORS ARE RESIDENT IN A MEMBER STATE OF THE EUROPEAN ECONOMIC AREA, A QUALIFIED INVESTOR).
IMPORTANT: You must read the following disclaimer before continuing. The following disclaimer applies to the attached offering memorandum, and you are therefore advised to read this disclaimer page carefully before reading, accessing or making any other use of the attached offering memorandum. In accessing the attached offering memorandum, you agree to be bound by the following terms and conditions, including any modifications to them from time to time, each time you receive any information from us as a result of such access.
NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE SECURITIES ACT OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION AND THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS.
THE FOLLOWING OFFERING MEMORANDUM MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE U.S. SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS.
Confirmation of your representation: In order to be eligible to view this offering memorandum or make an investment decision with respect to the securities, you must: (i) not be a U.S. person (as defined in Regulation S under the U.S. Securities Act), and be outside the United States; or (ii) be a qualified institutional buyer (as defined in Rule 144A under the U.S. Securities Act), provided that investors resident in a Member State of the European Economic Area must be a qualified investor (within the meaning of Article 2(1)(e) of Directive 2003/71/EC and any relevant implementing measure in each Member State of the European Economic Area). You have been sent the attached offering memorandum on the basis that you have confirmed to the initial purchasers set forth in the attached offering memorandum (collectively, the ‘‘Initial Purchasers’’ and each, an ‘‘Initial Purchaser’’), being the sender or senders of the attached, that either: (A)(i) you and any customers you represent are not U.S. persons; and (ii) the e-mail address to which this offering memorandum has been delivered is not located in the United States, its territories and possessions, any state of the United States or the District of Columbia; ‘‘possessions’’ include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands; or (B) you and any customers you represent are qualified institutional buyers and, in either case, that you consent to delivery by electronic transmission.
This offering memorandum has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of transmission and, consequently, none of the Initial Purchasers, any person who controls any of the Initial Purchasers, Johnston Press Bond Plc (the ‘‘Issuer’’), Johnston Press plc (the ‘‘Company’’) or any of its subsidiaries, nor any director, officer, employers, employee or agent of theirs, or affiliate of any such person, accepts any liability or responsibility whatsoever in respect of any difference between the offering memorandum distributed to you in electronic format and any hard copy version available to you on request from the Initial Purchasers. You are reminded that the attached offering memorandum has been delivered to you on the basis that you are a person into whose possession this offering memorandum may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not nor are you authorised to deliver this offering memorandum to any other person. You may not transmit the attached offering memorandum (or any copy of it or part thereof) or disclose, whether orally or in writing, any of its contents to any other person except with the consent of the Initial Purchasers. If you receive this document by e-mail, you should not reply by e-mail to this announcement. Any reply e-mail communications, including those you generate by using the ‘‘Reply’’ function on your e-mail software, will be ignored or rejected. If you receive this document by e-mail, your use of this e-mail is at your own risk and it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature.
The materials relating to the offering do not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that the offering be made by a licensed broker or dealer and an Initial Purchaser or any affiliate of such Initial Purchaser is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by the Initial Purchasers or such affiliate on behalf of the Issuer in such jurisdiction.
Restrictions: The attached document is being furnished in connection with an offering exempt from registration under the U.S. Securities Act. Nothing in this electronic transmission constitutes an offer of securities for sale in the United States or to any U.S. person.
Any securities to be issued will not be registered under the U.S. Securities Act or the securities laws of any other jurisdiction and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as such term is defined in Regulation S under the U.S. Securities Act), except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act. Notwithstanding the foregoing, prior to the expiration of a 40-day distribution compliance period (as defined under Regulation S under the U.S. Securities Act) commencing on the issue date, the securities may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons, except pursuant to another exemption from the registration requirements of the U.S. Securities Act.
This communication is for distribution only to, and is directed solely at, persons who (i) are outside the United Kingdom, (ii) are investment professionals, as such term is defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘‘Financial Promotion Order’’), (iii) are persons falling within Article 49(2)(a) to (d) of the Financial Promotion Order, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any Notes may otherwise be lawfully communicated or caused to be communicated (all such persons together being referred to as ‘‘relevant persons’’). This offering memorandum is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this offering memorandum relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this offering memorandum or any of its contents. Offering memorandum Not for General Distribution in the United States 3APR201423052883 Johnston Press Bond Plc £225,000,000 8.625% Senior Secured Notes due 2019 Interest payable 1 June and 1 December Issue price: 98.0% plus accrued interest, if any, from the issue date Johnston Press Bond Plc (the ‘‘Issuer’’), a public limited company incorporated under the laws of England and Wales, which is wholly owned by GLAS Nominees Limited, is offering £220,000,000 aggregate principal amount of its 8.625% Senior Secured Notes due 2019 (the ‘‘Notes’’). The Issuer will pay interest on the Notes semi-annually on each 1 June and 1 December, commencing on 1 December 2014. The Notes will mature on 1 June 2019. The Issuer may redeem some or all the Notes on or after 1 June 2017, at the redemption prices set out in this offering memorandum. Prior to 1 June 2017, the Issuer may redeem some or all the Notes at a price equal to 100% of the aggregate principal amount of the Notes redeemed, plus accrued and unpaid interest and additional amounts, if any, plus the applicable ‘‘make whole’’ premium, as described in this offering memorandum. In addition, prior to 1 June 2017, the Issuer may redeem up to 35% of the original aggregate principal amount of the Notes with the net cash proceeds from certain equity offerings at a price equal to 108.625% of the principal amount of the Notes redeemed, plus accrued and unpaid interest and additional amounts, if any, provided that at least 65% of the original aggregate principal amount of the Notes remains outstanding after such redemption. At any time prior to 1 June 2017, the Issuer may, during either period consisting of 12 consecutive months ending on the day immediately preceding the first, second or third anniversary of the date on which the Notes are issued (the ‘‘Issue Date’’), redeem up to 10% of the aggregate principal amount of the Notes at a price equal to 103% of the principal amount of the Notes redeemed, plus accrued and unpaid interest and additional amounts, if any. Additionally, the Issuer may redeem all, but not part, of the Notes at a price equal to 100% of the principal amount plus accrued and unpaid interest and additional amounts, if any, upon the occurrence of certain changes in applicable tax law. Upon the occurrence of certain events constituting a change of control, the Issuer may be required to offer to redeem the Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest and additional amounts, if any. Subject to certain conditions and limitations, within 135 days of the end of the Company’s fiscal year, commencing with the Company’s first fiscal year-end after the Issue Date, the Issuer must make an offer to purchase Notes in an amount equal to a certain percentage of the Excess Cash Flow (as defined herein) for such fiscal year, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest and additional amounts, if any, to the date of purchase. The Initial Purchasers (as defined herein) will, concurrently with the issuance of the Notes on the Issue Date, deposit an amount equal to the gross proceeds from the offering of the Notes into an escrow account (the ‘‘Escrow Account’’). The amount deposited in the Escrow Account will be pledged on a first ranking basis in favour of the Trustee (as defined herein) on behalf of the holders of the Notes. The Escrow Account will be prefunded with an amount (when considered together with the gross proceeds of the offering of the Notes) sufficient to pay the Special Mandatory Redemption Price (as defined below). The release of the escrowed proceeds to the Issuer (the ‘‘Escrow Release’’) will be subject to the satisfaction of certain conditions, as further described herein. If the conditions to the Escrow Release have not been satisfied or waived on or prior to 30 June 2014 or upon the occurrence of certain other events, the Notes will be redeemed at a redemption price equal to 100% of the aggregate initial issue price of the Notes, plus accrued and unpaid interest from the Issue Date to the special mandatory redemption date and additional amounts, if any (the ‘‘Special Mandatory Redemption Price’’). On the date on which Escrow Release occurs (the ‘‘Escrow Release Date’’), Johnston Press plc (the ‘‘Company’’ or ‘‘Johnston Press’’) will effect the Debt Assumption (as defined herein), whereby the Issuer will become a wholly-owned subsidiary of the Company. On and from the Issue Date, the Notes will be senior secured obligations of the Issuer and will rank pari passu in right of payment with all the existing and future unsubordinated indebtedness of the Issuer that is not subordinated in right of payment to the Notes. On and from the Escrow Release Date, the Notes will be guaranteed (each a ‘‘Note Guarantee’’ and together, the ‘‘Note Guarantees’’) on a senior secured basis by the Company and certain subsidiaries of the Company (collectively, the ‘‘Guarantors’’). On and from the Escrow Release Date, the Notes and the Note Guarantees will be secured by first ranking liens on certain property and assets that will also secure the obligations of the Issuer, the Company and certain of its subsidiaries under the New Revolving Credit Facility Agreement (as defined herein). Pursuant to the terms of the Intercreditor Agreement (as defined herein), the liabilities in respect of obligations under the New Revolving Credit Facility Agreement and certain hedging obligations that are secured by the property and assets that also secure the obligations under the Notes and the Note Guarantees will receive priority with respect to any proceeds received upon any enforcement action over any such property or assets. There is currently no public market for the Notes. Application has been made to the Irish Stock Exchange for the approval of this document as Listing Particulars. Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Global Exchange Market, which is the exchange regulated market of the Irish Stock Exchange. The Global Exchange Market is not a regulated market for the purposes of Directive 2004/39/EC. There is no assurance that the Notes will be listed on the Official List of the Irish Stock Exchange and admitted to trading on the Global Exchange Market. Investing in the Notes involves a high degree of risk. See ‘‘Risk factors’’ beginning on page 28. The Notes and the Note Guarantees have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the ‘‘U.S. Securities Act’’) or the laws of any other jurisdiction and, subject to certain exceptions, may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the U.S. Securities Act (‘‘Regulation S’’)). The Notes are being offered and sold outside the United States to non-U.S. persons in reliance on Regulation S and within the United States to ‘‘qualified institutional buyers’’ (as defined in Rule 144A under the U.S. Securities Act (‘‘Rule 144A’’)) in reliance on Rule 144A. Prospective purchasers of the Notes are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the U.S. Securities Act provided by Rule 144A. For a description of these and certain further restrictions on offers, sales and transfers of the Notes, see ‘‘Notice to investors’’. The Notes will be issued in the form of global notes in registered form. See ‘‘Book-entry, delivery and form’’. The Issuer expects the Notes to be delivered to investors in book-entry form through Euroclear Bank SA/NV (‘‘Euroclear’’) and Clearstream Banking, societ´ e´ anonyme (‘‘Clearstream’’) on or about 16 May 2014.
Joint book running managers J.P. Morgan Credit Suisse Lloyds Bank
The date of these listing particulars is 14 May 2014 You should base your decision to invest in the Notes solely on the information contained in this offering memorandum. We have not, and J.P. Morgan Securities plc, Credit Suisse Securities (Europe) Limited and Lloyds Bank plc (collectively, the ‘‘Initial Purchasers’’) have not, authorised anyone to provide you with information that is different from the information contained herein. You must not rely on unauthorised information or representations. You should not assume that the information contained in this offering memorandum is accurate as of any date other than the date on the front cover of this offering memorandum.
We are not, and the Initial Purchasers are not, making an offer of the Notes in any jurisdiction where such offer is not permitted. Table of contents
Summary...... 1 Description of the Notes ...... 185 Risk factors ...... 28 Book-entry, delivery and form ...... 263 Use of proceeds ...... 69 Tax considerations ...... 268 Capitalisation ...... 70 Limitations on validity and enforceability of the Note Selected historical consolidated Guarantees and security interests . . 276 financial data ...... 71 Plan of distribution ...... 289 Management’s discussion and analysis of financial condition and results of Notice to investors ...... 292 operations ...... 74 Legal matters ...... 296 Industry ...... 108 Independent auditors ...... 297 Business ...... 119 Where to find additional information . 298 Management ...... 150 Enforcement of civil liabilities ...... 299 Principal shareholders ...... 171 Listing and general information ..... 303 Certain relationships and related party Index to financial statements ...... F-1 transactions ...... 172 Description of other indebtedness . . . 173
Johnston Press Bond Plc (the ‘‘Issuer’’) is incorporated as a public limited company under the laws of England and Wales and, as at the date on the front cover of this offering memorandum, is a wholly owned subsidiary of GLAS Nominees Limited (the ‘‘Orphan SPV Shareholder’’). Its registered office is at 2 London Wall Buildings, London, EC2M 5UU, United Kingdom, and it is registered with the Registrar of Companies for England and Wales under number 08945271. On the Escrow Release Date (as defined below), the Company intends to effect the Debt Assumption (as defined below) whereby the Issuer will become a wholly-owned subsidiary of the Company. Our website is www.johnstonpress.co.uk. The information contained on our website is not part of this offering memorandum.
i Important information about the Offering This offering memorandum does not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation. No action has been, or will be, taken to permit a public offering in any jurisdiction where action would be required for that purpose. Accordingly, the Notes may not be offered or sold, directly or indirectly, nor may this offering memorandum be distributed, in any jurisdiction except in accordance with the legal requirements applicable in such jurisdiction.
This offering memorandum is personal to each offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire Notes. Distribution of this offering memorandum to any person other than the prospective investor and any person retained to advise such prospective investor with respect to the purchase of Notes is unauthorised, and any disclosure of any of the contents of this offering memorandum, without our prior written consent, is prohibited. Each prospective investor, by accepting delivery of this offering memorandum, agrees to the foregoing and agrees not to make photocopies of this offering memorandum or any documents referred to in this offering memorandum.
In making an investment decision, prospective investors must rely on their own examination of the Issuer, the Company and its subsidiaries and the terms of this Offering, including the merits and risks involved. In addition, none of the Issuer, the Group, the Initial Purchasers or any of the Issuer’s, the Group’s or the Initial Purchaser’s respective representatives is making any representation to you regarding the legality of an investment in the Notes, and you should not construe anything in this offering memorandum as legal, business, tax or other advice. You should consult your own advisors as to the legal, tax, business, financial and related aspects of an investment in the Notes. You must comply with all laws applicable in any jurisdiction in which you buy, offer or sell the Notes or possess or distribute this offering memorandum, and you must obtain all applicable consents and approvals; neither the Issuer, the Group nor the Initial Purchasers shall have any responsibility for any of the foregoing legal requirements.
This offering memorandum is based on information provided by the Issuer, the Group and other sources that we believe to be reliable. The Initial Purchasers are not making any representation or warranty, express or implied, that this information is accurate or complete and are not responsible for this information. Nothing contained in this offering memorandum is, or shall be relied upon as, a promise or representation by any of the Initial Purchasers as to the past or future. In this offering memorandum, we have summarised certain documents and other information in a manner it believes to be accurate, but we refer you to the actual documents for a more complete understanding.
The information contained in this offering memorandum is correct as of the date hereof. Neither the delivery of this offering memorandum at any time after the date of publication nor any subsequent commitment to purchase the Notes shall, under any circumstances, create an implication that there has been no change in the information set forth in this offering memorandum or in the Group’s business since the date of this offering memorandum. References to any website contained herein do not form part of this offering memorandum.
The information contained in this offering memorandum under the caption ‘‘Exchange rate information’’ includes extracts from information and data publicly released by official and other sources. We accept no responsibility for the accuracy of such information.
The information set out in relation to sections of this offering memorandum describing clearing arrangements, including the section entitled ‘‘Book-entry, delivery and form’’, is subject to any change in, or reinterpretation of, the rules, regulations and procedures of Euroclear or Clearstream currently in effect. Euroclear and Clearstream are not under any obligation to perform or continue to perform under such clearing arrangements and such arrangements may
ii be modified or discontinued by any of them at any time. Neither the Issuer, the Group nor any of their respective agents will have responsibility for the performance of the respective obligations of Euroclear and Clearstream or their respective participants. Investors wishing to use these clearing systems are advised to confirm the continued applicability of these arrangements.
By receiving this offering memorandum, you acknowledge that you have had an opportunity to request from us for review, and that you have received, all additional information you deem necessary to verify the accuracy and completeness of the information contained in this offering memorandum. You also acknowledge that you have not relied on the Initial Purchasers in connection with your investigation of the accuracy of this information or your decision whether to invest in the Notes.
The Notes are subject to restrictions on transferability and resale and may not be transferred or resold, except as permitted under the U.S. Securities Act and the applicable state securities laws, pursuant to registration or exemption therefrom. As a prospective investor, you should be aware that you may be required to bear the financial risks of this investment for an indefinite period of time. Please refer to the sections in this offering memorandum entitled ‘‘Plan of distribution’’ and ‘‘Notice to investors’’.
The Notes will be available initially only in book-entry form. We expect that the Notes sold pursuant to this offering memorandum will be issued in the form of one or more global notes, which will be deposited with, or on behalf of, a common depositary and registered in the name of the nominee of the common depositary for the accounts of Euroclear and Clearstream. Beneficial interests in the global notes will be shown on, and transfers of beneficial interests in the global notes will be effected only through, records maintained by Euroclear and Clearstream and their direct and indirect participants, as applicable. After the initial issuance of the global notes, Notes in certificated form will be issued in exchange for the global notes only as set forth in the Indenture. See ‘‘Book-entry, delivery and form’’.
The Issuer reserves the right to withdraw the Offering at any time. The Issuer and the Initial Purchasers also reserve the right to reject any offer to purchase the Notes in whole or in part for any reason or no reason and to allot to any prospective purchaser less than the full amount of the Notes sought by it. The Initial Purchasers and certain of their respective related entities may acquire, for their own accounts, a portion of the Notes.
The Issuer cannot guarantee that the application it has made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Global Exchange Market will be approved as of the settlement date for the Notes or at any time thereafter, and settlement of the Notes is not conditional on obtaining this listing and admission to trading.
Each purchaser of the Notes will be deemed to have made the representations, warranties and acknowledgements that are described in this offering memorandum under the ‘‘Notice to investors’’ section of this offering memorandum. The Issuer and the Company accept responsibility for the information contained in this offering memorandum. To the best of their knowledge, the information contained in this offering memorandum is in accordance with the facts and does not omit anything likely to effect the import of this offering memorandum. Stabilisation IN CONNECTION WITH THE OFFERING OF THE NOTES, J.P. MORGAN SECURITIES PLC OR ONE OF ITS AFFILIATES OR PERSONS ACTING ON ITS BEHALF, (THE ‘‘STABILISING MANAGER’’) MAY OVER-ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER WILL UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFERING OF THE NOTES IS
iii MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN 30 DAYS AFTER THE ISSUE DATE, OR NO LATER THAN 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE NOTES, WHICHEVER IS EARLIER. Notice to investors in the United States The Notes and the Note Guarantees have not been, and will not be, registered under the U.S. Securities Act, or the laws of any other jurisdiction and, subject to certain exceptions, may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S). The Notes are being offered and sold outside the United States to non-U.S. persons in reliance on Regulation S and within the United States to ‘‘qualified institutional buyers’’ (as defined in Rule 144A of the U.S. Securities Act) in reliance on Rule 144A under the U.S. Securities Act. Prospective purchasers of the Notes are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the U.S. Securities Act provided by Rule 144A. For a description of these and certain further restrictions on offers, sales and transfers of the Notes, see ‘‘Notice to investors’’.
None of the U.S. Securities and Exchange Commission (the ‘‘SEC’’), any U.S. state securities commission or any non-U.S. securities authority has approved or disapproved of the Notes or determined that this offering memorandum is accurate or complete. Any representation to the contrary is a criminal offence. Notice to New Hampshire residents only NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENCE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES ANNOTATED, 1955, AS AMENDED (‘‘RSA 421-B’’) WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE OR CAUSE TO BE MADE TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. Notice to investors in the United Kingdom This issue and distribution of this offering memorandum is restricted by law. This offering memorandum is not being distributed by, nor has it been approved for the purposes of section 21 of the Financial Services and Markets Act 2000 by, a person authorised under the Financial Services and Markets Act 2000. This offering memorandum is for distribution only to, and is only directed at, persons who (i) are outside the United Kingdom; (ii) have professional experience in matters relating to investments (being investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘‘Financial Promotion Order’’)); (iii) are persons falling within Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the Financial Promotion Order; or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any Notes may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as ‘‘relevant persons’’). Accordingly, by accepting delivery of this offering memorandum, the recipient warrants and acknowledges that it is such a relevant person. The Notes are available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such Notes will be engaged in
iv only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents. No part of this offering memorandum should be published, reproduced, distributed or otherwise made available in whole or in part to any other person without the Group’s prior written consent. Notice to investors in the European Economic Area This offering memorandum is not a prospectus and is being distributed to a limited number of recipients for the sole purpose of assisting such recipients in determining whether to proceed with a further investigation of the purchase of, or subscription for, the Notes. This offering memorandum has been prepared on the basis that all offers of the Notes will be made pursuant to an exemption under the Prospectus Directive, as implemented in Member States of the European Economic Area (the ‘‘EEA’’), from the requirement to produce a prospectus for offers of the Notes. Accordingly, any person making or intending to make any offer within the EEA of the Notes, which are the subject of the placement contemplated in this offering memorandum, should only do so in circumstances in which no obligation arises for the Issuer, the Group or any of the Initial Purchasers to produce a prospectus for such offer. Neither the Issuer, the Group nor the Initial Purchasers have authorised, nor do they authorise, the making of any offer of Notes through any financial intermediary, other than offers made by the Initial Purchasers, which constitute the final placement of the Notes contemplated in this offering memorandum.
In relation to each Member State of the European Economic Area that has implemented the Prospectus Directive (each, a ‘‘Relevant Member State’’), each Initial Purchaser has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the ‘‘Relevant Implementation Date’’) it has not made and will not make an offer of Notes that are the subject of this offering memorandum to the public in that Relevant Member State prior to the publication of a prospectus in relation to the Notes that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of the Notes in the Relevant Member State at any time:
(a) to any legal entity that is a qualified investor as defined in the Prospectus Directive;
(b) to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive; or
(c) in any other circumstances falling within Article 3(2) of the Prospectus Directive; provided that no such offer of Notes shall result in a requirement for the publication by the Issuer or the Initial Purchasers of a prospectus pursuant to Article 3 of the Prospectus Directive or a supplement to a prospectus pursuant to Article 16 of the Prospectus Directive.
For the purposes of this provision, the expression an ‘‘offer of Notes to the public’’ in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe for the Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression ‘‘Prospectus Directive’’ means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in the Relevant Member State and the expression ‘‘2010 PD Amending Directive’’ means Directive 2010/73/EU.
v Forward-looking statements This offering memorandum contains ‘‘forward-looking statements’’ within the meaning of the securities laws of certain jurisdictions, including statements under the captions ‘‘Summary’’, ‘‘Risk factors’’, ‘‘Management’s discussion and analysis of financial condition and results of operations’’, ‘‘Industry’’, ‘‘Business’’ and in other sections. In some cases, these forward-looking statements can be identified by the use of forward -looking terminology, including the words ‘‘believes’’, ‘‘could’’, ‘‘estimates’’, ‘‘anticipates’’, ‘‘expects’’, ‘‘intends’’, ‘‘may’’, ‘‘will’’, ‘‘plans’’, ‘‘continue’’, ‘‘ongoing’’, ‘‘potential’’, ‘‘predict’’, ‘‘project’’, ‘‘target’’, ‘‘seek’’, ‘‘should’’ or ‘‘would’’ or, in each case, their negative or other variations or comparable terminology or by discussions of strategies, plans, objectives, targets, goals, future events or intentions. These forward- looking statements include all matters that are not historical facts. They appear in a number of places throughout this offering memorandum and include statements regarding the Group’s intentions, beliefs or current expectations concerning, among other things, the Group’s results of operations, financial condition, liquidity, prospects, growth, strategies and dividend policy and the industry in which the Group operates.
By their nature, forward-looking statements involve known and unknown risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance. You should not place undue reliance on these forward-looking statements.
Many factors may cause the Group’s results of operations, financial condition, liquidity and the development of the industry in which the Group competes to differ materially from those expressed or implied by the forward-looking statements contained in this offering memorandum.
These factors include, among others:
• the intentions, beliefs or current expectations of the Company and/or its directors concerning the Group’s plans or objectives for future management, operations, products, financial condition and results of operations;
• declines in print or digital advertising revenue;
• worsening of general economic and business conditions;
• risks related to the Group’s ability to continue as a going concern;
• the Group’s dependence on local economies and demographics;
• consolidation of the Group’s customer base and within its industry and increased competition;
• risks related to the advent of new technologies and industry practices;
• a decline in the Group’s newspaper circulation;
• failure to successfully develop the Group’s digital business;
• risks related to expansion into new product markets;
• risks related to the Group’s online business and mobile phone applications;
• risks related to the increasing use of social media;
• increases in newsprint costs;
• inability to continue to successfully execute cost-control measures;
• risks related to recent disposals of non-core businesses;
vi • risks related to legal proceedings;
• uninsured losses or losses in excess of the Group’s insurance coverage;
• service disruptions at the Group’s printing presses;
• loss of key personnel or inability to attract qualified personnel;
• deterioration in the Group’s relationship with its employees;
• risks related to outsourcing of certain aspects of the Group’s business;
• risks related to a vote for independence by Scotland;
• loss of or cyber-attacks on the Group’s information technology systems;
• risks related to the Group’s properties;
• compliance expenditures related to environmental and employee safety and health laws;
• compliance expenditures related to building, data protection and other regulations;
• infringement on the Group’s intellectual property by third parties;
• loss of reputation of the Group’s brands; and
• other factors discussed under ‘‘Risk factors’’.
These risks and others described under ‘‘Risk factors’’ are not exhaustive. Other sections of this offering memorandum describe additional factors that could adversely affect the Group’s results of operations, financial condition, liquidity and the development of the industry in which the Group operates. New risks can emerge from time to time, and it is not possible for the Group to predict all such risks, nor can the Group assess the impact of all such risks on its business or the extent to which any risks, or combination of risks and other factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results.
Any forward-looking statements are only made as of the date of this offering memorandum and the Group does not intend, and does not assume any obligation, to update forward-looking statements set forth in this offering memorandum. You should interpret all subsequent written or oral forward-looking statements attributable to the Group or to persons acting on its behalf as being qualified by the cautionary statements in this offering memorandum. As a result, you should not place undue reliance on these forward-looking statements. Industry and market data The Group operates in an industry for which it is difficult to obtain precise industry and market information. The market and competitive position data in the sections ‘‘Summary’’, ‘‘Risk factors’’, ‘‘Management’s discussion and analysis of financial condition and results of operations’’, ‘‘Industry’’ and ‘‘Business’’ of this offering memorandum are estimates by management based on industry publications, and from surveys or studies conducted by the Group or third-party industry consultants that are generally believed to be reliable. However, the accuracy and completeness of such information is not guaranteed and has not been independently verified. Additionally, industry publications and such studies generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy or completeness of such information is not guaranteed and in some instances the sources do not assume liability for such information. Some of the information herein has been extrapolated from such market data or reports using the Group’s experience and internal
vii estimates. Elsewhere in this offering memorandum, statements regarding the industry in which the Group operates and its position in this industry are based solely on the Group’s experience, internal studies and estimates, and the Group’s own investigation of market conditions. The Group believes that the sources of such information in this offering memorandum are reliable, but there can be no assurance that any of these assumptions is accurate or correctly reflects the Group’s position in its industry, and none of the Group’s internal surveys or information has been verified by any independent sources. While the Group is not aware of any misstatements regarding the industry or similar data presented herein, such data involves risks and uncertainties and are subject to change based on various factors, including those discussed under the heading ‘‘Risk factors’’ in this offering memorandum. As a result, neither the Group nor the Initial Purchasers make any representation as to the accuracy or completeness of any such information in this offering memorandum. However, the Issuer has accurately reproduced this information as far as the Issuer is aware and able to ascertain from third-party sources, no facts have been omitted which would render the reproduced information inaccurate or misleading.
In this offering memorandum, the Group refers to its audience base, which it defines as print audience (as measured by circulation volumes) plus online audience (as measured by unique users). In line with common practices across the industry, the number of unique users is determined by the number of unique IP addresses on incoming requests that the Group’s websites receive The Group does not eliminate from its calculation of audience base users that are part of both its print and digital audiences, because the Group sells print and digital advertising separately and thus its revenues are not adjusted for overlap users nor does the Group currently seek to determine how many of its unique users are, in fact, the same individual. Certain definitions In this offering memorandum, the following words and expressions have the following meanings, unless the context otherwise requires or unless otherwise so defined. In particular, capitalised terms set forth and used in the sections entitled ‘‘Description of other indebtedness—New Revolving Credit Facility Agreement’’, ‘‘Description of other indebtedness— Intercreditor Agreement’’ and ‘‘Description of the Notes’’, may have different meanings from the meanings given to such terms below and used elsewhere in this offering memorandum.
•‘‘2011 group consolidated financial statements’’ refers to the audited consolidated financial statements of the Company as at and for the 52 weeks ended 31 December 2011;
•‘‘2012 group consolidated financial statements’’ refers to the audited consolidated financial statements of the Company as at and for the 52 weeks ended 29 December 2012;
•‘‘2013 group consolidated financial statements’’ refers to the audited consolidated financial statements of the Company as at and for the 52 weeks ended 28 December 2013;
•‘‘Additional Notes’’ has the meaning given to such terms under the caption ‘‘Description of the Notes’’;
•‘‘Admission’’ refers to the admission of the shares of the Company issued pursuant to the Placing or the Rights Issue (as the case may be) to the premium segment of the Official List of the Financial Conduct Authority and to trading on the London Stock Exchange’s main market for listed securities;
• ‘‘Capital Refinancing Plan’’ has the meaning given to such term under the caption ‘‘Summary—The Transactions—The Capital Refinancing Plan’’;
•‘‘Clearstream’’ refers to Clearstream Banking, societ´ e´ anonyme;
viii •‘‘Collateral’’ refers to the collateral that will secure the Notes and the Note Guarantees, the New Revolving Credit Facility and certain designated hedging obligations, as described under the caption ‘‘Summary—The Offering—Collateral’’;
•‘‘Company’’ or ‘‘Johnston Press’’ refers to Johnston Press plc, a public limited company incorporated and registered in Scotland;
•‘‘Debt Assumption’’ refers to the transactions described under the caption ‘‘Summary—The Transactions—The Debt Assumption’’;
•‘‘EEA’’ refers to the European Economic Area;
•‘‘Employee Share Trust’’ refers to the Group’s employee share trust as further described under the caption ‘‘Management—Employee Share Trust’’;
•‘‘Escrow Account’’ refers to the segregated escrow account into which the gross proceeds from the Offering, together with an additional amount in pound sterling equivalent to interest on the Notes from the Issue Date up to the date that is six business days after the Escrow Longstop Date, will be deposited pursuant to the Escrow Agreement;
•‘‘Escrow Agent’’ refers to Deutsche Bank AG, London Branch, as escrow agent pursuant to the Escrow Agreement;
•‘‘Escrow Agreement’’ refers to an escrow agreement by and among the Issuer, the Company, the Trustee and the Escrow Agent, dated the Issue Date, in respect of the Escrow Account as further described under the caption ‘‘Summary—The Transactions—Escrow Release’’ and ‘‘Description of the Notes—Escrow of Proceeds; Special Mandatory Redemption’’;
•‘‘Escrow Charge’’ refers to the charge over the Escrow Account to be pledged in favour of the Trustee for the benefit of the holders of the Notes on the Issue Date;
•‘‘Escrow Longstop Date’’ refers to 30 June 2014;
•‘‘Escrow Release’’ refers to the release of the proceeds from the Offering of the Notes to the Issuer pursuant to the Escrow Agreement;
•‘‘Escrow Release Date’’ refers to the date on which the Escrow Release occurs;
•‘‘EU’’ refers to the European Union;
•‘‘Euroclear’’ refers to Euroclear Bank SA/NV;
•‘‘Existing Lending Facilities’’ refers to (a) the various bilateral revolving multi-currency credit facilities provided by The Royal Bank of Scotland plc, Lloyds TSB Scotland plc, Barclays Bank plc, National Australia Bank Limited, The Governor and the Company of the Bank of Ireland, Allied Irish Banks plc, Scotiabank (Ireland) Limited, Sumitomo Mitsui Banking Corporation Europe Limited and KBC Bank N.V. in the amounts of £140 million, £140 million, £100 million, £80 million, £45 million, £45 million, £30 million, £35 million and £15 million, respectively; and (b) the £10,000,000 net overdraft (£20,000,000 gross) provided by The Royal Bank of Scotland plc;
•‘‘Existing Lending Facilities Agreement’’ refers to:
(a) the various bilateral revolving multi-currency credit facility agreements entered into by the Company and guaranteed by certain of its subsidiaries with The Royal Bank of Scotland plc, Lloyds TSB Scotland plc, Barclays Bank plc, National Australia Bank Limited, The Governor and the Company of the Bank of Ireland, Allied Irish Banks plc, Scotiabank (Ireland) Limited, Sumitomo Mitsui Banking Corporation Europe Limited and KBC Bank N.V. pursuant to which revolving multi-currency credit facilities in the amounts of £140 million, £140 million, £100 million, £80 million,
ix £45 million, £45 million, £30 million, £35 million and £15 million, respectively, were made available; and
(b) the agreement between The Royal Bank of Scotland plc and the Company and Johnston Publishing Limited, dated 27 September 2005 and 6 October 2005, in respect of which a £10 million net overdraft (£20 million gross) was made available,
each agreement as amended, varied, overridden or supplemented by the Override Agreement;
•‘‘FSMA’’ refers to the Financial Services and Markets Act 2000, as amended;
•‘‘Gromwell’’ refers to Gromwell Limited;
•‘‘Group’’ refers to the Company and its direct and indirect subsidiaries, from time to time;
•‘‘Group consolidated financial statements’’ refers to the 2011 Group Consolidated Financial Statements, the 2012 Group Consolidated Financial Statements and the 2013 Group Consolidated Financial Statements, collectively;
•‘‘Guarantors’’ refers to the entities that will, on the Escrow Release Date, guarantee the obligations of the Issuer under the Notes, as described under the caption ‘‘Summary—The offering—Note Guarantees’’;
•‘‘HMRC’’ refers to Her Majesty’s Revenue and Customs;
•‘‘IFRS’’ refers to the International Financial Reporting Standards as adopted by the European Union;
•‘‘Indenture’’ refers to the indenture governing the terms of the Notes between, among others, the Issuer and the Trustee, dated the Issue Date, and in respect of which the Guarantors, including the Company, will accede on the Escrow Release Date;
•‘‘Initial Purchasers’’ refers to J.P. Morgan Securities plc, Credit Suisse Securities (Europe) Limited and Lloyds Bank plc and ‘‘Initial Purchaser’’ refers to any of them;
•‘‘Intercreditor Agreement’’ refers to the intercreditor agreement to be entered into on or about the Issue Date among, inter alios, the Issuer, the Company, the agent under the New Revolving Credit Facility Agreement, the Trustee and the Security Agent, as summarily described under ‘‘Description of other indebtedness—Intercreditor Agreement’’;
•‘‘Issue Date’’ refers to the date on which the Notes are issued;
•‘‘Issuer’’ refers to Johnston Press Bond Plc, currently a wholly-owned subsidiary of the Orphan SPV Shareholder, incorporated as a public limited company under the laws of England and Wales, and registered with the Registrar of Companies for England and Wales under number 08945271. On the Escrow Release Date, the Company intends to effect the Debt Assumption whereby the Issuer will become a wholly-owned subsidiary of the Company, as described under the caption ‘‘Summary—The Transactions—The Debt Assumption’’;
•‘‘New Pensions Framework Agreement’’ refers to the framework agreement entered into on 23 April 2014 by and among the Plan Trustees and the Company in respect of the 31 December 2012 actuarial valuation of the Pension Plan and the Transactions;
•‘‘New Revolving Credit Facility’’ refers to the super senior £25.0 million revolving credit facility made available pursuant to the New Revolving Credit Facility Agreement;
•‘‘New Revolving Credit Facility Agreement’’ refers to the agreement governing the New Revolving Credit Facility to be entered into as part of the Transactions as summarily described under ‘‘Description of other indebtedness—New Revolving Credit Facility Agreement’’;
x •‘‘Note Guarantees’’ refers to the senior secured guarantees of the Notes to be provided by the Guarantors pursuant to the Indenture;
•‘‘Notes’’ refers to the £225,000,000 aggregate principal amount of 8.625% senior secured notes due 2019 offered hereby;
•‘‘Notes Proceeds Loan’’ refers to the loan agreement to be entered into on the Escrow Release Date between the Issuer, as lender, and the Company, as borrower, pursuant to which the Issuer will lend proceeds from the Offering to the Company to be used as further described under ‘‘Use of proceeds’’;
•‘‘Offering’’ refers to the offering of the Notes;
•‘‘Orphan SPV Shareholder’’ refers to GLAS Nominees Limited, who will hold the shares of the Issuer on charitable trust until the Company effects the Debt Assumption, as summarily described under the caption ‘‘Summary—The Transactions—The Debt Assumption’’;
•‘‘Override Agreement’’ refers to the override agreement originally dated 28 August 2009 as amended and restated on 24 April 2012 and 23 December 2013, between, among others, the Company, as borrower, and Barclay’s Bank plc as agent, which agreement amends, varies, overrides or supplements the Existing Lending Facilities Agreement and the Private Placement Note Purchase Agreements;
•‘‘PanOcean’’ refers to PanOcean Management Limited;
• ‘‘Pension Plan’’ refers to the Johnston Press Pension Plan, the Group’s defined benefit pension scheme;
•‘‘Plan Trustees’’ refers to each of the trustees of the Pension Plan;
•‘‘Placing’’ refers to the placing of new and existing ordinary shares of the Company as described under the caption ‘‘Summary—The Transactions—The Placing’’;
•‘‘Placing Shares’’ means the new and existing ordinary shares of the Company to be issued or sold pursuant to the Placing;
•‘‘Priority Hedging’’ refers to certain designated hedging obligations, which will be secured by the Collateral and will receive priority over the Notes and the Note Guarantees, up to an overall aggregate Priority Hedging recoveries amount of £5,000,000, with respect to any proceeds received upon any enforcement action over the Collateral;
•‘‘Private Placement Note Purchase Agreements’’ refers to the note purchase agreements both dated 7 January 2003 between the Company and certain institutional purchasers, pursuant to which each institutional purchaser agreed to purchase 6.30% Guaranteed Series B Senior Notes and/or 5.75% Guaranteed Series A Senior Notes (in each case as defined in the relevant note purchase agreement) issued by the Company in aggregate principal amounts of £60 million and $115 million respectively and the note purchase agreement dated 15 June 2006 between the Company and certain institutional purchasers, pursuant to which each institutional purchaser agreed to purchase 6.18% Guaranteed Series A Senior Notes and/or 6.28% Guaranteed Series B Senior Notes (in each case as defined in the relevant note purchase agreement) issued by the Company in aggregate principal amounts of $55 million and $100 million respectively, each note purchase agreement as amended, varied, overridden or supplemented by the Override Agreeement;
•‘‘Private Placement Notes’’ refers to the 6.30% Guaranteed Series B Senior Notes and the 5.75% Guaranteed Series A Senior Notes (in each case as defined in the relevant Private Placement Note Purchase Agreement) issued by the Company in aggregate principal amounts of £60 million and $115 million respectively under the relevant Private Placement Note Purchase Agreements and the 6.18% Guaranteed Series A Senior Notes and 6.28%
xi Guaranteed Series B Senior Notes (in each case as defined in the relevant Private Placement Note Purchase Agreement) issued by the Company in aggregate principal amounts of $55 million and $100 million respectively under the relevant Private Placement Note Purchase Agreement;
•‘‘Purchase Agreement’’ refers to the purchase agreement to be entered into between the Issuer and the Initial Purchasers, in relation to the Notes offered hereby, and in respect of which the Guarantors, including the Company, will accede on the Escrow Release Date;
•‘‘Rights Issue’’ refers to the offer by way of rights to existing shareholders of the Company and to investors who participate in the Placing, as described under the caption ‘‘Summary— The Transactions—The Rights Issue’’;
•‘‘S75’’ refers to Section 75 of the UK Pensions Act 1995;
•‘‘SEC’’ refers to the U.S. Securities and Exchange Commission;
•‘‘Security Agent’’ refers to Deutsche Bank AG, London Branch, as security agent under the Security Documents, the New Revolving Credit Facility Agreement, the Indenture and the Intercreditor Agreement;
•‘‘Security Documents’’ refers to the agreements creating security interests over the Collateral as described under the captions ‘‘Description of the Notes—Security’’ and ‘‘Description of the Notes—Certain definitions’’;
•‘‘Sky’’ refers to British Sky Broadcasting Limited, a wholly owned subsidiary of British Sky Broadcasting Group plc;
•‘‘SME’’ refers to small to medium sized enterprises;
•‘‘Transactions’’ refers to the issuance of the Notes, the Placing and the Rights Issue, the full refinancing of the Existing Lending Facilities and the Private Placement Notes, the entry into the New Revolving Credit Facility Agreement, the entry into the Intercreditor Agreement, the Debt Assumption, the Escrow Release, the consummation of the New Pensions Framework Agreement and the carrying out of the transactions and entry into documents contemplated by or related to any of the foregoing, as described under ‘‘Summary—The Transactions’’;
•‘‘Trustee’’ refers to Deutsche Trustee Company Limited;
•‘‘U.K. GAAP’’ refers to generally accepted accounting principles in the United Kingdom;
•‘‘Underwriting Agreement’’ refers to the firm placing and rights issue underwriting agreement to be entered into between the Company, Panmure Gordon (UK) Limited and JP Morgan Securities plc, in relation to the new ordinary shares of the Company offered pursuant to the Placing and the Rights Issue;
•‘‘Usaha Tegas’’ refers to Usaha Tegas Sdn Bhd, a private limited company incorporated in Malaysia, or any of its subsidiaries as the context may require;
•‘‘U.S. Exchange Act’’ refers to the U.S. Securities Exchange Act of 1934, as amended;
•‘‘U.S. GAAP’’ refers to generally accepted accounting principles in the United States; and
•‘‘U.S. Securities Act’’ refers to the U.S. Securities Act of 1933, as amended.
xii Presentation of financial data and Non-IFRS measures No separate financial information in respect of the Issuer has been prepared or has been provided in this offering memorandum. Prior to the Offering, the Issuer has not engaged in any activities other than those related to its formation and the Transactions and has no material assets or liabilities. The Indenture governing the Notes will restrict the Issuer from conducting any activities other than those in connection with the issuance of the Notes, the transactions contemplated by the Escrow Agreement and as otherwise expressly permitted by the Indenture.
Because of the limited historical financial information available for the Issuer, except as indicated below, the financial information presented in this offering memorandum is the historical consolidated financial information of the Company and its subsidiaries and has been derived from the Group’s audited consolidated financial statements and the notes thereto included elsewhere in this offering memorandum.
The Group’s financial year runs from the calendar day following the previous financial year end to the Saturday nearest to 31 December each year, which was 31 December 2011 for the 52 week period in 2011, 29 December 2012 for the 52 week period in 2012 and 28 December 2013 for the 52 week period in 2013. Accordingly, from time to time, the Group’s financial year accounting period covers a 53 week period, which impacts the comparability of results. The Group does not present any 53 week periods in the historical financial information period on period included elsewhere in this offering memorandum. The Group’s 2014 financial year will end on 3 January 2015 and will constitute a 53 week period.
On 1 April 2014, the Group sold the issued capital of Formpress Publishing Limited (‘‘Formpress’’), a private limited company and subsidiary of the Company, which held all assets and liabilities of the operations of the Group in the Republic of Ireland. Unless otherwise stated, the Group’s financial information presented in this offering memorandum does not reflect this sale and thus includes results of operations attributable to Formpress.
References in this offering memorandum to ‘‘pound’’, ‘‘pound sterling’’, ‘‘U.K. pound’’ or ‘‘£’’ are to the lawful currency of the United Kingdom. The financial information and financial statements included in this offering memorandum are presented in pound sterling.
Certain amounts and percentages included in this offering memorandum have been rounded. Accordingly, in certain instances, the sum of the numbers in a column of a table may not exactly equal the total figure for that column.
The financial information included in this offering memorandum is not intended to comply with the applicable accounting requirements of the U.S. Securities Act and the related rules and regulations of the U.S. Securities and Exchange Commission (‘‘SEC’’) which would apply if the Offering was being registered with the SEC.
Non-IFRS financial measures The financial information included in this offering memorandum includes some measures which are not accounting measures within the scope of IFRS. These measures include Net Debt, Adjusted Group revenue, Adjusted Group operating (loss)/profit, Adjusted Group (loss)/profit for the period, Adjusted Group operating profit margin, Adjusted Group total operating costs, EBITDA, Adjusted Group EBITDA, Adjusted Group EBITDA margin, Underlying Group revenue, Underlying Group operating (loss)/profit, Underlying Group (loss)/profit for the period, Underlying Group total operating costs, Underlying Group advertising revenue, Underlying Group newspaper sales revenue, Underlying Group contract printing revenue, Underlying Group print advertising revenue, Underlying Group digital advertising revenue, Underlying Group EBITDA and Underlying Group EBITDA margin (together, the ‘‘Non-IFRS financial measures’’).
xiii The Group presents EBITDA and other Non-IFRS financial measures for informational purposes only (1) as they are used by the Company’s management to monitor and report to the Company’s board of directors on its financial position for outstanding debt and available operating liquidity and (2) to represent similar measures that are widely used by certain investors, securities analysts and other interested parties as supplemental measures of financial position, financial performance and liquidity. This information does not represent the results the Group would have achieved had any of the transactions for which an adjustment is made occurred at the beginning of the periods presented. The calculations for EBITDA and other Non-IFRS financial measures are based on various assumptions, management estimates, audited and unaudited financial statements and unaudited management accounts. It may not give an accurate or complete view of the financial condition or results of operations of the Group’s business for the periods presented herein. The Group is not presenting the Non-IFRS financial measures as measures of the Group’s results of operations. The Non-IFRS financial measures have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of the Group’s position or results of operation as reported under IFRS. The Non-IFRS financial measures are not measurements of financial performance under IFRS, or any other internationally accepted accounting principles, and should not be considered as alternatives to the historical financial position or other indicators of the Group’s operating performance, cash flows, forward position or any other measure of performance derived in accordance with IFRS. The Non-IFRS financial measures as presented in this offering memorandum may differ from, and may not be comparable to, similarly titled measures used by other companies due to differences in the way the Group’s Non-IFRS financial measures are calculated, and EBITDA as presented in this offering memorandum differs from ‘‘Consolidated EBITDA’’ defined and used in the section titled ‘‘Description of the Notes’’ of this offering memorandum and in the Indenture. The Non-IFRS financial information contained in this offering memorandum is not intended to comply with the reporting requirements of the SEC and will not be subject to review by the SEC. The calculations for the Non-IFRS financial measures are based on various assumptions. These amounts have not been, and, in certain cases cannot be, audited or reviewed by any independent accounting firm. The Group has also presented certain pro forma measures in this offering memorandum as the Group believes these measures more appropriately reflect to investors the financial position of, and cost of debt to, the Group in light of the Transactions. This information is inherently subject to risks and uncertainties. It may not give an accurate or complete picture of the Group’s financial condition or results of operations for the periods presented and should not be relied upon when making an investment decision.
Set forth below is an explanation of certain of the Non-IFRS financial measures included in this offering memorandum.
Net debt Unless otherwise specified herein, net debt is defined as total borrowings, less cash and cash equivalents, less the impact of currency hedging instruments and less capitalised debt issuance costs. See Note 22 to the 2013 Group consolidated financial statements for more information regarding the calculation of the Group’s net debt.
EBITDA The Group calculates EBITDA by adjusting operating profit by adding back depreciation of property, plant and equipment and amortisation of intangible assets. For an explanation and reconciliation of EBITDA to operating profit, see ‘‘Summary historical consolidated financial data and other financial data—Other financial data’’.
Exceptional items and IAS 21/39 items The Group analyses its financial performance and each of its primary financial measures including revenue, operating costs, operating (loss)/profit, net finance costs, (loss)/profit before
xiv tax, tax and (loss)/profit for the period on an actual basis, before ‘exceptional items’ and before ‘IAS 21/39 items’. These items are presented in separate columns within the Group income statement included elsewhere in this offering memorandum.
‘‘Exceptional items’’ consist of items identified as exceptional either due to the nature of the item or their significance, and include impairment of intangible assets, any write-downs in the value of presses and assets held for sale and provisions for lease dilapidations, material gains or losses on sales of assets not in the ordinary course of business, restructuring and redundancy costs, revenue from the termination of a long term printing contract, IAS 19 past service gains or losses on the Group’s pension scheme, a levy payable to the Pension Protection Fund and pension expenses following a wind up of certain companies in prior years. There can be no assurance that items the Group has identified for adjustment as exceptional will not recur in the future or that similar items will not be incurred in the future. Exceptional items are set out in notes 7 and 15 to the 2013 Group’s consolidated financial statements.
‘‘IAS 21/39 items’’ consist of items relating to the fair value movement in the Group’s derivative financial instruments (primarily interest rate caps and foreign exchange call options) as well as the retranslation of the Group’s U.S. dollar and Euro denominated borrowings. IAS 21/39 items are set out in note 11c of the 2013 Group’s consolidated financial statements.
The ‘before exceptional items’ and ‘before IAS 21/39 items’ performance measures are limited in their usefulness compared with the comparable total performance measures as they exclude important elements of the Group’s overall financial performance, namely the exceptional items and the IAS 21/39 items. However, the Company believes that in separately presenting financial performance before these items it is easier to read and interpret financial performance between periods, as profit measures are more comparable by excluding the distorting effect of these items. The presentation of financial performance before these items is additional to, and not a substitute for, the comparable performance measures presented in accordance with IFRS.
Management uses the ‘before exceptional items’ and ‘before IAS 21/39 items’ measures as the basis for monitoring financial performance and in communicating financial performance to investors in external presentations and announcements of financial results. Internal financial reports, budgets and forecasts are primarily prepared on the basis of these performance measures. Management compensates for the limitations inherent in the use of the ‘before exceptional items’ and ‘before IAS 21/39 items’ performance measures through the separate monitoring and disclosure of ‘exceptional items’ and ‘IAS 21/39 items’ as a component of the Group’s overall financial performance.
Underlying Group financial measures The Group uses underlying financial measures to reflect its view of the evolving performance of its on-going business in its current form, following the portfolio consolidation and reshaping of the past several years. The Group believes that such adjustments enable a better understanding of the underlying performance of its business at period year-end.
The Group calculates Underlying Group revenue, Underlying Group operating (loss)/profit, Underlying Group (loss)/profit for the period and Underlying Group EBITDA by further adjusting these measures after making adjustments for ‘Exceptional items’ and ‘IAS 21/39 items’ as described above. See ‘‘Managements discussion and analysis of financial condition and results of operations—Results of Operations—Year-on-Year Comparability of Results—Other Adjustments’’. These ‘‘Other Adjustments’’ are made to reflect the closure or merging of titles, the conversion of publications from daily to weekly and the termination of the News International printing contracts. Specifically, the Group removes from Adjusted Group revenue the revenues lost due to the closure of newspapers, the conversion of newspapers from daily to weekly publications and the loss of the News International printing contracts. Additionally, the Group removes from Adjusted Group operating (loss)/profit an amount of cost equal to the lost revenue from newspapers that were closed or converted from daily to weekly publication plus 10% of 2012
xv revenue to account for an estimate of shared costs allocated to such closed or converted newspapers, and the actual cost of sales and operating expense associated with the discontinued printing operations for News International together with mitigating cost savings and revenue from new print contracts that commenced in 2012. In calculating the adjustment to operating profit relating to newspaper closures and conversions, the Group assumes that the costs to be removed equals the lost revenue relating to such newspaper closures and conversions plus 10% of 2012 revenue, which assumption may not reflect the actual direct and indirect costs associated with the newspapers that were closed or converted from daily to weekly. To calculate Underlying Group financial measures, the Group makes a number of assumptions regarding costs. These estimates and assumptions are inherently uncertain, although considered reasonable by the Group, and subject to significant business, economic and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the Group’s control. Any future changes to accounting standards may have a significant impact on the Group’s reported results and position. In making an investment decision, you should rely upon your own examination of the terms of the Offering and the financial information contained in this offering memorandum. You should consult your own professional advisors for an understanding of the differences between U.K. GAAP, IFRS and U.S. GAAP, and how those differences could affect the financial information contained in this offering memorandum. The consolidated financial statements of the Group have been prepared in accordance with IFRS. This offering memorandum contains the consolidated financial statements of the Group as at and for the 52 weeks ended 28 December 2013 audited by Deloitte LLP and the independent auditor’s report thereon, the consolidated financial statements of the Group as at and for the 52 weeks ended 29 December 2012 audited by Deloitte LLP and the independent auditor’s report thereon and the consolidated financial statements of the Group as at and for the 52 weeks ended 31 December 2011 audited by Deloitte LLP and the independent auditor’s report thereon. The independent auditor’s report for the 52 weeks ended 28 December 2013 states that, while the opinion of Deloitte LLP contained therein is not modified, Deloitte LLP have also considered the adequacy of the disclosure in note 3 to the consolidated financial statements concerning the Group’s ability to continue as a going concern. See note 3 to the 2013 Group consolidated financial statements. In respect of the audit reports relating to the consolidated financial statements of the Group reproduced herein Deloitte LLP, the Group’s independent auditor, provides: ‘‘This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.’’ Investors in the Notes should understand that these statements are intended to disclaim any liability to parties (such as purchasers of the Notes) other than to the Company with respect to those reports. The SEC would not permit such limiting language to be included in a registration statement or a prospectus used in connection with an offering of securities registered under the U.S. Securities Act, or in a report filed under the U.S. Exchange Act. If a U.S. court (or any other court) were to give effect to the language quoted above, the recourse that investors in the Notes may have against the independent auditors based on their reports or the consolidated financial statements to which they relate could be limited. The extent to which auditors have responsibility or liability to third parties is unclear under the laws of many jurisdictions, including the United Kingdom, and the legal effect of these statements in audit reports is untested in the context of an offering of securities. The inclusion of the language referred to above, however, may limit the ability of holders of the Notes to bring any action against Deloitte LLP for damages arising out of an investment in the Notes.
xvi Exchange rate information The following table sets forth, for the periods indicated, the high, low, average and period end Bloomberg Composite Rate (New York) expressed as U.S. dollars per £1.00. The Bloomberg Composite Rate is a ‘‘best market’’ calculation, in which, at any point in time, the bid rate is equal to the highest bid rate of all contributing bank indications and the ask rate is set to the lowest ask rate offered by these banks. The Bloomberg Composite Rate is a mid-value rate between the applied highest bid rate and the lowest ask rate. Neither the Group nor the Initial Purchasers make any representation that the pound sterling or U.S. dollar amounts referred to in this offering memorandum have been, could have been or could, in the future, be converted into U.S. dollars or pound sterling, as the case may be, at any particular rate, if at all.
(expressed as U.S. dollars per £1.00) Period end Average High Low Year 2008 ...... 1.4629 1.8430 2.0334 1.4391 2009 ...... 1.6173 1.5670 1.6988 1.3753 2010 ...... 1.5612 1.5457 1.6362 1.4334 2011 ...... 1.5549 1.6041 1.6706 1.5343 2012 ...... 1.6248 1.5852 1.6279 1.5317 2013 ...... 1.6556 1.5647 1.6556 1.4867
Period end Average High Low Month October 2013 ...... 1.6038 1.6091 1.6236 1.5951 November 2013 ...... 1.6368 1.6114 1.6368 1.5905 December 2013 ...... 1.6556 1.6382 1.6556 1.6264 January 2014 ...... 1.6441 1.6473 1.6637 1.6354 February 2014 ...... 1.6743 1.6566 1.6748 1.6304 March 2014 ...... 1.6681 1.6625 1.6762 1.6496 April 2014 ...... 1.6873 1.6747 1.6873 1.6574
On 5 May 2014, the Bloomberg Composite Rate between the pound sterling and the U.S. dollar was $1.6866 per £1.00.
The above rates may differ from the actual rates used in the preparation of the financial statements and other financial information appearing in this offering memorandum.
The Issuer has accurately reproduced this information as far as the Issuer is aware and able to ascertain from third-party sources, no facts have been omitted which would render the reproduced information inaccurate or misleading.
xvii Summary This summary highlights information contained elsewhere in this offering memorandum. The summary below does not contain all the information that you should consider before investing in the Notes. You should read the entire offering memorandum carefully, including the Group consolidated financial statements, before making an investment decision. See ‘‘Risk factors’’ for certain factors that you should consider before investing in the Notes.
Overview
The Group is one of the largest local and regional multimedia companies in the UK in terms of the number of titles published and audience reach (Source: Audit Bureau of Circulations). The Group provides news and information services to local and regional communities through its portfolio of publications and websites, which as at the date of this offering memorandum, consists of 13 paid-for daily newspapers, 196 paid-for weekly newspapers, 39 free titles, 10 free lifestyle magazines and 198 local news and e-commerce websites. The Group operates in eight regions including: Scotland, The North East, West Yorkshire, The North West & Isle of Man, South Yorkshire, The South, Midlands and Northern Ireland. The Group delivers extensive coverage of local news, events and people in the markets in which it operates.
The Group’s principal revenue streams are derived from newspaper sales and advertising across print and digital. The Group has total daily paid-for circulation of approximately 0.26 million, total weekly paid-for circulation of approximately 1.1 million and total weekly free distribution of over one million (Source: Audit Bureau of Circulations). In March 2014, the Group recorded a digital audience of 15.9 million unique users, resulting in a combined monthly audience of 26.3 million, which represents an increase in monthly unique users of 42.0 per cent compared to March 2013, in which there was a digital audience of 11.2 million unique users and a combined monthly audience of 23.3 million. This provides advertisers with access to local audiences and serves as an important advertising platform for SMEs. The Group’s key advertising areas are general display advertising and product category advertising; the major advertising categories include employment, property and motors. The Group also sells advertising to national advertisers who either aim to reach a regional or local audience or to complement a national campaign with local presence. Further revenue streams are generated from non-advertising related digital activities, contract printing and other activities such as organising exhibitions and fairs.
The Group’s strengths
A growing overall digital audience base The Group is a leading UK multimedia company with a growing overall audience base (measured by copies sold and unique online users) for its digital content. During 2013, the Group’s aggregate online and print audience reached an average of 24.5 million users a month, which includes a monthly average print audience of 12.2 million (excluding audiences generated from free titles) and a monthly average online audience of 12.3 million unique users in 2013, up from 10.1 million unique users in 2012 and 7.9 million unique users in 2011. Online audiences have continued to grow during the first quarter of 2014. In January 2014, digital audiences grew to 16.8 million unique users, an increase of 47 per cent as compared to January 2013, and in February 2014 digital audiences comprised 15.7 million unique users, representing growth of 53 per cent as compared to February 2013. In March 2014, digital audiences grew to 15.9 million unique users, representing growth of 42 per cent as compared to March 2013.
Print audiences consume the Group’s printed publications which include titles that have a long and rich history, an example being the Stamford Mercury which was first published in 1695. In the markets in which the Group operates, it is a leading provider of local news and information.
1 The Group’s digital audiences access its content online through PC’s, tablets and mobile devices. All of the Group’s major titles, including The Scotsman and The Yorkshire Post, have a digital presence and enjoy large and growing online audiences. As at the date of this offering memorandum, the Group has 18 tablet news and information apps for titles such as the Belfast Newsletter and the Portsmouth News.
The Group believes that the strength of the its print and online brands and its in-depth knowledge of the communities it serves are highly valued by advertisers who represent the Group’s principal source of revenue. The Group believes that its in-depth knowledge of the consumers in the local markets it serves, coupled with its brand strength and geographic presence, provides the Group with a solid platform for growing its overall audiences in those markets.
Leading position in most of the Group’s markets The Group publishes more titles than any other local and regional publisher in the United Kingdom and in the majority of the markets in which it operates, the Group publishes the leading local or regional news-brand based on audience size and circulation. Examples of titles in its portfolio that have historically achieved high household penetration rates include, the Northumberland Gazette, Garstang Courier, Stornoway Gazette, Hastings Observer and the Daventry Express.
In 2013, the Group completed the relaunch of 227 print titles and associated news websites and e-commerce websites (the ‘‘Relaunch Programme’’), leading to more attractive modern content that the Group believes has appealed to both readers and advertisers. The Group believes that the results of the Relaunch Programme have been one of the key drivers for the Group’s online audience growth, have helped attract new audiences to its publications, and have attracted new and lapsed advertisers back to the Group.
The Group also enjoys deep and long-standing relationships with the communities it serves, including both readers and advertisers. Editorial teams are an integral part of their local communities beyond their reporting of local news stories. This enables the Group to be in a position to deliver more insightful, relevant and high quality editorial content as well as offer cost effective and targeted advertising solutions. The Group believes that traditional local and regional publishers underpin the delivery of news and information in the markets in which the Group operates, and the Group further believes that emerging online communities, which represent a significant growth area for the Group, will continue to look to trusted and established brands for local news and information. The Group believes that its well recognised and trusted local newspaper brands will provide it with a competitive advantage and make it a favoured destination for online readers and advertisers in the growing online marketplace.
At the forefront of the shift to digital The Group is currently the largest online regional publisher in the United Kingdom as measured by unique digital users. Between July 2013 and December 2013, the Group recorded the highest average monthly unique users (13.1 million) in comparison to its direct competitors, the Newsquest network (12.9 million), the Trinity Mirror Regional Network (12.2 million) and the Local World Network (11.7 million) (source: ABC Regional Publication Multi-Platform Report July-December 2013).
The Group has invested significantly in its digital activities and currently has 185 local news websites and 36 tablet and mobile apps (including 18 news apps) as well as consumer offerings, SME marketing services offerings and more recently a hyper-local video offering.
In the 2013 financial year, total digital revenues increased by 19.4 per cent to £24.6 million from £20.6 million in the 2012 financial year, supporting the Group’s revenue replacement strategy of pursuing digital revenue to offset declines in revenue from traditional print media. The Group has experienced significant growth rates in the majority of its digital business lines
2 in the 2013 financial year as compared to the 2012 financial year: property and motors digital advertising revenues grew 125 per cent and 200 per cent, respectively; local and national digital display advertising grew 33 per cent and 28 per cent, respectively; and the Group’s voucher website, DealMonster, grew by 76 per cent. In March 2014, online audiences reached 15.9 million users, representing a 42 per cent increase from March 2013.
The Group believes that it has a track record of introducing successful new digital offerings. In late 2013, the Group launched the Digital Kitbag, which offers a range of digital marketing solutions to SMEs, including search engine and email marketing, website build, and social media capabilities. By developing bundled products and services to meet the full range of SME digital marketing needs, the Group believes that it will be in a position to substantially increase the number of businesses to which it can market attractive solutions and increase SME marketing spend captured. The rollout of Digital Kitbag follows several other initiatives undertaken to organically grow the Group’s digital business. In the course of 2013, the Group accelerated the growth of its digital verticals portfolio including ‘‘DealMonster’’, its daily deals website, and the entertainment portal ‘‘WOW247’’, and relaunched all its local websites with an improved look and feel, better navigation, improved social media content and substantially more video. The Group is also currently implementing a new Customer Relationship Management (‘‘CRM’’) system to track customer preferences more efficiently and identify revenue generation opportunities, and expects to realise the benefits of that system towards the end of 2014.
Diversified business model The Group’s revenue base is well diversified by sales category, geography and customer mix. The Group’s largest revenue category is print advertising which accounted for 53.7 per cent of total Adjusted Group revenues in the 2013 financial year. Within print advertising, the top ten advertisers accounted for only 11.7 per cent of total revenue in the 2013 financial year. The Group’s print portfolio is located in diverse regional markets throughout the UK: Scotland, the North East, West Yorkshire, the North West & Isle of Man, Yorkshire, the Midlands, the South and Northern Ireland. For the 2013 financial year, 18.1 per cent of the Group’s newspaper sales revenue was generated in Scotland, with 16.8 per cent generated in Yorkshire. The remaining 65.1 per cent of the Group’s newspaper sales revenue in the 2013 financial year was more equally diversified across other geographical areas throughout the UK.
The Group believes that its combination of print (newspaper and magazine) and digital assets provides advertisers with an attractive audience base that is significant in number and broad in demographics. Because of the diversity of its audiences and advertising customers, the Group is not reliant on any one source of revenue.
Track record of improved cost performance The Group and its senior management have a proven track record of identifying and implementing cost reduction opportunities, and have delivered increased cost savings over the last few years. Adjusted Group operating costs were reduced by £33.7 million in 2013 and £37.6 million in 2012, representing reductions of 12.4 per cent and 12.2 per cent per annum in 2013 and 2012, respectively, underpinning an improvement in Adjusted Group operating profit margin from 17.4 per cent in 2012 to 18.7 per cent in 2013. Recent cost savings initiatives have included streamlining the regional management structure, implementing better practices in editorial, rationalisation of sales and back-office functions, outsourcing of advertisement- creation and the consolidation of production locations. As a result of these and other initiatives, the number of FTEs employed by the Group has fallen by 680 to 3,281 as at the end of December 2013 compared with 3,961 at the end of December 2012. From December 2011 to December 2012 the Group reduced its FTEs by 661. The Group believes that as a result of such initiatives it is now a more streamlined organisation that is better equipped to deliver its business strategy.
3 Track record of strong cash flow generation and deleveraging The Group has a strong record of cash generation. In the past two years, the Group has worked to improve cash flow significantly, control capital expenditures (while maintaining value-accretive investments in the growth of its digital businesses), and continually review the Group’s property portfolio to identify and dispose of assets. As a result, the Group has been able to use operating cash flow to decrease its total borrowings from £372.1 million as at 31 December 2011 to £323.4 million as at 28 December 2013.
Highly experienced and well-respected management team The Group’s senior management team, led by Chief Executive Officer Ashley Highfield, has significant industry experience in multimedia publishing organisations. The Group’s Directors have considerable experience in business transformation and operational and financial management in media and other organisations. The Group believes that its senior management is well placed to transform it into a truly multimedia organisation.
The Group’s strategy
The Group is working to transition its business from print to digital in order to establish itself as the leading provider of local and regional news and information services and to be the number one provider of marketing solutions for SME advertisers in its markets. The Group has a well-defined strategy to develop its business going forward which is based on six key strategic priorities:
Continue building overall audiences The Group aims to continue building overall audiences, by continuing to provide comprehensive and in-depth local content to the communities it serves, while maintaining reader trust and customer loyalty in the markets in which it operates. The Group recognises the growing trend towards digital content consumption in the industry, and the Group intends to continue to make value-accretive investments in its digital platforms and new technologies to continue to grow overall online audiences and create new revenue streams. By accelerating growth in online audiences, the Group believes that it will be in a better position to offset any material audience declines experienced in its print media business in the future.
Growing digital substantially The Group believes that digital advertising sales represent a major opportunity for future growth. It intends to continue to make value-accretive capital investments to grow its digital business, with the objective of transforming the mix of its revenue base over time, from mostly print to mostly digital, ahead of its competitors, and to better position its business to capitalise on the structural shift to online media consumption and growth in the market for digital advertising. The Group plans to leverage its long-standing relationships with local advertisers and communities to help drive future revenue growth in digital in local markets, by enabling local communities to interact with established local brands via digital channels that deliver locally relevant content and services. The Group will also seek to increase digital revenues by scaling and improving existing digital offerings, such as DealMonster and WOW247, as well as through the introduction of new offerings such as Digital Kitbag, the Group’s digital marketing solution for SMEs.
Returning to revenue growth The Group is committed to returning to top line revenue growth through a number of key drivers. The Group will seek to stabilise traditional revenue streams in the print media business through cover price increases and by seeking growth in its overall subscriber base. The Group further intends to stabilise its core print advertising revenues through improvements to pricing, such as incentivising non-discount selling, packaging of products for customers that will produce the best results for them, and investing in technology and training for sales
4 management and sales representatives, to up-skill, reorganise and better focus its sales force. The Group also intends to accelerate the growth of both its digital audiences and revenues, in line with its digital growth strategy, through improvements to current digital products, new digital product development, training and opportunistic changes in hiring to create an employee base with a more diversified skill set and sharing of best practices across the Group.
Maintaining cost leadership The Group intends to continue its focus on improving cost performance to maintain profitability. The Directors have identified a number of opportunities for improved cost performance, including further adoption of best practices and cost savings opportunities through further outsourcing of non-core functions. The Group currently has a rolling programme of process improvements as part of its Group efficiency agenda. The Group believes that these added efficiencies will continue to transform its business into a more modern multimedia organisation.
Growing profitability The Group aims to continue growing profitability. The 2013 financial year represented a year on year growth in Underlying Group operating profit of 2.5 per cent which was achieved through operating cost reductions, as well as the stabilisation and strengthening of certain key revenue lines.
Focus on cash flow generation The Group is committed to improving operating performance and maintaining its track record of high cash generation. The Group intends to pursue sustained high EBITDA margins, efficiently manage working capital, and to control capital expenditure, while maintaining targeted digital investments. The Company intends to continue to be focused on deleveraging.
Recent developments
Interim Results for January, February and March 2014 Based on the Group’s unaudited management accounts for the first three months of 2014, there has been continued strong growth in digital revenues, as well as a slowing decline in print advertising revenues compared to the first three months of 2013. As a result, Adjusted Group revenue for the first three months of 2014 recorded a mid single digit rate of decline over the same period last year, in contrast to an 11% decrease in Adjusted Group revenue for the 2013 financial year. The implementation of planned cost initiatives remains on track which, together with a lower level of depreciation, resulted in growth in Adjusted Group operating profit for the first three months of 2014 compared to the same period last year. Adjusted Group EBITDA for the first three months of 2014 was broadly flat year-on-year. During the first three months of 2014, local display print advertising revenues outperformed national display and circulation revenue declined broadly in line with 2013. Following a major restructuring programme, including a voluntary redundancy programme in the fourth quarter of 2013 which will see over 650 employees leave the business, cash outflows in respect of restructuring and other exceptional costs in the first three months of 2014 were approximately £11 million. This includes approximately £6 million in respect of the reductions of employees.
The unaudited management accounts on which the above is based have not been audited, reviewed or compiled by the Group’s independent auditor and may not comply with IFRS in all respects. These three month results may not be indicative of the remainder of the financial half-year or any other period. See ‘‘Information regarding forward-looking statements.’’
Irish Business Disposal On 1 April 2014, the Group entered into an agreement for the sale of Formpress Publishing Limited, which holds the trade and assets of its Republic of Ireland operations, to Iconic Newspapers Ltd for £7.2 million in cash.
5 This disposal occured on 1 April 2014 and the Group no longer has ongoing trading operations in the Republic of Ireland, other than the retention of certain leasehold and freehold property interests. The Group will continue to provide printing facilities to Iconic Newspapers Limited for a certain period post Disposal. It is also intends that certain leasehold properties will be sub-leased to Formpress Publishing Limited. The Group has retained its Northern Irish titles including The Newsletter and Derry Journal (which are also sold in the Republic of Ireland).
For the 52 weeks ended 28 December 2013, the operating profit before exceptional items for the assets subject to the disposal amounted to £1.1 million.
Sky Strategic Agreement In addition, the Company has entered into an agreement with Sky (a wholly owned subsidiary of British Sky Broadcasting Group plc) pursuant to which the Company has been appointed as Sky’s sole advertising sales representative to promote and sell AdSmart Local targeted television advertising service, aimed at SMEs, in certain UK regions, including Sheffield, Derby and Nottingham. AdSmart represents an expansion of the Company’s portfolio of advertising offerings, and is at the top end of that portfolio.
The Group’s history
The Group traces its origins to 1767 and has acquired titles in its portfolio that have been servicing local markets for over 300 years. It was incorporated in 1928 as a private company and listed on the London Stock Exchange in 1988 as Johnston Press plc. The Group has grown organically and through acquisitions to become the second largest regional newspaper publisher in the UK in terms of weekly newspaper circulation (Source: Newspaper Society) and is the largest local and regional digital publisher based on size of its online audience (Source: Audit Bureau of Circulation). As well as the eight publishing regions mentioned above, the Group operates a printing division with three regional printing centres, a media sales centre in Sheffield and an accounting centre in Peterborough and has a head office based in London.
The Group underwent five key periods of acquisitive growth starting in 1996, 1999, 2002, 2005 and 2006, which increased the Group’s geographical presence. These were financed primarily through debt resulting in substantial borrowings, which the Group has subsequently sought to reduce. In 2006 the Group’s net debt was £746.4 million. The Group has not made any acquisitions since 2006 and has been actively disposing of some of its non-core assets and using cash generated from operations to reduce net debt.
In 2008, the Company raised £212.3 million through a rights issue. This fundraising introduced PanOcean as a 20 per cent shareholder of the Group.
The Group successfully refinanced its Existing Lending Facilities and Private Placement Notes on 28 August 2009, by entering into the Override Agreement which extended their respective maturity date to September 2012. On 24 April 2012, the Group agreed to amend and restate the Override Agreement to, among other things, further extend the maturity date of the Existing Lending Facilities and Private Placement Notes to 30 September 2015.
The terms of the Override Agreement for the Existing Lending Facilities and the Private Placement Notes provide the Group with incentives to implement an alternative debt structure by the end of 2014. On 27 December 2013, the Group announced that it and existing creditors under the Override Agreement for the Existing Lending Facilities and the Private Placement Notes had agreed to reset the financial covenants for the Existing Lending Facilities and the Private Placement Notes to 30 September 2015, thereby providing the Company with a stable financial platform from which to pursue a full refinancing of such debt in 2014.
6 Ashley Highfield was appointed Chief Executive Officer in November 2011 and since then has made key senior management appointments including a new Group Commercial Director, a Marketing Director, a new Group HR Director and more recently:
• David King as Chief Financial Officer in June 2013; and
• Jeff Moriarty as Chief Digital and Product Officer in March 2014.
With the appointment of Ashley Highfield as CEO, the Group embarked on a new vision and strategy that was aimed at ensuring that the Group’s news and information content would remain relevant, popular, effective and locally produced. The Group would achieve this by:
• transitioning to digital so that it becomes the number one provider of local and regional news and information services, as well as the number one provider of digital marketing solutions for SME advertisers in its markets; and
• implementing its well-defined strategy to develop its business going forward, which is based on six key strategic priorities.
The Issuer
The Notes will be issued by Johnston Press Bond Plc (the ‘‘Issuer’’), a special purpose public limited company incorporated under the laws of England and Wales, formed for the purpose of consummating the Offering.
The Issuer is currently a wholly-owned subsidiary of GLAS Nominees Limited (the ‘‘Orphan SPV Shareholder’’), who will hold the shares of the Issuer on charitable trust. The Issuer will be required to redeem the Notes at the price set forth in ‘‘Description of the Notes—Escrow of Proceeds; Special Mandatory Redemption’’ if the conditions to releasing the proceeds of the Offering from the Escrow Account, including the Debt Assumption, are not satisfied on or prior to the Escrow Longstop Date or certain other events occur.
No separate financial information in respect of the Issuer has been prepared or has been provided in this offering memorandum. Prior to this Offering, the Issuer has not engaged in any activities and has no material assets or liabilities. The Indenture governing the Notes will restrict the Issuer from conducting any activities other than those in connection with the issuance of the Notes, the transactions contemplated by the Escrow Agreement and as otherwise expressly permitted by the Indenture.
The Transactions
The Capital Refinancing Plan As a result of discussions with the Group’s core lenders and various other stakeholders, the Group is proposing to implement a capital refinancing plan which comprises the following four components (the ‘‘Capital Refinancing Plan’’):
• the raising of gross proceeds of approximately £140 million through the Placing and the Rights Issue;
• the raising of gross proceeds of approximately £220 million through the issue of the Notes;
• the entry into the £25 million New Revolving Credit Facility; and
• revisions to the schedule of pension contributions, modifications to the funding arrangements and associated matters pursuant to the New Pensions Framework Agreement.
Under the terms of the New Pensions Framework Agreement, the Group will agree to pay fixed contributions to the Pension Plan in accordance with the agreed schedules of contributions and recovery plan resulting from the actuarial valuation as at 31 December 2012.
7 Although, if the Pension Plan’s funding position deteriorates, contributions may have to be revisited and additional contributions may be required. Contributions would ordinarily only be revisited in the context of the triennial valuation of the Pension Plan, although the Plan Trustees have power to call a valuation earlier if they resolve to do so.
Interconditionality of the Capital Refinancing Plan Each of (i) the release of proceeds from the issue of the Notes from the Escrow Account to the Issuer, (ii) the availability of the New Revolving Credit Facility, (iii) the effectiveness of the new pension arrangements and associated matters pursuant to the New Pensions Framework Agreement and (iv) the repayment of the Existing Lending Facilities and the Private Placement Notes is conditional on the raising of at least £140.0 million of gross proceeds from the Placing and the Rights Issue and the completion of each of the other components of the Capital Refinancing Plan.
The Placing and The Rights Issue The Company intends to raise at least £140 million in gross proceeds through the Placing and the Rights Issue.
Applications have been made to the UK Financial Conduct Authority (‘‘FCA’’) and to the London Stock Exchange for the Placing shares to be admitted to the premium segment of the Official List and to trading on the London Stock Exchange’s main market. Applications have been made to the FCA and to the London Stock Exchange for the Rights Issue shares (nil paid and fully paid) to be admitted to the premium segment of the Official List and to trading on the London Stock Exchange’s main market for listed securities.
The Placing shares will, when issued and fully paid, rank pari passu in all respects with the Company’s existing ordinary shares, including the right to receive all dividends and other distributions (if any) declared, made or paid by the Group after the date of issue of the Placing shares. The Rights Issue shares will, when issued and fully paid, rank pari passu in all respects with the Company’s existing ordinary shares including the right to all future dividends and other distributions declared, made or paid.
Pensions The Johnston Press Retirement Savings Plan The Johnston Press Retirement Savings Plan is a defined contribution Master trust arrangement for current employees, operated by Zurich. Contributions by the Group are a percentage of basic salary. Employer contributions range from 1 per cent of basic salary, for employees statutorily enrolled, through to 12 per cent of basic salary for Senior Executives. Employees who were active members of the Money Purchase section of the Pension Plan on 31 August 2013 transferred from the Pension Plan to the Johnston Press Retirement Savings Plan from 1 September 2013.
The Pension Plan The Pension Plan is a defined benefit pension plan. It is closed to new members and closed to future accrual. There was formerly a defined contribution section of the Pension Plan which was closed on August 2013 and members’ benefits were transferred to the Johnston Press Retirement Savings Plan. 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 to the defined benefit section of the Pension Plan are fixed annual amounts with the intention of eliminating the deficit, which was £131.2 million as at 31 December 2010 on an ongoing basis and £303.0 million on a buy-out basis (that is, the cost of securing the Pension Plan’s benefits through the purchase of annuities payable in the event of the Pension Plan winding-up or a group-wide insolvency). Based on the outcome of the triennial valuation at 31 December 2010, the fixed annual contribution amount is currently £5.7 million from 1 June 2012 under the schedule of
8 contributions agreed between the Company and the Plan Trustees. The £5.7 million annual contributions are payable until 31 December 2024. However, pursuant to the New Pensions Framework Agreement, these contributions will increase on the implementation of the Capital Refinancing Plan. Under the rules of the Pension Plan, additional contributions may be payable on the disposal of Group companies or businesses in the publishing industry.
IAS 19 (revised 2011)—‘‘Employee benefits’’ is effective for annual periods beginning on or after 1 January 2013 and will therefore be applied in the next accounting period. The key changes are that the deferral of actuarial gains and losses will no longer be permitted and the deficit should be recognised in full on the balance sheet (subject to any restrictions in IFRIC 14). The finance cost, which is currently the difference between the interest on liabilities and expected return on assets will be replaced by a net interest cost. In most cases the finance cost will increase as the expected return on assets will effectively be based on the discount rate (i.e. the returns available on AA-rated corporate bonds) with no allowance made for any outperformance expected from the Pension Plan’s actual asset holding. Had the standard been applied in the current financial year, the Group’s loss before tax would have been increased by approximately £5.2 million.
In August 2009, as part of the refinancing of the Company’s Existing Lending Facilities and Private Placement Notes, the Pension Plan was granted security interests over £170 million of the Group’s assets, on substantially the same terms as the creditors of the Existing Lending Facilities and the Private Placement Notes. These security interests remained in place following the amendment and restatement of the Override Agreement on 24 April 2012.
The current IFRS and actuarial valuation of the Pension Plan excludes the impact of the Capital Refinancing Plan. A new valuation of the Pension Plan as at 31 December 2012 has been commissioned by the Trustee and to take account of the Capital Refinancing Plan timetable, the deadline for finalising the valuation has been extended by agreement with the Plan Trustees.
Conditional on the Capital Refinancing Plan, the Plan Trustees and the Company have entered into the New Pensions Framework Agreement agreeing, inter alia, to the following:
• On implementation of the Capital Refinancing Plan, removal of the existing secured guarantee (with security up to £170 million) provided in favour of the Plan Trustees by the Company and certain of its subsidiaries in relation to any default on a payment obligation under the Pension Plan. This was agreed in relation to the refinancing of the Existing Lending Facilities and Private Placement Notes in 2009. In return for the removal of this security and the aforementioned guarantee, an unsecured cross-guarantee will be provided on implementation of the Capital Refinancing Plan by the Company and certain of its subsidiaries in favour of the Plan Trustees in relation to any default on a payment obligation under the Pension Plan. Each claim made under the unsecured cross-guarantee is capped at an amount equal to the aggregate S75 debt of the Pension Plan at the date any claim made by the Plan Trustees falls due.
• The deficit as at the 31 December 2012 valuation date will be sought to be addressed over an 11 year period by entry into a recovery plan providing for contributions starting at £6.3 million in 2014, £6.5 million in 2015 and £10.0 million in 2016 increasing by three per cent per annum with a final payment of £12.7 million in 2024.
• Settlement of unpaid PPF levies and S75 debts.
• The Pension Plan will be entitled to receive 25 per cent of the net available cash proceeds from business or asset disposals, up to and including 31 August 2015, exceeding £1 million in a single transaction or £2.5 million over the course of a 12 month period, subject to certain permitted disposals, conditions in relation to financial leverage and other exceptions set out in the New Pensions Framework Agreement.
9 • The Company will also pay additional contributions to the Pension Plan in the event that the 2014/2015 PPF levy or the 2015/2016 PPF levy is less than £3.2 million.
• Additional contributions will also be payable to the Pension Plan in the event that the Group satisfies certain conditions in relation to financial leverage.
Any funding agreement needs to be reflected in the valuation documentation of the Pension Plan, which must be submitted to the Pensions Regulator who may exercise certain powers if it is not compliant with the relevant legislation.
If the Pension Plan’s funding position deteriorates after successful implementation of the Capital Refinancing Plan then the contributions may have to be revisited and additional contributions to the Pension Plan may be required. Contributions would ordinarily only be revisited in the context of the triennial valuation of the Pension Plan, although the Plan Trustees have power to call a valuation earlier if they resolve to do so.
Irish Pension Schemes In addition, the Group maintains liability for two defined benefit schemes providing benefits for a small number of former employees in Limerick and Leinster. Both schemes have been closed to future accrual since 2010 and are either already being wound up (in the case of Leinster) or will be wound up in the short term future (in the case of Limerick).
Escrow release Concurrently with the closing of the Offering on the Issue Date, the Issuer will enter into the Escrow Agreement with the Company, the Trustee and the Escrow Agent, pursuant to which the gross proceeds of the Offering sold on the Issue Date together with an additional amount in pound sterling equivalent to interest on the Notes from the Issue Date up to and including the date that is six business days after the Escrow Longstop Date will be deposited into the Escrow Account. The Escrow Account will be pledged on a first-ranking basis in favour of the Trustee for the benefit of the holders of the Notes pursuant to an escrow charge dated the Issue Date between the Issuer and the Trustee (the ‘‘Escrow Charge’’). The initial funds deposited in the Escrow Account, and all other funds, securities, interest, dividends, distributions and other property and payments credited to the Escrow Account (less any property and/or funds paid in accordance with the Escrow Agreement) are referred to, collectively, as the ‘‘Escrowed Property’’.
In order to cause the Escrow Agent to release the Escrowed Property to the Issuer (the ‘‘Escrow Release’’), the Escrow Agent, the Trustee and J.P. Morgan Securities plc as representative for the Initial Purchasers shall have received from the Issuer or the Company, at a time that is on or before the Escrow Longstop Date, an officer’s certificate (the ‘‘Escrow Release Certificate’’), upon which both the Escrow Agent and the Trustee shall be entitled to conclusively rely, without further investigation or liability to any person, to the effect that, on or prior to or substantially concurrently with the Escrow Release:
(1) the New Revolving Credit Facility Agreement shall have been executed by the parties thereto and all conditions precedent to the initial funding under the New Revolving Credit Facility Agreement shall have been satisfied or waived;
(2) the Company or its subsidiaries shall have received in aggregate at least £140 million in gross proceeds from the Placing and the Rights Issue;
(3) those documents, legal opinions and certificates substantially in the form attached as exhibits to the Escrow Agreement that are required to be delivered prior to release of the Escrowed Property from the Escrow Account shall have been delivered in accordance with the terms of the Escrow Agreement;
10 (4) each of the Guarantors shall have expressly assumed all of its obligations as a Guarantor under its Note Guarantee by executing and delivering to the Trustee a supplemental indenture;
(5) the Company shall own, directly or indirectly, 100% of the capital stock in the Issuer;
(6) the Guarantors shall have caused the Notes and the Note Guarantees to be secured by the Collateral pursuant to the terms of the Security Documents and acceded to the Purchase Agreement in respect of the Notes, and the Intercreditor Agreement shall have been executed by the parties thereto;
(7) the Existing Lending Facilities will be prepaid in full, the Private Placement Notes will be redeemed in full and the liens on the collateral securing the Existing Lending Facilities, the Private Placement Notes and obligations under the Pension Plan and certain other obligations will be released; and
(8) no default or event of default under the Indenture shall have occurred and be continuing.
In order to determine compliance with the condition described under paragraph (8) above, all restrictive covenants set forth in the Indenture (a) will be applicable to the Issuer from the Issue Date and (b) will be treated as if they had been applicable to the Company and its Restricted Subsidiaries beginning on the Issue Date. See ‘‘Description of the Notes—Escrow of proceeds; Special Mandatory Redemption’’.
If the conditions to the Escrow Release have not been satisfied or waived on or prior to the Escrow Longstop Date, or upon the occurrence of certain other events, the Notes will be redeemed at a special mandatory redemption price equal to 100% of the aggregate initial issue price of the Notes, plus accrued and unpaid interest from the Issue Date to the special mandatory redemption date and additional amounts, if any.
The Debt Assumption On the Issue Date, the Issuer will be a wholly owned subsidiary of the Orphan SPV Shareholder, who will hold the shares of the Issuer on charitable trust. It is intended that the Orphan SPV Shareholder will maintain ownership of the Issuer outside the Group until the conditions to Escrow Release are satisfied. On the Escrow Release Date, the Company intends to effect the Debt Assumption whereby the Issuer will become a wholly-owned subsidiary of the Company. Substantially concurrently with the consummation of the Debt Assumption, all Guarantors will guarantee the Issuer’s obligations under the Notes and accede to the Indenture pursuant to a supplemental indenture. On the Escrow Release Date, the Guarantors will also accede to the Purchase Agreement pursuant to an accession agreement, respectively.
For a summary of the Group’s corporate structure and principal outstanding financing arrangements at the date hereof after giving effect to the Transactions, see ‘‘—Corporate and financing structure’’ and ‘‘Description of other indebtedness’’.
11 Corporate and financing structure
The following diagram summarises the Group’s corporate structure after giving effect to the Transactions. See ‘‘Description of the Notes’’ and ‘‘Description of other indebtedness’’ for more information on the Group’s principal outstanding financing arrangements after giving effect to the Transactions. All entities shown below are 100% wholly owned, with the exception of certain non-Guarantors.
= Guarantors
Public Shareholders
£25.0 million New Revolving Credit Facility (1)(3) Johnston Press plc (the “Company”) Notes Proceeds(5) Loan
£225.0 million of Johnston Press Bond Plc Notes offered (the “Issuer”) hereby(2)(3)(4)
(6)(7) (3)(6) Subsidiary Non-Guarantors Subsidiary Guarantors 13MAY201421175869
(1) The Company will enter into the New Revolving Credit Facility, which will become effective upon the satisfaction of certain conditions to utilisation including the release of the proceeds of the Notes from escrow to the Issuer and the receipt by the Company or its subsidiaries in aggregate at least £140.0 million in gross proceeds from the Placing and the Rights Issue. The New Revolving Credit Facility Agreement provides for borrowings of up to a maximum of £25.0 million. The New Revolving Credit Facility matures in 2018. The original borrower under the New Revolving Credit Facility will be the Company. The New Revolving Credit Facility will, as of the Escrow Release Date, be jointly and severally guaranteed on a senior secured basis by the Issuer and the same entities that will initially guarantee the Notes.
(2) The Notes will, as of the Escrow Release Date, be jointly and severally guaranteed on a senior secured basis by the Guarantors. The Note Guarantees will be subject to contractual and legal limitations and will be able to be released under certain circumstances. See ‘‘Description of the Notes—Release of Note Guarantees’’ and ‘‘Limitations on validity and enforceability of the Note Guarantees and security interests’’.
(3) The Notes, the Note Guarantees and the New Revolving Credit Facility will, as of the Escrow Release Date, be secured on a pari passu basis by security interests in the Collateral. Pursuant to the terms of the Intercreditor Agreement, any liabilities in respect of obligations under the New Revolving Credit Facility Agreement and Priority Hedging that are secured by assets that also secure the Group’s obligations under the Notes and the Note Guarantees will receive priority with respect to any proceeds received upon any enforcement action over any such assets. Any remaining proceeds received upon any enforcement action over any Collateral, after all obligations under the New Revolving Credit Facility Agreement and any Priority Hedging have been repaid, will be applied pro rata in repayment of all obligations under the Indenture and the Notes and any other pari passu indebtedness (including hedging obligations that do not constitute Priority Hedging) of the Issuer and the Guarantors that is secured by the Collateral. See ‘‘Description of other indebtedness—Intercreditor Agreement’’. The liens on the Collateral will be subject to certain limitations and exclusions, subject to the terms of the Intercreditor Agreement and may be released under certain circumstances. See ‘‘Risk factors— Risks related to the Group’s structure—There are circumstances other than repayment or discharge of the Notes under which the Collateral securing the Notes and the Note Guarantees will be released automatically and under which the Note Guarantees will be released automatically, without your consent or any action on the part of the Trustee.’’ and ‘‘Description of the Notes—Security’’ for further information on the security interests that will secure the Notes and the New Revolving Credit Facility as of the Escrow Release Date.
(4) Upon consummation of the Offering, the proceeds of the Offering will be deposited into the Escrow Account until the date that certain conditions are satisfied, including the consummation of the Debt Assumption. The conditions to Escrow Release are described in ‘‘Description of the Notes—Escrow of proceeds; Special Mandatory Redemption’’. Upon Escrow Release, the proceeds from this Offering together with the proceeds from the Placing and the Rights Issue will be used to repay in full the amounts outstanding under the Existing Lending Facilities and the Private Placement Notes and related accrued cash interest and make-whole amounts and to pay commissions, fees and expenses in connection with the Transactions and certain amounts owed to the Pension Plan, with the remaining balance to be used for general corporate purposes including the funding of the Company’s Employee Share Trust. See ‘‘Use of proceeds’’. As at 1 April 2014, £206.7 million was outstanding under the Existing Lending Facilities and £106.7 million was outstanding under the Private Placement Notes, in each case, excluding accrued payment in kind interest and cash interest.
(5) On the Escrow Release Date, the Issuer will enter into a proceeds loan with the Company under which the Issuer will loan an amount equal to the gross proceeds from the issuance of the Notes to the Company (the ‘‘Notes Proceeds Loan’’). See ‘‘Description of the Notes—The Notes Proceeds Loan’’ for more information.
12 (6) On the Escrow Release Date, the Notes will be guaranteed on a senior secured basis by the Guarantors. All other subsidiaries of the Company will not guarantee the Notes. The Group has one material company, Johnston Publishing Ltd, which will be a Guarantor. Johnston Publishing Ltd, on a consolidated basis, represented 94.5 per cent and 94.7 per cent of Adjusted Group revenues and 108.3 per cent and 103.2 per cent of Adjusted Group EBITDA for the 52 weeks ended 28 December 2013 and for the 52 weeks ended 29 December 2012, respectively, and 95.3 per cent and 98.7 per cent of the Group’s tangible fixed assets as at 28 December 2013 and as at 29 December 2012, respectively.
The Group also records the value of its publishing titles as intangible assets on its consolidated balance sheet. These publishing titles were valued at £538.5 million at 28 December 2013 or 80.1 per cent of total Group assets. Therefore, in addition to Johnston Publishing Ltd, all subsidiary companies that own publishing titles or are employers will be included as Guarantors.
(7) As of 28 December 2013, after giving pro forma effect to the Transactions, including the Offering, the Company’s subsidiaries that are not Guarantors would have had total borrowings outstanding in an aggregate of £nil.
13 The Offering The summary below describes the principal terms of the Notes, the Note Guarantees and the Collateral. It is not intended to be complete and certain of the terms and conditions described below are subject to important exceptions. You should carefully review the ‘‘Description of the Notes’’ section of this offering memorandum for more detailed descriptions of the terms and conditions of the Notes.
Issuer ...... Johnston Press Bond Plc (the ‘‘Issuer’’).
Notes offered ...... £225.0 million aggregate principal amount of 8.625% Senior Secured Notes due 2019 (the ‘‘Notes’’).
Issue date ...... On or about 16 May 2014 (the ‘‘Issue Date’’).
Maturity date ...... 1 June 2019.
Interest payment dates . Semi-annually in arrears on each 1 June and 1 December, commencing on 1 December 2014. Interest will accrue from the Issue Date and will be payable in cash.
Issue price ...... 98.0% plus accrued interest, if any, from the Issue Date.
Denomination ...... The Notes will have a minimum denomination of £100,000 and any integral multiple of £1,000 in excess thereof. Notes in denominations of less than £100,000 will not be available.
Ranking of the Notes . . . The Notes will be general obligations of the Issuer and will:
• on and from the Escrow Release Date, be secured as described below under ‘‘—Collateral’’;
• rank pari passu in right of payment with all existing and future indebtedness of the Issuer that is not subordinated in right of payment to the Notes, including on and from the Escrow Release Date, the obligations of the Issuer under the New Revolving Credit Facility Agreement;
• be effectively subordinated to all existing and future secured indebtedness of the Issuer to the extent of the value of the assets securing such indebtedness, unless such assets also secure the Notes on an equal and ratable or prior basis;
• be effectively subordinated to any existing and future indebtedness of the Issuer that will receive proceeds from any enforcement action over the Collateral on a priority basis, including indebtedness under the New Revolving Credit Facility and Priority Hedging;
• rank senior in right of payment to all existing and future indebtedness of the Issuer that is expressly subordinated in right of payment of the Notes; and
• on and from the Escrow Release Date, be structurally subordinated to all existing and future indebtedness, including obligations to trade creditors and lessors, of each non-Guarantor subsidiary of the Company (other than the Issuer).
Note Guarantees ...... On and from the Escrow Release Date, the Notes will be unconditionally guaranteed on a senior secured basis initially by
14 certain subsidiaries of the Company organised under the laws of England and Wales, Scotland and Northern Ireland (the ‘‘Guarantors’’). The Group has one material company, Johnston Publishing Ltd, which will be a Guarantor. Johnston Publishing Ltd, on a consolidated basis, represented 94.5 per cent and 94.7 per cent of Adjusted Group revenues and 108.3 per cent and 103.2 per cent of Adjusted Group EBITDA for the 52 weeks ended 28 December 2013 and for the 52 weeks ended 29 December 2012, respectively, and 95.3 per cent and 98.7 per cent of the Group’s tangible fixed assets as at 28 December 2013 and as at 29 December 2012, respectively.
The Group also records the value of its publishing titles as intangible assets on its consolidated balance sheet. These publishing titles were valued at £538.5 million at 28 December 2013 or 80.1 per cent of total Group assets. Therefore, in addition to Johnston Publishing Ltd, all subsidiary companies that own publishing titles or are employers will be included as Guarantors.
The Note Guarantees will be subject to contractual and legal limitations, and may be released under certain circumstances. See ‘‘Description of the Notes—Note Guarantees’’ and ‘‘Risk factors— Risks related to the Notes and the Note Guarantees’’.
Ranking of the Note Guarantees ...... On and from the Escrow Release Date, the Note Guarantee of each Guarantor will be a general senior obligation of such Guarantor and will:
• be secured as described below under ‘‘—Collateral’’;
• rank pari passu in right of payment with all existing and future indebtedness of such Guarantor that is not subordinated in right of payment to the Notes, including its obligations under the New Revolving Credit Facility Agreement;
• be effectively subordinated to all existing and future secured indebtedness of such Guarantor to the extent of the value of the assets securing such secured indebtedness, unless such assets also secure the Note Guarantees on an equal and ratable or prior basis;
• be effectively subordinated to any existing and future indebtedness of such Guarantor that will receive proceeds from any enforcement action over the Collateral on a priority basis, including indebtedness under the New Revolving Credit Facility and Priority Hedging;
• rank senior in right of payment to all existing and future indebtedness of such Guarantor that is expressly subordinated in right of payment to its Note Guarantee; and
• on and from the Escrow Release Date, be structurally subordinated to all existing and future indebtedness, including obligations to trade creditors and lessors, of each non-Guarantor subsidiary of such Guarantor (other than the Issuer).
15 The Note Guarantees will be subject to release under certain circumstances. See ‘‘Risk factors—Risks related to the Notes and the Note Guarantees’’ and ‘‘Description of the Notes—Note Guarantees’’.
Collateral ...... On the Issue Date, the Notes will be secured on a first-ranking basis by the escrowed property held in the segregated escrow account described below under ‘‘—Escrow of Proceeds; Special Mandatory Redemption’’. On and from the Escrow Release Date and subject to the terms of the Security Documents and the Intercreditor Agreement, the obligations of the Issuer and the Guarantors under the Notes and the Note Guarantees, the Indenture, the New Revolving Credit Facility Agreement and certain designated hedging arrangements will be secured by security interests granted on a first ranking basis over:
• substantially all of the assets of the Issuer and the Guarantors organised under the laws of England and Wales (collectively, the ‘‘English Guarantors’’) other than leasehold interests in real estate with a term of less than 35 years and freehold interests in real estate with a value of less than £250,000;
• substantially all of the assets of the Guarantors organised under the laws of Northern Ireland (collectively, the ‘‘NI Guarantors’’) other than the shares of Century Newspapers Limited, leasehold interests in real estate with a term of less than 35 years and freehold interests in real estate with a value of less than £250,000; and
• substantially all of the assets of the Guarantors organised under the laws of Scotland (collectively, the ‘‘Scottish Guarantors’’) other than the shares of each Scottish Guarantor and leasehold interests in real estate with a term of less than 35 years and freehold interests in real estate with a value of less than £250,000.
Pursuant to the terms of the Intercreditor Agreement, any liabilities in respect of obligations under the New Revolving Credit Facility Agreement and Priority Hedging, if any, secured by the Collateral will receive priority in payment to the Notes with respect to any proceeds received upon any enforcement action over any Collateral. See ‘‘Description of other indebtedness—Intercreditor Agreement’’.
The security interests over the Collateral may be released under certain circumstances. See ‘‘Risk factors—Risks related to the Notes and the Note Guarantees’’, ‘‘Description of other indebtedness— Intercreditor Agreement’’ and ‘‘Description of the Notes—Security— Release of security’’.
Optional redemption . . . Prior to 1 June 2017, the Issuer will be entitled at its option to redeem all or a portion of the Notes at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus accrued and unpaid interest and additional amounts, if any, plus the applicable ‘‘make whole’’ premium set forth under the caption ‘‘Description of the Notes—Optional redemption’’.
16 On or after 1 June 2017, the Issuer will be entitled at its option to redeem all or a portion of the Notes at the redemption prices set forth under the caption ‘‘Description of the Notes—Optional redemption’’, plus accrued and unpaid interest and additional amounts, if any.
At any time prior to 1 June 2017, upon not less than 10 nor more than 60 days notice, the Issuer may, during either period consisting of 12 consecutive months ending on the day immediately preceding the first or second anniversary of the date of the Indenture, redeem up to 10% of the original aggregate principal amount of the Notes (including any Additional Notes) at a redemption price equal to 103% of the principal amount of the Notes redeemed, plus accrued and unpaid interest and additional amounts, if any. See ‘‘Description of the Notes—Optional redemption’’.
Prior to 1 June 2017, the Issuer will be entitled at its option, on one or more occasions, to redeem the Notes in an aggregate principal amount not to exceed 35% of the original aggregate principal amount of the Notes (including Additional Notes) with the net cash proceeds from certain equity offerings at a redemption price equal to 108.625% of the principal amount outstanding in respect of the Notes redeemed, plus accrued and unpaid interest and additional amounts, if any, provided that at least 65% of the original aggregate principal amount of the Notes (including any Additional Notes) remains outstanding immediately after each such redemption. See ‘‘Description of the Notes—Optional redemption’’.
Additional amounts; tax redemption ...... Any payments made by or on behalf of the Issuer or any Guarantor under or with respect to the Notes or a Note Guarantee, respectively, will be made without withholding or deduction for or on account of taxes unless required by law. If the Issuer or Guarantors are required by law to withhold or deduct amounts for or on account of tax imposed by the United Kingdom or any jurisdiction from or through which payment on any such Note or Note Guarantee is made, with respect to a payment to the holders of Notes, the Issuer or the relevant Guarantor will, subject to certain exceptions, pay the additional amounts necessary so that the net amount received by the holders of the Notes after the withholding or deduction is not less than the amount that they would have received in the absence of the withholding or deduction. See ‘‘Description of the Notes—Additional Amounts’’.
In the event of certain developments affecting taxation, the Issuer may redeem the Notes in whole, but not in part, at any time, at a redemption price of 100% of the principal amount, plus accrued and unpaid interest, if any, and additional amounts, if any, to the date of redemption. See ‘‘Description of the Notes—Optional redemption for changes in withholding taxes’’.
Original issue discount . . The Notes will be issued with ‘‘original issue discount’’ for U.S. federal income tax purposes. U.S. investors in the Notes will be subject to tax on original issue discount (as ordinary income) as it accrues, in advance of the cash attributable to that income (and in addition to stated interest). For a discussion of the U.S. Federal
17 income tax consequences of the acquisition, ownership and disposition of the Notes, see ‘‘Tax considerations—Material United States federal income tax consequences’’.
Change of Control ..... Upon the occurrence of certain events constituting a change of control, the Issuer may be required to offer to repurchase all outstanding Notes at a purchase price in cash equal to 101% of the principal amount redeemed on the date of purchase plus accrued and unpaid interest, if any, to the date of purchase. See ‘‘Description of the Notes—Change of Control’’.
Excess Cash Flow Offer . Subject to certain conditions and limitations, within 135 days of the end of the Company’s fiscal year, commencing with the Company’s first fiscal year-end after the Issue Date, the Issuer must make an offer to purchase Notes in an amount equal to a certain percentage of the Excess Cash Flow (as defined herein) for such fiscal year, at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest and additional amounts, if any, to the date of purchase.
Certain covenants ..... The Indenture relating to the Notes, among other things, will restrict the ability of the Company and its restricted subsidiaries (including the Issuer) to:
• incur or guarantee additional indebtedness;
• pay dividends or make other distributions, purchase or redeem the Group’s stock or prepay or redeem subordinated debt;
• make certain investments, acquisitions, loans or restricted payments;
• enter into agreements that restrict the Company’s and its restricted subsidiaries’ ability to pay dividends;
• transfer or sell assets;
• engage in transactions with affiliates;
• create liens on assets to secure indebtedness;
• impair security interests; and
• merge or consolidate with or into another company.
Each of these covenants is subject to significant exceptions and qualifications. See ‘‘Description of the Notes—Certain covenants’’.
Transfer restrictions .... None of the Issuer or the Guarantors has registered the Notes or the Note Guarantees under the U.S. Securities Act. You may only offer or sell the Notes in transactions that are exempt from, or not subject to, the registration requirements of the U.S. Securities Act, or pursuant to an effective registration statement. See ‘‘Notice to investors’’. None of the Issuer or the Guarantors has agreed to, or otherwise undertaken, to register the Notes under the U.S. Securities Act.
No prior market ...... The Notes will be new securities for which there is currently no established trading market. Although the Initial Purchasers have advised the Group that they intend to make a market in the Notes,
18 they are not obligated to do so and they may discontinue market- making at any time without notice. Accordingly, there is no assurance that an active trading market will develop for the Notes.
Listing ...... Application will be made to list the Notes on the Official List of the Irish Stock Exchange and to admit the Notes to trading on the Global Exchange Market of the Irish Stock Exchange. There is no assurance that the Notes will be listed on the Official List of the Irish Stock Exchange and admitted to trading on the Global Exchange Market of the Irish Stock Exchange.
Use of proceeds ...... Johnston Press intends to use the net proceeds from this Offering together with the net proceeds from the Placing and the Rights Issue to repay in full the amounts outstanding under the Existing Lending Facilities and the Private Placement Notes and to repay accrued cash interest with respect thereto, pay certain amounts owed to the Group’s Pension Plan, and to pay commissions, fees and other expenses in connection with the Transactions, with the remaining balance to be used for general corporate purposes. See ‘‘Use of proceeds’’.
Escrow of Proceeds; Special Mandatory Redemption ...... Concurrently with the closing of the Offering on the Issue Date, the Initial Purchasers will deposit an amount equal to the gross proceeds from the Offering into the Escrow Account.
The Notes are subject to a special mandatory redemption at a redemption price equal to 100% of the aggregate issue price of the Notes plus accrued and unpaid interest to the redemption date and additional amounts, if any, if the conditions to Escrow Release described under the caption ‘‘Description of the Notes—Escrow of proceeds; Special Mandatory Redemption’’ are not satisfied on substantially the terms described in this offering memorandum by the Escrow Longstop Date. The Notes may also be redeemed at the Issuer’s option, in whole but not in part, at any time prior to the Escrow Longstop Date if, in the Issuer’s or the Company’s judgment, certain transactions will not be consummated on substantially the terms described in this offering memorandum by the Escrow Longstop Date, at a redemption price equal to 100% of the aggregate issue price of the Notes plus accrued and unpaid interest and additional amounts, if any, to the redemption date. See ‘‘Description of the Notes—Escrow of proceeds; Special Mandatory Redemption’’.
In connection with the foregoing, the Escrow Account will be prefunded by Johnston Press with an amount (when considered together with the gross proceeds of the Offering) sufficient to pay the special mandatory redemption price for the Notes, together with accrued and unpaid interest from the Issue Date to the special mandatory redemption date.
Governing Law ...... The Indenture, the Notes and the Note Guarantees will be governed by the laws of the State of New York. The Intercreditor Agreement and the New Revolving Credit Facility Agreement are
19 governed by English law. The Security Documents are governed by English law, Scots law and Northern Irish law.
Security Agent ...... Deutsche Bank AG, London Branch.
Trustee ...... Deutsche Trustee Company Limited.
Principal Paying Agent . . Deutsche Bank AG, London Branch.
Registrar and Transfer Agent ...... Deutsche Bank Luxembourg S.A.
Escrow Agent ...... Deutsche Bank AG, London Branch.
Risk factors ...... Investing in the Notes involves a high degree of risk. See the ‘‘Risk factors’’ section for a description of certain of the risks you should carefully consider before investing in the Notes.
20 Summary historical consolidated financial data and other financial data No separate financial information in respect of the Issuer has been prepared or has been provided in this offering memorandum. Prior to the Offering, the Issuer has not engaged in any activities other than those related to its formation and the Transactions and has no material assets or liabilities.
The following table summarises the Group’s historical consolidated financial data as at the dates and for the periods indicated, which have been derived from the Company’s historical consolidated financial statements, which have been audited by Deloitte LLP. The consolidated financial statements of the Company have been prepared in accordance with IFRS.
The results of operations for prior periods are not necessarily indicative of the results to be expected for the full year or any future period. This summary historical consolidated financial data should be read in conjunction with the information contained under the captions ‘‘Use of proceeds’’, ‘‘Capitalisation’’ and the Group consolidated financial statements and accompanying notes included elsewhere in the offering memorandum and discussed in ‘‘Presentation of financial data and Non-IFRS measures’’ and ‘‘Management’s discussion and analysis of financial condition and results of operations’’.
Summary consolidated income statement data
52 weeks ended 31 December 29 December 28 December (£ in thousands) 2011 2012 2013 Total: Revenue(1) ...... 373,845 358,691 302,799 Cost of sales ...... (235,143) (207,868) (173,710) Gross profit ...... 138,702 150,823 129,089 Operating expenses(2) ...... (81,986) (85,602) (103,966) Impairment of intangibles(2) ...... (163,695) (24,780) (270,793) Operating profit/(loss) ...... (106,979) 40,441 (245,670) Investment income ...... 67 148 394 Net finance (expense)/ income on pension assets/ liabilities ...... 2,250 (2,471) (1,576) Change in fair value of hedges ...... (676) (7,297) (1,691) Retranslation of USD debt ...... (285) 4,275 1,749 Retranslation of Euro debt ...... 285 262 (235) Finance costs ...... (38,475) (42,129) (39,808) Share of results of associates ...... 10 6 2 Profit/(loss) before tax(3) ...... (143,803) (6,765) (286,835) Tax...... 54,866 12,376 74,869 Profit/(loss) for the period ...... (88,937) 5,611 (211,966) (1) Revenue for the 52 weeks ended 28 December 2013 includes £12.8 million of revenue received from the Group’s regional newspapers in the Republic of Ireland, including its Donegal titles, the trade and assets of which were sold on 1 April 2014. See ‘‘Recent developments—Irish Business Disposal’’ and ‘‘Business—Material Contracts’’.
(2) Operating expenses and impairment of intangibles for the 52 weeks ended 29 December 2012 have been restated to reflect the effect of a change in the Group’s accounting policies in 2013 to classify impairment of presses and assets held for sale as impairment of intangibles instead of as operating expenses to preserve comparability with operating expenses and impairment of intangibles for the other periods presented. Operating expenses and impairment of intangibles for the 52 weeks ended 29 December 2012 as stated in the Group’s audited consolidated financial statements were £110.4 million and £0, respectively.
(3) Profit/(loss) before tax for the 52 weeks ended 28 December 2013 includes £0.2 million of profit before tax ascribed to the Group’s regional newspapers in the Republic of Ireland, including its Donegal titles, the trade and assets of which were sold on 1 April 2014. ‘‘Business—Material Contracts’’.
21 Summary consolidated balance sheet data
As at As at As at 31 December 29 December 28 December (£ in thousands) 2011 2012 2013 Non-current assets ...... 914,995 873,255 596,539 Intangible assets ...... 742,851 742,294 541,360 Property, plant and equipment ...... 171,154 127,223 54,181 Available for sale investments ...... 970 970 970 Interests in associates ...... 14 20 22 Trade and other receivables ...... 666 Derivative financial instruments ...... — 2,742 — Current assets ...... 81,741 85,023 76,071 Assets classified as held for sale ...... 3,238 7,601 6,625 Inventories ...... 4,709 2,850 2,545 Trade and other receivables ...... 48,730 41,628 36,718 Cash and cash equivalents ...... 13,407 32,789 29,075 Derivative financial instruments ...... 11,657 155 1,108 Total assets(1) ...... 996,736 958,278 672,610 Current liabilities ...... 422,552 69,527 90,814 Trade and other payables ...... 42,958 50,934 74,013 Current tax liabilities ...... 4,244 2,947 752 Retirement benefit obligation ...... 2,200 5,700 5,700 Borrowings ...... 372,094 8,520 8,553 Derivative financial instruments ...... 1,056 99 — Short-term provisions ...... — 1,327 1,796 Non-current liabilities ...... 289,820 614,834 484,713 Borrowings ...... — 334,220 314,863 Derivative financial instruments ...... 306 — — Retirement benefit obligation ...... 101,790 115,619 72,634 Deferred tax liabilities ...... 181,609 160,584 92,776 Trade and other payables ...... 148 142 136 Long-term provisions ...... 5,967 4,269 4,304 Total liabilities ...... 712,372 684,361 575,527 Net assets ...... 284,364 273,917 97,083 Equity Share capital ...... 65,081 65,081 69,541 Share premium account ...... 502,818 502,818 502,829 Share-based payments reserve ...... 17,845 18,959 13,576 Revaluation reserve ...... 2,160 1,783 1,737 Own shares ...... (5,379) (5,589) (5,312) Translation reserve ...... 9,779 9,267 9,579 Retained earnings ...... (307,940) (318,402) (494,867) Total equity ...... 284,364 273,917 97,083 (1) Total assets for the 52 weeks ended 28 December 2013, 29 December 2012 and 31 December 2011 includes assets of the Group’s regional newspapers in the Republic of Ireland, including its Donegal titles, the trade and assets of which were sold on 1 April 2014. The assets were sold for an amount equal to net book value so the net impact on Group net assets was nil. See ‘‘Recent developments—Irish Business Disposal’’ and ‘‘Business—Material Contracts’’.
22 Summary consolidated cash flow data
52 weeks ended 31 December 29 December 28 December (£ in thousands) 2011 2012 2013 Cash generated from operations(1) ...... 71,207 80,692 54,537 Income tax paid ...... (3,282) (4,809) (2,800) Net cash inflow from operating activities(1) ...... 67,925 75,883 51,737 Investing activities Interest received ...... 51 120 16 Dividends received from available for sale investments ...... — 22 378 Dividends received from associated undertakings . . . 25 — — Proceeds on disposal of publishing titles ...... — — 1,965 Proceeds on disposal of property, plant and equipment ...... 2,589 8,936 3,697 Expenditure on digital intangible assets ...... — — (3,033) Purchases of property, plant and equipment ...... (1,802) (5,171) (4,320) Net cash received from investing activities ...... 863 3,907 (1,297) Financing activities Dividends paid ...... (152) (152) (152) Interest paid(1) ...... (25,629) (21,837) (24,803) Repayment of borrowings ...... (28,371) (2,697) (26,586) Repayment of loan notes ...... (6,363) (23,841) (6,473) Financing fees ...... (53) (11,826) (514) Net cash flow from derivatives ...... — 198 — Issue of shares ...... — — 4,471 Cash movement relating to own shares held ...... (375) (253) (97) Decrease in bank overdrafts ...... (5,550) — — Net cash used in financing activities(1) ...... (66,493) (60,408) (54,154) Net increase in cash and cash equivalents ...... 2,295 19,382 (3,714) Cash and cash equivalents at the beginning of the period ...... 11,112 13,407 32,789 Cash and cash equivalents at the end of the period . 13,407 32,789 29,075 (1) Cash generated from operations and net cash in from operating activities for the 52 weeks ended 29 December 2012 include exceptional cash receipts due to the termination of the News International printing contract (which were £10.0 million in 2013 and £30.0 million in 2012). Additionally, cash generated from operations, net cash in from operating activities, interest paid and net cash used in financing activities for the 52 weeks ended 29 December 2012 have been restated to reflect the correct classification of £4.6 million of interest paid, which was incorrectly classified as cash generated from operations in the Group’s audited consolidated financial statements for the 52 weeks ended 29 December 2012. Cash generated from operations, net cash in from operating activities, interest paid and net cash used in financing activities for the 52 weeks ended 29 December 2012 as stated in the Group’s audited consolidated financial statements for the 52 weeks ended 29 December 2012 were £76.1 million, £71.3 million, £17.2 million and £55.8 million.
23 Other financial data
As of and for the 52 weeks ended (£ in thousands except for percentages 31 December 29 December 28 December and ratios or unless otherwise noted) 2011 2012 2013 Total borrowings(1) ...... 372,094 342,740 323,416 Net debt(2) ...... 351,663 319,370 302,038 Adjusted Group(3) Revenue ...... 373,845 328,691 292,799 Operating (loss)/profit ...... 64,552 57,045 54,879 (Loss)/profit for the period ...... 22,033 21,424 17,311 EBITDA(4) ...... 82,538 69,760 62,631 EBITDA margin(5) ...... 22.1% 21.2% 21.4% Underlying Group(6) Revenue ...... 335,185 308,774 291,899 Operating (loss)/profit ...... 58,599 52,962 54,279 (Loss)/profit for the period ...... 16,080 17,341 16,711 EBITDA(4) ...... 76,585 65,677 62,031 EBITDA margin(7) ...... 22.8% 21.3% 21.3%
Pro forma financial data(8)
52 weeks ended (£ in millions except for ratios unless otherwise noted) 28 December 2013 Pro forma cash and cash equivalents(9) ...... 23.5 Pro forma total borrowings(10) ...... 225.0 Pro forma net debt(11) ...... 201.5 Pro forma interest expense(12) ...... 19.4 Ratio of pro forma net debt to Underlying Group EBITDA(13)(11)(6)(4) ...... 3.3x Ratio of Underlying Group EBITDA to pro forma interest expense(13)(12)(6)(4) . . 3.1x (1) Total borrowings for the periods presented represents the total of current borrowings and non-current borrowings (including payment in kind interest accrued), less capitalised debt issuance costs.
(2) Net debt for the periods represents total borrowings, less cash and cash equivalents, less the impact of currency hedging instruments and less capitalised debt issuance costs.
(3) The ‘‘Adjusted Group’’ financial measures are derived from the Group’s continuing operations and exclude (i) items that have been identified as exceptional due to the size or nature of the item, which the Group refers to as ‘‘Exceptional Items’’ and (ii) items that related to movements in the fair value of derivative financial instruments and gains or losses on foreign exchange transactions, which the Group refers to as ‘‘IAS 21/39 Items’’. The Group presents the Adjusted Group financial measures in order to provide a better understanding of its business and to allow comparability between periods; however, these financial measures are presented for informational purposes only and are not measurements of performance under IFRS. See ‘‘Presentation of financial data and Non-IFRS measures’’.
24 The table below reconciles revenue, operating (loss)/profit, (loss)/profit for the period and EBITDA for the 52 weeks ended 28 December 2013, 29 December 2012 and 31 December 2011, respectively to Adjusted Group revenue, Adjusted Group operating (loss)/profit, Adjusted Group (loss)/profit for the period and Adjusted Group EBITDA.
Total (£ in thousands except for percentages Exceptional IAS 21/39 Adjusted and ratios or unless otherwise noted) Statutory items(a) items(b) Group 52 Weeks ended 28 December 2013 Revenue ...... 302,799 (10,000) N/A 292,799 Operating (loss)/profit ...... (245,670) 300,549 N/A 54,879 (Loss)/profit for the period ...... (211,966) 229,155 (122) 17,311 EBITDA(4) ...... (237,918) 300,549 N/A 62,631 52 Weeks ended 29 December 2012 Revenue ...... 358,691 (30,000) N/A 328,691 Operating (loss)/profit ...... 40,441 16,604 N/A 57,045 (Loss)/profit for the period ...... 5,611 13,729 2,084 21,424 EBITDA(4) ...... 53,156 16,604 N/A 69,760 52 Weeks ended 31 December 2011 Revenue ...... 373,845 N/A N/A 373,845 Operating (loss)/profit ...... (106,979) 171,531 N/A 64,552 (Loss)/profit for the period ...... (88,937) 110,473 497 22,033 EBITDA(4) ...... (88,993) 171,531 N/A 82,538 (a) Exceptional items for the 52 weeks ended 28 December 2013 consist of: recognised revenue of £10.0 million as a result of a termination fee payable on the final aspect of a long term printing contract with News International following its closure of News of the World in 2012; an expense of £4.4 million by the Group for payment of pension plan fund levies; a pension expense of £1.3 million following the wind up of certain companies in prior years; restructuring costs of £24.4 million relating to various reorganisation processes designed to reduce the size and cost of overhead functions, early lease termination costs of £3.0 million, empty property costs of £1.4 million, dilapidation costs of £1.4 million and other associated legal and consulting fees of £2.8 million; £0.7 million relating to legal fees in relation to the exploration of refinancing and £0.5 million relating to legal fees for an aborted proposed disposal of certain assets; an impairment of £202.4 million recognised for publishing titles largely due to changes in the discount and growth rate assumptions applicable to the business and sector as a whole; and charges of £68.4 million incurred for write down in the value of presses and property assets brought about as a result of structural rationalisations, increased centralisation, divisional and title reorganisations and closures of certain internal operations, such as printing presses. Exceptional items for the 52 weeks ended 29 December 2012 consist of: recognised revenue of £30.0 million from the termination of the final aspect of a long term printing contract with News International following its closure of News of the World in 2012; a gain of £1.5 million as a result of the Group having offered a number of existing pensioners the opportunity to take part in a pension exchange where, for a higher current pension, they forego a proportion of future increases; restructuring costs of £21.6 million primarily relating to various reorganisation processes designed to reduce the size and cost of overhead functions £1.6 million of early lease termination, empty property and dilapidation costs, and associated legal fees of £1.2 million of other associated legal and consulting fees; a gain of £1.0 million from the disposal of property; and charges of £24.8 million incurred for write down in the value of presses and property assets brought about as a result of structural rationalisations, increased centralisation, divisional and title reorganisations and closures of specific operations including presses. Exceptional items for the 52 weeks ended 31 December 2011 consist of: charges of £163.7 million for impairment of intangible assets; a gain of £0.3 million on assets held for sale, a write down of £0.6 million in value of assets held for sale, £4.3 million in restructuring costs including redundancy costs, a write down of £5.2 million in value of presses in existing business; and a gain of £1.9 million as a result of the Group having offered a number of existing pensioners the opportunity to take part in a pension exchange where, for a higher pension, they forego a proportion of future increases.
(b) IAS 21/39 items included a net charge of £1.7 million for the 52 weeks ended 28 December 2013, £7.3 million for the 52 weeks ended 29 December 2012 and £0.7 million for the 52 weeks ended 31 December 2011, in each case related to movement in the fair value of derivative financial instruments, and a net credit of £1.5 million for the 52 weeks ended 28 December 2013, £4.5 million for the 52 weeks ended 29 December 2012 and £nil million for the 52 weeks ended 31 December 2011, in each case resulting from the retranslation of foreign denominated debt at the period end.
(4) The Group calculates EBITDA by adjusting operating (loss)/profit by adding back depreciation of property, plant and equipment and amortisation of intangible assets. EBITDA is presented for informational purposes only and is not a measure of performance under IFRS. See ‘‘Presentation of financial data and Non-IFRS measures’’. The following table provides a reconciliation of EBITDA to operating (loss)/profit for the periods indicated:
52 weeks ended 31 December 29 December 28 December (£ in thousands) 2011 2012 2013 Operating (loss)/profit ...... (106,979) 40,441 (245,670) Depreciation of property, plant and equipment ...... 17,986 12,715 7,543 Amortisation of intangible assets ...... — — 209 EBITDA ...... (88,993) 53,156 (237,918)
(5) Adjusted Group EBITDA margin, expressed as a percentage, represents Adjusted Group EBITDA divided by Adjusted Group revenue.
25 (6) The ‘‘Underlying Group’’ financial measures are derived from the ‘‘Adjusted Group’’ financial measures, adjusted further to remove revenue and costs due to the closure of newspapers, the conversion of newspapers from daily to weekly publications and the costs associated with loss of the News International contract. To calculate Underlying Group financial measures the Group makes a number of estimates and assumptions regarding revenue and costs. These estimates and assumptions are inherently uncertain, although considered reasonable by the Group, and subject to significant business, economic and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the Group’s control. The Group presents the ‘‘Underlying Group’’ financial measures as it believes this basis better reflects the historical performance of the Group, however, these financial measures are presented for informational purposes only and are not measurements of performance under IFRS. See ‘‘Presentation of financial data and Non-IFRS measures’’. The table below reconciles Adjusted Group revenue, Adjusted Group operating (loss)/profit, Adjusted Group (loss)/profit for the period and Adjusted Group EBITDA for the 52 weeks ended 28 December 2013, the 52 weeks ended 29 December 2012 and the 52 weeks ended 31 December 2011 to Underlying Group revenue, Underlying Group operating (loss)/profit, Underlying Group (loss)/profit for the period and Underlying Group EBITDA. For a reconciliation of Adjusted Group revenue, Adjusted Group operating(loss)/profit, Adjusted Group (loss)/profit for the period and Adjusted Group EBITDA for such periods to revenue, operating (loss)/profit, (loss)/profit for the period and EBITDA, see note (3) above.
(£ in thousands except for percentages Adjusted Other Underlying and ratios or unless otherwise noted) Group adjustments(a) Group 52 Weeks ended 28 December 2013 Revenue ...... 292,799 (900) 291,899 Operating (loss)/profit ...... 54,879 (600) 54,279 (Loss)/profit for the period ...... 17,311 (600) 16,711 EBITDA(4) ...... 62,631 (600) 62,031 52 Weeks ended 29 December 2012 Revenue ...... 328,691 (19,917) 308,774 Operating (loss)/profit ...... 57,045 (4,083) 52,962 (Loss)/profit for the period ...... 21,424 (4,083) 17,341 EBITDA(4) ...... 69,760 (4,083) 65,677 52 Weeks ended 31 December 2011 Revenue ...... 373,845 (38,660) 335,185 Operating (loss)/profit ...... 64,552 (5,953) 58,599 (Loss)/profit for the period ...... 22,033 (5,953) 16,080 EBITDA(4) ...... 82,538 (5,953) 76,585 (a) Other adjustments remove from revenue, in each period, the revenue lost due to the closure of newspapers (£nil, £5.8 million and £12.9 million for the 52 weeks ended 28 December 2013, 29 December 2012 and 31 December 2011, respectively), the conversion of newspapers from daily to weekly publications (£nil, £4.1 million and £9.0 million for the 52 weeks ended 28 December 2013, 29 December 2012 and 31 December 2011, respectively) and the News International contract (£0.9 million and £10.0 million and £16.8 million for the 52 weeks ended 28 December 2013, 29 December 2012 and 31 December 2011 respectively). Other Adjustments remove from operating (loss)/profit, (loss)/profit for the period and EBITDA, an amount of cost equal to 100% of the lost revenue from newspapers that were closed plus 10% of revenue from 2012 to cater for an allocation of shared costs to newspapers that were closed (£nil, £6.8 million and £13.9 million for the 52 weeks ended 28 December 2013, 29 December 2012 and 31 December 2011, respectively), an amount of cost equal to 100% of the lost revenue from newspapers that were converted from daily to weekly publication plus 10% of revenue for 2012 to cater for the allocation of shared costs to newspapers that were converted from daily to weekly publication (£nil, £4.1 million and £9.0 million for the 52 weeks ended 28 December 2013, 29 December 2012 and 31 December 2011, respectively) and the actual cost of sales associated with the discontinued printing operations for News International together with mitigating cost savings and revenue from new print contracts which commenced in 2012 (£0.3 million, £4.9 million and £9.8 million for the 52 weeks ended 28 December 2013, 29 December 2012 and 31 December 2011, respectively). In the case of revenue from newspaper closures and conversions to weekly publications, the above adjustments represent the year-on-year difference on specific titles. Cost and expense adjustments to operating (loss)/profit relating to newspaper closures and conversions are based on the assumption that cost and expense is equal to lost revenue.
(7) Underlying Group EBITDA margin, expressed as a percentage, represents Underlying Group EBITDA divided by Underlying Group revenue.
(8) The unaudited pro forma financial information presented herein has been derived from or developed by applying pro forma adjustments to the Group’s historical debt as at 28 December 2013, to give effect to the Transactions; including the use of proceeds from the Offering and the Placing and Rights Issue, as described in ‘‘Use of proceeds’’. The unaudited pro forma adjustments are based upon available information and certain assumptions that the Group believes are reasonable under the circumstances. The unaudited pro forma financial information is presented for informational purposes only. The unaudited pro forma financial information does not purport to represent what the Group’s results of operations or financial condition would have been had the Transactions actually occurred on the date indicated, and they do not purport to project the results of operations or financial condition for any future period or as at any future date. The unaudited pro forma financial information should be read in conjunction with the information contained in ‘‘Selected historical consolidated financial data’’, ‘‘Management’s discussion and analysis of financial condition and results of operations’’ and the Group consolidated financial statements and related notes thereto appearing elsewhere in this offering memorandum. The unaudited pro forma financial information is not intended to represent pro forma financial information prepared in accordance with the requirements of Regulation S-X promulgated under the U.S. Securities Act or other SEC requirements, IFRS, U.K. GAAP or U.S. GAAP.
(9) Pro forma cash and cash equivalents represents cash and cash equivalents of the Group after giving effect to the Transactions as if the Transactions had occurred on 28 December 2013 and after adjusting for cash flows between 28 December 2013 and 1 April 2014. The cash balance of £23.5 million reflects: (i) £24.2 million of cash on balance sheet
26 as of 29 March 2014; (ii) £6.1 million of cash from the disposal of Formpress on 1 April 2014; and (iii) £2.6 million of cash to balance sheet resulting from the Transactions (See ‘‘Use of proceeds’’, ‘‘Capitalisation’’ and ‘‘Summary—Recent developments—Irish Business Disposal’’); less (x) £5.3 million interest on total borrowings paid on 1 April 2014; (y) £2.7 million paid in employment taxes; and (z) £1.4 million estimated cash from property sales held for prepayment of existing obligations.
(10) Pro forma total borrowings represents total borrowings of the Group (gross of issuance costs) after giving effect to the Transactions as if the Transactions had occurred on 28 December 2013. See ‘‘Capitalisation’’.
(11) Pro forma net debt represents pro forma total borrowings less pro forma cash and cash equivalents. See ‘‘Capitalisation’’.
(12) Pro forma interest expense represents the normalised total cash interest expense of the Group after giving effect to the Transactions as if the Transactions had occurred on 30 December 2012.
(13) For purposes of presenting the ratios of pro forma net debt to Underlying Group EBITDA and Underlying Group EBITDA to pro forma interest expense, Underlying Group EBITDA has been adjusted to remove £1.1 million of Underlying Group EBITDA that we estimate was generated by the assets associated with Formpress for the 52 weeks ended 28 December 2013. Formpress was disposed of on 1 April 2014. See ‘‘Summary—Recent developments—Irish Business Disposal’’.
Segment Information
The following table sets forth revenue by reportable segment (excluding inter-segment sales and exceptional items), representing the Group’s external sales:
52 weeks ended 31 December 29 December 28 December (£ in thousands) 2011 2012 2013 Publishing ...... 344,863 308,438 280,003 Contract printing(1) ...... 28,982 20,253 12,796 (1) Contract printing revenue includes all revenue related to the Group’s contract printing operations, including any amounts received from third party publishers for newsprint in the case of third party publishers who do not provide their own newsprint.
27 Risk factors An investment in the Notes involves a high degree of risk. You should carefully consider the following risks, together with the other information provided to you in this offering memorandum, in deciding whether to invest in the Notes. The occurrence of any of the events discussed below could be detrimental to the Group’s financial performance. If these events occur, the trading price of the Notes could decline, the Group may not be able to pay all or part of the interest or principal on the Notes, and you may lose all or part of your investment. Additional risks not currently known to the Group or which are presently deemed immaterial may also harm the Group and affect your investment.
This offering memorandum contains ‘‘forward-looking’’ statements that involve risks and uncertainties. The Group’s actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such differences include those discussed below. See ‘‘Forward-looking statements’’.
Risks related to the Group’s business
Further declines, over and above those already anticipated, in advertising revenue from print media, the Group’s largest source of revenue, would adversely affect the Group. The Group generates revenue primarily from the sale of advertising in its print media business. For the 2013 financial year, the 2012 financial year and the 2011 financial year, advertising revenue from print media, which includes display advertising and employment, property, motor and other classified advertising revenues, constituted 51.9 per cent, 50.5 per cent and 56.9 per cent, respectively, of the Group’s consolidated revenue.
The Group’s advertising revenue from print media declined by 26.2 per cent from £212.8 million in the 2011 financial year to £157.1 million in the 2013 financial year. This percentage change was impacted by the results of businesses disposed of during the relevant period. Removing the effects of publications that were closed or changed from daily to weekly from the calculation, the Underlying Group advertising revenue from print media declined by 19.8 per cent from £195.8 million in the 2011 financial year to £157.1 million in the 2013 financial year. This decline occurred in all categories of advertising revenue from print media.
The Group’s print advertising revenues could continue to decline due to further migration of advertiser spending to online media, a slow economic recovery in the regions in which the Group operates within the UK and a lack of consumer or business confidence. Migration of classified advertising to online media means that despite signs of an economic recovery commencing in the UK, it is unlikely that these revenues will be fully recovered or that the trend of declining print advertising revenues will be reversed. Consumer and/or business confidence has been low due to difficulties in the UK economy and on-going Eurozone issues, with national and local businesses reducing display advertising as consumers have been spending less. Reductions, including over and above those already anticipated, in the Group’s print advertising revenue could result from, amongst other things:
• a continued decline in economic conditions;
• a permanent decline in the amount spent on advertising in general;
• a decline in the popularity of the Group’s editorial content or perceptions of the Group’s brands;
• the use of alternative means of delivery, such as the internet, radio and television broadcasting, direct mail and ‘‘below-the-line advertising’’ (which is advertising in untraditional media);
28 • the inability of the Group’s digital offering to successfully capture advertising spend as it continues to migrate from print to online advertising;
• the activities of the Group’s competitors, including increased competition from other local, regional and national newspapers or new market entrants;
• for motor advertising, further motor dealership consolidation leading to an increased concentration of ownership and consequent downward pressure on advertising volumes and price;
• for employment advertising, reductions in the level of recruitment advertising, further consolidation through online aggregators or a shift from print to other media;
• for property advertising, a slowdown in property sales, leading to estate agent closures and lower advertising levels, a lack of supply of houses for sale, limiting demand for advertising, or further migration of advertising to online aggregators or other media;
• legislation that may be passed in both England and Scotland which may remove the obligation to publish certain types of public sector notices in local and regional newspapers;
• a change in the demographic make-up of the population in areas where the Group’s newspapers are sold;
• a decrease in the price of local and national advertising;
• price competition from other advertisers;
• any disruption or adverse event affecting the Group’s relationship with the independent third party that undertakes the Group’s national sales operation;
• any prolonged disruptions to the Group’s in-house media sales centre; and
• severe or adverse weather conditions over an extended period.
A significant further decline, over and above what is currently anticipated by the Group, in the Group’s advertising revenue from print media as a result of any one or a combination of the foregoing factors would have a material adverse effect on the Group’s business, results of operations and financial condition.
The Group’s business may be materially and adversely affected by general business conditions and a worsening of the general economy. The Group conducts its operations principally in the United Kingdom and the profitability of the Group’s business may therefore be adversely affected by a worsening of general economic conditions in the United Kingdom, whether in isolation or as a consequence of economic conditions, or disruptions to European and/or global financial markets. Conditions which result in inflation, high levels of unemployment, a decrease in the volume of property transactions and low levels of consumer confidence, and other factors that may be particularly prevalent during periods of economic downturn, affect the disposable income of customers as well as their spending habits, which can, in turn, negatively affect the sales of the Group’s newspapers as well as its ability to generate advertising revenue in the markets in which the Group operates. To the extent that the current economic environment does not continue to improve, improves at varying rates or improves more slowly than is currently anticipated, the Group’s business, results of operations and financial condition may be materially and adversely affected.
The Group’s independent audit report for the 2013 financial year includes an emphasis of matter in respect of its ability to continue as a going concern. The audit report issued by the Group’s statutory auditors on its audited consolidated financial statements for the 2013 financial year contains an emphasis of matter paragraph regarding the Group’s ability to continue as a going concern. This explanatory paragraph indicates the
29 existence of a material uncertainty which may give rise to substantial doubt as to the Group’s ability to continue as a going concern. Whilst the statutory auditors have concluded that the use of the going concern basis of accounting in the preparation of the Group’s financial statements is appropriate, these conditions indicate the existence of a material uncertainty which may give rise to significant doubt regarding the Group’s ability to continue as a going concern.
Note 3 to the Group’s audited consolidated financial statements for the 2013 financial year, which is incorporated by reference in this offering memorandum within the Notes to the consolidated financial statements (including significant accounting policies), also includes certain disclosures regarding the going concern basis of accounting in preparing the financial statements.
The Group depends to a significant extent on the economies and the demographics of the local communities that it serves. The Group’s advertising revenues and newspaper sales revenues are dependent on a variety of factors specific to the local and regional communities that the Company’s newspapers serve. These factors include, among others, the size and demographic characteristics of the local population, level and nature of competition, local economic conditions in general, and the related retail segments in particular, as well as local weather conditions. If the local economy, population or prevailing retail environment of a community the Group serves experiences a downturn, the Group’s publications, revenues and profitability in that market could be adversely affected. For example, the Group’s operating results for the first half of the 2013 financial year were negatively affected as a result of the unusual adverse weather conditions that affected various parts of the United Kingdom, including Yorkshire, the Midlands and the North East, where the Company’s more popular daily and weekly newspaper titles are sold. Many of the foregoing factors are outside the Group’s control and the Group’s failure or inability to respond to changes in the economies and demographics of the local communities in the markets in which it operates could have a material adverse effect on the Group’s business, results of operations and financial condition.
The Group operates in a competitive industry and the advent of new technologies and industry practices, such as the provision of newspaper content on free internet sites, may result in decreased advertising and newspaper sales revenue. Revenue in the regional newspaper industry is dependent primarily upon advertising and to a lesser extent newspaper sales revenue. Competition for advertising and readers is intense and comes from local, regional and national newspapers, radio, broadcast and cable television, direct mail, internet and other communications and advertising media that operate in the Group’s markets. In addition, the UK government has recently issued local television licences, which will result in the launch of new local television channels across major towns and cities throughout the UK. With the continued development of alternative forms of media, particularly those based on the internet where barriers to entry are low and costs are inexpensive relative to newspaper print media, the Group’s businesses face increased competition. Competition from alternative media platforms could make it increasingly difficult for the Group to attract advertisers and readers, in particular if participants in alternative media platforms are able to improve their ability to target specific audiences and thereby become a more attractive medium than the Group’s business offering. Such circumstances could result in the Group’s newspaper and digital offering not being as competitive in relation to these alternative media platforms, which could, in turn, inhibit the Group’s ability to grow or maintain its print advertising, newspaper sales revenues and digital revenues, grow or maintain its print advertising.
In addition, the use of alternative means of delivery, such as the internet, direct mail or ‘‘below-the-line advertising’’, for news, advertising and other content has increased significantly in recent years (and is expected to continue in the future) and may accelerate any potential
30 decline in advertising revenue for printed newspaper products. Should significant portions of the Group’s target audience choose to receive content using these alternative delivery sources rather than through the Group’s newspapers, and if the Group is not able successfully to migrate its audiences in sufficient numbers to its digital distribution channels (and/or is not able to generate equivalent revenue or profit through such channels), then the Group could experience a long-term decline in circulation and would need to respond to the changing circumstances. Such response could include a reduction in advertising rates and/or the price charged for daily and weekly titles, as well as an increase in costs of producing or promoting its editorial content, any or all of which may have a material adverse effect on the Group’s business, results of operations and financial condition.
A significant decline in the Group’s newspaper circulation and hence revenue is likely to have a material adverse effect on the Group’s business, results of operations and financial condition. The Group’s ability to attract advertisers and thereby generate revenue and profits from advertising, is primarily dependent upon its success in attracting readership of the newspapers and websites that the Group publishes.
The Group’s regional and local newspaper circulation volumes have been declining for a number of years. For example, circulation volumes for paid regional newspapers in the UK declined by 10.7 per cent from the 2012 financial year to the 2013 financial year. Such decline has been driven by both structural and cyclical factors, including the increasing trend toward online media consumption of news and other related content through the internet, mobile phones and tablets, reduced consumer expenditure as a result of the continuing economic downturn on consumer expenditure, and the conversion of certain newspaper titles from daily to weekly. If the Group is unable to stop this decline or if the rate of decline were to accelerate, it would result in lower readership and circulation levels and, consequently, may have an adverse effect on the Group’s business, results of operations and financial condition.
In order to address the impact of declining circulation volumes on the Group’s business, the Group has implemented cover price increases. However, there can be no assurance that the Group will continue to implement such measures to offset any declines in circulation in the future. Further declines in circulation or a failure to capture regional audiences with its digital offering could impair the Group’s ability to maintain or increase its advertising prices, cause purchasers of advertising in the Group’s publications to reduce or discontinue those purchases or discourage potential new advertising customers, all of which could have a material adverse effect on the Group’s business, results of operations and financial condition. Newspaper sales revenue and the Group’s ability to continue to grow its web and mobile audience could be adversely affected by, amongst other things:
• competition from other publications (in particular, free publications in metropolitan areas) and other forms of media available in the Group’s various markets, including the internet, local, regional and national newspapers, radio, broadcast and cable television, local television, direct mail and mobile phones/tablets;
• declining numbers of regular newspaper buyers and consumer spending on discretionary items like newspapers; and
• declining numbers of local retail outlets such as local news agents.
A significant reduction in digital advertising revenue would adversely affect the Group’s business, results of operations and financial condition. Digital advertising revenue represented 8.4 per cent (£24.6 million) of the Group’s total Adjusted Group revenue in the 2013 financial year, compared to 6.3 per cent in the 2012 financial year and 4.9 per cent (£18.5 million) in the 2011 financial year, respectively. The Group’s 185 news websites and other digital services compete with national news providers, such as the BBC, existing local and national newspaper websites and digital services, and also
31 with a number of national and local online only competitors and new market entrants, as well as social media.
A change in the allocation of advertising expenditure away from local news and media websites or a reduction in consumption of local news and media websites, would adversely affect the Group’s digital advertising revenues. A reduction in the Group’s digital advertising revenues could result from:
• migration of advertising revenue to other websites and social media;
• local marketing by a company such as Google or another major global online competitor;
• a decline in the popularity or demand for local information and news content;
• a change in the algorithm used by search engines, such as Google, causing the Group’s content to be less prominent in search results, which would require the Group to increase its own marketing and advertising spend to maintain brand awareness and website traffic;
• a decrease in the price and hence margin of online advertising;
• a decline in the allocation of advertising budgets to, or reduction in use of, local websites and services by national advertisers;
• the introduction of a new successful aggregator in the employment market or any other advertising category, taking significant market share;
• the launch of a competing new digital service that attracts consumers, advertisers or user generated content (‘‘UGC’’); and
• an inability to monetise mobile traffic at margins comparable to web-based traffic.
A significant reduction in revenue resulting from any or all of the above, is likely to have a material adverse effect on the Group’s business, results of operations and financial condition.
The Group has made significant investments in and continues to make efforts to build its digital businesses. Failure to develop its digital businesses successfully would adversely affect the Group’s business, results of operations and financial condition. The Group has made, and intends to continue to make, significant investments in, and to build its digital business in line with market demands. The success and growth of the Group’s overall business depends to a significant degree upon the development and further expansion of its digital business and its ability to continue to adapt to technological changes, evolving industry standards and customers’ changing needs and preferences in a timely manner. For the 2013 financial year, capital expenditure relating to the Group’s digital business amounted to £3.0 million. Digital technologies and platforms develop and evolve quickly and the level of investment by the Group required to implement any new technologies may be significant or unanticipated. The Group may not have sufficient funds to make further necessary investments or may not be able to implement such technologies successfully, which may have a material adverse effect on the Group’s business, results of operations and financial condition. In order for the Group’s digital businesses to grow and succeed over the long-term, the Group believes it must, among other things:
• significantly increase its online traffic;
• monetise a significant proportion of its web and mobile traffic;
• reduce the amount of traffic sold at low prices;
• expand the content and functionality it offers on its websites;
• expand the level of UGC available on its websites;
32 • increase the ‘timeliness’ of information on its websites and in its social media offerings;
• increase the number and nature of videos and photos on its digital services;
• expand its mobile phone and tablet products and services;
• develop its websites to serve their specific local audiences better;
• launch new products and services to advertisers;
• attract and retain talent for critical positions; and
• maintain and form relationships with strategic partners to attract more consumers and improve website functionality.
There can be no assurances that the Group will be successful in achieving any or all of the foregoing objectives or that its digital business will be profitable or successful in the future. If the Group is unable to grow its digital audience and advertiser base, it could lose significant opportunities for new advertising revenue from digital sources while also losing advertising revenue from traditional sources due to the general reallocation from print to digital advertising taking place. If the Group is not successful in developing and expanding its digital business, or if increased competition results in increased cost pressures, such failure or revenue reductions could have a material adverse effect on its business, results of operations and financial condition.
Expansion into new product markets will subject the Group to various challenges. The Group’s success is dependent on its timely anticipation of changes in consumer preferences as well as the subsequent development and effective marketing, promotion and sale of new products. For example, the Group’s new digital product offerings such as Digital Kitbag, DealMonster and The SmartList have only recently begun to generate revenue for the Group. Expansion into such new product areas will subject the Group to various risks and challenges, including its lack of experience operating such businesses, potential difficulties in staffing and managing new products, potential inability to meet the changing preferences and demands of the Group’s audiences, small to medium sized enterprises (‘‘SMEs’’) and advertisers.
The Group’s sales staff, journalists and other employees may have limited relevant experience in this field and may require extensive training in the creation and monetisation of content and digital products and services and the sale of print and digital advertising packages. These factors may result in further costs and potential delays in the Group’s ability to generate revenues from such offerings. Moreover, the launch and success of new products are inherently uncertain, especially as to their appeal to consumers, and there can be no assurance as to the Group’s continuing ability to develop and launch successful new products. In addition, any inability by the Group to identify and meet the changing demands and preferences of its audiences, SMEs and advertisers may result in a decline in newspaper circulation, reduced advertising or digital revenues. Any such declines may have a material adverse effect on the Group’s business, results of operations and financial condition.
The Group cannot guarantee the success or growth of its online business and in particular its mobile phone applications. Digital products and services are characterised by rapid technological developments, frequent new product and service introductions and evolving industry standards. The emerging character of these products and services and their evolution requires the Group to use leading technologies effectively, employ personnel with specialised experience, continue to develop the Group’s technological expertise, enhance the Group’s current products and services and continue to improve the performance, features and reliability of the Group’s technology and advanced information systems. In addition, the widespread adoption of new internet technologies or standards could require substantial expenditures to replace, upgrade, modify or adapt the Group’s technology and systems. If the Group fails to keep pace with technological
33 developments and industry standards or to introduce new products and services that satisfy customer demands, it could have a material adverse effect on the Group’s business, results of operations and financial condition.
There can be no assurance that the Group’s current systems will continue to provide adequate support for the Group’s online offerings, or that they will not be rendered obsolete by new technologies or more advanced systems introduced in the industry or adopted by its competitors such as platforms competing with Android and iOs systems. In addition, new internet or other technology-based products, services or enhancements that the Group offers may contain design flaws or other defects, may require modifications or may cause the Group’s audience to lose confidence in its products and services or may otherwise not be acceptable to the Group’s audience or advertisers. The occurrence of one or more of these events could have a material adverse effect on the Group’s business, financial condition and results of operations. Moreover, the Group depends on third party technology providers for the development and maintenance of its systems, and any failure in performances of these providers or the Group’s ability to maintain relationships with such providers would negatively impact the Group’s business, results of operations and financial condition.
In addition, the market for mobile websites and downloadable applications permitting access to news content and other activities from a mobile device is relatively new to the Group. The Group has relaunched 197 of its news websites since 2012 (including in respect of titles it has now disposed of) and has since launched mobile phone applications (‘‘apps’’) for a number of its newspaper titles and other online offerings. No assurances can be given that there will be commercial acceptance of the Group’s recently launched mobile phone apps, that other competing mobile apps will not be developed that adversely affect the commercial acceptance of the Group’s mobile app, or that the Group’s ability to capitalise on any available growth opportunities will not be adversely affected by other risk factors previously discussed, any or all of which could have a material adverse effect on the Group’s business, results of operations or financial condition.
The Group’s audience (traffic) is increasingly sourced from social media, including Facebook and Twitter. An inability of the Group to maintain or grow its audience sourced from social media, or a change in habits of social media users, or changes in advertiser attitudes to traffic sourced from social media, could impact the Group’s ability to maintain or grow its digital revenue, and could have a material adverse effect on the Group’s business, results of operations and financial condition.
Increases in newsprint costs or a reduction in the availability of newsprint could adversely affect the Group’s business, results of operations and financial condition. The basic raw material for the Group’s publications is newsprint. The Group generally maintains an inventory of newsprint to ensure adequate supply. However, an inability to obtain an adequate supply of newsprint in future, due to shortages, labour unrest at newsprint production plants, transportation difficulties or other supply disruptions, could have a material adverse effect on the Group’s ability to produce and deliver its print publications, which could, in turn, negatively impact the Group’s results of operations. Additionally, the Group has partnered with Associated Newspapers Limited to purchase newsprint in order to obtain more favourable prices. If the Group’s partnership with Associated Newspapers Limited ends, the price of newsprint for the Group may increase, which if substantial, may increase operating costs and may have an adverse effect on the Group’s business, results of operations and financial condition.
Newsprint is a commodity and, as such, its price varies considerably from time to time as a result of, among other things, supply shortfalls and foreign currency exchange fluctuations. For example, the price for the 42.5 gsm grade of newsprint primarily used by the Group’s titles decreased by 14 per cent from the 2011 financial year to the 2013 financial year. For the 2013
34 financial year, newsprint costs were £22.8 million, which represented 9.6 per cent of the Group’s total costs. The Group has no long-term supply contracts for, nor has it attempted to hedge fluctuations in purchases of, newsprint nor has it entered into contracts with embedded derivatives for the purchase of newsprint in the past. In addition, the Group expects the newsprint industry to reduce production capacity in future, which could result in an increase in the price the Group pays for its newsprint. An inability to obtain newsprint at a favourable price, or substantial adverse swings in the price of newsprint in the future, could have a material adverse effect on the Group’s business, results of operations or financial condition.
Consolidation in the markets or sectors in which the Group’s principal advertisers operate could place it at a competitive disadvantage. The Group generates income primarily from the sale of advertising. Historically, certain of the markets in which the Group’s principal advertisers operate experienced significant consolidation. In particular, there has been a recent trend towards increased consolidation among automotive dealers in the UK. This has created larger players who command a greater advertising spend which, in part, has been diverted to other media platforms, such as the internet. A continuation of this trend or greater consolidation in other advertising sectors could have an adverse effect on the Group’s business, results of operations and financial condition.
Industry consolidation in the markets in which the Group operates could adversely affect the Group’s business, results of operations and financial condition. As at the date of this offering memorandum, the Group is one of the largest local newspaper led groups in the UK. It is possible that market consolidation, subject to competition authority approval, could take place. The Group could be the subject of, or participate in a takeover, as part of industry consolidation.
In the event of consolidation or takeover, the financial performance of the Group could be adversely affected by:
• distraction of senior management away from operations and trading;
• loss of key talent through uncertainty; and
• significant expenditure in exploring or defending a successful bid.
In the event that the Group is part of any takeover or consolidation discussions in the future, there may be an adverse effect on the Group’s operation and trading, regardless of whether or not a transaction involving the Group takes place. Any such takeover or consolidation could therefore have a material adverse effect on the Group’s business, results of operations and financial condition.
If the Group is unable to continue to execute cost-control measures successfully, its total operating costs may be greater than expected, which may adversely affect its profitability. As a result of adverse general economic and business conditions and the Group’s operating results, the Group has taken steps to lower operating costs. The Group has implemented general cost-control measures such as workforce reductions, wage-freezes, the outsourcing of advertisement creation and the reduction of sub-editorial functions and has consolidated its sales call centres to two locations and its print centres to three locations.
The Group has reduced operating costs by £71.4 million over the last two financial years. The Group expects to continue to reduce labour and other costs in the future year and the Group expects to incur further restructuring and redundancy costs in future periods, as it continues to reduce its operating cost base. For example, in the 2013 financial year, the Group incurred £24.4 million in respect of restructuring costs. While the Group expects to reduce its cost base further, it may prove harder or take longer than planned to achieve further savings. In addition, estimates of cost savings are inherently uncertain, and the Group may not be able to
35 achieve cost savings or expense reductions within the period the Group has projected, or at all. The Group’s ability to successfully realize savings and the timing of any realisation may be affected by factors such as the need to ensure continuity in the Group’s operations, labour and other contracts, regulations and/or statutes governing employee/employer relationships, and other factors. In addition, the Group’s implementation of these cost-control measures has and is expected to continue to require upfront costs. If restructuring and redundancy costs are considered too high, relative to the prospective benefit, then both the timing and scale of operating cost savings may be adversely affected, which could have a material adverse effect on the Group’s business, results of operations and financial condition.
If the Group does not achieve expected savings from these initiatives, or if the Group’s operating costs increase as a result of these initiatives, the Group’s total operating costs may be greater than anticipated. These cost-control measures may also affect the Group’s business and its ability to generate future revenue. Because portions of the Group’s expenses are fixed costs that neither increase nor decrease proportionately with revenues, the Group is limited in its ability to reduce costs in the short-term to offset any declines in revenues. If these cost-control efforts do not reduce costs sufficiently or otherwise adversely affect the Group’s business, income from continuing operations may decline, which could have a material adverse effect on the Group’s business, results of operations and financial condition.
The Group has recently disposed of certain non-core businesses and premises, which may affect the Group’s business, results of operations or financial condition. During the three years to December 2013, the Group has closed 42 newspaper titles. It has also converted five daily newspapers from daily to weekly circulations.
The closure of these titles, combined with circulation declines resulting from conversion, could affect the Group’s audience reach, and impact its ability to attract local and national advertisers.
The Group also disposed of certain non-core newspaper titles in 2013 (namely the Petersfield Post, the Selby Times and the Goole Courier titles for total consideration of £1.9 million), and on 1 April 2014 entered into a sale agreement with Iconic Newspaper Limited for the sale of the trade and assets of the Group’s regional newspapers in the Republic of Ireland, including its Donegal titles, for £7.2 million. In the 2013 financial year, the Republic of Ireland business generated an operating profit before exceptional items of £1.1 million. This sale was completed on 1 April 2014 and as a condition to the sale, the Company agreed to provide a guarantee in respect of the performance of certain obligations of the entities within the Group making the disposal of the trade and assets up to a maximum aggregate limit of £3 million. That guarantee will be effective for up to 36 months following completion of the sale.
As a result of these disposals, the Group’s profitability could be adversely impacted by:
• the Group’s inability to reduce shared costs, previously supported by disposed titles;
• the Group’s earnings in Euro no longer providing a natural hedge against Euro debt costs; and
• distraction of management in providing transaction services; and
• indemnities, guarantees and warranty claims which, if they were to arise, could result in further costs.
The Group is subject to legal proceedings, including libel claims that, if determined adversely, could negatively affect the Group’s results of operation and financial condition. The Group is subject to legal proceedings, including libel claims that arise in the course of the Group’s business. The damages that may be claimed as well as costs in these legal proceedings could be substantial, including claims for punitive or extraordinary damages. If the outcome of
36 such legal proceedings are not favourable to the Group, it could adversely affect the Group’s future results of operations. In addition, the Group is liable for the content of its publications or advertisements. Any such liability could increase the Group’s expenses and harm its reputation and relationships with customers. The Group may also be liable to third parties if the content of its publications, websites, other digital and social media services or advertisements violates intellectual property rights of third parties. Such liability, if significant, could adversely affect the Group’s future results of operations. The Group has initiated professional negligence claims against advisors to the Portsmouth & Sunderland Newspapers Pension and Life Assurances Plan (1971) (the ‘‘P&SN Plan’’), a pension plan that was transferred into the Group’s pension plan as part of the acquisition of Portsmouth & Sunderland Newspapers plc by the Group in 2000. As a result of the delayed valuation of the P&SN Plan, the Group’s pension plan has potential unanticipated additional liabilities in an amount of approximately £8 million. The Group is currently seeking to stay the professional negligence claims whilst bringing separate declaratory proceedings to determine if such unanticipated liabilities have been accrued. To the extent that the court determines that such liabilities have been accrued and the Group’s professional negligence claims are unsuccessful or the additional liabilities, or a significant proportion of them, cannot be recovered from the defendants, then the resulting shortfall in the Group’s pension plan attributable to the P&SN Plan will need to be met by the Company, which could adversely affect the Group’s business, results of operations and financial condition. Uninsured losses or losses in excess of the Group’s insurance coverage could adversely affect the Group’s business, results of operations and financial condition. The Group maintains comprehensive liability coverage, but certain types of losses may be either uninsurable, self-insured or not economically insurable, such as losses due to earthquakes, other natural disasters, riots, acts of war or terrorism. In addition, even if a loss is insured, the Group may be required to pay a significant deductible on any claim for recovery of such loss prior to the insurer being obliged to reimburse the Group for the loss, or the amount of the loss may exceed the Group’s coverage for the loss. There are historical gaps in liability insurance coverage with respect to certain of the Group’s entities that were acquired over time. To the extent there are successful claims relating to periods for which there is no liability insurance coverage, the Group may be fully responsible for such claims. The Group’s business, results of operations and financial condition may be adversely affected in such circumstances. Service disruptions at the Group’s printing presses could adversely affect the Group’s business, results of operations and financial condition. As at the date of this offering memorandum, the Group operates presses at two sites in England, and one in Northern Ireland, printing most of its own titles ‘in-house’. The English presses are 7 and 8 years old and the Northern Irish Presses are 11 and 18 years old. In the event any of these presses are out of service for a significant period including due to wear and tear, latent defect or operator error, amongst others, the Group may not be able to meet its publishing schedule and may lose contract printing revenue as a result. Additional costs may be incurred, and a significant loss of advertising newspaper sales or content printing revenue could occur. Consequently, the Group’s business, results of operations and financial condition may be adversely affected in such circumstances. The Group depends on key personnel and may not be able to operate and grow its business effectively if it loses the services of key personnel or is unable to attract qualified personnel in the future. The Group’s success depends on its key personnel, particularly its senior management, and its ability to retain them and hire other qualified employees. Competition for senior management personnel is intense and the Group may not be able to retain its personnel. The loss of a significant number of key personnel may have a negative effect on the quality of the Group’s products and would, amongst other things require the remaining key personnel to divert immediate and substantial attention to seeking a replacement.
37 Production and distribution of the Group’s various publications and the generation of advertising revenue also require skilled and experienced employees. In particular, as part of the Group’s strategy to grow its digital offering, the Group intends to recruit and retain more digital development and specialist digital sales and operations staff. The Group’s ability to identify, recruit, hire, train, develop and retain qualified and effective personnel depends on numerous factors, including factors which the Group cannot control, such as competition and conditions in the local employment markets in which it operates. In addition, the Group also operates in a highly competitive market, which is subject to high levels of attrition and salary inflation. A shortage of such employees, or the Group’s inability to retain such employees, could have an adverse impact on the Group’s productivity and costs, its ability to expand, develop and distribute new products and new digital services, to generate advertising sales and its entry into new markets which could materially adversely affect the Group’s business, results of operations and financial condition.
A deterioration in the Group’s relationship with its employees may affect operational and financial performance. The Group relies on maintaining good relations with its employees and representative unions. However, there can be no assurance that work stoppages or other labour-related developments (including the introduction of new labour regulations in the UK or in response to the Group’s cost-cutting measures) will not occur in future, which could adversely affect the Group’s business, results of operations and financial condition.
Over the last three years, the Group has reduced its staffing levels from 4,662 full-time equivalents (‘‘FTEs’’) at 31 December 2011 to 3,281 FTEs at 28 December 2013. The Group is also reviewing other payments made to staff, including mileage allowances and other allowances. It is the Group’s intention to ensure the allowances are appropriate to the business needs, and reimburse staff for costs incurred. There is a risk that changes to these allowances result in work stoppages. Whilst resolved satisfactorily, work stoppages occurred at South Yorkshire Newspapers during the summer of 2011 over compulsory redundancies in editorial staff. There is a risk of disruption or further work stoppages and a deterioration in quality, or timeliness of output. In the event of significant disruption in any or all of these areas in the future, print and digital, advertising revenues and circulation could be adversely affected, which in turn could have a material adverse effect on the Group’s business, results of operations and financial condition.
The Group’s commercial freedom could be restricted if it is found to be dominant in local markets. There are a number of local markets across the UK where the Group’s newspaper titles have a high share of local newspaper circulation. The UK competition authorities have previously tended to determine that local newspaper markets should or may be defined narrowly (both geographically and as regards the alternative advertising products included—for example, the internet), and that may mean that the Group is considered by the regulators to be dominant in particular areas where it has a particularly high share of circulation of local titles. Whilst there is nothing to prohibit companies from being dominant, the Chapter II prohibition of the UK Competition Act 1998 prohibits conduct by dominant companies which may be categorised as an abuse of their dominant position. Case law of the European Courts indicates that dominant companies have a special responsibility not to allow their conduct to impede competition. This may restrict the Group’s freedom to act in these local areas, for example as regards pricing below cost and granting discounts or rebates that are loyalty inducing. In addition, the Group will need to ensure compliance with this additional set of responsibilities. These factors in addition to possible future competition claims initiated by the relevant authorities against the Group could have a material adverse effect on the Group’s business, results of operations and financial condition.
38 The Group outsources certain aspects of its business to third parties and may fail to reduce costs and such outsourcing may subject the Group to risks, including disruptions in the Group’s business and increased costs. The Group contracts with other companies to perform functions or operations that, in the past, the Group has performed itself. The Group currently relies on partners or third party service providers for services such as the provision of advertising creation, the printing of its titles in certain geographies and ‘‘prepress’’ (being the processes and procedures that occur between the creation of a print layout and the final printing), and national advertising sales and the Group may outsource additional business functions in the future. The Group prints 61 titles (and the Thursday edition of three daily titles) at third party printers, where the Group believes this to provide the optimal solution. As an example, for geographical distribution reasons, 29 titles are printed with Newsquest in Glasgow. The Group’s national advertising sales operation throughout the UK is undertaken by Mediaforce Limited (‘‘Mediaforce’’), an independent third party, on an exclusive basis. If the Group’s agreement with Mediaforce is not renewed or terminated, if Mediaforce fails to comply with its obligations under the agreement, or if Mediaforce otherwise fails to provide the services as required under the terms of the agreement and the Group is unable to find an adequate replacement advertising sales operator on a timely and commercial basis (or at all), and on terms which are favourable to the Group, then this could have a material adverse effect on the Group’s business, results of operations and financial condition.
The Group is therefore at risk to availability, price and quality offered by third party printers. Any significant changes in these factors could adversely affect profit margins and have a material adverse effect on the group’s business, results of operations and financial condition. Outsourcing may not result in lower costs and increased efficiencies. Because these third parties may not be as responsive to the Group’s needs as the Group might be or may experience problems with their own operations beyond the Group’s control, outsourcing increases the risk of disruption to the Group’s operations. If the Group is unable to effectively utilize, or integrate with, its partners or outsource providers, or if these partners or third party service providers experience business difficulties or are unable to provide business services as anticipated, the Group may need to seek alternative service providers or resume providing these business processes internally, which could be costly and time-consuming and have a material adverse effect on the Group’s business, results of operations and financial condition.
The Group’s business, results of operations and financial condition could be adversely affected by a vote for independence by Scotland. The Group publishes 38 titles in Scotland and revenues from print circulation and print advertising in Scotland represented 13.4 per cent of its total revenues for the 2013 financial year. A number of the Group’s subsidiaries and the Company are registered in Scotland. The uncertainty created by the vote on independence may have a negative impact on consumer and business confidence in Scotland, which, in turn, may result in decreased advertising spending, thereby negatively affecting the Group’s revenues. In addition, an affirmative vote in favour of Scottish independence could result in Scotland’s exit from the European Union and there can be no assurance that, even if Scotland were to apply for such membership, Scotland would be able to join as an independent member. EU accession could also potentially require Scotland to adopt the Euro as its official currency. Members of the UK government have also expressed their unwillingness to maintain a common currency union with an independent Scotland. These factors create uncertainty over the economic future of an independent Scotland, which could have a material adverse effect on the Group’s business, results of operations and financial condition.
In addition, the taxation and currency-related implications for the Group of an independent Scotland are unclear and any consequent change in taxation, currency or other related matters resulting from Scottish independence could have an adverse effect on the Group’s business, financial condition and results of operations.
39 Any temporary or permanent loss of or cyber-attacks on, any of the Group’s information technology systems could have a material adverse effect on the Group. The Group is increasingly dependent on technology to support its newspaper production, digital business and its accounting and other back office services. In addition, the Group is investing in its Client Relationship Management (‘‘CRM’’) system and in technologies to increase its data capture across its business segments, in particular, the holding of personal data. The Group’s business therefore depends upon ongoing investments in advanced computer database and telecommunications technology as well as upon the Group’s ability to protect its telecommunications and information technology systems against damage or system interruptions from natural disasters, deliberate attacks or system failures, and other events beyond its control. In order for the Group to compete effectively and to meet its customers’ needs, it must maintain its systems as well as invest in improved technology and security measures. The Group has entered into agreements whereby it is provided with location data centres where computer equipment and data are stored in a secure environment. However, there can be no assurance that such facilities will not be compromised. A temporary or permanent loss of any of the Group’s systems or networks could cause significant disruption to its business operation, or damage to its reputation resulting in a loss of revenue and potentially higher costs in the future, which could have an adverse effect on the Group’s business, results of operations and financial condition.
As a result of cyber security incidents, whether they be deliberate attacks or system failures, an unauthorized party may obtain access to the Group’s data or its users’ data or its systems may be compromised. Cyber-attacks evolve quickly and often are not recognized until launched against a target, so the Group may be unable to anticipate these attacks or to implement adequate preventative measures. The Group’s network and information systems may also be compromised by power outages, fire, natural disasters, terrorist attacks, war or other similar events. There can be no assurance that the actions, measures and controls the Group has implemented will be sufficient to prevent disruptions to systems critical to its operations, the unauthorized release of confidential information or the corruption of data. Such events may occur in the future and, in turn, could disrupt the Group’s operations or other third party information technology systems in which the Group is involved. A significant breakdown, invasion, corruption, destruction or interruption of critical information technology systems, or infrastructure by employees, others with authorized access to the Group’s systems, or unauthorized persons could result in legal or financial liability or otherwise negatively impact its operations. Such an incident also could require significant management attention and resources, generate additional cost and loss of revenue and could negatively impact the Group’s reputation among its customers, advertisers and the public, all or any of which could have a negative impact on the Group’s business, results of operations and financial condition.
Risks associated with the Group’s properties may have a material adverse effect on the Group’s business, financial condition or results of operations. A large proportion of the Group’s property portfolio is held through leasehold interests, including a small number of properties key to the operation of the business which are due to expire within the next five years. Property leases are generally subject to expiry and periodic rent reviews. As a result, the Group is susceptible to economic conditions related to the property rental market. In addition, the Group may not be able to renew its existing property leases effectively as they expire or may only be able to renew such leases on less favourable terms. These factors may result, among other things, in significant alterations in rental terms (including rental rates), in an inability to affect lease renewals and in a failure to secure real estate locations adequate to meet annual targets. In addition, while the Group reduces its headcount, and hence its need for property space, there may be a delay in reducing associated rent costs proportionately, as the Group remains committed to pay rents on under-utilised properties. In addition, the Group is required to maintain the properties, and in the event of lease termination and exit by the Group of a particular property, dilapidation costs may need to be paid to the landlord. The Group accrues for potential costs of properties that it may exit
40 in the near term. However, the level of dilapidation costs incurred can vary significantly from estimates made. As a result, any of the foregoing factors could have a material adverse effect on the Group’s business, financial condition or results of operations.
The Group is subject to environmental and employee safety and health laws and regulations that could cause it to incur significant compliance expenditures and liabilities. The Group’s operations are subject to laws and regulations pertaining to the environment and the management and disposal of wastes at its printing facilities. Under various environmental laws, a current or previous owner or operator of real property may be liable for contamination resulting from the release or threatened release of hazardous or toxic substances at that property. Such laws often impose liability on the owner or operator without regard to fault and the costs of any required investigation or clean up can be substantial.
The Group’s operations are also subject to various employee safety and health laws and regulations, including those pertaining to occupational injury and illness, employee exposure to hazardous materials and employee complaints. Environmental and employee safety and health laws tend to be complex, comprehensive and frequently changing. As a result, the Group may be involved from time to time in administrative and judicial proceedings and investigations related to environmental and employee safety and health issues. These proceedings and investigations could result in substantial costs to the Group, divert its management’s attention. Furthermore, if it is determined that the Group is not in compliance with applicable laws and regulations, it could result in significant liabilities, fines or the suspension or interruption of the operations of specific printing facilities.
Future events, such as changes in existing laws and regulations, new laws or regulations or the discovery of conditions not currently known to the Group, may give rise to additional compliance or remedial costs that could be material.
Building, data protection and other regulations could result in additional expenditures that could adversely affect the Group’s cash flow and results of operations. As a result of the Disability Discrimination Act 1995 and the Building Regulations 2000, the Group is required to make reasonable provision for disabled people to gain access to its properties and not to make it unreasonably difficult for such individuals to work on such properties. Fire regulations also require the Group to provide appropriate access, detection systems and exits. If regulators or the courts were to decide that the Group has not met these requirements, it could be required to make substantial alterations to, and incur capital expenditure for its properties. Furthermore, existing regulatory requirements could become more onerous, involving significant unanticipated expenditures that could have a material adverse effect on the Group’s cash flow and results of operations. The Group may also be prevented from using properties for their current use, if such use (or recent redevelopment of such properties) is not a lawful permitted use or redevelopment under planning legislation.
The Group is subject to regulation regarding the use of personal customer and credit card data. The Group processes sensitive personal customer data (including name, address, age, bank details and credit card details) as part of its business and therefore must comply with strict data protection and privacy laws in the jurisdictions in which the Group operates. Such laws restrict the Group’s ability to collect and use personal information relating to its audiences including the use of that information for marketing purposes and for its advertisers to focus their advertising campaigns. The Group relies on third party contractors as well as its own employees to maintain its databases and therefore, the Group is exposed to the risk that such data could be wrongfully appropriated, lost or disclosed, or processed in breach of data protection regulations. If the Group or any of the third party service providers on which it relies fails to store or transmit customer information and payment details online in a secure manner, or if any loss of personal customer data were otherwise to occur, the Group could face liability under data protection laws or sanctions by card merchants. This could also result in the
41 loss of the goodwill of its customers and deter new customers which would have a material adverse effect on the Group’s business, results of operations and financial condition.
The Group’s intellectual property could be subject to infringement by third parties or claims of infringement of third parties’ rights. The Group regards its copyright, domain names, customer databases and similar intellectual property as important to its business. The Group relies on a combination of copyright and trademark laws in order to protect its intellectual property. There can be no assurance that these efforts will be adequate, or that third parties will not infringe upon or misappropriate the Group’s proprietary rights.
The Group may be the subject of claims of infringement of the rights of others or party to claims to determine the scope and validity of the intellectual property rights of others. Such claims, whether or not valid could require the Group to spend significant sums in litigation, pay damages, re-brand or re-engineer services, acquire licences to third party intellectual property and distract management attention from the business, which may have a material and adverse effect on its business, results of operations and financial condition.
Failure by the Group to maintain and enhance its brands could have a material and adverse effect on its business, results of operations and financial condition. The success of the Group and of its digital business strategy is dependent in part on the strength of its brands and reputation. If the Group is unable to maintain and enhance the strength of its brands, then its ability to retain and expand its audience as well as advertising customers and its attractiveness to existing and potential audiences and advertisers may be impaired and operating results could be adversely affected. Maintaining and enhancing the Group’s brands may require the Group to make substantial investments, including maintaining the publication of newspaper titles with declining circulation which may be less commercially viable. If the Group fails to maintain and enhance the Group’s brands successfully, or if the Group incurs excessive expenses or makes unsuccessful investments in this effort, its business, results of operations and financial condition may be adversely affected. Moreover, maintaining and enhancing its brand will rely in part on the Group’s ability to provide up-to-date technology and to provide high quality products and services both online and in print, which it may not do successfully. Any failure by the Group to maintain or enhance, in whole or in part, the Group’s brands, could have a material adverse effect on the Group’s business, results of operations and financial condition.
Risks related to the Group’s financial profile
The Group’s substantial leverage and debt service obligations could adversely affect the Group’s business and prevent it from fulfilling its obligations with respect to the Notes and the Note Guarantees. The Group is, and following the issuance of the Notes, will continue to be, highly leveraged. As at 28 December 2013, after giving effect to the issuance of the Notes and the consummation of the other Transactions, the Company and its consolidated subsidiaries would have had total third party indebtedness of £225.0 million. In addition, the New Revolving Credit Facility Agreement provides for a committed amount of £25.0 million of secured credit borrowings. The Existing Lending Facilities and the Private Placement Notes will be repaid in full with a portion of the proceeds from the Offering and the Placing and the Rights Issue.
The level of the Group’s indebtedness following the issuance of the Notes could have important consequences to holders of the Notes offered hereby, including, but not limited to:
• making it difficult for the Group to satisfy its obligations with respect to the Notes;
• increasing the Group’s vulnerability to, and reducing its flexibility to respond to, adverse economic and industry conditions;
42 • requiring the dedication of a substantial portion of the Group’s cash flow from operations to the payment of principal of, and interest on, indebtedness, thereby reducing the availability of such cash flow for, and limiting the ability and increasing the cost to obtain additional financing to fund, working capital, capital expenditures, acquisitions, joint ventures or other general corporate purposes;
• limiting the Group’s flexibility in planning for, or reacting to, changes in the Group’s business and the competitive environment and the industry in which the Group operates; and
• placing the Group at a competitive disadvantage, to the extent that the Group’s competitors are not as highly leveraged.
Any of these or other consequences or events could have a material adverse effect on the Group’s ability to satisfy its debt obligations, including the Notes.
Despite the Group’s significant leverage, the Group will still be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with the Group’s substantial indebtedness. The Group may be able to incur substantial additional indebtedness in the future, including secured indebtedness. Although the Indenture and the New Revolving Credit Facility Agreement contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with those restrictions could be substantial. In addition, neither the Indenture nor the New Revolving Credit Facility Agreement prevents the Group from incurring obligations that do not constitute indebtedness under those agreements.
The Group is subject to restrictive debt covenants that may limit its ability to finance its future operations and capital needs and to pursue business opportunities and activities. The Indenture will restrict, among other things, the Group’s ability to:
• incur or guarantee additional indebtedness;
• pay dividends or make other distributions, purchase or redeem the Group’s stock or prepay or redeem subordinated debt;
• make certain investments, acquisitions, loans or restricted payments;
• enter into agreements that restrict the Company’s and the Company’s restricted subsidiaries’ ability to pay dividends;
• transfer or sell assets;
• engage in transactions with affiliates;
• create liens on assets to secure indebtedness;
• impair security interests; and
• merge or consolidate with or into another company.
All these limitations are subject to significant exceptions and qualifications. See ‘‘Description of the Notes—Certain covenants’’. The covenants to which the Group is subject could limit its ability to finance its future operations and capital needs and its ability to pursue business opportunities and activities that may be in its interest.
In addition, the Group will be subject to the affirmative and negative covenants contained in the New Revolving Credit Facility Agreement. See ‘‘Description of other indebtedness—New Revolving Credit Facility Agreement’’. A breach of any of those covenants or other restrictions could result in an ‘‘event of default’’ under the New Revolving Credit Facility Agreement. Upon the occurrence of any event of default under the New Revolving Credit Facility Agreement,
43 subject to applicable cure periods and other limitations on acceleration or enforcement, the relevant creditors could cancel the availability of the New Revolving Credit Facility and elect to declare all amounts outstanding under the New Revolving Credit Facility Agreement, together with accrued interest, immediately due and payable. In addition, any default under the New Revolving Credit Facility Agreement could lead to an event of default and acceleration under the Group’s debt instruments that contain cross-default or cross-acceleration provisions, including the Indenture. If the Group’s creditors, including the creditors under the New Revolving Credit Facility, accelerate the payment of those amounts, the Company cannot assure you that its assets and the assets of its subsidiaries would be sufficient to repay in full those amounts, to satisfy all other liabilities of its subsidiaries which would be due and payable and to make payments to enable the Issuer to repay the Notes, in full or in part. In addition, if the Group is unable to repay those amounts, its creditors could proceed against any collateral granted to them to secure repayment of those amounts.
The Group requires a significant amount of cash to service its debt and sustain its operations, and the Company’s ability to generate sufficient cash depends on many factors beyond its control. The Group’s ability to make payments on and to refinance its indebtedness, and to fund working capital and to make capital expenditures, will depend on the Group’s future operating performance and ability to generate sufficient cash. This depends on the success of the Group’s business strategy and on economic, financial, competitive, market, legislative, regulatory and other factors, as well as the factors discussed in these ‘‘Risk factors’’, many of which are beyond the Group’s control.
The Group cannot assure you that its business will generate sufficient cash flows from operations, that revenue growth, cost savings and operational improvements will be realised or that future debt and equity financing will be available to the Group in an amount sufficient to enable the Group to pay its debts when due, including the Notes, or to fund the Group’s other liquidity needs. See ‘‘Management’s discussion and analysis of financial condition and results of operations’’.
If the Group’s future cash flows from operations and other capital resources (including borrowings under the New Revolving Credit Facility Agreement) are insufficient to pay its obligations as they mature or to fund its liquidity needs, the Group may be forced to:
• reduce or delay its business activities and any capital expenditures;
• sell assets;
• obtain additional debt or equity capital; or
• restructure or refinance all or a portion of the Group’s debt, including the Notes, on or before maturity.
The Group cannot assure you that it would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. Any failure to make payments on the Notes on a timely basis would likely result in a reduction of the Group’s credit rating, which could also harm the Group’s ability to incur additional indebtedness. In addition, the terms of the Group’s debt, including the Notes and the New Revolving Credit Facility Agreement, limit, and any future debt may limit, the Group’s ability to pursue any of these alternatives. Any refinancing of the Group’s debt could be at higher interest rates and may require the Group to comply with more onerous covenants, which could further restrict the Group’s business and adversely affect the Group’s financial condition and results of operations. If the Group is unable to refinance all or a portion of its indebtedness or obtain such refinancing on terms which are acceptable to it, the Group may be forced to sell assets. There can be no assurance that any assets which the Group could be required to dispose of can be sold or that, if sold, the timing of such sale and the amount of proceeds realised from such sale will be acceptable.
44 The Group is exposed to interest rate risk and shifts in such rates may adversely affect its debt service obligations. Any loans made under the New Revolving Credit Facility will bear interest at variable rates, generally linked to market benchmarks such as LIBOR, as applicable. To the extent that the interest rates were to increase significantly on such indebtedness, the Group’s interest expense would correspondingly increase, reducing the Group’s cash flow. While the Group may attempt to manage this risk through entering into hedging arrangements, there can be no assurance that any current or future hedging contracts the Group enters into will adequately protect its operating results from the effects of interest rate fluctuations or will not result in losses or that the Group’s risk management practices and procedures will operate successfully.
The Group’s reported results could be adversely affected by the impairment of its assets, including its publishing titles. The Group tests its assets and liabilities for impairment on a six-monthly basis. Key assumptions used in the valuation calculations are: the discount rate; expected change in underlying revenues and direct costs; and growth rates. Significant declines in third party print revenue or circulation of the Group’s own titles, over that assumed, could result in a potential impairment of presses. Similarly, changes in assumptions or trading of the publishing businesses could result in a potential impairment of publishing assets which, as at 28 December 2013, totalled £538.5 million and represented 80.1% of total assets. For example, in the 2013 financial year, the Group conducted impairment testing and recognised impairment losses of £202.4 million in respect of its publishing titles, £63.7 million in respect of property, plant and equipment and £4.7 million in respect of assets held for sale. In the 2012 financial year, the Group recognised impairment losses of £0.5 million in respect of its publishing titles and £24.8 million on presses and assets held for sale. In determining impairment of its publishing titles, the carrying value of its publishing titles were discounted to net present value, at estimated pre-tax discount rates that reflect current market interest rates and the risks specific to each title. The Group can give no assurance that it will not record any further impairments with respect to its publishing titles or other assets in the future. Any future impairment may result in material reductions of the Group’s income and equity under IFRS which in turn could restrict the Group’s capacity to pay dividends. See ‘‘Management’s discussion and analysis of financial condition and results of operations—Principal factors affecting the Group’s results of operations—Impairment of publishing titles’’, ‘‘Management’s discussion and analysis of financial condition and results of operations—Results of operations for the 52 week periods ended 28 December 2013 and 29 December 2012’’ and ‘‘Management’s discussion and analysis of financial condition and results of operations—Results of operations for the 52 weeks ended 29 December 2012 and 52 weeks ended 31 December 2011’’.
Risks related to the Notes and the Note Guarantees
If the conditions to the escrow are not satisfied, the Issuer will be required to redeem the Notes, which means that you may not obtain the return you expect on the Notes. This Offering will be consummated before the closing of the Placing and the Rights Issue. Concurrently with the issuance of the Notes on the Issue Date, the Initial Purchasers will deposit the gross proceeds from this Offering into an escrow account for the account of the Issuer and charged in favour of the Trustee (or any successor Trustee under the Indenture) holding all such rights to the Escrow Account and the amount credited therein for itself and the holders of the Notes, as the secured parties under the Escrow Charge. The Escrow Release will be subject to the satisfaction of certain conditions that are outside of the Group’s control, including the closing of the Placing and the Rights Issue. In the event that, among other things, the closing of the Placing and the Rights Issue do not take place on or prior to the Escrow Longstop Date (for example, in the event that the Company’s shareholders do not vote in favour of the resolutions in relation to the Placing and the Rights Issue at the general meeting or in the event that the Underwriters exercise their termination rights under the Underwriting Agreement prior to Admission) or any of the other conditions to the Escrow
45 Release as described under the caption ‘‘Description of the Notes—Escrow of proceeds; Special Mandatory Redemption’’ become incapable of being satisfied on or prior to the Escrow Longstop Date, the Issuer will be required to redeem all of the Notes at a special mandatory redemption price equal to 100% of the aggregate initial issue price of the Notes, plus accrued and unpaid interest from the Issue Date to the date of special mandatory redemption and additional amounts, if any, pursuant to the terms of the special mandatory redemption provided under the Indenture, and you may not obtain the investment return you expect on the Notes. In the event of a special mandatory redemption, the escrowed funds will not be sufficient to cover any additional amounts that may be due to holders of the Notes pursuant to the provisions of the Indenture described under the caption ‘‘Description of the Notes— Additional Amounts’’, in which case your ability to collect any additional amounts will be limited to the remaining assets of the Issuer. There can be no assurance that the Escrow Release conditions will be met or that you will collect all additional amounts owed in the case of a special mandatory redemption.
The Company cannot assure you that all conditions to Escrow Release will be satisfied or waived or that the Issuer will not otherwise have to redeem the Notes. If for any reason the Issuer believes that the necessary steps of the Transactions will not be completed before the Escrow Longstop Date, the Issuer has the option to redeem the Notes earlier on the same terms. See ‘‘Description of the Notes—Escrow of proceeds; Special Mandatory Redemption’’.
Johnston Press may be unable to complete the Debt Assumption within the anticipated timeframe. Pursuant to the Indenture, Johnston Press is required to consummate the Debt Assumption by the Escrow Release Date. If Johnston Press does not complete the Debt Assumption by such date, the Issuer will be in default under the Indenture. In order to complete the Debt Assumption, there are various steps that Johnston Press must take in order for the Issuer to be acquired by the Company. It is possible that these steps and processes may take longer than Johnston Press currently expects or that Johnston Press is delayed in completing the Debt Assumption.
If insolvency proceedings are commenced in respect of the Issuer, there may be a delay in repaying the escrowed funds to the holders of the Notes. If insolvency proceedings are commenced in respect of the Issuer, while the escrow account remains funded, English insolvency law may delay the trustee under the Indenture governing the Notes from using the escrowed funds to pay the Special Mandatory Redemption. In that event, Johnston Press believes that the holders of the Notes would be treated as secured creditors of the Issuer with a first ranking fixed charge security interest in the escrowed funds.
Holders of the Notes may not control certain decisions regarding the Collateral. On and from the Escrow Release Date, the obligations under the Notes and the Notes Guarantees will be secured on a first-ranking basis with security interests over the Collateral that also secure the Group’s obligations under the New Revolving Credit Facility and certain hedging obligations. In addition, the Indenture also permits the Collateral to secure additional indebtedness in accordance with the terms thereof and the Intercreditor Agreement.
The Intercreditor Agreement provides that the Security Agent will only enforce the Collateral as directed by an ‘‘instructing group’’. In general, an instructing group may constitute holders of at least 662⁄3% of ‘‘super senior’’ indebtedness (which includes drawn and undrawn commitments under the New Revolving Credit Facility Agreement and Priority Hedging) (together, the ‘‘Majority Super Senior Creditors’’) and holders of over 50% of the aggregate credit participation of the Notes and certain pari passu debt (together, the ‘‘Majority Senior Secured Creditors’’). The Intercreditor Agreement provides that where there is an inconsistency between enforcement instructions provided by the Majority Super Senior Creditors and the Majority Senior Secured Creditors and relevant consultation procedures have been complied with, the instructions of the Majority Senior Secured Creditors will prevail. However, if and to
46 the extent the obligations under the New Revolving Credit Facility and any Priority Hedging have not been fully discharged within six months of the agreed consultation period, enforcement action can be taken, or if certain insolvency events occur and the Security Agent has not commenced any enforcement action, then the enforcement instructions provided by the Majority Super Senior Creditors will prevail. See ‘‘Description of other indebtedness— Intercreditor Agreement’’.
Disputes may occur between the holders of the Notes, the holders of any other pari passu additional debt, the counterparties to certain hedging obligations and lenders under the New Revolving Credit Facility as to the appropriate manner of pursuing enforcement remedies and strategies with respect to the Collateral. In such an event, the holders of the Notes may be bound by any decisions of the holders of other pari passu additional indebtedness and/or the lenders under the New Revolving Credit Facility if the circumstances are such that the instructions of such creditors prevail or form a controlling majority in any combined class in which the holders of the Notes vote, which may result in enforcement action in respect of the shared Collateral, whether or not such action is approved by the holders of the Notes or may be adverse to such holders. The creditors under the New Revolving Credit Facility or any other pari passu additional indebtedness may have interests that are different from the interests of holders of the Notes and they may elect to pursue their remedies under the Security Documents at a time when or in a manner which would otherwise be disadvantageous for the holders of the Notes. See ‘‘Description of other indebtedness—Intercreditor Agreement’’.
The holders of the Notes will also have no separate right to enforce the Collateral. In addition, the holders of the Notes will not be able to instruct the Security Agent, force a sale of the Collateral or otherwise independently pursue the remedies of a secured creditor under the relevant Security Document, unless they comprise an instructing group which is entitled to give such instructions, which, in turn, will depend on certain conditions and circumstances including those described above.
Furthermore, other creditors not subject to the Intercreditor Agreement could commence enforcement action against the Issuer, the Company or any of its subsidiaries during such period, and the Issuer or the Company or one or more of its subsidiaries could seek protection under applicable bankruptcy laws, or the value of certain Collateral could otherwise be impaired or reduced in value.
In addition, if the Security Agent sells Collateral comprising the shares of any of the Group’s subsidiaries as a result of an enforcement action in accordance with the Intercreditor Agreement, claims under the Notes and the Note Guarantees and the liens over any other assets securing the Notes and the Note Guarantees may be released. See ‘‘Description of other indebtedness—Intercreditor Agreement’’ and ‘‘Description of the Notes—Security—Release of Security.’’
Creditors under the New Revolving Credit Facility Agreement and certain hedging obligations will be entitled to be repaid with the proceeds of the Collateral sold in any enforcement sale in priority to the Notes. On and from the Escrow Release Date, the Notes and the Note Guarantees will be secured by the same Collateral securing the obligations under the New Revolving Credit Facility and certain hedging obligations. Pursuant to the Intercreditor Agreement, the liabilities under the New Revolving Credit Facility Agreement and the Priority Hedging will have priority over any amounts received from the sale of the Collateral pursuant to an enforcement action taken with respect to the Collateral. As such, proceeds from enforcement sales of capital stock and other assets that are part of the Collateral must first be applied in satisfaction of obligations under the New Revolving Credit Facility Agreement and Priority Hedging and thereafter to repay on a pari passu basis the obligations of the Issuer and the Guarantors under the Notes and the Note Guarantees any other pari passu indebtedness (including hedging obligations that do not constitute Priority Hedging) of the Issuer and the Guarantors permitted to be incurred and
47 secured by the Collateral pursuant to the Indenture, the New Revolving Credit Facility Agreement and the Intercreditor Agreement. Under the terms of the Indenture and the Intercreditor Agreement, up to £25.0 million of indebtedness incurred under the New Revolving Credit Facility Agreement and Priority Hedging can be secured in priority to the Notes. See ‘‘Description of other indebtedness—Intercreditor Agreement’’. You may not be able to recover on the Collateral if in the event of any realisation or enforcement of the Collateral the then-outstanding claims under the New Revolving Credit Facility Agreement and Priority Hedging are greater than the proceeds realised, and if there are any remaining proceeds following repayment of the Group’s New Revolving Credit Facility and Priority Hedging in full, such proceeds shall be shared pro rata and pari passu between the holders of the Notes and other pari passu creditors. In addition, under the terms of the Indenture and the New Revolving Credit Facility Agreement, the Group will be permitted to incur significant pari passu additional indebtedness and other obligations that may be secured by the same Collateral in accordance with the Intercreditor Agreement.
No appraisals of any of the Collateral have been prepared by the Group or on the Group’s behalf in connection with the issuance of the Notes. On and from the Escrow Release Date, the Notes will be secured only to the extent of the value of the Collateral that has been granted as security for the Notes and the Note Guarantees, and such security may not be sufficient to satisfy the obligations under the Notes and the Note Guarantees. On and from the Escrow Release Date, the Group’s obligations under the Notes will be secured only by the Collateral. No appraisals of any of the Collateral have been prepared by the Group or on its behalf in connection with the issuance of the Notes. There is no guarantee that the value of the Collateral will be sufficient to enable the Issuer to perform its obligations under the Notes. There is no requirement to provide funds to enhance the value of the Collateral if it is insufficient. The proceeds of any sale of the Collateral following an event of default with respect to the Notes may not be sufficient to satisfy, and may be substantially less than, amounts due on the Notes.
The amount of proceeds realised upon the enforcement of the security interests over the Collateral or in the event of liquidation will depend upon many factors, including, among others, general market and economic conditions, the condition of the market for the Collateral, the ability to sell Collateral in an orderly sale, the fair value of the Collateral, the timing and manner of the sale, whether or not the Group’s business is sold as a going concern, the ability to readily liquidate the Collateral, any restrictions on the sale of Collateral, the availability of buyers and the condition of the Collateral and exchange rates. Further, there may not be any buyer willing and able to purchase the Group’s business as a going concern, or willing to buy a significant portion of its assets in the event of an enforcement action.
Portions of the Collateral may be illiquid and may have no readily ascertainable market value. In the event of a foreclosure, liquidation, bankruptcy or similar proceeding, the Issuer cannot assure you that the proceeds from any sale or liquidation of this Collateral will be sufficient to pay its obligations under the Notes.
By its nature, some or all the Collateral may not have a readily ascertainable market value or may not be saleable or, if saleable, there may be substantial delays in its disposal. To the extent that liens, security interests and other rights granted to other parties encumber assets owned by the Issuer or the Guarantors, those parties have or may exercise rights and remedies with respect to the property subject to their liens, security interests or other rights that could adversely affect the value of that Collateral and the ability of the Security Agent or investors as holders of the Notes to realise or enforce that Collateral. If the proceeds of any sale of Collateral are not sufficient to repay all amounts due on the Notes and the Note Guarantees, investors (to the extent not repaid from the proceeds of the sale of the Collateral) would have only an unsecured claim against the Issuer’s and the Guarantors’ remaining assets. Each of these factors or any challenge to the validity of the Collateral or the Intercreditor Agreement could reduce the proceeds realised upon enforcement of the Collateral. In addition, there can
48 be no assurance that the Collateral could be sold in a timely manner, if at all. Proceeds from enforcement sales of capital stock and other assets that are part of the Collateral must first be applied in satisfaction of obligations under the New Revolving Credit Facility Agreement and Priority Hedging and thereafter to repay on a pari passu basis the obligations of the Issuer and the Guarantors under the Notes and any other pari passu indebtedness (including hedging obligations that do not constitute Priority Hedging) of the Issuer and the Guarantors permitted to be incurred and secured by the Collateral pursuant to the Indenture and the Intercreditor Agreement. In addition, the Indenture governing the Notes will allow incurrence of certain additional permitted debt in the future that is secured by the Collateral on a priority or pari passu basis in accordance with the terms thereof and the Intercreditor Agreement. The incurrence of any additional debt secured by the Collateral would reduce amounts payable to you from the proceeds of any sale of the Collateral.
To the extent that there are any other first priority and pre-existing security interests permitted under the New Revolving Credit Facility Agreement and the Indenture and other rights encumber the Collateral securing the Notes, the beneficiaries of such security interests or other rights may have or may exercise rights and remedies with respect to the Collateral that could adversely affect the value of the Collateral and the ability of the Security Agent to realise or foreclose on the Collateral.
The Issuer and the Guarantors will have control over the Collateral securing the Notes, and the sale of particular assets could reduce the pool of assets securing the Notes. The Security Documents will, subject to the terms of the New Revolving Credit Facility Agreement and the Indenture, allow the Issuer and the Guarantors to remain in possession of, retain control over, freely operate, and collect, invest and dispose of any income from the Collateral securing the Notes. So long as no default or event of default under the New Revolving Credit Facility Agreement or the Indenture is occurring or would result therefrom, the Issuer and the Guarantors may, among other things, without any consent by the Security Agent, conduct ordinary course activities with respect to the Collateral, such as selling, factoring or otherwise disposing of Collateral and making ordinary course cash payments, including in connection with the conduct of the Group’s business and repayments of indebtedness.
The security interests in the Collateral will be granted to the Security Agent rather than directly to the holders of the Notes. The ability of the Security Agent to enforce certain of the Collateral may be restricted by local law. The security interests in the Collateral that will secure the obligations of the Issuer under the Notes and the obligations of the Guarantors under the Note Guarantees will not be granted directly to the holders of the Notes but will be granted only in favour of the Security Agent. The Indenture and the Intercreditor Agreement will provide that only the Security Agent has the right to enforce the Security Documents. As a consequence, holders of the Notes will not have direct security interests and will not be entitled to take enforcement action in respect of the Collateral securing the Notes, except through the Trustee, who will (subject to the provisions of the Indenture and the Intercreditor Agreement) provide instructions to the Security Agent in respect of the Collateral.
It may be difficult to realise the value of the Collateral securing the Notes. The Collateral securing the Notes will be subject to any and all exceptions, defects, encumbrances, liens, security interests and other imperfections permitted under the Indenture or the New Revolving Credit Facility Agreement and accepted by other creditors that have the benefit of first priority security interests in the Collateral securing the Notes from time to time, whether on or after the Escrow Release Date. The existence of any such exceptions, defects, encumbrances, liens, security interests and other imperfections could adversely affect the value of the Collateral securing the Notes, as well as the ability of the Security Agent to realise or foreclose on such Collateral. Furthermore, the first priority ranking of security interests can be
49 affected by a variety of factors, including, among others, the timely satisfaction of perfection requirements, or statutory liens.
The security interests of the Security Agent will be subject to practical problems generally associated with the realisation of security interests over personal property such as the Collateral. For example, the Security Agent may need to obtain the consent of a third party to enforce a security interest. Johnston Press cannot assure you that the Security Agent will be able to obtain any such consent. Johnston Press also cannot assure you that the consents of any third parties will be given when required to facilitate a foreclosure on such assets. Accordingly, the Security Agent may not have the ability to foreclose upon those assets, and the value of the Collateral may significantly decrease.
The rights of holders of the Notes in the Collateral may be adversely affected by the failure to perfect the security interests in the Collateral. Under applicable law, a security interest in certain tangible and intangible assets can only be properly perfected, and its priority retained, through certain actions undertaken by the secured party and/or the grantor of the security. The liens in the Collateral securing the Notes may not be perfected with respect to the claims of the Notes if either the Group or the Security Agent (as the case may be) fails or is unable to take the actions required to be taken in order to perfect any of these liens. Such failure may result in the invalidity of the relevant security interest in the Collateral or adversely affect the priority of such security interest in favour of the Notes against third parties, including a trustee in bankruptcy and other creditors who claim a security interest in the same collateral.
The granting of the security interests in the Collateral in connection with the issuance of the Notes may create hardening periods for such security interests in accordance with the law applicable in certain jurisdictions. The granting of new security interests in the Collateral in connection with the issuance of the Notes may create hardening periods for such security interests in certain jurisdictions. The applicable hardening period for these new security interests will run from the moment each such security interest has been granted, perfected or recreated. If the security interest granted, perfected or recreated were to be enforced before the end of the respective applicable hardening period, it may be declared void and/or it may not be possible to enforce it. In addition, the granting of a shared security interest to secure future indebtedness may restart or reopen hardening periods in certain jurisdictions. The applicable hardening period may run from the moment such security interest is amended, granted or perfected. If the security interest granted were to be enforced during the restarted or reopened hardening period, it may be declared void or ineffective and/or it may not be possible to enforce it. See ‘‘Limitations on validity and enforceability of the Note Guarantees and security interests’’.
Risks related to the Group’s structure
The Issuer is a special purpose finance subsidiary that has no revenue-generating operations of its own, no assets other than its interests in the Notes Proceeds Loan after giving effect to the Transactions and will depend on cash from the Group’s operating companies to be able to make payments on the Notes. The Issuer is a wholly-owned special purpose finance subsidiary with no business operations or significant assets. The Issuer is currently wholly owned by the Orphan SPV Shareholder. On the Escrow Release Date, the Company intends to effect the Debt Assumption whereby the Issuer will become a wholly-owned subsidiary of the Company. On the Escrow Release Date, the only significant asset of the Issuer will be the Notes Proceeds Loan made by the Issuer to the Company. The Issuer’s material liabilities will include the Notes, the guarantee of obligations under the New Revolving Credit Facility Agreement, the guarantee of obligations under the New Pensions Framework Agreement and any additional debt it may incur in the future. See ‘‘Description of the Notes’’ and ‘‘Description of other indebtedness’’. As such, the Issuer will be
50 dependent upon payments from the Company to make any payments due on the Notes. If the Company fails to make scheduled payments on the Notes Proceeds Loan, the Issuer will not have any other source of funds that would allow it to make payments on its indebtedness, including the Notes. The Company will be dependent upon payments from other members of the Group to meet its obligations, including its obligations under the Notes Proceeds Loan. In the event that the Company does not receive distributions or other payments from its subsidiaries, the Company may be unable to make required principal and interest payments on the Notes Proceeds Loan, resulting in the Issuer being unable to make required principal and interest payments on the Notes. The Issuer does not expect to have any other sources of funds that would allow it to make payments to holders of the Notes.
The amounts available to the Company from the other relevant members of the Group will depend on the profitability and cash flows of such members of the Group and the ability of such members to make payments to it under applicable law or the terms of any financing agreements or other contracts that may limit or restrict their ability to pay such amounts. The inability to transfer cash among entities within the Group may mean that even though the Group, in aggregate, may have sufficient resources to meet its obligations, it may not be permitted to make the necessary transfers from one entity in the Group to another entity in the Group in order to enable the entity owing the obligations to make payments thereunder. In addition, the members of the Group that do not guarantee the Notes have no obligation to make payments with respect to the Notes.
The Notes will be structurally subordinated to the liabilities of non-Guarantor subsidiaries. Certain subsidiaries of the Company will not guarantee the Notes and, under various circumstances, the Note Guarantees may be released and newly incorporated subsidiaries of the Company may not be required to guarantee the Notes. See ‘‘—There are circumstances other than repayment or discharge of the Notes under which the Collateral securing the Notes and the Note Guarantees will be released automatically and under which the Note Guarantees will be released automatically, without your consent or any action on the part of the Trustee’’ and ‘‘Description of the Notes’’. Unless a subsidiary of the Company is a Guarantor, such subsidiary will not have any obligation to pay amounts due under the Notes or to make funds available for that purpose.
On the Escrow Release Date, the Notes will be guaranteed on a senior secured basis by the Guarantors. All other subsidiaries of the Company will not guarantee the Notes. The Group has one material company, Johnston Publishing Ltd, which will be a Guarantor. Johnston Publishing Ltd, on a consolidated basis, represented 94.5 per cent and 94.7 per cent of Adjusted Group revenues and 108.3 per cent and 103.2 per cent of Adjusted Group EBITDA for the 52 weeks ended 28 December 2013 and for the 52 weeks ended 29 December 2012, respectively, and 95.3 per cent and 98.7 per cent of the Group’s tangible fixed assets as at 28 December 2013 and as at 29 December 2012, respectively.
The Group also records the value of its publishing titles as intangible assets on its consolidated balance sheet. These publishing titles were valued at £538.5 million at 28 December 2013 or 80.1 per cent of total Group assets. Therefore, in addition to Johnston Publishing Ltd, all subsidiary companies that own publishing titles or are employers will be included as Guarantors. As of 28 December 2013, after giving pro forma effect to the Transactions, including the Offering, the Company’s subsidiaries that are not Guarantors would have had no indebtedness. In the event that any non-Guarantor subsidiary becomes insolvent, is liquidated, reorganised or dissolved or is otherwise wound up other than as part of a solvent transaction: • the creditors of the Issuer (including the holders of the Notes) and the Guarantors will have no right to proceed against the assets of such subsidiary; and
51 • holders of indebtedness of, and trade creditors of, non-Guarantor subsidiaries, including lenders under bank financing agreements, generally are entitled to payments of their claims from the sale or other disposal of the assets of such companies before any Guarantor, as a direct or indirect shareholder, will be entitled to receive any distributions from such subsidiary. As such, the Notes and each Note Guarantee will be structurally subordinated to the creditors (including trade creditors) and any preferred stockholders of any non-Guarantor subsidiaries of the Company. There are circumstances other than repayment or discharge of the Notes under which the Collateral securing the Notes and the Note Guarantees will be released automatically and under which the Guarantees will be released automatically, without your consent or any action on the part of the Trustee. The Issuer and the Guarantors will be entitled to the release of the assets constituting Collateral from the liens securing the Notes and the Note Guarantees under any one or more of the following circumstances automatically without the consent of the holders of the Notes or the Trustee: (a) in connection with any sale or other disposition of the property or assets to a person that is not (either before or after giving effect to such transaction) the Company or a restricted subsidiary, if the sale or other disposition does not violate the covenant contained under the caption ‘‘Description of the Notes—Certain covenants—Limitation on sales of assets and Subsidiary stock’’; (b) if such Collateral is an asset of a Guarantor or any of its subsidiaries, in connection with any sale or other disposition of capital stock of that Guarantor to a person that is not (either before or after giving effect to such transaction) the Company or a restricted subsidiary, if the sale or other disposition does not violate the covenant contained under the caption ‘‘Description of the Notes—Certain Covenants—Limitation on sales of assets and Subsidiary stock’’ and the Guarantor ceases to be a restricted subsidiary as a result of the sale or other disposition; (c) in the case of a Guarantor that is released from its Note Guarantee pursuant to the terms of the Indenture, the Security Documents or the Intercreditor Agreement, the release of the property and assets, and capital stock, of such Guarantor; (d) in the case of the assets of any restricted subsidiary, if the Company designates any restricted subsidiary that is a Guarantor as an unrestricted subsidiary in accordance with the applicable provisions of the Indenture; (e) as described under the caption ‘‘Description of the Notes—Amendments and waivers’’; (f) as provided for under the Intercreditor Agreement or any additional intercreditor agreement, including in connection with enforcement actions; (g) upon legal defeasance, covenant defeasance or discharge of the Notes as provided under the captions ‘‘Description of the Notes—Defeasance’’ and ‘‘Description of the Notes— Satisfaction and discharge’’; (h) as described in the second paragraph of the covenant described under the caption ‘‘Description of the Notes—Certain covenants—Limitation on Liens’’; or (i) upon the full and final payment and performance of all obligations of the Company and the Issuer under the Indenture and the Notes. In addition, the Note Guarantee of a Guarantor (other than the Company) will be released: (a) in connection with any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation) to a person that is not
52 (either before or after giving effect to such transaction) the Company or a restricted subsidiary, if the sale or other disposition does not violate the covenant described under the caption ‘‘—Certain Covenants—Limitation on sales of assets and Subsidiary stock’’; (b) in connection with any sale or other disposition of capital stock of that Guarantor or its parent company (other than the Company) to a person that is not (either before or after giving effect to such transaction) the Company or a restricted subsidiary, if the sale or other disposition does not violate the covenant described under the caption ‘‘—Certain covenants—Limitation on sales of assets and Subsidiary stock’’; (c) upon the release or discharge of the Note Guarantee by such Guarantor of the indebtedness that resulted in the creation of such Note Guarantee pursuant to the covenant described under ‘‘Description of the Notes—Certain covenants—Limitation on issuances of guarantees of Indebtedness’’, so long as no Event of Default (as defined under the caption ‘‘Description of the Notes’’) would arise as a result thereof; (d) if the Company designates any restricted subsidiary that is a Guarantor to be an unrestricted subsidiary in accordance with the applicable provisions of the Indenture; (e) upon legal defeasance, covenant defeasance or satisfaction and discharge of the Indenture as provided under the captions ‘‘Description of the Notes—Defeasance’’ and ‘‘Description of the Notes—Satisfaction and discharge’’; (f) as provided under the caption ‘‘Description of the Notes—Amendments and waivers’’; or (g) in connection with enforcement actions pursuant to the Intercreditor Agreement or any additional intercreditor agreement in certain circumstances. The Note Guarantee of the Company will be released in the circumstances described in paragraphs (e) and (f) of the preceding paragraph or in connection with enforcement actions pursuant to the Intercreditor Agreement or any additional intercreditor agreement. The interests of the Company’s shareholders may be inconsistent with the interests of holders of the Notes. The interests of the Company’s various shareholders could conflict with the interests of the holders of the Notes, particularly if the Group encounters financial difficulties or is unable to pay its debts when due. The Company’s shareholders could cause the Company to pursue acquisitions, divestitures, financings, dividend distributions or other transactions (subject to the limitations set forth in the Indenture) that, in their judgment, could enhance their equity investments, although such transactions might involve risks to holders of the Notes. Furthermore, no assurance can be given that the Company’s principal shareholders will not sell all or any part of their respective shareholdings at any time nor that they will not look to reduce their holding by means of a sale to a strategic investor, an equity offering or otherwise. Such divestitures may not trigger a change of control under the Indenture. See ‘‘—The Group may not be able to obtain the funds required to repurchase the Notes upon a change of control’’. The Group may not be able to obtain the funds required to repurchase the Notes upon a change of control. The Indenture will contain provisions relating to certain events constituting a Change of Control (as defined under ‘‘Description of the Notes’’). See ‘‘Description of the Notes—Change of Control’’. Upon the occurrence of a Change of Control, the Group will be required to offer to repurchase all outstanding Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest and additional amounts, if any, to the date of repurchase. If a Change of Control were to occur, Johnston Press cannot assure you that the Group would have sufficient funds available at such time, or that Johnston Press would have sufficient funds to provide to the Issuer to pay the purchase price of the outstanding Notes and finally repay amounts outstanding under the New Revolving Credit Facility Agreement or that the
53 restrictions in the Group’s New Revolving Credit Facility Agreement, the Indenture, the Intercreditor Agreement or the Group’s other then-existing contractual obligations would allow the Group to make such required repurchases and final repayments. In the future, a Change of Control may result in an event of default under, or acceleration of the Group’s other indebtedness. The repurchase of the Notes pursuant to such an offer could cause a default under such indebtedness, even if the Change of Control itself does not. The ability of the Issuer to receive cash from the Company’s subsidiaries to allow it to pay cash to the holders of the Notes following the occurrence of a Change of Control may be limited by the Group’s then existing financial resources. Sufficient funds may not be available when necessary to make any required repurchases. If a Change of Control occurs at a time when the Group is prohibited from providing funds to the Issuer by contractual obligations under the Group’s then-outstanding indebtedness for the purpose of repurchasing the Notes, the Group may seek the consent of the relevant lenders under such indebtedness to purchase the Notes or attempt to refinance the borrowings that contain such prohibition. If such consent to repay such borrowings is not obtained, the Issuer will remain prohibited from repurchasing any Notes. In addition, Johnston Press expects that the Issuer would require third-party financing to make an offer to repurchase the Notes upon a Change of Control. Johnston Press cannot assure you that the Group would be able to obtain such financing. Any failure by the Issuer to offer to purchase the Notes would constitute a default under the Indenture which would, in turn constitute an event of default under the New Revolving Credit Facility Agreement. See ‘‘Description of the Notes—Change of Control’’. The change of control provision contained in the Indenture may not necessarily afford you protection in the event of certain important corporate events, including a reorganisation, restructuring, merger or other similar transaction involving the Group that may adversely affect you, because such corporate events may not involve a shift in voting power or beneficial ownership or, even if they do, may not constitute a Change of Control. Except as described under ‘‘Description of the Notes—Change of Control’’, the Indenture will not contain provisions that would require the Issuer to offer to repurchase or redeem the relevant Notes in the event of a reorganisation, restructuring, merger, recapitalisation or similar transaction. The definition of Change of Control in the Indenture will include a disposition of all or substantially all the assets of the Company and its restricted subsidiaries (if any), taken as a whole, to any person. Although there is a limited body of case law interpreting the phrase ‘‘all or substantially all’’, there is no established precise definition of the phrase under applicable law. Accordingly, in certain circumstances, there may be a degree of uncertainty as to whether a particular transaction would involve a disposition of ‘‘all or substantially all’’ of the Company’s assets and its restricted subsidiaries taken as a whole. As a result, it may be unclear as to whether a Change of Control has occurred and whether the Issuer is required to make an offer to repurchase the Notes. Investors may not be able to recover in civil proceedings for U.S. securities law violations. The Issuer and the Guarantors and their respective subsidiaries are organised outside the United States, and their business is conducted entirely outside the United States. The executive officers of the Issuer and the directors and executive officers of the Guarantors are resident in the United Kingdom or the United States. Although the Issuer and the Guarantors will submit to the jurisdiction of certain New York courts in connection with any action under U.S. securities laws or under the Indenture, you may be unable to effect service of process within the United States on the directors and executive officers of the Issuer and the Guarantors. In addition, because all the assets of the Issuer and the Guarantors and their respective subsidiaries and all or a majority of the assets of their directors and executive officers are located outside of the United States, you may be unable to enforce against them judgments obtained in the U.S. courts. See ‘‘Enforcement of civil liabilities’’.
54 England The United States and England currently do not have a treaty providing for the reciprocal recognition and enforcement of judgments (as opposed to arbitration awards) in civil and commercial matters. Consequently, a final judgment for payment rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon U.S. federal securities laws, would not automatically be recognised or enforceable in England. In order to enforce any such U.S. judgment in England, proceedings must first be initiated before a court of competent jurisdiction in England. In such an action, the English court would not generally reinvestigate the merits of the original matter decided by the U.S. court (subject to what is described below) and it would usually be possible to obtain summary judgment on such a claim (assuming that there is no good defence to it). Recognition and enforcement of a U.S. judgment by an English court in such an action is conditional upon (among other things) the following: • the U.S. court having had jurisdiction over the original proceedings according to English conflicts of laws principles; • the U.S. judgment being final and conclusive on the merits in the sense of being final and unalterable in the court which pronounced it and being for a definite sum of money; • the U.S. judgment not being for a sum payable in respect of taxes, or other charges of a like nature or in respect of a penalty or fine; • the U.S. judgment not contravening English public policy; • the U.S. judgment not having been arrived at by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damages sustained and is not being otherwise in breach of Section 5 of the Protection of Trading Interests Act 1980; • the U.S. judgment not having been obtained by fraud or in breach of English principles of natural justice; • the U.S. judgment is not a judgment on a matter previously determined by an English court or another court whose judgment is entitled to recognition in England or conflicts with an earlier judgment of such court; or • the English enforcement proceedings being commenced within the relevant limitation period). Subject to the foregoing, investors may be able to enforce in England judgments that have been obtained from U.S. federal or state courts. Notwithstanding the preceding, Johnston Press cannot assure you that those judgments will be recognised or enforceable in England. In addition, Johnston Press cannot assure you whether an English court would accept jurisdiction and impose civil liability if the original action was commenced in England, instead of the United States, and predicated solely upon U.S. federal securities laws.
Scotland The United States and Scotland are not currently bound by a treaty providing for reciprocal recognition and enforcement of judgments issued by either country’s civil courts. Accordingly, a judgment pronounced by a U.S. federal or state court based on civil liability would not be directly recognised or enforced in Scotland. However, a party who has obtained a favourable judgment in the U.S. may initiate enforcement proceedings in Scotland by lodging with the Court of Session, which has exclusive jurisdiction over such matters in Scotland, a Summons seeking Decree Conform in terms of the judgment of the U.S. court.
55 Decree Conform is a common-law remedy and there are few authoritative statements of the law in Scotland in this regard. On the basis of the authorities which currently exist, the Scottish Court will recognise the judgment of the U.S. court if it is satisfied that the following conditions are met: • That the U.S. court had jurisdiction in terms of the rules of Scottish private international law; • That the judgment is not one for multiple damages under section 5 of the Protection of Trading Interests Act 1980; • That the U.S. court acted judicially and was not misled by fraud of one of the parties; • That the U.S. judgment is final; • That the U.S. judgment is enforceable in the United States; • That the judgment, if enforced in Scotland, would not be contrary to public policy or to the laws of the United Kingdom and in particular the terms of the Human Rights Act 1988. In determining whether the U.S. court had jurisdiction under Scottish private international law, the Scottish court will have regard to the residence of the party against whom the judgment was granted and also whether there was prorogation of, or submission to, the jurisdiction of the U.S. court. As the United States has both federal and state legal systems, it has been said that where the basis of the judgment is the law of a state, then the relevant connection, in private international law terms, must be with that part of the country. If, however, the basis of the judgment is the law of the country as a whole, then the connection should also be with the country as a whole. In determining whether a defender has submitted to the jurisdiction of the U.S. court, the Scottish Court will look objectively at the defender’s actions in each particular case. It will consider whether the defender took steps which were only necessary or only useful if an objection to the jurisdiction of the U.S. court had been waived. Scottish private international law does not require that a defender appear or be represented in the U.S. court for that party to have submitted to the U.S. court’s jurisdiction. In determining whether a judgment is one of multiple damages, the Scottish Court will give a wide meaning to section 5 of the 1980 Act. In a recent case, the Scottish courts decided that the statutory prohibition under section 5 prohibited the enforcement of a U.S. judgment which was not a direct claim for multiple damages, but related to an earlier judgment in favour of the creditor, which was a judgment for multiple damages under U.S. anti-trust legislation. In determining whether a judgment would be contrary to public policy and the European Convention on Human Rights, the Scottish court will consider whether the judgment being sought would be disproportionate. If the Scottish court is satisfied that these conditions are met, it will grant decree in U.S. dollars if that is the money of account, or the pursuer may select a currency which most closely expresses his loss. It will then be for the enforcing party to provide to the Court a currency exchange certificate in terms of the Rules of the Court of Session prior to decree being extracted (extract being the stage at which the enforcing party may begin to take steps to enforce a decree). Lodging a currency conversion certificate will allow the enforcing party to obtain the decree in pounds sterling which, in turn, will assist the enforcing party in their efforts to enforce the decree using the usual forms of diligence.
Northern Ireland The United States and Northern Ireland currently do not have a treaty providing for the reciprocal recognition and enforcement of judgments (as opposed to arbitration awards) in civil and commercial matters. Any judgment rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon U.S. federal securities law,
56 would not be directly enforceable in Northern Ireland. In order to enforce any such judgment in Northern Ireland, proceedings must be initiated by way of civil law action on the judgment debt before a court of competent jurisdiction in Northern Ireland. In this type of action, a court in Northern Ireland generally will not (subject to the matters identified below) reinvestigate the merits of the original matter decided by a U.S. court if: • the relevant U.S. court had jurisdiction (under the rules of private international law in Northern Ireland) to give the judgment; and • the judgment is final and conclusive on the merits of the claim and is for a definite sum of money (not being a sum payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty or otherwise based on a U.S. law that a court in Northern Ireland considers to be a penal, revenue or other public law). A court in Northern Ireland may refuse to enforce such a judgment on a number of grounds, including, if it is established that: • the relevant U.S. court lacked jurisdiction (under the rules of private international law in Northern Ireland) or the judgment is not final and conclusive; • the enforcement of such judgment would contravene public policy or statute in Northern Ireland; • the enforcement of the judgment is prohibited by statute (including, without limitation, if the amount of the judgment has been arrived at by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damage sustained); • the Northern Irish proceedings were not commenced within the relevant limitation period; • before the date on which the U.S. court gave judgment, the issues in question had been the subject of a judgment of a court in Northern Ireland or of a court of another jurisdiction whose judgment is enforceable in Northern Ireland; • the judgment has been obtained by fraud or in proceedings in which the principles of natural justice were breached; • the bringing of proceedings in the relevant U.S. court was contrary to an agreement under which the dispute in question was to be settled otherwise than by proceedings in that court (to whose jurisdiction the judgment debtor did not submit), for example by way of arbitration or proceedings in a different court; • the bringing of proceedings in the relevant U.S. court was contrary to an agreement that any dispute would be settled by reference to a different governing law than that applied by the U.S. court; or • an order has been made and remains effective under section 9 of the U.K. Foreign Judgments (Reciprocal Enforcement) Act 1933 applying that section to U.S. courts including the relevant U.S. court. If a court in Northern Ireland gives judgment for the sum payable under a U.S. judgment, the Northern Irish judgment will be enforceable by methods generally available for this purpose. It may not be possible to obtain a Northern Irish judgment or to enforce that judgment if the judgment debtor is subject to any insolvency or similar proceedings, or if the judgment debtor has any set-off or counterclaim against the judgment creditor. Subject to the foregoing, investors may be able to enforce in Northern Ireland judgments in civil and commercial matters obtained from U.S. federal or state courts in the manner described above. It is, however, uncertain whether a court in Northern Ireland would impose liability on the Group in an action predicated upon the U.S. federal securities law brought in Northern Ireland.
57 English, Scottish and Northern Irish insolvency laws and other jurisdictions may provide you with less protection than U.S. bankruptcy law. England Certain of the Guarantors are incorporated under the laws of England and Wales (together, the ‘‘English Guarantors’’). Assuming that there is no change to the situation of each English Guarantor’s centre of main interests, insolvency proceedings with respect to any of those entities should proceed under, and be governed by, English insolvency law (although this could be challenged and secondary/ancillary proceedings could be opened in other jurisdictions) however, it is not possible to predict with certainty in which jurisdiction insolvency or similar proceedings would be commenced. English insolvency law may not be as favourable to investors as the laws of the United States or other jurisdictions with which investors are familiar. In the event that any one or more of the English Guarantors’ experiences financial difficulty, it is not possible to predict with certainty the outcome of insolvency or similar proceedings. There are circumstances under English insolvency law in which the granting by an English company of security and guarantees can be challenged. Under English insolvency law, English courts are empowered to order the appointment of an administrator in respect of an English company in certain circumstances. An administrator can also be appointed out of court by an English company, its directors or the holder of a qualifying floating charge and different procedures apply according to the identity of the appointor. During the administration, in general no proceedings or other legal process may be commenced or continued against such company, or security enforced over such company’s property, except with leave of the court or the consent of the administrator. The moratorium does not, however, apply to a ‘‘security financial collateral arrangement’’ (such as a charge over cash or financial instruments, such as shares, bonds or tradable capital market debt instruments) under the Financial Collateral Arrangements (No. 2) Regulations 2003. During the administration of an English company, a creditor would not be able to enforce any security interest (other than security financial collateral arrangements) or guarantee granted by it without the consent of the administrator or the court. In addition, a secured creditor cannot appoint an administrative receiver while an administrator is in office although, in certain circumstances (principally where one of the exceptions to the general prohibition on the appointment of an administrative receiver applies), the holder of a floating charge can block the appointment of an administrator by another creditor, a company or its directors by appointing an administrator or, where possible, an administrative receiver. The placing of any of the English Guarantors into liquidation would also potentially lead to challenges against the granting of security and guarantees. Further, there is a possibility that a court could recharacterise as floating charges any security interests expressed to be created by a security document as fixed charges where the chargee does not have the requisite degree of control over the relevant chargor’s ability to deal with the relevant assets and the proceeds thereof or does not exercise such control in practice, as the description given to the charges in the relevant security document as fixed charges is not determinative. In general terms, in circumstances where a company has been placed into administration or liquidation, the liquidator or administrator has the power to bring proceedings to challenge any grant of security or giving of any Note Guarantee as a result of it being considered to be a transaction at an undervalue, a preference, a transaction defrauding creditors or (in relation to any charge created or taking effect as a floating charge) a voidable floating charge. In such circumstances, the courts of England and Wales have the power to make void such transactions, or restore the position to what it would have been if such company had not entered into the transaction. As a result, or if the security or Note Guarantees are held to be unenforceable for any other reason, you would cease to have any security claim against the grantor or a claim against the Guarantor giving such Note Guarantee.
58 Scotland Certain of the Guarantors, including the Company, are incorporated under the laws of Scotland (the ‘‘Scottish Guarantors’’). Assuming that there is no change to the situation of each of the Scottish Guarantors centre of main interests, insolvency proceedings with respect to any of those entities should proceed under, and be governed by, Scottish insolvency law (although this could be challenged and secondary/ancillary proceedings could be opened in other jurisdictions) however, it is not possible to predict with certainty in which jurisdiction insolvency or similar proceedings would be commenced. Scottish insolvency law may not be as favourable to investors as the laws of the United States or other jurisdictions with which investors are familiar. In the event that any one or more of the Scottish Guarantors experiences financial difficulty, it is not possible to predict with certainty the outcome of insolvency or similar proceedings. There are circumstances under Scottish insolvency law in which the granting by a Scottish company of security and guarantees can be challenged. Under Scottish insolvency law, Scottish courts are empowered to order the appointment of an administrator in respect of a Scottish company in certain circumstances. An administrator can also be appointed out of court by a Scottish company, its directors or the holder of a qualifying floating charge and different procedures apply according to the identity of the appointor. During the administration, in general no proceedings or other legal process may be commenced or continued against such company, or security enforced over such company’s property, except with leave of the court or the consent of the administrator. The moratorium does not, however, apply to a ‘‘security financial collateral arrangement’’ (such as a charge over cash or financial instruments, such as shares, bonds or tradable capital market debt instruments) under the Financial Collateral Arrangements (No. 2) Regulations 2003. During the administration of a Scottish company, a creditor would not be able to enforce any security interest (other than security financial collateral arrangements) or guarantee granted by it without the consent of the administrator or the leave of the court. In addition, the holder of a floating charge cannot appoint a receiver while an administrator is in office although, in certain circumstances (principally where one of the exceptions to the general prohibition on the appointment of an administrative receiver applies), the holder of a floating charge can block the appointment of an administrator by a company or its directors by appointing an administrator or, where possible, a receiver. The placing of any of the Scottish Guarantors into liquidation or administration would also potentially lead to challenges against the granting of security and guarantees. In general terms, in circumstances where a company has been placed into administration or liquidation, the liquidator or administrator has the power to bring proceedings to challenge any grant of security or giving of any Note Guarantee as a result of it being considered to be a gratuitous alienation, an unfair preference or a fraudulent preference or (in relation to any charge created or taking effect as a floating charge) a voidable floating charge. In such circumstances, the Scottish courts have the power to make void such transactions, or restore the position to what it would have been if such company had not entered into the transaction. As a result, or if the security or Note Guarantees are held to be unenforceable for any other reason, you would cease to have any security claim against the grantor or a claim against the Guarantor giving such Note Guarantee.
Northern Ireland In Northern Ireland, insolvency laws are substantially the same as those of England although Guarantors organised under the laws of Northern Ireland (‘‘Northern Irish Guarantors’’) will be subject to the separate jurisdiction of the Northern Irish courts concerning the application of insolvency proceedings. The statements made in respect of the relative degree of protection that investors may be afforded under English insolvency laws when compared to other jurisdictions with which investors are familiar would also apply in respect of the Northern Irish insolvency laws to which Northern Irish Guarantors would be subject.
59 General Notwithstanding the statements above on the potential jurisdiction of the English, Scottish and Northern Irish courts, in the event that any one or more of the Issuer, the Guarantors, any future Guarantors, if any, or any other of the Group’s subsidiaries experienced financial difficulty, it is not possible to predict with certainty in which jurisdiction or jurisdictions insolvency or similar proceedings would be commenced, or the outcome of such proceedings. The insolvency and other laws of different jurisdictions may be materially different from, or in conflict with, each other, including in the areas of rights of secured and other creditors, the ability to void preferential transfers, preferences, transactions at an undervalue and transactions defrauding creditors, the validity of certain floating charges, priority of governmental and other creditors, ability to obtain or claim interest following the commencement of insolvency proceedings and the duration of the proceedings. The application of these laws, or any conflict among them, could call into question whether any particular jurisdiction’s laws should apply, adversely affect your ability to enforce your rights under the Note Guarantees or the Collateral in these jurisdictions and limit any amounts that you may receive. See ‘‘Limitations on validity and enforceability of the Note Guarantees and security interests’’. The Notes and the Note Guarantees will be subject to certain limitations on enforcement and may be limited by applicable laws or subject to certain defences that may limit their validity and enforceability. Generally, a court could subordinate, set aside or void the Notes or the Note Guarantees under various corporate purpose or benefit, fraudulent conveyance or transfer, voidable preference, insolvency or bankruptcy challenges, financial assistance, preservation of share capital, thin capitalisation, capital maintenance or similar laws or regulations affecting the rights of creditors generally if, at the time the Notes were issued or one of the Guarantors entered into a Note Guarantee: • the Issuer incurred the debt under the Notes or any of the Guarantors incurred a liability under a Note Guarantee with the intent to hinder, delay or defraud any present or future creditor, favoured one or more creditors to the detriment of others when the Issuer contemplated insolvency or the Issuer or the Guarantors subsequently entered an insolvency process (a ‘‘preference’’) and the Issuer or a Guarantor was insolvent or became insolvent as a result of issuing the Notes or such Note Guarantee; • the Issuer or a Guarantor did not receive fair consideration or reasonably equivalent value in money or money’s worth for issuing the Notes or the Note Guarantee and, at the time the Issuer issued the Notes or a Guarantor issued a Note Guarantee (an ‘‘undervalue’’), the Issuer or a Guarantor was insolvent or became insolvent as a result of issuing the Notes or such Note Guarantee; or • the Issuer or a Guarantor incurs debts beyond the Group’s or its ability to pay those debts as they matured. Jurisdictions may have different ‘‘hardening’’ or ‘‘claw back’’ periods, during which the issue of the Notes and the Note Guarantees can be challenged.
England Under English law, the relevant periods would be (prior to the onset of insolvency) six months, in the case of a preference to an unconnected person; two years, in the case of an undervalue or a preference to a connected person; twelve months in the case of a voidable floating charge; and two years in the case of a floating charge created in favour of a connected person. There is no hardening period in respect of a transaction defrauding creditors. In any such case, the court could set aside or void the payment obligations under the Notes or such Note Guarantees or subordinate the Notes or such Note Guarantees to presently existing and future indebtedness of ours or such Guarantor, or require the holders of the Notes to
60 repay any amounts received with respect to the Notes or such Note Guarantees. As a result, you may not receive any repayment on the Notes. Furthermore, the voidance of the Notes could result in an event of default with respect to the Group’s other debt and that of the Guarantors that could result in acceleration of such debt. Generally, subject to ongoing interpretation by the courts of England and Wales, an entity would be considered insolvent under English law if (i) its assets are less than the amount of its liabilities, taking into account contingent and prospective liabilities or (ii) it is unable to pay its debts as they become due. If the Note Guarantees were legally challenged, any Note Guarantees could also be subject to the claim that, since the Note Guarantees were incurred for the Group’s benefit, and only indirectly for the benefit of the Guarantor, the obligations of the applicable Guarantor were incurred for less than fair consideration. A court could thus void the obligations under the Note Guarantees, subordinate them to the applicable Guarantor’s other debt or take other action detrimental to the holders of the Notes. For a further discussion of relevant English insolvency law, see ‘‘Limitations on validity and enforceability of the Note Guarantees and security interests’’.
Scotland Under Scots law, the relevant periods would be (prior to the onset of insolvency): (i) in the case of a gratuitous alienation to an unconnected person—2 years; (ii) in the case of a gratuitous alienation to an connected person—5 years; (iii) in the case of an unfair preference—6 months; and (iv) in the case of a fraudulent preference—no time limit. In any such case, the court could set aside or void the payment obligations under the Notes or such Note Guarantees or subordinate the Notes or such Note Guarantees to presently existing and future indebtedness of such Guarantor, or require the holders of the Notes to repay any amounts received with respect to the Notes or such Note Guarantees. As a result, you may not receive any repayment on the Notes. Furthermore, the voidance of the Notes could result in an event of default with respect to the Group’s other debt and that of the Guarantors that could result in acceleration of such debt. Generally, subject to ongoing interpretation by the Scottish courts an entity would be considered insolvent under Scots law if (i) its assets are less than the amount of its liabilities, taking into account contingent and prospective liabilities or (ii) it is unable to pay its debts as they become due. If the Note Guarantees were legally challenged, any Note Guarantees could also be subject to the claim that, since the Note Guarantees were incurred for the Group’s benefit, and only indirectly for the benefit of the Guarantor, the obligations of the applicable Guarantor were incurred for less than adequate consideration. A court could thus void the obligations under the Note Guarantees, subordinate them to the applicable Guarantor’s other debt or take other action detrimental to the holders of the Notes. For a further discussion of relevant Scottish insolvency law, see ‘‘Limitations on validity and enforceability of the Note Guarantees and security interests.’’ In Scotland, a challenge to the validity of the Note Guarantee or security interest in the Collateral on the basis that they constituted gratuitous alienation, unfair preference or fraudulent preference could be brought by a liquidator, administrator or creditor.
Northern Ireland In Northern Ireland, the Notes and the Note Guarantees will be subject to limitations on enforcement and may be limited by applicable laws or subject to defences that may limit their validity and enforceability that are substantially the same as described as being applicable under English law.
61 Investors may face foreign exchange risks by investing in the Notes. The Notes will be denominated and payable in pounds sterling. If investors measure their investment returns by reference to a currency other than pounds sterling, an investment in the Notes will entail foreign exchange related risks due to, among other factors, possible significant changes in the value of pounds sterling relative to the currency by reference to which such investors measure the return on their investments. These changes may be due to economic, political and other factors over which Johnston Press has no control. Depreciation of pounds sterling against the currency by reference to which such investors measure the return on their investments could cause a decrease in the effective yield of the Notes below their stated coupon rates and could result in a loss to investors when the return on the Notes is translated into the currency by reference to which such investors measure the return on their investments. Investments in the Notes denominated in a currency other than United States dollars by United States investors may also have important tax consequences as a result of foreign exchange gains or losses, if any. See ‘‘Tax considerations—Material United States federal income tax consequences’’. The Pension Plan has a defined benefit section which is currently in deficit. The Group may be required to increase its contributions to cover an increase in the cost of funding future pension benefits or to cover funding shortfalls under the Pension Plan. Under Accounting Standard IAS 19, the Pension Plan had an aggregate deficit of £78.3 million as at 28 December 2013. Higher deficit funding payments have been made to the scheme since June 2012 as agreed with the Plan Trustees and taking into account cashflow forecasts for the Group. The Pension Plan is closed to future accrual, and pension exchange exercises have taken place to limit the level of pension increases, reducing the liability further. The Plan Trustees are currently finalising a triennial valuation of the deficit under the Pension Plan, which was due to be conducted at 31 December 2013, but was brought forward to 31 December 2012 and which is expected to be completed shortly following the implementation of the Capital Refinancing Plan. The indicative valuation results provided by the actuary reveal that, as at 31 December 2012, the Pension Plan had a deficit of £182.2 million on an on-going basis and at 31 October 2013 had a deficit of £126.7 million on an on-going basis and at 31 December 2012, had a deficit of £387.6 million on a buy-out basis. The buy-out basis is calculated by reference to the cost of securing the liabilities of the Pension Plan by the purchase of annuities from an insurance company. The buy-out deficit is the reference by which any debts payable under section 75 of the Pensions Act 1995 (‘‘S75 Debts’’) are calculated. S75 Debts, however, would only be triggered in a limited number of circumstances where an employer participating in the Pension Plan is no longer in a position to contribute to the Pension Plan, such as insolvency or a winding-up of the Pension Plan. After discussions between the Group and the Plan Trustees, it has been agreed, subject to successful completion of the Capital Refinancing Plan, that the Pension Plan’s existing security will be removed on completion of the Capital Refinancing Plan and the deficit will be removed by entry into a recovery plan providing for payments over an 11 year period with contributions starting at £6.3 million in 2014 and £6.5 million in 2015, and then contributions of £10.0 million in 2016 increasing by three per cent per annum with a final payment of £12.7 million in 2024. The agreement is documented in the Framework Agreement entered into by the Company and the Plan Trustees. The payments under the recovery plan will be certified as at the date the recovery plan is entered into and although it is anticipated that the payment profile will not change if the Pension Plan’s funding position deteriorates, the contributions may have to be revisited and additional contributions may be required. Contributions would ordinarily only be revisited in the context of the triennial valuation of the Johnston Press Pension Plan, although the Plan Trustees have power to call a valuation earlier if they decide to do so. The Company has also agreed to pay the expenses of the Pension Plan and the Pension Protection Fund (‘‘PPF’’) levy as they fall due. Additional contributions may also be payable if the 2014/2015 PPF levy or the 2015/2016 PPF levy is less than £3.2 million, if
62 certain triggers relating to the Group’s leverage are satisfied and also on certain business or asset disposals by the Group. Any funding agreement needs to be reflected in the valuation documentation of the Pension Plan, which must be formally submitted to the Pensions Regulator who may exercise certain powers if it is not compliant with the relevant legislation. The Group’s most recent company and subsidiary company assessment over the 12 month period to 31 March 2014 resulted in a downgrading by Dun and Bradstreet of the Group’s pension covenant strength, following an emphasis of matter by the Group’s auditors in the June 2013 interim financial statements. On 2 April 2014 the Dun and Bradstreet score was upgraded from 69 to 98 incorporating the year end results and disposal of the Irish operations. However, the Company and certain subsidiaries have entered into a flexible apportionment arrangement with the Plan Trustees which is expected to result in a decrease in the PPF levy from the £3.2 million payable in the 2013/14 financial year. The PPF levy is a levy payable in respect of all defined benefit pension plans in the UK. The PPF was established to provide compensation for members of defined benefit pension plans whose employers entered into an insolvency process where there were insufficient assets in the plans to pay members the benefits they were entitled to under the plan. The PPF is funded by the investment returns on the assets of the pension plans that transition into the PPF and the PPF levy. With effect from December 2000, the P&SN Plan was transferred into the Pension Plan as part of the acquisition of these titles by the Group. The Company believes that the P&SN Plan did not validly equalise normal retirement dates for its members and that therefore additional liabilities may potentially accrue to the P&SN Plan in the amount of approximately £8 million. The Group has brought professional negligence claims against its professional advisers who acted on the acquisition for recovery of these amounts if accrued. These proceedings have been stayed whilst the Group seeks declaratory proceedings to determine if such unanticipated liabilities have, in fact, accrued. To the extent that the court determines that such liabilities have been accrued and the Group’s professional negligence claims are unsuccessful or the additional liabilities, or a significant proportion of them, cannot be recovered from the defendants, then the resulting shortfall in the Pension Plan attributable to the P&SN Plan will need to be met by the Company, which could adversely affect the Group’s business, results of operations and financial condition. Any further requirement to increase its Pension Plan contributions or PPF levy could adversely affect the Group’s business, results of operations and financial condition. Measurement of the cost of the Pension Plan for funding purposes and accounting purposes is dependent on market conditions and actuarial assumptions outside the Group’s control. The Pension Plan undergoes valuations on a triennial cycle. Following such periodic valuations, the Group and the Plan Trustees agree the level of deficit contributions that are to be paid to the Pension Plan based on advice from the actuaries of the Pension Plan. Prolonged periods of low interest rates, such as those seen in the current environment, tend to increase the liabilities of defined benefit pension schemes because liabilities are calculated by discounting future benefits by reference to prevailing interest rates appropriate to the duration of the pension benefit payment. Adverse experience in equity and other investment markets, increases in longevity and mortality rates may also have a negative effect on the funding positions of the Pension Plan when these valuations take place. A material increase in the deficit of the Pension Plan would require the total amount of the Group’s contributions to the Pension Plan to increase and would have an adverse impact on the Group’s business, financial condition and the results of operations. The Group and the Pension Plan Trustees are currently finalising the valuation as at 31 December 2012 in accordance with the agreement documented in the Framework Agreement and it is anticipated that the next valuation will be as at 31 December 2015 although the Plan Trustees have the power to call an earlier valuation should they choose to do so.
63 For the purposes of its annual accounts, the Group is required to make certain year-end assumptions regarding the Pension Plan in accordance with International Accounting Standards. The reported accounting values for pension assets and liabilities can change from one reporting period to the next depending on several factors, including factors outside the Group’s control, such as changes in discount rates, interest rates, inflation rates, the market performance of the diversified investments underlying the pension schemes and actuarial data (including mortality rates). For example, as of 31 December 2013, a 0.1 per cent decrease or increase in bond yields would result in a £7.6 million increase or a £7.6 million decrease, respectively, in the pension scheme liabilities for accounting purposes, partially offset by valuation movements in respect of the assets. Each 0.1 per cent decrease or increase in the assumed inflation rate would result in a £4.0 million decrease or a £4.0 million increase, respectively, in the Pension Plan’s liabilities for accounting purposes, if there were no equivalent valuation movements in respect of the Pension Plan assets. These and other sensitivities are not uniform across the Pension Plan. Such changes may materially and adversely affect the Group’s business, results of operations and financial condition. The Pensions Regulator in the United Kingdom has power in certain circumstances to issue contribution notices or financial support directions, which, if issued, may result in significant liabilities arising in the Group. The Pensions Regulator also has a review role in relation to scheme funding and has power in certain circumstances to set assumptions and contributions for funding of pension schemes. The powers of the Pensions Regulator may also have an impact in respect of the Pension Plan. For example, the Pensions Regulator has powers (where it considers it reasonable) to issue contribution notices and financial support directions in certain circumstances on employers (or any associated or connected party) in order to ensure that additional contributions are paid into defined benefit pension schemes or that other financial support is put in place to the benefit of defined benefit pension schemes. A person holding alone or together with his or her associates, directly or indirectly, one third or more of the Company’s voting power could be the subject of a contribution notice or a financial support direction. The terms ‘‘associate’’ and ‘‘connected person’’, which are taken from the Insolvency Act 1986 (UK), are widely defined and could cover the Group’s significant Shareholders (and their associated entities) and others deemed to be shadow directors. If the Company and the Plan Trustees are unable to agree the deficit or contributions as part of a triennial funding valuation, the Pensions Regulator’s powers allow it to set assumptions and contribution levels. Even when the Company and the Plan Trustees reach agreement on the deficit and contributions, any funding agreement needs to be reflected in the valuation documentation of the Pension Plan which must be submitted to the Pensions Regulator who may exercise certain powers if it considers such agreement as not compliant with the relevant UK legislation. The Group’s results of operation and financial condition could be adversely impacted if the Newspaper Society Pension Scheme requests the Group to contribute to its defined benefit pension scheme. The Company is a member of the Newspaper Society (the ‘‘NS’’), an unincorporated body representing the interests of local newspaper publishers. NS has proposed plans to incorporate itself as a company limited by guarantee and to merge with the Newspaper Publishers’ Association (a body representing the interests of publishers of national newspapers). As part of those plans, it has proposed that existing members enter into a deed of covenant in respect of the deficit to the NS’s defined benefit pension scheme. Under that proposal, the members would agree to make agreed contributions over a maximum period of 25 years or until such time as the deficit has been addressed. The Company has indicated its intention to enter into such a deed of covenant on or before 16 May 2014 and to make annual contributions from the date the deed of covenant is entered into in the region of £90,000. The contribution obligation
64 would be contractual in nature and would only arise on entry by the Company into the deed of covenant. As currently constituted, voting by members of NS is proportionate to their share of total subscriptions. The Company has an approximately 21 per cent voting interest in NS. The deed of covenant will require the support of members of NS controlling 75 per cent of the votes in order to become effective. In the event that the deed of covenant does not become effective and/or the merger with the Newspaper Publishers’ Association does not take place, there is a risk that NS will cease to continue its operations, potentially crystallising outstanding liabilities, including a S75 Debt under its defined benefit pension scheme. The S75 Debt would arise as at the date the NS ceased its operations and the NS defined benefit pension scheme had a deficit on a buy-out basis (being the basis on which S75 Debts are calculated) of £10.6 million as at the last valuation date of 1 December 2012. In such circumstances, the Group may be required to contribute its proportionate share of any such liability which could have a material adverse effect on the Group’s cash flow position. There may not be an active trading market for the Notes, in which case your ability to sell the Notes may be limited. Johnston Press or the Issuer cannot assure you as to: • the liquidity of any market in the Notes; • your ability to sell your Notes; or • the prices at which you would be able to sell your Notes. In connection with entering into the Backstop Agreement (as defined herein) by the Initial Purchasers, certain lenders under the Existing Lending Facilities (including Lloyds Bank plc or certain of its affiliates) have committed to purchase from the Initial Purchasers a significant aggregate principal amount of the Notes and have also agreed not to dispose of such Notes, if any are purchased, for a period terminating upon the earlier of the date that is seven days following the end of stabilisation activities by the Stabilising Manager in respect of the Notes and either 21 days or 30 days after the Issue Date based upon the terms of such lenders’ commitment (such period, the ‘‘Lock-up Period’’). See also ‘‘Plan of distribution.’’ If such lenders actually purchase a significant aggregate principal amount of the Notes, the liquidity of the Notes may be negatively affected during the Lock-up Period and the price of the Notes may be negatively affected after the expiry of the Lock-up Period. Future trading prices for the Notes will depend on many factors, including, among other things, prevailing interest rates, the Group’s operating results and the market for similar securities. Historically, the market for non-investment grade securities has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the Notes. The liquidity of a trading market for the Notes may be adversely affected by a general decline in the market for similar securities and is subject to disruptions that may cause volatility in prices. The trading market for the Notes may attract different investors and this may affect the extent to which the Notes may trade. It is possible that the market for the Notes will be subject to disruptions. Any such disruption may have a negative effect on you, as a holder of the Notes, regardless of the Group’s prospects and financial performance. As a result, there is no assurance that there will be an active trading market for the Notes. If no active trading market develops, you may not be able to resell your holding of the Notes at a fair value, if at all. Although an application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Global Exchange Market, the Issuer cannot assure you that the Notes will be or remain listed. Although no assurance is made as to the liquidity of the Notes as a result of the admission to trading on the Global Exchange Market, failure to be approved for listing or the delisting (whether or not for an alternative admission to listing on another stock exchange) of the Notes from the Official List of the Irish Stock
65 Exchange may have a material effect on a holder’s ability to resell the relevant Notes, as applicable, in the secondary market. Although no assurance is made as to the liquidity of the Notes as a result of the admission to trading on the Global Exchange Market, failure to be approved for listing or the delisting (whether or not for an alternative admission to listing on another stock exchange) of the Notes from the Official List of the Irish Stock Exchange may have a material effect on a holder’s ability to resell the relevant Notes, as applicable, in the secondary market. In addition, the Indenture will allow the Group to issue additional Notes in the Future, which could adversely impact the liquidity of the Notes. Credit ratings may not reflect all risks, are not recommendations to buy or hold securities and may be subject to revision, suspension or withdrawal at any time. One or more independent credit rating agencies may assign credit ratings to the Notes. The credit ratings address the Group’s ability to perform its obligations under the terms of the Notes and credit risks in determining the likelihood that payments will be made when due under the Notes. The ratings may not reflect the potential impact of all risks related to the structure, market, additional risk factors discussed above and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal by the rating agency at any time. No assurance can be given that a credit rating will remain constant for any given period of time or that a credit rating will not be lowered or withdrawn entirely by the credit rating agency if, in its judgment, circumstances in the future so warrant. A suspension, reduction or withdrawal at any time of the credit rating assigned to the Notes by one or more of the credit rating agencies may adversely affect the cost and terms and conditions of the Group’s financings and could adversely affect the value and trading of the Notes. The transferability of the Notes may be limited under applicable securities laws. The Notes and the Note Guarantees have not been, and will not be, registered under the U.S. Securities Act or the securities laws of any state or any other jurisdiction and, unless so registered, may not be offered or sold in the United States, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act and the applicable securities laws of any U.S. state or any other jurisdiction. See ‘‘Notice to investors’’. It is the obligation of holders of the Notes to ensure that their offers and sales of the Notes within the United States and other countries comply with applicable securities laws. Investors in the Notes may have limited recourse against the Group’s independent auditors. In respect of the audit reports relating to the annual financial statements reproduced herein, Deloitte LLP, the Group’s independent auditor provides: ‘‘This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.’’ Investors in the Notes should understand that these statements are intended to disclaim any liability to parties (such as purchasers of the Notes) other than to the Company with respect to those reports. The SEC would not permit such limiting language to be included in a registration statement or a prospectus used in connection with an offering of securities registered under the U.S. Securities Act, or in a report filed under the U.S. Exchange Act. If a U.S. court (or any other court) were to give effect to the language quoted above, the recourse that investors in the Notes may have against the independent auditors based on their reports or the consolidated financial statements to which they relate could be limited. The extent to which auditors have responsibility or liability to third parties is unclear under the laws of many jurisdictions, including the United Kingdom, and the legal effect of these statements in the
66 audit reports is untested in the context of an offering of securities. The inclusion of the language referred to above, however, may limit the ability of holders of the Notes to bring any action against the Group’s auditors for damages arising out of an investment in the Notes. The Notes will initially be held in book-entry form and therefore investors must rely on the procedures of the relevant clearing systems to exercise any rights and remedies. The Notes will initially only be issued in global certificated form and held through Euroclear and Clearstream. Interests in the global Notes will trade in book-entry form only, and Notes in definitive registered form, or definitive registered Notes, will be issued in exchange for book-entry interests only in very limited circumstances. Owners of book-entry interests will not be considered owners or holders of Notes. The common depositary, or its nominee, for Euroclear and Clearstream will be the sole registered holder of the global notes representing the Notes. Payments of principal, interest and other amounts owing on or in respect of the global notes representing the Notes will be made to the paying agent, which will make payments to Euroclear and Clearstream. Thereafter, these payments will be credited to participants’ accounts that hold book-entry interests in the global notes representing the Notes and credited by such participants to indirect participants. After payment to Euroclear and Clearstream via the Paying Agent, the Issuer will have no responsibility or liability for the payment of interest, principal or other amounts to the owners of book-entry interests. Accordingly, if investors own a book-entry interest, they must rely on the procedures of Euroclear and Clearstream, and if investors are not participants in Euroclear and Clearstream, they must rely on the procedures of the participant through which they own their interest, to exercise any rights and obligations of a holder of Notes under the Indenture. Unlike the holders of the Notes themselves, owners of book-entry interests will not have the direct right to act upon the Issuer’s solicitations for consents, requests for waivers or other actions from holders of the Notes. Instead, if an investor owns a book-entry interest, it will be permitted to act only to the extent it has received appropriate proxies to do so from Euroclear and Clearstream. The procedures implemented for the granting of such proxies may not be sufficient to enable such investor to vote on a timely basis. Similarly, upon the occurrence of an event of default under the Indenture, unless and until definitive registered Notes are issued in respect of all book-entry interests, if investors own book-entry interests, they will be restricted to acting through Euroclear and Clearstream. The procedures to be implemented through Euroclear and Clearstream may not be adequate to ensure the timely exercise of rights under the Notes. See ‘‘Book-entry, delivery and form’’. If certain changes to tax law were to occur, the Issuer would have the option to redeem the Notes. If certain changes in the law of any Relevant Taxing Jurisdiction, as defined under ‘‘Description of the Notes—Additional Amounts’’, become effective that would impose withholding taxes or other deductions on the payments on the Notes or the Note Guarantees, the Issuer may redeem the Notes in whole, but not in part, at any time, at a redemption price of 100% of the principal amount, plus accrued and unpaid interest, if any, and additional amounts, if any, to the date of redemption. Johnston Press is unable to determine whether such a change to any tax laws will be enacted, but if such change does occur, the Notes will be redeemable at its option and the redemption price may be less than the market value of the Notes at the relevant time. The Notes will be treated as issued with ‘‘original issue discount.’’ The Notes will be treated as issued with ‘‘original issue discount’’ for U.S. Federal income tax purposes. U.S. investors in the Notes will be subject to tax on original issue discount (as ordinary income) as it accrues, in advance of the cash attributable to that income (and in addition to stated interest). For a discussion of the U.S. Federal income tax consequences of the acquisition, ownership and disposition of the Notes, see ‘‘Tax considerations—Material United States federal income tax consequences’’.
67 Payments under the Notes may be subject to withholding tax under the EU Directive on the taxation of savings income. Under EC Council Directive 2003/48/EC on the taxation of savings income in the form of interest payments (the ‘‘Savings Directive’’), each Member State is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a paying agent (within the meaning of the Savings Directive) located within its jurisdiction to, or for the benefit of, an individual resident or certain limited types of entities established in that other Member State; however, for a transitional period, Austria and Luxembourg will instead apply a withholding system in relation to such payments unless during such period they elect otherwise, deducting tax at a rate of 35% (subject to a procedure whereby, on meeting certain conditions, the beneficial owner of the interest or other income may request that no tax be withheld). The transitional period is to terminate at the end of the first full financial year following agreement by certain non-EU countries to the exchange of information relating to such payments. The Luxembourg government has announced its intention to replace the current withholding tax regime under the Savings Directive with an automatic exchange of information system as of 1 January 2015. A number of non-EU countries have adopted similar measures (either provision of information or transitional withholding) in relation to payments made by a person within its jurisdiction to, or for the benefit of, an individual resident or certain limited types of entities established in a Member State. In addition, the Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a Member State to, or collected by such a person for, an individual resident or Residual Entities established in one of those territories. The Council of the European Commission adopted certain changes to the Savings Directive on 24 March 2014. EU Members have until 1 January 2016 to adopt national laws to implement these changes. The changes, when implemented, will broaden the scope of the requirements described above. Investors who are in any doubt as to their position should consult their professional advisers. If a payment to an individual were to be made or collected through an EU Member State which has opted for a withholding system and an amount of, or in respect of, tax were to be withheld from that payment pursuant to the Savings Directive or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to such Directive or any agreement entered into by a new EU Member State with (i) any other state or (ii) any relevant dependent or associated territory of any EU Member State providing for measures equivalent to or the same as those provided by the Directive, neither the Issuer nor any paying agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. The Issuer is required to maintain a paying agent with a specified office in an EU Member State that is not obliged to withhold or deduct tax pursuant to the Savings Directive or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with or introduced in order to conform such Directive or any agreement entered into by a new EU Member State with (i) any other state or (ii) any relevant dependent or associated territory of any EU Member State providing for measures equivalent to or the same as those provided by the Directive.
68 Use of proceeds The gross proceeds from the sale of the Notes will be £220.5 million, and will be deposited in the Escrow Account pending satisfaction of the conditions to the Escrow Release, as described under the caption ‘‘Description of the Notes—Escrow of proceeds; Special Mandatory Redemption’’ . Upon the Escrow Release, the Issuer will make a loan in an amount equal to the gross proceeds of the Notes offered hereby to the Company. The Company will use the proceeds from this Offering together with proceeds from the Placing and the Rights Issue to repay in full the amounts outstanding under the Existing Lending Facilities and the Private Placement Notes, pay certain amounts owed to the Group’s pension scheme, provide funding to the Company’s Employee Share Trust and pay any costs and administrative expenses, fees and indemnities in connection with, or otherwise related to, the Transactions. Any remaining balance will be used for general corporate purposes, including to meet the Company’s working capital requirements and to pursue the ongoing implementation of the Company’s strategy.
Certain affiliates of the Initial Purchasers are mandated lead arrangers and/or lenders under the New Revolving Credit Facility Agreement. In addition, Lloyds Bank plc (or certain of its affiliates) are lenders under the Existing Lending Facilities and are holders of the Private Placement Notes and an affiliate of Lloyds Bank plc is acting as facility agent for the New Revolving Credit Facility. Certain of the Initial Purchasers are affiliates of shareholders of the Company.
Sources and Uses
The following table sets forth the estimated sources and uses of the proceeds from this Offering. Actual amounts will vary from estimated amounts depending on several factors, including differences from the estimate of fees and expenses and outstanding amounts upon repayment.
£ in £ in Sources millions Uses millions Notes offered hereby ...... 225.0 Repayment of total existing debt(2) . . . 330.2 Placing and the Rights Issue(1) ...... 140.0 Repayment of accrued cash interest(3) . 5.0 Pension scheme payment(4) ...... 3.3 Estimated commissions, fees and other expenses(5) ...... 23.9 Cash to balance sheet(6) ...... 2.6 Total sources ...... 365.0 Total uses ...... 365.0 (1) Assumes raising of gross proceeds of £140.0 million pursuant to the Placing and the Rights Issue. (2) Reflects the repayment of all amounts outstanding under the Group’s Existing Lending Facilities and Private Placement Notes, including accrued PIK interest and make-whole payments. The amounts outstanding under the Group’s Existing Lending Facilities and Private Placement Notes assumed to be payable on 23 June 2014 were £206.7 million and £106.7 million, respectively. The accrued PIK interest on the Existing Lending Facilities and the Private Placement Notes assumed to be payable on 23 June 2014 is approximately £6.5 million. The accrued PIK interest as of 28 December 2013 was £20.4 million. The decrease in the amount of accrued PIK interest is due to a substantial reduction in the rate at which PIK margin has been applied to reflect the assumption that the Existing Lending Facilities and Private Placement Notes will be fully repaid prior to 31 December 2014. See ‘‘Capitalisation’’. (3) The accrued interest assumed to be payable on 23 June 2014 on the Existing Lending Facilities and the Private Placement Notes is approximately £5.0 million. (4) Under the New Pensions Framework Agreement, the Group has agreed to pay to its pension scheme certain unpaid Pension Protection Fund levies and Section 75 debt, totalling £3.3 million, upon completion of the Transactions. For more information, see ‘‘Summary—The Transactions—Pensions’’. (5) Reflects the Group’s estimate of commissions, fees and other expenses associated with this Offering, including the original issue discount in respect of the Notes, other discounts and other commissions, advisory and other professional fees and other transaction costs. (6) Reflects cash to balance sheet resulting from the Transactions. Such cash, together with other available cash of the Company, will be used for general corporate purposes, including to meet the Company’s working capital requirements and to pursue the ongoing implementation of the Company’s strategy. In addition, the Company plans to use approximately £5.4 million to provide funding to the Company’s Employee Share Trust (in accordance with the Company’s share sourcing strategy), to enable the Employee Share Trust to acquire ordinary shares to settle outstanding awards under the Group’s employee share plans. See ‘‘Management—Compensation—Employee Share Trust’’.
69 Capitalisation The following table sets forth the Group’s unaudited consolidated capitalisation as at 28 December 2013, on an actual basis and on an as adjusted basis to give effect to the Offering and the consummation of the other Transactions, and, with respect to cash and cash equivalents, after further adjusting for trading between 28 December 2013 and 1 April 2014. See ‘‘Use of proceeds’’ and ‘‘Summary—The Transactions’’. As adjusted information below is illustrative only and does not purport to be indicative of the Company’s capitalisation following the completion of the Offering.
You should read this table together with the sections of this offering memorandum entitled ‘‘Use of proceeds’’, ‘‘Selected historical consolidated financial data’’, ‘‘Management’s discussion and analysis of financial condition and results of operations’’ and ‘‘Description of other indebtedness’’ and the Group Consolidated Financial Statements and related notes included elsewhere in this offering memorandum.
As at 28 December 2013 £ in millions Actual As adjusted Cash and cash equivalents ...... 29.1 23.5(1) Existing Lending Facilities(2) ...... 200.9 — Private Placement Notes(2) ...... 111.0 — New Revolving Credit Facility(3) ...... — 0.0 Notes offered hereby(4) ...... — 225.0 Total debt(2) ...... 311.9 225.0 Total equity(5) ...... 97.0 237.0 Total capitalisation ...... 408.9 462.0 (1) Pro forma for the Transactions after adjusting for cash flows between 28 December 2013 and 1 April 2014. The cash balance of £23.5 million reflects: (i) £24.2 million of cash on balance sheet as of 29 March 2014; (ii) £6.1 million of cash from the disposal of Formpress on 1 April 2014; and (iii) £2.6 million of cash to balance sheet resulting from the Transactions (See ‘‘Summary—Recent developments—Irish Business Disposal’’); less (x) £5.3 million interest on total borrowings paid on 1 April 2014; (y) £2.7 million paid in employment taxes; and (z) £1.4 million estimated cash from property sales held for prepayment of existing obligations.
(2) Amounts reflected are aggregate principal amounts and do not include unamortised debt issue costs of £8.8 million as at 28 December 2013 and £20.4 million of payment-in-kind interest accrued on the Existing Lending Facilities and the Private Placement Notes as of 28 December 2013, which amount will be reduced to £6.5 million as of 23 June 2014 if the Transactions are consummated prior to 31 December 2014, per an agreement with the applicable creditors. The outstanding amounts under the Existing Lending Facilities and the Private Placement Notes and break costs, if any, will be repaid in full with the proceeds of the Offering together with the proceeds from the Placing and the Rights Issue. See ‘‘Use of proceeds’’. The actual amount to be repaid under the Existing Lending Facilities and the Private Placement Notes will vary depending on the date of issuance of the Notes and the date of completion of the Placing and the Rights Issue due to the impact of accrued interest on the amounts to be prepaid.
(3) The New Revolving Credit Facility Agreement is expected to make available a £25.0 million revolving credit facility. See ‘‘Description of other indebtedness—New Revolving Credit Facility Agreement’’. It is expected that the New Revolving Credit Facility will be undrawn as of the Escrow Release Date.
(4) The Notes have been reflected in the table at their aggregate principal amount of £225.0 million and do not include debt issue costs.
(5) The increase of £140.0 million in the Group’s total equity on an as adjusted basis reflects the gross proceeds raised from the Placing and the Rights Issue and excludes underwriting fees and other costs in respect of the Placing and the Rights Issue.
70 Selected historical consolidated financial data No separate financial information in respect of the Issuer has been prepared or has been provided in this offering memorandum. Prior to the Offering, the Issuer has not engaged in any activities other than those related to its formation and the Transactions and has no material assets or liabilities.
The following table summarises the Group’s historical consolidated financial data as at the dates and for the periods indicated, which have been derived from the Company’s historical consolidated financial statements, which have been audited by Deloitte LLP. The consolidated financial statements of the Company have been prepared in accordance with IFRS.
The results of operations for prior periods are not necessarily indicative of the results to be expected for the full year or any future period. This summary historical consolidated financial data should be read in conjunction with the information contained under the captions ‘‘Use of proceeds’’, ‘‘Capitalisation’’ and the Group’s consolidated financial statements and accompanying notes included elsewhere in the offering memorandum and ‘‘Management’s discussion and analysis of financial condition and results of operations’’.
Summary consolidated income statement data
52 weeks ended 31 December 29 December 28 December (£ in thousands) 2011 2012 2013 Total: Revenue(1) ...... 373,845 358,691 302,799 Cost of sales ...... (235,143) (207,868) (173,710) Gross profit ...... 138,702 150,823 129,089 Operating expenses(2) ...... (81,986) (85,602) (103,966) Impairment of intangibles(2) ...... (163,695) (24,780) (270,793) Operating profit/(loss) ...... (106,979) 40,441 (245,670) Investment income ...... 67 148 394 Net finance (expense)/ income on pension assets/ liabilities ...... 2,250 (2,471) (1,576) Change in fair value of hedges ...... (676) (7,297) (1,691) Retranslation of USD debt ...... (285) 4,275 1,749 Retranslation of Euro debt ...... 285 262 (235) Finance costs ...... (38,475) (42,129) (39,808) Share of results of associates ...... 10 6 2 Profit/(loss) before tax(3) ...... (143,803) (6,765) (286,835) Tax...... 54,866 12,376 74,869 Profit/(loss) for the period ...... (88,937) 5,611 (211,966) (1) Revenue for the 52 weeks ended 28 December 2013 includes £12.8 million of revenue received from the Group’s regional newspapers in the Republic of Ireland, including its Donegal titles, the trade and assets of which were sold on 1 April 2014. See ‘‘Recent Developments—Irish Business Disposal’’ and ‘‘Business—Material Contracts’’.
(2) Operating expenses and impairment of intangibles for the 52 weeks ended 29 December 2012 have been restated to reflect the effect of a change in the Group’s accounting policies in 2013 to classify impairment of presses and assets held for sale as impairment of intangibles instead of as operating expenses to preserve comparability with operating expenses and impairment of intangibles for the other periods presented. Operating expenses and impairment of intangibles for the 52 weeks ended 29 December 2012 as stated in the Group’s audited consolidated financial statements were £110.4 million and £nil, respectively.
(3) Profit/(loss) before tax for the 52 weeks ended 28 December 2013 includes £0.2 million of profit before tax ascribed to the Group’s regional newspapers in the Republic of Ireland, including its Donegal titles, the trade and assets of which were sold on 1 April 2014. ‘‘Business—Material Contracts’’.
71 Summary consolidated balance sheet data
As at As at As at 31 December 29 December 28 December (£ in thousands) 2011 2012 2013 Non-current assets ...... 914,995 873,255 596,539 Intangible assets ...... 742,851 742,294 541,360 Property, plant and equipment ...... 171,154 127,223 54,181 Available for sale investments ...... 970 970 970 Interests in associates ...... 14 20 22 Trade and other receivables ...... 666 Derivative financial instruments ...... — 2,742 — Current assets ...... 81,741 85,023 76,071 Assets classified as held for sale ...... 3,238 7,601 6,625 Inventories ...... 4,709 2,850 2,545 Trade and other receivables ...... 48,730 41,628 36,718 Cash and cash equivalents ...... 13,407 32,789 29,075 Derivative financial instruments ...... 11,657 155 1,108 Total assets(1) ...... 996,736 958,278 672,610 Current liabilities ...... 422,552 69,527 90,814 Trade and other payables ...... 42,958 50,934 74,013 Current tax liabilities ...... 4,244 2,947 752 Retirement benefit obligation ...... 2,200 5,700 5,700 Borrowings ...... 372,094 8,520 8,553 Derivative financial instruments ...... 1,056 99 — Short-term provisions ...... — 1,327 1,796 Non-current liabilities ...... 289,820 614,834 484,713 Borrowings ...... — 334,220 314,863 Derivative financial instruments ...... 306 — — Retirement benefit obligation ...... 101,790 115,619 72,634 Deferred tax liabilities ...... 181,609 160,584 92,776 Trade and other payables ...... 148 142 136 Long-term provisions ...... 5,967 4,269 4,304 Total liabilities ...... 712,372 684,361 575,527 Net assets ...... 284,364 273,917 97,083 Equity Share capital ...... 65,081 65,081 69,541 Share premium account ...... 502,818 502,818 502,829 Share-based payments reserve ...... 17,845 18,959 13,576 Revaluation reserve ...... 2,160 1,783 1,737 Own shares ...... (5,379) (5,589) (5,312) Translation reserve ...... 9,779 9,267 9,579 Retained earnings ...... (307,940) (318,402) (494,867) Total equity ...... 284,364 273,917 97,083 (1) Total assets for the 52 weeks ended 28 December 2013, 29 December 2012 and 31 December 2011 includes assets of the Group’s regional newspapers in the Republic of Ireland, including its Donegal titles, the trade and assets of which were sold on 1 April 2014. The assets were sold for an amount equal to net book value so the net impact on Group net assets was £nil. See ‘‘Recent Developments—Irish Business Disposal’’ and ‘‘Business—Material Contracts’’.
72 Summary consolidated cash flow data
52 weeks ended 31 December 29 December 28 December (£ in thousands) 2011 2012 2013 Cash generated from operations(1) ...... 71,207 80,692 54,537 Income tax paid ...... (3,282) (4,809) (2,800) Net cash inflow from operating activities(1) ...... 67,925 75,883 51,737 Investing activities Interest received ...... 51 120 16 Dividends received from available for sale investments ...... — 22 378 Dividends received from associated undertakings . . . 25 — — Proceeds on disposal of publishing titles ...... — — 1,965 Proceeds on disposal of property, plant and equipment ...... 2,589 8,936 3,697 Expenditure on digital intangible assets ...... — — (3,033) Purchases of property, plant and equipment ...... (1,802) (5,171) (4,320) Net cash received from investing activities ...... 863 3,907 (1,297) Financing activities Dividends paid ...... (152) (152) (152) Interest paid(1) ...... (25,629) (21,837) (24,803) Repayment of borrowings ...... (28,371) (2,697) (26,586) Repayment of loan notes ...... (6,363) (23,841) (6,473) Financing fees ...... (53) (11,826) (514) Net cash flow from derivatives ...... — 198 — Issue of shares ...... — — 4,471 Purchase of own shares ...... (375) (253) (97) Decrease in bank overdrafts ...... (5,550) — — Net cash used in financing activities(1) ...... (66,493) (60,408) (54,154) Net increase in cash and cash equivalents ...... 2,295 19,382 (3,714) Cash and cash equivalents at the beginning of the period ...... 11,112 13,407 32,789 Cash and cash equivalents at the end of the period . 13,407 32,789 29,075 (1) Cash generated from operations and net cash in from operating activities for the 52 weeks ended 29 December 2012 have been restated to reflect the effect of a change in the Group’s accounting policies in 2013 to include exceptional cash receipts due to the termination of the News International printing contract (which were £10.0 million in 2013 and £30.0 million in 2012). Additionally, cash generated from operations, net cash in from operating activities, interest paid and net cash used in financing activities for the 52 weeks ended 29 December 2012 have been restated to reflect the correct classification of £4.6 million of interest paid, which was incorrectly classified as cash generated from operations in the Group’s audited consolidated financial statements for the 52 weeks ended 29 December 2012. Cash generated from operations, net cash in from operating activities, interest paid and net cash used in financing activities for the 52 weeks ended 29 December 2012 as stated in the Group’s audited consolidated financial statements were £76.1 million, £71.3 million, £17.2 million and £55.8 million.
73 Management’s discussion and analysis of financial condition and results of operations The following information should be read together with the ‘‘Selected historical consolidated financial data’’ and the Group’s consolidated financial statements included elsewhere in this offering memorandum. The following discussion contains forward-looking statements that reflect the Group’s plans, estimates and beliefs. The Group’s actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this offering memorandum, particularly in the sections entitled ‘‘Risk factors’’ and ‘‘Forward-looking statements’’.
Certain of the financial measures described below, such as Underlying Group revenue, Underlying Group operating (loss)/profit and EBITDA are not financial measures calculated in accordance with IFRS. Accordingly, they should not be considered as alternatives to IFRS financial measures as indicators of the Group’s performance. These financial measures may not be comparable to similarly titled measures reported by other companies due to differences in the way these measures are calculated. See ‘‘Presentation of financial data and Non-IFRS measures’’.
Johnston Press prepares its consolidated financial statements on the basis of 52-week or 53-week years, as was formerly typical in the newspaper industry. This reflects the importance of weekly publications to the Group’s operating results and facilitates accurate year-on-year comparisons of those results. As used in this section:
• ‘‘2013’’ and ‘‘the year ended 28 December 2013’’ refer to the 52 weeks ended 28 December 2013, and ‘‘year-end 2013’’ means 28 December 2013;
• ‘‘2012’’ and ‘‘the year ended 29 December 2012’’ refer to the 52 weeks ended 29 December 2012, and ‘‘year-end 2012’’ means 29 December 2012;
• ‘‘2011’’ and ‘‘the year ended 31 December 2011’’ refer to the 52 weeks ended 31 December 2011, and ‘‘year-end 2011’’ means 31 December 2011;
• ‘‘period under review’’ means 2013, 2012 and 2011, as so defined; and
• ‘‘consolidated financial statements’’ refers to the consolidated financial statements of Johnston Press plc in 2011, 2012 and 2013 included elsewhere in this Offering Memorandum, and prepared in each case in accordance with IFRS as adopted by the European Union.
The following discussion focuses on the consolidated financial statements. The consolidated financial statements have been audited by Deloitte LLP. In its report on the 2013 consolidated financial statements, Deloitte LLP stated that the 2013 consolidated financial statements give a true and fair view of the state of the Group’s affairs as at 28 December 2013 and of the Group’s loss for the 52 week period then ended and that the 2013 consolidated financial statements have been properly prepared in accordance with IFRS as adopted by the European Union. Deloitte LLP also highlighted in its report on the 2013 consolidated financial statements the use of the going concern basis of accounting, based on financial covenants in bank lending facilities that are being refinanced simultaneously with this Offering. See the discussion below under the caption ‘‘Going Concern’’ under ‘‘Liquidity and Capital Resources’’.
In addition to the IFRS or ‘‘statutory’’ figures contained in the Company’s consolidated financial statements, the Group sometimes presents ‘‘Underlying Group revenue’’ and ‘‘Underlying Group operating (loss)/profit’’, which reflect adjustments with respect to its operations that have been discontinued through closure or conversion of titles. Unless stated otherwise, all financial data in this Management’s discussion and analysis of financial condition and results of operations are based on the IFRS figures contained in the consolidated financial statements.
74 Group Overview
The Group is one of the largest local and regional multi-media organisations in the UK in terms of number of titles published and audience reach (Source: Audit Bureau of Circulations). The Group provides news and information services to local and regional communities through its portfolio of publications and websites, which as at the date of this offering memorandum, consists of 13 paid-for daily newspapers, 196 paid-for weekly publications, 39 free titles, 10 lifestyle magazines and 198 local news and e-commerce websites. The Group operates in eight regions: Scotland, the North East, West Yorkshire, the North West & Isle of Man, South Yorkshire, Midlands, The South and Northern Ireland. The Group delivers extensive coverage of local news, events and people.
The Group’s principal revenue streams are derived from newspaper sales (accounting for 30.0 per cent of Underlying Group revenues in 2013) and advertising across print and digital channels (accounting for 62.2 per cent of Underlying Group revenues in 2013). The Group has total daily paid-for print circulation of approximately 0.26 million, total weekly paid-for circulation of approximately 1.1 million and total weekly free distribution of over 1 million (Source: Audit Bureau of Circulations). Smaller revenue streams are generated from non-advertising related digital activities, contract printing services to third parties and sundry activities such as organising exhibitions and fairs.
The Group does not report revenues by geographical segments, as its primary segment is the UK which, during the period under review, accounted for 95.8 per cent of the Group’s revenues.
The Group’s results over the period under review have been shaped by its response to the changing business environment in its industry, as described below. In particular, as the Group has adapted its business to the new environment by reshaping its print business and increasing its focus on digital, it has incurred considerable restructuring costs, including for redundancies and lease terminations, and it has recognised substantial write-downs in the value of its intangible assets.
In evaluating the revenue and operating (loss)/profit of its reconfigured business as it existed at year-end 2013, the Group makes a series of adjustments to arrive at ‘‘Underlying Group revenue’’ and ‘‘Underlying Group operating (loss)/profit’’, described below. During the period under review, the rate of decline in Underlying Group revenue has decreased to 5.5 per cent in 2013 compared to 7.9 per cent from 2011 to 2012. Underlying Group operating profit has increased 2.5 per cent from 2012 to 2013, compared to a decrease of 9.6 per cent from 2011 to 2012.
Group Response to Industry Trends
Overview of Industry trends Regional and local newspaper circulation in print has been in decline for a number of years as news and information consumption has shifted from the traditional printed product to digital products such as PCs, tablets and mobile phones. This decline in print has been exacerbated by closures of free weekly newspapers, many of which were launched during the 1980s and 1990s.
Weekly titles published in smaller towns have traditionally outperformed daily titles published in cities and large towns, where readers are generally younger and have less disposable income. Some publishers are changing the frequency of publication of titles from daily to weekly. This reduces costs whilst generally maintaining reach, in an attempt to maximise advertising revenue per copy. In addition, cover price increases are used to offset part of the financial effect of circulation volume declines. The implementation of planned cost initiatives remains on track which, together with a lower level of depreciation, resulted in growth in Adjusted Group operating profit for the first three months of 2014 compared to the same period last year.
75 The print advertising market has been challenging since 2008. In an attempt to address declining revenue streams, publishers have sought to reduce costs by closing titles, cutting jobs and merging back-office and editorial functions.
Print advertising has been impacted by the challenging economic environment as well as the continuing shift of audiences from print to digital. Local and regional publishers have invested in making their news products available in digital form and entered into partnerships with large online classified players to maintain a presence in the classified advertising market.
Certain consolidation in the industry took place in 2012, with the creation of Local World, a joint venture between DGMT’s Northcliffe and Yattendon Group’s Iliffe News & Media that holds itself out as the largest regional media network in the UK and that represents a prominent example of new investment in the UK newspaper industry.
Group’s responses The Group has responded to industry trends by launching its new strategy to protect its long standing print heritage, but also recognising the need to accelerate its digital offering, so that in its local markets it can become the leading provider of local and regional news and information services as well as marketing solutions for SME advertisers. This strategy is based on the Group’s expectation that there will be a stable base-line level of readership for UK regional and local print publications. This strategy encompasses the following:
Relaunch Programme To support its print strategy, the Group recently completed its ‘‘Relaunch Programme’’ of 185 print titles and associated news websites, leading to more attractive modern content that the Group believes has appealed to both readers and advertisers. The Group believes that the results of the Relaunch Programme has been one of the key drivers of online audience growth, and that the Relaunch Programme has helped attract new and lapsed advertisers back to the Company.
A key feature of the Relaunch Programme was the implementation of a templated design for the relaunched titles, with the intention of supporting an automated process for including externally authored news and information content in both print and online publications. By including user generated content directly from its audience, the Group believes that its titles will remain relevant and will contribute towards stabilising declines in its newspaper circulation. In the example of one of its titles, The Bourne Local, the Group in late 2013 moved to a structure under which approximately 75 per cent of its content was produced by its readers. As a result of this change, the title’s cumulative audience increased by approximately 54 per cent in the first two months of 2014 as compared to the first two months of 2013. While it may not be possible to replicate this result with every title, the Group believes that this example provides a model for audience growth. The Group also believes that the Relaunch Programme gives it a more cost effective way of generating news content. In line with its industry, the Group has also converted the publication frequency of five titles from daily to weekly, which has reduced publishing costs whilst still maintaining a significant reach in its markets.
By including its news websites in the Relaunch Programme, the Group has attempted to address the structural shift of news and information consumption from print to digital by ensuring that all of its major titles have an associated website. In January 2014, the Group’s digital audience comprised 16.8 million unique users, representing an increase of 47 per cent from January 2013, and in February 2014 digital audiences comprised 15.7 million unique users, representing an increase of 53 per cent from February 2013.
Expanding digital advertising In order to compete more effectively in the digital classified advertising market, which is currently dominated by a small number of players such as Google, Rightmove and Autotrader,
76 the Group has entered into strategic partnerships, including with Zoopla.co.uk and Motors.co.uk. Given the structural change in classified advertising towards digital, the Group has realigned its primary advertising focus to display advertising in both print and digital, offering locally targeted multi-platform solutions to advertising customers. In 2013, the Group’s total digital revenue was £24.6 million, an increase of 19.4 per cent from £20.6 million in 2012.
The Group’s digital investment has been focused on growing audiences, existing digital revenue streams and launching new digital offerings. The Group achieved significant growth rates in the majority of its digital business lines in the 2013 financial year: property and motors digital advertising revenues grew 125.0 per cent and 200.0 per cent, respectively, digital display advertising grew 30.3 per cent, and the Group’s voucher website, DealMonster, grew by 76 per cent.
The Group has also recently launched several new digital offerings, including Digital Kitbag, which offers a range of digital marketing solutions to SMEs, including search engine and email marketing, website buildout, and social media capabilities. Other new launches include ‘WOW24/7’ (an entertainment listings and information service), ‘Findit’ (a service that helps consumers find local businesses) and ‘NEWSEYE’ (which offers users enhanced video content across a number of the Group news websites and which positions the Group in the fast growing online video segment). The Group has also launched a jobs offering called ‘The Smartlist’, which is a tailored CV search service. In February and March 2014, the Group launched two new Smartlist offerings, the Engineers list and the Accountancy list.
Rigorous cost reduction The Group has a proven track record of identifying and implementing cost reduction opportunities. Operating costs were reduced by £33.7 million in 2013 and £37.6 million in 2012, representing reductions of 12.4 per cent from 2012 to 2013 and 12.2 per cent from 2011 to 2012. This reduction in operating costs has been achieved by, among other measures, consolidation and centralisation of contact centres and restructuring of senior management; redundancy programmes; savings in production costs through closure of printing plants at Leeds, Peterborough and Sunderland; outsourcing; and changing titles from daily to weekly format. Recent cost savings initiatives have included streamlining the regional management structure, implementing better practices in editorial, rationalisation of sales and back-office functions, outsourcing of advertisement-creation and the consolidation of production locations. Planned cost initiatives and significant reductions in FTE that have already been implemented are expected to drive material operating cost reductions in 2014 as compared to 2013. The Group intends to continue reducing costs, and its 2014 ‘‘cost savings programme’’ is currently being implemented.
Principal Factors Affecting the Group’s Results of Operations
The results of operations and financial condition of the Group have been influenced during the period under review by various factors, including those summarised below, and the Group expects that these factors may continue to have an impact on its results of operations and financial condition in the future.
Advertising market subdued by difficult economic conditions The Group generates revenue primarily from the sale of advertising, representing £181.7 million or 60.0 per cent of total Adjusted Group revenue for 2013. The advertising market, in general, is sensitive to the economic climate. The majority of the Group’s advertising revenue comprises local and regional advertising. The Group’s business is sensitive to the local, regional and national economic climate.
77 The economic indicators that principally drive the Group’s principal advertising categories comprise:
• Gross Domestic Product (‘‘GDP’’), which is the underlying indicator that drives most advertising categories, in particular, display advertising;
• The rate of unemployment, which has an inverse relationship to results from the Group’s employment advertising;
• New car registrations, which drive results of the Group’s motors advertising category; and
• Residential property transactions, which drive results of the Group’s property advertising.
Each market in which the Group operates has a localised economic climate with rates of growth or decline for each ‘‘macro’’ indicator, affecting the volume, price and type of advertising sold locally. The Group’s operating performance in 2013 is illustrative of the sensitivity of trading performance to macro indicators, whereby advertising revenues decreased by 13.8 per cent from January 2013 to June 2013, whilst, in the second-half of 2013 when macro indicators started to improve, the rate of decline of Group’s advertising revenue slowed to 5.6 per cent from July 2013 to December 2013.
The Group anticipates that the macro indictors for 2014 will be more positive than in 2013; however, certain global, local or national events may impact business and consumer confidence and cause a change in expected macro indicators impacting advertising volumes in the markets in which the Group operates.
On-going structural shift in news consumption Newspaper sales revenues accounted for 30.0 per cent of total Underlying Group revenues in 2013. Regional and local circulation in print has been in decline for a number of years as news and information consumption has shifted from the traditional printed product to digital products such as PCs, tablets and mobile phones. The declines in circulation of paid daily/ evening newspapers averaged 8.9 per cent in 2012 and the decline in weekly circulation averaged 7.5 per cent in 2012 (Source: Enders, Regional and Local Press: 2013 Sector Update). The Group believes that there is a stable base-line level of readership for regional and local print publications and the decline will ‘‘bottom out’’ at a certain point in time. Although the Group has attempted to mitigate and offset the impact of continuing circulation declines by increasing cover prices and re-launching titles, there is a sensitivity that newspaper circulation declines may continue for longer than currently anticipated and the market will ‘‘bottom out’’ at a lower point than expected. This might result in the Group implementing further programmes to attempt to reduce costs in order to maintain existing margins.
Fluctuations in the price of newsprint Changes in the price of newsprint, the paper on which newspapers are printed, can have a significant effect on the Group’s operating results, as newsprint is the Group’s principal raw material expense. During the 52 week period ended 28 December 2013, the Group’s total newsprint consumption was approximately 56,500 metric tonnes, with newsprint expense representing 9.6 per cent of the Group’s total costs. Newsprint is a commodity and its costs are cyclical and prices have historically experienced significant volatility.
The Group sources its newsprint primarily from the UK (approximately 82 per cent in 2013), Scandinavia (approximately 5 per cent in 2013) and Canada (approximately 11 per cent in 2013). In 2013, the Group contracted to purchase its newsprint requirements through Harmsworth Printing Limited (until the end of 2014) in pound sterling with quarterly market price movements. As a recent example, average newsprint prices in 2013 decreased by approximately 8.6 per cent but that decrease has largely been reversed since the beginning of 2014. Any significant increase in the cost of newsprint in the future could have a negative impact on the Group’s financial condition and results of operation.
78 Impairment of Publishing Titles The Group’s principal assets are its publishing titles. As at 28 December 2013, the carrying value of its publishing titles totalled £538.5 million, representing 80.1 per cent of total assets. The Group tests the carrying value of its publishing titles for impairment annually, based on expected cash flows from each title discounted to net present value, at estimated pre-tax discount rates that reflect current market interest rates and the risks specific to each title. The amount of impairment was £202.4 million in 2013 and £0.5 million in 2012, and £163.7 million in 2011. The Group’s publishing titles may in the future be subject to further write downs, which may have an adverse impact on its results of operations, including its operating (loss)/ profit and its total (loss)/profit for each period. Any such impairment, however, is a non-cash adjustment and will not have any impact on the Company’s cash inflows from operations or its cash position.
Efficiency and Cost Control Initiatives The Group’s financial results are directly affected by the extent to which it manages its costs. The Group has implemented a series of cost control and efficiency measures over the period under review, which have resulted in a significant reduction of its cost base. See ‘‘Group Response to Industry Trends—Group’s Responses—Rigorous cost reduction’’ above.
Current trading and recent developments
Interim Results for January, February and March 2014 Based on the Group’s unaudited management accounts for the first three months of 2014, there has been continued strong growth in digital revenues, as well as a slowing decline in print advertising revenues compared to the first three months of 2013. As a result, Adjusted Group revenue for the first three months of 2014 recorded a mid single digit rate of decline over the same period last year, in contrast to an 11% decrease in Adjusted Group revenue for the 2013 financial year. The implementation of planned cost initiatives remains on track which, together with a lower level of depreciation, resulted in growth in Adjusted Group operating profit for the first three months of 2014 compared to the same period last year. Adjusted Group EBITDA for the first three months of 2014 was broadly flat year-on-year. During the first three months of 2014 local display print advertising outperformed national display and circulation revenue declined broadly in line with 2013. Following a major restructuring programme, including a voluntary redundancy programme in the fourth quarter of 2013 which will see over 650 employees leave the business, cash outflows in respect of restructuring and other exceptional costs in the first three months of 2014 were approximately £11 million. This includes approximately £6 million in respect of the reductions of employees.
The unaudited management accounts on which the above is based have not been audited, reviewed or compiled by the Group’s independent auditor and may not comply with IFRS in all respects. These three month results may not be indicative of the remainder of the financial half-year or any other period. See ‘‘Information regarding forward-looking statements.’’
Irish Business Disposal On 1 April 2014, the Group entered into an agreement for the sale of Formpress Publishing Limited, which holds the trade and assets of its Republic of Ireland operations, to Iconic Newspapers Ltd for £7.2 million in cash.
This disposal occurred on 1 April 2014 and the Group no longer has ongoing trading operations in the Republic of Ireland, other than the retention of certain leasehold and freehold property interests. The Group will continue to provide printing facilities to Iconic Newspapers Limited for a certain period post disposal. It also intends that certain leasehold properties will be sub-leased to Formpress Publishing Limited. The Group has retained its Northern Irish titles including The Newsletter and Derry Journal (which are also sold in the Republic of Ireland).
79 For the 52 weeks ended 28 December 2013, the operating profit before exceptional items for the assets subject to the disposal amounted to £1.1 million.
Sky Strategic Agreement In addition, the Company has entered into an agreement with Sky (a wholly owned subsidiary of British Sky Broadcasting Group plc) pursuant to which the Company has been appointed as Sky’s sole advertising sales representative to promote and sell AdSmart Local targeted television advertising service, aimed at SMEs, in certain UK regions, including Sheffield, Derby and Nottingham. AdSmart represents an expansion of the Company’s portfolio of advertising offerings, and is at the top end of that portfolio.
Results of Operations
The Group’s results over the period under review have been shaped by its response to the changing business environment for the print news industry. In particular, as the Group has adapted its business to the new environment by reshaping its print business and increasing its focus on digital, it has incurred considerable restructuring costs, including for redundancies and lease terminations, and it has recognised substantial write-downs in the value of its intangible assets.
In evaluating the revenue and operating (loss)/profit of its reconfigured business as it existed at year-end 2013, the Group makes a series of adjustments to arrive at ‘‘Underlying Group revenue’’ and ‘‘Underlying Group operating (loss)/profit’’. See ‘‘Year-on-Year Comparability of Results’’ below. During the period under review, the decrease in Underlying Group Revenue has slowed, decreasing 5.5 per cent from 2012 to 2013 compared to a decrease of 7.9 per cent from 2011 to 2012. Underlying Group operating profit has increased 2.5 per cent from 2012 to 2013, compared to a decrease of 9.6 per cent from 2011 to 2012.
The following table sets out the results of operations, as calculated under IFRS and after adjusting for exceptional items and IAS 21/39 items, together with other adjustments to reflect
80 the Underlying Group revenue and Underlying Group operating (loss)/profit that corresponds to the business as it existed at year-end 2013, for each year in the period under review:
Statutory Exceptionals(1) IAS 21/39(2) Adjusted Other(3) Underlying £m £m £m £m £m £m 2013 Revenue ...... 302.8 (10.0) — 292.8 (0.9) 291.9 Cost of sales ...... (173.7) — — (173.7) Operating expenses . . . (104.0) 39.8 — (64.2) Impairment(4) ...... (270.8) 270.8 — — Total operating costs .. (548.5) 310.6 — (237.9) 0.3 (237.6) Operating (loss)/profit . (245.7) 300.6 — 54.9 (0.6) 54.3 Net finance costs ..... (41.2) — 0.2 (41.0) (Loss)/profit before tax (286.8) 300.5 0.2 13.9 Tax...... 74.9 (71.4) (0.1) 3.4 (Loss)/profit for the period ...... (212.0) 229.2 0.1 17.3 2012 Revenue ...... 358.7 (30.0) — 328.7 (19.9) 308.8 Cost of sales ...... (207.9) — — (207.9) Operating expenses . . . (85.6) 21.8 — (63.8) Impairment(4) ...... (24.8) 24.8 — — Total operating costs .. (318.3) 46.6 — (271.6) 15.8 (255.8) Operating (loss)/profit . 40.4 16.6 — 57.0 (4.0) 53.0 Net finance costs ..... (47.2) — 2.8 (44.5) (Loss)/profit before tax (6.8) 16.6 2.8 12.6 Tax...... 12.4 (2.9) (0.7) 8.8 Profit/(loss) for the period ...... 5.6 13.7 2.1 21.4 2011 Revenue ...... 373.8 — — 373.8 (38.7) 335.1 Cost of sales ...... (235.1) — — (235.1) Operating expenses(4) . . (76.3) 2.1 — (74.2) Impairment(4) ...... (169.5) 169.5 — — Total operating costs .. (480.9) 171.6 — (309.3) 32.7 (276.6) Operating (loss)/profit . (107.0) 171.6 — 64.6 (6.0) 58.6 Net finance costs ..... (36.8) — 0.7 (36.1) (Loss)/profit before tax (143.8) 171.6 0.7 28.4 Tax...... 54.9 (61.1) (0.2) (6.4) Profit/(loss) for the period ...... (88.9) 110.5 0.5 22.0 Notes: (1) ‘‘Exceptionals’’ refers to items identified which are deemed to be exceptional by virtue of their nature or size, as further described below under the caption ‘‘—Year-on-Year Comparability of Results—Exceptional items’’.
(2) ‘‘IAS 21/39’’ refers to items relating to the fair value movement in the Group’s derivative financial instruments (primarily interest rate caps and foreign exchange call options) as well as the retranslation of the Group’s existing U.S. dollar and Euro denominated borrowings, as further described below under the caption ‘‘—Year-on-Year Comparability of Results— IAS 21/39 adjustments’’.
(3) ‘‘Other’’ refers to other adjustments which have been made to reflect the impact of closed titles and the change of publication frequency of five titles from daily to weekly, as well as the impact of the termination of the News International printing contracts in 2012 and 2013, as further described below under the caption ‘‘—Year-on-Year Comparability of Results—Other adjustments’’.
(4) Operating expenses and impairment of intangibles for the 52 weeks ended 29 December 2012 have been restated to reflect the effect of a change in the Group’s accounting policies in 2013 to classify impairment of printing presses and assets held for sale as impairment of intangibles instead of as operating expenses to preserve comparability with operating expenses and impairment of intangibles for the other periods presented. Operating expenses and impairment of intangibles for the 52 weeks ended 29 December 2012 as stated in the Group’s audited consolidated financial
81 statements were £110.4 million and £nil, respectively. For purposes of the above table and the discussion below, of the £7.8 million of ‘‘operating expenses’’ identified as ‘‘non-recurring items’’ for 2011 in the 2012 consolidated financial statements, £2.1 million is treated as non-recurring operating expenses, and £5.8 million is added to the £163.7 million of ‘‘impairment of intangibles’’. For a more detailed comparison of the differing presentation in the 2013 consolidated financial statements and the 2012 consolidated financial statements, see the Group income statement and note 7 to each of the 2013 and 2012 consolidated financial statements.
Year-on-Year Comparability of Results The financial information presented in this section includes measures which are not accounting measures within the scope of IFRS. These measures were adjusted for exceptional items, fair value movements on derivative contracts and certain discontinued or converted operations of the Group. Adjustments were made with respect to the following items:
• Exceptional items. The Group’s results were adjusted to remove the impact of a number of exceptional gains (included in ‘‘Revenue’’) and exceptional costs and expenses (included in ‘‘Operating expenses’’).
• IAS 21/39 items. Under IAS 21/39, the Group is required to record as a gain or loss fair value movements in the Group’s derivative financial instruments (principally interest rate caps and foreign exchange call options).
• Other adjustments. Certain measures were further adjusted to remove the impact of steps taken to restructure the Group’s newspaper business over the period under review, as certain publications have been closed and others have been converted from daily to weekly publication. The Group believes that the development of the Group’s continuing business is better reflected by making eliminations from revenues and operating costs in prior years with respect to the revenue, cost, and expense contributions of closed or converted titles and other discontinued operations.
In the presentation of its consolidated financial statements, the Group identifies exceptional items and IAS 21/39 items and presents its revenues, operating expenses, net finance costs, tax and (loss)/profit for the period as calculated in accordance with IFRS, as well as ‘‘before Exceptional and IAS 21/39 items,’’ which are referred to as ‘‘Adjusted Group’’ measures. Additionally, the Group presents those measures on an Underlying Group basis by further adjusting Adjusted Group measures to reflect the closure or merging of titles and the conversion of publications from daily to weekly.
The following discussion sets out the impact of these adjustments on the Group’s results of operations.
Exceptional items ‘‘Exceptional items’’ comprise each item identified as exceptional due to the size or nature of the item. Exceptional items include impairment of intangible assets, any write-downs in the value of presses and property assets, provisions for lease dilapidations, restructuring and redundancy costs, revenue from the termination of a long term printing contract, IAS 19 past service gains or losses on the Pension Plan and a levy payable to the Pension Protection Fund.
82 The following table sets out the impact of exceptional items for each year during the period under review:
Impact of Exceptional items
52 week period 2013 2012 2011 Categories £m £m £m Revenue ...... — — — Termination of printing contract ...... 10.0 30.0 — Total revenue ...... 10.0 30.0 Operating expenses—pensions Pension Protection Fund contribution ...... (4.4) — — Section 75 pension debt ...... (1.3) — — IAS 19 past service gain ...... — 1.5 1.9 Operating expenses—restructuring costs Redundancy costs ...... (24.4) (21.6) (4.3) Lease termination costs, empty property and dilapidations ...... (5.8) (1.6) — Other ...... (2.8) (1.2) — Operating expenses—gain on disposal Property, plant and equipment ...... 0.2 1.0 — Assets held for sale ...... — — 0.3 Operating expenses—other ...... (1.2) 0.1 — Total operating expenses ...... (39.7) (21.8) (2.1) Impairment Intangible assets ...... (202.4) — (163.7) Property, plant and equipment ...... (63.7) (17.2) (5.1) Assets held for sale ...... (4.7) (7.6) (0.6) Total impairment ...... (270.8) (24.8) (169.4) Total operating expenses and impairment ...... (310.5) (46.6) (171.5) Total Exceptional items ...... (300.5) (16.6) (171.5)
The components underlying each of these exceptional items are as follows:
Revenue. In 2011, 2012 and 2013, the Group has recognised exceptional revenue of £nil, £30.0 million and £10.0 million, respectively. This was as a result of the termination of a long term printing contract with News International following the closure of the News of the World in 2011, with a further contract terminated the following year.
Operating expenses—pensions. In 2011 and 2012, the Group offered a number of then-existing participants in the Pension Plan an opportunity to take part in a pension exchange whereby, in exchange for higher pension payments in the short term, they forgo a proportion of future increases. In 2011 and 2012, this resulted in gains realised under IAS 19 of £1.9 million and £1.5 million, respectively. During 2013, the UK Pension Regulator requested payment by the Company of PPF levies amounting to £3.1 million and £3.2 million for the years ending 31 March 2013 and 31 March 2014, respectively, in accordance with an agreed schedule of contributions. Of these contributions, £4.4 million was charged to the income statement for the period to 28 December 2013. Additionally, the Group incurred a pension-related expense amounting to £1.3 million for the period to 28 December 2013 following the winding up of certain Group companies in prior years.
Operating expenses—restructuring costs. Restructuring costs primarily relate to various reorganisation processes implemented to reduce staff costs and enable operating efficiencies
83 (2011: £4.3 million; 2012: £21.6 million; 2013: £24.4 million), early lease termination costs (2011: £nil, 2012: £nil, 2013: £3.0 million), empty property costs (2011: £nil, 2012: £1.4 million, 2013: £1.4 million), dilapidations (2011: £nil, 2012: £0.2 million, 2013: £1.4 million) and other items relating to associated legal and consulting fees (2011: £nil, 2012: £1.2 million, 2013: £2.8 million).
Operating expenses—gain on disposal. Gains and losses on the disposal of certain assets including property, plant and equipment and assets held for sale which are considered individually material have been classified as exceptional items. In 2011, the Group recognised a gain of £0.3 million due to the disposal of assets held for sale. During 2012, the Group recognised a gain of £1.0 million from the disposal of a significant property in the Isle of Man and, in 2013, the Group recognised a gain of £0.2 million from the disposal of certain printing presses.
Operating expenses—other. In 2013, the Group incurred £0.7 million in relation to legal fees incurred in connection with the renegotiation of covenants under the Override Agreement governing its Existing Lending Facility and Private Placement Notes and £0.5 million relating to legal fees for an aborted disposal of certain assets.
Impairment. In the financial periods ended 31 December 2011, 29 December 2012 and 28 December 2013, impairment charges of £163.7 million, £nil and £202.4 million, respectively, were recognised by the Group in respect of its publishing titles. The impairment charge in 2013 reflected, in the main, a change implemented by the Group in the discount and growth rate assumptions applicable to its business and the sector as a whole. The Group also incurred charges for write downs in the value of its presses and property assets (2011: £5.7 million, 2012: £24.8 million, 2013: £68.4 million) as a result of structural rationalisations, increased centralisation, divisional and title reorganisation and closures of certain internal operations, in particular, printing presses.
IAS 21/39 adjustments ‘‘IAS 21/39 items’’ relate to the fair value movement in the Group’s derivative financial instruments (primarily interest rate caps and foreign exchange call options) as well as the retranslation of the Group’s U.S. dollar and Euro denominated borrowings. The pre-tax value of adjustments for IAS 21/39 items was £0.7 million in 2011, £2.8 million in 2012 and £0.2 million in 2013. In each of the foregoing periods under review, these adjustments were primarily attributable to changes in the fair value of hedging contracts and the retranslation of U.S. dollar denominated borrowings, with the retranslation of Euro denominated borrowings having a smaller effect. For further information on IAS 21/39 items, see Note 11c to the 2013 consolidated financial statements.
Other adjustments During the period under review, the Group closed or merged certain titles and converted others from daily to weekly publication in response to declining sales. In addition, profitable printing contracts with News International were terminated (triggered by the closure of the News of the World in 2011). In addition to the adjustments reflecting exceptional and financial accounting items as set out above, the Group has made ‘‘Other’’ adjustments to its results of operation for 2013, 2012 and 2011 to remove revenue and costs due to such closures, mergers and conversions and the costs associated with termination of the News International printing contracts.
More specifically, the Group makes the following ‘‘Other’’ adjustments to its results of operation to arrive at ‘‘Underlying Group’’ financial measures:
• eliminating from revenue the effect of lost revenue due to the closure or merger of titles, the conversion of newspapers from daily to weekly publication and the termination of the News International printing contracts;
84 • eliminating from operating profit the amount of costs attributed to:
(i) lost revenue from newspapers that were closed or converted from daily to weekly publication;
(ii) 10 per cent of revenue for 2012, representing an allocation of shared costs or Group ‘‘overhead’’ to reorganised titles; and
(iii) discontinued printing operations for News International following termination of the printing contract, together with mitigating cost savings and the contribution from new print contracts that commenced in 2012.
In the case of lost revenue from newspaper closures and mergers and conversion of daily titles to weekly publication, the foregoing revenue adjustments are based on assumptions regarding financial performance of each affected publication in the periods immediately prior to, and immediately following, the relevant change.
In the case of ‘‘Other’’ adjustments made to operating profit relating to newspaper closures and mergers and conversions of daily titles to weekly publication, 100% of revenue lost due to such change is used as an estimate of the costs of the operations that were discontinued, based on the assumption that the discontinued activities were not profitable at the time they were discontinued. Additionally, the Group makes assumptions about the benefit derived by these titles from shared costs. This estimate may not reflect the actual direct and indirect costs associated with the newspapers that were closed or the difference in cost between weekly and daily publication.
The foregoing ‘‘Other’’ adjustments are summarised in the following table:
2013 2012 2011 £m £m £m Revenue Daily to weekly conversion ...... — (4.1) (9.0) Closed titles ...... — (5.8) (12.9) Loss of News International contract ...... (0.9) (10.0) (16.8) (0.9) (19.9) (38.7) Costs Daily to weekly conversion ...... — 4.1 9.0 Closed titles ...... — 6.8 13.9 Loss of News International contract ...... 0.3 4.9 9.8 0.3 15.8 32.7 ‘‘Net other adjustments’’ ...... (0.6) (4.1) (6.0)
Most of the title closures and conversions that give rise to the adjustments for 2012 occurred in the first six months of 2012. The Group does not calculate ‘‘Other’’ adjustments to revenue or operating costs by component of revenue or category of advertising revenue. When the results of these components of revenue or categories of advertising for the first six months of 2012 are compared to the same components and categories of the second six months of 2012, the title closures and conversions that occurred in the first six months of 2012 create an impression of sharp decline in the results of these components and categories. After removing the effects of these closures and conversions, for most components of revenue and categories of advertising revenue, while there were modest declines in results, they were not as large as the statutory or adjusted figures would suggest.
While the Group makes the foregoing ‘‘Other’’ adjustments to its revenue and operating (loss)/ profit in order to analyse the performance of its underlying business as it existed at
85 28 December 2013, these adjustments are not permitted under IFRS and have not been audited or formally reviewed by the Group’s external auditors.
Explanation of key income statement items Revenue The vast majority of Group revenue was generated during the period under review from the UK and the Republic of Ireland, and its principal revenues streams are discussed below.
Advertising. Advertising revenues comprise the largest component of the Group’s revenues, accounting for £181.7 million or 60.0 per cent of total revenues in 2013. Advertising revenues are categorised as either ‘‘print’’ (in the Group’s newspaper publications) or ‘‘digital’’ (on the Group’s news websites). The principle categories of advertising revenue comprise the following:
• Display—bought space in the news section of a title or a news site. This type of advertising is typically designed to help customers build brand awareness.
• Employment—recruitment businesses or direct from employers who wish to either advertise jobs, in print or digital format. Employment also includes value added services such as ‘The Smartlist’, offering the screening of curriculum vitae’s and providing recruiters with qualified short lists.
• Property—primarily estate agents who wish to advertise a property for sale or build brand awareness. This can be in print or on the Group’s news websites where a partnership with Zoopla.co.uk also exists.
• Motors—either car dealerships promoting particular cars or developing local brand awareness, or private individuals advertising in either the Group’s newspapers or news sites. A partnership also exists for online advertising with Motors.co.uk.
• Other—other advertising revenue comprises advertising associated with personal entertainment announcements including births, marriages and deaths (‘‘BMD’s’’) and public notices along with other classified revenues.
Newspaper Sales. Newspaper sales represent the Group’s proportion of the revenue generated from the cover price of news titles sold. Newspaper sales are the second largest contributor to the Group’s revenues, accounting for £87.7 million or 30.0 per cent of total Underlying Group revenue in 2013.
Newspapers are sold through retailers where the consumer is either paying over the counter or using a pre-paid voucher which will have an associated discount. Newspapers can also be delivered direct to the consumers home, and in such arrangements payment can be made by direct debit, cash or invoice. The Group offers a small discount to home delivery customers.
Contract printing. The Group provides contract printing services to third parties on a competitive basis as a means to generate incremental revenue and utilise excess printing capacity. In 2013, contract printing accounted for £21.2 million or 7 per cent of total Group revenue.
Contract printing customers consist primarily of other publishers that generally do not compete directly with the Group’s publications. For example, the Group prints Metro and the Daily Mirror for Trinity Mirror.
Other. Other revenues includes leaflet revenues, which are generated alongside free distribution titles, and other sundry sales revenue streams which include events, local awards, reader holidays and offers, sponsorship and syndication reduction related to closure of free titles (leaflets and papers).
86 Cost of sales Cost of sales includes newsprint costs together with all costs of producing the Group’s publications including all relevant employee related costs. These costs include all production costs and costs related to IT systems, editorial, advertising and establishment, plus an allocation of depreciation and lease costs.
Operating expenses Operating expenses (excluding impairment, which is shown separately) also include, for 2013 and 2012 as set out in the 2013 consolidated financial statements, exceptional costs, principally restructuring costs including redundancies and property related costs offset by gain on sale of assets. Operating expenses as set out in the table above and discussed below are calculated on a comparable basis.
Between the 2012 consolidated financial statements and 2013 consolidated financial statements, the Group changed the classification of impairment expenses between ‘‘operating expenses’’ and, respectively, ‘‘impairment of intangibles, property, plant and equipment and assets held for sale’’ (for 2013 and 2012) and ‘‘impairment of intangibles’’ (for 2012 and 2011). For purposes of the above table and the discussion below, of the £7.8 million of ‘‘operating expenses’’ given as ‘‘non-recurring items’’ for 2011 in the 2012 consolidated financial statements, £2.1 million is treated as non-recurring operating expenses, and £5.8 million is added to the £163.7 million of ‘‘impairment of intangibles’’. More specifically, ‘‘operating expenses’’ in the 2013 consolidated financial statements corresponds, in the 2012 consolidated financial statements, to the line item ‘‘operating expenses’’ plus the following line items in note 7: ‘‘gain on sale of assets’’, ‘‘gain on sale of assets held for sale’’, ‘‘costs from the termination of print contract’’, ‘‘return on previously written down available for sale investments’’, ‘‘restructuring costs of existing business including redundancy costs’’ and ‘‘IAS 19 past service gain’’. For a more detailed comparison of the differing presentation in the 2013 consolidated financial statements and the 2012 consolidated financial statements, see the Group Income Statement and note 7 to each of the 2013 consolidated financial statements and the 2012 consolidated financial statements.
Impairment Impairment (which has been shown separately from operating expenses) principally reflects impairment of intangibles, which results from a revaluation by the Group of the amount of earnings, discounted to present value, it expects to earn from its news titles. The Group impaired its intangibles in 2013 and 2011, in each case with a material impact on its operating (loss)/profit. Impairment also reflects impairment of property, plant and equipment and impairment of assets held for sale. See note 15 to the 2013 consolidated financial statements for discussion of the relevant impairment discount rates. See ‘‘—Operating expenses’’ above for a discussion of the classification and presentation of impairment items from 2011 to 2013.
Total operating costs Total operating costs, presented in the table titled ‘‘Results of Operations’’, comprise cost of sales, operating expenses and impairment. Total operating costs as presented in this table are not a line item in the statutory consolidated financial statements. Nonetheless, because the Group does not find the distinction between ‘‘cost of sales’’ and ‘‘selling expenses’’ to be meaningful in the running of the business, it uses total operating costs in its management accounts, in its analysis of the development of its business and in its earnings announcements (where the line item is sometimes referred to simply as ‘‘operating costs’’).
Net finance costs Net finance costs consist principally of interest on loans, payment-in-kind interest accrual and amortisation of issuance costs of term debt. Finance costs also include interest on pension liabilities, although this interest is reported net of—and is largely offset by—expected return
87 on pension assets. Net finance costs also include IAS 21/39 adjustments for changes in the fair value of hedges and retranslation of U.S. dollar and Euro denominated debt. Going forward, under changes to IAS 19 that became effective on 1 January 2014, non-cash pension interest costs will increase by an estimated £5.2 million per year. See Note 2 to the 2013 Group consolidated financial statements.
Tax Tax as calculated under IFRS is tax currently payable under applicable tax law (based on taxable profit for the period) plus deferred tax. Taxable profit for the period differs from profit before tax under IFRS because taxable profit excludes items of income or expense that are not taxable or deductible in the current period (and also excludes items of income or expense that are never taxable or deductible). Deferred tax is the tax expected to be payable or recoverable in the future on these differences between taxable profit under applicable tax law and profit before tax under IFRS.
UK corporation tax was calculated at 24.0 per cent through 31 March 2013 and at 23.0 per cent thereafter. Deferred tax is calculated at the tax rates that are expected to apply in the period when the expected tax payable or recoverable is settled. For 2012 and 2011, the deferred tax rates that applied were 23 per cent and 25 per cent, respectively. Due to a change in UK tax rates that became effective subsequent to 2013, the deferred tax rate applied was 20 per cent in 2013.
Results of operations for the 52 week periods ended 28 December 2013 and 29 December 2012 Statutory Revenue Total revenue decreased 15.6 per cent to £302.8 million for the 52 weeks ended 28 December 2013 from £358.7 million for the 52 weeks ended 29 December 2012. This change is principally the result of declines in contract printing (due largely to the loss of the News International contracts) and in print advertising. The following table sets out the components of statutory revenue for the two years:
Statutory Revenue
2013 2012 change change £m £m £m per cent Advertising Revenues Print advertising ...... 157.1 181.3 (24.2) (13.3) Digital advertising ...... 24.6 20.6 4.0 19.4 Total advertising ...... 181.7 201.9 (20.2) (10.0) Non Advertising Revenues Newspaper sales ...... 87.7 91.8 (4.1) (4.5) Contract printing ...... 21.2 48.4 (27.2) (56.2) Other ...... 12.2 16.6 (4.4) (26.5) Total statutory revenue ...... 302.8 358.7 (55.9) (15.6)
Advertising revenue. Advertising revenue decreased 10.0 per cent to £181.7 million for the 52 weeks ended 28 December 2013 from £201.9 million for the 52 weeks ended 29 December 2012. The £20.2 million decrease in advertising revenues reflects a difficult but improving market in 2013. Throughout 2013, year-over-year revenue declines improved in each quarter (14.8 per cent, 12.7 per cent, 7.6 per cent and 5.3 per cent in the first, second, third and fourth quarters, respectively) with steeper declines in the first two quarters reflecting the closure of titles in those periods. Digital advertising, which accounted for 8.1 per cent of total revenues in
88 2013, increased 19.4 per cent, highlighting the trend towards digital advertising. The following table shows the changes in advertising revenue by category between 2013 and 2012:
Print and Digital Advertising
Statutory Revenue Analysis
Total advertising Print Digital 2013 2012 change 2013 2012 change 2013 2012 change Categories £m £m per cent £m £m per cent £m £m per cent Property ...... 24.9 27.9 (10.8) 24.0 27.5 (12.7) 0.9 0.4 125.0 Employment ...... 20.3 21.9 (7.3) 12.7 14.6 (13.0) 7.6 7.3 4.1 Motors ...... 14.9 17.2 (13.4) 14.0 16.9 (17.2) 0.9 0.3 200.0 Display ...... 77.2 85.9 (10.1) 68.6 79.3 (13.5) 8.6 6.6 30.3 Other ...... 44.4 49.0 (9.4) 37.8 43.0 (12.1) 6.6 6.0 10.0 Total ...... 181.7 201.9 (10.0) 157.1 181.3 (13.3) 24.6 20.6 19.4
As can be seen in the following table, the decline in advertising revenues slowed substantially in the second half of 2013:
Advertising Revenues—Half-Yearly Revenue Analysis
52 week period First half Second half 2013 2012 change 2013 2012 change 2013 2012 change Categories £m £m per cent £m £m per cent £m £m per cent Property ...... 24.9 27.9 (10.8) 13.6 15.7 (13.4) 11.3 12.2 (7.4) Employment ...... 20.3 21.9 (7.3) 10.7 12.5 (14.4) 9.6 9.4 2.1 Motors ...... 14.9 17.2 (13.4) 7.6 9.5 (20.0) 7.3 7.7 (5.2) Display ...... 77.2 85.9 (10.1) 38.1 44.1 (13.6) 39.1 41.8 (6.5) Other ...... 44.4 49.0 (9.4) 22.8 25.9 (12.0) 21.6 23.1 (6.5) Total ...... 181.7 201.9 (10.0) 92.8 107.7 (13.8) 88.9 94.2 (5.6)
The movements in each individual component of advertising revenues are explained as follows:
Advertising revenue—Property. Despite early signs of an improving market in the latter parts of the year, the first half of 2013 still remained a very difficult market for property advertising. As a result, this category declined by 10.8 per cent in 2013 with a January to June decline of 13.4 per cent and a July to December decline of 7.4 per cent.
Advertising revenue—Employment. The employment category was the Group’s strongest performing category over the year and generated £20.3 million in 2013, a single digit annual decline of 7.3 per cent. Most of the 2013 growth was digital led with digital employment growing by 4.1 per cent year on year and print declining by 13 per cent year on year. Digital employment revenue now accounts for 37.4 per cent of the Group’s total annual employment revenue, its highest digital to total revenue category. The Group expects the employment market, the Group’s improving performance in this category and the changing mix from print to digital to continue into 2014.
Advertising revenue—Motors. 2013 remained difficult for both new and used car dealers. New and used car sales volumes remained low and the market experienced continued consolidation of dealerships, which form a core part of our advertising base in this category. Overall the motors category generated £14.9 million of revenue in 2013, an annual decline of 13.4 per cent. Once again, the print category accounted for all the decline, with an annual decline rate of 17.2 per cent, compared to digital, which grew 200.0 per cent to £0.9 million for 2013 from £0.3 million for 2012.
89 Advertising revenue—Display. 2013 began with tight control over marketing budgets for many of the Group’s display advertising customers. Overall display advertising generated £77.2 million in 2013 at an annual decline of 10.1 per cent. Print advertising declined by 13.5 per cent in 2013 and digital advertising grew by 30.3 per cent in 2013 (44.6 per cent in the second half of 2013). Digital display advertising was the largest contribution to digital advertising revenues in 2013. The Group believes that the improved digital performance is due to, in addition to the macro factors mentioned above, the investments that the Group has made in its websites and the improvements it has made to its sales proposition.
Advertising revenue—Other. Other advertising generated £44.4 million in revenue, representing a decline of 9.4 per cent from 2012 to 2013, with print revenue declining 12.1 per cent from 2012 to 2013 and digital revenue growing by 10.0 per cent from 2012 to 2013. Public notices in print performed comparatively well with a decline of 6.8 per cent from 2012 to 2013. Other classified and entertainment had the largest decreases of 17.0 per cent and 23.0 per cent, respectively from 2012 to 2013. The digital growth of 10.0 per cent was driven by public notices.
Newspaper sales. Revenue from newspaper sales decreased 4.5 per cent to £87.7 million for the 52 weeks ended 28 December 2013 from £91.8 million for the 52 weeks ended 29 December 2012, due largely to the change in frequency of five daily titles to weekly publication. Revenues only benefit from the part year effect of increases in cover prices, which occurred at different parts of the year (March, April, June and October, the majority coming in June).
Other revenue. Other revenue declined 26.5 per cent to £12.2 million for the 52 weeks ended 28 December 2013 from £16.6 million for the 52 weeks ended 29 December 2012. The principal contributor to this decrease was leaflet revenue, which fell 36.8 per cent to £3.6 million in 2013, largely due to the closure of free titles. Sundry revenue fell 17.7 per cent to £7.9 million in 2013, with reductions in events and awards, dating, sponsorship and SMS competitions.
Contract printing. Revenue from contract printing decreased 56.2 per cent to £21.2 million for the 52 weeks ended 28 December 2013 from £48.4 million for the 52 weeks ended 29 December 2012. The £27.2 million decrease was primarily attributable to the negotiated receipts of £10.0 million in 2013 and £30.0 million in 2012 in connection with the termination of the News International contract, which were accounted for as exceptional items. Excluding this exceptional revenue, contract print revenues declined £7.2 million from 2012 to 2013.
Underlying Group revenue Underlying revenue decreased 5.4 per cent to £291.9 million for the 52 weeks ended 28 December 2013 from £308.8 million for the 52 weeks ended 29 December 2012. The following table sets out the components of Underlying Group revenue for the two years:
Underlying Group revenue
2013 2012 change change £m £m £m per cent Advertising Revenues Print advertising ...... 157.1 173.5 (16.4) (9.5) Digital advertising ...... 24.6 20.6 4.0 19.4 Total advertising ...... 181.7 194.1 (12.4) (6.4) Non Advertising Revenues Newspaper sales ...... 87.7 89.6 (1.9) (2.1) Contract printing ...... 10.3 8.4 1.9 22.6 Other ...... 12.2 16.7 (4.5) (26.9) Total Underlying Group revenue ...... 291.9 308.8 (16.9) (5.4)
90 Total Underlying Group advertising revenues decreased 6.4 per cent to £181.7 million for the 52 weeks ended 28 December 2013 from £194.1 million for the 52 weeks ended 29 December 2012, reflecting a difficult but improving market in 2013. Digital advertising, which accounted for 8.4 per cent of Underlying Group revenue in 2013, increased 19.4 per cent from 2012 to 2013, highlighting the trend towards digital advertising. Underlying Group revenues from newspaper sales decreased 2.1 per cent from 2012 to 2013. Revenues only benefit from the part year effect of increases in cover prices, which occurred at different parts of the year (March, April, June and October, the majority coming in June).
Operating costs The Group analyses its costs and expenses on the basis of ‘‘total operating costs’’, which it defines as ‘‘cost of sales’’ plus ‘‘operating expenses’’ plus ‘‘impairment of intangibles, property, plant and equipment and assets held for sale’’ (each as calculated under IFRS for the consolidated financial statements).
Cost of sales. Cost of sales decreased 16.4 per cent to £173.7 million for the 52 week period ended 28 December 2013 from £207.9 million for the 52 weeks ended 29 December 2012. The reduction in cost of sales is principally due to the closure of titles, the conversion of 5 titles from daily to weekly in 2012 and the loss of the News International contract, as well as efficiency savings in editorial.
Operating expenses. Operating expenses increased 21.5 per cent to £104.0 million for the 52 week period ended 28 December 2013 from £85.6 million for the 52 week period ended 29 December 2012. The majority of this increase is the result of exceptional costs, which were £39.8 million in 2013 and £21.8 million in 2012. Exceptional costs consisted principally of redundancy costs (£24.4 million in 2013 and £21.6 million in 2012) incurred across the business rationalising, in particular, with respect to the sales and back office functions, and the creation of a re-sized, flatter and more agile organisation. Operating exceptional costs also include lease terminations, empty property and dilapidations costs associated with reorganising certain pension related payments associated with restructuring, pension obligations and PPF levies and other restructuring costs comprising legal fees and aborted transaction costs.
After removing the effect of exceptional costs, operating expenses increased 0.7 per cent to £64.2 million for the 52 weeks ended 28 December 2013 from £63.8 million for the 52 weeks ended 29 December 2012.
Impairment. Impairment increased £270.8 million for the 52 weeks ended 28 December 2013 from £24.8 million for the 52 weeks ended 29 December 2012. The principal component of impairment in 2013 was impairment of intangible assets, reflecting the Group’s revised expectations of the future earnings of its publishing titles. The Group did not record any impairment of intangible assets for 2012. Impairment of property, plant and equipment was £63.7 million in 2013 and £17.2 million in 2012. Impairment of assets held for sale was £4.7 million in 2013 and £7.5 million in 2012.
Total operating costs. Total operating costs increased 72.3 per cent to £548.5 million for the 52 week period ended 28 December 2013 from £318.3 million for the 52 week period ended 29 December 2012. This increase is substantially due to exceptional items, principally impairment of publishing titles of £202.4 million and a write down in values of presses and property assets of £68.4 million.
After removing the effect of exceptional costs, total operating costs decreased 12.4 per cent to £237.9 million for the period ended 28 December 2013 from £271.7 million for the 52 week period ended 29 December 2012. This decrease is explained further in the table below which
91 shows the components of Adjusted Group operating costs in 2012 and 2013 (consisting of statutory operating costs minus exceptional costs):
Adjusted Group total operating costs
2013 2012 change Category £m £m per cent Editorial ...... 55.7 63.2 (11.9) Production ...... 48.6 62.0 (21.6) Advertising & Digital ...... 45.7 45.1 1.3 Administration ...... 26.5 27.5 (3.6) Distribution ...... 15.0 17.2 (12.8) Establishment ...... 16.3 17.8 (8.4) Newspaper Sales & Marketing ...... 13.8 16.1 (13.8) Depreciation ...... 7.8 12.7 (38.6) IT Systems ...... 8.5 10.1 (16.7) Total ...... 237.9 271.7 (12.4)
During 2013, significant reductions have taken place across all categories of operating costs with the exception of advertising and digital which has increased due to the investment in developing the digital business. The Group has achieved double digit reductions in operating costs with respect to editorial, production, distribution, newspaper sales and marketing and IT systems. Editorial costs decreased by £7.5 million (11.9 per cent) and Production costs reduced by £13.4 million (21.6 per cent). Distribution costs decreased by £2.2 million to £15.0 million for the year, reflecting cost savings through a reduced number of print locations, more centralised distribution, transport and logistics arrangements and more streamlined leaflet distribution arrangements. Administrative expenses for 2013 were £26.5 million compared to £27.5 million for 2012. Depreciation costs have decreased by 38.6 per cent due to the closure of printing sites and impairments of print assets.
Statutory operating (loss)/profit Operating loss increased to £245.7 million from operating profit for the 52 week period ended 28 December 2013 from £40.4 million for the 52 week period ended 29 December 2012. In both years, the operating loss is due to exceptional items, which were a net cost of £300.5 million in 2013 and a net cost of £16.6 million in 2012.
After adjustment for exceptional items, operating profit decreased 3.8 per cent to £54.9 million for the 52 week period ended 28 December 2013 from £57.0 million for the 52 week period ended 29 December 2012. Of this £57.0 million, £51.5 million was attributable to publishing and £5.5 million was attributable to contract printing.
The Group’s operating margin (excluding exceptional items) grew from 17.4 per cent in the 52 week period ended 29 December 2012 to 18.7 per cent in the 52 week period ended 28 December 2013.
Underlying Group operating (loss)/profit Underlying Group operating profit increased 2.5 per cent to £54.3 million for the 52 week period ended 28 December 2013 from £53.0 million for the 52 week period ended 29 December 2012. This improved result reflects adjustments relating to operations that were discontinued due to closure or downsizing of £0.6 million in 2013 and £4.0 million in 2012. The Group, in analysing the performance of its business, believes that this stable ‘‘like-for-like’’ result demonstrates that the decline in results of its underlying business has slowed and perhaps reversed.
92 Net finance costs Net finance costs decreased 12.8 per cent to £41.2 million for the 52 week period ended 28 December 2013 from £47.2 million for the 52 week period ended 29 December 2012. The largest component of net finance costs was finance costs consisting of interest on loans, which was £39.8 million in 2013 and £42.1 million in 2012. The £6.0 million decrease in net finance costs was primarily due to reduced debt levels.
Tax Tax credit increased to £74.9 million for the 52 week period ended 28 December 2013 from a credit of £12.4 million for the 52 week period ended 29 December 2012. The £62.5 million credit increase in income tax credit was primarily attributable to the recognition of the tax benefit arising on the impairment write-down of intangible publishing title assets and benefit of reorganisation costs as well as the benefit of the reduction in tax rate to 23 per cent from 1 April 2013. The 23.25 per cent basic tax rate applied for the 2013 period was a blended rate due to the tax rate of 24.0 per cent in effect for the first quarter of 2013, changing to 23.0 per cent from 1 April 2013 under Section 6 of the UK Finance Act 2012.
(Loss)/profit for the year Loss for the year was £212.0 million for the 52 week period ended 28 December 2013, compared to a profit of £5.6 million for the 52 week period ended 29 December 2012. The difference in (loss)/profit for the year for 2013 as compared to 2012 is principally the result of impairment charges and other exceptional items as discussed above.
Results of operations for the 52 weeks ended 29 December 2012 and 52 weeks ended 31 December 2011 Statutory Revenue Total revenue decreased 4.0 per cent to £358.7 million for the 52 weeks ended 29 December 2012 from £373.8 million for the 52 weeks ended 31 December 2011, including loss of revenue due to the loss of the News International contracts. The £15.1 million decrease in revenue reflected a £29.4 million decrease in advertising revenue and a £3.8 million decrease in newspaper sales, which were partly offset by a £19.4 million increase in contract printing revenue, which consisted of extraordinary revenue of £30.0 million resulting from the termination of the News International contracts combined with a decrease in contract printing revenue of £10.6 million. The following table sets out the components of statutory revenue for the two years:
Statutory Revenue
2012 2011 change change £m £m £m per cent Advertising Revenues Print advertising ...... 181.3 212.8 (31.5) (14.8) Digital advertising ...... 20.6 18.5 2.1 11.4 Total advertising ...... 201.9 231.3 (29.4) (12.7) Non Advertising Revenues Newspaper sales ...... 91.8 95.6 (3.8) (4.0) Contract printing ...... 48.4 29.0 19.4 66.9 Other ...... 16.6 17.9 (1.3) (7.3) Total statutory revenue ...... 358.7 373.8 (15.1) (4.0)
Advertising revenue. Advertising revenue decreased 12.7 per cent to £201.9 million for the 52 weeks ended 29 December 2012 from £231.3 million for the 52 weeks ended 31 December 2011. Of this decrease, £19.8 million was in classified and display advertising revenue, reflecting
93 the challenging economic environment. All Employment, property and motors were down by double digit percentages from 2011 to 2012. Motors was the most affected reflecting the lack of new car sales and migration to online advertising. The decline in display revenues was consistent throughout the year and was seen throughout the industry as large national advertisers reduced marketing spend. Digital advertising revenues increased by 11.4 per cent, driven by digital display revenues and contributions from new digital enterprises including a new venture with Zoopla for online property revenues and a partnership with motors.co.uk to boost digital motors revenues.
The following table shows the changes in advertising revenue by category between the two years:
Print and Digital Advertising
Revenue Analysis
Total advertising Print Digital 2012 2011 per cent 2012 2011 per cent 2012 2011 per cent Categories £m £m change £m £m change £m £m change Property ...... 27.9 31.2 (10.6) 27.5 30.9 (11.0) 0.4 0.3 33.3 Employment ...... 21.9 25.8 (15.1) 14.6 18.7 (21.9) 7.3 7.1 2.8 Motors ...... 17.2 20.8 (17.3) 16.9 20.5 (17.6) 0.3 0.3 0.0 Display ...... 85.9 97.7 (12.1) 79.3 92.2 (14.0) 6.6 5.5 20.0 Other ...... 49.0 55.8 (12.2) 43.0 50.5 (14.9) 6.0 5.3 13.2 Total ...... 201.9 231.3 (12.7) 181.3 212.8 (14.8) 20.6 18.5 11.4
The movements in each individual component of advertising revenues are explained as follows:
Advertising revenue—Property. Despite early signs of an improving market in the latter parts of the year, 2012 remained a very difficult market for print property advertising. The Group saw total property advertising revenue decrease by 10.6 per cent in 2012, and print property advertising revenues declined by 11.0 per cent to £27.5 million. Digital property revenue increased to £0.4 million.
Advertising revenue—Employment. The Group’s Employment category declined by 15.1 per cent from 2011 to 2012, with the decline entirely accounted for by print advertising which declined by 21.9 per cent. In a challenging market, digital employment advertising, in contrast, performed relatively well increasing 2.8 per cent to £7.3 million in 2012 from £7.1 million in 2011.
Advertising revenue—Motors. The Group’s Motors category also experienced declines in 2012, as spending on motor vehicles remained muted. The 17.3 per cent decline from 2011 to 2012 is entirely accounted for by the decline in motor print advertising. Digital motor advertising remained flat at £0.3 million in each year.
Advertising revenue—Display. 2012 was difficult for display advertising, with a decline of 12.1 per cent to £85.9 million from 2011. Importantly, although it is currently a small revenue stream, digital display advertising revenue increased 20.0 per cent from £5.5 million in 2011 to £6.6 million for 2012.
Advertising revenue—Other. This category generated £49.0 million in revenue, representing an annual decline of 12.2 per cent, with print advertising revenues declining 14.9 per cent and digital growing by 13.2 per cent. BMDs and public notices in print performed comparatively well with a decline of 7.0 per cent and 8.0 per cent from 2011 to 2012, respectively. Other classified and entertainment had the biggest declines with revenue down 13.0 per cent and 24.0 per cent respectively. The digital advertising revenues increased from £5.3 million in 2011
94 to £6.0 million in 2012. Digital public notices increased by 5.0 per cent to £2.5 million and Group’s new digital product Dealmonster grew from £nil to £0.4 million in 2012.
Newspaper sales. Revenue from newspaper sales decreased 4.0 per cent to £91.8 million in 2012 from £95.6 million in 2011, due largely to the conversion of five daily titles to weekly publication.
Other revenue. Other revenue declined 7.3 per cent to £16.6 million for the 52 weeks ended 29 December 2012 from £17.9 million for the 52 weeks ended 31 December 2011. The principal contribution to this decrease was leaflet revenue, which fell 17.1 per cent to £5.7 million in 2012 due largely to the closure of free titles. Sundry revenue fell 6.8 per cent to £9.6 million in 2012, with the most significant reductions in events and awards, dating, sponsorship and SMS competitions.
Contract printing. Revenue from contract printing increased 66.9 per cent to £48.4 million for the 52 weeks ended 29 December 2012 from £29.0 million for the 52 weeks ended 31 December 2011. The £19.4 million increase was primarily due to the exceptional receipt of £30.0 million in 2012 relating to the termination of the News International printing contract.
Underlying revenue Underlying Group revenue decreased 7.9 per cent to £308.8 million for the 12 months ended 29 December 2012 from £335.2 million for the 12 months ended 31 December 2011. The following table sets out the components of Underlying Group revenue for 2012 and 2011:
Underlying Group revenue
2012 2011 change change £m £m £m per cent Advertising Revenues Print advertising ...... 173.5 195.8 (22.3) (11.4) Digital advertising ...... 20.6 18.4 2.2 12.0 Total advertising ...... 194.1 214.2 (20.1) (9.4) Non Advertising Revenues Newspaper sales ...... 89.6 90.8 (1.2) (1.3) Contract printing ...... 8.4 12.2 (3.8) (31.1) Other ...... 16.7 17.9 (1.2) (6.7) Total Underlying Group revenue ...... 308.8 335.2 (26.4) (7.9)
Total Underlying Group advertising revenues decreased 9.4 per cent to £194.1 million for the 52 weeks ended 28 December 2012 from £214.2 million for the 52 weeks ended 29 December 2011, reflecting a difficult market in 2012. Underlying Group digital advertising revenues grew by 12.0 per cent, beginning a trend towards digital advertising. Newspaper sales were down 1.3 per cent on an underlying basis.
Operating Costs The Group analyses its costs and expenses on the basis of ‘‘total operating costs’’, which it defines as ‘‘cost of sales’’ plus ‘‘operating expenses’’ plus ‘‘impairment of intangibles, property, plant and equipment and assets held for sale’’ (each as calculated under IFRS for the consolidated financial statements).
Cost of sales. Cost of sales decreased 11.6 per cent to £207.9 million for the 52 week period ended 29 December 2012 from £235.1 million for the 52 week period ended 31 December 2011. The reduction in cost of sales is principally due to the closure of titles, as well as to significantly reduced personnel costs in 2012 as initiatives were implemented to restructure the Group’s operations for efficiency. There were also savings in production costs due to the closure
95 of the printing plants at Leeds, Peterborough and Sunderland during 2012. The Group’s newsprints costs in the UK decreased £5.8 million, or 16.1 per cent, from £35.9 million for the 52 weeks ended 31 December 2011 to £30.1 million for the 52 weeks ended 29 December 2012.
Operating expenses. Operating expenses (excluding impairment) increased 4.4 per cent to £85.6 million for the 52 week period ended 29 December 2012 from £82.0 million for the 52 week period ended 31 December 2011. The increase in operating expenses includes exceptional costs, which were £21.8 million in 2012 and £2.1 million in 2011. After removing exceptional costs, which were largely redundancy costs associated with consolidating the Group’s contact centres and restructuring senior management, Adjusted Group operating expenses decreased 14.0 per cent to £63.8 million for the 52 weeks ended 29 December 2012 from £74.2 million for the 52 weeks ended 31 December 2011.
Impairment. Impairment decreased to £24.8 million for the 52 weeks ended 29 December 2012 from £169.5 million for the 52 weeks ended 31 December 2011. An impairment charge of £24.8 million on presses and assets held for sale was taken in 2012, and a charge of £169.5 million, including of £163.7 million on intangible assets was recorded in 2011. The larger impairment amount for 2011 reflects a change in the discount rate applied and the Group’s revised expectations of the future earnings of its publishing titles. The Group did not record any impairment of intangible assets for 2012.
Total operating costs. Total operating costs decreased 33.8 per cent to £318.3 million for the 52 week period ended 29 December 2012 from £480.8 million for the 52 week period ended 31 December 2011. This decrease was primarily due to exceptional items in 2011, principally impairment of publishing titles. Exceptional costs of £46.6 million for 2012 included £24.4 million in redundancy and a write down of the value of printing presses in existing businesses of £17.2 million and assets held for sale of £7.6 million. Exceptional costs of £171.5 million for 2011 consisted primarily of a £163.7 million impairment of intangible assets relating to publishing titles, £4.3 million in restructuring costs relating to redundancies and closures and a write down of the value of printing presses of £5.2 million.
After removing the effect of exceptional costs, total Adjusted Group operating costs decreased 12.2 per cent to £271.6 million for the 52 week period ended 29 December 2012 from £309.3 million for the period ended 31 December 2011. This decrease is explained further in the table below which shows the components of Adjusted Group operating costs in 2012 and 2011 (consisting of statutory operating costs including costs of sales minus exceptional costs):
Adjusted Group total operating costs
2012 2011 per cent Category £m £m change Editorial ...... 63.2 68.0 (7.1) Production ...... 62.0 75.3 (17.6) Advertising & Digital ...... 45.1 48.9 (7.7) Administration ...... 27.5 33.5 (17.9) Distribution ...... 17.2 21.7 (20.7) Establishment ...... 17.8 18.1 (1.7) Newspaper Sales & Marketing ...... 16.1 16.1 0.0 Depreciation ...... 12.7 18.0 (29.4) IT Systems ...... 10.1 9.9 2.0 Total ...... 271.6 309.3 (13.9)
Headcount reductions and cost savings across a number of operating cost categories were achieved as a result of initiatives such as the consolidation and centralisation of the Group’s contact centres and the restructuring of senior management. There were significant savings in production costs due to the closure of the printing plants at Leeds, Peterborough and
96 Sunderland during the year, as well as the reduced costs from the closing of 59 titles and the conversion of five titles from daily to weekly publication (which offsets the impact of lower newspaper sales revenues from the change).
Statutory operating (loss)/profit Operating (loss)/profit increased to operating profit of £40.4 million for the 52 week period ended 29 December 2012 from an operating loss of £107.0 million for the 52 week period ended 31 December 2011. In both years, the result was affected by exceptional items, which were a net cost of £16.6 million in 2012 and a net cost of £171.5 million in 2011.
Adjusted Group operating profit decreased 11.6 per cent. to £57.0 million for the 52 week period ended 29 December 2012 from £64.6 million for the 52 week period ended 31 December 2011. Of the operating profit of £57.0 million for 2012, £51.5 million was attributable to advertising and £5.5 million was attributable to contract printing.
The Adjusted Group operating margin was 17.3 per cent in the 52 weeks ended 31 December 2011 compared to 17.4 per cent in the 52 weeks ended 29 December 2012. This increase in margin reflects the 12.2 per cent cost savings being offset by a 12.1 per cent reduction in revenues.
Underlying Group operating (loss)/profit Underlying Group operating profit decreased 9.6 per cent to £53.0 million for the 52 week period ended 29 December 2012 from £58.6 million for the 52 week period ended 31 December 2011.
Net finance costs Net finance costs increased 28.3 per cent to £47.2 million for 2012 from £36.8 million for 2011. The largest component of net finance costs was interest on bank overdrafts and loans, which was £26.9 million in 2012 and £25.5 million in 2011. In addition there was an increase in the PIK accrual of £3.3 million in 2011 to £11.0 million in 2012 partly offset by amortisation of the term debt issue costs of £4.1 million for the 2012 year. The net finance expense on pension assets/liabilities amounted to £2.5 million in 2012 compared to a benefit in 2011 of £2.2 million.
Tax Tax credit decreased 77.4 per cent to a credit of £12.4 million for the 52 week period ended 29 December 2012 from a credit of £54.9 million for the 52 week period ended 31 December 2011. The £42.5 million decrease in income tax credit was primarily attributable to the recognition of the tax benefit arising on the impairment write-down on intangible publishing title assets in 2011. The 24.5 per cent basic tax rate applied for the 2012 financial year was a blended rate due to the tax rate of 26.0 per cent in effect for the first quarter of 2012, changing to 24.0 per cent from 1 April 2012 under the 2012 Finance Act.
(Loss)/profit for the year Profit for the year was £5.6 million for the 52 week period ended 29 December 2012 compared to loss for the year of £88.9 million for the 52 week period ended 31 December 2011. The increase in (loss)/profit for the year is principally the result of the impairment charges and other exceptional items in 2011 discussed above.
EBITDA, Adjusted Group EBITDA and Underlying Group EBITDA The Group presents EBITDA, Adjusted Group EBITDA and Underlying Group EBITDA for informational purposes only (1) as they are used by the Group’s management to monitor and report to board members on its financial position for outstanding debt and available operating liquidity and (2) to represent similar measures that are widely used by certain investors, securities analysts and other interested parties as supplemental measures of financial position,
97 financial performance and liquidity. The Group calculates EBITDA by adjusting operating profit by adding back depreciation of property, plant and equipment and amortisation of intangible assets.
The Group is not presenting EBITDA, Adjusted Group EBITDA and Underlying Group EBITDA as measures of the Group’s results of operations. These measures have important limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of the Group’s financial position or results of operations as reported under IFRS. These non-IFRS financial measures are not measurements of financial performance under IFRS, or any other internationally accepted accounting principles, and should not be considered as alternatives to the historical financial position or other indicators of the Group’s operating performance, cash flows, forward position or any other measure of performance derived in accordance with IFRS. These measures may differ from and may not be comparable to similarly titled measures used by other companies due to differences in the way the Group chooses to calculate these measures. The non-IFRS financial information contained in this offering memorandum is not intended to comply with the reporting requirements of the SEC and will not be subject to review by the SEC.
The Group calculates EBITDA by adjusting operating (loss)/profit by adding back depreciation of property, plant and equipment and amortisation of intangible assets. The following table provides a reconciliation of EBITDA to operating (loss)/profit for the periods indicated:
52 weeks ended 28 December 29 December 31 December 2013 2012 2011 £m £m £m Operating (loss)/profit ...... (245.7) 40.4 (107.0) Depreciation of property, plant and equipment .... 7.5 12.7 18.0 Amortisation of intangible assets ...... 0.2 — — EBITDA ...... (237.9) 53.2 (89.0)
The Group also calculates Adjusted Group EBITDA by excluding ‘‘exceptional items’’ and ‘‘IAS 21/39 items’’, as discussed above under ‘‘Year-on-Year Comparability of Results’’. The following table reconciles EBITDA with Adjusted Group EBITDA for each year in the periods under review:
52 weeks ended 28 December 29 December 31 December 2013 2012 2011 £m £m £m EBITDA ...... (237.9) 53.2 (89.0) Exceptional items ...... 300.5 16.6 171.5 IAS 21/39 ...... ——— Adjusted Group EBITDA ...... 62.6 69.8 82.5
98 The following table provides a reconciliation of Adjusted Group EBITDA to net cash inflow from operating activities for the periods indicated:
52 weeks ended 28 December 29 December 31 December 2013 2012 2011 £m £m £m Adjusted EBITDA ...... 62.6 69.8 82.5 Working capital movements and other non-cash items ...... 1.2 7.5 (5.1) Cash exceptional costs ...... (12.4) (21.9) (4.0) News International receipt ...... 10.0 30.0 — Tax...... (2.8) (4.8) (3.3) Pension payments ...... (6.9) (4.7) (2.2) Net cash inflow from operating activities ...... 51.7 75.9 67.9
The Company expects cash outflows in respect of exceptional costs for 2014 of approximately £16 million in respect of reductions of employees, of which approximately £6 million was paid in the first three months of 2014. The Company also expects cash outflows in 2014 in respect of exceptional costs of £5.4 million in to provide funding to the Company’s Employee Share Trust (in accordance with the Company’s share sourcing strategy) to enable the Employee Share Trust to finance unfunded options previously issued that are now expected to vest following the recent increase in share price. See ‘‘Management—Compensation—Employee Share Trust’’. The Company expects that its total cash outflows in respect of exceptional costs in 2014 will significantly exceed its historical cash outflows in respect of exceptional costs.
The Group further calculates Underlying Group EBITDA by removing ‘‘Other’’ adjustments from Adjusted Group EBITDA. See ‘‘—Year-on-Year Comparability of Results’’ above. The table below reconciles Underlying Group EBITDA to Adjusted Group EBITDA for each year in the periods under review:
52 weeks ended 28 December 29 December 31 December 2013 2012 2011 £m £m £m Adjusted Group EBITDA ...... 62.6 69.8 82.5 Other adjustments ...... (0.6) (4.1) (6.0) Underlying Group EBITDA ...... 62.0 65.7 76.6
Liquidity and Capital Resources
During the periods under review, the Group’s primary sources of cash were from operating activities, proceeds on disposals of fixed assets, one-off receipts associated with the termination of the News International contracts and the issue of shares on exercise of warrants. The Group also received cash from borrowings under the Existing Lending Facilities and Private Placement Notes.
The Group’s Existing Lending Facilities and Private Placement Notes are being refinanced under the Capital Refinancing Plan. Following consummation of the Capital Refinancing Plan, the Group expects that its principal sources of liquidity will be cash flows generated from operating activities, cash and cash equivalents received under the Capital Refinancing Plan and any future borrowings under its New Revolving Credit Facility.
The Capital Refinancing Plan is part of an on-going trend by the Group over the past five years to reduce its level of indebtedness. The Group’s net indebtedness (measured as total financial
99 debt, excluding payment-in-kind interest obligations, minus cash and cash equivalents minus the impact of currency hedge instruments plus term debt issue costs) consistently decreased from £419.9 million at 2 January 2010 to £335.3 million at 31 December 2011 to £281.7 million at 28 December 2013. Immediately following the Capital Refinancing Plan, the Group expects that its net indebtedness will be approximately £201.5 million. As part of the Capital Refinancing Plan, the Group expects to enter into the New Revolving Credit Facility, which will provide for up to £25 million of senior secured revolving credit, subject to the satisfaction of certain conditions.
The Group’s principal uses of cash have been to pay interest and principal under the Existing Lending Facilities and Private Placement Notes; to make lease payments and to pay other contractual commitments; to fund restructuring expenses including redundancy programmes; to finance capital expenditure, particularly on the development of the digital business; and to fund pension obligations. Following the Capital Refinancing Plan, the Group’s principal cash needs will be for capital expenditures, debt service and other contractual commitments and for pension obligations.
The Company is of the opinion that, taking into account the net proceeds of the Capital Refinancing Plan receivable by the Company, the Group has sufficient working capital for its present requirements, that is, at least the next 12 months from the date of this offering memorandum.
Historical cash flows The following table summarises the Group’s cash flow statements for the following periods:
2013 2012 2011 £m £m £m Operating cash flows before movements in working capital ...... 48.6 73.2 75.1 Decrease in inventories ...... 0.3 1.9 (0.2) Decrease in receivables ...... 4.9 6.8 1.4 Increase/(decrease) in payables ...... 0.7 (1.2) (5.1) Cash generated from operations ...... 54.5 80.7 71.2 Income tax paid ...... (2.8) (4.8) (3.3) Net cash inflow from operating activities ...... 51.7 75.9 67.9 Net cash (used in)/received from investing activities ...... (1.3) 3.9 0.9 Net cash used in financing activities ...... (54.2) (60.4) (66.5) Net (decrease)/increase in cash and cash equivalents ...... (3.7) 19.4 2.3 Cash and cash equivalents at the beginning of period ...... 32.8 13.4 11.1 Cash and cash equivalents at the end of the period ...... 29.1 32.8 13.4
Working capital management Except to the extent otherwise managed by the Company, the Group’s working capital movements tend to be relatively stable. Cash receipts come from a large number of diversified sources, principally advertisers who are individuals or small or medium-sized companies or individuals who are newspaper subscribers. Taken as a whole, such advertiser and subscriber base tends not to provide significant fluctuations in timing of payments. The Group’s operations do not require it to hold a large amount of inventory, and that inventory tends to consist principally of newsprint and other printing supplies. Absent other considerations, the Group endeavours to be prompt in making payments to suppliers.
During the period under review, the Group was required to comply with covenants in its Override Agreement governing the Existing Lending Facilities and Private Placement Notes in a difficult market environment. Accordingly, the Group managed its working capital position in
100 order to ensure covenant compliance. Following the Capital Refinancing Plan, the Group believes that its financial position and the nature of the new financial covenants to which it will be subject under the Indenture and the New Revolving Credit Facilities Agreement will allow it to stay in compliance. The Group furthermore intends to maintain a cushion of cash and cash equivalents and undrawn amounts under its New Revolving Credit Facility Agreement.
Net cash inflow from operating activities Net cash inflow from operating activities for the 52 weeks ended 28 December 2013 was £51.7 million, consisting of operating cash flows before movements in working capital of £48.6 million, a working capital increase of £5.9 million and income tax paid of £2.8 million. The net cash inflow from operating activities includes a £10.0 million receipt in connection with the termination of the News International contracts and also reflects exceptional expenses (principally restructuring costs and pensions levy and S75 obligations) of £12.4 million. The working capital increase of £5.9 million reflects the Group’s management of its working capital position in 2013, as discussed above.
Net cash inflow from operating activities for the 52 weeks ended 29 December 2012 was £75.9 million, consisting of operating cash flows before movements in working capital of £73.2 million, a working capital increase of £7.5 million and income tax paid of £4.8 million. The net cash inflow from operating activities includes a £30.0 million receipt in connection with the termination of the News International contracts and also reflects exceptional expenses (principally restructuring costs) paid of £21.8 million. The working capital increase of £7.5 million reflects the Group’s management of its working capital position in 2012, as discussed above.
Net cash inflow from operating activities for the 52 weeks ended 31 December 2011 was £67.9 million, consisting of operating cash flows before movements in working capital of £75.1 million, a working capital decrease of £3.9 million and income tax paid of £3.3 million. The net cash inflow from operating activities reflects exceptional expenses (principally restructuring costs) paid of £4.0 million. The working capital decrease of £3.9 million reflects the Group’s management of its working capital position in 2011 as discussed above.
Net cash (used in)/received from investing activities During each year in the period under review, as part of the on-going rationalisation of its activities, the Group received funds from the sale of property, plant and equipment. This cash received was, during the period under review, partially offset by investments made in its operations in line with its strategic objectives for the reshaping of its business.
Net cash used in investing activities was £1.3 million in the 52 weeks ended 28 December 2013. This principally reflected increased investment on publishing infrastructure of £4.3 million and investment in developing digital platforms of £3.0 million. The increased investment was partially offset by proceeds from property and other asset disposals.
Net cash received from investing activities was £3.9 million in the 52 weeks ended 29 December 2012 and reflected proceeds from the disposal of property, plant and equipment of £8.9 million, offset by the purchase of property, plant and equipment of £5.2 million.
Net cash used in investing activities was £0.9 million in the 52 weeks ended 31 December 2011 and reflected proceeds from the disposal of property, plant and equipment of £2.6 million, offset by the purchase of property, plant and equipment of £1.8 million.
The Group’s net capital expenditure was £1.8 million, £5.2 million and £7.3 million for the 52 weeks ended 31 December 2011, 29 December 2012 and 28 December 2013, respectively.
101 Net cash used in financing activities In each year during the period under review, the group made substantial cash payments for debt service. The amount of these payments declined in each period, however, decreasing 10.4 per cent from 2012 to 2013 and decreasing 9.2 per cent. from 2011 to 2012, reflecting lower average amounts of debt outstanding in each successive period.
Net cash used in financing activities for the 52 weeks ended 28 December 2013 was £54.2 million. This principally reflected interest paid of £24.8 million, borrowings under the Existing Lending Facilities repaid of £26.6 million and redemption of the Private Placement Notes of £6.5 million. These debt payments were partially offset by the consideration for the issue of shares on the exercise of warrants of £4.5 million.
Net cash used in financing activities for the 52 weeks ended 29 December 2012 were £60.4 million. This principally reflected interest paid of £21.8 million, borrowings under the Existing Lending Facilities repaid of £2.7 million, redemption of the Private Placement Notes of £23.8 million and financing fees of £11.8 million. The Group refinanced a portion of its indebtedness in 2013, resulting in the £11.8 million of financing fees and resulting as well in lower 2012 interest costs in 2012 principally as a result of timing of payments. As a result of the refinancing arrangements, the Company was required to pay accrued interest in 2012 for only three quarterly interest periods, compared to interest payments for four quarterly interest periods in the other years.
Net cash used in financing activities for the 52 weeks ended 31 December 2011 were £66.5 million. This principally reflected interest paid of £25.6 million, borrowings under the Existing Lending Facilities repaid of £28.4 million, redemption of the Private Placement Notes of £6.4 million and a decrease in bank overdrafts of £5.6 million.
Cash and cash equivalents As at 28 December 2013, the Group had £29.1 million in cash and cash equivalents, compared to cash and cash equivalents of £32.8 million at 29 December 2012 and £13.4 million at 31 December 2011. The £3.7 million decrease in cash position at year-end 2013 compared to year-end 2012 reflects net cash used in financing activities slightly exceeding net cash inflow from operating activities as well as net cash used in investing activities. The improved position at year-end 2012 compared to year-end 2011 principally reflects receipt of the £30.0 million payment in connection with the termination of the News International contracts, which was partially offset by increased net cash used in financing activities for that year.
Expected cash requirements Capital expenditure plan In the financial periods ended 31 December 2011, 29 December 2012 and 28 December 2013, the Group incurred capital expenditure of £1.8 million, £5.2 million and £7.3 million respectively. Of this, the predominant amount was spent on publishing infrastructure and developing the digital platforms.
The Group has planned capital expenditures for its 2014 financial year of £7.7 million, including investment in the digital business (£3.3 million) and Group IT (£4.4 million). The Group expects capital expenditure for 2014 and 2015 to be broadly in line with current depreciation levels. The Group expects to fund these capital expenditures with cash balances, cash flows from operating activities and funds available under its New Revolving Credit Facility.
102 Contractual commitments The following table summarises contractual obligations owed to third parties by period in effect at 28 December 2013, after giving pro forma effect to the Transactions:
Contractual Obligations
Payments due by period less than more than Total 1 year 1-3 years 3-5 years 5 years £m £m £m £m £m Senior Secured Debt(1) ...... 225.0 — — 225.0 — Operating leases(2) ...... 48.3 6.0 9.1 7.8 25.4 Purchase obligations(3) ...... 65.9 49.6 3.3 5.0 8.0 Other long-term liabilities(4) ...... 74.1 74.0 0.1 0.0 0.0 Total ...... 413.3 129.6 12.4 237.8 33.4 (1) Senior Secured Debt is as incurred under the Capital Refinancing Plan and is calculated based on the undiscounted cash flows of financial liabilities based on the scheduled dates of payment. The table includes aggregate principal amounts that are payable at maturity but not interest. This table does not reflect any amounts paid under the Existing Lending Facilities and Private Placement Notes, which are being repaid pursuant to the Capital Refinancing Plan.
(2) Operating leases are based on leases in effect at 28 December 2013.
(3) Purchase obligations are based on obligations in effect at 28 December 2013 include only those items identified where obligations exceed £500,000 per annum.
(4) Other long-term liabilities are based on obligations (excluding pension obligations) in effect at 28 December 2013.
The Group expects to fund these contractual obligations, commercial commitments and principal payments from its current cash flows from operating activities and funds available under the Capital Refinancing Plan.
Pension liabilities The Group operates the Pension Plan, a defined benefit pension plan with a scheme funding deficit of £131.2 million and which is closed to new members and closed to future accrual. As part of the Capital Refinancing Plan, the Plan Trustees and the Company have entered into the New Pensions Framework Agreement agreeing, inter alia, to the following:
• On implementation of the Capital Refinancing Plan, removal of the existing secured guarantee (with security up to £170 million) provided in favour of the Plan Trustees by the Company and certain subsidiaries in relation to any default on a payment obligation under the Pension Plan. This was agreed in relation to the refinancing of the Existing Lending Facilities and Private Placement Notes in 2009. In return for the removal of this security and the aforementioned guarantee, an unsecured cross-guarantee will be provided on implementation of the Capital Refinancing Plan by the Company and certain subsidiaries in favour of the Plan Trustees in relation to any default on a payment obligation under the Pension Plan. Each claim made under the guarantee is capped at an amount equal to the aggregate S75 Debt of the Pension Plan at the date any claim made by the Plan Trustees falls due.
• The deficit as at the 31 December 2012 valuation date will be sought to be addressed over an 11 year period by entry into a recovery plan providing for contributions starting at £6.3 million in 2014, £6.5 million in 2015 and £10.0 million in 2016 increasing by three per cent per annum with a final payment of £12.7 million in 2024.
• Settlement of unpaid PPF levies and S75 Debts.
• The Pension Plan will be entitled to receive 25 per cent of proceeds from business or asset disposals exceeding £1 million in a single transaction or £2.5 million over the course of a
103 12 month period, subject to certain permitted disposals and other exceptions set out in the New Pensions Framework Agreement.
• The Company will also pay additional contributions to the Pension Plan in the event that the 2014/2015 PPF levy or the 2015/2016 PPF levy is less than £3.2 million.
• Additional contributions will also be payable to the Pension Plan in the event that the Group satisfies certain conditions in relation to financial leverage.
Off balance sheet arrangements The Group believes that it does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Group’s financial condition, changes in financial condition, revenues or expenses, operating results, liquidity, capital expenditures or capital resources that is material to investors.
Contingent Obligations Johnston Press Ireland Limited. A number of contingent liabilities exist at 28 December 2013, regarding libel claims. Including legal costs to defend claims, total contingent liabilities are estimated at Euro 300,000.
Exposure to Financial Market and Credit Risks
During the period under review, the Group was exposed to market risks, including adverse changes in currency exchange rates and interest rates. Following the Capital Refinancing Plan, the Group will pay a fixed rate of interest on the Notes, which will be denominated in pounds sterling. It may in addition incur up to £25.0 million of LIBOR-based floating rate debt under its New Revolving Credit Facility. Accordingly, the Group does not expect to have any exposure to exchange rate fluctuations and only moderate exposure to interest rate fluctuations under the Notes and the New Revolving Credit Facility. In addition, the Group has been exposed, and may continue to be exposed, to certain commodity, liquidity and credit risks; however, such risks historically have not had a material impact on the Group’s results of operations or financial condition.
Interest rate risk Following the implementation of the Capital Refinancing Plan, the Group will have £225.0 million of fixed rate indebtedness under the Notes and will have the ability to incur up to £25.0 million of LIBOR-based floating rate indebtedness under its New Revolving Credit Facility. The Group’s ability to incur additional indebtedness is restricted under the terms of the Notes and the New Revolving Credit Facility. See ‘‘Description of other indebtedness—New Revolving Credit Facility’’. The Group estimates that, if the New Revolving Credit Facility is drawn in full and it has incurred no other floating rate indebtedness, a 10 basis point increase in LIBOR will result in a £25,000 increase in its annual net finance costs.
Foreign Exchange risk/Translation Following the implementation of the Capital Refinancing Plan, the Group expect to have no further exposure to debt obligations in currencies other than the pound sterling. Following the disposal of the Group’s Irish business, as discussed above under ‘‘Current Trading and Recent Developments—Irish Business Disposal’’, the Group will have disposed of its principal operational exposure to currencies other than the pound sterling. Going forward, the Group expects a certain amount of exposure to currencies other than the pound sterling in its purchases of paper and other printing supplies.
Commodity price risk The Group’s purchases of newsprint are affected by commodity pricing and may be subject to significant price fluctuations as a result of seasonal shifts, climate conditions, industry demand
104 and other factors that are outside the Group’s control and are generally unpredictable. See ‘‘Risk Factors—Increases in newsprint costs or a reduction in the availability of newsprint could adversely affect the Group’s business, results of operations and financial condition’’. The impact of commodity price risk has not historically been significant as commodity pricing aberrations are often brief and the Group limits its exposure to the risk by entering into annual newsprint agreements with third parties at a fixed price in pound sterling.
Credit risk Credit risk arises on financial instruments such as trade receivables and short-term bank deposits. The Group has no significant concentrations of credit risk since the nature of the Group’s operations results in a large customer base. The average credit period taken on sales was 39 days for the 2013 financial year and 41 days for the 2012 financial year.
Before accepting any new credit customer, the Group obtains a credit check from an external agency to assess the potential customer’s credit quality and then defines credit terms and limits on a by-customer basis. These credit terms are reviewed regularly. In the case of one-off customers or low value purchases, pre-payment for the goods is required under the Group’s policy. The Group reviews trade receivables past due but not impaired on a regular basis and considers, based on past experience, that the credit quality of these amounts at the period end date has not deteriorated since the transaction was entered into and so considers the amounts recoverable. Regular contact is maintained with all such customers and, where necessary, payment plans are in place to further reduce the risk of default on the receivable.
Critical judgements in applying the Group’s accounting policies
In the process of applying the Group’s accounting policies, which are described in Note 3 to the 2013 audited consolidated financial statements, management has made judgements that have had a significant effect on the amounts recognised in the financial statements. Other accounting policies involve a significant degree of estimation uncertainty and involve a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. The most significant of these policies involving management judgement or estimation uncertainty are set out below. These estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant, and actual results may differ from these estimates.
Valuation of publishing titles on acquisition The Group’s policies require that a fair value at the date of acquisition be attributed to the publishing titles owned by each acquired entity. The Group’s management uses its judgement to determine the fair value attributable to each acquired publishing title taking into account the consideration paid, the earnings history and potential of the title, any recent similar transactions, industry statistics such as average earnings multiples and any other relevant factors.
The publishing titles are considered to have indefinite economic lives due to the historic longevity of the brands and the ability to evolve the brands in the changing media environment.
Assets held for sale Where a property or a significant item of equipment (such as a print press or property no longer required as part of Group operations) is marketed for sale, management is highly committed to the sale and the asset is available for immediate sale, the Group classifies that asset as held for sale. If the asset is expected to be sold within twelve months, the asset is classed as a current asset. The value of the asset is held at the lower of the net book value or the expected realisable sale value. The Directors have estimated the sale values based on the
105 current price that the asset is being marketed at and advice from independent property agents. The actual sale proceeds may differ from the estimate.
Provisions for onerous leases and dilapidations Where the Group exits a rented property, an estimate of the anticipated total future cost payable under the terms of the operating lease, including rentals, rates and other related expenses, is charged to the Income Statement at the point of exit as an onerous lease. Where there is a break clause in the contract, rentals are provided for up to that point. In addition, an estimate is made of the likelihood of sub-letting the premises and any rentals that would be receivable from a sub tenant. Where receipt of sub-lease rentals is considered reasonable, these amounts are deducted from the rentals payable by the Group under the lease and provision charged for the net amount.
Under the terms of a number of property leases, the Group is required to return the property to its original condition at the lease expiry date. The Group has estimated the expected costs of these dilapidations and charged these costs to the Income Statement. No discounting has been applied to the provision as the effect of the discounting is not considered material.
Valuation of share-based payments The Group estimates the expected value of equity-settled share-based payments and this is charged through the Income Statement over the vesting periods of the relevant awards. The cost is estimated using a Black-Scholes valuation model. The Black-Scholes calculations are based on a number of assumptions that are set out in Note 30 and are amended to take account of estimated levels of share vesting and exercise. This method of estimating the value of the share-based payments is intended to ensure that the actual value transferred to employees is reflected in the share-based payments reserve by the time the payments are made.
Impairment of publishing titles and print presses Determining whether publishing titles are impaired requires an estimation of the value in use of the cash generating units (‘‘CGUs’’) to which these assets are allocated. Key areas of judgement in the value in use calculation include the identification of appropriate CGUs, estimation of future cash flows expected to arise from each CGU, the long-term growth rates and a suitable discount rate to apply to cash flows in order to calculate present value. The Group has identified its CGUs based on the seven geographic regions in which it operates. This is considered to be the lowest level at which cash inflows generated are largely independent of the cash inflows from other groups of assets and has been consistently applied in the current and prior periods. A £202.4 million impairment loss has been recognised in 2013 (2012: £nil). The carrying value of publishing titles at 28 December 2013 was £538.5 million (2012: £742.3 million). Further details of the impairment reviews that the Group performs are provided in Note 15 to the 2013 audited consolidated financial statements.
Determining whether print presses are impaired requires an estimation of the value in use of each print site. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the print sites and a suitable discount rate in order to calculate present value. See Note 16 to the 2013 audited consolidated financial statements.
Valuation of pension liabilities The Group records in its Statement of Financial Position a liability equivalent to the deficit on the Group’s defined benefit pension schemes. This liability is determined with advice from the Group’s actuarial advisers each year and can fluctuate based on a number of factors, some of
106 which are outside the control of management. The main factors that can impact the valuation include:
• the discount rate used to discount future liabilities back to the present date, determined each year from the yield on corporate bonds;
• the actual returns on investments experienced as compared to the expected rates used in the previous valuation;
• the actual rates of salary and pension increase as compared to the expected rates used in the previous valuation;
• the forecast inflation rate experienced as compared to the expected rates used in the previous valuation; and
• mortality assumptions.
Details of the assumptions used to determine the liabilities at 31 December 2013 are set in Note 24 to the 2013 audited consolidated financial statements incorporated by reference into this offering memorandum.
107 Industry The Group is a leading UK multimedia company and, in the majority of the markets in which it operates, publishes the leading local or regional news brand based on audience.
Local and regional publishers
According to the Newspaper Society (‘‘NS’’), an independent industry association representing the interest of the UK’s regional and local media, local and regional publishers deliver critical information to local and regional communities around the UK, traditionally providing greater coverage of local news, local events and local people than any other publisher. NS also reports that local newspapers are more than twice as trusted as any other media channel and that advertising on local newspaper websites is 77 per cent more likely to be believed and relied upon than advertising on other websites. Local and regional publishers help ensure democratic scrutiny, accountability and encourage informed and active citizenship, providing a platform for local communities to contribute their own content and actively engage in discussing community issues. In doing so, local and regional publishers also provide local, regional and national advertisers with unrivalled reach and engagement with local audiences.
Readership and coverage
British people are among the most avid newspaper readers in the world. According to public opinion research cited by Kantar Media, 58 per cent of all British adults (approximately 30 million people) read a regional newspaper, compared with 53 per cent who read a national newspaper. Local and regional news also has a high solus readership; 22 per cent of those who read a regional newspaper do not read a national newspaper. In addition to regional print titles, there are also approximately 1,700 websites and hundreds of other print, digital and broadcast channels in the UK (source Kantar Media—GB TGI 2013 Q3 (April 2012—March 2013)).
The demographic reach of regional media is extremely broad, with wide coverage of both sexes and all social classes and age groups. The table below sets out a summary of the coverage of the regional press in the UK.
Demographic reach of regional news
Coverage by age Any regional newspaper Coverage by ISBA region Any regional newspaper 15-24 43 per cent London 55 per cent 25-34 47 per cent South 53 per cent 35-44 54 per cent East 60 per cent 45-54 58 per cent South West 65 per cent 55-64 65 per cent Wales 55 per cent 65+ 75 per cent Midlands 58 per cent Coverage by sex Any regional newspaper North West 58 per cent Men 59 per cent Yorkshire 57 per cent Women 57 per cent North East 57 per cent Coverage by social class Any regional newspaper Scotland 67 per cent ABC1 58 per cent Border 79 per cent C2DE 58 per cent West 58 per cent Source: Kantar Media—GB TGI 2013 Q3 (April 2012—March 2013)
Size of market and key players
According to NS, as of 1 January 2014, there are 1,111 regional and local newspapers operating in the UK today, including 101 daily’s, 13 Sunday papers, 462 paid weeklies, 467 free weeklies and 68 fortnightly titles, and these regional and local newspapers were operated by 103 local
108 press publishers, including 53 producing just one local title. The top 20 publishers account for 84.0 per cent of all titles and 97.2 per cent of total audited weekly circulation.
The table below sets out the twenty most significant regional newspaper groups operating in the UK measured both by weekly circulation and by the number of titles published.
Top 20 UK Regional Press Publishers
Rank by weekly Rank by Total number Weekly circulation Group name No of titles of titles circulation 1 Trinity Mirror plc ~ ...... 3 130 8,533,436 2 Newsquest Media Group ...... 2 185 5,434,471 3 Local World ...... 5 107 4,697,195 4 Johnston Press plc ~* ...... 1 213 4,362,909 5 Associated Newspapers Ltd ~ ...... 17 1 3,871,525 6 Evening Standard Ltd ...... 17 1 3,454,450 7 The Midland News Association Ltd* ...... 8 17 1,987,183 8 ARCHANT * ...... 6 66 1,463,939 9 D.C. Thomson & Co Ltd ...... 14 6 1,357,608 10 Tindle Newspapers Ltd * ...... 4 110 981,065 11 City AM ...... 17 1 645,605 12 Independent News & Media ...... 14 6 446,343 13 Romanes Media Group ...... 7 28 398,941 14 NWN Media Ltd ...... 10 14 398,187 15 Bullivant Media Ltd ...... 12 9 305,303 16 CN Group Ltd ...... 11 10 297,906 17 Irish News Ltd ...... 17 1 245,502 18 KM Group ...... 9 16 244,906 19 Guiton Group ...... 16 5 189,144 20 Champion Newspapers ...... 13 8 163,140 — Total top 20 publishers ...... — 934 39,478,758 — Total all publishers (103) ...... — 1,111 40,607,310 Source: NS, 1 January 2014 Note: Based on newspaper titles with their own circulation/distribution figures, as listed on the NS database.
* Includes titles with independently audited circulation figures ~ Metros are included under the publisher responsible for distribution and local advertising sales. Includes London Evening Standard, Daily Record, Sunday Post, Sunday Mail and all regional daily free titles
Competition between regional publishers operating in the UK remains limited due to minimal geographical overlap between titles, with each publisher highly entrenched in its regional/local areas. The regional and local newspaper industry in the UK has a significant economic footprint, employing over 30,000 people including 10,000 journalists. In 2012, the four largest regional newspaper groups had revenues of £1.6 billion, with total sales and advertising revenue across the industry of £1.9 billion.
Business Model
Historically, local and regional publishers in the UK have derived two main sources of income— copy sales and advertising. In 2012, total revenue generated by local and regional publishers in the UK from copy sales was £589 million (31.6 per cent), with £1.27 billion (68.4 per cent) generated from advertising, according to industry research by Enders Analysis (‘‘Enders’’)(1).
(1) As used throughout this ‘‘Industry’’ section, all references to revenue derived from Enders Analysis reflect Enders’ reporting of ‘‘expenditure’’ or ‘‘spend’’ and may differ from other definitions of revenue.
109 Advertising is predominantly in two different forms, display advertising and classified advertising:
• Classified advertising—brief, small advertisements grouped under specific headings such as jobs, houses, apartments, cars (i.e. classifications)
• Display advertising—larger advertisements usually in a rich media format containing logos, images or photographs
Due to the large and varied regional newspaper sector in the UK, historically print has played a central role in the classified advertising market for all types of advertisers. This position has gradually been displaced by online as the UK internet market has developed. Accordingly, the distinction between local classified and local display advertising has become increasingly blurred for regional publishers as traditional classified advertising revenues have migrated to Internet specialists. For regional publishers, local classified advertising is now far closer to local display advertising, with a distinct focus on local businesses rather than individuals (e.g. car dealerships, estate agents etc.). In this way, regional publishing is complementary to the solutions provided by Internet specialists.
Cost of Cover price alternatives
Circulation revenue
Paid-for Demand circulation elasticity
Advertising Classified yield Total Advertising revenue revenue Advertising Display volumes
New Income Digital marketing streams services 13MAY201421182087
Of the £1.27 billion of revenues generated by regional print advertising in the UK in 2012, display advertising accounted for £585 million (46.0 per cent) with £689 million (54.0 per cent) coming from classified advertising. According to Enders, the local and regional press have historically tended to rely more on classified advertising than the national press, with classified advertising accounting for 57 per cent of advertising revenues in the regional press but only 15 per cent of advertising revenues in the national press in 2010. Revenues from classified advertising and display advertising, respectively, have been under pressure in recent years from cyclical and structural factors.
Circulation Revenues According to Enders, total circulation revenues in the UK local and regional publishing industry were £589 million in 2012. The emergence of the internet and technological advances in media
110 content consumption have led to a structural decline in newspaper circulation volumes. Circulation declines have been driven by both cyclical and structural factors, primarily:
• the impact of the ongoing economic downturn on consumer expenditure and advertising budgets of local businesses;
• the increasing shift to online media consumption underpinned by increased broadband and mobile penetration; and
• the relatively lower engagement with print media by younger adults.
The circulation decline has been a phenomenon that has affected both UK national and regional publishers. To a large extent, the resulting effect on circulation revenues for UK regional publishers has been somewhat mitigated by increases in cover prices. According to Enders, cover price rises in 2012 offset approximately two thirds of consumer expenditure volume decline. Enders also reports that UK regional circulation revenues declined by approximately 3.2 per cent between 2010 and 2012 while paid circulation volumes in the UK experienced a steeper decline of 9.7 per cent over the same period as illustrated by the following chart.
UK regional newspaper circulation and cover prices
UK regional newspaper revenue (£m) 2010-12 CAGR
2010-12 UK regional newspaper revenue CAGR 1,215 1,111 991 (9.7)% Total annual paid circulation (m)
629 609 589 (3.2)%
+7.1% 59p 55p 52p Basic Cover Price
2010 2011 2012 13MAY201421183213
Source: Enders Analysis
According to Enders, approximately 1 billion paid weekly and daily regional newspaper titles were circulated throughout the UK in 2012, representing a decline of 10.7 per cent compared to 2011. After adjusting for title closures, launches and non-reporting titles, paid-for daily titles declined by 9.0 per cent, paid-for weekly titles declined by 7.5 per cent and paid-for Sunday papers declined by 15.2 per cent.
111 Closure of titles Free titles have been significantly impacted by the ongoing economic downturn, with the twin impact of falling circulation and advertising volumes driving yields on some titles to an unsustainable level, prompting an industry-wide rebalancing of regional publishing portfolios towards paid-weekly titles. Research conducted in 2012 by the Press Gazette, a UK media trade magazine, indicates that at least 242 local newspapers closed between 2005 and the start of 2012, while the National Union of Journalists, in November 2013, estimated that approximately 20 per cent of the UK’s local newspapers have closed in the last decade. Enders estimates that regional newspaper circulation volumes in the UK declined by 45 million copies in 2013 as compared to 2012, a result which followed a decline of 59 million copies in 2012 as compared to 2011, with the majority of the reduction in circulation volumes attributable to free weekly titles. Recently, the rate of title closures in the UK regional publishing industry has broadly stabilised as the recalibration of regional publishing portfolios has reached an advanced stage.
Change in publishing frequency In response to the challenges posed by the structural decline in print circulation and advertising, UK regional publishers have transitioned some of their daily titles to weeklies in recent years. The underlying drivers for this consolidation include the following:
• the reduction of newspaper production and distribution costs;
• to increase advertising revenue per copy (i.e. yield);
• to align production and distribution of publications with modern consumer behaviour and purchasing patterns (with purchases of print newspapers being displaced by the increasing trend towards delivery of content through digital media platforms such as mobile and internet);
• to create content-focussed, quality publications; shifting from ‘nice to have’ to ‘must have’, albeit on a less frequent basis; and
• to provide an integrated digital / print product to readers and advertising customers.
The immediate impact of reducing the frequency of a publication is to boost circulation per issue. At the end of 2011, Local World, Johnston Press and Trinity Mirror collectively moved 11 titles from daily to weekly publication. On average, paid circulation per issue at these 11 titles was declining at approximately 9 per cent year-on-year. Following the frequency change, according to Enders, circulation volumes at these titles increased by an average of 23 per cent year-on-year. The consequent increase in audience numbers per title enhanced regional publishers’ ability to improve advertising revenue per copy (which is sold more on the basis of reach than frequency).
In adopting the foregoing strategy, regional publishers have also addressed the fall in gross weekly circulation by focussing on cost discipline. Enders cites the example of The Bath Chronicle (Local World), which on changing from daily to weekly publication, experienced a 60 per cent decline in editorial costs, with additional sizeable savings from printing and distribution. Enders anticipates that publishers will continue to manage the structural challenges of the industry in this way, with a heightened emphasis on portfolio efficiency and yield enhancement of individual titles through cost discipline, digital audience growth and new vertical revenue streams.
Cover price rises The use of cover price rises as a tool to combat circulation revenue decline has been a UK industry-wide theme in newspaper publishing (both regional and national) in recent years. According to Enders, print media pricing has fallen behind wider inflation in the frequent purchase of small ticket items by consumers, such as high street chain coffee and confectionary.
112 In UK regional press, product price rises have often been implemented in tandem with the shift from daily to weekly titles. According to Enders, in the example cited above of the 11 titles moved from daily to weekly publication collectively by Johnston Press and Trinity Mirror, average cover prices increased from £0.46 to £1.00 during the transition from daily to weekly titles. In addition, some titles in the regional press have implemented up to 40 per cent price increases following the transition from daily to weekly titles.
This is likely to be a continuing trend as regional publishers in the UK continue to combat circulation decline by re-positioning their print portfolios higher up the value chain.
The chart below demonstrates the industry-wide decline in print advertising revenue which has been largely driven by the broad-based migration of classified advertising business from print to online.
Overall UK advertising market breakdown (£bn)
Print¹ Digital (online) Television Other²
15.1 14.4 1.5 13.6 1.5 12.7 12.8 1.5 12.3 12.2 11.9 12.0 11.8 11.7 1.4 11.4 1.5 3.6 1.4 1.5 1.4 10.8 1.4 1.4 1.3 3.6 10.4 1.3 10.1 3.5 1.2 1.2 1.1 3.4 3.4 3.2 3.3 3.3 3.3 3.5 3.3 3.4 2.9 3.1 3.2 2.4 0.7 1.2 1.7 2.8 7.5 6.8 0.1 0.3 6.0 3.0 3.4 4.0 4.5 5.3
6.0 5.7 5.7 5.8 5.5 5.5 4.9 3.7 3.7 3.3 3.0 2.8 2.7 2.6 2.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E13MAY201421180858 2015E 2016E
Source: ZenithOptimedia
(1) Print advertising includes newspapers and magazines
(2) Other advertising include radio, cinema and outdoor
The Internet and new digital devices have fundamentally changed the classified advertising market. Facebook, Google, Zoopla and Rightmove in property, Auto Trader in motors and LinkedIn in employment have become larger forums for new classified advertising and have lowered demand for classifieds in regional print publications. According to Enders, Rightmove accounted for over 50 per cent of 2012 online property spend while Auto Trader accounted for over 75 per cent of online auto spend. The structural shift in personal classified advertising to online has substantially taken place and local and regional publishers are no longer heavily reliant on classified advertising. Classified advertising for regional publishers is becoming more akin to display advertising, with regional publishers focussing on ‘‘Hyperlocal’’ classified and display advertising solutions for businesses that complement those provided by Internet specialists. The graphic below illustrates the evolution of the projected local media marketplace in which these changes in advertising are likely to take place:
113 13MAY201421180536
These trends have resulted in local and regional publishers not only migrating their advertising business online, but also across digital devices, with regional publishers creating and owning digital brands which operate as Internet advertising specialists. As classified advertising expenditures fall in print, regional publishers’ expansion of online advertising services across multiple digital devices will become an observable and positive development in the regional publishing industry. The effect of this transition, however, will manifest itself in digital display advertising and digital services rather than digital classified advertising. To that end, regional publishers have partnered with more established digital classified advertising providers to integrate and leverage search and database functionality into local websites and mobile offerings.
After several years of steep declines in print advertising, primarily driven by the structural shift of classified advertising from print media to online platforms, there are signs that the rate of print advertising decline is beginning to stabilise due in part to the broader cyclical recovery of the UK advertising market as a whole. As stated in the Warc Expenditure Report, UK advertising forecasts for 2014 have increased to £18.8 billion—a year-on-year growth of 5.3 per cent—following the release of data for the third quarter of 2013 which showed advertising revenues at their highest rate of year-on-year growth since 2010. While Enders forecasts a 66 per cent decline in print advertising from £1.6 billion in 2010 to £628 million in 2020, it also anticipates that the growth in local internet advertising will offset the bulk of this decline and that local internet advertising expenditure will rise from £1.4 billion in 2010 to £2.5 billion in 2020.
The chart below demonstrates the scale of the migration of advertising expenditure from print to digital and the growth that is forecast in the segment, with digital advertising growing at a
114 faster rate than the rate of decline in print. The significant restructuring process undergone by UK regional publishers in recent years has forced regional publishing platforms to face this structural trend, with digital audience growth becoming a core focus. According to NS, traffic to local media websites grew by 40 per cent in 2013, double the website traffic growth rates observed in 2012. The total audience for all local media publishers increased by 40 per cent in 2013.
Classified advertising expenditure by channel (£m)
5,000
4,559 4,560 4,616 National newspapers Regional newspapers Magazines 4,476 4,500 Printed directories Internet 4,261 319 4,116 454 4,139 219 626 881 4,000 159
972 941 1,005 1,035 3,500 918 994 960 3,104
3,000 650 2,830 622 608 641 809 533 915 2,505 2,500 509 2,269 981 2,161 2,090 2,014 433 1,931 2,000 1,000 640 1,023 2,138 489 1,075 1,500 2,014 2,044 1,134 1,938 277 1,170 1,899 1,877 342 212 1,209 1,523 175 240 1,000 142 180 112 135 1,018 85 108 908 72 86 789 689 62 500 633 589 534 466 460 466 480 449 424 390 338 254 241 199 176 161 148 129 0 108 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f 2014f13MAY201421175750 2015f 2016f
Source: Enders Analysis estimates based on company data, AA/WARC and IAB/PwC data
Between 2013 and 2016, print advertising revenue declines are forecast to stabilise at a CAGR of 3.1 per cent compared with a CAGR of 11.4 per cent from 2007 to 2012. Digital advertising revenue is growing faster than declines in print advertising revenue and offers a significant opportunity for the local and regional publication industry to capture online revenue growth. According to data published by eMarketer, expenditure on mobile advertising was £526 million in 2012 and is expected to be more than four times higher in 2014 (£2.3 billion).
Market and Other Industry Dynamics
The UK economy Despite the extended economic downturn which has had an adverse effect on the performance of local and regional publishers, a number of UK economic and consumer/business indicators are showing positive momentum over the past few quarters.
According to the UK Office for National Statistics (the ‘‘ONS’’), British business sentiment and consumer confidence levels have continued to strengthen, with consumer confidence data for January 2014 rising to its highest level since 2007 and business confidence at its highest level since 2009 in the fourth quarter of 2013, as shown in the charts below. In addition, in the fourth quarter of 2013, the UK economy expanded by 2.7 per cent on an annualised basis, and for the 2013 calendar year, UK gross domestic product increased by 1.8 per cent. Household Final Consumption expenditure has also been increasing each quarter since the first quarter of 2012, and was 2.4 per cent higher in the fourth quarter of 2013 than in the same period in 2012, and on an annual basis, between 2012 and 2013, increased by 2.4 per cent—the highest annual growth rate since 2007.
According to the Institute of Practitioners in Advertising (the ‘‘IPA’’), the UK professional body for advertising, media and marketing communications agencies, advertising revenues are currently benefitting from this improving consumer and business sentiment, with UK corporate
115 marketing budgets having increased for the fifth consecutive quarter. Moreover, the IPA forecasts business advertising spending across the UK to increase by 3.3 per cent in real terms in 2014.
SMEs The local consumer marketplace in the UK has an especially high volume of SMEs. SMEs represent approximately 99 per cent of all UK companies, deliver approximately 50 per cent of all UK jobs, and generate approximately 40 per cent of UK company turnover, but only account for approximately 18 per cent of total UK advertising. Only 30 per cent of UK SMEs advertise, which is considered to be primarily attributable to concerns over advertising costs. According to Enders, in 2012, SMEs spent £32 billion on advertising and marketing in local communities. The chart below sets out advertising and marketing expenditure for SMEs and large enterprises, on business-to-business and business-to-consumer (local and national) basis in 2012.
2012 UK Advertising and marketing expenditure (£bn)
90 82 80 70 60
50 42 40 32 27 30 20 8 9 10 0 B2B B2C local B2C national
Large enterprises SMEs 13MAY201421175259
Source: Enders Analysis.
SMEs have a growing range of digital marketing channels available to them. The pace of expansion in the tools available to SMEs has led to the local digital marketing landscape being highly fragmented. Local and regional publishers have extensive media platforms and distribution channels that position them to address the growing requirements for digital marketing services of their existing (and new) SME customers, including:
• website build and micro-site development and capabilities;
• search engine marketing optimisation and Google AdWords;
• email marketing;
• social media marketing, including training and support for social media websites such as Facebook, Twitter and LinkedIn;
• data analytics; and
• integrated campaigns across digital display, daily deals and transactional (e.g. venue/event bookings).
The focus of SME IT marketing solutions has shifted from the provision of underlying technology to the provision of products and services. Although the level of technology adoption by UK SMEs is extremely high, the proportion of SMEs that are proactively engaged at all levels, including proprietary website, data tools, digital marketing and communications, and online transactions, is relatively small. According to Enders, corporate enterprises have been developing websites and data platforms since the 1990s, but fewer than 30 per cent of SMEs had transactional websites in 2010. A variety of factors support the positioning of
116 regional publishers to capitalise on the forecast growth in the provision of marketing services to SMEs, including:
• an ‘‘on-the-ground’’ local sales force retaining a substantial advantage over technology businesses that rely on algorithm and self-service solutions;
• titles with highly trusted local brands that are entrenched in regional communities and a trusted platform to provide local media advisory services;
• established billing relationships with over 1 million SMEs across the UK; and
• the ability to leverage editorial content to drive exposure across regional publishing platforms.
Printing press closures Pressure on circulation volumes has led to the closure and centralisation of print functions across the publishing industry as publishers focus on cutting costs, increasing margins and making their businesses more agile and digitised. According to NS, printing and distribution costs constitute, on average, over 20 per cent of the cost of producing a newspaper. In addition, in recent years, spare capacity across the publishing industry has been retired, and, for the most part, been replaced with outsourced third-party printing agreements.
Consolidation According to NS, the current UK local and regional newspaper sector is concentrated, with the top five newspaper groups accounting for over 66 per cent of local/regional press circulation. Regional and local newspaper groups have made public statements indicating the need for further consolidation in the industry. Consolidation presents potential benefits for the local and regional publishing industry, including:
• Expansion of geographical footprint to attract national advertisers in both print and digital, through a single buying point;
• increased investment in the expansion of digital products and services;
• cost synergies through centralisation of certain functions;
• sharing of content and best practises; and
• the creation of new national vertical income streams.
Mergers in local and regional publishing are governed by The UK Merger Regime and are subject to three sets of regulations, comprising (i) the standard merger regime, (ii) cross-media ownership restrictions and (iii) a ‘‘public interest’’ test. The Office of Fair Trading (‘‘OFT’’) carries out a relatively short ‘‘first phase’’ examination of mergers, at the end of which a decision is taken on whether a more detailed ‘‘second phase’’ examination by the Competition and Markets Authority (‘‘CMA’’) is warranted, or whether the merger should instead be cleared by the OFT (with or without remedies).
In recent times, consolidation in the industry has been slowed by the UK media regulatory framework, which has not taken into account the competition across media platform boundaries, between newspapers and other media. In 2009, several regional publishing groups challenged the relevance of the existing media merger regime in relation to regional publishers. The publishers voiced concerns that the media merger regime is outdated, and is preventing or deterring consolidation seen by many as necessary for the transition of such groups to sustainable digital business models. The OFT subsequently published a report in June 2009, ‘‘Review of the local and regional media merger regime’’, concluding that no legislative change was required to the existing merger regime.
117 Regulation of the Newspaper Industry
The Group is subject to national, regional and local laws and regulations, including those relating to data privacy, advertising and intellectual property. The Group conforms to the Press Complaints Commission Code of Practice and is monitoring proposed industry regulation resulting from the Leveson inquiry and report (the ‘‘Leveson Report’’), which was a judicial public inquiry into and a report on the culture and practices of the British press following the News International phone hacking scandal, including recommendations to replace the Press Complaints Commission. The Press Complaints Commission is a voluntary, self-regulatory organisation for printed British newspapers and magazines, and the Press Complaints Commission Code of Practice is a set of standards of accuracy, privacy and ethics, against which any member of the public may bring a complaint against a publication that has volunteered to meet the standards of the Code of Practice. Members of the Press Complaints Commission adjudicate complaints and suggest measures of correction where the Code of Practice has been broken. The newspaper industry in the United Kingdom is in the process of setting up a new self-regulatory system, called the Independent Press Standards Organisation (the ‘‘IPSO’’) which will replace the press Complaints Commission and which is meant to align with the principles set out in the Leveson Report and is expected to be fully implemented by 1 June 2014. The Group has signed a contract binding itself to the IPSO and giving the IPSO powers of investigation, enforcement and sanction over the Group. The Group is also subject to laws requiring it to pay taxes or governing its relationships with employees, including minimum wage requirements, overtime, working conditions, hiring and terminating, non-discrimination for disabilities and other individual characteristics, work permits and benefit offerings. The Group believes that its business is conducted in substantial compliance with applicable laws and regulations, and it has not received any notice of non-compliance that may have material effects on its business.
118 Business Overview
The Group is one of the largest local and regional multimedia companies in the UK in terms of the number of titles published and audience reach (Source: Audit Bureau of Circulations). The Group provides news and information services to local and regional communities through its portfolio of publications and websites, which as at the date of this offering memorandum, consists of 13 paid-for daily newspapers, 196 paid-for weekly newspapers, 39 free titles, 10 free lifestyle magazines and 198 local news and e-commerce websites. The Group operates in eight regions including: Scotland, The North East, West Yorkshire, The North West & Isle of Man, South Yorkshire, The South, Midlands and Northern Ireland. The Group delivers extensive coverage of local news, events and people in the markets in which it operates.
The Group’s principal revenue streams are derived from newspaper sales and advertising across print and digital. The Group has total daily paid-for circulation of approximately 0.26 million, total weekly paid-for circulation of approximately 1.1 million and total weekly free distribution of over one million (Source: Audit Bureau of Circulations). In March 2014, the Group recorded a digital audience of 15.9 million unique users, resulting in a combined monthly audience of 26.3 million which represents an increase in monthly unique users of 42.0 per cent compared to March 2013, in which there was a digital audience of 11.2 million unique users and a combined monthly audience of 23.3 million. This provides advertisers with access to local audiences and serves as an important advertising platform for SMEs. The Group’s key advertising areas are general display advertising and product category advertising; the major advertising categories include employment, property and motors. The Group also sells advertising to national advertisers who either aim to reach a regional or local audience or to complement a national campaign with local presence. Further revenue streams are generated from non-advertising related digital activities, contract printing and other activities such as organising exhibitions and fairs.
The Group’s strengths
The Group believes that it has a number of key strengths that differentiate it from its competitors. The strengths include:
A growing overall digital audience base The Group is a leading UK multimedia company with a growing overall audience base (measured by copies sold and unique online users) for its digital content. During 2013, the Group’s aggregate online and print audience reached an average of 24.5 million users a month, which includes a monthly average print audience of 12.2 million (excluding audiences generated from free titles) and a monthly average online audience of 12.3 million unique users in 2013, up from 10.1 million unique users in 2012 and 7.9 million unique users in 2011. Online audiences have continued to grow during the first quarter of 2014. In January 2014, digital audiences grew to 16.8 million unique users, an increase of 47 per cent since January 2013, and in February 2014 digital audiences comprised 15.7 million unique users, representing growth of 53 per cent from February 2013. In March 2014, digital audiences grew to 15.9 million unique users, representing growth of 42 per cent from March 2013.
Print audiences consume the Group’s printed publications which include titles that have a long and rich history, an example being the Stamford Mercury which was first published in 1695. In the markets in which the Group operates, it is a leading provider of local news and information.
The Group’s digital audiences access its content online through PC’s, tablets and mobile devices. All of the Group’s major titles, including The Scotsman and The Yorkshire Post, have a digital presence and enjoy large and growing online audiences. As at the date of this offering
119 memorandum, the Group has 18 tablet news and information apps for titles such as the Belfast Newsletter and the Portsmouth News.
The Group believes that the strength of its print and online brands and its in-depth knowledge of the communities it serves are highly valued by advertisers who represent the Group’s principal source of revenue. The Group believes that its in-depth knowledge of the consumers in the local markets it serves, coupled with its brand strength and geographic presence, may provide the Group with a solid platform for growing its overall audiences in those markets.
Leading position in most of its markets. The Group publishes more titles than any other local and regional publisher in the United Kingdom and in the majority of the markets in which it operates, the Group publishes the leading local or regional news-brand based on audience size and circulation. Examples of titles in its portfolio that have historically achieved high household penetration rates include, the Northumberland Gazette, Garstang Courier, Stornoway Gazette, Hastings Observer and the Daventry Express.
In 2013, the Group completed the relaunch of 227 print titles and associated news websites and e-commerce websites (the ‘‘Relaunch Programme’’), leading to more attractive modern content that the Group believes has appealed to both readers and advertisers. The Group believes that the results of the Relaunch Programme have been one of the key drivers for the Group’s online audience growth, have helped attract new audiences to its publications, and have attracted new and lapsed advertisers back to the Group.
The Group also enjoys deep and long-standing relationships with the communities it serves, including both readers and advertisers. Editorial teams are an integral part of their local communities beyond their reporting of local news stories. This enables the Group to be in a position to deliver more insightful, relevant and high quality editorial content as well as offer cost effective and targeted advertising solutions. The Group believes that traditional local and regional publishers underpin the delivery of news and information in the markets in which the Group operates, and the Group further believes that emerging online communities, which represent a significant growth area for the Group will continue to look to trusted established brands for local news and information. The Group believes that its well recognised and trusted local newspaper brands will provide it with a competitive advantage and make it a favoured destination for online readers and advertisers in the growing online marketplace.
At the forefront of the shift to digital The Group is currently the largest online regional publisher in the United Kingdom measured by unique digital users. Between July 2013 and December 2013, the Group recorded the highest average monthly unique users (13.1 million), in comparison to its direct competitors the Newsquest network (12.9 million), the Trinity Mirror Regional Network (12.2 million) and the Local World Network (11.7 million) (source: ABC Regional Publication Multi-Platform Report July-December 2013).
The Group has invested significantly in its digital activities and currently has 185 local news websites and 36 tablet and mobile apps (including 18 news apps) as well as consumer offerings, SME marketing services offerings and, more recently, a hyper-local video offering.
In the 2013 financial year, total digital revenues increased by 19.4 per cent from £20.6 million in the 2012 financial year to £24.6 million in the 2013 financial year supporting the Group’s revenue replacement strategy of pursuing digital revenue to offset declines in revenue from traditional print media. The Group has experienced significant growth rates in the majority of its digital business lines in the 2013 financial year: property and motors digital advertising revenues grew 125 per cent and 200 per cent, respectively, local and national digital display advertising grew 33 per cent and 28 per cent respectively, and the Group’s voucher website,
120 DealMonster, grew by 76 per cent. In March 2014, online audiences reached 15.9 million users, representing a 42 per cent increase from March 2013.
The Group believes that it has a track record of introducing successful new digital offerings. In late 2013, the Group launched the Digital Kitbag, which offers a range of digital marketing solutions to SMEs, including search engine and email marketing, website build, and social media capabilities. By developing bundled products and services to meet the full range of SME digital marketing needs, the Group believes that it will be in a position to substantially increase the number of businesses to which it can market attractive solutions and increase SME marketing spend captured. The rollout of Digital Kitbag follows several other initiatives undertaken to organically grow the Group’s digital business. In the course of 2013, the Group accelerated the growth of its digital verticals portfolio including ‘‘DealMonster’’, its daily deals website, and the entertainment portal ‘‘WOW247’’, and relaunched all its local websites with an improved look and feel, better navigation, improved social media content and substantially more video. The Group is also currently implementing a new Customer Relationship Management (‘‘CRM’’) system to track customer preferences more efficiently and identify revenue generation opportunities, and expects to realise the benefits of that system towards the end of 2014.
Diversified business model The Group’s revenue base is well diversified by sales category, geography and customer mix. The Group’s largest revenue category is print advertising which accounted for 53.7 per cent of total Adjusted Group revenues in the 2013 financial year. Within print advertising, the top ten advertisers accounted for only 11.7 per cent of total revenue in the 2013 financial year. The Group’s print portfolio is located in diverse regional markets throughout the UK: Scotland, the North East, West Yorkshire, the North West & Isle of Man, Yorkshire, the Midlands, the South and Northern Ireland. For the 2013 financial year, 18.1 per cent of the Group’s newspaper sales revenue was generated in Scotland, with 16.8 per cent generated in Yorkshire. The remaining 65.1 per cent of the Group’s newspaper sales revenue in the 2013 financial year was more equally diversified across the other geographical areas throughout the UK.
The Group believes that its combination of print (newspaper and magazine) and digital assets provides advertisers with an attractive audience base that is significant in number and broad in demographics. Because of the diversity of its audiences and advertising customers, the Group is not reliant on any one source of revenue.
Track record of improved cost performance The Group and its senior management have a proven track record of identifying and implementing cost reduction opportunities, and have delivered increased cost savings over the last few years. Adjusted Group operating costs were reduced by £33.7 million in 2013 and £37.6 million in 2012, representing reductions of 12.4 per cent and 12.2 per cent per annum in 2013 and 2012, respectively, underpinning an improvement in Adjusted Group operating profit margin from 17.4 per cent in 2012 to 18.7 per cent in 2013. Recent cost savings initiatives have included streamlining the regional management structure, implementing better practices in editorial, rationalisation of sales and back-office functions, outsourcing of advertisement- creation and the consolidation of production locations. As a result of these and other initiatives, the number of FTEs employed by the Group has fallen by 680 to 3,281 as at the end of December 2013 compared with 3,961 at the end of December 2012. From December 2011 to December 2012 the Group reduced its FTEs by 661. The Group believes that as a result of such initiatives it is now a more streamlined organisation that is better equipped to deliver its business strategy.
Track record of strong cash flow generation and deleveraging The Group has a strong record of cash generation. In the past two years, the Group has worked to improve cash flow significantly, control capital expenditures (while maintaining
121 value-accretive investments in the growth of its digital businesses), and continually review the Group’s property portfolio to identify and dispose of assets. As a result, the Group has been able to use operating cash flow, exceptional income and proceeds from the sale of assets to decrease its total borrowings from £372.1 million as at 31 December 2011 financial year to £323.4 million as at 28 December 2013.
Highly experienced and well-respected management team The Group’s senior management team, led by Chief Executive Officer Ashley Highfield, has significant industry experience, in multimedia publishing organisations. The Group’s Directors have considerable experience in business transformation and operational and financial management in media and other organisations. The Group believes that its senior management is well placed to transform it into a truly multimedia organisation.
The Group’s strategy
The Group is working to transition its business from print to digital in order to establish itself as the leading provider of local and regional news and information services and to be the number one provider of marketing solutions for SME advertisers in its markets. The Group has a well-defined strategy to develop its business going forward which is based on six key strategic priorities:
Continue building overall audiences The Group aims to continue building overall audiences, by continuing to provide comprehensive and in-depth local content to the communities it serves, while maintaining reader trust and customer loyalty in the markets in which it operates. The Group recognises the growing trend towards digital content consumption in the industry, and the Group intends to continue to make value-accretive investments in its digital platforms and new technologies to continue to grow overall online audiences and create new revenue streams. By accelerating growth in online audiences, the Group believes that it will be in a better position to offset any material audience declines experienced in its print media business in the future.
Growing digital substantially The Group believes that digital sales represent a major opportunity for future growth. It intends to continue to make value-accretive capital investments to grow its digital business, with the objective of transforming the mix of its revenue base over time, from mostly print to mostly digital, ahead of its competitors, and to better position its business to capitalise on the structural shift to online media consumption and growth in the market for digital advertising. The Group plans to leverage its long-standing relationships with local advertisers and communities to help drive future revenue growth in digital in local markets, by enabling local communities to interact with established local brands via digital channels that deliver locally relevant content and services. The Group will also seek to increase digital revenues by scaling and improving existing digital offerings, such as DealMonster and WOW247, as well as through the introduction of new offerings such as Digital Kitbag, the Group’s digital marketing solution for SMEs.
Returning to revenue growth The Group is committed to returning to top line revenue growth through a number of key drivers. The Group will seek to stabilise traditional revenue streams in the print media business through cover price increases and by seeking growth in its overall subscriber base. The Group further intends to stabilise its core print advertising revenues through improvements to pricing, such as incentivising non-discount selling, packaging of products for customers that will produce the best results for them, and investing in technology and training for sales management and sales representatives, to up-skill, reorganise and better focus its sales force. The Group also intends to accelerate the growth of both its digital audiences and revenues, in
122 line with its digital growth strategy, through improvements to current digital products, new digital product development, training and opportunistic changes in hiring to create an employee base with a more diversified skill set and sharing of best practices across the Group.
Maintaining cost leadership The Group intends to continue its focus on improving cost performance to maintain profitability. The Directors have identified a number of opportunities for improved cost performance, including further adoption of best practices and cost savings opportunities through further outsourcing of non-core functions. The Group currently has a rolling programme of process improvements as part of its Group efficiency agenda. The Group believes that these added efficiencies will continue to transform its business into a more modern multimedia organisation.
Growing profitability The Group aims to continue growing profitability. The 2013 financial year represented a year on year growth in Underlying Group operating profit of 2.5 per cent which was achieved through operating cost reductions, as well as the stabilization and strengthening of certain key revenue lines.
Focus on cash flow generation The Group is committed to improving operating performance and maintaining its track record of high cash generation. The Group intends to pursue sustained high EBITDA margins, efficiently manage working capital, and to control capital expenditure, while maintaining targeted digital investments. The Group believes that the Company can continue to use surplus cash to reduce net debt.
The Group’s history
The Group traces its origins to 1767 and has acquired titles in its portfolio that have been servicing local markets for over 300 years. It was incorporated in 1928 as a private company and listed on the London Stock Exchange in 1988 as Johnston Press plc. The Group has grown organically and through acquisitions to become one of the leading regional newspaper publishers in the UK in terms of weekly newspaper circulation (Source: Newspaper Society) and is the largest local and regional digital publisher based on size of its online audience (Source: Audit Bureau of Circulation). As well as the eight publishing regions mentioned above, the Group operates a printing division with three regional printing centres, a media sales centre in Sheffield and an accounting centre in Peterborough and has a head office based in London.
The Group underwent five key periods of acquisitive growth starting in 1996, 1999, 2002, 2005 and 2006, which increased the Group’s geographical presence. These were financed primarily through debt resulting in substantial borrowings, which the Group has subsequently sought to reduce. In 2006 the Group’s net debt was £746.4 million. The Group has not made any acquisitions since 2006 and has been actively disposing of some of its non-core assets and using cash generated from operations to reduce net debt.
In 2008, the Company raised £212.3 million through a rights issue. This fundraising, introduced PanOcean as a 20 per cent shareholder of the Group.
The Group successfully refinanced its Existing Lending Facilities and Private Placement Notes on 28 August 2009, by entering into the Override Agreement which extended their maturity date to September 2012. On 24 April 2012, the Group agreed to amend and restate the Override Agreement to, among other things, further extend the maturity date of the Existing Lending Facilities and Private Placement Notes to 30 September 2015.
The terms of the Override Agreement for the Existing Lending Facilities and the Private Placement Notes provide the Group with incentives to implement an alternative debt structure
123 by the end of 2014. On 27 December 2013, the Group announced that it and existing creditors under the Overridge Agreement had agreed to reset the financial covenants thereby for the Existing Lending Facilities and the Private Placement Notes to 30 September 2015, providing the Company with a stable financial platform from which to pursue a full refinancing of such debt in 2014.
Ashley Highfield was appointed Chief Executive Officer in November 2011 and since then has made key senior management appointments including a new Group Commercial Director, a Marketing Director, a new Group HR Director and more recently:
• David King as Chief Financial Officer in June 2013; and • Jeff Moriarty as Chief Digital and Product Officer in March 2014.
With the appointment of Ashley Highfield as CEO, the Group embarked on a new vision and strategy that was aimed at ensuring that the Group’s news and information content would remain relevant, popular, effective and locally produced. The Group would achieve this by:
• transitioning to digital so that it becomes the number one provider of local and regional news and information services, as well as the number one provider of digital marketing solutions for SME advertisers in its markets; and
• implementing its well-defined strategy to develop its business going forward, which is based on six key strategic priorities.
In addition, the Company has entered into an agreement with Sky (a wholly owned subsidiary of British Sky Broadcasting Group plc) pursuant to which the Company has been appointed as Sky’s sole advertising sales representative to promote and sell AdSmart Local targeted television advertising service, aimed at SMEs, in certain UK regions, including Sheffield, Derby and Nottingham.
Principal business activities
The Group is a leading UK multimedia company and one of the leading providers of news, information and advertising in many of its markets. It attracts a wide audience across a number of different media channels such as print, digital and mobile. The Group’s focus is on local or regional markets where it aims to meet a wide range of news, information and advertising needs of the communities it operates in, and in doing so, provide advertisers with what is believed to be an effective means of promoting their goods and services.
Local and regional press is seen as a critical source of trusted, public service information to local and regional communities across the UK and delivers critical information to these communities with greater coverage of local news, local events and local people than any other medium. Local and regional press is highly trusted by readers and ensures democratic scrutiny and accountability and is believed to encourage informed and active citizenship. In addition, local and regional media companies provide regional and national advertisers with unrivalled reach and engagement with local audiences, therefore remaining important to SMEs.
The Group’s operations span varied communities ranging from rural areas, villages and small towns to larger urban and metropolitan centres. With its portfolio of print, digital and mobile channels, the Group is well placed to deliver extensive reach to its advertisers throughout the communities it serves. For example, in October 2013, the Group ran a six week display campaign and reader promotion and competition for Camelot plc (‘‘Camelot’’), the UK national lottery operator (the ‘‘Camelot Campaign’’). The Camelot Campaign provided localised native advertising for Camelot via various Group titles with a series of over 70 editorial articles featuring, among other things, a description of community activities supported by Lotto, one of Camelot’s draw-based lottery games. In addition to general display advertising, the Group also designed and built a dedicated micro-website for the Camelot Campaign. The Camelot Campaign generated over 10,000 entries and resulted in advertising recall (which is defined as
124 respondents saying they recall seeing the advertisement when shown a copy of it) of 56 per cent according to Research Analysis of Media, an independent measurement bureau who measure and analyse media campaigns (‘‘RAM’’). Additionally, according to RAM, Camelot’s brand recognition (the number of respondents recognising the brand and knowing who it was) increased from 83 per cent to 86 per cent during the Camelot Campaign and advertisement recognition (the number of people who when asked, recognised seeing the Camelot Campaign on of the front page of one of the Group’s newspapers) was 71 per cent. Ultimately, RAM reported that 30 per cent of respondents to the Camelot Campaign took action and participated in the UK national lottery as a result of the Camelot Campaign.
Content generation Central to the Group’s operations is the generation of editorial news content. The Group’s news and informational content is primarily generated in four ways:
• Locally based Journalists. The Group employs 1,182 Editorial FTEs (as at 28 December 2013). The majority of journalists spend most of their time on the ground in the communities they serve with the purpose of drawing even larger readership to their respective titles by capturing local stories in words, pictures, graphics and video and publishing them in print and on the Group websites.
• Freelance contributors. The Group has relationships with freelance contributors, some of whom specialise in content such as sports, reviews, fashion and business.
• Third party purchased content, the Group uses two primary sources of third party content:
The Press Association to whom it pays an annual subscription, which allows the Group’s titles to use the news content of the Press Association such as puzzles, gardening and motor reviews and national stories with a local interest in its titles.
A syndication agreement with South West News Services (SWNS) which will allow the Group to use its content free of charge. In exchange, the Group has agreed to a revenue share agreement that allows SWNS to syndicate content from the Group’s titles on a revenue share basis, with the Group receiving 55 per cent of the proceeds.
The Group also has a contract for provision of content with Reuters and Getty images, which is largely for use by the Scotsman publication.
• User generated content (UGC). The Group has invested in a template solution, training and technology infrastructure that provides its user generated contributors with the skills and the tools to author content more simply and effectively. The contributors that provide user generated content typically fall into three groups:
Regular contributors. These tend to be contributors with a specific interest such as fitness, arts & craft and local politics.
Organisations. Examples of organisations that contribute user generated content are schools, who will provide news and photographs of school plays, trips or sports events, and rotary organisations who may provide content on local charity work.
Breaking news contributors. This is a wider base of contributors who submit news and photos of events that they may have witnessed. They tend to submit less frequently, but the news they submit is more likely to make the front page.
Three of the Group’s titles are now primarily produced from UGC, namely The Bourne Local, Harrogate Advertiser and the Pocklington Post. In respect of The Bourne Local, for example, approximately 75 per cent of the content is produced by its readers and the total audience during the first two months of 2014 increased by 54 per cent as compared to the first two months of 2013. It is expected that increased user contributions will allow the Group to achieve
125 substantial operating efficiencies and also remain relevant to communities as content is submitted ‘by the people for the people’.
The Group has divided its newspaper titles into four segments based on audience and market characteristics and has developed an editorial strategy for each segment via the editorial board. The editorial strategy for each title seeks to ensure that the title meets the editorial needs of its readers in both print and digital.
The Group has also embarked on a strategy of ‘digital first publishing’ which is aimed at producing content that, at the outset, is designed to be published online. This is a shift from the traditional approach of producing content for print and then adjusting it to be published online.
The Group’s products The Group has a well-established and broad portfolio of brands and, in the majority of its markets, the Group publishes the leading local or regional newspaper, with the daily titles typically located in the larger metropolitan areas and the weeklies in the smaller urban and rural markets. The lead title for a geographical market is supplemented by a range of ancillary publications including other supporting paid-for and free newspapers, depending on the size of the local market. Together these provide comprehensive coverage of the local or regional area. On average, the Group sells more than 0.26 million daily newspapers, outselling almost every newspaper in the markets in which it operates. It sells approximately 1.1 million weekly paid-for newspapers and has a free weekly distribution of over 1 million copies.
As at the date of this offering memorandum, the Group publishes 13 paid for daily titles, 196 paid-for weekly titles, 39 free titles and 10 magazines across the eight regions in which it operates. Amongst those, three are morning papers with a regional footprint in a substantial part of the UK—The Scotsman, The Yorkshire Post and the Belfast News Letter. The Group also publishes one Sunday newspaper, Scotland on Sunday. Of the remainder, 196 are paid-for weeklies, 35 are free-weeklies, one free-fortnightly, three free-monthlies and ten magazines. Details on Group’s various newspaper titles are set out in the annex to this offering memorandum.
Other publications include a portfolio of ten magazines which typically, but not exclusively, carry aspirational content and corresponding advertising. Most of the Group’s major markets now include a magazine in their publishing portfolio and these publications continue the process of expanding the Group’s product offering within the markets in which it operates. This is designed to improve opportunities for advertisers to reach a more targeted audience with an enhanced advertising response and should enable the Group to attract advertisers who are less likely to appear in the Group’s mainstream newspapers.
Print publications Daily newspapers The Group’s daily newspapers have been recognized for the quality of their content, having received numerous nominations and awards. Recent recognition includes seven Scottish Press Awards, five 2013 O2 Regional Media Awards and three Society of Editors Regional Press Awards. Included among these recognitions were three Reporter of the Year Awards, three Feature Writer of the Year Awards and three Photographer of the Year Awards. Edinburgh Evening News had a particularly successful 2013 and captured the Scottish Press Awards for Journalist of the Year and Scoop of the Year as well as the Journalism Team of the Year.
126 The Group’s top ten daily titles are set out in the table below:
Top 10 Daily Titles
Average monthly Title Region Year founded audience(1) The Scotsman ...... Scotland 1817 1,863,418 Yorkshire Evening Post ...... Yorkshire 1890 777,763 Sheffield Star ...... South Yorkshire 1887 691,974 Edinburgh Evening News ...... Scotland 1873 613,904 The Yorkshire Post ...... Yorkshire 1754 609,190 The News (Portsmouth) ...... South 1877 540,424 Sunderland Echo ...... North East 1873 452,037 Lancashire Evening Post ...... North West 1886 388,912 Shields Gazette ...... North East 1849 366,724 Blackpool Gazette ...... North West 1873 347,118 (1) Average Monthly Audience includes print and digital audience
Paid for weekly titles The Group’s non-daily newspapers have also been recognized for the quality of their content and received various awards in 2013. The Newtown Abbey Times won the Northern Ireland Press Photographer’s Association award for Photographer of the Year. The Falkirk Herald won the Scottish Press Awards Weekly Newspaper of the Year Award. The Stornaway Gazette won the Highlands and Islands Media Awards recognition for Top Story of the Year.
The Group’s top ten weekly titles are set out in the table below:
Top 10 Weekly Titles
Average monthly Title Region Year founded audience(1) Northampton Chronicle And Echo ...... Midlands 1931 350,766 Peterborough Telegraph ...... Midlands 1948 304,798 Halifax Courier ...... Yorkshire 1892 245,345 Northants Telegraph ...... Midlands 1897 221,997 Mansfield & Ashfield Chad ...... South Yorkshire 1952 206,602 Derbyshire Times ...... South Yorkshire 1854 189,422 Wakefield Express ...... Yorkshire 1852 173,174 Doncaster Free Press ...... South Yorkshire 1925 170,003 Derry Journal—Friday ...... Northern Ireland 1772 158,827 Chichester Observer ...... South 1887 156,335 (1) Average Monthly Audience includes print and digital audience
Circulation and print distribution On average, the Group sells more than 0.26 million daily newspapers, outselling almost every newspaper in the market in which it operates. It sells approximately 1.1 million weekly paid for newspapers and has a free weekly distribution of over 1 million copies and a total weekly distribution of approximately 4.4 million copies.
Newspapers are primarily distributed from printing facilities through distributors to an extensive chain of retailers including newsagents, supermarkets, vending boxes and corporate bulk sales.
The Group benefits from agreements with distributors providing for the delivery of newspapers from printing facilities to bulk locations, retailers, and residential and corporate subscribers.
127 Typically, a newspaper is party to one or more distribution agreements, covering different stages of delivery and geographical areas.
The Group’s digital media and online operations The Group’s digital audience has an average monthly reach of 13.1 million unique users a month (Source: Audit Bureau of Circulation July-December 2013). The Group has built a strong digital foundation and in 2013 it was awarded the Digital Advertising Operations Team of the Year from the Association of Online Publishers beating both The Telegraph and Trinity Mirror. The Group’s average monthly page views have grown steadily from 70.1 million in 2011 to 79.7 million in 2012 and 94.7 million in 2013. In addition, in 2013, the Group appointed Jeff Moriarty as Chief Digital and Product Officer with effect from March 2014, who the Group believes will strengthen management in its key strategic digital growth area.
Online news The Group has 185 news websites affiliated with its traditional news brands which are typically branded to reflect the leading local newspaper title in the area. Some of the print content, including headline stories, breaking news, analysis, commentary and selected stories from the daily or weekly print newspaper editions are available to the public on the newspapers’ associated websites and on mobile devices. The Group’s news websites can be used to cross promote the Group’s printed products including subscriptions to the Group’s print newspapers.
The Group’s news websites carry news, information, services and advertising relevant to each local market and include an increasing amount of UGC in the form of user contributed text and audio-visual material. The Group also increasingly focuses on social media such as Facebook and Twitter to provide content to, and further engage with, its audiences. Such social media audiences can then be directed back to the relevant news site, which encourages other news consumption and/or purchase of a printed copy for in depth coverage of a story.
The audiences that the Group attracts to its news websites provide the Group with additional opportunities to sell advertising. It is a key objective of the Group that each of its local news websites becomes the leading local online portal for its geographic area and provides rich content for that community with functionality and brand awareness to match.
A further newly launched online product, NewsEye, offers users enhanced video content across a number of the Group’s new websites. In fact, the Group has a rapidly growing video inventory and is able to monetise video and adverts for SMEs. The Scotsman, Yorkshire Evening Post and The News (Portsmouth) are the first daily news brands in the Group’s portfolio to introduce NewsEye—with additional roll-out planned throughout this year 24 sites should receive the new player by the end of March 2014. Videos featured on those websites are branded under the NewsEye banner, guiding users to an enhanced video section which is both easy to navigate and further brings to life the news and issues in those areas. The NewsEye destination will allow users to choose from a range of different video sections: Most popular, Latest, News, Sport, Lifestyle and—for Scotsman readers—Scottish Independence. Users will be able to seamlessly click between videos without waiting for the page to reload—thanks to html5 pushState functionality.
Online advertising categories The Group has online category specific advertisement websites designed to enhance its traditional classified advertisement offerings. The Group supports its operations through vertical integration of its various classified listings either with market leading partners or other
128 Group members. This vertical integration allows for the sharing of advertisements across local regions and markets. Key online classifieds partners and offerings include:
(A) Categories operated in conjunction with third parties
Property-Zoopla. Zoopla is an independent market leading provider of online classified property listings. Through its agreement with the Group, Zoopla supports classified property advertisement operations across the Group’s portfolio and effectively increases the property listings available for viewing via the Group’s branded property classifieds webpages. The expanded exposure provided by the Zoopla partnership enables agents and developers to extend the distribution and exposure of their properties onto hundreds of leading local websites across the UK.
Motors-Motors.co.uk. Motors.co.uk is the UK’s second largest car search network. It is integrated into each of the Group’s local motors classified webpages providing users with the ability to search over 150,000 cars for sale and motor dealers with a strong locally focused platform to promote their business and car stock. This partnership provides the Group with a powerful motors offering for both audiences and advertisers.
(B) Categories owned and operated by the Group alone
The SmartList. This is owned by the Group and allows businesses to submit job details of a vacancy or role to be filled to a SmartList team of recruitment professionals for one fixed fee. Using their national resources, including local newspapers, job boards and social media, the team compile a SmartList of high quality, local candidates which are selected and screened specifically for the role. This SmartList is then submitted to the employer to review and interview the most promising candidates for the role to be filled. In February 2014 and March 2014, the Group launched two new SmartList offerings, the EngineerList and the AccountancyList.
Employment-Jobstoday.co.uk. Jobstoday.co.uk is the leading recruitment brand in many of the towns and cities across the UK, covering over 300 locations from as far north as the Western Isles of Scotland and south to Portsmouth on the south coast of England. This website allows for the review of available jobs in selected local communities and the matching of job applicant CVs with available listings.
Findit. Findit (renamed ‘‘business directory’’ in 2013) has been integrated into the Group’s 185 local news websites, enabling users to search and choose a local business or service, assisted by reviews, comments and ratings of other customers. Businesses are able to purchase premium listings on the site, giving them access to a range of visibility features which will assist them in attracting new customers.
In addition to traditional display and category advertising, the Group has launched entertainment and discount websites focused on delivering information on exciting local events and entertainment as well as deals and discounts directly to consumers. The Group’s principle entertainment and consumer discount websites are as follows:
WOW247. WOW247 stands for What’s On Where 24/7 and is designed to keep users up to date on entertainment and leisure activities wherever they are across the UK, 24 hours a day, seven days a week. The digital platform provides information to users covering an average of up to 1,500,000 unique events across a range of areas including film, music, theatre, food and drink and days out.
DealMonster.co.uk. Offering discounts on local goods and services, DealMonster.co.uk is a hyper-local deal website intended to address the discount advertising needs of local SMEs. More than just a coupon provider, DealMonster works with local SMEs to coordinate the delivery of deal offerings with local consumers in a way that rewards repeat engagement of the consumer with the local business.
129 As a complement to its other digital offerings, the Group has launched new business services products specifically targeting the needs of SMEs. The Group intends for these platforms to become a substantial revenue stream, and presents itself as the ‘trusted digital advisor’ that SMEs are seeking to help them make the right decisions in the complex landscape of digital marketing and recruitment.
DigitalKitbag. The Group has recently launched DigitalKitbag, which aims to provide online marketing solutions for SMEs. The service is intended to meet the full range of digital marketing needs of SMEs which the Group believes will allow it to substantially increase both the number of businesses to which they can offer relevant solutions and the share of each business’ total marketing spend that can be captured. The initial wave of Digital Kitbag products and services includes: website development and digital presence (including mobile sites), search engine marketing, email marketing and Google social media management. In support of the Group’s Digital Kitbag offering, the Group has become a Google ‘‘Premier SME Partner’’, one of only nine in the UK of which it is the only regional or local press organisation. This allows the Group to carry Google’s endorsement as a recommended reseller of Google Adwords.
Mobile media The Group’s mobile offering has grown from inception in 2012 to an average of 6.4 million unique users per month in the first quarter of the 2014 financial year. The Group currently offers mobile specific digital offerings for 18 of its news brands including The Scotsman, The Yorkshire Post, Sunderland Echo, Sheffield Star and Peterborough Telegraph. In addition, it operates 11 football specific apps and seven non-news mobile sites, some of which are also associated with its website offerings such as DealMonster, iannounce (a birth, marriage and death (‘‘BMDs’’) notices website) and Jobstoday.
The table below illustrates the growth of the Group’s mobile audiences over the course of 2013 and the first quarter of 2014.
Average monthly mobile users (m)
8 m 50% 39.9% 7 m 35.8% 32.7% 40% 6 m 30.2% 26.9% 5 m 30% 4 m 3 m 6.4 20% 2 m 4.2 4.9 3.0 3.6 10% 1 m 0 m 0% Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Mobile Users Mobile Users as a % of Online Users 13MAY201421175505
According to Enders, aggregate smartphone and tablet use is expected to increase approximately threefold by 2020, causing overall internet usage to nearly double in the same timeframe. As consumers are more likely to access news more often during the course of a day with an increase in the number of devices they own, the Group will continue to try to identify opportunities to expand its existing mobile offering. The Group also increasingly focuses on its presence on social media such as Facebook and Twitter, in order to provide content and to engage with its audience, particularly younger demographics.
130 Revenue sources
Newspaper sales In the 2013 financial year, circulation revenue from newspaper sales was £87.7 million. 6.1 per cent of the Group’s circulation revenue was derived from home delivery subscriptions and the remainder from single copy sales. In February 2014, the Group had 31,404 subscribers for home delivery of its newspapers. Aggregate average daily paid circulation for the Group’s daily print newspapers was approximately 260,000 copies for the 2013 financial year.
Advertising Advertising revenue, which includes revenue generated from online and mobile products, is the largest component of Group revenue, with print advertising accounting for 53.7 per cent of its Adjusted Group revenue in the 2013 financial year and digital advertising accounting for 8.4 per cent of its total revenue in the same period. The Group categorizes advertising revenues as follows:
• Display—local advertising for SMEs and national advertising for nation-wide marketing to local audiences.
• Property—estate agent property and lettings advertising. This can be display advertising to build brand awareness or traditional classified advertising.
• Motors—national brand, local dealerships and personal automotive classifieds.
• Employment—classified job listings and recruiter services postings.
• Other—BMDs, public notices from local authorities and other classified advertising.
• Digital—includes all online digital advertising revenue (including from display, property, motors, employment and other).
For the 2013 financial year, 12.4 per cent of the Group’s print advertising revenue derived from national clients.
The Group advertising rate structures vary among its publications and are a function of various factors, including local market conditions, competition, circulation, readership and demographics. The Group’s corporate management works with local newspaper management to approve advertising rates and a portion of Group titles’ incentive compensation is based upon growing advertising revenue. The Group’s sales compensation program emphasizes digital and new business growth. Local teams share advertising concepts throughout the Group’s network as part of ‘best practice’ efforts to enable advertising sales teams to utilize advertising products and sales strategies that are successful in other markets the Group serves.
Substantially all of the Group advertising revenue is derived from a diverse group of local retailers and local classified advertisers, resulting in very limited customer concentration. No single advertiser accounted for more than one per cent of the Group’s total advertising revenue in the 2013, 2012 or 2011 financial years and its 10 largest advertisers account for 11.7 per cent of total advertising revenue in the 2013 financial year.
131 The table below shows the total advertising revenue for 2013 compared with 2012, broken down by category:
Full year Print Digital 2013 2012 per cent 2013 2012 per cent 2013 2012 per cent Categories £m £m change £m £m change £m £m change Property ...... 24.9 27.9 (10.8) 24.0 27.5 (12.7) 0.9 0.4 125.0 Employment ...... 20.3 21.9 (7.3) 12.7 14.6 (13.0) 7.6 7.3 4.1 Motors ...... 14.9 17.2 (13.4) 14.0 16.9 (17.2) 0.9 0.3 200.0 Other ...... 44.4 49.0 (9.4) 37.8 43.0 (12.1) 6.6 6.0 10.0 Display ...... 77.2 85.9 (10.1) 68.6 79.3 (13.5) 8.6 6.6 30.3 Total ...... 181.7 201.9 (10.0) 157.1 181.3 (13.3) 24.6 20.6 19.4
Print advertising Display The Group’s most significant print advertising category, accounting for 43.7 per cent of total print advertising revenues in the 2013 financial year, is display advertising. Display advertising consists of brands or other offerings and are generally included alongside editorial content in its titles.
Property Real estate advertising has been the Group’s most successful source of classified advertising revenue for several years. For the 2013 financial year, property advertising represented 15.3 per cent of total print advertising revenues. Despite the increasing availability of online alternatives, property print advertising has remained a core element of the standard advertising mix for both real estate agents and house builders. The Group’s news titles sell print property advertising as display, full-page inserts, leaflets and news covers. For real estate agents, this reflects the value of brand advertising in print, which acts as an important means of attracting new instructions as well as new buyers and sellers. It also confirms the Group’s own market research which indicates the high value that vendors place on having their properties advertised in their local newspapers.
Motors The Motors category contributed 8.9 per cent of total print advertising revenues for the 2013 financial year and this category continues to be challenged primarily due to structural and economic factors. While the general economy is experiencing growth, structural factors, specifically industry consolidation, have created larger players with greater advertising pricing power who have diverted parts of their budgets to other media platforms. The use of websites, both generic and those operated by the automotive industry itself, has also been a factor behind declining motors revenues, but not to the same extent as the process of industry consolidation. Motor dealers themselves have also experienced difficult market conditions and, though new car sales have recently improved after several years of decline, their profit margins continue to be under pressure.
Employment Employment advertising generated 8.1 per cent of the Group’s print advertising revenues for the 2013 financial year. During that year, the Group also increased its investment in this advertising category and developed offerings and services to better address the changing demands of the market, including additions to the SmartList offering such as the ‘‘Engineerlist’’ and ‘‘Accountancylist’’.
132 Other All other print advertising revenues accounted for £37.8 million of Group revenues or 24.1 per cent of total Group advertising revenues in the 2013 financial year. Other revenue comprises the following categories: entertainment (£6.6 million), BMDs (£12.0 million), public notices (£9.6 million) and Other classified (£9.6 million).
Digital Digital advertising The Group’s digital advertising revenues contributed 8.4 per cent of total Adjusted Group advertising revenues in the 2013 financial year and grew 19.4 per cent year on year to £24.6 million. The Group is now increasingly starting to witness some advertising categories approaching the ‘tipping point’ where declines in certain print advertising category revenues are offset to some extent by growth in the corresponding digital advertising category’s revenues. June was the first month in 2013 where growth in digital advertising revenues offset the decline in print advertising revenues within an advertising category at one or more of the Group’s publishing units. Taking November 2013 as a more recent example, the Group saw four publishing units reach the tipping point across one or more advertising categories.
Growth in digital advertising revenues was strong throughout the 2013 financial year, with revenues in the first half of the year growing by 13 per cent year on year and the second half growing by 25.3 per cent. Online local display advertising revenues grew by 33 per cent from the 2012 financial year to the 2013 financial year on a year on year basis, from £5.1 million to £6.8 million. A contributing factor to this growth has been the Group’s print to digital upsell rate which averaged 48 per cent over 2013, up from 33 per cent over 2012.
Revenues from the Group’s online employment category in the 2013 financial year grew to £7.6 million from £7.3 million, a year on year growth of 4.1 per cent for the 2012 financial year to the 2013 financial year. Online advertising revenues from national advertisers grew to £1.8 million for the 2013 financial year, representing a year on year growth of 28 per cent from the 2012 financial year, with online display advertising as the biggest growth category. Online property and motors advertising revenues grew year on year from the 2012 financial year to the 2013 financial year by 125 per cent and 200 per cent, with property advertising delivering revenues of £0.89 million and motors advertising delivering £0.88 million.
Non-advertising digital revenue The Group’s non-advertising digital revenues were £2.7 million for the 2013 financial year. These revenues are primarily made up of revenues from DealMonster, SmartList and other digital enterprises. New digital services are starting to contribute to other digital revenues, albeit from a low base. This includes DigitalKitbag which generated £47,000 in its first few months of operations. Revenues from the Group’s new employment offering, The SmartList, grew from £36,000 in the 2012 financial year to £592,000 in the 2013 financial year. The Group believes that these new digital revenue streams represent opportunities for revenue growth in the future.
Contract printing
The Group provides contract printing services to third parties on a competitive basis as a means to generate incremental revenue and utilise excess printing capacity. Contract printing customers consist primarily of other publishers that do not compete directly with the Group’s publications. For example, the Group prints Metro and Daily Mirror for Trinity Mirror under medium-term contracts. Contract printing represented 3.5 per cent of the Underlying Group revenues in the 2013 financial year. Although not a main focus of the Group, this is a steady revenue stream at no additional cost to the Group.
133 Leaflets
The Group operates a leaflet distribution business ‘Letterbox direct’ that delivers newspapers to customers’ homes. In conjunction with this service the Group also distributes leaflets and inserts for advertisers, which generates incremental revenue as it leverages the Group’s newspaper distribution network. In the 2013 financial year, the leaflet distribution business generated £3.6 million of revenues.
Printing
In recent years, the Group has rationalised its printing requirements in line with market demands through significant investment in new high speed full colour presses and the closure of its less efficient operations. Closures in 2012 included printing operations in Leeds, Isle of Man, Peterborough and Sunderland and the Group has transferred much of its printing into high speed printing operations in Sheffield and Portsmouth. Both of these sites have benefitted from significant investments in the highest quality full colour production as well as value added services such as on line inserting. The Group also has a printing operation in Carn servicing the markets of Northern Ireland. In addition the Group uses strategic print partners to provide printing capacity in key geographical areas allowing for reduced distribution costs.
The Group has also positioned itself at the forefront of newspaper production and offers the printing services used in its own publications and to third party customers in the external contract print market.
Newsprint
Newsprint is the principal raw material used in the production of the Group’s daily newspapers and other print publications. It is a commodity that is generally subject to considerable price volatility. To address this volatility, the Group enters into newsprint purchase agreements for 18 month periods. The Group has contracted to purchase newsprint from Harmsworth Printing Limited until the end of 2014. These purchases are made in sterling and are subject to quarterly market price adjustments. The Group generally maintains two weeks’ worth of inventory and at least 85 per cent of the newsprint purchased by the Company is currently made up of recycled content. The cost of newsprint for its newspapers was 9.6 per cent of its total operating costs in the 2013 financial year.
Advertising sales and marketing
The Group operates its sales and marketing activities through two primary channels. The first channel is the direct Group sales force which is made up of 1,129 advertising FTEs (December 2013 FTEs). These FTEs are employed within the Group’s locally based businesses and have direct relationships with advertisers. Local sales generally account for approximately 75 to 80 per cent of the Group’s print advertising sales (77 per cent in 2013). This sales force sells across the Group’s media offerings. Sales to national accounts and a number of regional advertising agencies who represent larger customers are handled by Mediaforce, the second primary channel. Mediaforce is based in London, Birmingham, Dublin, Manchester and Edinburgh and undertakes the Group’s national sales operation which currently generates around 20 to 25 per cent of the Group’s advertising revenues (23 per cent in the 2013 financial year). Mediaforce sells both print and online advertising for the Group.
Newspaper subscriptions can be purchased online from the relevant news-site. The Group does not have a large operation for marketing its newspapers.
IT systems and security
The Group has continued to invest in common IT systems across the Group. Work has also been undertaken to ensure that all advertising and accounting systems across the Group have
134 adopted the same standard software, classification listings and customer interfaces. The Group believes that these measures have simplified the introduction of new services which will improve the customer experience when contacting the Group’s publishing centres and provide an efficient and timely way of deploying new features and platforms, particularly in the area of digital publishing. The common system strategy has allowed the Group to capture customers’ details on a central database, which is the foundation for creating a number of new revenue opportunities.
As part of its IT strategy, the Group has consolidated its data storage into two large hosted data centres. These data centres provide access to all business critical data across the Group. The data-centres also provide direct internet access and will enable the Group’s readers and viewers to interact with each Group title in a timely and efficient way, improving the user experience and creating overall efficiencies whilst increasing the resilience and back-up facilities of the Group.
During 2013, the Group partnered with Occam Data Management to implement a ‘‘big data’’ project. The aim of the project is to create a central depositary of all contact points that customers have with the Group, whether it be via its printed publications, online, or via mobile device (smart-phone, tablet, etc.). Such ‘‘Single Customer View’’ enables close coordination of how the Group’s customers interact with it, and will facilitate the provision of relevant and targeted marketing to its customer base, which creates a number of new revenue opportunities for the Group.
As a major regional publisher the Group is a target for cyber-attacks on an almost continual basis. A layered approach to security, involving multiple firewall systems, DDoS mitigation, and intrusion detection, is used throughout the organisation. In addition, the Group uses expertise from key vendors, including Microsoft, Vodafone and Dell to ensure that its systems are configured and maintained using industry best-practices. The threat and landscape is continually evolving. The Group takes both pro-active and reactive steps both to meet these new challenges as they come to light and to reduce the likelihood of new threats having an impact on the business.
Intellectual property
The Group is a major provider of information and original content to consumers and, as such, intellectual property rights, particularly copyright, are important in the sale and marketing of its products and services. The Group owns copyrights in each of its publications as a whole and in all individual content items created by its employees in the course of their employment, subject to very limited exceptions. Where the Group has entered into licensing agreements with wire services and other content suppliers, it has done so on terms that the Group believes are sufficient to satisfy the needs of its publishing operations. The Group also relies on less formal arrangements with its freelance contributors for the same purpose. The Group believes that it has taken appropriate and reasonable measures to secure and maintain copyright protection of content produced and distributed by it.
The Group’s intellectual property constitutes a significant part of the value of the company. The Group relies on the trademark, copyright, internet/domain name, trade secret and other laws of the UK and other countries, as well as nondisclosure and confidentiality agreements, to protect its intellectual property rights. The Group has registered a number of domain names, many of which include trademarks, service marks and trade names used in its business, under which it operates websites associated with its publishing and online operations.
While the Group’s business makes extensive use of technology, the Group is not materially dependent on specific third party proprietary technology.
135 Properties
The Group owns or leases properties in each geographic region in which it operates, including a head office in London. The Group believes that the current portfolio of properties meets its current needs. Following the disposal of under-utilised properties and printing centres over recent years, the Group now leases most of the properties it occupies.
Long leasehold Short leasehold Address Freehold (>25 years) (<25 years) 108 Holyrood Road, Edinburgh(1) ...... — — Lease due to be surrendered June 2014 No. 1 Leeds (held in three leases) ...... — — Leases expire 2022 and 2027 Echo House, Pennywell, Sunderland ...... — — Lease expires 2023 York Street, Sheffield ...... Freehold — — Caxton Way, Dinnington, Colliery Estate, Outgang Lane, Dinnington ...... Freehold — — The News Centre, Hilsea, Portsmouth ...... Freehold — — 1000 Lakeside, Portsmouth ...... — — Lease expires 2028 2 Esky Drive, Carn Industrial Estate, Portadown . . Leasehold Lease expires — 2994 2 Cavendish Square, London ...... — — Lease expires 2028 Albert House, Northampton ...... — — Lease expires 18 July 2023 Auckland Park, Milton Keynes ...... — — Lease expires 31 August 2015 Donegal Square South, Belfast ...... — — Lease expires 2021 Avro House, Avro Crescent, Blackpool ...... — — Lease expires 2023 Part of Oliver’s Place, Fulwood, Preston ...... — — Lease expires 2023 (1) 108 Holyrood Road, Edinburgh, is the Company’s current Scottish head office, registered office and one of the Group’s network call centers. Contracts for the surrender of the lease have been exchanged and due to be completed on 30 June 2014. On 2 May 2014, the Company entered into a contract for the lease of a new head office and national call centre in Edinburgh but this replacement letting will not be ready by 30 June 2014. In the interim, the Company will use temporary and existing offices.
Environmental
Environmental policy The Group’s environmental policy aims to ensure that every aspect of its activity is conducted in accordance with sound environmental practices. The Group aims to ensure that it continually minimises the environmental impact of its activities. The Group has consistently reduced the energy consumption from its operations in recent years and this remains a priority for the Group.
136 The reduction in the Group’s overall energy usage is due, in part, to further consolidation of the business premises together with a number of energy efficiency measures coming to fruition. Following the success of lighting updates at our Dinnington print works, the same approach is planned to be rolled out at our Portsmouth print works. The Group is also installing Automatic Meter Reading systems for gas throughout all premises, which will enable more accurate monitoring and eliminate estimated readings. The further reductions resulting from such changes in the Group’s energy usage will help to reduce the amount of Climate Change Levy that we pay as part of the Carbon Reduction Commitment. This scheme allows its energy-intensive sites to make energy efficiency improvements in exchange for discounts from the levy. The Group has operated under the Carbon Reduction Commitment Energy Efficiency Scheme since its inception. The scheme requires participants to purchase allowances to cover the carbon dioxide emissions associated with their energy use. The scheme is moving to Phase 2 (for which the Group has registered), pursuant to which the Group will be obligated to monitor, report and comply with various requirements over five years.
Paper supply and waste management The Group buys paper from sustainable sources and 95 per cent of our supply currently comes from UK paper mills that use only 100 per cent recycled fibre in the production of newsprint. Where possible, the Group seeks to utilise UK sources of paper. Where feasible these policies help to keep the Group’s carbon footprint down by not importing paper and support UK businesses by helping to ensure they are above the targets set by the government and newspaper industry for recycled content (70 per cent).
The Group is represented on the Newsprint Industry Materials Committee (‘‘NIMC’’)—part of the Newspaper Publishers Association—which self-regulates the way the industry manages waste and any related processes for materials we use in the production of newspapers. The NIMC lobbies government on environmental issues and has been successful at setting and achieving targets for waste and fibre content.
All the Group’s newsprint waste is returned to paper mills in the UK to be reused in the manufacture of papers and the industry cooperates to achieve targets which are agreed with the Government. In 2011, 78.9 per cent of British newsprint was produced from recycled fibre (against an agreed target of 70 per cent). The Group adheres to the requirements of the Producer Responsibility Obligations Regulations 1997.
Both paper and non-paper waste is segregated into over 20 different streams to maximise their recycling potential and the Group operates in long-standing partnerships with industry leading environmental services companies. Non-paper based waste from printing presses is separated and collected for recycling in line with the Environmental Protection Act and Hazardous Waste Regulations. This process is audited and ISO 14001 accredited and carried out by the Group’s partners. Around 90 per cent of all material collected is recycled and re-used in the manufacture of a diverse range of products.
Dell remains the Group’s principal supplier of IT equipment and the Group works with them to provide disposal channels for redundant IT equipment.
Health and safety
Each Group company has a Health & Safety Committee, chaired by that area’s Managing Director who ensures all actions identified by the Health & Safety Committee are completed. This is monitored by the Group Health and Safety manager. In addition, the Group also has a Group Health & Safety Committee made up of representatives from key areas across the business. This committee, in conjunction with the Group Health and Safety Manager, instructs and reviews audit visits, monitors compliance with Group policies, ensures those policies are kept up to date and encourages best practice. The Group Health & Safety Manager has, again, coordinated independent audits of all the Group’s main sites. He works closely with each of
137 these sites to maintain the strong links with site health & safety officers which in turn has helped all sites to improve their scores in the Group’s rolling programme of internal audit inspections. The Group’s consistent reporting processes have now been in place for more than nine years, allowing performance over time to be measured. The Group ensures that every accident is reported and this is a key part of its control environment. Following the introduction of rigorous health and safety management and reporting processes, 2013 has been the Group’s best year on record. For the third year running the number of accidents has reduced by approximately 42 per cent year on year and the Group achieved lengthy periods without any reportable accidents. The Group’s publishing sites achieved nine months without any ‘lost time’ accidents and its print sites have, to date, achieved 23 months without a ‘lost time’ accident. The number of employees involved in accidents in the Group’s printing and publishing operations in the 2013 financial year was 1.9 per cent, compared to 2.6 per cent in the 2012 financial year and 3 per cent in the 2011 financial year.
Employee and labour relations For the 2013 calendar year, the number of full time equivalent employees (‘‘FTEs’’), at the relevant period end, of the Group was 3,281. The table below sets out the average number of FTEs employed by the Group in each of the last three financial years:
52 week period ended 28 December 29 December 31 December 2013 2012 2011 Editorial ...... 1,182 1,558 1,704 Advertising ...... 1,129 1,383 1,513 Administration ...... 204 227 309 Other ...... 766 793 1,136 Total: ...... 3,281 3,961 4,662
52 week period ended 28 December 29 December 31 December 2013(1) 2012(1) 2011(1) UK...... 3,118 3,791 4,473 Ireland ...... 163 170 189 Total: ...... 3,281 3,961 4,662 (1) Number of FTEs for the 52 week period ended 31 December 2011 reflect those numbers as included on the Group’s human resources system. Number of FTEs for the 52 week period ended 29 December 2012 and 28 December 2013 reflect these numbers as included on the Group’s information system.
All Group employees have the right to freedom of association and, in a number of cases, the Group recognises trade unions at a subsidiary level in the UK. The employees in respect of the three print sites locations in Portsmouth, Dinnington and Carn have union recognition agreements in place with the union UNITE. In editorial, approximately a third of the centres have collective agreements in place, the majority with the NUJ. Each publication is treated as a separate unit with individual agreements in place and therefore no union is recognised on a business wide basis. Work stoppages occurred at South Yorkshire Newspapers for a period of eight weeks during the summer of 2011 but were resolved satisfactorily and the Group did not change its position regarding the dispute (which concerned compulsory redundancies in editorial). There was no significant loss of revenue or disruption to the publication or circulation of the Group’s titles. Other than this incident, there has not been any significant work stoppage in the last four years and the Group believes that its relations with its employees and the trade unions are satisfactory. The Group launched the YourSay survey in January 2013 involving all of its employees and this identified some key areas of improvement, of which many were implemented throughout 2013. In conjunction with this, the Group reviewed its internal communication channels taking account of internal feedback which resulted in a more transparent and inclusive approach across the entire business.
138 Competition
Newspaper competition The Group competes with other news outlets for newspaper sales, media consumption and online readership. In the various local markets in which the Group publishes its titles, it often publishes the local or regional newspaper of record. In such cases, it may not be subject to major competition from other local newspapers. However, in all cases, the Group is subject to competition from other news providers, such as the BBC local news broadcast services, although online news sites such as these garner much of their content from specialised regional and local news providers such as the Group. One of the Group’s unique selling points is its ability to have its journalists on the ground in the communities they serve, which is likely to place them in a position where larger news organisations that cover national news may not be able to compete with the Group in terms of speed of news reporting. The Group therefore competes on quality of local stories and in-depth analysis of local issues.
As news content for the Group’s local and regional titles is generally different to that covered by national newspapers, with the exception of The Scotsman/Scotland on Sunday and, to a lesser extent, The Yorkshire Post, the Group does not believe itself to be in competition with national news providers.
Advertising competition The Company views advertising competition as separated into two categories:
Display advertising—This type of advertising is typically bought by local businesses whose primary purpose for purchasing advertising is often focused on brand building to a targeted geographic audience. In this respect the Group competes with other forms of local advertising such as local radio and other online news and websites. The Group’s unique selling point for advertising is its ability to leverage off its heritage brands both in print and online in the local communities. Based on this, the Group believes it has a valued position amongst its local, regional and national advertisers, seeking to reach local and regional audiences. There are low barriers to entry in local and regional advertising and it is quite common for hyper local publications and websites to enter the Group’s markets, however, initially at least, these publications/websites typically have less brand recognition than the Group’s brands.
Category advertising—This form of advertising is highly competitive and has been impacted by structural changes which have seen online market leaders such as Rightmove and Autotrader take a large share of the traditional regional newspaper classified market. In response to this, the Group has entered into partnerships with smaller players in the Property, Motors and Employment category advertising space in an attempt to maintain a ‘share of wallet’ in the classified market space. The Group’s strategy is to offer a combined package to classified advertisers where display advertising in print and digital is used for brand building and recognition and category advertising is placed using the strength of the Group’s partnerships to drive transactions. In this regard, it is the Directors belief that the Group is in a strong position to deliver value to its local advertisers and has to some extent protected itself from competition from the online aggregators such as Rightmove and Autotrader.
Regulatory environment
The Group is subject to national, regional and local laws and regulations, including those relating to data privacy, advertising and intellectual property. The Group conforms to the Press Complaints Commission Code of Practice and is monitoring proposed industry regulation resulting from the Leveson inquiry and report (the ‘‘Leveson Report’’), which was a judicial public inquiry into and a report on the culture and practices of the British press following the News International phone hacking scandal, including recommendations to replace the Press Complaints Commission. The Press Complaints Commission is a voluntary, self-regulatory organization for printed British newspapers and magazines, and the Press Complaints
139 Commission Code of Practice is a set of standards of accuracy, privacy and ethics, against which any member of the public may bring a complaint against a publication that has volunteered to meet the standards of the Code of Practice. Members of the Press Complaints Commission adjudicate complaints and suggest measures of correction where the Code of Practice has been broken. The newspaper industry in the United Kingdom is in the process of setting up a new self-regulatory system, called the Independent Press Standards Organisation (the ‘‘IPSO’’), which is meant to align with the principles set out in the Leveson Report and is expected to be fully implemented by June 1, 2014. The Group has signed a contract binding itself to the IPSO and giving the IPSO powers of investigation, enforcement and sanction over the Group. The Group is also subject to laws requiring it to pay taxes or governing its relationships with employees, including minimum wage requirements, overtime, working conditions, hiring and terminating, non discrimination for disabilities and other individual characteristics, work permits and benefit offerings. The Group believes that its business is conducted in substantial compliance with applicable laws and regulations, and it has not received any notice of non compliance that may have material effects on its business.
Litigation
The Group is from time to time subject to defamation, libel and similar claims and proceedings in the ordinary course of business. The Group generally tries to resolve these issues promptly by a variety of means, such as consultation, negotiation and discussion and has systems in place to allow for escalation of any disputes or concerns that its journalists become aware of. Save as disclosed in this offering memorandum, neither the Company nor any member of the Group is or has been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) which may have, or have had during the 12 months prior to the date of this offering memorandum, a significant effect on the Company’s and/or the Group’s financial position or profitability.
The negligence proceedings The Company is pursuing three claims against professional advisers on the grounds of negligence in connection with advice given in relation to the equalisation of the normal retirement dates (‘‘NRDs’’) for the Portsmouth & Sunderland Newspapers Pension and Life Assurance Plan (1971) (the ‘‘P&SN Plan’’), which was transferred into the Plan on the acquisition by the Company of Portsmouth & Sunderland Newspapers PLC (the ‘‘Negligence Proceedings’’). Simultaneously, the Company is commencing proceedings to seek declaratory relief in relation to the P&SN Plan (the ‘‘Declaratory Proceedings’’). The financial liability caused by the delay in the date of equalising NRDs from March 1992 to May 1994, to which the Negligence Proceedings relate, is estimated to be approximately £8 million. Unless the Declaratory Proceedings find that equalisation was achieved as intended, or such a sum (or a proportion thereof) can be recovered from the defendants in the Negligence Proceedings, such shortfall (or the proportion thereof which is not recovered) will need to be met by the Company.
The Company claims that Sedgwick Noble Lowndes (now part of Mercer) (‘‘Mercer’’), the advisers of Portsmouth & Sunderland Newspapers PLC and the trustees of the P&SN Plan, did not provide adequate advice in relation to the method by which equalisation of the NRDs should be achieved. It is the Company’s position that Mercer acted in breach of duty by failing to advise Portsmouth & Sunderland Newspapers PLC and the trustees of the P&SN Plan (i) that equalisation of NRDs necessitated an amendment to the P&SN Plan in compliance with strict contractual requirements; (ii) that it was not competent to advise on the process by which equalisation of NRDs was achieved; and (iii) that P&SN Plc and the trustees of the P&SN Plan should seek advice from a firm of solicitors on the point.
In 1999, Portsmouth & Sunderland Newspapers PLC sold a group business, One Stop Community Stores Ltd (‘‘One Stop’’), the employees of which had participated in the P&SN Plan. As a result, the steps taken in relation to the P&SN Plan to equalise NRDs were considered by the
140 prospective purchaser of One Stop. As part of that process, concern was raised by two advisers to the purchaser that equalisation had not been validly achieved. As a result, P&SN Plc sought advice from Rowe & Maw (now part of Mayer Brown LLP) (‘‘Mayer Brown’’ and, together with Mercer, the ‘‘defendants’’) on this issue. Mayer Brown advised that an announcement to members was effective in equalising NRDs from 30 April 1992. The Company alleges that this advice was given in breach of duty in that Mayer Brown ought to have advised that an announcement alone was not sufficient to validly amend the P&SN Plan and that, on the face of it, the P&SN Plan did not equalise NRDs until May 1994.
In 2000, Mercer also advised Portsmouth & Sunderland Newspapers PLC and the trustees of the P&SN Plan in relation to merging the P&SN Plan with the Plan. The Company alleges that, in breach of its duty, Mercer advised that the trustees of the JP Scheme could safely accept a transfer of assets from the P&SN Plan. The Company claims that Mercer ought to have identified that the method of equalisation adopted in 1992 was invalid, or potentially invalid, and advised that the assets due to be transferred were potentially significantly less than the assets required.
It has been agreed with the defendants that the claims be advanced under the professional negligence pre-action protocol. To permit the protocol steps to be followed, the Negligence Proceedings in the English courts have been stayed on two occasions. The last stay has expired and an application has therefore been made to extend the stay of proceedings for 12 months with effect from 30 November 2013. That application is due to be heard shortly.
In addition to defending the claim against them, both defendants have argued that another professional adviser is potentially responsible for the losses claimed by the Company. Protective proceedings have been issued against such other professional adviser in the Court of Session in Scotland in relation to a proposed claim by the Company that they failed to take steps generally to protect the interests of Company and of the Plan Trustees. The protective proceedings have been stayed pending the outcome of the Declaratory Proceedings.
Capital Reorganisation
In connection with the Placing and the Rights Issue, the Company is proposing to implement a reorganisation of its share capital (the ‘‘Capital Reorganisation’’) so as to reduce the nominal value of its ordinary shares to ensure that the issue price (when determined) of the Rights Issue shares and Placing shares complies with the Companies Act 2006. The Capital Reorganisation will be presented for approval by the Company’s ordinary shareholders at the general meeting to be held in respect of the approval of the Placing and the Rights Issue. The Capital Reorganisation will take place before Admission of the Placing shares and the Rights Issue shares. Under the Capital Reorganisation, each existing ordinary share in the Company of 10 pence nominal value will be subdivided into one ordinary share of 1 penny nominal value and one deferred share of 9 pence nominal value, with very limited rights. Each of the Placing and the Rights Issue is conditional upon (among other things) the completion of the Capital Reorganisation. The proportion of the issued share capital of the Company held by each ordinary shareholder immediately following the Capital Reorganisation will remain unchanged.
Dividend policy
The board of directors of the Company (the ‘‘Board’’) has not declared a dividend to holders of its ordinary shares (‘‘Ordinary Shareholders’’) since its results of operation for the year ended 31 December 2007. The Board continues to believe that the most important use of available cash in the current environment is to reduce the Group’s indebtedness.
The Board understands the importance of delivering value for Ordinary Shareholders and believes that the proceeds of the Capital Refinancing Plan together with a successful implementation of the Group’s strategy will provide a platform from which the Group can return to overall revenue growth and generate increased surplus cash-flow with a view to
141 further deleveraging the Group and re-investing some of that surplus cash to grow its digital presence further. This should allow the Board to resume payment of dividends in the medium- term future. Although the Placing and the Rights Issue will result in a material reduction in leverage, the Company intends, in accordance with its financial strategy, to prioritise cash generation and further net leverage reduction. Nevertheless, the Board is conscious that ordinary shareholders have not received a dividend for a number of years and wishes to resume the payment of dividends to Ordinary Shareholders when it is prudent to do so, and at a level commensurate with a continued de-leveraging profile. The Board currently intends to consider the resumption of dividend payments for holders of ordinary shares in the medium- term future, although achieving this will be subject to a number of risks, many of which are outside the control of the Company. Any decision to resume the declaration of dividends on the ordinary shares will be made in the discretion of the Board and subject to the availability of distributable profits and the covenants in the Indenture. The Group has also entered into the New Pensions Framework Agreement with the Plan Trustees which, whilst not restricting the payment of dividends to Ordinary Shareholders, does require the Company to consult with the Plan Trustees and to give due consideration to making additional contributions to the Pension Plan.
The Board has recently become aware of a technical issue in respect of the payment of dividends to holders of the Company’s 13.75 per cent Cumulative Preference Shares and 13.75 per cent ‘‘A’’ Cumulative Preference Shares (together, the ‘‘Preference Shares’’) which are normally payable in June and December in each financial year. In December in the 2011 financial year and in June and December in the 2012 financial year, the Company did not have sufficient distributable profits to pay dividends to holders of the Preference Shares at the relevant times (amounting to £76,010 of payments in each instance) and interim accounts showing the requisite level of distributable profits were prepared but not filed at the United Kingdom Companies House in accordance with the Companies Act of 2006 (United Kingdom) (the ‘‘2006 Act’’).
In order to remedy this matter, the Company intends to seek shareholder approval for a reduction of the Company’s share premium account by an amount sufficient to eliminate the accumulated deficit (which was £133.1 million as at 28 December 2013) on the Company’s profit and loss account and create distributable reserves for the Company going forward (the ‘‘Reduction Resolution’’). The Reduction will also need to be approved by the Court of Session in Scotland and by the holders of Preference Shares.
Creating distributable reserves in this way will give the Company greater flexibility going forward and will allow it, subject to the obligations of its financing documentation, to pay dividends to its shareholders lawfully going forward, including to holders of the Preference Shares (which it is required to do in June and December every year under its articles of association, subject to the availability of distributable reserves). It will also enable the Company to be able to purchase shares for the Company’s Employee Share Trust to settle outstanding awards under the Company’s employee share plans.
If the Reduction Resolution is not passed at an annual general meeting of the Company by Ordinary Shareholders and at separate meetings of holders of Preference Shares, the Company will not be allowed, amongst other things, to lawfully pay dividends to either its Ordinary Shareholders going forward or to holders of Preference Shares until such time as distributable reserves are available. The Company will also be unable to purchase shares for the Company’s Employee Share Trust to settle outstanding awards under the Company’s employee share plans.
Where the Company is unable to pay the biannual dividends to holders of the Preference Shares, such dividends will be deemed to be in arrears. This would give holders of Preference Shares a right to attend and vote at general meetings of the Company pursuant to the terms of the Company’s articles of association, until such time as the dividends are paid in full.
142 As a consequence of the payment of the dividends referred to above the Company may, under the 2006 Act, have claims against past and present holders of the Preference Shares who were recipients of these dividends and against persons who were members of the board of directors (the ‘‘Directors’’) of the Company at the time of payment of the dividends or who have subsequently become directors of the Company.
It is not the intention of the Company that any claims should be made by the Company against either past and/or present holders of Preference Shares who received the dividends or against past and/or present Directors in respect of the dividend payments. Therefore, it is intended that a special resolution also be proposed at an annual general meeting of the Company, to ratify and confirm the appropriation of profits to the payments concerned; to release claims which the Company may have either against such holders of Preference Shares who received the dividends or against any such Directors of the Company in respect of the dividends; and generally to approve the Company entering into deeds of release in favour of such holders of Preference Shares and Directors in relation to the same. The Directors who are also holders of ordinary shares in the Company would not be entitled, and do not intend, to vote on this special resolution, which would also be subject to confirmation of the Reduction by the Court of Session in Scotland.
The Company intends to seek confirmation from HMRC that the dividends will continue to be treated as a distribution for UK tax purposes and that the proposed waiver and release will have no tax implications for UK tax resident holders of the Preference Shares.
Pensions
The Johnston Press Retirement Savings Plan The Johnston Press Retirement Savings Plan is a defined contribution Master trust arrangement for current employees, operated by Zurich. Contributions by the Group are a percentage of basic salary. Employer contributions range from 1 per cent of basic salary, for employees statutorily enrolled, through to 12 per cent of basic salary for Senior Executives. Employees who were active members of the Money Purchase section of the Pension Plan on 31 August 2013 transferred from the Pension Plan to the Johnston Press Retirement Savings Plan from 1 September 2013.
The Pension Plan The Pension Plan is a defined benefit pension plan closed to new members and closed to future accrual. There was formerly a defined contribution section of the Pension Plan which was closed in August 2013 and members’ benefits were transferred to the Johnston Press Retirement Savings Plan. 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 to the defined benefit section of the Pension Plan are fixed annual amounts with the intention of eliminating the deficit, which was £131.2 million as at 31 December 2010 on an ongoing basis and £303.0 million on a buy-out basis (that is, the cost of securing the Pension Plan’s benefits through the purchase of annuities payable in the event of the Pension Plan winding-up or a group-wide insolvency). Based on the outcome of the triennial valuation at 31 December 2010, the fixed annual contribution amount is currently £5.7 million from 1 June 2012 under the schedule of contributions agreed between the Company and the Plan Trustees. The £5.7 million annual contributions are payable until 31 December 2024. However, pursuant to the New Pensions Framework Agreement, these contributions will increase on the implementation of the Capital Refinancing Plan. Under the rules of the Pension Plan, additional contributions may be payable on the disposal of Group companies or businesses in the publishing industry.
IAS 19 (revised 2011)—‘‘Employee benefit’’ is effective for annual periods beginning on or after 1 January 2013 and will therefore be applied in the next accounting period. The key changes are that the deferral of actuarial gains and losses will no longer be permitted and the deficit
143 should be recognised in full on the balance sheet (subject to any restrictions in IFRIC 14). The finance cost, which is currently the difference between the interest on liabilities and expected return on assets will be replaced by a net interest cost. In most cases the finance cost will increase as the expected return on assets will effectively be based on the discount rate (i.e. the rated corporate bonds) with no allowance made for anyמreturns available on AA outperformance expected from the Pension Plan’s actual asset holding. Had the standard been applied in the current financial year, the Group’s loss before tax would have been increased by approximately £5.2 million.
In August 2009, as part of the refinancing of the Company’s debt facilities to the Existing Lending Facilities and Private Placement Notes, the Pension Plan was granted security over £170 million of the Group’s assets, on substantially the same terms as creditors under the Existing Lending Facilities and the Private Placement Notes. These security interests remained in place following the amendment and restatement of the Override Agreement on 24 April 2012.
The current IFRS and actuarial valuation of the Pension Plan excludes the impact of the Capital Refinancing Plan. A new valuation of the Pension Plan as at 31 December 2012 has been commissioned by the Trustee and to take account of the Capital Refinancing Plan timetable, the deadline for finalising the valuation has been extended by agreement with the Plan Trustees.
Conditional on the Capital Refinancing Plan, the Plan Trustees and the Company have entered into the New Pensions Framework Agreement agreeing, inter alia, to the following:
• On implementation of the Capital Refinancing Plan, removal of the existing secured guarantee (with security up to £170 million) provided in favour of the Plan Trustees by the Company and certain of its subsidiaries in relation to any default on a payment obligation under the Pension Plan. This was agreed in relation to the refinancing of the Existing Lending Facilities and Private Placement Notes in 2009. In return for the removal of this security and the aforementioned guarantee, an unsecured cross-guarantee will be provided on implementation of the Capital Refinancing Plan by the Company and certain of its subsidiaries in favour of the Plan Trustees in relation to any default on a payment obligation under the Pension Plan. Each claim made under the unsecured cross-guarantee is capped at an amount equal to the aggregate S75 debt of the Pension Plan at the date any claim made by the Plan Trustees falls due.
• The deficit as at the 31 December 2012 valuation date will be sought to be addressed over an 11 year period by entry into a recovery plan providing for contributions starting at £6.3 million in 2014, £6.5 million in 2015 and £10.0 million in 2016 increasing by three per cent per annum with a final payment of £12.7 million in 2024.
• Settlement of unpaid PPF levies and S75 debts.
• The Pension Plan will be entitled to receive 25 per cent of net proceeds from business or asset disposals up to and including 31 August 2015 exceeding £1 million in a single transaction or £2.5 million over the course of a 12 month period, subject to certain permitted disposals, conditions in relation to financial leverage and other exceptions set out in the New Pensions Framework Agreement.
• The Company will also pay additional contributions to the Pension Plan in the event that the 2014/2015 PPF levy or the 2015/2016 PPF levy is less than £3.2 million.
• Additional contributions will also be payable to the Pension Plan in the event that the Group satisfies certain conditions in relation to financial leverage.
Any funding agreement needs to be reflected in the valuation documentation of the Pension Plan, which must be submitted to the Pensions Regulator who may exercise certain powers if it is not compliant with the relevant legislation.
144 If the Pension Plan’s funding position deteriorates after successful implementation of the Capital Refinancing Plan then the contributions may have to be revisited and additional contributions to the Pension Plan may be required. Contributions would ordinarily only be revisited in the context of the triennial valuation of the Pension Plan, although the Plan Trustees have power to call a valuation earlier if they resolve to do so.
Irish Pension Schemes In addition, the Group maintains liability for two defined benefit schemes providing benefits for a small number of former employees in Limerick and Leinster. Both schemes have been closed to future accrual since 2010 and are either already being wound up (in the case of Leinster) or will be wound up in the short term future (in the case of Limerick).
Material contracts
The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by members of the Group (a) in the two years immediately preceding the date of this offering memorandum and are, or may be, material or (b) contain provisions under which any member of the group has any obligation or entitlement which is material to the Group as at the date of this offering memorandum:
The Underwriting Agreement—Pursuant to the Underwriting Agreement dated 9 May 2014 between the Company, Panmure Gordon (UK) Limited and JP Morgan Securities plc (the ‘‘Underwriters’’), the Underwriters have agreed to use reasonable endeavours to (i) procure subscribers or purchasers (as the case may be) for the Placing shares and, failing which, the Underwriters have agreed severally to subscribe for any new Placing Shares issued by the Company at the Placing price, and (ii) procure subscribers for the new ordinary shares in the Company not taken up under the Rights Issue and, failing which, the Underwriters have agreed severally to subscribe for the new ordinary shares in the Company at the issue price.
If any of the conditions in the Underwriting Agreement are not fulfilled (or where permitted, waived) in all respects by specified times and dates, the obligations of the Underwriters under the Underwriting Agreement shall terminate.
Under the Underwriting Agreement, the Company has given certain representations and warranties to the Underwriters regarding the accuracy of the information contained in the prospectus published in connection with the Placing and Rights Issue, and also an indemnity in relation to the Placing and the Rights Issue.
The Underwriting Agreement provides the Underwriters with the right to terminate their respective obligations under the Underwriting Agreement under a number of enumerated circumstances. For example, the Underwriters may terminate their respective obligations under the Underwriting Agreement if there is a material breach of any of the provisions of the Underwriting Agreement by the Company or any of the warranties contained in the Underwriting Agreement ceases to be true and accurate and not misleading in any material respect at any time prior to Admission. In addition, the Underwriters may also terminate on the occurrence of certain force majeure events including a material adverse change in economic, political or market conditions or any outbreak of hostilities or similar crisis which, in either case, (in the good faith opinion of the Underwriters) makes it inadvisable or impracticable to proceed with the Placing and the Rights Issue.
The subscription agreement—Pursuant to a subscription agreement dated 14 May 2008 between the Company and Gromwell, a wholly-owned subsidiary of Usaha Tegas, the Company agreed to allot and issue, and Gromwell agreed to subscribe for, 31,486,988 new ordinary shares at a price of 135.75 pence per share for an aggregate subscription price of £42,743,586.21. The new ordinary shares subscribed for by Gromwell rank pari passu with the existing ordinary shares in the Company, including the right to participate in the Rights Issue
145 and the right to receive all dividends and other distributions. Pursuant to the terms of the agreement, Gromwell has the right to appoint a director to the Company’s board of directors for so long as it holds ten per cent or more of the issued share capital of the Company, and the appointed director shall be appointed as a member of the Nomination Committee. For more information on the Company’s Nomination Committee, see ‘‘Management—Committees of the Board—Nomination Committee’’. The agreement also contains certain representations, warranties and indemnities given by Gromwell to the Company which are customary for an agreement of this nature.
STV Central Limited—Collaboration Agreement—On 30 April 2013, Johnston Publishing Limited (‘‘JPL’’, a subsidiary of the Company) entered into a collaboration agreement with STV Central Limited (‘‘STV’’) in relation to JPL’s online recruitment platform, The SmartList (the ‘‘Platform’’) (the ‘‘Collaboration Agreement’’) Pursuant to the collaboration, each party agreed to provide or procure certain services and expertise, together with a contribution towards development costs in relation to the Platform in Scotland.
Each party has agreed to provide certain advertising and marketing services in respect of the Platform and in accordance with an agreed budget and profit sharing arrangements. Furthermore, the parties have agreed certain sharing arrangements in relation to development costs associated with the business plan to develop the Platform.
The Collaboration Agreement shall continue until terminated for cause, or upon six months written notice from either party. Extensive repayment obligations have been included in the event that either party gives notice to terminate the Collaboration Agreement within the first two years of the collaboration. The Collaboration Agreement also includes a mutual non-solicitation clause.
New Pensions Framework Agreement—Pursuant to negotiations in relation to the actuarial valuation of the Pension Plan as at 31 December 2012 and in the context of and conditional on the Capital Refinancing Plan, the Company and the Plan Trustees have entered into a framework agreement (the ‘‘New Pensions Framework Agreement’’) in relation to the funding of the Pension Plan and certain other matters. The key terms are as follows:
• On implementation of the Capital Refinancing Plan, removal of the existing secured guarantee (with security up to £170 million) provided in favour of the Plan Trustees by the Company and certain subsidiaries in relation to any default on a payment obligation under the Pension Plan. This was agreed in relation to the refinancing of the Existing Lending Facilities and Private Placement Notes in 2009. In return for the removal of this security and the aforementioned guarantee, an unsecured cross-guarantee will be provided on implementation of the Capital Refinancing Plan by the Company and certain of its subsidiaries in favour of the Plan Trustees in relation to any default on a payment obligation under the Pension Plan. Each claim made under the unsecured cross-guarantee is capped at an amount equal to the aggregate S75 debt of the Pension Plan at the date any claim made by the Plan Trustees falls due.
• The deficit as at the 31 December 2012 valuation date will be sought to be addressed over an 11 year period by entry into a recovery plan providing for contributions starting at £6.3 million in 2014, £6.5 million in 2015 and £10.0 million in 2016 increasing by three per cent per annum with a final payment of £12.7 million in 2024.
• Settlement of unpaid PPF levies and S75 debts.
• The Pension Plan will be entitled to receive 25 per cent of the net available cash proceeds from business or asset disposals up to and including 31 August 2015 exceeding £1 million in a single transaction or £2.5 million over the course of a 12 month period, subject to certain permitted disposals, conditions relating to financial leverage and other exceptions set out in the New Pensions Framework Agreement.
146 • The Company will also pay additional contributions to the Pension Plan in the event that the 2014/2015 PPF levy or the 2015/2016 PPF levy is less than £3.2 million.
• Additional contributions will also be payable to the Pension Plan in the event that the Group satisfies certain conditions in relation to financial leverage.
If the Pension Plan’s funding position deteriorates after successful implementation of the Capital Refinancing Plan then the contributions may have to be revisited and additional contributions to the Pension Plan may be required. Contributions would ordinarily only be revisited in the context of the triennial valuation of the Pension Plan, although the Plan Trustees have power to call a valuation earlier if they resolve to do so.
The Irish Sale Agreement—On 1 April 2014, Score Press Ireland (the ‘‘Seller’’) an unlimited Irish incorporated subsidiary company of, and guaranteed by, the Company entered into an agreement (the ‘‘Sale and Purchase Agreement’’) with Iconic Newspapers Limited (the ‘‘Purchaser’’) a subsidiary company of, and guaranteed by, Mediaforce Holdings Limited to sell, and immediately complete the sale of, the whole of the issued share capital of Formpress Publishing Limited (the ‘‘Target’’) a private limited company that was a wholly owned subsidiary of the Seller for an aggregate consideration of £7.2 million (the ‘‘Aggregate Consideration’’) payable and paid in full in cash on completion.
The Sale and Purchase Agreement is governed by the laws of the Republic of Ireland and each party gave warranties and indemnities customary for a transaction of this nature, including in particular a Deed of Indemnity by the Seller in relation to taxation liabilities of the Target.
The aggregate liability of the Seller for all claims under the Sale and Purchase Agreement (including a deed of indemnity) shall not exceed the Aggregate Consideration. Claims in respect of the warranties given must be brought within 24 months of the date of the Sale and Purchase Agreement and claims brought under the tax warranties given and any claims under the deed of indemnity must be brought before the fifth anniversary of the date of the Sale and Purchase Agreement. The Seller has given non-compete covenants concerning, and non-solicit undertakings regarding the employees of, the business sold affecting all subsidiaries of the Company, in each case for a period 24 months from the date of the Sale and Purchase Agreement with exceptions for retained businesses (including in particular sales in the Republic of Ireland of Ulster retained titles. These undertakings are customary for a transaction of this nature.
As part of the disposal, Johnston Publishing Limited (an immediate subsidiary of the Company) will provide and/or procure the provision of certain transitional services of an administrative nature to the Target for a period of up to one year following the date of the Sale and Purchase Agreement and for the same period, under a printing agreement, another Company subsidiary will, on commercial terms, continue printing operations in Ulster as a contractor for the Purchaser for the printing of the Republic of Ireland newspaper titles the subject of the disposal.
News International Contract Printing Agreements—Pursuant to two agreements dated 25 August 2004 and 21 February 2005 between the Group and various entities in the News International Group (‘‘News International’’), The Group had been engaged to print The Sun and News of the World at the Group’s printing facilities in Portsmouth and Dinnington. Under these agreements, the Group gave and received certain indemnities, representations and undertakings which are customary for commercial agreements of this nature. In consideration for such contract printing services, News International agreed to pay the Group an aggregate amount of £12.4 million per annum for the duration of the agreements. The Group and News International have since terminated these agreements, which resulted in the Group receiving termination payments from News International of £30 million and £10 million in the 2012 financial year and 2013 financial year, respectively.
147 Mediaforce National Advertisement Sales Agreement—An agreement dated 14 August 2000 between the Group and Mediaforce (London) Limited (‘‘Mediaforce’’), pursuant to which Mediaforce was appointed exclusive national advertisement sales representative in relation to the Group’s titles published within the UK and the Isle of Man. Under the agreement, Mediaforce agreed to use its best endeavours to secure national advertising business throughout the UK for newspapers published by the Group and the Group agreed to pay Mediaforce a commission based on revenue generated for the Group by Mediaforce. Each party is permitted to terminate the agreement with one year’s prior written notice.
The Sky Subscription Agreement—Pursuant to the Sky Subscription Agreement, between the Company and British Sky Broadcasting Limited (‘‘Sky’’), a wholly owned subsidiary of British Sky Broadcasting Group plc, the Company has conditionally agreed to allot and issue, and Sky has conditionally agreed to subscribe for Placing shares. In addition, pursuant to the terms of the agreement, Sky has agreed to conditionally commit to taking up the rights associated with the Placing shares for which it has subscribed in the Rights Issue. The total investment to be made by Sky under the Placing and the Rights Issue will be approximately £5 million. The new Company ordinary shares subscribed for by Sky will rank pari passu with the existing Company ordinary shares, including the right to participate in the Rights Issue and the right to receive all dividends and other distributions. The agreement also contains certain representations and warranties given by Sky to the Company and by the Company to Sky which are customary for an agreement of this nature.
The Sky Strategic Agreement—Pursuant to the Sky Strategic Agreement, between the Company and Sky, the Company has been appointed as Sky’s sole advertising sales representative to promote and sell AdSmart Local targeted television advertising service in certain UK regions, including Sheffield, Derby and Nottingham.
The Gromwell Undertaking—In connection with the Placing and the Rights Issue, Gromwell and the Company entered into an irrevocable undertaking in relation to the ordinary shares in the Company held by Gromwell (and its affiliate, EFL Limited). Gromwell is a wholly owned subsidiary of Usaha Tegas and PanOcean is the ultimate holding company of Usaha Tegas. Pursuant to that undertaking, Gromwell has undertaken to sell or procure the sale of, as part of the Placing, a specified number of the ordinary shares in the Company which it or EFL Limited currently hold. Gromwell has irrevocably committed that it, together with EFL Limited, will use the full proceeds of such sales to subscribe for Rights Issue shares under the Rights Issue. Gromwell has further irrevocably committed to vote (and to procure that EFL Limited shall vote) in favour of the resolution at the Company’s general meeting to approve, among other things, the Placing and the Rights Issue. The Company has agreed to pay Gromwell a commission of 1.25 per cent on the aggregate value of the Rights Issue shares for which it subscribes at the Issue price.
The Tindle Press Undertaking—In connection with the Placing and the Rights Issue, on 29 April 2014, Tindle Press Holdings Limited (‘‘Tindle Press’’) and the Company entered into an irrevocable undertaking in relation to the existing ordinary shares in the Company held by Tindle Press, which was amended on 8 May 2014. Pursuant to that undertaking, Tindle Press has undertaken to sell or procure the sale of, as part of the Placing, such a number of its existing ordinary shares in the Company as will generate proceeds (after deduction of costs and expenses) sufficient to allow each of Tindle Press and Sir Raymond Tindle (who holds 100 per cent of the share capital of Tindle Press) to subscribe, in full, for the Rights Issue shares for which Tindle Press and Sir Raymond Tindle will be entitled to subscribe after giving effect to sales of existing ordinary shares in the Company via the Placing. Tindle Press and Sir Raymond Tindle have further undertaken to so take up and subscribe in full for, or (as the case may be) procure the take up and subscription in full of, the full amount of ordinary shares under the Rights Issue for which they are entitled to subscribe.
148 Warrants—As part of the refinancing of its Existing Lending Facilities and Private Placement Notes completed on 28 August 2009, the Company issued warrants in respect of a number of the Company’s shares representing approximately 5.0 per cent of its then-outstanding share capital to the lenders under the Group’s Existing Lending Facilities and holders of Private Placement Notes (together, the ‘‘Existing Creditors’’), exercisable at any time over the 5 year period ending 27 August 2014 (the ‘‘First Issue Warrants’’).
As part of the amendment and restatement of the Override Agreement completed on 24 April 2012 (i) the exercise period for the First Issue Warrants was extended to 30 September 2017 (the ‘‘Warrant Expiry Date’’), (ii) the Company issued additional warrants in respect of a number of the Company’s shares representing approximately 2.5 per cent of its then-outstanding share capital to the Group’s Existing Creditors (the ‘‘Second Issue Warrants’’) and (iii) the Company undertook, on or before 30 September 2012, and subject to receiving all necessary shareholder approvals, authorisations and powers, to issue further warrants in respect a number of the Company’s shares representing just under 5.0 per cent of its outstanding share capital as at 23 April 2012 to the Group’s Existing Creditors (the ‘‘Third Issue Warrants’’). The Third Issue Warrants were subsequently issued on 25 September 2012.
Each of the First Issue Warrants, the Second Issue Warrants and the Third Issue Warrants (together, the ‘‘Warrants’’) are exercisable at 10 pence (being the nominal value of the ordinary shares) each at any time prior to the Warrant Expiry Date. The Warrants contain anti-dilution provisions to protect the warrant holders and also cash settlement provisions.
As at 7 May 2014, the registered holders of Warrants were: AIB Venture Capital Limited, Continental Casualty Company, CRT Capital Group LLC, New York Life Insurance and Annuity Corporation, New York Life Insurance Company, Pacific Life Insurance Company, Pica Hartford Life Insurance Comfort Trust, Primerica Life Insurance Company, Principal Life Insurance Company, Prudential Retirement Guaranteed Cost Business Trust, Prudential Retirement Insurance and Annuity Company, Scotiabank (Ireland) Limited, Seaport Group LLC Profit Sharing Plan, The Northwestern Mutual Life Insurance Company, The Prudential Insurance Company of America, The Variable Annuity Life Insurance Company, Western National Life Insurance Company, Marathon Asset Management, BBHISL Nominees Ltd, Jefferies International Ltd London and CRT Capital Group LLC.
As at 7 May 2014, an aggregate of 49,262,044 Warrants had been exercised by holders of Warrants into 49,262,044 ordinary shares in the Company in accordance with the terms of the Warrants.
Over the period from 23 January 2013 to 14 March 2014, as a result of the exercise of 49,262,044 Warrants, 49,262,044 ordinary shares have been admitted to the ‘‘premium listing’’ segment of the Official List and to trading on the London Stock Exchange’s main market for listed securities.
From 1 January 2014 to 1 April 2014, 4,833,738 Warrants have been exercised.
149 Management Executive officers and directors of Johnston Press Bond Plc (the ‘‘Issuer’’)
The Issuer was incorporated on 18 March 2014, under the laws of England and Wales. The board of directors of the Issuer is currently composed of the following members:
Name Address Title Brian Carne ...... 2 London Wall Buildings, Director London EC2M 5UU, United Kingdom Mia Linda Drennan ...... 2 London Wall Buildings, Director London EC2M 5UU, United Kingdom Lee Morrell ...... 2 London Wall Buildings, Director London EC2M 5UU, United Kingdom
On and from the Escrow Release Date, it is expected that the board of directors of the Issuer will be as follows:
Name Address Title Ashley Highfield ...... 2 Cavendish Square, London Director W1G 0AN, United Kingdom David King ...... 2 Cavendish Square, London Director W1G 0AN, United Kingdom
There are no potential conflicts of interest between any duties of any of the Issuer’s management to the Issuer and their private interests and/or other duties.
Executive officers and directors of Johnston Press plc (the ‘‘Company’’)
The Company was incorporated on 31 December 1928, under the laws of Scotland. Operating and corporate decisions for the consolidated group are generally made by the board of directors of the Company. The Company’s board of directors consists of eight directors. The Company’s board of directors and senior management team is composed of the following members:
Name Age Title Ian Russell, CBE ...... 61 Non-Executive Chairman Ashley Highfield ...... 48 Chief Executive Officer David King ...... 54 Chief Financial Officer Mark Pain ...... 52 Independent Non-Executive Director Ralph Marshall ...... 62 Non-Executive Director Camilla Rhodes ...... 56 Independent Non-Executive Director Kjell Aamot ...... 63 Independent Non-Executive Director Stephen van Rooyen ...... 41 Independent Non-Executive Director
Summarised below is a brief description of the experience of the individuals who serve as members of the Company’s board of directors and senior management team.
Ian Russell, CBE was appointed a Director of the Company on 9 January 2007 and has been the Chairman of the Company since 12 March 2009. Mr. Russell is also the Chairman of the Nomination Committee. He previously served as Chief Executive Officer of Scottish Power PLC from 2001 until 2006, having previously been the Group Finance Director from 1994 until 2001. Mr. Russell has had a career in finance working for companies such as HSBC, Mars Limited and
150 KPMG. He is a member of the Institute of Chartered Accountants of Scotland. Mr. Russell holds a Bachelor of Commerce degree, with honours, from the University of Edinburgh.
Ashley Highfield was appointed a Director of the Company on 1 November 2011. From November 2008 to October 2011, Mr. Highfield worked as Vice President of Microsoft, responsible for Windows Mobile, MSN, Hotmail, Windows Live/Instant Messenger and Bing. From October 2000 to November 2008, Mr. Highfield worked at the BBC as Director of New Media and Technology, where he oversaw the launch of the iPlayer. Prior to joining the BBC, he worked as Managing Director at Flextech (now Virgin Media) Interactive. He is a Chartered (Information) Engineer. Mr. Highfield holds a business computing systems degree from City University Business School, London.
David King was appointed a Director of the Company on 1 June 2013. Mr. King previously worked at Time Out Group, where he was Chief Executive Officer until July 2012, after which he worked as a consultant before starting at the Company as Chief Financial Officer. Prior to Time Out he was Chief Financial Officer of BBC Worldwide for nine years. Mr. King held senior financial roles at a Citibank/Storehouse Joint Venture and worked as a management consultant at Coopers & Lybrand, before joining the BBC. Mr. King is a fellow of the Institute of Chartered Accountants.
Mark Pain was appointed a Director of the Company on 1 May 2009. He is also the Chairman of the Audit Committee. From June 2006 to June 2009, Mr. Pain served as the Chief Financial Officer and Group Finance Director of Barratt Developments PLC. Mr. Pain previously held a number of senior executive and board positions at Abbey National Plc, including Group Finance Director and Group Sales Director. Mr. Pain is a fellow of the Institute of Chartered Accountants and graduated from the University of Warwick with a Bachelor of Science degree, with honors, in management sciences.
Ralph Marshall was appointed a Director of the Company on 27 June 2008. Mr. Marshall has more than 30 years’ experience in financial and general management. He is an executive director of Usaha Tegas, Astro All Asia Networks Limited and Tanjong Public Limited Company. He is also the executive deputy chairman and group chief executive officer of Astro Holdings Sdn Bhd Group. He is an associate of the Institute of Chartered Accountants in England and Wales and a member of the Malaysian Institute of Certified Public Accountants.
Camilla Rhodes was appointed a Director of the Company on 13 July 2009 and is Chairman of the Remuneration Committee. Prior to joining the Company, Ms. Rhodes worked for News International for 28 years, holding senior roles including Managing Director of Times Newspapers, publisher of the Times and Sunday Times, from 1997 to 2001, and Managing Director of News Group Newspapers, the division responsible for the Sun and News of the World, from 2001 to 2005. In 2005, she set up News Magazines, a standalone magazine publishing division of News International. Ms. Rhodes runs her own consultancy. She is a graduate in economics from University College London.
Kjell Aamot was appointed a Director of the Company on 1 August 2010. He is also an Executive Advisor at FSN capital partners AS. From 1989 to 2009, Mr. Aamot served as President and Chief Executive Officer of Schibsted ASA, transforming it from a family-owned Norwegian newspaper company to a listed international multi-media group with presence in 25 countries. He previously worked at Verdens Gang as Chief Financial Officer from 1977 to 1985 and as Chief Executive Officer from 1985 to 1989. Mr. Aamot holds a master’s degree in business and economics from the Norwegian School of Management.
Stephen van Rooyen was appointed a Director of the Company on 1 June 2013. Mr. van Rooyen has served as Managing Director, Sales and Marketing for British Sky Broadcasting Group plc since August 2011. He is responsible for marketing and customer acquisition and retention across the Sky group’s range of entertainment and communications products and oversees the Sky Betting & Gaming business. Mr. van Rooyen was previously joint Deputy
151 Managing Director, Customer Group, and before that, Director of Product Management. He joined the Sky group in July 2006 from Virgin Media where he was Director of Strategy and has also worked at News International and Accenture in both Australia and the United Kingdom.
Allegations against Ralph Marshall
As reported in the press, a First Information Report has been registered in October 2011 by the Central Bureau of Investigations (‘‘CBI’’) of India against, among others, Mr. Marshall, commencing formal investigations into whether the subscription of shares in Sun Direct TV Private Limited by a subsidiary of ASTRO Overseas Limited (‘‘ASTRO Overseas’’) was an illegal gratification made for facilitating the acquisition of Aircel Limited by Maxis Communications Berhad (‘‘MCB’’). Ralph Marshall was a director of both ASTRO Overseas and MCB at the time each event took place. In October 2013, various media sources in India reported that the CBI had completed a chargesheet to be filed against a number of individuals, including Mr. Marshall, in connection with these events. However, as at the date of this offering memorandum, no public statement has been made by the CBI that it has completed a chargesheet and so far as Mr. Marshall is aware, no chargesheet has been filed against him.
Additionally, certain media reports in Indonesia have reported that summonses and an arrest warrant have been issued by Indonesian authorities against Mr. Marshall in relation to his involvement in Astro All Asia Networks Limited’s (‘‘Astro All Asia’’) Indonesian venture as Executive Deputy Chairman of Astro All Asia. Mr. Marshall is not aware of any arrest warrant or summons having been issued against him in connection with the Astro All Asia matter.
Mr. Marshall has denied any wrongdoing in connection with the foregoing.
Board practices
The Company is managed by its board of directors (the ‘‘Board’’), which is made up of eight members, two of whom are the Chief Executive Officer and the Chief Financial Officer (the ‘‘Executive Directors’’). The Board is responsible for setting its direction through the establishment of strategies, key policies and the approval of financial objectives and targets. Board monitors the implementation of strategies and policies through a structured approach of reporting by senior management and recognises the importance of managing relationships with various stakeholders. The Executive Directors are involved in the Group’s day-to-day business activities.
The Board meets at least eight times per year and reviews strategy, operating and capital budgets, operating results and other matters relating to its overall objectives. Additional Board meetings are held during the year if required.
Committees of the Board
The Group’s governance framework is designed to provide strong oversight across the business.
Nomination Committee The Nomination Committee assists the Board in discharging its responsibilities relating to the composition of the Board. The Nomination Committee is responsible for evaluating the balance of skills, knowledge and experience on the Board, the size, structure and composition of the Board, retirements and appointments of additional and replacement directors and will make appropriate recommendations to the Board on such matters. The Company’s Nomination Committee is comprised of all of the Company’s non-executive directors. The chairman of the Nomination Committee is Mr. Russell. The Company therefore considers that it complies with the U.K. Corporate Governance Code (the ‘‘Code’’) recommendations regarding the composition of the Nomination Committee.
152 Audit Committee The Audit Committee assists the Board in discharging its responsibilities with regard to financial reporting, external and internal audits and controls, including reviewing the Company’s annual financial statements, reviewing and monitoring the extent of the non-audit work undertaken by external auditors, advising on the appointment of external auditors and reviewing the effectiveness of the Company’s internal audit activities, internal controls and risk management systems. The ultimate responsibility for reviewing and approving the annual report and accounts and the half yearly reports remains with the Board. The membership of the Company’s Audit Committee comprises three members, all of whom are independent non-executive directors, (namely Mr. Pain, Mr. Aamot and Ms. Rhodes). Mr. Pain is considered by the Board to have recent and relevant financial experience and is chairman of the Audit Committee. The Company therefore considers that it complies with the Code recommendation regarding the composition of the Audit Committee.
Remuneration Committee The Remuneration Committee assists the Board in discharging its responsibilities in relation to remuneration, including making recommendations to the Board on the Company’s policy on executive remuneration, determining the individual remuneration and benefits package of each of the Executive Directors and recommending and monitoring the remuneration of senior management below Board level. The Code provides that the Remuneration Committee should comprise at least three members, all of whom are independent non-executive directors. The membership of the Company’s Remuneration Committee comprises three members, all of whom are independent non-executive directors, (namely Ms. Rhodes, Mr. Pain and Mr. van Rooyen). The chairman of the Remuneration Committee is Ms. Rhodes. The Company therefore considers that it complies with the Code recommendations regarding the composition of the Remuneration Committee. The Remuneration Committee takes advice when necessary from advisers, New Bridge Street, an Aon Hewitt Company.
Conflicts of interest
Save as disclosed in this section, Johnston Press believes that there are currently no conflicts of interest between the duties owed by executive management and directors to Johnston Press and their private interests.
Ralph Marshall is the representative appointed to the Board by PanOcean, the Company’s shareholder, an affiliate of Usaha Tegas, and an executive director and shareholder of Usaha Tegas. In certain situations, the interests of Usaha Tegas, as the Company’s shareholder, may differ from the interests of the Company’s other shareholders or the interests of the holders of the Notes. See ‘‘Risk factors—Risks related to the Group’s structure—The interests of the Company’s shareholders may differ from the interests of the holders of the Notes’’.
Ian Russell is a director of the Mercantile Investment Trust, which holds approximately 3.6 per cent of the Company’s existing issued share capital.
Stephen van Rooyen is Managing Director, Sales and Marketing for British Sky Broadcasting Group plc, a subsidiary of which has entered into the Sky Strategic Agreement and the Sky Subscription Agreement. See ‘‘Business—Material Contracts.’’
Compensation
The aggregate compensation paid by the Group to the members of the Board for the 52 weeks ended 28 December 2013 was £1.1 million.
In addition to the normal annual bonus opportunity, for 2014 only, a further bonus opportunity will be made available to the Executive Directors, payable for achieving significant financial benefits as a result of the Capital Refinancing Plan. Clear success factors will
153 determine the outcome of this additional bonus opportunity, including, among other things, a significant reduction in the Company’s cost of capital. In determining any payout, the Remuneration Committee will seek the input of the Company’s financial advisers where necessary and appropriate. Half of the total bonus earned will be deferred for three years (in line with the Company’s normal bonus policy), vesting in March 2018.
A separate cash bonus arrangement will also be operated for the retention and incentivisation of current other senior managers which is unavailable to the Executive Directors. It is expected that the maximum aggregate bonus payments available to be made under this arrangement will be in the region of £4.5 million. Any bonus payment will be determined by the Remuneration Committee based on the satisfaction of financial targets and would only be made in March 2016. Bonus payments will be subject to customary clawback provisions.
Executive Directors
Maximum Current bonus as annual per cent of Notice Commencement Name Position salary salary period of appointment Ashley Highfield Chief Executive Officer 400,000 180 per 12 months 1 November 2011 cent(1) David King .... Chief Financial Officer 250,000 150 per 6 months 16 May 2013(2) cent(1) (1) For 2014 only the bonus maximum has been increased from 120 per cent for Ashley Highfield and 100 per cent for David King and will revert to these percentages of salary from 2015 onwards. The normal bonus will be subject to the achievement of stretching EBITDA, digital revenue, audience growth and advertiser/staff satisfaction targets. The additional bonus opportunity in 2014 will be payable for achieving significant financial benefits as a result of a successful capital raising that provides a strong platform for future growth. Clear success factors will determine the outcome of this additional bonus opportunity, including, among other things, a significant reduction in the Company’s cost of capital. Half of the total bonus earned will be deferred for three years (in line with the Company’s normal policy), vesting in March 2018.
(2) David King joined the Company on 16 May 2013 but was appointed to the Board on 1 June.
Each of the Executive Directors is employed pursuant to a service agreement with the Company. The principal terms of these agreements, including the Executive Directors’ annual salaries, are set out above. The salaries will be reviewed, but not necessarily increased, in or around the month of January each year.
The Executive Directors are expected to devote the whole of their time, attention and abilities to the performance of their duties during their agreed working hours and in return the Executive Directors receive the following benefits under the terms of their service agreements (in addition to the salary and bonus set out above):
• For Executive Directors, the Company may contribute into the Johnston Press Retirement Savings Plan (JPRSP), a private pension or pay a salary supplement in lieu of pension. The Company may make pension contributions of, in respect of Mr. Highfield, up to 25 per cent of basic salary and match any individual contributions up to a maximum of 5 per cent of salary. Only base salary is pensionable;
• Reasonable expenses incurred by the Executive Directors in the course of their duties will be reimbursed by the Company;
• Entitlements to participate in the Employee Share Plans (subject to eligibility requirements);
• Entitlements to participate in a private medical cover scheme (which includes cover for spouses and dependents) and a life assurance scheme of four times annual salary in the case of Mr. Highfield and two times annual salary in the case of Mr. King;
• Entitlements to an annual car allowance of £10,500 in the case of Mr. Highfield and £10,000 in the case of Mr. King;
154 • In the event of sickness absence, entitlements to receive payment of full salary and contractual benefits for up to 6 months in any 12 month;
• Entitlement to relocation expenses;
• Entitlements to have the benefit of directors’ and officers’ liability insurance maintained by the Company on their behalf; and
• 26 days’ annual leave per annum (plus public holidays).
Mr. Highfield’s service agreement can be terminated by either party giving the other not less than 12 months’ written notice (or on six months’ notice from the Company in the event that he has been incapacitated by reason of ill health or accident for a period of 180 days in the preceding 12 months) whilst Mr. King’s service agreement can be terminated by either party giving the other not less than six months’ written notice. Each of the Executive Directors may be put on garden leave during this time and their employer can elect to terminate their employment by making a payment in lieu of notice equivalent to their basic salary and contractual benefits at the time of termination.
The employment of each Executive Director will be terminable with immediate effect and without notice or payment in lieu of notice in certain circumstances. In the case of Mr. Highfield, such circumstances include where he is guilty of serious or gross neglect of his duties, refuses to carry out the reasonable and proper instructions of the Board, commits any material breach of his obligations under his service agreement, is declared bankrupt, is guilty of conduct likely to bring the Company or Group into disrepute, is convicted of a criminal office (excluding certain road traffic offences) or for any other reason justifying summary dismissal at law. In the case of Mr. King, such circumstances include where he is disqualified from acting as a director, is guilty of a breach of the rules or regulations issued by the Company or the Group or regulations of any regulatory body relevant to the Group, is guilty of gross misconduct affecting the business of the Group, commits any serious breach of any of the provisions of his service agreement, is declared bankrupt, is convicted of a criminal office (excluding certain road traffic offences), is guilty of fraud or dishonesty which may bring him or the Group into disrepute, becomes of unsound mind or abuses alcohol or drugs in such a manner as to affect the Executive Director’s ability to perform his duties under the service agreement.
The Executive Directors’ service agreements also contain post-termination restrictions including: (i) a six month restriction not to compete with the Group; (ii) a six month restriction on soliciting clients or customers of the Company or Group (or suppliers in the case of Mr. King); (iii) a restriction on soliciting key employees of the Company or Group for six months in the case of Mr. Highfield and nine months in the case of Mr. King; and, in the case of Mr. King, (iv) a six month restriction on being concerned with the supply of products to any customer and (v) a restriction preventing him from holding himself out as connected with the Group at any time following termination.
Non-executive Directors
Senior Committee independent Year of Name Basic fee £ chair fee £ director fee £ Total £ appointment Ian Russell(1) ...... 130,000 — — 130,000 2007 Mark Pain ...... 40,000 7,500 7,500 55,000 2009 Ralph Marshall ...... 40,000 — — 40,000 2008 Camilla Rhodes ...... 40,000 7,500 — 47,500 2009 Kjell Aamot ...... 40,000 — — 40,000 2010 Steven van Rooyen ...... 23,000 — — 23,000 2013 (1) Non-executive Chairman
155 It is currently the Company’s policy that 50 per cent of non-executive directors’ fees are utilised to purchase shares in the Company in the name of the director or his nominee.
The non-executive directors’ service contracts are terminable at will, subject to one or three month notice period.
Pension arrangements No executive director has any accrued right under the Group’s final salary pension which is closed to future accrual.
The total amount set aside or accrued by the Group to provide pension, retirement or other benefits is £118,000.
Employee Share Trust
The employee share trust was established on 19 November 1993 (the ‘‘Employee Share Trust’’) to encourage or facilitate the holding of shares in the capital of the Company for the benefit of employees, former employees and the connected persons of such employees and former employees of the Group. The current trustee of the Employee Share Trust is Computershare Trustees (Jersey) Limited, an independent professional trustee incorporated in Jersey. The Employee Share Trust has the power to acquire ordinary shares of the Company for the purpose of using them for the Group’s Employee Share Plans. The Employee Share Trust holds ordinary shares of the Company purchased on the open market in order to meet awards under various Group employee share plans. To the extent that insufficient ordinary shares are held in the Employee Share Trust to satisfy outstanding awards, the Company has entered into a share supply agreement and a loan agreement with the Employee Share Trust to provide funds to the Employee Share Trust for it to acquire sufficient ordinary shares to meet the awards. On 28 December 2013, the number of ordinary shares held by the Employee Share Trust to meet the outstanding awards under the Johnston Press plc Performance Share Plan (the ‘‘PSP’’) and the Johnston Press plc Company Share Option Plan (the ‘‘CSOP’’) was 12,707,321.
Employee share plans
Value Creation Plan Subject to completion of the Capital Refinancing Plan it is intended to introduce a new employee share plan (the ‘‘Value Creation Plan’’) in which the Executive Directors and certain other members of the Executive Management Committee would be granted awards with conditions appropriate to support the Company’s Future Strategy and to provide direct Shareholder alignment. This new share plan will be subject to approval by the Company’s Shareholders and will be put to them for consideration. The Remuneration Committee considers that the Value Creation Plan is appropriate in order to refocus existing: incentives to ensure the delivery of a strong platform for future growth and to incentivise and align the executive Directors and other selected senior executives with Shareholder returns once that platform has been created.
Subject to approval by Shareholders, it is proposed that executive Directors and other selected members of the senior management team will receive one-off awards in 2014 under the Value Creation Plan instead of the normal grant under the Performance Share Plan (the ‘‘PSP’’). The grant of awards under the Value Creation Plan is subject to completion of the Capital Refinancing Plan. Awards under the Value Creation Plan will take the form of options. The option exercise price for all awards will be equal to 118 per cent of the average middle market quotation of an ordinary share for each of the dealing days during the 30 day period immediately following the date on which the Capital Refinancing Plan is completed. Awards will only vest to the extent that on the third anniversary of the date on which the Capital Refinancing Plan completes the option price is less than the lower of (i) the average of the middle market quotation of an ordinary share for each of the dealing days during the 30 days
156 immediately prior to the third anniversary of the date on which the Capital Refinancing Plan completes and (ii) the middle market quotation of an ordinary share on the dealing day immediately prior to the third anniversary of the date on which the Capital Refinancing Plan completes. The vesting of awards will also be subject to the satisfaction of an underpin and the participant’s continued employment within the Group. In particular, awards will only vest to the extent the Remuneration Committee is satisfied that there has been a commensurate improvement in the Company’s financial position over the three year period from the date on which the Capital Refinancing Plan is completed. Following the vesting of awards, the ordinary shares subject to awards will be delivered to participants in two tranches on the third anniversary of the date on which the Capital Refinancing Plan is completed and the fourth anniversary of that date. To the extent that the Group’s proposed Value Creation Plan is approved, an annual charge will be made by the Group totalling £8.4 million over four years, regardless of performance.
The Group has issued options that had not been accrued as at 31 December 2013, as the criteria for vesting were not met. Recent movements in Jura’s share price have resulted in the potential vesting of options for an estimated aggregate amount of £5.4 million, starting in 2014. This will result in additional charges to the income statement.
The Johnston Press plc Performance Share Plan 2006 (the ‘‘PSP’’) (a) General
The operation of the PSP is supervised by the remuneration committee of the board of the Company (the ‘‘Remuneration Committee’’).
(b) Eligibility
Any employee (including an executive director) of the Company or any subsidiary of the Company, is eligible to participate in the PSP. The Remuneration Committee may in its absolute discretion grant awards to such eligible employees as it shall select.
(c) Awards under the PSP
An award may take one of four forms:
(i) a ‘‘Conditional Award’’, meaning a conditional right to acquire a specified number of ordinary shares in the Company (‘‘Ordinary Shares’’); or
(ii) an ‘‘Option’’, meaning a right to acquire a specified number of Ordinary Shares at an exercise price determined by the Remuneration Committee which may be a nominal amount; or
(iii) a ‘‘Forfeitable Shares Award’’, meaning the transfer of a specified number of Ordinary Shares to a participant at a purchase or subscription price determined by the Remuneration Committee which may be a nominal amount. The Ordinary Shares are beneficially owned by the participant from the date of transfer but are subject to restrictions and forfeiture determined by the Remuneration Committee; or
(iv) a ‘‘Cash Conditional Award’’, meaning a notional right to acquire a specified number of Ordinary Shares.
Participants may be granted any combination of awards, whether in a single grant or pursuant to a series of grants.
No payment is required for the grant of an award.
Awards may normally only be granted within six weeks after the approval of the PSP by the Company in general meeting or within 6 weeks after the dealing day after the announcement of the Company’s results for any period. Awards may also be granted at any other time at
157 which the Remuneration Committee determines that there are exceptional circumstances which justify the grant of an award. No award may be granted after 27 April 2016 (ten years after the date on which the PSP was approved by the Company in general meeting) nor at any time at which a dealing would not be permitted under the model code.
Subject to the limit set out in paragraph (g) below, awards may be satisfied by the issue of new Ordinary Shares or by the transfer of Existing Ordinary Shares, either from treasury or otherwise or a cash equivalent where the Remuneration Committee so determines. When an award is approved, the Company ensures that sufficient Ordinary Shares are held by the Employee Share Trust (the trustee of which is an offshore independent professional trustee) to meet a proportion of the number of Ordinary Shares required at the end of the performance period.
(d) Conditions on vesting or exercise
An award may be granted subject to such performance condition or conditions as the Remuneration Committee in its discretion sees fit, which must be satisfied before an award may be exercised or vest. Performance is normally measured over a three year performance period. There will be no provision for re-testing.
If an event occurs which causes the Remuneration Committee to determine that the performance conditions have ceased to be appropriate, it may in its discretion vary or waive those conditions provided that any new conditions imposed (or any variation) are in its opinion fair, reasonable and no more difficult to satisfy than the previous conditions.
(e) Dividend accrual payments
The Remuneration Committee may determine on or before the date of grant of an award, that on exercise or vesting of that award, the participant shall be entitled to receive, in addition to the Ordinary Shares to which he then becomes entitled, a payment equal in value to the aggregate amount of the dividends, including the dividend tax credit, which would have been paid to the participant in respect of those Ordinary Shares between the date of grant and the date on which the award first becomes exercisable or vests if they had been beneficially owned by him over that period. The payment may be made in cash or in an equivalent number of Ordinary Shares.
(f) Individual limit
The maximum total market value of Ordinary Shares over which awards may be granted to any employee during any financial year of the Company is 125 per cent of his salary (where salary means base salary excluding any benefits in kind) unless the Remuneration Committee determines that exceptional circumstances exist in relation to the recruitment or retention of an eligible employee, in which case this maximum limit may be increased to 150 per cent of his salary.
(g) Overall dilution limit
No award may be granted under the PSP on any date if, as a result, either of the following limits would be exceeded:
(i) the aggregate number of Ordinary Shares issued or transferred from treasury, or committed to be issued or transferred from treasury, pursuant to awards made under the PSP and pursuant to grants or appropriations made during the previous ten years under all other employee share plans established by the Company would exceed ten per cent of the issued ordinary share capital of the Company on that date (although it is proposed to increase this to 13 per cent, subject to approval of the Company’s shareholders); or
158 (ii) the aggregate number of Ordinary Shares issued or transferred from treasury, or committed to be issued or transferred from treasury, pursuant to awards made under the PSP and pursuant to grants or appropriations made during the previous ten years under all other discretionary employee share plans established by the Company would exceed five per cent of the issued ordinary share capital of the Company on that date.
(h) Vesting/exercise of awards
In normal circumstances, an award will vest on the later of (i) the date on which the Remuneration Committee determines whether any performance conditions have been satisfied (in whole or in part), or (ii) the third anniversary of the date of grant. Having become exercisable, an Option may be exercised for a period of 12 months.
If a participant ceases to be employed within the Group before the expiry of the performance period by reason of:
(i) death;
(ii) injury or disability;
(iii) redundancy;
(iv) retirement;
(v) the company employing the participant ceasing to be, or the business to which the participant’s office or employment relates being transferred to a person who is not, a member of the Group; or
(vi) any other reason (except where the participant has been summarily dismissed) as the Remuneration Committee in its discretion permits, awards will vest on the normal vesting date to the extent any applicable performance conditions have been achieved and an Option will become exercisable and remain exercisable for a period of 12 months (including in the case of death) from that date. The number of Ordinary Shares which vest or over which Options are exercisable will, in these circumstances, be determined by reference to the extent to which the performance conditions have been fulfilled over the performance period and will then be pro-rated according to the length of the reduced performance period when compared to the original performance period, unless the Remuneration Committee determines that a higher number, not exceeding the number of Ordinary Shares determined by applying the performance conditions, should apply.
Where a participant dies following cessation of employment for one of the good leavers reasons listed above but his award has not yet vested, it will vest on the normal vesting date unless the Remuneration Committee decides that it will vest on the date of his death, in which case the award shall be reduced pro rata in the normal way.
Where a participate dies following cessation of employment for one of the good leavers reasons listed above and he holds a vested option which has not yet been exercised, it shall continue to remain exercisable for a period of 12 months from the date of death unless it lapses by reason of a company event.
In exceptional circumstances (and normally in the case of death) unless the Remuneration Committee decides that the award will vest on the date of the cessation.
If a participant is summarily dismissed or ceases to be employed by a member of the Group for any other reason than those listed above, any award will lapse immediately on such cessation.
159 (i) Clawback
At any time within two years of the vesting date of an award, the Remuneration Committee may reduce (or extinguish) bonuses, awards or rights to acquire Ordinary Shares under any share incentive plan or bonus plan operated by the Group, or require a participant to pay to any Group member (whether directly or by way of deduction from salary or other amount owed to the individual) such amount as may be required to satisfy such clawback if it determines that exceptional circumstances exist (including those being a material mis-statement of the Company’s financial results, assessment of a performance condition being based on an error or inaccurate or misleading information or misconduct of the participant).
(j) Takeover, scheme of arrangement and liquidation
In the event of a takeover or scheme of arrangement or the voluntary winding-up of the Company occurring before the expiry of the performance period, awards will vest on notification of such event and an Option will become exercisable and remain exercisable for a period of one month from the date of that notification or until the expiry of any compulsory acquisition period, if earlier. The number of Ordinary Shares which vest or over which Options are exercisable will, in these circumstances, be determined by reference to the extent to which the performance conditions have been fulfilled over the reduced performance period and will then be pro-rated according to the length of the reduced performance period when compared to the original performance period. The Remuneration Committee may, acting fairly and reasonably, decide that such a reduction is inappropriate and increase the number of Ordinary Shares which vest or become exercisable to such number as it decides, provided that such number does not exceed the number of Ordinary Shares determined by applying the performance conditions.
Where any such event occurs as part of an internal reorganisation of the Company, the Remuneration Committee may, with the consent of the acquiring company decide that subsisting awards will be exchanged for awards over shares in the acquiring company.
(k) Alterations of share capital
In the event of any variation in the ordinary share capital of the Company, a demerger, special dividend or other similar event which affects the market value of an Ordinary Share to any material extent, such adjustments to the number of Ordinary Shares subject to awards and the price at which they may be acquired may be made by the Remuneration Committee as it may determine to be appropriate.
(l) Voting, dividend and other rights
Until awards are exercised or vest, participants have no voting or other rights in respect of the Ordinary Shares subject to those awards.
Ordinary Shares issued or transferred pursuant to the PSP will rank pari passu in all respects with Ordinary Shares already in issue except that they will not rank for any dividend or other distribution paid or made by reference to a record date falling prior to the date of exercise or vesting of the relevant award.
Benefits obtained under the PSP shall not be pensionable. Awards are not assignable or transferable.
(m) Administration and Amendment
The operation of the PSP will be supervised by the Remuneration Committee which may amend the PSP of the terms of any award granted under it by resolution provided that:
(i) prior approval of the Company in general meeting will be required for any amendment to the advantage of participants to those provisions of the PSP relating to eligibility,
160 the limitations on the number of Ordinary Shares, cash or other benefits subject to the PSP, a participant’s maximum entitlement or to the basis for determining a participant’s entitlement under the PSP and the adjustment thereof in the event of a variation in capital, except in the case of minor amendments to benefit the administration of the PSP and amendments to take account of changes in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants or for any member of the Group; and
(ii) no amendment may be made which would alter to the disadvantage of participants any rights already acquired by them under the PSP without the prior approval of a majority of the affected participants.
The Johnston Press plc Company Share Option Plan (the ‘‘CSOP’’) (a) General
The CSOP is approved by HMRC under Schedule 4 to the Income Tax (Earnings and Pensions) Act 2003 (United Kingdom) (‘‘Schedule 4’’).
The operation of the CSOP is supervised by the Remuneration Committee.
(b) Eligibility
Any employee (excluding directors of the Company or any participating member of the Group is eligible to participate in the CSOP.
The Remuneration Committee may in its absolute discretion grant options to eligible employees to acquire Ordinary Shares in the Company.
(c) Timing of and consideration for grant of options
An option may be granted at any time, though no option may be granted later than ten years after the adoption of the CSOP by the Company. No payment is required for the grant of an option.
(d) Conditions on exercise
The board of the Company may grant an option subject to such objective terms as it sees fit. An option may only be exercised to the extent that any such performance conditions have been met.
The Remuneration Committee may amend a performance condition if it considers, acting fairly and reasonably, that it would be appropriate to do so and the amended condition will be not materially less or more difficult to satisfy than the unaltered condition.
(e) Plan Limits
No person shall be granted any options if, as a result, the aggregate price of Ordinary Shares which are granted to him under the CSOP in a calendar year would exceed 100 per cent of his base salary.
No option may be granted to any person at any time if, as a result, the aggregate market value of Ordinary Shares which are subject to subsisting options granted to him under the CSOP and any other share option scheme established by the Company or any associated company of the Company approved under Schedule 4 would exceed £30,000 or such other limit as may be imposed from time to time by HMRC.
161 (f) Exercise price
The exercise price of an option shall be determined by the Remuneration Committee before the date of grant and shall not be less than the average of the middle-market quotation of an Ordinary Share for the three dealing days immediately before the date of grant.
(g) Exercise and lapse of Options
In normal circumstances, an option may not be exercised before the third anniversary of its date of grant.
If a participant ceases to be employed within the Group by reason of death, the option will become exercisable by his personal representatives and remain exercisable for a period of 12 months after the date of his death.
If a participant ceases to be employed within the Group by reason of:
(i) injury, ill-health or disability;
(ii) redundancy;
(iii) retirement; or
(iv) his employment being with a company which ceases to be, or being transferred to a person who is not, a Group member, the option will normally become exercisable and remain exercisable for a period of 12 months after the date of cessation and if not exercised shall lapse at the end of that period.
If a participant ceases to be employed within the Group for any other reason, the option may only be exercised at the discretion of the Remuneration Committee.
An option will, in any event, lapse on the tenth anniversary of its date of grant, if not previously exercised.
(h) Alterations of share capital
In the event of any variation in the share capital of the Company, adjustments to the number of Ordinary Shares subject to options and the exercise price may be made by the Remuneration Committee in such manner as it may determine appropriate. The prior approval of HMRC is required for any such adjustment.
(i) Takeover, scheme of arrangement and liquidation
In the event of a takeover, scheme of arrangement or the voluntary winding-up of the Company, an option will become exercisable and remain exercisable for a period of one month (or in the event of a takeover, such longer period not exceeding six months as the Remuneration Committee may permit) from the date the Remuneration Committee notifies the participants, or until the expiry of any compulsory acquisition period, if earlier, to the extent that the performance conditions have been fulfilled.
If such an event occurs, an option may also be released in exchange for an equivalent new option to be granted by any acquiring company, if the participant so wishes and the acquiring company agrees.
In the event of a demerger, special dividend or other similar event, an option may be exercised on such terms and during such period as the Remuneration Committee may determine, to the extent that the performance conditions have been fulfilled.
162 (j) Voting, dividend and other rights
Until options are exercised, option holders have no voting or other rights in respect of the Ordinary Shares subject to their options.
Ordinary Shares issued or transferred pursuant to the CSOP shall rank pari passu in all respects with the Ordinary Shares already in issue except that they will not rank for any dividend or other distribution paid or made by reference to a record date falling prior to the date of exercise of the option.
Benefits obtained under the CSOP shall not be pensionable. Options are not assignable or transferable.
(k) Administration and Amendment
The Remuneration Committee may amend the CSOP at any time provided that no amendment may be made which would alter to the disadvantage of a participant any rights already acquired by him under the CSOP without the prior approval of the majority of the affected participants. No cash or other non-share benefits are available under the CSOP.
At any time at which the CSOP is and is intended to remain HMRC approved, no amendment to any key feature of the CSOP shall have effect until approved by HMRC or the Remuneration Committee resolves that the alteration shall take effect even if this causes the CSOP to cease to be HMRC approved.
The Johnston Press 2007 Sharesave Plan (the ‘‘2007 Sharesave’’) (a) General
The 2007 Sharesave is approved by HMRC under Schedule 3 to the Income Tax (Earnings and Persons) Act 2003 (United Kingdom).
(b) Eligibility
All employees (including directors working at least 25 hours per week excluding meal breaks) of the Company or any participating member of the Group who have completed a period of service determined by the board of the Company (such period not to exceed five years) and who are UK tax resident are eligible to participate in the 2007 Sharesave. The board of the Company may in its discretion extend participation to other employees or directors of participating members of the Group who do not meet these requirements.
(c) Savings contract
Participating employees must enter into a Save-As-You-Earn savings contract with an approved savings carrier under which they agree to make monthly contributions from net salary for a period of either three or five years. On maturity of the savings contract, a tax-free bonus is added to the employee’s savings. Monthly savings contributions must be between £5 and £250.
(d) Grant of Options
Each employee who joins the 2007 Sharesave and enters into a savings contract is granted an option to acquire Ordinary Shares in the Company. The number of Ordinary Shares under option is equal to that number of Ordinary Shares which may be acquired at the option price with the proceeds of the savings contract at maturity. The board of the Company may impose a limit on the number of Ordinary Shares over which options may be granted in which case applications from employees may be scaled down.
The option price per Ordinary Share is the market value of an Ordinary Share when invitations to participate in the 2007 Sharesave are issued on the date specified in such invitation, less a discount of up to 20 per cent (or, in the case of an option to subscribe, the nominal value of
163 an Ordinary Share if higher). Market value is determined as the middle-market quotation of an Ordinary Share as derived from the Daily Official List of the London Stock Exchange on the last dealing day before invitations to participate in the 2007 Sharesave are sent out or, if the board of the Company so decides, the average of the middle-market quotations over the three dealing days preceding that date, or the middle-market quotation of the Ordinary Shares on such other dealing day or days as may be agreed in advance with HMRC.
No option may be granted later than ten years after the approval of the 2007 Sharesave by the board of the Company.
(e) Timing of invitations
Invitations to participate in the 2007 Sharesave may be issued at any time but before the board of the Company decides to issue invitations it should have regard to when the option price may be determined. The option price may only be determined within six weeks after:
(i) the approval of the 2007 Sharesave by HMRC;
(ii) the dealing day after the announcement of the Company’s results for any period;
(iii) the date on which a new savings contract prospectus is announced or takes effect or at any other time at which the board of the Company determines that there are exceptional circumstances which justify the grant of options.
(f) Limit on issue of new Ordinary Shares
On any date, no option may be granted under the 2007 Sharesave if, as a result, the aggregate number of Ordinary Shares issued or committed to be issued pursuant to grants made under the 2007 Sharesave and during the previous ten years under all other employee share plans established by the Company would exceed ten per cent of the issued ordinary share capital of the Company on that date. Ordinary Shares which have been the subject of options or rights granted under any employee share plan established by the Company which have lapsed shall not be taken into account for the purposes of this limit.
(g) Exercise and lapse of Options
In normal circumstances, an option may be exercised for a period of six months from the third or fifth anniversary of the commencement of the savings contract depending on the length of the savings contract chosen by the participant and any option not exercised within that period will lapse.
Early exercise is permitted on the death of a participant or on his ceasing to hold office or employment with the Group by reason of injury, disability, redundancy, retirement, the sale or transfer out of the Group of his employing company or business or for any other reason (provided in such case the option was granted more than three years previously), for a period of six months from the date of such cessation (or 12 months in the case of death).
Options may be satisfied by the issue of new Ordinary Shares or by the transfer of existing Ordinary Shares, either from treasury or otherwise.
(h) Takeovers and liquidations
Rights to exercise options early for a limited period also arise if another company acquires control of the Company as a result of a takeover or a scheme of arrangement. An option may be exercised within the period of one month from the date a participant is notified of a general offer or six months of the date on which the court sanctions a scheme of arrangement. In the case of an internal corporate reorganisation, an option may be exchanged for an option over shares in the acquiring company if the participant so wishes and the acquiring company agrees.
164 If the Company passes a resolution for a voluntary winding-up, any subsisting option must be exercised within six months of the passing of that resolution or it lapses.
(i) Alterations of share capital
In the event of any variation in the share capital of the Company, adjustments to the number of Ordinary Shares subject to options and the exercise price may be made by the board of the Company in such manner and with effect from such date as the board of the Company may determine to be appropriate. The prior approval of HMRC is required for any such adjustment.
(j) Voting, dividend and other rights
Until options are exercised, option holders have no voting or other rights in respect of the Ordinary Shares subject to their options.
Ordinary Shares issued or transferred pursuant to the 2007 Sharesave rank pari passu in all respects with the Ordinary Shares already in issue except that they do not rank for any dividend or other distribution paid or made by reference to a record date falling prior to the date of exercise of the option. Benefits obtained under the 2007 Sharesave are not pensionable.
Options are not assignable or transferable.
(k) Administration and Amendment
The 2007 Sharesave will be administered by the Remuneration Committee which may amend the 2007 Sharesave or the terms of any option granted under it by resolution provided that:
(a) prior approval of the Company in general meeting will be required for any amendment to the advantage of participants to those provisions of the 2007 Sharesave relating to eligibility, the limitations on the number of Ordinary Shares subject to the 2007 Sharesave, a participant’s maximum entitlement or the basis for determining a participant’s entitlement under the 2007 Sharesave and the adjustment thereof in the event of a variation in capital, except in the case of minor amendments to benefit the administration of the 2007 Sharesave and amendments to take account of changes in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants or for any member of the Group;
(b) no amendment may be made which would alter to the disadvantage of a participant any rights already acquired by him under the 2007 Sharesave without the prior approval of the majority of the affected participants; and
(c) no amendment may be made to any key feature of the 2007 Sharesave without the prior approval of HMRC.
No cash or other non-share benefits are available under the 2007 Sharesave.
The Johnston Press 2009 Republic of Ireland Sharesave Plan (the ‘‘Irish Sharesave’’) The Irish Sharesave is approved by the Irish Revenue Commissioners. The Irish Sharesave operates on materially the same terms as the 2007 sharesave. No further options are to be granted under the Irish Sharesave.
The Johnston Press plc Share Incentive Plan (the ‘‘SIP’’) (a) General
The operation of the SIP is supervised by the Remuneration Committee. The SIP is approved by HMRC under Schedule 2 to the Income Tax (Earnings and Pensions) Act 2003 (United Kingdom).
165 The SIP is constituted by a trust deed entered into by the Company and EES Corporate Trustees Limited (then known as Halifax Corporate Trustees Limited) (the ‘‘SIP Trustees’’).
(b) Eligibility
All employees of the Company and participating Group companies who are U.K. resident taxpayers and have such qualifying period of continuous service (not exceeding 18 months) as the Remuneration Committee may determine are entitled to participate. An employee is not eligible to participate in the SIP in any tax year if he has participated in any other relevant share scheme established by a Group member. Every employee who meets all of the eligibility requirements of the SIP must be invited to participate.
Overseas employees who would otherwise qualify but who do not pay U.K. tax may also be invited to participate. It is not possible to invite employees based in the Republic of Ireland to participate in the SIP.
(c) Ordinary Shares available under the SIP
Participants may acquire Ordinary Shares of the Company under the SIP. The board of the Company may in its discretion operate the SIP by offering to eligible employees some or all of the following:-
(i) up to £3,000 of free Ordinary Shares (or such other limit as may be permitted under legislation from time to time) in any tax year (‘‘Free Shares’’);
(ii) the opportunity to agree to deductions being made from their pre-tax salary (‘‘Partnership Share Money’’) to be applied by the SIP Trustees in purchasing Ordinary Shares on their behalf (‘‘Partnership Shares’’); and
(iii) free Ordinary Shares in proportion to the number of Partnership Shares acquired (‘‘Matching Shares’’) such proportion not to exceed two Matching Shares for each Partnership Share acquired.
Benefits under the SIP are not pensionable.
(d) Free Shares
The basis of allocation of Free Shares is at the Remuneration Committee’s discretion. The board of the Company may determine whether or not Free Shares are awarded at all, the number or value of Free Shares awarded and whether or not they shall be subject to performance targets. The performance measures used must be based on business results or other objective criteria and may apply to individuals or larger performance units. If performance targets are not imposed, Free Shares must be awarded according to an objective formula. Each participant must enter into a Free Share Agreement.
(e) Partnership Shares
Each participant’s Partnership Share Money may not exceed the lower of £125 a month (or such other limit as may be permitted from time to time) and ten per cent of the participant’s salary in any tax year. Partnership Share Money is applied by the SIP Trustees in acquiring Partnership Shares on behalf of participants. Partnership Shares are acquired within 30 days of the deduction being made or, at the Remuneration Committee’s discretion, Partnership Share Money may be accumulated over a period of up to 12 months and then applied in the acquisition of Partnership Shares. Each participant must enter into a Partnership Share agreement.
(f) Dividend Shares
The SIP Trustees may reinvest cash dividends in the acquisition of further Ordinary Shares (‘‘Dividend Shares’’) on behalf of participants.
166 (g) Acquisition of Ordinary Shares
The SIP Trustees may buy Ordinary Shares in the market or privately or may subscribe for new Ordinary Shares. Private purchases must be at a price which is not materially more than the market price and the subscription price for new Ordinary Shares must be a sum no greater than the market value on the date of subscription (or the nominal value, if higher). Purchases by the SIP Trustees will be funded by participating Group companies.
(h) Holding period
Free Shares and Matching Shares awarded under the SIP must be held in trust by the SIP Trustees for a holding period specified by the Remuneration Committee. This period must expire between three and five years from the date of award of the Ordinary Shares or, if earlier, when the participant ceases to be employed within the Group. Dividend Shares must remain in trust for a holding period of three years or, if earlier, until the participant ceases to be employed within the Group. Partnership Shares may be withdrawn from the trust at any time, though any Partnership Shares withdrawn within three years of the date on which they were awarded may result in the corresponding Matching Shares being forfeited (see below).
While the Ordinary Shares are held in trust, the participant will be the beneficial owner and will be entitled to receive dividends and, through the SIP Trustees, to vote and to participate in substantially the same way as other shareholders of the Company.
Ordinary Shares may be left in trust until the participant ceases to be employed within the Group.
(i) Forfeiture
Free Shares and Matching Shares may be forfeited if the participant ceases to be employed within the Group before the expiry of a period specified by the Remuneration Committee (not exceeding three years) beginning with the date of award of such Ordinary Shares, unless he leaves employment for certain specified reasons such as retirement or redundancy. The Remuneration Committee may also provide that, if a participant withdraws from the SIP within three years of the date on which they were acquired, his Free Shares or Matching Shares shall be forfeited.
(j) SIP limits
No Ordinary Shares shall be issued to the SIP Trustees under the SIP, if, as a result, the aggregate number of Ordinary Shares issued or committed to be issued pursuant to awards, appropriations or grants made under the SIP and, during the ten years preceding that day, under all other employee share plans established by the Company, would exceed ten per cent of the issued ordinary share capital of the Company on that day.
For the purposes of this limit, any Ordinary Shares comprised in an option that has lapsed and any Ordinary Shares which are already in issue when placed under option shall be disregarded.
(k) Amendments to the SIP
The Remuneration Committee may at any time amend the SIP in any respect provided that any amendment to a key feature of the SIP must be approved by HMRC and provided further that any amendment to the advantage of participants made to the provisions dealing with eligibility, the limitations on the number of Ordinary Shares or other benefits subject to the SIP, a participant’s maximum entitlement or the basis for determining a participant’s entitlement under the SIP and the adjustment thereof in the event of a variation in capital must be approved by the Company in general meeting unless it is minor and to benefit the administration of the SIP or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants, Group companies or the SIP Trustees or to take into account existing or proposed legislation.
167 The Johnston Press plc Deferred Share Bonus Plan 2012 (the ‘‘Deferred Plan’’) (a) General
The operation of the Deferred Plan is supervised by the Remuneration Committee.
(b) Eligibility
Any employee (including an executive director) of the Company or any subsidiary of the Company who is eligible to receive a bonus (payable in cash and/or shares) part, or all, of which is to be deferred under the Deferred Plan, is eligible to be granted an award.
(c) Awards under the Deferred Plan
An award may take one of three forms:
(i) a ‘‘Conditional Award’’, meaning a conditional right to acquire a specified number of Ordinary Shares; or
(ii) an ‘‘Option’’, meaning a right to acquire Ordinary Shares with a nil exercise price; or
(iii) a ‘‘Forfeitable Shares Award’’, meaning the transfer of the beneficial interest in Ordinary Shares, subject to certain restrictions and forfeiture.
No payment is required for the grant of an award.
Awards may be granted at any time, though no award may be granted on or after 25 January 2022.
An award may be satisfied by the transfer of Ordinary Shares (other than treasury shares) or a cash equivalent where the Remuneration Committee so determines.
(d) Conditions on vesting or exercise
Awards must not be subject to any performance conditions.
(e) Individual limit
The number of Ordinary Shares over which an award is granted shall be determined by the Remuneration Committee in its discretion.
(f) Vesting / exercise of awards
In normal circumstances, an award will vest on the third anniversary of the date of grant or such other date determined by the Remuneration Committee, provided such date occurs before the fifth anniversary of the date of grant. An option will remain exercisable until the fifth anniversary of this grant date or such other date determined by the Remuneration Committee, provided such date occurs before the seventh anniversary of the date of grant.
If a participant ceases to be a director or employee of the Group before the normal vesting date by reason of:
(i) death;
(ii) injury or disability;
(iii) redundancy;
(iv) retirement;
(v) his employing company ceasing to be, or being transferred to a person who is not a member of the Group, or
(vi) any other reason if the Remuneration Committee so decides,
168 awards will vest on the date of cessations and an Option will become exercisable and remain exercisable for a period of 12 months commencing on the vesting date (or until the end of the normal option exercise period, if sooner). To the extent that the option is not exercised, it will lapse at the end of that period.
If a participant ceases to be a director or an employee of the Group for any other reason than those listed above, any award will lapse immediately on such cessation.
(g) Clawback
At any time before the later of the first anniversary of payment of bonus to which the award relates, and the publication of the Company’s first set of audited accounts for the financial year immediately following the end of the performance period to which an award relates, the Remuneration Committee may reduce (or extinguish) bonuses, awards or rights to acquire Ordinary Shares under any share incentive plan or bonus plan operated by the Group, or require a participant to pay to any Group member (whether directly or by way of deduction from salary or other amount owed to the individual) such amount as may be required to satisfy such clawback if it determines that exceptional circumstances exist (including those being a material mis-statement of the Company’s financial results, the Remuneration Committee forming the view that an error was made in assessing the size of the bonus to which the award relates, resulting in the award being granted over more Ordinary Shares than should have been the case, or misconduct of the participant).
(h) Takeover, scheme of arrangement or liquidation
In the event of a takeover or scheme of arrangement or the voluntary winding-up of the Company, any unvested awards will vest on notification of such event and an Option will become exercisable and remain exercisable for a period of one month from the date of that notification or, if shorter, until the date of the normal option exercise period.
Where any such event occurs as part of an internal reorganisation of the Company, the Remuneration Committee may, with the consent of the acquiring company, decide that subsisting awards will be exchanged for awards over shares in the acquiring company.
(i) Alterations of Share Capital
In the event of any variation in the ordinary share capital of the Company, a demerger, special dividend or other similar event which affects the market value of an Ordinary Share to any material extent, such adjustments to the number of Ordinary Shares subject to awards and the price at which they may be acquired may be made by the Remuneration Committee as it may determine to be appropriate.
(j) Voting, dividend and other rights
Until awards are exercised or vest, participants have no voting or other rights in respect of the Ordinary Shares subject to those awards.
Ordinary Shares issued or transferred pursuant to the Deferred Plan will rank pari passu in all respects with Ordinary Shares already in issue except that they will not rank for any dividend or other distribution paid or made by reference to a record date falling prior to the date of exercise or vesting of the relevant award.
Benefits obtained under the Deferred Plan shall not be pensionable. Awards are not assignable or transferable.
(k) Administration amendment
The Remuneration Committee may at any time alter the Deferred Plan or the terms of any award, provided that no amendment may be made which would alter to the material
169 disadvantage of participants without the prior approval of a majority of the affected participants.
Share ownership
Certain members of the Board and senior management have a beneficial ownership interest in the Company, as set forth below.
As at 28 December 2013 Number of Director ordinary shares Percentage Ian Russell, CBE ...... 4,161,040 0.61 Ashley Highfield(1) ...... 1,160,270 0.15 David King(1) ...... — 0 Mark Pain ...... 695,318 0.10 Ralph Marshall ...... 738,087 0.11 Camilla Rhodes ...... 470,410 0.07 Kjell Aamot ...... 667,238 0.10 Stephen van Rooyen ...... 47,154 0.1 (1) In addition to the holdings shown above, which are all held beneficially, Ashley Highfield and David King held interests in 12,707,321 ordinary shares at 28 December 2013 by virtue of their status as potential beneficiaries of the Employee Share Trust.
As at 31 December 2013, the following options and awards over Company ordinary shares have been granted to members of the Board under the Group’s employee share plans :
Number of ordinary shares Option subject to exercise Exercise/performance Director Employee share plans award/option price period Ashley Highfield ..... Performance Share Plan 10,471,204 4.78p 11/11/14 to 10/11/15 Ashley Highfield ..... Deferred Share Bonus Plan 207,222 6.39p 15/03/15 to 14/03/17 Ashley Highfield ..... Performance Share Plan 6,954,581 5.49p 14/09/15 to 13/09/16 Ashley Highfield ..... Performance Share Plan 180,000 14.50p 21/12/15 to 20/12/16 Ashley Highfield ..... Deferred Share Bonus Plan 608,194 15.62p 15/04/16 to 14/04/18 Ashley Highfield ..... Performance Share Plan 2,000,000 5.00p 05/06/16 to 04/06/17 David King ...... Performance Share Plan 1,000,000 17.45p 05/06/16 to 04/06/17
170 Principal shareholders All the outstanding shares of the Issuer are currently held by the Orphan SPV Shareholder. On the Escrow Release Date, the Company intends to effect the Debt Assumption whereby the Issuer will become a wholly-owned subsidiary of the Company.
The table below sets forth information with respect to the beneficial ownership of Johnston Press’s issued share capital of each person or group of affiliated persons who is known to Johnston Press to beneficially own 3% or more of its issued share capital as at 7 May 2014:
As at 7 May 2014 Number of Shareholder shares Percentage PanOcean Management Limited(1) ...... 133,671,088 19.37 Orbis Investment Management Limited(2) ...... 72,635,674 10.53 Cazenove Capital Management Limited ...... 56,036,119 8.12 Tindle Press Holdings Limited(3) ...... 51,179,698 7.42 JPMorgan Asset Management (UK) Limited(4) ...... 40,494,500 5.87 Standard Life Investments Ltd...... 21,553,214 3.12 (1) PanOcean Management Limited (‘‘PanOcean’’), a company incorporated in Jersey, Channel Islands, is the ultimate holding company of Usaha Tegas Sdn Bhd. (‘‘Usaha Tegas’’). PanOcean is the trustee of a discretionary trust, the beneficiaries of which are members of the family of Ananda Krishnan Taparanandam and foundations including those for charitable purposes.
(2) Orbis Investment Management Limited exercises the voting rights of the ordinary shares of the Company held by various Orbis collective investment schemes.
(3) As of 3 April 2014, Tindle Newspapers Limited transferred its equitable interest in 7.42 per cent of the share capital of the Company to its parent company, Tindle Press Holdings Limited (‘‘Tindle Press’’). Sir Raymond Tindle holds 100 per cent of the share capital of Tindle Press.
(4) JPMorgan Asset Management (UK) Limited is an affiliate of J.P. Morgan Securities plc, one of the Initial Purchasers for the Offering, and part of the J.P. Morgan Chase & Co. group.
171 Certain relationships and related party transactions As of the date of this offering memorandum, the Company has not entered, and does not currently intend to enter, into any material transactions with related parties, other than as indicated below and as described under ‘‘Management—Share ownership’’.
The subscription agreement
Pursuant to a subscription agreement dated 14 May 2008 between the Company and Gromwell, a wholly-owned subsidiary of Usaha Tegas, the Company agreed to allot and issue, and Usaha Tegas agreed to subscribe for, 31,486,988 new ordinary shares at a price of 135.75 pence per share for an aggregate subscription price of £42,743,586.21. The new ordinary shares subscribed for by Gromwell rank pari passu with existing ordinary shares in the Company, including the right to participate in the Rights Issue and the right to receive all dividends and other distributions. See ‘‘Business—Material Contracts—The subscription agreement’’ for further information.
The Sky Strategic Agreement
The Company entered into an agreement with Sky, pursuant to which the Company has been appointed as Sky’s sole advertising sales representative to promote and sell Sky’s AdSmart targeted television advertising service in certain UK regions, including Sheffield, Derby and Nottingham.
Undertakings in connection with the Placing and the Rights Issue
The Company has entered into undertakings with Gromwell (a wholly-owned subsidiary of Usaha Tegas), Tindle Press (the parent company of Tindle Newspapers Limited) and Sky (a wholly owned subsidiary of British Sky Broadcasting group plc) in connection with the Placing and the Rights Issue. See ‘‘Business—Material Contracts—The Gromwell Undertaking’’, ‘‘Business—Material Contracts—The Tindle Press Undertaking’’ and ‘‘Business—Material Contracts—The Sky Subscription Agreement’’ for further information.
The sale and purchase agreement
On 26 September 2013, Johnston Publishing Limited, one of the Company’s subsidiaries, entered into a sale and purchase agreement with Tindle Newspapers Limited for the sale of the business of the Petersfield Post division of Johnston Publishing Limited to Tindle Newspapers Limited for the sum of £1,500,000. See ‘‘Principal Shareholders’’.
172 Description of other indebtedness The following summary of the material terms of the Group’s financing arrangements after giving effect to the Transactions does not purport to describe all of the applicable terms and conditions of such arrangements and is subject to, and qualified in its entirety by reference to, the underlying documents. For further information regarding the Group’s existing indebtedness, see ‘‘Use of proceeds’’, ‘‘Capitalisation’’, and ‘‘Management’s discussion and analysis of financial condition and results of operations’’. Capitalised terms used in the following summary not otherwise defined in this offering memorandum have the meanings ascribed to them in their respective agreement.
New Revolving Credit Facility Agreement
Overview and structure In connection with the Transactions, the Company will enter into a new £25 million revolving credit facility agreement on or prior to the Issue Date of the Notes (the ‘‘New Revolving Credit Facility Agreement’’) with among others, Credit Suisse AG, London Branch, J.P. Morgan Limited and Lloyds Bank plc as arrangers, Lloyds Bank plc, as agent (the ‘‘RCF Facility Agent’’) and other parties named therein will accede to the New Revolving Credit Facility Agreement on the Escrow Release Date.
The New Revolving Credit Facility Agreement may be utilized by any current or future borrower under the New Revolving Credit Facility Agreement in euros, U.S. dollars, pounds sterling, or any other readily available and agreed currency (if approved by all lenders) by the drawing of cash advances or ancillary facilities. The New Revolving Credit Facility Agreement may be used for working capital requirements and/or for general corporate purposes but may not be used for repaying, purchasing or otherwise acquiring the Notes or any senior notes or debt facility, the payment of any coupon in respect of the Notes or any refinancing indebtedness in respect thereof, any acquisition of a company, business or undertaking or any refinancing of such acquisition, any purpose which would constitute unlawful financial assistance within the meaning of sections 678 or 674 of the Companies Act 2006 or any equivalent and applicable provisions in any jurisdiction nor any purpose to which the proceeds of any Notes are applied (or any refinancing thereof).
Subject to the satisfaction of the conditions precedent and the other conditions to utilisation, the New Revolving Credit Facility may be utilized from and including the Escrow Release Date until the date falling one month prior to the ‘‘termination date’’ of the New Revolving Credit Facility (which is the date falling 4 years and 6 months after the earlier of (i) the Escrow Release Date and (ii) the date of first utilization of the New Revolving Credit Facility.
The original borrower under the New Revolving Credit Facility Agreement will be the Company.
Interest and Fees Loans under the New Revolving Credit Facility will initially bear interest at rates per annum equal to LIBOR or, for loans under the New Revolving Credit Facility denominated in euro, EURIBOR, plus a margin of 3.75% per annum. Beginning 12 months following the date of the New Revolving Credit Facility Agreement, the margin for each loan under the New Revolving Credit Facility will be determined in accordance with a ratchet based on the ratio of
173 consolidated net debt to Consolidated EBITDA (as defined in the New Revolving Credit Facility Agreement) as follows:
Per cent per Consolidated net debt to Consolidated EBITDA ratio annum Equal to or greater than 3.00:1 ...... 3.75 Greater than or equal to 2.50:1 but less than 3.0:1 ...... 3.50 Greater than or equal to 2.00:1 but less than 2.5:1 ...... 3.25 Less than 2.0:1 ...... 3.0
A commitment fee is payable on the aggregate undrawn and uncancelled amount of the New Revolving Credit Facility Agreement from the date the New Revolving Credit Facility Agreement is signed to the end of the availability period for the New Revolving Credit Facility at a rate of 40% of the then applicable margin for the New Revolving Credit Facility. Generally, the commitment fee is payable quarterly in arrears, on the last day of availability of the New Revolving Credit Facility and if cancelled, on the cancelled amount of the relevant lender’s commitment under the New Revolving Credit Facility at the time such cancellation is effective,
Default interest is calculated as an additional 1% per annum on the overdue amount.
The Company is also required to pay an arrangement fee and customary agency fees to the RCF Facility Agent and the Security Agent in connection with the New Revolving Credit Facility.
Repayments Loans under the New Revolving Credit Facility must be repaid on the last day of the interest period relating thereto, subject to a netting mechanism against new loans under the New Revolving Credit Facility to be drawn on such date.
All outstanding amounts under the New Revolving Credit Facility Agreement are required to be repaid on the ‘‘termination date’’ (see ‘‘—Overview and Structure’’ above).
Prepayment The New Revolving Credit Facility Agreement allows for voluntary prepayments (subject to a minimum amount and a minimum notice period).
In addition to voluntary prepayments, the New Revolving Credit Facility Agreement requires mandatory prepayment in full or in part in certain circumstances, including, subject to certain conditions:
• with respect to any Lender, if it becomes unlawful for such Lender to perform any of its obligations under the New Revolving Credit Facility or to maintain its participation in any utilization of the New Revolving Credit Facility (or if it becomes unlawful for any affiliate of that Lender for that Lender to do so) and such Lender has not transferred its participation;
• upon certain notes purchases (see ‘‘—Covenants’’ below); and
• upon the occurrence of a ‘‘change of control’’, (which comprises, generally, the scenarios set out under the definition of ‘‘Change of Control’’ under the caption ‘‘Description of the Notes—Certain Definitions’’).
Guarantees The New Revolving Credit Facility will be guaranteed, on or about the Escrow Release Date, by among others, the Issuer and and the entities named therein.
The New Revolving Credit Facility Agreement requires that each member of the Group that is or becomes a ‘‘material company’’ (which is generally defined under the New Revolving Credit Facility Agreement to include, among other things, a subsidiary of the Company that has earnings before interest, tax, depreciation and amortization representing 5% or more of
174 consolidated EBITDA or gross assets representing 5% or more of the gross assets of the Group) will be required to become a guarantor under the New Revolving Credit Facility Agreement as soon as practicable (i) by reference to the financial statements delivered on the date of signing of the New Revolving Credit Facility Agreement and (ii) thereafter, by reference to the annual financial statements of the Company for the relevant fiscal year, demonstrating that such subsidiary is a material company (and in any event within 45 days or if earlier the date such subsidiary guarantees the Notes). Additionally, the Company is required to ensure that the guarantors represent more than 85 per cent of each of the Consolidated EBITDA (as defined in the New Revolving Credit Facility Agreement) and gross assets of the Group, respectively (in each case, excluding intra-Group items).
Security The New Revolving Credit Facility will be secured by security interests granted on a first ranking basis over:
• substantially all of the assets of the Issuer and the English Guarantors, other than leasehold interests in real estate with a term of less than 35 years and freehold interests in real estate with a value of less than £250,000;
• substantially all of the assets of the NI Guarantors, other than the shares of Century Newspaper Limited, leasehold interests in real estate with a term of less than 35 years and freehold interests in real estate with a value of less than £250,000; and
• substantially all of the assets of the Scottish Guarantors, other than the shares of each Scottish Guarantor and leasehold interests in real estate with a term of less than 35 years and freehold interests in real estate with a value of less than £250,000.
Representations and warranties The New Revolving Credit Facility Agreement contains certain customary representations and warranties (subject to certain exceptions and qualifications and with certain representations and warranties being repeated), including status, binding obligations, non-conflict with other obligations, validity and admissibility in evidence, power and authority, governing law and enforcement and no default.
Covenants The New Revolving Credit Facility Agreement contains certain of the incurrence covenants and related definitions (with certain adjustments) that will be included in the section entitled ‘‘Description of the Notes—Certain covenants’’. In addition, the New Revolving Credit Facility Agreement contains a financial covenant (see ‘‘—Financial covenants’’ below).
The New Revolving Credit Facility Agreement also contains a ‘‘notes purchase condition’’ covenant. Subject to certain exceptions set out in the New Revolving Credit Facility Agreement, the Company may not, and shall procure that no subsidiary of the Company that has not been designated as an unrestricted subsidiary (collectively, together with the Company, the ‘‘Restricted Group’’) will, repay, prepay, purchase, defease, redeem acquire or retire the principal amount of the Notes (or, in each case, any replacement or refinancing thereof as permitted under the New Revolving Credit Facility Agreement from time to time.
The New Revolving Credit Facility Agreement also requires certain members of the Restricted Group to observe certain affirmative covenants, including covenants relating to maintenance of ‘‘guarantor and security coverage’’ (see ‘‘—Guarantees’’ above) and further assurance with respect to security interests granted.
The New Revolving Credit Facility Agreement also contains an ‘‘information covenant’’ under which, among other things and in the first instance, the Company is required to deliver to the
175 RCF Facility Agent annual financial statements, semi-annual financial statements, monthly financial statements and compliance certificates.
Financial covenants The New Revolving Credit Facility Agreement requires the Company to comply with a ‘‘consolidated leverage covenant’’ which will test the ratio of Consolidated Net Debt to Consolidated EBITDA (each as defined in the New Revolving Credit Facility Agreement). The consolidated leverage covenant will be tested quarterly on a rolling basis. The consolidated leverage covenant if breached, will trigger an event of default under the New Revolving Credit Facility Agreement and it will also act as a drawstop to new money drawings under the New Revolving Credit Facility. The table below sets out the consolidated leverage covenant levels.
Consolidated net debt to consolidated EBITDA ratio 12 months ended: to be no more than: 31 December 2014 ...... 4.40:1 31 March 2015 ...... 4.35:1 30 June 2015 ...... 4.15:1 30 September 2015 ...... 3.95:1 31 December 2015 ...... 3.80:1 31 March 2016 ...... 3.85:1 30 June 2016 ...... 3.85:1 30 September 2016 ...... 3.70:1 31 December 2016 ...... 3.55:1 31 March 2017 ...... 3.55:1 30 June 2017 ...... 3.60:1 30 September 2017 ...... 3.45:1 31 December 2017 ...... 3.30:1 31 March 2018 ...... 3.30:1 30 June 2018 ...... 3.30:1 30 September 2018 ...... 3.15:1
The Company is permitted to prevent or cure breaches of the consolidated leverage covenant by applying a ‘‘cure’’ amount (generally, amounts received by the Company in cash pursuant to any new equity or permitted subordinated debt) as if consolidated total net debt had been reduced by such amount. No more than four different cure amounts may be taken into account prior to the original termination date of the New Revolving Credit Facility Agreement and cure amounts in consecutive 3-month periods are not permitted.
Events of default The New Revolving Credit Facility Agreement contains events of default, with certain adjustments, as those applicable to the Notes as set forth in the section entitled ‘‘Description of the Senior Secured Notes—Events of Default.’’ In addition, the New Revolving Credit Facility Agreement contains the following events of default:
• inaccuracy of a representation or statement when made; and
• unlawfulness, invalidity and repudiation and rescission of agreements.
Governing Law The New Revolving Credit Facility Agreement is governed by English law although the restrictive covenants and certain events of default, which are included in the New Revolving Credit Facility Agreement and largely replicate those contained in the Indenture, are construed in accordance with New York law (without prejudice to the fact that the New Revolving Credit Facility Agreement is governed by English law).
176 Intercreditor Agreement
To establish the relative rights of certain creditors under the financing arrangements, the Issuer and the Company (together and along with any other members of the Group that accede to the Intercreditor Agreement, the ‘‘Debtors’’) will enter into an intercreditor agreement on or about the Issue Date with, among others, the Security Agent, the facility agent, the arrangers (the ‘‘Arrangers’’) and the lenders under the New Revolving Credit Facility Agreement and the Trustee.
The Intercreditor Agreement sets forth, among other things:
(i) the ranking of certain indebtedness and Collateral of the Debtors;
(ii) when payments can be made in respect of certain indebtedness of the Debtors;
(iii) when enforcement actions can be taken in respect of that indebtedness;
(iv) the terms pursuant to which certain indebtedness will be subordinated;
(v) turnover provisions;
(vi) when Collateral and guarantees will be released to permit a sale of any assets subject to security interests; and
(vii) the order for applying proceeds from enforcement action and other amounts received by the Security Agent.
The Intercreditor Agreement contains provisions relating to other and future indebtedness that may be incurred that is permitted by the New Revolving Credit Facility and the Indenture, including:
(i) obligations to counterparties to certain hedging agreements (the ‘‘Hedge Counterparties’’, such obligations being the ‘‘Hedging Liabilities’’ and any agreements documenting such obligations being the ‘‘Hedging Agreements’’), including:
• the Hedging Liabilities owed by the Debtors to Hedge Counterparties to the extent of such counterparties’ Hedging Liabilities designated as ranking in the payments waterfall in priority to other Hedging Liabilities (up to an overall aggregate priority amount of £5,000,000) (the ‘‘Priority Hedge Counterparties’’, and such obligations being the ‘‘Priority Hedging Liabilities’’); and
• the Hedging Liabilities which are not Priority Hedging Liabilities (the ‘‘Non Priority Hedging Liabilities’’); and
(ii) indebtedness entitled to be treated pari passu with:
• the ‘‘Credit Facility Lender Liabilities’’ (being the liabilities owed by the Debtors to the creditors under the New Revolving Facility Agreement or other instrument (each a ‘‘Credit Facility Agreement’’) evidencing the terms of a credit facility (the ‘‘Credit Facility Lenders’’, their representative being the ‘‘Credit Facility Agent’’));
• the ‘‘Senior Secured Notes Liabilities’’, being the liabilities owed by the Debtors to the holders of the Notes (the ‘‘Senior Secured Noteholders’’); and
• the Hedging Liabilities,
(such pari passu indebtedness being the ‘‘Permitted Senior Secured Debt Liabilities’’, the creditors to whom such liabilities are owed by the Debtors being the ‘‘Permitted Senior Secured Debt Creditors’’, and their representative being the ‘‘Permitted Senior Secured Debt Representative’’).
177 In this description of the Intercreditor Agreement, the following terms have the meaning indicated below:
• ‘‘Creditor Representative’’ means either of, or both of, the Majority Super Senior Creditor Representative and the Majority Permitted Debt/Notes Representative;
• ‘‘Debt Documents’’ means, among others:
• the Intercreditor Agreement,
• the Hedging Agreements,
• the New Revolving Credit Facility Agreement and related finance documents (the ‘‘Credit Facility Finance Documents’’),
• the Senior Secured Notes Finance Documents (being, amongst others, the Notes, the Indenture and other documents relating to the Notes designated as such),
• the finance documents relating to the Permitted Senior Secured Debt Liabilities (the ‘‘Permitted Senior Secured Debt Documents’’, and together with the Senior Secured Notes Finance Documents, the ‘‘Senior Permitted Debt/Notes Documents’’),
• the documents evidencing the Collateral,
• the Purchase Agreement,
• any purchase agreement relating to the Permitted Senior Secured Debt Liabilities;
• any agreement evidencing the terms of liabilities owed by a Debtor to another Debtor or member of the Group (an ‘‘Intra-Group Lender’’, and such liabilities being the ‘‘Intra- Group Liabilities’’); or
• any agreement evidencing the terms of liabilities owed to subordinated creditors (‘‘Subordinated Liabilities’’);
• ‘‘Majority Permitted Debt/Notes Creditors’’ means those creditors of the Senior Permitted Debt/Notes Liabilities (the ‘‘Senior Permitted Debt/Notes Creditors’’) whose credit participations at that time aggregate more than 50% of the total credit participations under the Senior Permitted Debt/Notes Liabilities at that time;
• ‘‘Majority Permitted Debt/Notes Representative’’ means any person who has agreed to act on behalf of the Majority Permitted Debt/Notes Creditors in accordance with the provisions of the Intercreditor Agreement;
• ‘‘Majority Super Senior Creditors’’ means those creditors of the Super Senior Liabilities (the ‘‘Super Senior Creditors’’) whose credit participations at that time aggregate at least 66.67% of the total credit participations under the Super Senior Liabilities at that time;
• ‘‘Majority Super Senior Creditor Representative’’ means the Credit Facility Agent or any other person approved to act on behalf of the Majority Super Senior Creditors in accordance with the provisions of the Intercreditor Agreement;
• ‘‘Senior Secured Creditors’’ means the Super Senior Creditors, the Senior Permitted Debt/ Notes Creditors and the Non Priority Hedge Counterparties.
• ‘‘Senior Secured Creditor Liabilities’’ means the Super Senior Liabilities, the Senior Permitted Debt/Notes Liabilities and the Non Priority Hedging Liabilities;
• ‘‘Senior Permitted Debt/Notes Liabilities’’ means the Senior Secured Notes Liabilities and the Permitted Senior Secured Debt Liabilities;
178 • ‘‘Super Senior Liabilities’’ means the Credit Facility Lender Liabilities and the Priority Hedging Liabilities;
The following description is a summary of certain provisions contained in the Intercreditor Agreement. It does not restate the Intercreditor Agreement in its entirety, and you are urged to read that document (a copy of which is available on request) because it, and not the description that follows, defines your rights as a holder of the Notes.
Ranking and priority Ranking and priority of liabilities The Intercreditor Agreement provides that the Credit Facility Lender Liabilities, the Hedging Liabilities, the Senior Secured Notes Liabilities and the Permitted Senior Secured Debt Liabilities shall rank in right and priority of payment pari passu and without any preference between them.
Ranking and priority of security The Intercreditor Agreement provides that the Collateral shall secure (but only to the extent such Collateral is expressed to secure such liabilities) pari passu and without any preference between them, the Agent Liabilities (being the liabilities of any Debtor to the Credit Facility Agent, the Trustee and the applicable Permitted Senior Secured Debt Representative), the Senior Secured Creditor Liabilities and all present and future liabilities and obligations, actual and contingent, of the Debtors to the Security Agent. Under the Intercreditor Agreement, all proceeds from enforcement of the Collateral will be applied as provided under ‘‘—Application of Proceeds’’ below.
Restrictions on Credit Facility Lender Liabilities and Senior Secured Notes Liabilities Permitted payments The Intercreditor Agreement imposes no restrictions on payments to be made in respect of the Credit Facility Liabilities which are made pursuant to the Credit Facility Finance Documents. Payments to be made in respect of the Senior Permitted Debt/Notes Liabilities may be made at any time pursuant to the Senior Permitted Debt/Notes Documents to the extent not prohibited by any Credit Facility Agreement.
Collateral and guarantees Subject to provisions relating to accepting or receiving the benefit of security and guarantees by lenders of ancillary facilities under the Credit Facility Finance Documents (‘‘Ancillary Lenders’’), the Credit Facility Lenders or the Senior Secured Notes Creditors may take, accept or receive the benefit of:
(i) any Collateral in respect of their liabilities if, to the extent legally possible and subject to the agreed principles governing the granting of security contained in the New Revolving Credit Facility (the ‘‘Agreed Security Principles’’), at the same time it is offered to the Security Agent as trustee for the other secured creditors in respect of the liabilities owed to such creditors (subject to alternative arrangements in jurisdictions where security cannot be granted in favour of the Security Agent as trustee); and
(ii) any guarantee, indemnity or other assurance against loss in respect of their liabilities in addition to those in the original form of each Credit Facility Agreement or the Indenture or Purchase Agreement, the Intercreditor Agreement and those already shared by all the secured creditors in respect of their liabilities if, to the extent legally possible and subject to any Agreed Security Principles, at the same time it is also offered to the other secured creditors.
179 Enforcement of Collateral The Security Agent may refrain from enforcing the Collateral unless otherwise instructed by an Instructing Group.
Instructing Group The ‘‘Instructing Group’’ entitled to give instructions to the Security Agent in respect of enforcement of Collateral means:
(i) at any time while any Senior Permitted Debt/Notes Liabilities are outstanding, the Majority Permitted Debt/Notes Representative or the Majority Permitted Debt/Notes Creditors;
(ii) at any time while any Super Senior Liabilities are outstanding, the Majority Super Senior Creditor Representative or the Majority Super Senior Creditors;
(iii) if the Creditor Representatives are able to agree terms of joint instructions for enforcement prior to the end of the consultation period, all Creditor Representatives; or
(iv) following the Super Senior Discharge Date, the Majority Permitted Debt/Notes Representative or the Majority Permitted Debt/Notes Creditors.
Enforcement Instructions and Consultation As soon as reasonably practicable following receipt of any instructions as to enforcement of the Collateral (‘‘Enforcement Instructions’’) from a Creditor Representative, the Security Agent shall provide a copy of such Enforcement Instructions to the Credit Facility Agent, the Trustee and any Permitted Senior Secured Debt Representative (the ‘‘Agents’’) and the Hedge Counterparties. The Security Agent shall commence implementation of such Enforcement Instructions on the date falling 10 Business Days (or such shorter period as each Creditor Representative shall agree) after the date of receiving them (or, if more than one Creditor Representative provides instructions, after the date the first Enforcement Instructions are received) (the ‘‘Enforcement Instruction Effective Date’’), provided that no conflicting Enforcement Instructions are received from any other Creditor Representative prior to the Enforcement Instruction Effective Date.
If the Security Agent has received conflicting enforcement instructions, such Creditor Representatives will consult with each other in good faith for a period of not less than 30 days (or such shorter period as the Creditor Representatives may agree) (the ‘‘Consultation Period’’) with a view to agreeing instructions as to enforcement. In such case, the Enforcement Instruction Effective Date shall be deemed extended to the end of the Consultation Period.
If the Creditor Representatives are not able to agree joint instructions as to enforcement by the end of the Consultation Period, the enforcement instructions provided by the Majority Permitted Debt/Notes Creditors will prevail.
However, enforcement instructions provided by the Majority Super Senior Creditors (or on their behalf by the Majority Super Senior Creditor Representative) will prevail if:
(i) the Super Senior Creditors have not been fully repaid in cash within six months of the end of the Consultation Period;
(ii) the Security Agent has not received Enforcement Instructions from the Majority Permitted Debt/Notes Creditors within 30 days of the end of the Consultation Period;
(iii) the Security Agent has not commenced any enforcement of the security within 90 days of the end of the Consultation Period; or
(iv) an insolvency event has occurred and the Security Agent has not commenced any enforcement of the Collateral.
180 The Creditor Representatives will not be obligated to consult as described above if an Event of Default is continuing and:
(i) the Collateral has become enforceable as a result of an insolvency event; or
(ii) one of the Creditor Representatives determines in good faith (and confirms the same to the Security Agent in writing) that delaying the enforcement of Collateral could reasonably be expected to affect the ability to enforce, or realise proceeds of, the Collateral materially and adversely.
Release of the Guarantees and the Collateral Non-distressed Disposal In circumstances in which a disposal to a person is permitted under the Debt Documents that is not being effected:
(i) at the request of an Instructing Group in circumstances in which the Collateral has become enforceable;
(ii) by the enforcement of Collateral; or
(iii) after an acceleration event in respect of the Credit Facility Lender Liabilities, the Senior Secured Notes Liabilities or the Permitted Senior Secured Debt Liabilities has occurred or the Collateral has been enforced,
(paragraph (iii) above being a ‘‘Distress Event’’ and a disposal in the circumstances described in paragraphs (i), (ii) or (iii) above being a ‘‘Distressed Disposal’’), the Intercreditor Agreement will provide that the Security Agent is irrevocably authorized to release the Collateral or any other claim over that asset and, if the relevant asset consists of shares in the capital of a Debtor, to release the Collateral or any other claim over loans to, shares in or assets of that Debtor and the shares in, loans to and assets of any of that Debtor’s subsidiaries (to the extent being disposed of), provided that, in each case, the release of security interests will only be effective upon the making of the disposal.
Distressed Disposal Where a Distressed Disposal of an asset is being effected, the Intercreditor Agreement will provide that the Security Agent is irrevocably authorized and instructed:
(i) in respect of the disposal of an asset forming part of the Collateral, to release the security interests, or any other claim over the relevant asset;
(ii) if the asset which is disposed of consists of shares in the capital of a Debtor or a holding company of a Debtor, to release that Debtor or holding company and any subsidiary of that Debtor or holding company from all or any part of the liabilities under the Debt Documents and to release the security interests over any Collateral granted by that Debtor or holding company or any subsidiary of that Debtor or holding company and any claims in respect of Subordinated Liabilities or Intra-Group Liabilities;
(iii) if the disposal is a disposal of assets that consist of shares in the capital of a Debtor or a holding company of a Debtor, to dispose of all, but not part, of the liabilities under the Debt Documents and certain other liabilities and security interests over any Collateral of the Debtor if the transferee will not be treated as a Senior Secured Creditor or secured party under the Intercreditor Agreement; and
(iv) if the asset that is disposed of consists of shares in the capital of a Debtor or a holding company of a Debtor, to transfer to another Debtor all or any part of the disposed entity’s obligations under Intra-Group Liabilities, Subordinated Liabilities or other liabilities owed to a Debtor.
181 The net proceeds of each Distressed Disposal (and of any disposal of liabilities pursuant to paragraph (iii) above) shall be paid to the Security Agent for application in accordance with the provisions described under ‘‘—Application of Proceeds’’ as if those proceeds were the proceeds of a Distressed Disposal and, to the extent that any disposal of liabilities has occurred pursuant to paragraph (iii) above, as if that disposal of liabilities had not occurred. If a Distressed Disposal is being effected by or at the request of the Security Agent, it is a further condition to such release that:
(i) the proceeds of such disposal are in cash (or substantially in cash);
(ii) all claims of the Senior Secured Creditors under the relevant Debt Documents against any member of the Group (and any Subsidiary of that member of the Group) whose shares are sold or disposed of pursuant to such Distressed Disposal, are unconditionally released and discharged or sold concurrently with such sale (and are not assumed by the purchaser or one of its affiliates), and all security interests in respect of the assets that are sold or disposed of is simultaneously and unconditionally released and discharged concurrently with such sale (provided that if each Agent or the applicable Instructing Group, acting reasonably and in good faith, determine that the Senior Secured Creditors will recover a greater amount if any such claim is sold or otherwise transferred to the purchaser or one of its affiliates and not released or discharged, and serves a written notice on the Security Agent confirming the same, the Security Agent shall be entitled to sell or otherwise transfer such claim to the purchaser or one of its affiliates; and
(iii) such sale or disposal is made pursuant to a public auction or the Security Agent has received a fairness opinion in respect of such sale or disposal.
Turnover The Intercreditor Agreement will provide that if any creditor receives or recovers (but in the case of a Senior Secured Creditor, only in the case of paragraph (iv) below):
(i) any payment or distribution of, or on account of or in relation to, any of the liabilities owed to such creditor which is not a payment permitted under the terms of the Debt Documents;
(ii) any amount by way of set-off in respect of any liabilities owed to such creditor which is not a payment permitted under the terms of the Debt Documents;
(iii) any amount on account of, or in relation to any of the liabilities owed to such creditor after the occurrence of a Distress Event or as a result of litigation or proceedings against a member of the Group (other than after the occurrence of certain insolvency events in respect of that member of the Group);
(iv) any proceeds or other amount in connection with the realisation or enforcement of security or of any Distressed Disposal; or
(v) any distribution in cash or in kind or payment of, or on account of or in relation to, any of the liabilities owed to such creditor by a member of the Group which is made as a result of, or after the occurrence of, certain insolvency events in respect of that member of the Group, in each case, except in accordance with the order described under ‘‘—Application of Proceeds’’, it shall:
(i) in relation to receipts and recoveries not received or recovered by way of set-off:
• hold a amount of that receipt or recovery equal to the relevant liabilities owed to such creditor on trust for the Security Agent and promptly pay that amount or an amount
182 equal to that amount to the Security Agent for application in accordance with the terms of the Intercreditor Agreement; and
• promptly pay an amount equal to the amount (if any) by which receipt or recovery exceeds the relevant liabilities owed to such creditor to the Security Agent for application in accordance with the terms of the Intercreditor Agreement; and
(ii) in relation to receipts and recoveries received or recovered by way of set-off, promptly pay an amount equal to that receipt or recovery to the Security Agent for application in accordance with the terms of the Intercreditor Agreement.
Application of proceeds The Intercreditor Agreement will provide that amounts received from the realization or enforcement of all or any part of the security (or a transaction in lieu thereof), recovered in connection with the occurrence of an insolvency event in accordance with the turnover provisions or in connection with a Distressed Disposal, or other amounts paid to the Security Agent for application as described below will be applied in the following order of priority:
(i) first, pari passu and pro rata in payment of the following amounts:
• any sums owing to the Security Agent, any receiver or delegate, as the case may be; and
• any sums owing to each of the Agents, in each case on its own behalf, for application towards the discharge of all present and future liabilities and obligations, actual and contingent, owed by any Debtor to it under or in connection with the Debt Documents, including any amounts arising in connection with any realisation or enforcement of the Collateral or any other Distressed Disposal or any action taken at the request of the Security Agent by the subordinated creditors in accordance with the terms of the Intercreditor Agreement;
(ii) second, pari passu and pro rata to:
• each Credit Facility Agent on behalf of the Credit Facility Lenders it represents;
• the Arrangers; and
• the Priority Hedge Counterparties,
for application towards the discharge of the Credit Facility Lender Liabilities, related Arranger Liabilities and the Priority Hedging Liabilities, respectively;
(iii) third, pari passu and pro rata to:
• the Trustee on behalf of the Senior Secured Noteholders it represents;
• each Permitted Senior Secured Debt Representative on behalf of the Permitted Senior Secured Debt Creditors it represents; and
• the Non Priority Hedge Counterparties,
for application towards the discharge of the Senior Secured Notes Liabilities, the Permitted Senior Secured Debt Liabilities (other than the liabilities owed to each Permitted Senior Secured Debt Representative, which shall be paid in accordance with paragraph (i) above) and the Non Priority Hedging Liabilities, respectively;
(iv) fourth, if none of the Debtors is under any further actual or contingent liability under any relevant Debt Document, in payment to any person whom the Security Agent is obligated to pay in priority to any Debtor; and
(v) fifth, in payment of the surplus (if any) to the relevant Debtor.
183 Consents, amendments and override In addition to customary minor, technical or administrative matter amendments by the Security Agent, and each Creditor Representative, the Intercreditor Agreement will provide that it may be amended or waived only with the consent of the Company, the requisite majority (66.67%) of Credit Facility Lenders, the requisite majority (above 50%) of Senior Secured Noteholders, the requisite majority (above 50%) of Permitted Senior Secured Debt Creditors and the Security Agent unless it is an amendment, waiver or consent that has the effect of changing or that relates to any amendment or waiver to:
(i) the payment waterfall, enforcement of Collateral or redistribution provisions;
(ii) certain provisions relating to the exercise of discretion by the Security Agent in acting in accordance with the terms of the Intercreditor Agreement; or
(iii) the order of priority or subordination set forth in the Intercreditor Agreement, which shall not be made without the written consent of:
(i) the Agents;
(ii) the Credit Facility Lenders;
(iii) the Senior Secured Noteholders (to the extent that the amendment or waiver would materially and adversely affect them);
(iv) the Permitted Senior Secured Debt Creditors (to the extent that the amendment or waiver would materially and adversely affect them);
(v) each Hedge Counterparty (to the extent that the amendment or waiver would materially and adversely affect them); and
(vi) the Security Agent.
Subject to the paragraphs above and certain other exceptions, no amendment or waiver of or consent in relation to the Intercreditor Agreement may impose new or additional obligations on or withdraw or reduce the rights of any party to the Intercreditor Agreement, other than:
(i) in the case of a Senior Secured Creditor, in a way which affects or would affect Senior Secured Creditors of that party’s class generally; or
(ii) in the case of a Debtor, to the extent consented to by the Company under the terms of the Intercreditor Agreement, without the prior consent of that party.
Unless expressly stated otherwise in the Intercreditor Agreement, the Intercreditor Agreement overrides anything in the other Debt Documents to the contrary.
Additional indebtedness In the event that any Debtor incurs any additional indebtedness, or refinances existing indebtedness, that is permitted to be designated as Permitted Senior Secured Debt Liabilities under the terms of the Debt Documents and is entitled to be secured by the Collateral, the liabilities in respect of such additional Permitted Senior Secured Debt Liabilities will share in the proceeds of any enforcement of Collateral on a pro rata basis with the applicable group of creditors, provided that such creditor accedes to the Intercreditor Agreement (if not already a party thereto).
Governing law The Intercreditor Agreement is governed by English law.
184 Description of the Notes Johnston Press Bond plc (the ‘‘Issuer’’) will issue £225.0 million aggregate principal amount of 8.625% Senior Secured Notes due 2019 (the ‘‘Notes’’) under an indenture (the ‘‘Indenture’’), between, among others, itself, as issuer, Deutsche Trustee Company Limited, as trustee (the ‘‘Trustee’’) and Deutsche Bank AG, London Branch, as security agent, in a private transaction that is not subject to the registration requirements of the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’). The Indenture contains provisions that define your rights and govern the obligations of the Issuer and the Guarantors under the Notes. The terms of the Notes include those set out in the Indenture. The Indenture is not required to be, nor will it be, qualified under the U.S. Trust Indenture Act of 1939, as amended. Certain terms used in this ‘‘Description of the Notes’’ are defined below under the caption ‘‘—Certain Definitions.’’ In this ‘‘Description of the Notes’’, the term ‘‘Issuer’’ refers only to Johnston Press Bond plc, and references to the ‘‘Company,’’ ‘‘we,’’ ‘‘our,’’ and ‘‘us’’ refer only to Johnston Press plc, and not to any of its subsidiaries. The following is only a summary of certain provisions of the Indenture, the Notes and the Notes Proceeds Loan Agreement and refers to the Intercreditor Agreement, the Escrow Agreement and the Security Documents. It does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of those agreements, including the definitions of certain terms therein. We urge you to read the Indenture, the Notes, the Intercreditor Agreement and the Security documents because they and not this description define your rights as a holder of the Notes. Copies of the form of the Indenture, the Notes, the Intercreditor Agreement and the Security Documents may be obtained by requesting them from us at the address indicated under ‘‘Listing and General Information.’’ The Intercreditor Agreement is described under ‘‘Description of other Indebtedness—Intercreditor Agreement.’’ The Security Documents referred to below under the caption ‘‘—Security’’ define the terms of security that will secure the notes. The proceeds of the offering of the Notes sold on the Issue Date, together with the proceeds from the Placing and the Rights Offering, will be used, on the Escrow Release Date, by the Company, directly or indirectly through the use of intercompany loans or distributions, to prepay, in full, the outstanding borrowings under the Existing Facility Agreement and to redeem the Existing Notes, to pay certain fees, costs and expenses incurred in connection with the Transactions, and for general corporate purposes. See ‘‘Use of Proceeds’’. On the Issue Date the initial purchasers will, concurrently with the closing of the offering of the Notes, deposit the gross proceeds of the offering of the Notes into a segregated escrow account (the ‘‘Escrow Account’’) pursuant to the terms of an escrow deed (the ‘‘Escrow Agreement’’) dated as of the Issue Date among the Issuer, the Company, the Trustee and Deutsche Bank AG, London Branch, as escrow agent (the ‘‘Escrow Agent’’). If the conditions to release of the Escrowed Property (as defined below), as more fully described under the caption ‘‘—Escrow of Proceeds; Special Mandatory Redemption’’ (the ‘‘Escrow Release Conditions’’), have not been satisfied on or prior to June 30, 2014 (the ‘‘Escrow Longstop Date’’), or upon the occurrence of certain other events, the Notes will be redeemed at a price equal to 100% of the initial purchase price of the Notes, plus accrued and unpaid interest and Additional Amounts (as defined below), if any, from the Issue Date to the Special Mandatory Redemption Date (as defined below). See ‘‘—Escrow of Proceeds; Special Mandatory Redemption’’. On and from the Escrow Release Date (as defined below), the Notes will be secured by the Collateral. See ‘‘—Security’’. On the Escrow Release Date, the Company will effect the Debt Assumption (as defined below). Upon consummation of the Debt Assumption, the Issuer will be a wholly owned subsidiary of the Company and the Guarantors will guarantee the Notes.
185 The term ‘‘Debt Assumption’’ means, collectively, the following transactions: (1) the Company shall have directly or indirectly acquired 100% of the Equity Interests in the Issuer; and (2) each Guarantor shall have expressly assumed all of its obligations as a Guarantor under its Note Guarantee by executing and delivering to the Trustee a supplemental indenture. To the extent permitted under the Indenture, the Company may determine to effect the Debt Assumption on the Escrow Release Date through alternative means to achieve the same result (which alternative means, if any, are also referred to herein as the Debt Assumption). Prior to the Escrow Release Date, the Issuer will be prohibited from engaging in any business activity or any other activity, other than certain activities relating to the Indenture, the Notes, the Transactions and any related transactions. The registered holder of a Note will be treated as the owner of it for all purposes. Only registered holders will have rights under the Indenture.
Overview of the Notes The Notes will be general obligations of the Issuer and will: • on and from the Escrow Release Date, be secured as described below under the caption ‘‘—Security’’; • rank pari passu in right of payment with all existing and future Indebtedness of the Issuer that is not subordinated in right of payment to the Notes, including, on and from the Escrow Release Date, the obligations of the Issuer under the Revolving Credit Facility Agreement; • be effectively subordinated to all existing and future secured Indebtedness of the Issuer to the extent of the value of the assets securing such secured Indebtedness, unless such assets also secure the Notes on an equal and ratable or prior basis; • be effectively subordinated to any existing and future Indebtedness of the Issuer that will receive proceeds from any enforcement action over the Collateral on a priority basis, including Indebtedness under the Revolving Credit Facility and certain Hedging Obligations; • rank senior in right of payment to all existing and future Indebtedness of the Issuer that is expressly subordinated in right of payment to the Notes; • on and from the Escrow Release Date, be structurally subordinated to all existing and future Indebtedness, including obligations to trade creditors and lessors, of each non-Guarantor Subsidiary of the Company (other than the Issuer); and • on and from the Escrow Release Date, be guaranteed by the Initial Guarantors (as defined below).
Principal, maturity and interest On the Issue Date, the Issuer will issue the Notes in an aggregate principal amount of £220.0 million. The Notes will mature on June 1, 2019. The Notes will be issued in fully registered form, without coupons, in minimum denominations of £100,000 and any integral multiple of £1,000 excess thereof. Interest on the Notes will accrue at the rate of 8.625% per annum. Interest on the Notes will accrue from the date of original issue, or, if interest has already been paid or provided for, from the most recent date to which interest has been paid or provided for. Interest on the Notes will be payable semi-annually to Holders of record at the close of business on May 15 or November 15 immediately preceding the interest payment date, on June 1 and December 1 of each year, commencing December 1, 2014. Interest will be computed on the basis of a 360-day
186 year consisting of twelve 30-day months. Interest on overdue principal and interest will accrue at a rate that is 1% higher than the then applicable interest rate on the Notes. The Issuer may issue an unlimited aggregate principal amount of additional Notes under the Indenture in one or more series from time to time (the ‘‘Additional Notes’’), subject to limitations set forth in the Indenture. Any Additional Notes will be part of the same issue as the Notes currently being offered and will be treated as a single class for all purposes under the Indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase, provided that any Additional Notes that are not fungible with the Notes offered hereunder for U.S. federal income tax purposes shall have a separate CUSIP, ISIN or other identifying number from such Notes. Holders of Additional Notes will vote on all matters as a single class with Holders of Notes issued on the Issue Date. The rights of Holders to receive the payments of interest on the Notes are subject to applicable procedures of Euroclear and Clearstream. If the due date for any payment in respect of any Notes is not a Business Day at the place at which such payment is due to be paid, the holder thereof will not be entitled to payment of the amount due until the next succeeding Business Day at such place, and will not be entitled to any further interest or other payment as a result of any such delay.
Paying Agent and Registrar for the Notes The Issuer will maintain one or more paying agents (each, a ‘‘Paying Agent’’) for the Notes, including in London (the ‘‘Principal Paying Agent’’). As long as the Notes remain outstanding, the Issuer has also agreed that it will, to the extent reasonably practicable and permitted as a matter of law, ensure that there is a paying agent for the Notes in a European Union Member State that will not be obliged to withhold or deduct tax pursuant to Council Directive 2003/48/EC on the taxation of savings income in the form of interest payments which was adopted by the ECOFIN Council on June 3, 2003, and amended by Council Decision on April 26, 2004, and July 19, 2004, or pursuant to any other directive implementing the conclusions of the ECOFIN (European Union Economic and Finance Ministers) Council Meeting of November 26 and 27, 2000, or any law implementing or complying with, or introduced to conform to, such Directive (or such other directive) or any agreement entered into by a new European Union Member State with (a) any other state or (b) any relevant dependent or associated territory of any European Union Member State providing for measures equivalent to or the same as those provided for by such Directive (if such a European Union Member State exists). The Issuer will also maintain one or more registrars (each, a ‘‘Registrar’’) and a transfer agent (the ‘‘Transfer Agent’’) in Luxembourg. The initial Registrar will be Deutsche Bank Luxembourg S.A. The initial Transfer Agent will be Deutsche Bank Luxembourg S.A. The Registrar in Luxembourg will maintain a register reflecting ownership of Definitive Registered Notes (as defined herein) outstanding from time to time and will make payments on and facilitate transfer of Definitive Registered Notes on behalf of the Issuer. The Issuer will initially appoint Deutsche Bank AG, London Branch as Principal Paying Agent. The Issuer may change any Paying Agent, Registrar or Transfer Agent for the Notes without prior notice to the Holders of such Notes. For so long as the Notes are listed on the Official List of the Irish Stock Exchange and admitted for trading on the Global Exchange Market and to the extent required by the Irish Stock Exchange, the Issuer will publish a notice of any change of Paying Agent, Registrar or Transfer Agent in a newspaper having a general circulation in Dublin (which is expected to be The Irish Times) or, to the extent and in the manner permitted by the Irish Stock Exchange, post such notice on the official website of the Irish Stock Exchange (www.ise.ie).
187 The Notes Proceeds Loan On the Escrow Release Date, the Issuer, as lender, and the Company, as borrower, will enter into the Notes Proceeds Loan Agreement pursuant to which the Issuer will make a loan to the Company in an amount equal to the gross proceeds from the issuance of the Notes. The Notes Proceeds Loan will be denominated in pounds sterling and will be in aggregate principal amount equal to the aggregate principal amount of the Notes issued on the Issue Date. See ‘‘Use of Proceeds’’. The Notes Proceeds Loan will bear interest at a rate at least equal to the interest rate of the Notes. Interest on the Notes Proceeds Loan will be payable in cash, semi-annually in arrears on or prior to the corresponding date for the payment of interest on the Notes. The Notes Proceeds Loan Agreement will provide that the Company will pay the Issuer interest and principal due and payable on the Notes and any Additional Amounts due thereunder. All amounts payable under the Notes Proceeds Loan will be payable to such account or accounts with such Person or Persons as the Issuer may designate. The maturity date of the Notes Proceeds Loan will be the same as the maturity date of the Notes. Except as otherwise required by law, all payments under the Notes Proceeds Loan Agreement will be made without deductions or withholding for, or on account of, any applicable tax. In the event that the Company is required to make any such deduction or withholding, it shall gross-up each payment to the Issuer to ensure that the Issuer receives and retains a net payment equal to the payment which it would have received had no such deduction or withholding been made. The Notes Proceeds Loan will provide that the Company will make all payments pursuant thereto on a timely basis in order to ensure that the Issuer can satisfy its payment obligations under the Notes and the Indenture, taking into account the administrative and timing requirements under the Indenture with respect to amounts payable on the Notes.
Note Guarantees Prior to the Escrow Release Date, the Notes will not benefit from any guarantees. On and from the Escrow Release Date, the Notes will benefit from the Note Guarantee of the Company and certain of the Company’s Subsidiaries organised under the laws of England and Wales, Scotland and Northern Ireland (the ‘‘Initial Guarantors’’). The Guarantors will, jointly and severally, fully and unconditionally guarantee payment of the Notes on a senior secured basis. On and from the Escrow Release Date, the Note Guarantee of each Guarantor will be a general senior obligation of such Guarantor and will: • be secured as described below under the caption ‘‘—Security’’; • rank pari passu in right of payment with all existing and future senior Indebtedness of such Guarantor that is not subordinated in right of payment to the Notes, including its obligations under the Revolving Credit Facility Agreement; • be effectively subordinated to all existing and future secured Indebtedness of such Guarantor to the extent of the value of the assets securing such secured Indebtedness, unless such assets also secure the Note Guarantees on an equal and ratable or prior basis; • be effectively subordinated to any existing and future indebtedness of such Guarantor that will receive proceeds from any enforcement action over the Collateral on a priority basis, including Indebtedness under the Revolving Credit Facility and certain Hedging Obligations; • rank senior in right of payment to all existing and future Indebtedness of such Guarantor that is expressly subordinated in right of payment to its Note Guarantee; and • on and from the Escrow Release Date, be structurally subordinated to all existing and future Indebtedness, including obligations to trade creditors and lessors, of each non-Guarantor Subsidiary of such Guarantor (other than the Issuer).
188 The obligations of a Guarantor under its Note Guarantee will be limited as necessary to prevent the relevant Note Guarantee from constituting a fraudulent conveyance or unlawful financial assistance under applicable law, or otherwise to reflect limitations under applicable law. By virtue of these limitations, a Guarantor’s obligation under its Note Guarantee could be significantly less than amounts payable with respect to the Notes, or a Guarantor may have effectively no obligation under its Note Guarantee. See ‘‘—Risk Factors—Risks related to the Group’s structure—The Notes and the Note Guarantees will be subject to certain limitations on enforcement and may be limited by applicable laws or subject to certain defences that may limit their enforceability’’ The validity and enforceability of the Note Guarantees and the liability of each Guarantor will be subject to the limitations described in ‘‘Limitations on validity and enforceability of the Note Guarantees and security interests.’’ Not all of the Subsidiaries of the Company will guarantee the Notes. In the event of a bankruptcy, liquidation or reorganization of any of these non-Guarantor Subsidiaries, such non-Guarantor Subsidiaries will pay the holders of their debt and their trade creditors before they will be able to distribute any of their assets to the Issuer or to the Company. At December 28, 2013, after giving effect to the Transactions and applying the net proceeds in the manner described in this offering memorandum, there would have been outstanding £225.0 million of Indebtedness of the Company and its Subsidiaries. Although the Indenture contains limitations on the amount of additional Indebtedness that the Company and its Restricted Subsidiaries may Incur, under certain circumstances the amount of such Indebtedness could be substantial and, in any case, such Indebtedness may be structurally senior Indebtedness or secured Indebtedness. See ‘‘—Certain Covenants—Limitation on Indebtedness’’ below. As described below under the caption ‘‘—Certain Covenants—Limitation on issuances of guarantees of Indebtedness,’’ certain Restricted Subsidiaries of the Company that guarantee certain Indebtedness of other entities, including indebtedness under the Revolving Credit Facility Agreement, will also be required to become Guarantors. Substantially all of the operations of the Company are conducted through its Subsidiaries. Claims of creditors of Subsidiaries of the Company that are not Guarantors (other than the Issuer), including trade creditors and lessors, and claims of preferred shareholders (if any) of Subsidiaries, will have priority with respect to the assets and earnings of such Subsidiaries, over the claims of creditors of the Issuer and the Guarantors, including Holders. Therefore, on and from the Escrow Release Date, the Notes will be effectively subordinated to creditors (including trade creditors and lessors) and preferred shareholders (if any) of Subsidiaries of the Company that are not Guarantors or the Issuer. As of December 28, 2013, after giving pro forma effect to the Transactions, the Subsidiaries of the Company that will not initially guarantee the Notes on the Escrow Release Date would have had total third-party financial debt of nil. Although the Indenture limits the incurrence of Indebtedness by the Company and its Subsidiaries, such limitation is subject to a number of significant qualifications. See ‘‘—Certain Covenants— Limitation on Indebtedness’’ below.
Release of Note Guarantees The Note Guarantee of a Guarantor (other than the Company) will be released: (a) in connection with any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation) to a Person that is not (either before or after giving effect to such transaction) the Company or a Restricted Subsidiary, if the sale or other disposition does not violate the covenant described under the caption ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock’’; (b) in connection with any sale or other disposition of Capital Stock of that Guarantor or its parent company (other than the Company) to a Person that is not (either before or after giving effect to such transaction) the Company or a Restricted Subsidiary, if the sale or
189 other disposition does not violate the covenant described under the caption ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock’’; (c) upon the release or discharge of the Guarantee by such Guarantor of the Indebtedness that resulted in the creation of such Note Guarantee pursuant to the covenant described under ‘‘—Certain Covenants—Limitation on issuances of guarantees of Indebtedness,’’ so long as no Event of Default would arise as a result thereof; (d) if the Company designates any Restricted Subsidiary that is a Guarantor to be an Unrestricted Subsidiary in accordance with the applicable provisions of the Indenture; (e) upon legal defeasance, covenant defeasance or satisfaction and discharge of the Indenture as provided below under the captions ‘‘—Defeasance’’ and ‘‘—Satisfaction and discharge’’; (f) as provided below under the caption ‘‘—Amendments and Waivers’’; or (g) in connection with enforcement actions pursuant to the Intercreditor Agreement or any additional intercreditor agreement in certain circumstances. The Note Guarantee of the Company will be released in the circumstances described in paragraphs (e) and (f) of the preceding paragraph or in connection with enforcement actions pursuant to the Intercreditor Agreement or any additional intercreditor agreement. No release and discharge of a Note Guarantee will be effective against the Trustee or the holders of Notes until the Issuer has delivered to the Trustee an Officer’s Certificate and an Opinion of Counsel stating that all conditions precedent provided for in the Indenture relating to such release and discharge have been satisfied and that such release and discharge is authorized and permitted under the Indenture, and the Trustee will be entitled to rely on such Officer’s Certificate and Opinion of Counsel absolutely and without further inquiry. At the request and expense of the Issuer, the Trustee will execute any documents reasonably required in order to evidence or effect such release, discharge and termination in respect of such Note Guarantee. None of the Issuer, the Trustee or any Guarantor will be required to make a notation on the Notes to reflect any such release, termination or discharge.
Restricted Subsidiaries and Unrestricted Subsidiaries As of the Escrow Release Date, all of the Company’s Subsidiaries will be ‘‘Restricted Subsidiaries’’ for purposes of the Indenture. However, under the circumstances described below under the definition of ‘‘Unrestricted Subsidiary,’’ the Company will be permitted to designate certain Subsidiaries (other than the Issuer or any successor to the Issuer) as ‘‘Unrestricted Subsidiaries.’’ The Company’s Unrestricted Subsidiaries will not be subject to the restrictive covenants in the Indenture. The Company’s Unrestricted Subsidiaries will not guarantee the Notes.
Escrow of proceeds; Special Mandatory Redemption Concurrently with the closing of the offering of the Notes on the Issue Date, the Issuer will enter into the Escrow Agreement with, inter alios, the Trustee and the Escrow Agent, pursuant to which the gross proceeds of the offering of the Notes sold on the Issue Date together with an additional amount in pound sterling equivalent to interest on the Notes from the Issue Date up to and including the date that is six Business Days after the Escrow Longstop Date (being the latest date on which a Special Mandatory Redemption can occur) will be deposited into the Escrow Account. The Escrow Account will be pledged on a first-ranking basis in favour of the Trustee for the benefit of the Holders pursuant to an escrow charge dated the Issue Date between the Issuer and the Trustee (the ‘‘Escrow Charge’’). The initial funds deposited in the Escrow Account, and all other funds, securities, interest, dividends, distributions and other property and payments credited to the Escrow Account (less any property and/or funds paid in accordance with the Escrow Agreement) are referred to, collectively, as the ‘‘Escrowed Property.’’
190 In order to cause the Escrow Agent to release the Escrowed Property to the Issuer (the ‘‘Escrow Release’’), the Escrow Agent, the Trustee and J.P. Morgan Securities plc as representative for the Initial Purchasers shall have received from the Issuer or the Company, at a time that is on or before the Escrow Longstop Date, an Officer’s Certificate (the ‘‘Escrow Release Certificate’’), upon which both the Escrow Agent and the Trustee shall be entitled to conclusively rely, without further investigation or liability to any Person, to the effect that, on or prior to or substantially concurrently with the Escrow Release: (1) the Revolving Credit Facility Agreement shall have been executed by the parties thereto and all conditions precedent to the initial funding under the Revolving Credit Facility Agreement shall have been satisfied or waived; (2) the Company or its Subsidiaries shall have received in aggregate at least £140.0 million in gross proceeds from the Placing and the Rights Offering; (3) those documents, legal opinions and certificates attached as exhibits to the Escrow Agreement that are required to be delivered prior to release of the Escrowed Property from the Escrow Account shall have been delivered in accordance with the terms of the Escrow Agreement; (4) each of the Initial Guarantors shall have expressly assumed all of its obligations as a Guarantor under its Note Guarantee by executing and delivering to the Trustee a supplemental indenture; (5) the Company shall own, directly or indirectly, 100% of the Equity Interests in the Issuer; (6) the Initial Guarantors shall have caused the Notes and the Note Guarantees to be secured by the Collateral pursuant to the terms of the Security Documents and acceded to the purchase agreement in respect of the Notes, and the Intercreditor Agreement shall have been executed by the parties thereto; (7) the Existing Facility Agreement will be prepaid in full, the Existing Notes will be redeemed in full and the Liens on the Collateral securing the Existing Facility Agreement, the Existing Notes and the Obligations under the Pension Scheme and certain other obligations will be released; and (8) no Default or Event of Default shall have occurred and be continuing. The Escrow Release shall occur automatically upon the satisfaction of the conditions set forth above (the date of such satisfaction, the ‘‘Escrow Release Date’’) on the date specified to the Escrow Agent in the Escrow Release Certificate. Upon the Escrow Release, the Escrow Account shall be reduced to zero, and the Escrowed Property shall be paid out in accordance with the Escrow Agreement. In order to determine compliance with the condition described under clause (8) of the Escrow Release Conditions described above, all restrictive covenants set forth in the Indenture (a) will be applicable to the Issuer from the Issue Date and (b) will be treated as if they had been applicable to the Company and its Restricted Subsidiaries beginning on the Issue Date. In the event that (a) the Escrow Release Date does not take place on or prior to the Escrow Longstop Date, (b) any of the conditions set forth above under the second paragraph under this caption ‘‘—Escrow of Proceeds; Special Mandatory Redemption’’ become incapable of being satisfied on or prior to the Escrow Longstop Date, (c) an Event of Default arises under clause (h) of the first paragraph under the heading titled ‘‘Events of Default’’ on or prior to the Escrow Longstop Date or (d) a Change of Control occurs prior to the Escrow Release Date (the date of any such event being the ‘‘Special Termination Date’’), the Issuer will redeem all of the Notes (the ‘‘Special Mandatory Redemption’’) at a price (the ‘‘Special Mandatory Redemption Price’’) equal to 100% of the aggregate issue price of the Notes, plus accrued and unpaid interest and Additional Amounts, if any, from the Issue Date to the Special Mandatory
191 Redemption Date (as defined below) (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). In addition, the Indenture and the Escrow Agreement will allow the Issuer to redeem the Notes, at its option, in whole but not in part, at any time prior to the Escrow Longstop Date at a redemption price equal to 100% of the aggregate issue price of the Notes plus accrued and unpaid interest and Additional Amounts, if any, to, but not including, the redemption date if, in its or the Company’s judgment, the Transactions will not be consummated on or prior to the Escrow Longstop Date on substantially the terms described in this offering memorandum. If the Issuer exercises this option, it will redeem the Notes with the amounts held in the Escrow Account upon a minimum of five Business Days prior notice. Notice of the Special Mandatory Redemption will be delivered by the Issuer no later than one Business Day following the Special Termination Date to the Trustee and the Escrow Agent, and will provide that the Notes shall be redeemed on a date that is no later than the fifth Business Day after such notice is given by the Issuer in accordance with the terms of the Escrow Agreement (the ‘‘Special Mandatory Redemption Date’’). On the Special Mandatory Redemption Date, the Escrow Agent shall pay to the Paying Agent for payment to each Holder the Special Mandatory Redemption Price for such holder’s Notes and, concurrently with the payment to such Holders, deliver the excess Escrowed Property (if any) to the Issuer. To secure the payment of the Special Mandatory Redemption Price, the Issuer will grant to the Trustee for the benefit of the Holders a security interest over the Escrow Account. Receipt by the Trustee of a notice of Special Mandatory Redemption (provided funds sufficient to pay the Special Mandatory Redemption Price are in the Escrow Account) or the occurrence of the Escrow Release shall each constitute deemed consent by the Trustee for the release of the Escrowed Property from the Escrow Charge. If at the time of a Special Mandatory Redemption, the Notes are listed on the Irish Stock Exchange and the rules of the Irish Stock Exchange so require, the Issuer will notify the Irish Stock Exchange that the Special Mandatory Redemption has occurred and of any relevant details relating to such special mandatory redemption. No provisions of the Escrow Agreement and, to the extent such provisions relate to the Issuer’s obligation to redeem the Notes in a Special Mandatory Redemption, the Indenture, may be waived or modified in any manner materially adverse to the Holders without the written consent of at least 90% in aggregate principal amount of Notes affected thereby. By accepting a Note, each Holder will be deemed to have agreed to be bound by the terms of the Escrow Agreement and have irrevocably authorised the Trustee to take all the actions set forth in the Escrow Agreement without the need for further direction from them under the Indenture.
Security In connection with the consummation of the Transactions, the existing Liens on the Collateral securing the Existing Facility Agreement, the Existing Notes and the Pension Scheme will be released and new security interests pursuant to new Security Documents will be granted. From the Escrow Release Date, the Notes and the Note Guarantees will be secured by first ranking Liens over the Collateral (subject to certain exceptions). Subject to the terms of the Indenture and the Intercreditor Agreement, certain other Indebtedness will be permitted to be secured by the Collateral now and in the future. Subject to the paragraph immediately below, from the Escrow Release Date, the Notes and the Note Guarantees will be secured by security interests granted on a first ranking basis over: (1) substantially all of the assets of the Issuer and the Guarantors organised under the laws of England and Wales other than leasehold interests in real estate with a term of less than 35 years and freehold interests in real estate with a value of less than £250,000;
192 (2) substantially all of the assets of the Guarantors organised under the laws of Northern Ireland other than the shares of Century Newspapers Limited, leasehold interests in real estate with a term of less than 35 years and freehold interests in real estate with a value of less than £250,000; and (3) substantially all of the assets of the Guarantors organised under the laws of Scotland (the ‘‘Scottish Guarantors’’) other than the shares of each Scottish Guarantor and leasehold interests in real estate with a term of less than 35 years and freehold interests in real estate with a value of less than £250,000. The Collateral will secure the payment and performance when due of all of the obligations of the Issuer and the Guarantors under the Indenture, the Notes and the Note Guarantees as provided in the relevant Security Document. Notwithstanding the foregoing, certain assets will not be pledged (or the relevant Liens not perfected) in accordance with the Agreed Security Principles, including: • if providing such security would be prohibited by corporate benefit, financial assistance, fraudulent preference, ‘‘thin capitalization’’ laws or regulations or similar matters, or providing security would result in a significant risk to the officers of the relevant security provider of contravention of their fiduciary duties and/or of civil or criminal liability; • if the cost of providing security is not proportionate to the benefit accruing to the Holders; and • if in certain jurisdictions it may be either impossible or impractical to create security over certain categories of assets, security will not be taken over such assets. Under the Indenture, the Issuer and the Guarantors will be permitted to incur certain additional Indebtedness in the future which may share in the Collateral, including additional Permitted Collateral Liens securing Indebtedness on a pari passu basis with the Notes. The amount of such Permitted Collateral Liens will be limited by the covenants described under the captions ‘‘—Certain Covenants—Limitation on Liens’’ and ‘‘—Certain Covenants—Limitation on Indebtedness.’’ Under certain circumstances, the amount of such additional Indebtedness secured by Permitted Collateral Liens could be significant. Pursuant to the terms of the Intercreditor Agreement, any liabilities in respect of Obligations under the Revolving Credit Facility and certain Hedging Obligations, if any, secured by the Collateral will receive priority in payment to the Notes with respect to any proceeds received upon any enforcement over any Collateral. The security interests under the new Security Documents will be granted in favour of the Security Agent on behalf of the holders of the secured obligations that are secured by the Collateral, which include the Notes, the Note Guarantees, the Revolving Credit Facility and certain Hedging Obligations. Such obligations will be secured equally and ratably by first ranking Liens over the Collateral (subject to certain exceptions).
Enforcement of Security The Security Documents will generally only become enforceable after the Security Agent gives notice of an intention to enforce following the occurrence of an event of default under the Revolving Credit Facility or an Event of Default under the Indenture. The Security Agent will only be permitted to enforce the Security Documents in accordance with instructions permitted to be given under the Intercreditor Agreement. For a description of security enforcement and other intercreditor provisions, please see ‘‘Description of other Indebtedness—Intercreditor Agreement.’’ See also ‘‘Risk Factors—Creditors under the New Revolving Credit Facility Agreement and certain hedging obligations will be entitled to be repaid with the proceeds of the Collateral sold in any enforcement sale in
193 priority to the Notes’’ and ‘‘Risk Factors—Holders of the Notes may not control certain decisions regarding the Collateral.’’
Other Subject to the terms of the Security Documents, and subject to certain exceptions required to ensure the security interests under the Security Documents are perfected, the Issuer and the Guarantors will have the right to remain in possession and retain exclusive control of the Collateral securing the Notes, to collect, invest and dispose of any income therefrom and to vote pledged shares. The Issuer and the Guarantors may, among other things, without any release or consent by the Trustee or the Security Agent, conduct ordinary course activities with respect to the Collateral, including, but subject to the covenant contained under the caption ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock’’: (1) selling, leasing, transferring or otherwise disposing of obsolete, surplus or worn out equipment or other assets or equipment that are no longer useful in the conduct of the business of the Company and its Restricted Subsidiaries, (2) selling, leasing, transferring or otherwise disposing of assets in the ordinary course of business and (3) any other action permitted by the Security Documents, the Intercreditor Agreement or any additional intercreditor agreement. No appraisal of any of the Collateral has been prepared by or on behalf of the Issuer in connection with the issuance of the Notes. There can be no assurance that the proceeds from the sale of the Collateral remaining after sharing with other creditors entitled to share in such proceeds would be sufficient to satisfy the obligations owed to the Holders. By its nature, some or all of the Collateral will be illiquid and may have no readily ascertainable market value. Accordingly, there can be no assurance that the Collateral will be able to be sold in a short period of time, if at all. See ‘‘Risk Factors—No appraisals of any of the Collateral have been prepared by the Group or on the Group’s behalf in connection with the issuance of the Notes. On and from the Escrow Release Date, the Notes will be secured only to the extent of the value of the Collateral that has been granted as security for the Notes and the Note Guarantees, and such security may not be sufficient to satisfy the obligations under the Notes and the Note Guarantees.’’ The Indenture will provide that each Holder, by accepting a Note, shall be deemed to have agreed to and accepted the terms and conditions of the Security Documents and the Intercreditor Agreement and any additional intercreditor agreement (whether then entered into or entered into in the future pursuant to the provisions described herein) and to have authorised and directed the Trustee and the Security Agent (as applicable) to enter into such documents.
Release of Security The Issuer and the Guarantors will be entitled to the release of the assets constituting Collateral from the Liens securing the Notes and the Note Guarantees under any one or more of the following circumstances: (1) in connection with any sale or other disposition of the property or assets to a Person that is not (either before or after giving effect to such transaction) the Company or a Restricted Subsidiary, if the sale or other disposition does not violate the covenant contained under the caption ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock’’; (2) if such Collateral is an asset of a Guarantor or any of its Subsidiaries, in connection with any sale or other disposition of Capital Stock of that Guarantor to a Person that is not (either before or after giving effect to such transaction) the Company or a Restricted Subsidiary, if the sale or other disposition does not violate the covenant contained under the caption ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock’’ and the Guarantor ceases to be a Restricted Subsidiary as a result of the sale or other disposition;
194 (3) in the case of a Guarantor that is released from its Note Guarantee pursuant to the terms of the Indenture, the Security Documents and the Intercreditor Agreement, the release of the property and assets, and Capital Stock, of such Guarantor; (4) in the case of the assets of any Restricted Subsidiary, if the Company designates such Restricted Subsidiary that is a Guarantor as an Unrestricted Subsidiary in accordance with the applicable provisions of the Indenture; (5) as described under the caption ‘‘—Amendments and waivers’’; (6) as provided for under the Intercreditor Agreement or any additional intercreditor agreement, including in connection with enforcement actions; (7) upon legal defeasance, covenant defeasance or satisfaction and discharge of the Indenture as provided below under the captions ‘‘—Defeasance’’ and ‘‘—Satisfaction and discharge’’; (8) as described in the second paragraph of the covenant described under the caption ‘‘—Certain Covenants—Limitation on Liens’’; or (9) upon the full and final payment and performance of all obligations of the Guarantors and the Issuer under the Indenture and the Notes. See ‘‘Risk Factors—There are circumstances other than repayment or discharge of the Notes under which the Collateral securing the Notes and the Note Guarantees will be released automatically and under which the Guarantees will be released automatically, without your consent or any action on the part of the Trustee.’’ The Indenture will provide that any release of a Lien on Collateral shall be evidenced by the delivery by the Issuer to the Trustee of an Officer’s Certificate of the Issuer, and that the Trustee and the Security Agent shall acknowledge and confirm such release upon delivery of such Officer’s Certificate.
Additional or amended intercreditor agreement The Indenture will provide that, subject to the covenants contained therein, at the request of the Issuer, at or prior to any time that the Issuer or a Guarantor incurs or guarantees any additional Indebtedness permitted to be secured by a Lien on the Collateral pursuant to the definition of Permitted Collateral Liens, the Issuer, the Guarantors, the Security Agent and the Trustee shall either amend and/or restate the Intercreditor Agreement or enter into with the creditors and/or agents of creditors with respect to such Indebtedness an intercreditor agreement on substantially the same terms as the Intercreditor Agreement, in either such case, to permit such Indebtedness to be subject to (and benefit from) substantially identical terms with respect to limitations on enforcement and other rights and limitations as contained in the Intercreditor Agreement (or, in the case of any such terms, terms more favourable to the Holders). If more than one such intercreditor agreement is outstanding at any one time, the collective terms of such intercreditor agreements must not conflict and must be no more disadvantageous to the Holders than if all such Indebtedness was a party to one such agreement. The Indenture will also provide that, at the direction of the Issuer and without the consent of the Holders, the Trustee shall upon the direction of the Issuer from time to time enter into one or more amendments and/or restatements of the Intercreditor Agreement or any such additional intercreditor agreement to: (1) cure any ambiguity, omission, defect or inconsistency therein; (2) increase the amount of Indebtedness permitted to be incurred or issued under the Indenture of the types covered thereby that may be incurred by the Issuer or any Guarantors that is subject thereto (including the addition of provisions relating to new Indebtedness); (3) add Guarantors thereto; (4) secure the Notes; or (5) make any other such change thereto (including any change reasonably necessary to effect the Debt Assumption) that does not materially adversely affect the rights of Holders (as determined in good faith by the Company).
195 The Issuer will not otherwise direct the Trustee to enter into any amendment and/or restatement of the Intercreditor Agreement or, if applicable, any additional intercreditor agreement, without the consent of the Holders of a majority in principal amount of the outstanding Notes, except as otherwise permitted under ‘‘—Amendments and waivers’’. The Indenture will provide that each Holder, by accepting a Note, will be deemed to have agreed to and accepted the terms and conditions of the Intercreditor Agreement or any amendment or restatement of the Intercreditor Agreement or any additional intercreditor agreement contemplated hereby, and the entry into such amendment or restatement of the Intercreditor Agreement or additional intercreditor agreement by the Security Agent and the Trustee and the performance of their obligations and the exercise of their rights thereunder and in connection therewith.
Optional redemption The Notes will be redeemable, at the Issuer’s option, at any time prior to maturity at varying redemption prices in accordance with the applicable provisions set forth below. On and after June 1, 2017, the Notes will be redeemable at the Issuer’s option, in whole or in part and from time to time, at the applicable redemption price set forth in the table below. Such redemption may be made upon notice delivered, or caused to be delivered to each Holder, not less than 10 nor more than 60 days prior to the redemption date. The Issuer may provide in such notice that payment of the redemption price and the performance of the Issuer’s obligations with respect to such redemption may be performed by another Person. Any such redemption and notice may, in the Issuer’s discretion, be subject to the satisfaction of one or more conditions precedent, including, but not limited to, the occurrence of a Change of Control. The Notes will be so redeemable at the following redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the relevant redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on June 1 of the years set forth below:
Year Redemption Price 2017 ...... 104.313% 2018 and thereafter ...... 100.000%
At any time prior to June 1, 2017, the Issuer will be entitled at its option on one or more occasions, during either period consisting of 12 consecutive months ending on the day immediately preceding the first, second or third anniversary of the Issue Date, to redeem the Notes in an aggregate principal amount not to exceed 10% of the aggregate principal amount of the Notes (including the principal amount of any Additional Notes), at a redemption price (expressed as a percentage of principal amount) of 103%, plus accrued and unpaid interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date). Such redemption may be made upon notice delivered or caused to be delivered to each Holder, not less than 10 nor more than 60 days prior to the redemption date. Any such redemption or notice may, at the Issuer’s discretion, be subject to the satisfaction of one or more conditions precedent. At any time prior to June 1, 2017, the Notes will be redeemable at the Issuer’s option, in whole or in part and from time to time, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium as of, and accrued and unpaid interest, if any, to, the applicable redemption date (subject to the rights of Holders of record on the relevant record date to receive interest due on the relevant interest payment date) (the ‘‘Redemption Price’’). Such redemption may be made upon notice delivered, or caused to be delivered to each Holder, not less than 10 nor more than 60 days prior to the redemption date. The Issuer may provide in such notice that payment of the Redemption Price and performance of the Issuer’s
196 obligations with respect to such redemption may be performed by another Person. Any such redemption or notice may, at the Issuer’s discretion, be subject to the satisfaction of one or more conditions precedent, including, but not limited to, the occurrence of a Change of Control. At any time prior to June 1, 2017, the Issuer will be entitled at its option on one or more occasions to redeem Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the Notes (including the principal amount of any Additional Notes) with funds in an equal aggregate amount not exceeding the aggregate proceeds of one or more Equity Offerings, at a redemption price (expressed as a percentage of principal amount) of 108.625%, plus accrued and unpaid interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that after giving effect to any such redemption: (a) an aggregate principal amount of Notes equal to at least 65% of the aggregate principal amount of Notes issued on the Issue Date (plus the aggregate principal amount of any Additional Notes issued after the Issue Date but excluding any Notes or Additional Notes held by the Company and its Restricted Subsidiaries) remains outstanding immediately after the occurrence of each such redemption; and (b) each such redemption occurs within 90 days after the date of the completion of the related Equity Offering. Such redemption may be made upon notice delivered or caused to be delivered to each Holder, not less than 10 nor more than 60 days prior to the redemption date. Any redemption notice given in respect of such redemption may be given prior to completion of the related Equity Offering, and any such redemption or notice may, at the Issuer’s discretion, be subject to the satisfaction of one or more conditions precedent, including, but not limited to, the completion of the related Equity Offering. If the Issuer effects an optional redemption of Notes, it will, if and for so long as the Notes are listed on the Official List of the Irish Stock Exchange and admitted for trading on the Global Exchange Market and to the extent required by the Irish Stock Exchange, inform the Global Exchange Market of such optional redemption and confirm the aggregate principal amount of the Notes that will remain outstanding immediately after such redemption. The Issuer may provide in any notice of redemption that payment of the redemption price and performance of the Issuer’s obligations with respect to such redemption may be performed by another Person.
Excess Cash Flow Offer The Issuer shall be required within 135 days after the end of each fiscal year of the Company, commencing with the Company’s first fiscal year-end after the Issue Date, to apply an amount equal to the Excess Cash Flow Amount for such fiscal year to make an offer (an ‘‘Excess Cash Flow Offer’’) to all Holders of Notes outstanding at the time of such offer to purchase such Holder’s Notes at a price in cash equal to 100% of the principal amount of thereof, plus accrued and unpaid interest and Additional Amounts, if any, to (but not including) the date of redemption, subject to the right of Holders on the relevant record date to receive interest due on the relevant interest payment date; provided that (i) the Issuer shall not be required to make an Excess Cash Flow Offer unless the amount of the Excess Cash Flow Offer exceeds £1.0 million and (ii) the Excess Cash Flow Amount for any fiscal year shall be reduced by an amount, if any, necessary so that the Company and its Restricted Subsidiaries would have had cash and Cash Equivalents as of the first Business Day of the fiscal year in which the Issuer makes such Excess Cash Flow Offer in an amount no less than £10.0 million after giving pro forma effect to such Excess Cash Flow Offer as if the Excess Cash Flow Offer Payment Date in
197 respect of such Excess Cash Flow Offer was such first Business Day and the Excess Cash Flow Offer had been accepted by Holders in respect of the entire Excess Cash Flow Amount. If the Issuer is required to make an Excess Cash Flow Offer pursuant to this covenant, the Issuer will deliver or cause to be delivered a notice to each Holder with a copy to the Principal Paying Agent and the Trustee no later than 135 days after the end of the applicable fiscal year of the Company stating: (i) that the Issuer is offering to purchase Notes in an amount equal to the Excess Cash Flow Amount and that such Holder has the right (subject to the prorating described below) to require the Issuer to purchase such Holder’s Notes at a purchase price in cash equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase (the ‘‘Excess Cash Flow Payment’’) (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); (ii) the purchase date (which will be no earlier than 10 days nor later than 60 days from the date such notice is given) (the ‘‘Excess Cash Flow Offer Payment Date’’); (iii) the instructions determined by the Issuer, consistent with the Indenture, that a Holder must follow in order to have its Notes purchased; and (iv) the amount of the Excess Cash Flow Offer. If, upon the expiration of the period for which the Excess Cash Flow Offer remains open, the aggregate principal amount of Notes surrendered by Holders exceeds the amount of the Excess Cash Flow Offer, the Notes to be purchased in the Excess Cash Flow Offer will be selected in accordance with the procedures of Euroclear and/or Clearstream, as applicable, unless otherwise required by law or stock exchange or depositary requirements, or if the Notes are not held through Euroclear or Clearstream, or Euroclear or Clearstream prescribes no method of selection, on a pro rata basis but in minimum denominations of £100,000 and in integral multiples of £1,000 in excess thereof. If the aggregate purchase price of the Notes surrendered by the Holders is less than the amount of the Excess Cash Flow Offer, the Issuer shall be permitted to use the portion of the Excess Cash Flow Amount that is not applied to the purchase of Notes in connection with such Excess Cash Flow Offer for general corporate purposes in compliance with the other covenants described in this ‘‘Description of the Notes’’. On the Excess Cash Flow Offer Payment Date, the Issuer will, to the extent lawful: (a) accept for payment all Notes or portions of Notes properly tendered pursuant to the Excess Cash Flow Offer; (b) deposit with, or to the order of, the Principal Paying Agent or tender agent for such Excess Cash Flow Offer, as applicable, an amount equal to the Excess Cash Flow Offer Payment in respect of all Notes or portions of Notes properly tendered; (c) deliver or cause to be delivered to the Principal Paying Agent for cancelation the Notes properly accepted; and (d) deliver or cause to be delivered to the Trustee an Officer’s Certificate stating the aggregate principal amount of Notes or portions of Notes being purchased by the Issuer. The Principal Paying Agent or tender agent for such Excess Cash Flow Offer, as applicable, will promptly deliver or cause to be delivered to each holder of Notes properly tendered the Excess Cash Flow Payment for such Notes, and the Trustee (or an authentication agent approved by it) will, in the case of Definitive Registered Notes, promptly authenticate and mail to each relevant Holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any. The Issuer will publicly announce the results of the Excess Cash Flow Offer on or as soon as practicable after the Excess Cash Flow Offer Payment Date. The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any other applicable securities laws and regulations to the extent those laws and regulations are applicable in connection with the repurchase of the Notes as a result of an Excess Cash Flow Offer. To the extent that the provisions of any applicable laws or regulations, including
198 securities laws, conflict with the provisions of this covenant, the Issuer will comply with the applicable laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof.
Selection and notice For so long as the Notes are listed on the Official List of the Irish Stock Exchange and admitted for trading on the Global Exchange Market and to the extent required by the Irish Stock Exchange, the Issuer shall publish notice of any redemption in a newspaper having a general circulation in Ireland (which is expected to be The Irish Times) or, to the extent and in the manner permitted by the Irish Stock Exchange, post such notice on the official website of the Irish Stock Exchange (www.ise.ie). In the case of any partial redemption, selection of the Notes for redemption will be made in accordance with the applicable procedures of Euroclear and/or Clearstream, as applicable, unless otherwise required by law or applicable stock exchange or depositary requirements, or if the Notes are not held through Euroclear or Clearstream or Euroclear or Clearstream prescribes no method of selection, on a pro rata basis. No Definitive Registered Note of £100,000 in aggregate principal amount or less shall be redeemed in part, except that if all of the Notes of a Holder are to be redeemed, the entire outstanding amount of Notes held by such Holder, shall be redeemed.
Mandatory redemption; Offers to purchase; Open market purchases Except as set forth under the caption ‘‘—Escrow of Proceeds; Special Mandatory Redemption’’, the Issuer is not required to make any mandatory redemption or sinking fund payments with respect to the Notes. However, under certain circumstances, the Issuer may be required to offer to purchase Notes as described under the captions ‘‘—Change of Control’’, ‘‘—Excess Cash Flow Offer’’ and ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock.’’ The Company and its Subsidiaries may at any time and from time to time purchase Notes in the open market or otherwise.
Additional Amounts All payments required to be made by or on behalf of the Issuer under or with respect to the Notes or by or on behalf of any Guarantor under or with respect to a Note Guarantee (each of the Issuer or such Guarantor and, in each case, any successor thereof, making such payment, the ‘‘Payor’’), will be made free and clear of, and without withholding or deduction for or on account of, any Taxes imposed or levied by or on behalf of any authority or agency having power to tax within any jurisdiction in which such Payor is incorporated, organized or otherwise resident for tax purposes, or engaged in business for tax purposes, or any jurisdiction from or through which payment is made by or on behalf of such Payor (each a ‘‘Relevant Taxing Jurisdiction’’), unless such Payor is required to withhold or deduct such Taxes by law or regulation. If a Payor is so required to withhold or deduct any amount for or on account of Taxes imposed or levied by or on behalf of a Relevant Taxing Jurisdiction from any payment made under or with respect to the Notes or a Note Guarantee, as applicable, such Payor will be required to pay such additional amounts (‘‘Additional Amounts’’) as may be necessary so that the net amount received by any Holder (including Additional Amounts) after such withholding or deduction will not be less than the amount the Holder or beneficial owner would have received if such Taxes had not been withheld or deducted; provided, however, that the foregoing obligation to pay Additional Amounts does not apply to: (a) any Taxes that would not have been (or would not be required to be) so imposed, withheld, deducted or levied but for the existence of any present or former connection between the relevant Holder or beneficial owner (or between a fiduciary, settlor,
199 beneficiary, partner, member or shareholder of, or possessor of power over the relevant Holder or beneficial owner, if the relevant Holder or beneficial owner is an estate, nominee, trust, partnership, company or corporation) and the Relevant Taxing Jurisdiction, including, without limitation, such Holder or beneficial owner being or having been a citizen, domiciliary, national or resident thereof, or being or having been present or engaged in a trade or business therein or having or having had a permanent establishment therein (other than any connection arising solely from the acquisition or holding of any Note, the receipt of any payments in respect of such Note or a Note Guarantee or the exercise or enforcement of rights under a Note or Note Guarantee); (b) any estate, inheritance, gift, sales, transfer, personal property or similar Tax; (c) any Taxes which are payable other than by withholding or deduction from payments made under or with respect to the Notes or any Note Guarantee; (d) any Taxes that would not have been (or would not be required to be) imposed, withheld, deducted or levied if such Holder or the beneficial owner of any Note or interest therein (i) complied with all reasonable written requests by the Payor (made at a time that would enable the Holder or beneficial owner acting reasonably to comply with such request) to provide information or documentation concerning the nationality, residence or identity of such Holder or beneficial owner or (ii) made any declaration or similar claim or satisfy any certification, information or reporting requirement, which in the case of (i) or (ii), is required or imposed by a statute, treaty, regulation or administrative practice of a Relevant Taxing Jurisdiction as a precondition to exemption from, or reduction in the rate of withholding or deduction of, all or part of such Taxes; (e) any Taxes withheld, deducted or imposed on a payment to an individual that are required to be made pursuant to the Council Directive 2003/48/ EC or any other directive implementing the conclusions of the ECOFIN (European Union Economic and Finance Ministers) Council Meeting of November 26 and 27, 2000 on the taxation of savings income in the form of interest payments which was adopted by the ECOFIN Council on 3 June 2003, or pursuant to any law implementing or complying with, or introduced in order to conform to, such Directive or any agreement entered into by a new European Union Member State with (i) any other state or (ii) any relevant dependent or associated territory of any European Union Member State providing for measures equivalent to or the same as those provided for by such Directive; (f) any Taxes imposed on or with respect to a Note presented for payment by or on behalf of a Holder or beneficial owner who would have been able to avoid such withholding or deduction by presenting the relevant Note to another paying agent in a member state of the European Union; (g) any Taxes imposed on or with respect to a payment which could have been made without deduction or withholding if the beneficiary of the payment had presented the Note for payment (where presentation is required) within 30 days after the date on which such payment or such Note became due and payable or the date on which payment thereof is duly provided for, whichever is later (except to the extent that the Holder or beneficial owner would have been entitled to Additional Amounts had the Note been presented on any day during the 30-day period); (h) any Taxes imposed on or with respect to any payment made under or with respect to such Note or Note Guarantee to any Holder who is a fiduciary or partnership or any Person other than the sole beneficial owner of such payment, to the extent that a beneficiary or settlor with respect to such fiduciary, a member of such a partnership or the beneficial owner of such payment would not have been entitled to the Additional Amounts had such beneficiary, settlor, member or beneficial owner been the sole beneficial owner of such Note;
200 (i) any withholding or deduction required to be made from a payment pursuant to Sections 1471-1474 of the U.S. Internal Revenue Code of 1986, as amended (the ‘‘Code’’), as of the Issue Date (or any amended or successor version), any regulations or official interpretations thereof, any similar law or regulation adopted pursuant to an intergovernmental agreement between a non-U.S. jurisdiction and the United States with respect to the foregoing or any agreements entered into pursuant to Section 1471(b)(1) of the Code; or (j) any Taxes imposed or levied by reason of any combination of clauses (a) through (i) above. The Issuer and the Guarantors (as the case may be) will pay and indemnify the Holders and/or beneficial owners for any present or future stamp, issue, registration, excise, property, court or documentary Taxes, or similar Taxes, charges or levies and interest, penalties and other reasonable expenses related thereto that arise in or are levied by any Relevant Taxing Jurisdiction on the execution, issuance, delivery, enforcement or registration of the Notes, the Indenture, the Note Guarantees or any other document or instrument in relation thereto (other than on a transfer or assignment of the Notes after this offering) or the receipt of any payments with respect thereto (limited, solely in the case of Taxes attributable to the receipt of any payments with respect thereto, to any such taxes imposed in a Relevant Taxing Jurisdiction that are not excluded under clauses (a), (b) or (d) through (i) above or any combination thereof). The Payor will make or cause to be made any withholding or deduction required in respect of Taxes, and remit the full amount deducted or withheld to the Relevant Taxing Jurisdiction, in accordance with applicable law. Upon request, the Payor will use reasonable efforts to provide, within a reasonable time after the date the payment of any such Taxes so deducted or withheld is made, the Trustee with official receipts or other documentation evidencing the payment of the Taxes with respect to which Additional Amounts are paid. If so provided, copies thereof will be made available at the offices of the Trustee and copies will be made available by the Trustee to a Holder or beneficial owner on written request. If any Payor will be obligated to pay Additional Amounts under or with respect to any payment made on the Notes, the Payor will deliver to the Principal Paying Agent with a copy to the Trustee on a date that is at least 30 days prior to the date of that payment (unless the obligation to pay Additional Amounts arises after the 30th day prior to that payment date, in which case the Payor shall notify the Principal Paying Agent and the Trustee promptly thereafter) a certificate stating the fact that Additional Amounts will be payable and the amount estimated to be so payable and such other information reasonably necessary to enable the Paying Agent to pay Additional Amounts to Holders or beneficial owners on the relevant payment date. Whenever in the Indenture there is mentioned, in any context: (a) the payment of principal; (b) redemption prices or purchase prices in connection with a redemption or a purchase of Notes, as applicable; (c) the payment of interest; or (d) any other amount payable on or with respect to any of the Notes, such reference will be deemed to include payment of Additional Amounts as described under this heading ‘‘—Additional Amounts,’’ to the extent that, in such context, Additional Amounts are, were or would be payable in respect thereof. The obligations described under this heading, ‘‘—Additional Amounts,’’ will survive any termination, defeasance or discharge of the Indenture or any Note Guarantee and will apply mutatis mutandis to any jurisdiction in which any successor Person to the Payor is incorporated, organized or otherwise resident for tax purposes or any political subdivision or taxing authority or agency thereof or therein.
201 For a discussion of certain withholding taxes applicable to payments under or with respect to the Notes, see ‘‘Tax Considerations.’’
Optional redemption for changes in withholding taxes
The Issuer is entitled to redeem Notes, at its option, at any time in whole but not in part, upon not less than 30 nor more than 60 days’ notice to the Holders, at a redemption price equal to 100% of the outstanding principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), in the event any Payor has become or would become obligated to pay, on the next date on which any amount would be payable with respect to the Notes, any Additional Amounts (but, in the case of a Guarantor, only if such amount could not be paid by the Issuer or another Guarantor who can pay such amount without the obligation to pay Additional Amounts), in each case, as a result of:
(a) a change in or an amendment to the laws (including any regulations or rulings promulgated thereunder) of any Relevant Taxing Jurisdiction; or
(b) any change in or amendment to any official published position regarding the application, administration or interpretation of such laws (including any regulations or rulings promulgated thereunder and including the decision of any court, governmental agency or tribunal), which change or amendment is publicly announced or becomes effective on or after the date of the Indenture and the Payor cannot avoid such obligation by taking reasonable measures available to it (including making payment through a Paying Agent located in another jurisdiction), provided that such Payor will not be required to take any measures that would result in the imposition on it of any material legal or regulatory burden or the incurrence by it of any material additional costs, or would otherwise result in any material adverse consequences. The foregoing provisions will apply mutatis mutandis to the laws and official positions of any jurisdiction in which any successor permitted under ‘‘—Certain Covenants— Merger and consolidation’’ is incorporated, organized or otherwise resident for tax purposes or any political subdivision or taxing authority or agency thereof or therein.
Prior to the giving of any notice of redemption described in the preceding paragraph, the Issuer will deliver to the Trustee an Officer’s Certificate to the effect that the Payor cannot avoid its obligation to pay Additional Amounts by taking reasonable measures available to it. The Issuer will also deliver to the Trustee an opinion of independent legal counsel of recognized standing to the effect that the Payor would be obligated to pay Additional Amounts as a result of a change or amendment described above. Absent manifest error, the Trustee will accept such opinion as sufficient evidence of the Payor’s obligations, to pay such Additional Amounts, and it will be conclusive and binding on the Holders.
Change of Control
On and from the Escrow Release Date, upon the occurrence of a Change of Control, each Holder will have the right to require the Issuer to repurchase all or any part (equal to £100,000 or integral multiples of £1,000 in excess thereof; provided that Notes of £100,000 or less may be redeemed in whole and not in part) of such Holder’s Notes at a purchase price in cash equal to 101% of the principal amount thereof on the date of repurchase, plus accrued and unpaid interest, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that the Issuer will not be obligated to repurchase Notes pursuant to this covenant in the event that all of the Notes have been called for redemption as described under ‘‘—Optional Redemption’’.
202 Unless the Issuer has exercised its right to redeem all the Notes as described under ‘‘—Optional redemption’’, the Issuer will, not later than 30 days following the date the Issuer obtains actual knowledge of any Change of Control having occurred, deliver, or cause to be delivered a notice (a ‘‘Change of Control Offer’’) to each Holder with a copy to the Principal Paying Agent and the Trustee stating: (1) that a Change of Control has occurred and that such Holder has the right to require the Issuer to purchase such Holder’s Notes at a purchase price in cash equal to 101% of the principal amount thereof on the date of purchase, plus accrued and unpaid interest, if any, to the date of purchase (the ‘‘Change of Control Payment’’) (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); (2) the purchase date (which will be no earlier than 10 days nor later than 60 days from the date such notice is given) (the ‘‘Change of Control Payment Date’’); and (3) the instructions determined by the Issuer, consistent with the Indenture, that a Holder must follow in order to have its Notes purchased.
On or prior to the Change of Control Payment Date, the Company will, pursuant to the terms of the Notes Proceeds Loan Agreement, repay the Notes Proceeds Loan to the extent necessary to finance the repurchase by the Issuer of any Notes tendered pursuant to the Change of Control Offer.
On the Change of Control Payment Date, the Issuer will, to the extent lawful:
(a) accept for payment all Notes or portions of Notes properly tendered pursuant to the Change of Control Offer;
(b) deposit with, or to the order of, the Principal Paying Agent or tender agent for such Change of Control Offer, as applicable, an amount equal to the Change of Control Payment in respect of all Notes or portions of Notes properly tendered;
(c) deliver or cause to be delivered to the Principal Paying Agent for cancelation the Notes properly accepted; and
(d) deliver or cause to be delivered to the Trustee an Officer’s Certificate stating the aggregate principal amount of Notes or portions of Notes being purchased by the Issuer.
The Principal Paying Agent or tender agent for such Change of Control Offer, as applicable, will promptly deliver or cause to be delivered to each holder of Notes properly tendered the Change of Control Payment for such Notes, and the Trustee (or an authentication agent approved by it) will, in the case of Definitive Registered Notes, promptly authenticate and mail to each holder a new Note equal in principal amount to any unpurchased portion of the Notes surrendered, if any. The Issuer will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date.
The Issuer will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Issuer and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. Notwithstanding anything to the contrary, a Change of Control Offer may be made in advance of a Change of Control, conditioned upon the consummation of a Change of Control, if a definitive agreement is in place for the Change of Control at the time the Change of Control Offer is made.
The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any other applicable securities laws and regulations to the extent those laws and regulations are applicable in connection with the repurchase of the Notes as a result of a Change of Control. To the extent that the provisions of any applicable laws or regulations, including securities laws, conflict with the provisions of this covenant, the Issuer will comply with the applicable laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof.
203 Subject to the limitations discussed below, the Company and the Issuer could, in the future, enter into certain transactions, including acquisitions, refinancings or recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of Indebtedness outstanding at such time or otherwise affect the Company or the Issuer’s capital structure or credit ratings. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders to require that the Issuer repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction.
The occurrence of certain events that constitute a Change of Control under the Notes would also be a change of control under the Revolving Credit Facility Agreement, which would entitle a lender under the Revolving Credit Facility Agreement to require the repayment of such lender’s commitments. Agreements governing future Indebtedness of the Company or its Subsidiaries may contain prohibitions of certain events that would constitute a Change of Control or require such Indebtedness to be repurchased or repaid upon a Change of Control. Agreements governing future Indebtedness of the Company or its Subsidiaries may prohibit the Issuer from repurchasing the Notes upon a Change of Control or restrict the ability of the Company or its Subsidiaries to provide funds to the Issuer necessary to enable it to purchase the Notes. Moreover, the exercise by the Holders of their right to require the Issuer to purchase the Notes could cause a default under, or require repayment of Indebtedness under, such agreements, even if the Change of Control itself does not, due to the financial effect of such purchase on the Company and/or its Subsidiaries.
The Issuer’s ability to pay cash to the Holders to repurchase the Notes following the occurrence of a Change of Control may be limited by the Issuer’s then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases of the Notes.
As described above under ‘‘—Optional redemption,’’ the Issuer also has the right to redeem the Notes at specified prices, in whole or in part, upon a Change of Control or otherwise. The provisions under the Indenture relating to the Issuer’s obligation to make an offer to purchase the Notes as a result of a Change of Control may be waived or modified with the written consent of the Holders of a majority in outstanding aggregate principal amount of the Notes.
The definition of Change of Control includes a phrase relating to the sale or other transfer of ‘‘all or substantially all’’ of the assets of the Company and its Restricted Subsidiaries. Although there is a developing body of caselaw interpreting the phrase ‘‘substantially all,’’ there is no precise definition of the phrase under applicable law. Accordingly, in certain circumstances, there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of ‘‘all or substantially all’’ of the assets of the Company and its Restricted Subsidiaries, and therefore it may be unclear as to whether a Change of Control has occurred and whether the Holders have the right to require the Issuer to repurchase such Notes.
If and for so long as the Notes are listed on the Official List of the Irish Stock Exchange and admitted for trading on the Global Exchange Market and to the extent required by the Irish Stock Exchange, the Issuer will publish a notice of any Change of Control Offer in a newspaper having a general circulation in Ireland (which is expected to be The Irish Times) or, to the extent and in the manner permitted by the Irish Stock Exchange, post such notice on the official website of the Irish Stock Exchange (www.ise.ie).
Certain covenants
Limitation on Indebtedness (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, Incur any Indebtedness (including Acquired Indebtedness); provided, however, that the Issuer, the Company or any other Guarantor may Incur Indebtedness (including Acquired
204 Indebtedness) if on the date of the Incurrence of such Indebtedness, on a pro forma basis, the Consolidated Fixed Charge Coverage Ratio would be at least 2.0 to 1.
(b) Notwithstanding the foregoing paragraph (a), the Company and Restricted Subsidiaries may Incur the following Indebtedness:
(i) On and from the Escrow Release Date, Indebtedness Incurred pursuant to any Credit Facility in an aggregate principal amount at any time outstanding not exceeding £25.0 million, plus, in the event of any refinancing of any such Indebtedness or any portion thereof, the aggregate amount of fees, underwriting discounts, premiums and other costs and expenses incurred in connection with such refinancing;
(ii) Indebtedness (A) of any Restricted Subsidiary to the Company or (B) of the Company or any Restricted Subsidiary to any Restricted Subsidiary; provided, that (a) any such Indebtedness owed by the Issuer or a Guarantor to a Restricted Subsidiary that is not the Issuer or a Guarantor shall, to the extent legally permitted, be subordinated in right of payment to, in the case of Indebtedness of the Issuer, the Notes or, in the case of Indebtedness of a Guarantor, its Note Guarantee and (b) any subsequent issuance or transfer of any Capital Stock of such Restricted Subsidiary to which such Indebtedness is owed, or other event, that results in such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any other subsequent transfer of such Indebtedness (except to the Company or a Restricted Subsidiary) will be deemed, in each case, an Incurrence of such Indebtedness by the issuer thereof not permitted by this clause (ii);
(iii) Indebtedness represented by the Notes (other than any Additional Notes) or Note Guarantees and any Indebtedness (other than the Indebtedness described in clauses (i) or (iii) of this paragraph (b) outstanding on the Issue Date after giving effect to the Transactions and the use of proceeds of the Notes and any Refinancing Indebtedness Incurred in respect of any Indebtedness described in paragraph (a) or clause (iii) or (vii) of this paragraph (b);
(iv) Indebtedness represented by Purchase Money Obligations, Capitalized Lease Obligations, mortgage financings, and in each case any refinancing with respect thereto, in an aggregate principal amount, including all indebtedness incurred to renew, refund, refinance, replace, defease or discharge any Indebtedness incurred pursuant to this clause (iv), not to exceed at any time the greater of (x) £5.0 million, and (y) 0.75% of Total Assets;
(v) guarantees by the Company or any Restricted Subsidiary of Indebtedness or any other obligation or liability of the Company or any Restricted Subsidiary (other than any Indebtedness Incurred by the Company or such Restricted Subsidiary, as the case may be, in violation of this covenant), including any counter-indemnity obligations or guarantees of the Company or any Restricted Subsidiary in respect of pension fund obligations, guarantees, bonds, letters of credit or similar instruments issued by a bank, financial institution, insurer, insurance company or other entity providing such instruments, provided that if the Indebtedness being guaranteed is subordinated to the Notes or a Note Guarantee, then the guarantee must be subordinated to the Notes or the Note Guarantee, as applicable, in each case to the same extent as the Indebtedness guaranteed;
(vi) Indebtedness of the Company or any Restricted Subsidiary (A) arising from the honouring of a check, draft or similar instrument of such Person drawn against insufficient funds, provided that such Indebtedness is extinguished within 30 Business Days of its Incurrence, (B) incurred to a trade creditor or under any indemnity, guarantee, bond or letter of credit issued in respect of such Indebtedness to a trade creditor or in respect of customer deposits and advance payments received in the ordinary course of business from customers for goods and services purchased in the
205 ordinary course of business, whether paid directly by the customer or by a credit card company, (C) owed on a short-term basis of no longer than five days to banks and other financial institutions incurred in the ordinary course of business of the Company and its Restricted Subsidiaries with such banks or financial institutions that arises in connection with ordinary banking arrangements to manage cash balances of the Company and its Restricted Subsidiaries, (D) Incurred in connection with credit card processing arrangements entered into in the ordinary course of business, (E) netting, overdraft protection and other similar arrangements arising under standard business terms of any bank at which the Company or any Restricted Subsidiary maintains an overdraft, cash pooling or other similar facility or arrangement, or (F) consisting of guarantees, indemnities, obligations in respect of earnouts or other purchase price adjustments, or similar obligations, Incurred in connection with the acquisition or disposition of any business, assets or Person;
(vii) Indebtedness of any Person: (a) existing at the time such Person becomes a Restricted Subsidiary; (b) assumed in connection with the acquisition of assets from such Person or any Affiliate thereof; or (c) existing at the time such Person merges, consolidates, amalgamates or is otherwise combined with the Company or any Restricted Subsidiary, in each case other than Indebtedness incurred to provide the funds used to acquire such Person or assets or the consideration for such merger, consolidation, amalgamation or other combination, provided that on the date of such acquisition, merger, consolidation, amalgamation or other combination after giving effect thereto, the Company could Incur at least £1.00 of additional Indebtedness pursuant to paragraph (a) above or the Consolidated Fixed Charge Coverage Ratio would not be less than it was immediately prior to giving effect to such acquisition, merger, consolidation, amalgamation or other combination;
(viii)Indebtedness of the Company or any Restricted Subsidiary in respect of (A) Hedging Obligations, entered into for bona fide hedging purposes and not for speculative purposes, (B) Management Guarantees, (C) the financing of insurance premiums in the ordinary course of business, or (D) take-or-pay obligations under supply arrangements incurred in the ordinary course of business;
(ix) the issuance by any Restricted Subsidiary to the Company or to any of its Restricted Subsidiaries of Preferred Stock or Disqualified Stock; provided that:
(A) any subsequent issuance or transfer of Equity Interests that results in any such Preferred Stock or Disqualified Stock being held by a Person other than the Company or a Restricted Subsidiary; and
(B) any sale or other transfer of any such Preferred Stock to a Person that is not either the Company or a Restricted Subsidiary,
will be deemed, in each case, to constitute an issuance of such Preferred Stock or Disqualified Stock by such Restricted Subsidiary that was not permitted by this clause (ix);
(x) Indebtedness of the Issuer or a Restricted Subsidiary in respect of letters of credit, surety, performance or appeal bonds, completion guarantees, bank guarantees, judgment, advance payment, customs, VAT or other tax guarantees or similar instruments issued in the ordinary course of business of such Person and not in connection with the borrowing of money, including letters of credit or similar instruments in respect of import duty, self-insurance and workers compensation obligations; provided, however, that upon the drawing of such letters of credit or other instrument, such obligations are reimbursed within 30 days following such drawing;
206 (xi) Indebtedness of the Company or any Restricted Subsidiary in an aggregate principal amount at any time outstanding not exceeding an amount equal to the greater of (x) £10.0 million, and (y) 1.5% of Total Assets; and
(xii) prior to the Escrow Release Date, Indebtedness incurred under the Existing Facility Agreement and the Existing Notes, in each case, as agreements governing such Indebtedness are in effect as of the Issue Date.
(c) For purposes of determining compliance with, and the outstanding principal amount of any particular Indebtedness Incurred pursuant to and in compliance with, paragraphs (a) and (b) of this covenant, (i) any other obligation of the obligor on such Indebtedness (or of any other Person who could have Incurred such Indebtedness under this covenant) arising under any guarantee, Lien or letter of credit, bankers’ acceptance or other similar instrument or obligation supporting such Indebtedness will be disregarded to the extent that such guarantee, Lien or letter of credit, bankers’ acceptance or other similar instrument or obligation secures the principal amount of such Indebtedness; (ii) in the event that Indebtedness meets the criteria of more than one of the types of Indebtedness described in paragraphs (a) or (b) above, the Company, in its sole discretion, will classify, and, subject to the last sentence of this paragraph (c), may from time to time reclassify, such item of Indebtedness and may include the amount and type of such Indebtedness in one or more of such clauses of paragraph (b) (including in part under one such clause and in part under another such clause) or paragraph (a); and (iii) the amount of Indebtedness issued at a price that is less than the principal amount thereof will be equal to the amount of the liability in respect thereof determined in accordance with IFRS. Any Indebtedness outstanding on the Escrow Release Date under the Revolving Credit Facility Agreement will be classified as Incurred on such date under paragraph (b)(i) of this covenant and may not be reclassified.
(d) For the purposes of determining compliance with any pound sterling-denominated restriction on the Incurrence of Indebtedness denominated in a currency other than pound sterling, the pound sterling-equivalent principal amount of such Indebtedness Incurred pursuant thereto will be calculated based on the relevant currency exchange rate in effect on the date that such Indebtedness was Incurred, in the case of term Indebtedness, or first committed, in the case of revolving credit Indebtedness; provided that (x) the pound sterling-equivalent principal amount of any such Indebtedness outstanding on the Issue Date will be calculated based on the relevant currency exchange rate in effect on the Issue Date, (y) if such Indebtedness is Incurred to refinance other Indebtedness denominated in a currency other than pound sterling, and such refinancing would cause the applicable pound sterling-denominated restriction to be exceeded if calculated at the relevant currency exchange rate in effect on the date of such refinancing, such pound sterling- denominated restriction will be deemed not to have been exceeded so long as the principal amount of such refinancing Indebtedness does not exceed the principal amount of such Indebtedness being refinanced, and (z) the pound sterling-equivalent principal amount of Indebtedness denominated in a currency other than pound sterling and Incurred pursuant to the Revolving Credit Facility Agreement will be calculated based on the relevant currency exchange rate in effect on, at the Company’s option, (i) the Issue Date, (ii) any date on which any of the respective commitments under the Revolving Credit Facility Agreement will be reallocated between or among facilities thereunder, or on which such rate is otherwise calculated for any purpose thereunder, or (iii) the date of such Incurrence. The principal amount of any Indebtedness Incurred to refinance other Indebtedness, if Incurred in a different currency from the Indebtedness being refinanced, will be calculated based on the currency exchange rate applicable to the currencies in which such respective Indebtedness is denominated that is in effect on the date of such refinancing.
207 Limitation on Restricted Payments (a) The Company will not, and will not permit any Restricted Subsidiary, directly or indirectly, to:
(i) declare or pay any dividend or make any distribution on or in respect of the Company’s or any of its Restricted Subsidiaries’ Equity Interests (including any such payment in connection with any merger or consolidation involving the Company or any of its Restricted Subsidiaries) except (A) dividends or distributions payable solely in its Equity Interests (other than Disqualified Stock) and (B) dividends or distributions payable to the Company or any Restricted Subsidiary (and, in the case of any such Restricted Subsidiary making such dividend or distribution, to other holders of its Equity Interests on no more than a pro rata basis);
(ii) purchase, redeem, retire or otherwise acquire for value any Equity Interests of the Company held by Persons other than the Company or a Restricted Subsidiary;
(iii) make any payment on or with respect to, or purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment, any Subordinated Obligations (other than (A) a payment of interest at the final maturity thereof, (B) a purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of any Subordinated Obligations in anticipation of satisfying a sinking fund obligation, principal instalment or final maturity, in each case due within one year of the date of such acquisition or retirement and (C) any Subordinated Obligations owed to the Company or any Restricted Subsidiary); or
(iv) make any Investment (other than a Permitted Investment) in any Person,
(any such payments and other actions set forth in these clauses (i) through (iv) above being herein referred to as a ‘‘Restricted Payment’’), unless, at the time the Company or such Restricted Subsidiary makes such Restricted Payment and after giving effect thereto:
(A) no Default or Event of Default has occurred and is continuing or would occur as a consequence of such Restricted Payment;
(B) the Company could at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four fiscal quarter period, Incur at least an additional £1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness;’’ and
(C) the aggregate amount of such Restricted Payment and all other Restricted Payments (the amount so expended, if other than in cash, to be as determined in good faith by the Board of Directors of the Company) declared or made subsequent to the Issue Date (and not returned or rescinded) (including Permitted Payments permitted below by clauses (iv), (v), (x) and (xi) of paragraph (b) of this covenant but excluding all other Restricted Payments permitted by paragraph (b) of this covenant) and then outstanding would not exceed, without duplication, the sum of:
(1) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) beginning on the first day of the fiscal quarter of the Company in which the Issue Date occurs to the end of the most recent fiscal quarter of the Company ending prior to the date of such Restricted Payment for which consolidated financial statements of the Company are available (or, in case such Consolidated Net Income will be a negative number, 100% of such negative number);
208 (2) the aggregate Net Cash Proceeds and the Fair Market Value of property or assets received (x) by the Company as capital contributions to the Company after the Issue Date or from the issuance or sale (other than to a Restricted Subsidiary) of its Equity Interests (other than Disqualified Stock and other than as received pursuant to the Placing and the Rights Offering) after the Issue Date, or (y) by the Company or any Restricted Subsidiary from the issuance and sale (other than to the Company or a Restricted Subsidiary) by the Company or any Restricted Subsidiary after the Issue Date of Indebtedness that has been converted into or exchanged for Capital Stock of the Company (other than Disqualified Stock), plus the amount of any cash and the Fair Market Value of any property or assets, received by the Company or any Restricted Subsidiary upon such conversion or exchange;
(3) the aggregate amount equal to (x) dividends, distributions, interest payments, return of capital, repayments of Investments or other transfers of assets to the Company or any Restricted Subsidiary from any Unrestricted Subsidiary, to the extent that such transfers of assets were not otherwise included in the Consolidated Net Income of the Company for such period, or (y) the net reduction in Investments in Unrestricted Subsidiaries resulting from the redesignation of any Unrestricted Subsidiary as a Restricted Subsidiary (valued in each case as provided in the definition of ‘‘Investment’’), not to exceed in the case of any such Unrestricted Subsidiary the aggregate amount of Investments (other than Permitted Investments) made by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary after the Issue Date; and
(4) in the case of any disposition or repayment of any Investment constituting a Restricted Payment (without duplication of any amount deducted in calculating the amount of Investments at any time outstanding included in the amount of Restricted Payments), an amount (to the extent not included in Consolidated Net Income) in the aggregate equal to the lesser of the return of capital, repayment or other proceeds with respect to all such Investments received by the Company or a Restricted Subsidiary and the initial amount of all such Investments constituting Restricted Payments;
provided that the Company will not be permitted to make any Restricted Payment of the type described in clause (i) or (ii) of this paragraph (a) unless on the date any such Restricted Payment is made the Consolidated Leverage Ratio for the Company and its Restricted Subsidiaries does not exceed 2.25 to 1.00 on a pro forma basis after giving effect thereto.
(b) The provisions of paragraph (a) of this covenant do not prohibit any of the following (each, a ‘‘Permitted Payment’’):
(i) any purchase, redemption, repurchase, defeasance or other acquisition or retirement of Equity Interests of the Company or Subordinated Obligations made by exchange (including any such exchange pursuant to the exercise of a conversion right or privilege in connection with which cash is paid in lieu of the issuance of fractional shares) for, or out of the proceeds of the substantially concurrent issuance or sale of, Equity Interests of the Company (other than Disqualified Stock and other than Equity Interests issued or sold to a Subsidiary) or a substantially concurrent capital contribution to the Company, provided that the Net Cash Proceeds from such issuance, sale or capital contribution will be excluded in subsequent calculations under clause (a)(iv)(C)(2) of this covenant and will not be considered to be proceeds from an Equity Offering for purposes of the ‘‘Optional Redemption’’ provisions of the Indenture;
(ii) any purchase, redemption, repurchase, defeasance or other acquisition or retirement of Subordinated Obligations made by exchange for, or out of the proceeds of the issuance
209 or sale of, Refinancing Indebtedness Incurred in compliance with the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’;
(iii) any purchase, redemption, repurchase, defeasance or other acquisition or retirement of Subordinated Obligations (A) with Excess Proceeds remaining following an Excess Proceeds Offer consummated in accordance with the covenant described under ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock,’’ or (B) at a price no greater than 101% following the occurrence of a Change of Control (pursuant to provisions in such Subordinated Obligations similar to those described under ‘‘—Change of Control’’), but only if the Issuer will have complied with the provisions described under ‘‘—Change of Control’’ and, if required, purchased all Notes tendered pursuant to the offer to repurchase required thereby, prior to purchasing or repaying such Subordinated Obligations or (C) constituting Acquired Indebtedness;
(iv) any dividend paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with the provisions of the Indenture;
(v) the purchase, repurchase, redemption, defeasance or other acquisition, cancelation or retirement for value of Equity Interests of the Company held by, or for the purpose of granting Equity Interests to, any current or former officer, director, consultant or employee of the Company or any Restricted Subsidiary pursuant to, or in connection with, any equity subscription agreement, stock option plan, shareholders’ agreement, management or employee benefit or incentive plan or any similar compensatory arrangement (including making Equity Interests available under any such plans or arrangements, including through the repurchase in the market of such Equity Interests); provided that such purchases, repurchases, redemptions, defeasances, acquisitions, cancellations or retirements do not exceed (a) £5.4 million in respect of funding the Company’s Employee Share Trust to settle outstanding awards, as described further under ‘‘Use of Proceeds’’ plus (b) an amount equal to £2.0 million per annum (with unused amounts being carried over into the succeeding year) plus (c) the Net Cash Proceeds received by the Company or its Restricted Subsidiaries since the Issue Date (including through receipt of proceeds from the issuance or sale of its Equity Interests to the Company) from, or as a contribution to the equity (in each case under this clause (v), other than through the issuance of Disqualified Stock) of the Company from, the issuance or sale to officers, directors, consultants or employees of the Company or any Restricted Subsidiary of Equity Interests, to the extent such Net Cash Proceeds are not included in any calculation under clause (a)(iv)(C)(2) or clause (b)(i) of this covenant;
(vi) payments by the Company to holders of Capital Stock of the Company in lieu of issuance of fractional shares of such Capital Stock;
(vii) any Restricted Payment made pursuant to or in connection with the Transactions;
(viii)the declaration and payment of dividends (a) to holders of any class or series of Disqualified Stock, or of any Preferred Stock of a Restricted Subsidiary, Incurred in accordance with the terms of the covenant described under ‘‘—Certain Covenants— Limitation on Indebtedness’’ or (b) required under the terms of any Preferred Stock of the Company outstanding on the Issue Date;
(ix) the repurchase of Equity Interests deemed to occur upon the exercise of stock options or warrants to the extent such equity interests represent a portion of the exercise price of those stock options or warrants;
(x) so long as no Default or Event of Default has occurred and is continuing (or would result therefrom), Restricted Payments in an aggregate amount outstanding at any
210 time not to exceed (net of repayments of any such loans or advances) £10.0 million, provided that the Company will not be permitted to make any Restricted Payment of the type described in clause (i) or (ii) of paragraph (a) of this covenant unless on the date any such Restricted Payment is made the Consolidated Leverage Ratio for the Company and its Restricted Subsidiaries does not exceed 2.25 to 1.00 on a pro forma basis after giving effect thereto; and
(xi) so long as no Default or Event of Default has occurred and is continuing (or would result therefrom), any Restricted Payments; provided that, on the date of any such Restricted Payment, the Consolidated Leverage Ratio for the Company and its Restricted Subsidiaries does not exceed 1.0 to 1.0 on a pro forma basis after giving effect thereto.
The amount of all Restricted Payments (other than cash) shall be the fair market value on the date of such Restricted Payment of the asset(s) or securities proposed to be paid, transferred or issued by the Company or such Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment. The fair market value of any cash Restricted Payment shall be its face amount, and the fair market value of any non-cash Restricted Payment shall be determined conclusively by the Board of Directors of the Company acting in good faith. The Company, in its sole discretion, may classify any Investment or other Restricted Payment as being made in part under one of the provisions of this covenant (or, in the case of any Investment, the clauses of Permitted Investments) and in part under one or more other such provisions (or, as applicable, clauses).
Limitation on restrictions on distributions from Restricted Subsidiaries The Company will not, and will not permit any Restricted Subsidiary to, create or otherwise cause to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness or other obligations owed to the Company, (ii) make any loans or advances to the Company or any Restricted Subsidiary or (iii) sell or transfer any of its property or assets to the Company (provided that dividend or liquidation priority between classes of Capital Stock, or subordination of any obligation (including the application of any remedy bars thereto) to any other obligation, will not be deemed to constitute such an encumbrance or restriction), except any encumbrance or restriction:
(a) pursuant to (i) agreements governing the Existing Facility Agreement and the Existing Notes, as in effect on the Issue Date, (ii) the Revolving Credit Facility Agreement, or (iii) any other agreement or instrument governing Indebtedness existing or entered into on or before the Issue Date (including the Notes, the Note Guarantees, the Indenture, the Intercreditor Agreement, the Security Document and the Escrow Agreement), as each of the agreements or instruments referred to in clauses (ii) and (iii) of this paragraph (a) are in effect as of Escrow Release Date;
(b) pursuant to any agreement or instrument of a Person, or relating to Indebtedness or Capital Stock of a Person, which Person is acquired by or merged or consolidated with or into the Company or any Restricted Subsidiary or was designated as a Restricted Subsidiary, or which agreement or instrument is assumed by the Company or any Restricted Subsidiary in connection with an acquisition of assets from such Person, as in effect at the time of such acquisition, merger or consolidation (except to the extent that such Indebtedness was incurred to finance, or otherwise in connection with or in contemplation of, such acquisition, merger or consolidation); provided that for purposes of this clause (b), if a Person other than the Company is the Successor Company with respect thereto, any Subsidiary thereof or agreement or instrument of such Person or any such Subsidiary will be deemed acquired or assumed, as the case may be, by the Company or a Restricted Subsidiary, as the case may be, when such Person becomes such Successor Company;
211 (c) pursuant to an agreement or instrument (a ‘‘Refinancing Agreement’’) effecting a refinancing of Indebtedness Incurred pursuant to, or that otherwise extends, renews, refunds, refinances or replaces, an agreement or instrument referred to in clause (a)(ii) or (iii) or (b) of this covenant or this clause (c) (an ‘‘Initial Agreement’’) or contained in any amendment, supplement or other modification to an Initial Agreement (an ‘‘Amendment’’); provided, however, that the encumbrances and restrictions contained in any such Refinancing Agreement or Amendment taken as a whole are not materially less favourable to the Holders taken as a whole than encumbrances and restrictions contained in the Initial Agreement or Initial Agreements to which such Refinancing Agreement or Amendment relates or will not adversely effect in any material respect, the Issuer’s ability to make principal or interest payments on the Notes as they become due (in each case, as determined in good faith by the Company);
(d) (i) that restricts in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease, license or similar contract, or the assignment or transfer of any lease, license or other contract, (ii) by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by the Indenture, (iii) contained in mortgages, pledges or other security agreements securing Indebtedness of the Company or a Restricted Subsidiary to the extent restricting the transfer of the property or assets subject thereto, (iv) pursuant to customary provisions restricting dispositions of real property interests set forth in any reciprocal easement agreements of the Company or any Restricted Subsidiary, (v) pursuant to Purchase Money Obligations, Capitalized Lease Obligations or mortgage financings that impose encumbrances or restrictions on the property or assets so acquired, (vi) on cash or other deposits or net worth imposed by customers or suppliers or required by insurance, surety or bonding companies, in each case, under agreements entered into in the ordinary course of business, (vii) pursuant to customary provisions contained in agreements and instruments entered into in the ordinary course of business (including, but not limited to, any lease, sale and leaseback, asset sale, stock sale, joint venture and other similar agreements entered into in the ordinary course of business), (viii) that arises or is agreed to in the ordinary course of business and does not detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or such Restricted Subsidiary or (ix) pursuant to Hedging Obligations;
(e) with respect to a Restricted Subsidiary (or any of its property or assets) imposed pursuant to an agreement entered into for the direct or indirect sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary (or the property or assets that are subject to such restriction) pending the closing of such sale or disposition;
(f) by reason of any applicable law, rule, regulation (including, without limitation, any exchange controls) or the terms of any license, authorization, concession, permit or order required by any regulatory authority having jurisdiction over the Company or any Restricted Subsidiary or any of their businesses;
(g) pursuant to an agreement or instrument (i) relating to any Indebtedness permitted to be incurred subsequent to the Issue Date pursuant to the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’ (A) if the encumbrances and restrictions contained in any such agreement or instrument taken as a whole are not materially less favourable to the Holders than the encumbrances and restrictions contained in any Initial Agreement (as determined in good faith by the Company), or (B) if such encumbrances and restrictions taken as a whole are not materially more disadvantageous to the Holders than is customary in comparable financings (as determined in good faith by the Company), (ii) relating to any working capital Indebtedness or any sale of receivables, or (iii) relating to any loan or advance by the Company to a Restricted Subsidiary subsequent to the Issue Date, including of proceeds of any Capital Stock or Indebtedness issued or Incurred by the
212 Company; provided that, in the case of this clause (iii), the encumbrances and restrictions contained in any such agreement or instrument taken as a whole are not materially less favourable to the Holders than the encumbrances and restrictions contained in the Revolving Credit Facility Agreement (as determined in good faith by the Company); or
(h) any encumbrance or restriction existing by reason of any Lien permitted under ‘‘—Limitation on Liens’’ that limit the right of the debtor to dispose of the assets subject to such Liens.
Limitation on sales of Assets and Subsidiary Stock (a) The Company will not, and will not permit any Restricted Subsidiary to, make any Asset Disposition unless:
(i) the Company or the Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Disposition at least equal to the fair market value of the Equity Interests and assets subject to such Asset Disposition, as such fair market value may be determined by the Board of Directors of the Company or the relevant Restricted Subsidiary;
(ii) in any such Asset Disposition or series of related Asset Dispositions, at least 75% of the consideration therefor received by the Company or such Restricted Subsidiary is in the form of cash; and
(iii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or any Restricted Subsidiary, as the case may be), within 365 days after the date of receipt of such Net Available Cash, for one or more of the following purposes:
(A) to repay (x) secured Indebtedness (other than Indebtedness secured on a basis junior to the Notes), (y) Indebtedness of a Restricted Subsidiary that is not a Guarantor or (z) Indebtedness incurred under Credit Facilities that rank pari passu with or senior to the Notes or the Note Guarantees (in each case other than Indebtedness owed to the Company, the Issuer or a Restricted Subsidiary) and, in each case, to retire such Indebtedness and to correspondingly permanently reduce commitments (if any) with respect thereto;
(B) to make a capital expenditure or invest in or commit to invest in Additional Assets (including by means of an investment in Additional Assets by a Restricted Subsidiary with an amount equal to Net Available Cash received by the Company or another Restricted Subsidiary);
(C) to purchase the Notes pursuant to an offer to all holders of Notes at a purchase price equal to at least 100% of the principal amount thereof, plus accrued and unpaid interest and Additional Amounts, if any, to (but not including) the date of purchase;
(D) to enter into a binding commitment to apply the Net Available Cash pursuant to clause (B) of this paragraph; provided that such binding commitment shall be treated as a permitted application of the Net Available Cash from the date of such commitment until the earlier of (x) the date on which such acquisition or expenditure is consummated, and (y) the 180th day following the expiration of the aforementioned 365 day period, or
(E) to make any required contribution or other required payment to a Pension Scheme in an aggregate amount not to exceed 25% of the Net Available Cash from such Asset Disposition,
213 provided, however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (a)(iii)(C) above, the Company or such Restricted Subsidiary will retire such Indebtedness and will cause the related Indebtedness (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. Pending the final application of any such Net Available Cash in accordance with clause (iii) above, the Company and its Restricted Subsidiaries may temporarily reduce Indebtedness or otherwise invest such Net Available Cash in any manner not prohibited by the Indenture.
(b) Any Net Available Cash from Asset Dispositions that is not applied or invested or committed to be applied or invested as provided in the preceding paragraph will be deemed to constitute ‘‘Excess Proceeds’’ under the Indenture. When the balance of such Excess Proceeds exceeds £20 million, within 20 Business Days thereof, the Issuer will make an offer (an ‘‘Excess Proceeds Offer’’) to all Holders and may make an offer to all other holders of other Indebtedness that is pari passu with the Notes or any Note Guarantees to purchase, prepay or redeem the maximum principal amount of Notes and such other pari passu Indebtedness (plus all accrued interest on the Indebtedness and the amount of all fees and expenses, including premiums, Incurred in connection therewith) that may be purchased, prepaid or redeemed out of the Excess Proceeds. The offer price for the Notes in any Excess Proceeds Offer shall be equal to 100% of the principal amount thereof, plus accrued and unpaid interest and Additional Amounts, if any, to (but not including) the date of purchase, prepayment or redemption, subject to the rights of Holders on the relevant record date to receive interest due on the relevant interest payment date, and will be payable in cash. Upon completion of each Excess Proceeds Offer, the amount of Excess Proceeds will be reset at zero.
(c) For the purposes of clause (ii) of paragraph (a) above, the following are deemed to be cash: (i) Cash Equivalents, (ii) the assumption of Indebtedness of the Company (other than Disqualified Stock of the Company) or any Restricted Subsidiary by any other Person (other than contingent liabilities), and the release of the Company or such Restricted Subsidiary from, or its indemnification against, all liability on payment of the principal amount of such Indebtedness in connection with such Asset Disposition, (iii) Indebtedness of any Restricted Subsidiary that is no longer a Restricted Subsidiary as a result of such Asset Disposition, to the extent that the Company and each other Restricted Subsidiary are released from any guarantee of payment of the principal amount of such Indebtedness in connection with such Asset Disposition, (iv) securities, notes or other obligations received by the Company or any Restricted Subsidiary from the transferee that are converted by the Company or such Restricted Subsidiary into cash within 180 days, (v) consideration consisting of Indebtedness of the Company or any Restricted Subsidiary received from Persons who are not the Company or any Restricted Subsidiary, (vi) Additional Assets and (vii) any Designated Noncash Consideration received by the Company or any of its Restricted Subsidiaries in an Asset Disposition having an aggregate Fair Market Value, taken together with all other Designated Noncash Consideration received pursuant to this clause, not to exceed an aggregate amount at any time outstanding equal to £5.0 million (with the Fair Market Value of each item of Designated Noncash Consideration being measured at the time received and without giving effect to subsequent changes in value).
(d) The Issuer will, not later than 45 days after the Issuer becomes obligated to make an Excess Proceeds Offer pursuant to this covenant, deliver or cause to be delivered a notice to each Holder stating that (i) an Asset Disposition that requires the repurchase of a portion of the Notes has occurred and that such Holder has the right (subject to the prorating described below) to require the Issuer to repurchase a portion of such Holder’s Notes in cash equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase; (ii) the repayment date (which will be no earlier than 10 days nor later than 60 days from the date such notice is mailed); (iii) the instructions determined by the Issuer,
214 consistent with this covenant, that a Holder must follow in order to have its Notes repurchased; and (iv) the amount of the Excess Proceeds Offer. If, upon the expiration of the period for which the Excess Proceeds Offer remains open, the aggregate principal amount of Notes and such other pari passu Indebtedness surrendered by Holders exceeds the amount of the Excess Proceeds Offer, the Notes to be purchased in the Excess Proceeds Offer will be selected accordance with the procedures of Euroclear and/or Clearstream, as applicable, unless otherwise required by law or stock exchange or depositary requirements, or if the Notes are not held through Euroclear or Clearstream, or Euroclear or Clearstream prescribes no method of selection, on a pro rata basis.
The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any other applicable securities laws and regulations to the extent those laws and regulations are applicable in connection with the repurchase of the Notes. To the extent that the provision of any applicable laws or regulations, including securities laws, conflict with provisions of this covenant, the Issuer will comply with the applicable laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof.
Limitation on transactions with Affiliates (a) The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into or conduct any transaction or series of related transactions involving an aggregate value in excess of £2.0 million (including the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an ‘‘Affiliate Transaction’’) unless (i) the terms of such Affiliate Transaction are not materially less favourable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained at the time in a comparable transaction with a Person who is not such an Affiliate, (ii) if such Affiliate Transaction involves aggregate consideration in excess of £10.0 million, the Company delivers to the Trustee a resolution of the Board of Directors of the Company set forth in an Officer’s Certificate certifying that such Affiliate Transaction complies with this covenant and (iii) if such Affiliate Transaction involves aggregate consideration in excess of £20.0 million, the Company delivers to the Trustee a fairness opinion provided by an appraisal or investment banking firm of national standing with respect to such Affiliate Transaction. For purposes of clause (a)(ii) of this paragraph, any Affiliate Transaction will only be deemed to have satisfied the requirements set forth in clause (a)(ii) if (A) such Affiliate Transaction is approved by a majority of the Disinterested Directors or (B) in the event there are no Disinterested Directors, a fairness opinion is provided by an appraisal or investment banking firm of national standing with respect to such Affiliate Transaction.
(b) The provisions of paragraph (a) of this covenant will not apply to:
(i) any Restricted Payment Transaction, excluding Permitted Investments under clauses (a)(ii), (b) and (n) of the definition thereof;
(ii) (A) the entering into, maintaining or performance of any employment contract, collective bargaining agreement, benefit plan, program or arrangement, related trust agreement or any other similar arrangement for or with any current or former employee, officer or director of or to the Company or any Restricted Subsidiary heretofore or hereafter entered into in the ordinary course of business, including vacation, health, insurance, deferred compensation, severance, retirement, savings or other similar plans, programs or arrangements, (B) the payment of compensation, performance, indemnification or contribution obligations, or any issuance, grant or award of stock, options, other equity-related interests or other securities, to employees, officers or directors in the ordinary course of business, (C) the payment of reasonable and customary fees to directors of the Company or any of its Restricted Subsidiaries (as determined in good faith by the Company or such Restricted Subsidiary), or (D) Management Advances and payments, waivers or transaction with
215 respect thereof (or in reimbursement of any expenses referred to in the definitions of such terms);
(iii) any transaction between or among any of the Company or one or more Restricted Subsidiaries;
(iv) any transaction arising out of agreements or instruments in effect on the Issue Date, and transactions pursuant to any amendment, modification or extension to such agreement, so long as such amendment, modification or extension, taken as a whole, is non-materially less favourable to the Company or the relevant Restricted Subsidiary than the original agreement or instrument as in effect on the Issue Date;
(v) any transaction with customers, clients, suppliers or purchasers or sellers of assets or services, in each case in the ordinary course of business and otherwise in compliance with the terms of the Indenture, on terms that are fair to the Company or the relevant Restricted Subsidiary in the reasonable determination of the senior management of the Company or the relevant Restricted Subsidiary, as applicable, or not materially less favourable to the Company or the relevant Restricted Subsidiary than those that could be obtained at the time in a transaction from a Person who is not an Affiliate of the Company;
(vi) any transaction between the Company or any Restricted Subsidiary, and any Affiliate of the Company controlled by the Company that is a joint venture (whether a company, unincorporated firm, undertaking association, joint venture, partnership or similar entity);
(vii) the Transactions;
(viii) issuances or sales of Equity Interests (other than Disqualified Stock) of the Company in compliance with the other provisions of the Indenture; and
(ix) any participation in a public tender or exchange offers for securities or debt instruments issued by the Company or any of its Subsidiaries that are conducted on arm’s length terms and provide for the same price or exchange ratio, as the case may be, to all holders accepting such tender or exchange offer.
Limitation on Liens The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or permit to exist any Lien on any of its property or assets (including Capital Stock of any other Person), whether owned on the date of the Indenture or thereafter acquired, securing Indebtedness (the ‘‘Initial Lien’’) except, (1) in the case of any property or asset that does not constitute Collateral, (a) Permitted Liens, or (b) if such Lien is not a Permitted Lien, to the extent that all payments due under the Indenture, the Notes and the Note Guarantees are secured on an equal and ratable pari passu basis with the obligations so secured (and if such obligations so secured are Subordinated Obligations, on a senior priority basis) until such time as such obligations are no longer secured by such Initial Lien and (2) in the case of any property or asset that constitutes Collateral, Permitted Collateral Liens.
Any Lien created for the benefit of the Holders pursuant to clause (1)(b) of the preceding paragraph of this covenant will provide by its terms that such Lien will be automatically and unconditionally released and discharged (i) upon the release and discharge of the Initial Lien to which it relates or (ii) otherwise under the circumstances described above under ‘‘Security— Release of Security’’.
Limitation on issuances of guarantees of Indebtedness The Company will not permit any of its Restricted Subsidiaries (other than a Guarantor or the Issuer), directly or indirectly, to guarantee, assume or in any manner become liable with respect
216 to any Credit Facilities or any other Public Debt of the Issuer or a Guarantor, unless such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture providing for the Note Guarantee of the payment of the Notes by such Restricted Subsidiary, which Note Guarantee will be senior to or pari passu with such Restricted Subsidiary’s guarantee of such Credit Facilities or Public Debt; provided that no such additional Note Guarantee need be provided in respect of Indebtedness of the Company or any Restricted Subsidiary that does not exceed £10 million, in the aggregate with all Credit Facilities and Public Debt described under this paragraph.
Each additional Note Guarantee will be limited as necessary to recognize certain defences generally available to guarantors (including those that relate to fraudulent conveyance or transfer, voidable preference, financial assistance, corporate purpose, capital maintenance or similar laws, regulations or defences affecting the rights of creditors generally) or other considerations under applicable law.
The Company will not be obligated to cause such Restricted Subsidiary to guarantee the Notes to the extent that such guarantee by such Restricted Subsidiary would reasonably be expected to give rise to or result in (i) a violation of applicable law which, in any case, cannot be prevented or otherwise avoided in the applicable jurisdiction through measures reasonably available to the Issuer or the Restricted Subsidiary; (ii) any personal liability for the officers, directors or (except in the case of a Restricted Subsidiary that is a partnership) shareholders of such Restricted Subsidiary (or, in the case of a Restricted Subsidiary that is a partnership, directors or shareholders of the partners of such partnership); (iii) a requirement under applicable law, rule or regulation to obtain or prepare financial statements or financial information of such Person to be included in any required filing with a legal or regulatory authority that the Company is not able to obtain or prepare without unreasonable expense; (iv) any violation of the provisions of any joint venture or other material agreement, in each case in effect on the Issue Date, governing or binding upon the Company or any Restricted Subsidiary; (v) any cost, expense, liability or obligation (including with respect to any Taxes) other than reasonable out-of-pocket expenses and other than reasonable expenses incurred in connection with any governmental or regulatory filing required as a result of, or any measures pursuant to clause (i) undertaken in connection with, such Note Guarantee.
Notwithstanding the preceding paragraphs of this covenant, any Note Guarantee by a Restricted Subsidiary will provide by its terms that it will be automatically and unconditionally released and discharged when (i) the Indebtedness that gave rise to the obligation to guarantee the Notes is discharged, (ii) in the case of any Note Guarantee granted as contemplated under the first paragraph of this covenant as a result of a Restricted Subsidiary guaranteeing other Indebtedness, when such other Indebtedness is released and discharged or (iii) otherwise under the circumstances described above under the caption ‘‘—Note Guarantees.’’
This covenant will not apply to (i) the Issuer acceding to the Revolving Credit Facility Agreement or entering into any Security Documents, in each case on the Escrow Release Date and (ii) any guarantees issued in connection with the Transactions on or before the Escrow Release Date.
No impairment of security interest The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, take or knowingly or negligently omit to take, any action which action or omission might or would have the result of materially impairing the security interests with respect to the Collateral (it being understood that for the purposes of this paragraph the incurrence of Liens on the Collateral permitted by the definition of Permitted Collateral Liens shall under no circumstances be deemed to materially impair the security interest with respect to the Collateral) for the benefit of the Trustee and the Holders, and the Company will not, and will not cause or permit any of its Restricted Subsidiaries to, grant to any Person other than the Security Agent, for the
217 benefit of the Trustee and the Holders and the other beneficiaries described in the Security Documents and the Intercreditor Agreement and any additional intercreditor agreement, any interest whatsoever in any of the Collateral, except as permitted by the Indenture or in the Security Documents; provided that (a) nothing in this provision will restrict the discharge or release of the Collateral in accordance with the Indenture, the Security Documents, the Intercreditor Agreement and any additional intercreditor agreement and (b) subject to the second paragraph of this covenant, the Company and its Restricted Subsidiaries may incur Permitted Collateral Liens.
The Indenture will provide that, at the direction of the Company and without the consent of the Holders, the Trustee and the Security Agent may from time to time enter into one or more amendments, extensions, renewals, restatements, supplements, modifications or replacements of or to the Security Documents to: (i) cure any ambiguity, omission, defect or inconsistency therein, (ii) provide for Permitted Collateral Liens to the extent permitted under the Indenture, (iii) comply with the terms of the Intercreditor Agreement or any additional intercreditor agreement, (iv) add to the Collateral, (v) provide for the assumption by a successor of the obligations of the Company, the Issuer or any Guarantor under the Indenture or the Notes, in each case, in accordance with ‘‘—Certain Covenants—Merger and consolidation’’, (vi) provide for the release of property and assets constituting Collateral from the Lien of the Security Documents and/or the release of the Note Guarantee of a Guarantor, in each case, in accordance with (and if permitted by) the terms of the Indenture, (vii) conform the Security Documents to this ‘‘Description of the Notes’’, (viii) evidence and provide for the acceptance of the appointment of a successor Trustee or Security Agent, or (ix) make any other change thereto that does not materially adversely affect the rights of any Holder (as determined in good faith by the Company); provided, however, that no Security Document may be amended, extended, renewed, restated, supplemented or otherwise modified or replaced (other than for any reason specified in clauses (i), (iii) (in connection with any enforcement action) and (iv) through (ix) of this paragraph), unless contemporaneously with such amendment, extension, renewal, restatement, supplement, modification or replacement, the Company delivers to the Trustee, either:
(a) a solvency opinion, in form and substance reasonably satisfactory to the Trustee, from an investment banking firm, appraisal firm or accounting firm of international standing confirming the solvency of the Company and its Restricted Subsidiaries, taken as a whole, on a consolidated basis, after giving effect to any transactions related to such amendment, extension, renewal, restatement, supplement, modification or replacement;
(b) a certificate from the Board of Directors or chief financial officer of the Company (acting in good faith) that confirms the solvency of the Person granting such Lien, after giving effect to any transactions related to such amendment, extension, renewal, restatement, supplement, modification or replacement; or
(c) an Opinion of Counsel (subject to customary exceptions and qualifications), confirming that, after giving effect to any transactions related to such amendment, extension, renewal, restatement, supplement, modification or replacement, the Lien or Liens securing the Notes and Note Guarantees created under the Security Documents so amended, extended, renewed, restated, supplemented, modified or replaced are valid and perfected Liens not otherwise subject to any limitation imperfection or new hardening period, in equity or at law, that such Lien or Liens were not otherwise subject to immediately prior to such amendment, extension, renewal, restatement, supplement, modification or replacement.
In the event that the Company complies with this covenant, the Trustee and the Security Agent will (subject to customary protections and indemnifications) consent to such amendment, extension, renewal, restatement, supplement, modification or replacement with no need for instructions from Holders.
218 Further assurances The Issuer, the Company and the other Guarantors will execute any and all further documents, financing statements, agreements and instruments, and take all further action that may be required under applicable law, to protect or perfect the validity and priority of the security interest created or intended to be created by the Security Documents in the Collateral.
Payments for consent The Company will not, and will not cause or permit any of its Restricted Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any holder of Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes, unless such consideration is offered to be paid and is paid to all Holders that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries shall be permitted, in any offer or payment of consideration for, or as an inducement to, any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes, to exclude Holders in any jurisdiction where (i) the solicitation of such consent, waiver or amendment, including in connection with an exchange offer or offer to purchase for cash, or (ii) the payment of the consideration therefor (A) would require the Company or any of its Restricted Subsidiaries to file a registration statement, prospectus or similar document under any applicable securities laws (including, but not limited to, the U.S. federal securities laws and the laws of the European Union or its member states), which the Company in its sole discretion determines (acting in good faith) would be materially burdensome; or (B) such solicitation would otherwise not be permitted under applicable law in such jurisdiction.
Reports So long as any Notes are outstanding, the Company will furnish to the Trustee:
(a) within 120 days after the end of the Company’s fiscal year beginning with the Company’s first fiscal year-end after the Issue Date, an annual report containing the following information: (i) audited consolidated balance sheets of the Company as of the end of the two most recent fiscal years and audited consolidated income statements and statements of cash flow of the Company for the two most recent fiscal years, including footnotes to such financial statements and the report of the independent auditors on the financial statements; (ii) pro forma income statement and balance sheet information of the Company, together with explanatory footnotes, for any material acquisitions, dispositions or recapitalisations that have occurred since the beginning of the most recently completed fiscal year as to which such annual report relates (unless such pro forma information has been provided in a previous report pursuant to clause (b) or (c) below (provided that such pro forma financial information will be provided only to the extent available without unreasonable expense, in which case, the Company will provide, in the case of a material acquisition, acquired company financials)); (iii) an operating and financial review of the audited financial statements, including a discussion of the results of operations (including a discussion by business segment); and (iv) a fair review of the Company’s business, any important events that have occurred since the end of the financial year and a description of the principal risks and uncertainties facing the Company; provided, however, that for so long as the capital stock of the Company is listed on the London Stock Exchange and the Company is subject to the UK Listing Rules, an annual report that complies in all material respects with the requirements applicable under the UK Listing Rules for annual reports will be deemed to satisfy the Company’s obligations under this clause (a); and provided further however that if on any date following the Issue Date the capital stock of the Company is not listed on the London Stock Exchange or the Company is not subject to the UK Listing Rules, then each annual report furnished after such date will contain the
219 foregoing information with a level of detail that is substantially comparable to this offering memorandum;
(b) within 60 days following the end of the first semi-annual period in each fiscal year of the Company beginning with the end of the Company’s first semi-annual period after the Issue Date, a semi-annual report containing the following information: (i) an unaudited condensed consolidated balance sheets as of the end of such semi-annual period and unaudited condensed statements of income and cash flow for the semi-annual and year to date periods ending on the unaudited condensed balance sheet date, and the comparable prior year periods for the Company, together with condensed footnote disclosure; (ii) pro forma income statement and balance sheet information of the Company, together with explanatory footnotes, for any material acquisitions, dispositions or recapitalisations that have occurred since the beginning of the most recently completed fiscal quarter as to which such semi-annual report relates (provided that such pro forma financial information will be provided only to the extent available without unreasonable expense, in which case, the Company will provide, in the case of a material acquisition, acquired company financials); (iii) an operating and financial review of the unaudited financial statements (including a discussion by business segment), an indication of important events that have occurred during the first six months of the financial year, and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; provided, however, that for so long as the capital stock of the Company is listed on the London Stock Exchange and the Company is subject to the UK Listing Rules, any semi-annual report that complies in all material respects with the requirements applicable under the UK Listing Rules for semi-annual reports will be deemed to satisfy the Company’s obligations under this clause (b);
(c) promptly after the occurrence of any material acquisition, disposition or restructuring of the Company and its Restricted Subsidiaries, taken as a whole, or any changes of directors or senior management at the Company or the Issuer or change in auditors of the Company or the Issuer or any other material event that the Company or the Issuer announces publicly, a report containing a description of such event; provided, however, that for so long as the capital stock of the Company is listed on the London Stock Exchange and the Company is subject to the UK Listing Rules, satisfaction in all material respects of the Company’s continuing disclosure obligations of the UK Listing Rules will be deemed to satisfy the Company’s obligations under this clause (c), whether or not any such report is furnished; and
(d) copies of all other reports furnished to the Company’s equity holders, provided, however, that the reports set forth in clauses (a), (b) and (c) above will not be required to (i) contain any reconciliation to U.S. generally accepted accounting principles or (ii) include separate financial statements for any Guarantors or non-Guarantor Subsidiaries of the Company.
All financial statements provided under this covenant shall be prepared in accordance with IFRS.
If the Company has designated any of its Subsidiaries as Unrestricted Subsidiaries and such Subsidiaries are Significant Subsidiaries, then the semi-annual and annual financial information required by paragraphs (a) and (b) of this covenant will include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes thereto, of the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Company.
220 So long as any Notes are outstanding, the Company will (i) after providing the annual and interim reports required by clauses (a) and (b) above, hold a conference call that Holders may attend, which may be combined with any conference call for the equity investors of the Company, to discuss such reports and the results of operations for the relevant reporting period; and (ii) maintain a website to which Holders, prospective investors, broker-dealers and securities analysts are given access and to which all of the reports required by this ‘‘Reports’’ covenant are posted.
In the event the Company becomes a SEC registrant and subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act, or elects to comply with such provisions, the Company will, for so long as it continues to file the reports required by Section 13(a) with the SEC, make available to the Trustee the annual reports, information, documents and other reports that the Company is, or would be, required to file with the SEC pursuant to such Section 13(a) or 15(d). Upon complying with the foregoing requirement, the Company will be deemed to have complied with the provisions contained in this covenant.
In addition, so long as the Notes remain outstanding, the Issuer will, during any period during which the Issuer is neither subject to Section 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, furnish to the Holders and prospective purchasers of the Notes designated by the Holders, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
The Issuer will also make available copies of all reports required by clauses (a) through (c) of the first paragraph of this covenant, if and so long as the Notes are listed on the Official List of the Irish Stock Exchange and admitted for trading on the Global Exchange Market and the rules of the Irish Stock Exchange so require, at the offices of the Principal Paying Agent.
Merger and consolidation (a) Neither the Company nor the Issuer will, directly or indirectly, consolidate with or merge with or into, or convey, transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving, transferee or lessee Person (the ‘‘Successor Company’’) will be a Person organized and existing under the laws of England, Scotland any member state of the European Union, Norway, Switzerland, Canada or the United States of America, any State thereof or the District of Columbia, and the Successor Company (if not the Company or the Issuer, as the case may be) will expressly assume all the obligations of the Company or the Issuer, as the case may be (1) under the Notes and the Indenture by executing and delivering to the Trustee a supplemental indenture, an accession agreement and/or one or more other documents or instruments in form reasonably satisfactory to the Trustee and (2) under the Intercreditor Agreement, the Notes Proceeds Loan Agreement and each Security Document to which the Company or the Issuer, as the case may be, is a party;
(ii) immediately after giving pro forma effect to such transaction (and treating any Indebtedness that becomes an obligation of the Successor Company or any Restricted Subsidiary as a result of such transaction as having been Incurred by the Successor Company or such Restricted Subsidiary at the time of such transaction), no Default or Event of Default will have occurred and be continuing;
(iii) immediately after giving effect to such transaction, either (A) the Company or the Issuer (or, if applicable, the Successor Company with respect thereto) could Incur at least £1.00 of additional Indebtedness pursuant to paragraph (a) of the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’ or (B) the Consolidated Fixed Charge Coverage Ratio of the Company (or, if applicable, the Successor Company with respect thereto) would equal or exceed the Consolidated Fixed
221 Charge Coverage Ratio of the Company (or, if applicable, the Successor Company with respect thereto) immediately prior to giving effect to such transaction; and
(iv) the Company (or, if applicable, the Successor Company with respect thereto) delivers to the Trustee an Officer’s Certificate and an Opinion of Counsel, each to the effect that such consolidation, merger conveyance, transfer or lease complies with the provisions described in this paragraph (a) and that the supplemental indenture and the Indenture constitute legal, valid and binding obligations of the Company, the Issuer or the Successor Company (as the case may be), enforceable in accordance with their terms, provided that (A) in giving such opinion such counsel may rely on an Officer’s Certificate as to compliance with the foregoing clauses (ii) and (iii) and as to any matters of fact, and (B) no Opinion of Counsel will be required for a consolidation, merger or transfer described in paragraph (c) of this covenant.
(b) A Guarantor (other than the Company or a Guarantor whose Note Guarantee is to be released in accordance with the terms of the Note Guarantee and the Indenture as described under ‘‘—Certain Covenants—Limitation on issuances of guarantees of Indebtedness’’) will not, directly or indirectly, consolidate with or merge with or into, or convey, transfer or lease all or substantially all its assets to, any Person, unless:
(i) the Successor Company (if not a Guarantor) will expressly assume all the obligations of the Guarantor under (1) the Note Guarantee and the Indenture by executing and delivering to the Trustee a supplemental indenture, an accession agreement and/or one or more other documents or instruments in form reasonably satisfactory to the Trustee and (2) the Intercreditor Agreement and each Security Document to which such Guarantor, as the case may be, is a party;
(ii) immediately after giving pro forma effect to such transaction (and treating any Indebtedness that becomes an obligation of the Successor Company as a result of such transaction as having been Incurred by the Successor Company at the time of such transaction), no Default will have occurred and be continuing; and
(iii) the Company (or, if applicable, the Successor Company with respect thereto) will have delivered to the Trustee an Officer’s Certificate and an Opinion of Counsel, each to the effect that such consolidation, merger or transfer complies with the provisions described in this paragraph (b), provided that (A) in giving such opinion such counsel may rely on an Officer’s Certificate as to compliance with the foregoing clause (ii) and as to any matters of fact, and (B) no Opinion of Counsel will be required for a consolidation, merger or transfer described in paragraph (c) of this covenant.
(c) Clauses (ii) and (iii) of paragraph (a) of this covenant and clause (ii) of paragraph (b) of this covenant will not apply to any transaction in which (i) any Restricted Subsidiary consolidates with, merges into or conveys, transfers or leases all or part of its assets to the Issuer or any Guarantor, (ii) the Company or the Issuer consolidates or merges with or into or conveys, transfers or leases all or substantially all its properties and assets to (A) an Affiliate incorporated or organized for the purpose of reincorporating or reorganizing the Company or the Issuer (as applicable) in another jurisdiction, or changing the legal form of the Company or the Issuer (as applicable) to a corporation or other entity or (B) a Restricted Subsidiary of the Company so long as all assets of the Company, and the Restricted Subsidiaries of the Company, immediately prior to such transaction (other than Capital Stock of such Restricted Subsidiary) are owned by such Restricted Subsidiary and its Restricted Subsidiaries immediately after the consummation thereof, or (iii) any Guarantor consolidates with, merges into or conveys, transfers or leases all or part of its assets to another Guarantor.
In respect of paragraph (a) of this covenant, the Successor Company will succeed to, and be substituted for, and may exercise every right and power of the Company or the Issuer, as the
222 case may be, under the Notes and the Indenture, and thereafter the predecessor Company or Issuer, as the case may be, will be relieved of all obligations and covenants under the Notes and the Indenture, except that the predecessor Company or Issuer, as the case may be, in the case of a lease of all or substantially all its assets will not be released from its guarantee of the obligation to pay the principal of and interest on the Notes or obligation to pay the principal of and interest on the Notes, as the case may be.
Any Indebtedness that becomes an obligation of the Company or any Restricted Subsidiary (or that is deemed to be Incurred by any Subsidiary that becomes a Restricted Subsidiary) as a result of any such transaction undertaken in compliance with this covenant, and any Refinancing Indebtedness with respect thereto, shall be deemed to have been Incurred in compliance with the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness.’’
Notwithstanding the foregoing, this covenant shall not prohibit or restrict any merger or consolidation in connection with the Debt Assumption.
Suspension of covenants on achievement of Investment Grade Status
If on any date following the Issue Date, the Notes have achieved Investment Grade Status and no Default or Event of Default has occurred and is continuing under the Indenture (a ‘‘Suspension Event’’), then, the Issuer shall notify the Trustee in writing that these two conditions have been satisfied, provided that such notification shall not be a condition for the suspension of the covenants set forth above to be effective. No notice will be sent to Holders of such event. Beginning on the date when the Suspension Event occurs and continuing until the Reversion Date (the date of which, the Issuer shall notify the Trustee in writing), the provisions of the Indenture summarized under the following captions will not apply to the Notes:
(a) ‘‘—Certain Covenants—Limitation on Indebtedness,’’
(b) ‘‘—Certain Covenants—Limitation on Restricted Payments,’’
(c) ‘‘—Certain Covenants—Limitation on restrictions on distributions from Restricted Subsidiaries,’’
(d) ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock,’’
(e) ‘‘—Certain Covenants—Limitation on the issuances of guarantees of Indebtedness,’’
(f) ‘‘—Certain Covenants—Limitation on transactions with Affiliates,’’ and
(g) clause (iii) of paragraph (a) of the covenant described under ‘‘—Certain Covenants—Merger and consolidation’’ and, in each case, any related default provision of the Indenture will cease to be effective and will not be applicable to the Company and its Restricted Subsidiaries. Such covenants and any related default provisions will again apply according to their terms from the first day on which a Suspension Event ceases to be in effect. Such covenants will not, however, be of any effect with regard to actions of the Company properly taken during the continuance of the Suspension Event, and the covenant described under ‘‘—Certain Covenants—Limitation on Restricted Payments’’ will be interpreted as if it has been in effect since the date of such Indenture, except that no default will be deemed to have occurred solely by reason of a Restricted Payment made while that covenant was suspended. On the Reversion Date, all Indebtedness Incurred during the continuance of the Suspension Event will be classified, at Company’s option, as having been Incurred pursuant to paragraph (a) of the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’ or one of the clauses set forth in the paragraph (b) of such covenant (to the extent such Indebtedness would be
223 permitted to be Incurred thereunder as of the Reversion Date and after giving effect to Indebtedness Incurred prior to the Suspension Event and outstanding on the Reversion Date). To the extent such Indebtedness would not be so permitted to be incurred under paragraphs (a) or (b) of the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness,’’ such Indebtedness will be deemed to have been outstanding on the Issue Date, so that it is classified as permitted under clause (iii) of paragraph (b) of the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness.’’
Limitation on activities of the Issuer prior to the Debt Assumption
Notwithstanding any other provision of the Indenture, prior to the consummation of the Debt Assumption:
(1) the Issuer will not engage in any business activity or undertake any other activity, other than any activity: (a) reasonably relating to the offering, sale, issuance and servicing of the Notes issued on the Issue Date, the incurrence of Indebtedness represented by the Notes issued on the Issue Date, lending or otherwise advancing the proceeds thereof to the Company in connection with the Debt Assumption, the Transactions, and any other activities in connection with the foregoing, (b) undertaken with the purpose of, and directly related to, fulfilling any other obligations under the Indenture (including any repurchase or purchase, repayment, redemption, prepayment of such debt, in each case, as permitted by the Indenture), the Notes, the Escrow Agreement, the Intercreditor Agreement, the Security Documents, any other document relating to the Notes issued on the Issue Date, the Revolving Credit Facility or any other document relating to the Revolving Credit Facility or (c) directly related or reasonably incidental to the establishment and/or maintenance of the Issuer’s corporate existence;
(2) the Issuer shall not incur any liabilities, other than liabilities for or in respect of Taxes and liabilities related to the Notes issued on the Issue Date, the Escrow Agreement or the Indenture, liabilities to the Company or any Restricted Subsidiary or liabilities otherwise reasonably related to the Debt Assumption and, on the Escrow Release Date, the Revolving Credit Facility Agreement and the Intercreditor Agreement;
(3) the Issuer shall not (a) transfer or assign any of its assets, except pursuant to the Escrow Agreement or in connection with the Debt Assumption or (b) issue any Capital Stock other than to the Company;
(4) the Issuer shall not create, incur or suffer to exist any Lien on any of its assets, except pursuant to the Escrow Agreement or the Escrow Charge;
(5) the Issuer shall not knowingly or negligently take or omit to take any action that would have the result of impairing the Liens created by the Escrow Charge; and
(6) for so long as any Notes are outstanding, the Issuer shall not commence or take any action or facilitate a winding-up, liquidation or other analogous proceeding in respect of the Issuer.
For the avoidance of doubt, following consummation of the Debt Assumption, the foregoing covenant will be of no further force or effect.
Limitation on Issuer activities following the Debt Assumption
For so long as any Notes are outstanding, the Issuer will not (i) change the Stated Maturity of the principal of, or any instalment of interest on the Notes Proceeds Loan; (ii) reduce the rate of interest on the Notes Proceeds Loan; (iii) change the currency for payment of any amount under the Notes Proceeds Loan; (iv) prepay or otherwise reduce or permit the prepayment or reduction of the principal amount of the Notes Proceeds Loan (except to the extent permitted by the Notes Proceeds Loan Agreement); (v) novate the Notes Proceeds Loan or any obligations
224 under the Notes Proceeds Loan Agreement or (vi) amend the Notes Proceeds Loan or the Notes Proceeds Loan Agreement in any manner adverse to the Holders. Notwithstanding the foregoing, the Notes Proceeds Loan may be amended to facilitate or otherwise accommodate or reflect an amendment, repayment, redemption or repurchase of the Notes.
Completion of Debt Assumption
Substantially concurrently with the completion of the Debt Assumption, each of the Issuer and the Guarantors shall take all necessary actions so that a Lien over the Collateral in respect of the Notes as described above under ‘‘—Security’’ has been granted to the Security Agent on behalf of, and for the benefit of, the Holders pursuant to Security Documents as contemplated by the Indenture and shall (to the extent not already done) execute and deliver, or shall cause the execution and delivery, to the Security Agent of the relevant Security Document and such further or additional Security Documents as are required to create an effective security interest over such Collateral on behalf of the Holders.
Events of Default and remedies
Each of the following is an ‘‘Event of Default’’:
(a) default for 30 days in the payment when due of interest or Additional Amounts, if any, with respect to the Notes;
(b) default in the payment when due (at maturity, upon redemption or otherwise) of the principal of, or premium, if any, on the Notes;
(c) the failure by the Issuer or any Guarantor to comply with its obligations under the covenant described under ‘‘—Certain Covenants—Merger and consolidation’’ or, for 30 days after written notice to the Issuer by the Trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding voting as a single class, with its obligations described under ‘‘—Change of Control’’;
(d) failure by the Issuer or any Guarantor for 60 days after written notice to the Issuer by the Trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding voting as a single class to comply with any of the agreements in the Notes, the Indenture, any Security Document or the Intercreditor Agreement (or any additional intercreditor agreement entered into pursuant to the terms of the Intercreditor Agreement or the Indenture) (other than a default in performance, or breach of a covenant or agreement which is specifically dealt with in clauses (a), (b) or (c));
(e) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries), whether such Indebtedness or Guarantee now exists, or is created after the Issue Date (other than any Indebtedness owed to the Company or any Restricted Subsidiary), if that default:
(i) is caused by a failure to pay principal of such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a ‘‘Payment Default’’); or
(ii) results in the acceleration of such Indebtedness prior to its Stated Maturity,
and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates £20.0 million or more;
225 (f) failure by the Company or any of its Restricted Subsidiaries to pay final judgments entered by a court or courts of competent jurisdiction aggregating in excess of £20.0 million, which judgments are not paid, discharged or stayed for a period of 60 consecutive days or more during which a stay of enforcement of such judgment was not (by reason of pending appeal or otherwise) in effect;
(g) except as permitted by the Indenture, any Note Guarantee provided by any Significant Subsidiary or the Note Guarantee provided by the Company is held in any judicial proceeding to be unenforceable or invalid or ceases for any reason to be in full force and effect, or any Guarantor, or any Person acting on behalf of any Guarantor, denies or disaffirms its obligations under its Note Guarantee (except, in each case, as contemplated by the terms thereof or of the Notes or the Indenture or by reason of the termination of the Indenture or such Note Guarantee or the release of such Note Guarantee in accordance with such Note Guarantee and the Indenture);
(h) certain events of bankruptcy or insolvency described in the Indenture with respect to the Issuer, the Company or any of its Restricted Subsidiaries that is a Significant Subsidiary or any group of its Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary; and
(i) any security interest created by the Security Documents ceases to be in full force and effect (except as permitted by the terms of the Indenture, the Intercreditor Agreement, any additional intercreditor agreement and the Security Documents) with respect to Collateral having a Fair Market Value in excess of £5.0 million and any such Default continues for 10 days, or an assertion in writing by the Company or any of its Restricted Subsidiaries that any Collateral is not subject to a valid, perfected security interest (except as permitted by the terms of the Indenture, the Intercreditor Agreement, any additional intercreditor agreement and the Security Documents).
If an Event of Default (other than an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company) occurs and is continuing, the Trustee by notice to the Company or the Holders of at least 25% in principal amount of the outstanding Notes by notice to the Company and the Trustee may declare the principal of and accrued but unpaid interest on all the Notes to be due and payable. Upon the effectiveness of such a declaration, such principal and interest will be due and payable immediately. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Issuer, the Company or any of its Restricted Subsidiaries that is a Significant Subsidiary or any group of its Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, occurs and is continuing, the principal of and accrued but unpaid interest on all the Notes will become immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. Under certain circumstances, the Holders of a majority in principal amount of the outstanding Notes may rescind any such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any Holders unless such Holders have provided the Trustee with indemnity and/or security and/or pre-funding to its satisfaction against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium, if any, or interest or Additional Amounts when due, no Holder may pursue any remedy with respect to the Indenture, the Notes or the Note Guarantees unless:
(1) such Holder has previously given the Trustee notice that an Event of Default is continuing;
(2) Holders of at least 25% in aggregate principal amount of the then outstanding Notes have provided a written request to the Trustee to pursue the remedy;
226 (3) such Holders have provided the Trustee with indemnity and/or security and/or pre-funding to its satisfaction against any loss, liability or expense;
(4) the Trustee has not complied with such request (without informing the Holders that it would not so comply) within 60 days after the receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the outstanding Notes have not given the Trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal amount of the outstanding Notes will be given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines (in its reasonable discretion) is unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability. Prior to taking any action under the Indenture, the Trustee will be entitled to indemnification and/or security and/or pre-funding satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action.
If a Default occurs and is continuing and is known to the Trustee, the Trustee shall provide notice to each Holder of the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of, premium (if any) or interest on any Note, the Trustee may withhold notice if and so long as the Trustee in good faith determines that withholding notice is in the interests of the Holders. In addition, the Company will be required to deliver to the Trustee, within 120 days after the end of each financial year an Officer’s Certificate indicating whether the signatory thereof knows of any Default that occurred during the previous year. The Company will also be required to deliver to the Trustee, within 30 days after the occurrence thereof, written notice of any event which would constitute Defaults or Events of Default, their status and what action the Company is taking or proposes to take in respect thereof.
Amendments and waivers
Subject to certain exceptions, the Indenture or the Notes may be amended with the consent of the Holders of not less than a majority in principal amount of the Notes then outstanding and any past default or compliance with any provisions may be waived with the consent of the Holders of a majority in principal amount of the Notes then outstanding and, subject to certain exceptions, any default or compliance with any provisions thereof may be waived with the consent of the Holders of not less than a majority in principal amount of the Notes then outstanding (including, in each case, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes). However, unless consented to by the Holders of at least 90% of the aggregate principal amount of the then outstanding Notes, no amendment or waiver may:
(a) reduce the principal amount of Notes whose Holders must consent to an amendment or waiver;
(b) reduce the rate of or extend the time for payment of interest on any Note;
(c) reduce the principal of or extend the Stated Maturity of any Note;
(d) reduce the premium payable upon the redemption of any Note, or change the date on which any Note may be redeemed, in each case, as described under ‘‘—Optional redemption’’ above;
(e) make any Note payable in currency other than that stated in such Note;
227 (f) impair the right of any Holder to receive payment of principal of and interest, or premium, if any, on such Holder’s Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such Holder’s Notes or any Note Guarantee in respect thereof;
(g) waive a Default or Event of Default in the payment of principal of, or interest, or premium, if any, on, the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the then outstanding Notes and a waiver of the payment default that resulted from such acceleration);
(h) waive a required redemption payment with respect to any Note (other than a payment required by one of the covenants described above under the caption ‘‘—Change of Control’’ or ‘‘—Limitation on sales of Assets and Subsidiary Stock’’);
(i) release any Guarantor from its obligations under its Note Guarantee or the Indenture, except in accordance with the terms of the Indenture and the Intercreditor Agreement;
(j) release a Lien on the Collateral granted for the benefit of the Holders, except in accordance with the terms of the relevant Security Document, the Indenture and the Intercreditor Agreement; or
(k) make any change in the preceding amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any applicable Holder, the Company, the Issuer, any Guarantor and the Trustee, as applicable, may amend the Indenture or the Notes to:
(a) cure any ambiguity, mistake, omission, defect or inconsistency;
(b) provide for the assumption of the Issuer’s or a Guarantor’s obligations under the Indenture or the Notes;
(c) provide for uncertificated Notes in addition to or in place of certificated Notes (provided that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code);
(d) add any Note Guarantees with respect to the Notes and any limitation on such Note Guarantees contemplated above under the caption ‘‘—Note Guarantees,’’ or confirm and evidence the release, termination or discharge of any Note Guarantee when such release, termination or discharge is provided for or permitted under the Indenture and the Intercreditor Agreement;
(e) to add security to or for the benefit of the Notes or to enter into additional or supplemental Security Documents, or confirm and evidence the release, termination or discharge of any Lien on the Collateral in accordance with the terms of the Indenture, the Intercreditor Agreement and the Security Documents;
(f) add to the covenants of the Company or the Issuer for the benefit of the Holders or to surrender any right or power conferred upon the Company or the Issuer;
(g) provide for or confirm the issuance of Additional Notes in accordance with the limitations set forth in the Indenture;
(h) conform the text of the Indenture, the Notes or any Note Guarantee to any provision of this ‘‘Description of the Notes’’ to the extent that such provision in this ‘‘Description of the Notes’’ was intended to be a verbatim recitation of a provision of the Indenture, the Notes or any Note Guarantee;
(i) to evidence and provide for the acceptance of the appointment of a successor Trustee under the Indenture;
228 (j) to comply with the rules of any applicable securities depositary; or
(k) make any change (including any change reasonably necessary to effect the Debt Assumption) that does not materially adversely affect the rights of any Holder (as determined in good faith by the Company).
The consent of the Holders is not necessary under the Indenture to approve the particular form of any proposed amendment or waiver. It is sufficient if such consent approves the substance of the proposed amendment or waiver. Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by such Holder and every subsequent Holder of all or part of the related Note. Any such Holder or subsequent Holder may revoke such consent as to its Note by written notice to the Trustee or the Company, received thereby before the date on which the Company certifies to the Trustee that the Holders of the requisite principal amount of Notes have consented to such amendment or waiver. After an amendment or waiver under the Indenture becomes effective, the Company is required to mail to Holders a notice briefly describing such amendment or waiver. However, the failure to give such notice to all Holders, or any defect therein, will not impair or affect the validity of the amendment or waiver.
The Trustee shall be entitled to receive and rely absolutely on an Opinion of Counsel and on an Officer’s Certificate with respect to the above matters.
Defeasance
The Issuer may, at its option or the option of the Company, at any time elect to have all its obligations discharged with respect to the outstanding Notes and all obligations of the Company and any other Guarantors discharged with respect to their Note Guarantees (‘‘Legal Defeasance’’), except for:
(a) the rights of holders of outstanding Notes to receive payments in respect of the principal of, or interest or premium, and Additional Amounts, if any, on such Notes when such payments are due from the trust referred to below;
(b) the Issuer’s obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payment and money for security payments held in trust;
(c) the rights, powers, trusts, duties and immunities of the Trustee, and the Issuer’s, the Company’s and any other Guarantor’s obligations in connection therewith; and
(d) the Covenant Defeasance and Legal Defeasance provisions of the Indenture.
In addition, the Issuer may, at its option or the option of the Company, at any time, elect to have the obligations of the Issuer, the Company and any other Guarantors released with respect to certain covenants under the Indenture, including the covenants described under ‘‘—Certain Covenants’’ (other than clauses (i), (ii) and (iv) of paragraph (a) under ‘‘—Certain Covenants—Merger and consolidation’’), the operation of the default provisions relating to such covenants described under ‘‘—Events of Default’’ above, and the operation of the cross acceleration provision, the bankruptcy provisions with respect to Subsidiaries, the judgment default provision and the guarantee default provision, described under ‘‘—Events of Default’’ above (‘‘Covenant Defeasance’’). If the Issuer exercises its legal defeasance options or its covenant defeasance option, each Guarantor will be released from all its obligations with respect to its Note Guarantee.
The Issuer may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Issuer exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If the Issuer exercises its covenant defeasance option, payment of the Notes may not be accelerated
229 because of an Event of Default specified in clause (c) (other than with respect to the covenant described under clauses (i), (ii) and (iv) of paragraph (a) under ‘‘—Certain Covenants—Merger and consolidation’’), (d), (e), (f) or (g) (other than with respect to the Company or the Issuer) under ‘‘—Events of Default.’’
Either defeasance option may be exercised to any redemption date or to the maturity date for the Notes. In order to exercise either defeasance option:
(a) the Issuer must irrevocably deposit or cause to be deposited in trust with the Trustee (or a Person designated for such purpose by the Trustee) for the benefit of the Holders cash in pound sterling, non-callable UK Government Securities or a combination thereof, sufficient (without reinvestment), in the opinion of a nationally recognized investment bank, appraisal firm or firm of independent public accountants, to pay principal of, and premium (if any) and interest on, the Notes to redemption or maturity, as the case may be, provided that if such redemption is made pursuant to the provisions described in the third paragraph under ‘‘—Optional redemption,’’ (i) the amount of cash in pound sterling or non-callable UK Government Securities, or a combination thereof, that the Issuer must irrevocably deposit or cause to be deposited will be determined using an assumed Applicable Premium calculated as of the date of such deposit and (ii) the Issuer must irrevocably deposit or cause to be deposited additional cash in pound sterling or non-callable UK Government Securities in trust on the redemption date as necessary to pay the Applicable Premium as determined on such date; and
(b) the Issuer must deliver to the Trustee:
(i) an Opinion of Counsel reasonably acceptable to the Trustee, subject to customary assumptions, exclusions and qualifications, to the effect that U.S. and non-U.S. Holders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such deposit and defeasance and will be subject to U.S. federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (in the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or other change in applicable U.S. federal income tax law);
(ii) an Officer’s Certificate stating that the deposit was not made by the Issuer with the intent of preferring the Holders over the other creditors of the Issuer with the intent of defeating, hindering, delaying or defrauding creditors of the Issuer or others; and
(iii) an Opinion of Counsel reasonably acceptable to the Trustee, subject to customary assumptions and qualifications, each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance, as the case may be, have been complied with.
Satisfaction and discharge
The Indenture will be discharged and cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when (a) either (i) all Notes previously authenticated and delivered (other than certain lost, stolen or destroyed Notes, and certain Notes for which provision for payment was previously made and thereafter the funds have been released to the Issuer) have been cancelled or delivered to the Registrar or Trustee for cancelation or (ii) all Notes not previously cancelled or delivered to the Registrar or Trustee for cancelation (A) have become due and payable, (B) will become due and payable at their Stated Maturity within one year or (C) have been or are to be called for redemption within one year under arrangements reasonably satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Issuer; (b) the Issuer has irrevocably deposited or caused to be deposited with the Trustee (or a Person designated by the Trustee for such purpose) cash
230 in pound sterling, or non-callable UK Government Securities or a combination thereof, sufficient (without reinvestment) to pay and discharge the entire Indebtedness on the Notes not previously cancelled or delivered to the Registrar for cancelation, for principal, premium, if any, and interest to the date of redemption or their Stated Maturity, as the case may be, provided that if such redemption is made pursuant to the provisions described in the third paragraph under ‘‘—Optional redemption,’’ (i) the amount of cash in pound sterling or non-callable UK Government Securities, or a combination thereof, that the Issuer must irrevocably deposit or cause to be deposited will be determined using an assumed Applicable Premium calculated as of the date of such deposit and (ii) the Issuer must irrevocably deposit or cause to be deposited additional money in trust on the redemption date as necessary to pay the Applicable Premium as determined on such date; (c) in respect of clause (b), no Default or Event of Default has occurred and is continuing on the date of the deposit (other than a Default or an Event of Default resulting from the borrowing of funds to be applied to such deposit and any similar deposit relating to other Indebtedness and, in each case, the granting of Liens to secure such borrowings) and the deposit will not result in the breach or violation of, or constitute a default under, any other instrument to which the Issuer is a party or by which the Issuer is bound (other than with respect to the borrowing of funds to be applied concurrently to make the deposit required to effect such satisfaction and discharge and any similar concurrent deposit relating to other Indebtedness, and in each case the granting of Liens to secure such borrowings); (d) the Issuer or any Guarantor has paid or caused to be paid all other sums then payable under the Indenture; and (e) the Issuer has delivered to the Trustee an Officer’s Certificate and an Opinion of Counsel each to the effect that all conditions precedent under the ‘‘Satisfaction and discharge’’ section of the Indenture relating to the satisfaction and discharge of the Indenture have been complied with, provided that any such counsel may rely on any Officer’s Certificate as to matters of fact (including as to compliance with the foregoing clauses (a), (b), (c) and (d)).
Concerning the Trustee and certain Agents
Deutsche Trustee Company Limited is to be appointed the Trustee under the Indenture.
The Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are set forth specifically in the Indenture. During the existence of an Event of Default, the Trustee will exercise such of the rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person’s own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder will have provided to the Trustee security and/or indemnity and/or pre-funding satisfactory to it against any loss, liability or expense and then only to the extent required by the terms of the Indenture.
The Trustee will be permitted to engage in transactions with the Issuer and the Guarantors; provided, however, that if it acquires any conflicting interest, it must either eliminate such conflict within 90 days of becoming aware of such conflict or resign. If the Trustee or any Agent becomes the owner or pledge of the Notes, it may deal with the Issuer with the same rights it would have if it were not the Trustee or such other agent.
The Indenture will set out the terms under which the Trustee may resign or be removed, and replaced. Such terms will include, among others, (a) that the Trustee may be removed at any time by the Holders of a majority in principal amount of the then outstanding Notes, or may resign at any time by giving written notice to the Company and (b) that if the Trustee at any time (i) has or acquires a conflict of interest that is not eliminated, (ii) fails to meet certain minimum limits regarding the aggregate of its capital and surplus or (iii) becomes incapable of acting as Trustee or becomes insolvent or bankrupt, then the Company may remove the Trustee, or any Holder who has been a bona fide Holder for not less than six months may
231 petition any court for the removal of the Trustee and the appointment of a successor Trustee. Any removal or resignation of the Trustee shall not become effective until the acceptance of appointment by the successor Trustee.
The Indenture will provide for the indemnification of the Trustee and the Agents for any loss, liability, Taxes or expenses incurred without gross negligence, wilful misconduct or fraud on its part, arising out of or in connection with the acceptance or administration of the Indenture.
No personal liability of directors, officers, employees, incorporators and stockholders
No director, officer, employee, incorporator or stockholder of the Company or any Subsidiary thereof will have any liability for any obligation of the Company, the Issuer or any Restricted Subsidiary under the Indenture, the Notes the Intercreditor Agreement, the Security Documents or for any claim based on, in respect of, or by reason of, any such obligation or its creation. Each Holder, by accepting the Notes, waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes.
Transfer and exchange
A Holder may transfer or exchange Notes in accordance with the Indenture. Upon any transfer or exchange, the Issuer, the Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents. No service charge shall be made for any transfer or exchange of Notes, but the Issuer may, subject to the covenant under the caption ‘‘—Additional Amounts,’’ require a Holder to pay any taxes or other governmental charges payable in connection with the transfer or exchange. The Issuer will not be required to transfer or exchange any Note selected for redemption or repurchase or to transfer or exchange any Note for a period of 15 Business Days prior to the day of the mailing of the notice of redemption or repurchase. The Notes will be issued in registered form and the Holder will be treated as the owner of such Note for all purposes. For further information about transfer and exchange procedures, see ‘‘Book-entry, delivery and form.’’
The Notes will be subject to certain restrictions on transfer and certification requirements, as described under ‘‘Notice to investors.’’
Listing of the Notes
Application has been made to the Irish Stock Exchange for the approval of this document as Listing Particulars. Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Global Exchange Market which is the exchange regulated market of the Irish Stock Exchange. The Global Exchange Market is not a regulated market for the purposes of Directive 2004/39/EC. The Issuer will use its commercially reasonable efforts to obtain and, for so long as the Notes are outstanding, maintain the listing of such Notes on the Official List of the Irish Stock Exchange or, if at any time the Issuer determines that it will not obtain or maintain such listing on the Official List of the Irish Stock Exchange, it will use its commercially reasonable efforts to obtain (prior to delisting) and thereafter maintain a listing of such Notes on another ‘‘recognized stock exchange’’ as defined in Section 1005 of the Income Tax Act 2007 of the United Kingdom.
Notices
For Notes which are represented by global certificates held on behalf of Euroclear and Clearstream, notices will be given by delivery of the relevant notices to Euroclear and Clearstream for communication to entitled account holders. In the case of Definitive Registered Notes, if any, all notices to Holders of Notes will be validly given if mailed to them at their respective addresses in the register of the Holders of such Notes, if any, maintained by the
232 Registrar. In addition, for so long as any Notes are listed on the Official List of the Irish Stock Exchange and admitted for trading on the Global Exchange Market, and to the extent that the rules of the Irish Stock Exchange so require, any such notice to the holders of the relevant Notes shall also be published in a newspaper having a general circulation in Ireland (which is expected to be The Irish Times) or, to the extent and in the manner permitted by the rules of the Irish Stock Exchange, posted on the official website of the Irish Stock Exchange (www.ise.ie) and, in connection with any redemption, and to the extent that the rules of the Irish Stock Exchange so require, the Issuer will notify the Irish Stock Exchange of any change in the principal amount of Notes outstanding.
Each such notice shall be deemed to have been given on the date of such publication or, if published more than once on different dates, on the first date on which publication is made, provided that, if notices are mailed, such notice shall be deemed to have been given on the later of such publication and the seventh day after being so mailed. Any notice or communication mailed to a Holder shall be mailed to such Person by first-class mail or other equivalent means and shall be sufficiently given to him if so mailed within the time prescribed. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it.
Currency indemnity and calculation of Pound Sterling denominated restrictions
Pound sterling is the sole currency of account with respect to the Notes and payment for all sums payable by the Issuer and the Guarantors under or in connection with the Notes, including damages. Any amount received or recovered in a currency other than pound sterling, whether as a result of, or the enforcement of, a judgment or order of a court of any jurisdiction, in the winding-up or dissolution of the Issuer or any Guarantor or otherwise by any Holder of a Note, as the case may be, or by the Trustee or any Agent, in respect of any sum expressed to be due to it from the Issuer or any Guarantor will only constitute a discharge to the Issuer or Guarantor, as the case may be, to the extent of the pound sterling amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery (or, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so).
If that pound sterling amount is less than the pound sterling amount expressed to be due to the recipient or the relevant Trustee or relevant Agent under any Note, the Issuer will indemnify them against the cost of making any such purchase. For the purposes of this currency indemnity provision, it will be prima facie evidence of the matter stated therein for the Holder of a Note or the Trustee or relevant Agent to certify in reasonable detail in a manner satisfactory to the Issuer (indicating the sources of information used) the loss it incurred in making any such purchase. These indemnities, to the extent permitted by law, constitute a separate and independent obligation from the Issuer’s other obligations, will give rise to a separate and independent cause of action, will apply irrespective of any waiver granted by any Holder or the Trustee or relevant Agent (other than a waiver of the indemnities set out herein) and will continue in full force and effect despite any other judgment, order, claim or proof for a liquidated amount in respect of any sum due under any Note or to the Trustee or relevant Agent.
Except as otherwise specifically set forth herein, for purposes of determining compliance with any pound sterling-denominated restriction herein, the Pound Sterling Equivalent amount for purposes hereof that is denominated in a non-pound sterling currency shall be calculated based on the relevant currency exchange rate in effect on the date such non-pound sterling amount is Incurred or made, as the case may be.
233 Prescription
Claims against the Company, the Issuer or any Guarantor for the payment of principal, premium or Additional Amounts, if any, on the Notes or any Note Guarantees will be prescribed ten years after the applicable due dates for payment thereof. Claims against the Company, the Issuer or any Guarantor for the payment of interest will be prescribed five years after the applicable due date for the payment of interest.
Governing law
The Indenture will provide that it and the Notes and the Note Guarantees will be governed by, and construed in accordance with, the laws of the State of New York. The Intercreditor Agreement and the Escrow Agreement will be governed by English law. The Security Documents will be governed by applicable local law of the jurisdiction under which the security interests are granted.
Consent to jurisdiction and service
The Company and the Issuer will appoint Corporation Service Company as agent for actions relating to the Notes or the Indenture brought in any U.S. Federal or state court located in the Borough of Manhattan in The City of New York and will submit to such jurisdiction.
Enforceability of judgments
Since substantially all of the assets of the Issuer and the Guarantors are outside the United States, any judgment obtained in the United States against the Issuer or any Guarantor, including judgments with respect to the payment of principal, premium, interest, Additional Amounts and any redemption price and any purchase price with respect to the Notes, may not be collectable within the United States.
Certain definitions
Set forth below are certain defined terms used in the Indenture.
‘‘Acquired Indebtedness’’ means Indebtedness of a Person (a) existing at the time such Person is merged with or into or becomes a Subsidiary or (b) assumed in connection with the acquisition of properties or assets from such Person, in each case, whether or not such Indebtedness was Incurred in connection with, or in contemplation of, such Person becoming a Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be Incurred on the date of the related acquisition of assets from any Person or the date the acquired Person becomes a Subsidiary.
‘‘Additional Assets’’ means (a) any non-current assets (other than Indebtedness and Capital Stock) used or to be used by the Company or a Restricted Subsidiary or otherwise useful in a Related Business (including any capital expenditures on any assets already so used); (b) the Capital Stock of a Person that is engaged in a Related Business and becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary; or (c) Capital Stock of any Person that at such time is a Restricted Subsidiary acquired from a third party.
‘‘Affiliate’’ of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, ‘‘control’’ when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract, or otherwise; and the terms ‘‘controlling’’ and ‘‘controlled’’ have meanings correlative to the foregoing.
‘‘Agent’’ means any Paying Agent, the Registrar, the Transfer Agent or any authenticating agent in respect of the Notes.
234 ‘‘Agreed Security Principles’’ means the Agreed Security Principles as set out in a schedule to the Revolving Credit Facility Agreement, as in effect on the Issue Date, as applied mutatis mutandis with respect to the Notes in good faith by the Company.
‘‘Applicable Premium’’ means, with respect to any Note on any redemption date, the greater of:
(a) 1.0% of the principal amount of such Note; and
(b) the excess (to the extent positive) of:
(i) the present value at such redemption date of (A) the redemption price of such Note at June 1, 2017 (such redemption price (expressed in a percentage of the principal amount) being set forth in the table under the second paragraph in ‘‘—Optional redemption’’ (excluding accrued and unpaid interest)), plus (B) all required remaining scheduled interest payments due on such Note to and including June 1, 2017 (excluding accrued but unpaid interest), computed using a discount rate equal to the Gilt Rate at such redemption date plus 50 basis points; over
(ii) the outstanding principal amount of such Note on such redemption date, as calculated by the Issuer or on behalf of the Issuer by such Person as the Issuer shall designate, provided that such calculation shall not be a duty or obligation of the Trustee or any Agent.
‘‘Asset Disposition’’ means any sale, lease (other than an ordinary course operating lease), transfer or other disposition of Equity Interests of a Restricted Subsidiary (other than directors’ qualifying shares, or shares to be held by third parties to meet applicable legal requirements), or other assets (each referred to for the purposes of this definition as a ‘‘disposition’’) by the Company or any of its Restricted Subsidiaries (including any disposition by means of a merger, consolidation or similar transaction), provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the Indenture described above under the caption ‘‘—Change of Control’’ and/or the provisions described above under the caption ‘‘—Certain Covenants—Merger and consolidation’’ and not by the provisions described under the caption ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock,’’ other than:
(a) a disposition to the Company or a Restricted Subsidiary;
(b) a disposition of cash or Cash Equivalents;
(c) the sale or discount, or factoring, (with or without recourse, and on customary or commercially reasonable terms) of accounts receivable or notes receivable, in each case, arising in the ordinary course of business, or the conversion or exchange of accounts receivable for notes receivable;
(d) any Restricted Payment Transaction;
(e) a disposition that is governed by the provisions described in ‘‘—Certain Covenants—Merger and consolidation’’;
(f) disposition of inventory, real property or other assets in the ordinary course of business;
(g) any disposition arising from foreclosure, condemnation, taking, expropriation or similar action with respect to any property or other assets or exercise of transaction rights under any lease, license, conversion or other agreement or pursuant to buy/sell arrangements under any joint venture or similar agreement or arrangement;
235 (h) a disposition of Capital Stock of a Restricted Subsidiary which are directors’ qualifying shares or which are de minimis holdings of Capital Stock to comply with legal or regulatory requirements;
(i) the abandonment or other disposition of patents, trademarks or other intellectual property that are, in the reasonable judgment of the Company, no longer economically practicable to maintain or useful in the conduct of the business of the Company and its Subsidiaries;
(j) a disposition of obsolete, surplus or worn out equipment or other assets or equipment or other assets that are no longer useful in the conduct of the business of the Company and its Restricted Subsidiaries;
(k) any surrender or waiver of contract rights or the settlement, release or surrender of contract, tort or other claims of any kind;
(l) any disposition arising as a result of any Permitted Lien;
(m) any disposition of leases or sub-leases (including any sale and lease back transactions) over real property in the ordinary course of business of the relevant entity (but this shall not include the disposal of a lease granted to the Company or a Restricted Subsidiary at a premium or granted to the Company or a Restricted Subsidiary for a period of more than 15 years); or
(n) any disposition or series of related dispositions for aggregate consideration not to exceed £5.0 million.
‘‘Beneficial Owner’’ has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular ‘‘person’’ (as that term is used in Section 13(d)(3) of the Exchange Act), such ‘‘person’’ will be deemed to have beneficial ownership of all securities that such ‘‘person’’ has the right to acquire by conversion or exercise of other securities, whether such right is currently exercisable or is exercisable only after the passage of time. The terms ‘‘Beneficial Ownership,’’ ‘‘Beneficially Owns’’ and ‘‘Beneficially Owned’’ have a corresponding meaning.
‘‘Board of Directors’’ means, for any Person, the board of directors or other governing body of such Person or, if such Person does not have such a board of directors or other governing body and is owned or managed by a single entity, the board of directors or other governing body of such entity, or, in either case, any committee thereof duly authorized to act on behalf of such board or other governing body. Unless otherwise provided in this ‘‘Description of the Notes’’, ‘‘Board of Directors’’ means the Board of Directors of the Company. For purposes of the definition of the term ‘‘Change of Control,’’ ‘‘Board of Directors’’ does not include any committee of the board of directors or other governing body.
‘‘Business Day’’ means a day other than a Saturday, Sunday or other day on which commercial banking institutions in London, United Kingdom or the Republic of Ireland or a place of payment under the Indenture are authorized or required by law to close and other than any other day on which the Trans-European Automated Real-Time Gross Settlement Express Transfer payment system is closed for the settlement of payments.
‘‘Capital Stock’’ of any Person means any and all shares of, partnership interests in, membership interests in or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity.
‘‘Capitalized Lease Obligation’’ means an obligation that is required to be classified and accounted for as a capitalized or finance lease for financial reporting purposes and reflected as a liability on a balance sheet (other than in the footnotes thereto), in each case in accordance with IFRS. The Stated Maturity of any Capitalized Lease Obligation shall be the date of the last payment of rent or any other amount due under the related lease. For the avoidance of doubt,
236 obligations that are accounted for as operating lease arrangements for financial reporting purposes in accordance with IFRS as in effect on the Issue Date will not be Capitalized Lease Obligations.
‘‘Cash Equivalents’’ means (a) money, (b) securities issued or fully guaranteed or insured by the United States of America, Canada, Switzerland, Norway or a member state of the European Union or, in each case, any agency or instrumentality of any thereof, (c) time deposits, overnight bank deposits, certificates of deposit or bankers’ acceptances (a ‘‘Deposit’’) of (i) any current lender under the Revolving Credit Facility Agreement or any affiliate thereof or (ii) any lender, bank, trust company or commercial bank having capital and surplus in excess of £250,000,000 or (iii) any lender, bank, trust company or commercial bank whose commercial paper is rated at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody’s (or if at such time neither is issuing ratings, then a comparable rating of another Nationally Recognized Statistical Rating Organization), (d) Deposits in the ordinary course of business and consistent with past practice issued by a bank or trust company which is authorized to operate as a bank or trust company in its home jurisdiction and in the jurisdiction in which the Deposit is made provided that all Deposits made with such bank or trust company do not exceed £500,000 at any one time, (e) repurchase obligations with a term of not more than thirty days for underlying securities of the types described in clauses (b) and (c) above entered into with any financial institution meeting the qualifications specified in clause (c) above, (f) money market instruments, commercial paper or other short-term obligations rated at least A-2 or the equivalent thereof by S&P or at least P-2 or the equivalent thereof by Moody’s (or if at such time neither is issuing ratings, then a comparable rating of another Nationally Recognized Statistical Rating Organization) with maturities of 12 months or less from the date of acquisition, (g) investments similar to any of the foregoing denominated in currencies other than euro, pound sterling or U.S. dollars obtained in the ordinary course of business and with the highest ranking obtainable in the applicable jurisdiction, (h) bills of exchange issued in the United States, Canada, a member state of the European Union, Switzerland or Norway eligible for rediscount at the relevant central bank and accepted by a bank (or any dematerialized equivalent), (i) readily marketable direct obligations issued by any state of the United States of America, any province of Canada, any member of the European Union, Switzerland or Norway or any political subdivision thereof, in each case, having one of the two highest rating categories obtainable from either Moody’s or S&P (or, if at the time, neither is issuing comparable ratings, then a comparable rating of another Nationally Recognized Statistical Rating Organization) with maturities of not more than two years from the date of acquisition, and (j) investment funds investing 95% of their assets in securities of the type described in clauses (a) through (i) above (which funds may also hold reasonable amounts of cash pending investment and/or distribution).
‘‘Change of Control’’ means the occurrence of any of the following:
(i) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation or similar business combination transaction), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Restricted Subsidiaries taken as a whole to any ‘‘person’’ (as that term is used in Section 13(d) of the Exchange Act);
(ii) the adoption of a plan relating to the liquidation or dissolution of the Company or the Issuer other than in a transaction which complies with the provisions described under ‘‘—Certain Covenants—Merger and consolidation’’;
(iii) the consummation of any transaction (including, without limitation, any merger or consolidation or similar business combination transaction) the result of which is that any ‘‘person’’ (as defined in clause (i) above) becomes the Beneficial Owner, directly or indirectly, of more than 50% of the Voting Stock of the Company, measured by voting power rather than number of shares;
237 (iv) during any 24-month period, Continuing Directors cease to constitute a majority of the Board of Directors of the Company; or
(v) following the Escrow Release Date, the first day on which the Company (or any successor entity) fails to own, directly or indirectly, 100% of the Capital Stock of the Issuer (except for directors’ qualifying shares and other nominal amounts of Capital Stock that are required to be held by other Persons under applicable law), other than in a transaction which complies with the provisions described under ‘‘—Certain Covenants—Merger and consolidation’’
‘‘Clearstream’’ means Clearstream Banking, societ´ e´ anonyme, as currently in effect or any successor thereof.
‘‘Code’’ means the U.S. Internal Revenue Code of 1986, as amended.
‘‘Collateral’’ means (1) the assets of the Issuer and the Guarantors for which a Lien has been created to secure the Notes and the Note Guarantees pursuant to the Security Documents and (2) any other asset in which a security interest has been or will be granted pursuant to any Security Document to secure the Obligations under the Indenture, the Notes or any Note Guarantee.
‘‘Commodities Agreements’’ means, in respect of a Person, any commodity futures contract, forward contract, repurchase agreement, option or similar agreement or arrangement (including derivative agreements or arrangements), as to which such Person is a party or beneficiary.
‘‘Companies Act’’ means the Companies Act 2006 (as amended, restated or re-enacted from time to time).
‘‘Consolidated Capital Expenditures’’ means, for any fiscal year, all expenditures or obligations in respect of expenditures (other than expenditures or obligations in respect of acquisitions or Investments) by the Company and the Restricted Subsidiaries during such period which, in accordance with IFRS, are treated as capital expenditure or are required to be included as additions during such period to property, plant or equipment reflected in the consolidated balance sheet of the Company and its Restricted Subsidiaries (only taking into account the actual cash payment made where assets are replaced and part of the purchase price is paid by way of part exchange), unless such expenditures or obligations are financed with (i) the net proceeds of the disposition of assets in compliance with the covenant described under ‘‘Certain covenants—Limitation on sales of Assets and Subsidiary Stock,’’ (ii) the proceeds of Indebtedness Incurred pursuant to the covenant described under ‘‘—Certain Covenants— Limitation on Indebtedness’’ that are not applied in permanent repayment of Indebtedness or (iii) the issuance or sale of Equity Interests of the Company or a Restricted Subsidiary or capital contribution to the Company or a Restricted Subsidiary; provided further that the term ‘‘Consolidated Capital Expenditure’’ shall not include (1) expenditures made in connection with the replacement, substitution, restoration or repair of assets to the extent financed with (x) insurance proceeds paid on account of the loss of or damage to the assets being replaced, restored or repaired or (y) awards of compensation arising from the taking by eminent domain or condemnation of the assets being replaced, (2) the purchase price of equipment that is purchased simultaneously with the trade-in of existing equipment to the extent that the gross amount of such purchase price is reduced by the credit granted by the seller of such equipment for the equipment being traded in at such time and (3) expenditures that are accounted for as capital expenditures by the Company or any Restricted Subsidiary and that actually are paid for by a Person other than the Company or any Restricted Subsidiary and for which neither the Company nor any Restricted Subsidiary has provided or is required to provide or incur, directly or indirectly, any consideration or obligation to such Person or any other Person (whether before, during or after such period), except to the extent any such source described in this proviso increased Consolidated EBITDA in the relevant fiscal year.
238 ‘‘Consolidated Current Assets’’ means, as at any date of determination, the total assets of the Company and its Restricted Subsidiaries on a consolidated basis which are properly classified as current assets in conformity with IFRS, excluding cash and Cash Equivalents of the Company and its Restricted Subsidiaries and assets classified as held for sale.
‘‘Consolidated Current Liabilities’’ means, as at any date of determination, the total liabilities of the Company and its Restricted Subsidiaries on a consolidated basis which are properly classified as current liabilities in conformity with IFRS, excluding the current portions of Funded Debt and Capitalized Lease Obligations of the Company and its Restricted Subsidiaries, other than current liabilities in respect of exceptional items.
‘‘Consolidated Debt Service’’ means, in respect of any fiscal year, the aggregate of: (a) Consolidated Fixed Charges payable in cash; (b) all payments of principal of any Indebtedness (other than Indebtedness owed to the Company or a Restricted Subsidiary), excluding (i) repayment of revolving extensions of credit which were available for simultaneous drawing according to the terms of such credit facility, (ii) any repayment of Indebtedness to the extent repaid or refinanced with Indebtedness permitted to be Incurred under the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’ and (iii) any repayment of Indebtedness to the extent repaid or refinanced with the net proceeds of the disposition of assets in compliance with the covenant described under ‘‘Certain covenants—Limitation on sales of Assets and Subsidiary Stock,’’; and (c) the amount of the capital element of any payments under any Capitalized Lease Obligation.
‘‘Consolidated EBITDA’’ means, for any period, Consolidated Net Income for such period, plus the following to the extent deducted in calculating such Consolidated Net Income, without duplication: (a) provision for all taxes (whether or not paid, estimated, accrued or deferred) based on income, profits or capital; (b) Consolidated Fixed Charges, foreign exchange differences that are treated as interest under IFRS, fair value movements on any Indebtedness or Hedging Obligations, costs related to the Transactions and non-cash interest relating to employee benefit plans or arrangements or postretirement benefit arrangements; (c) depreciation, impairment, amortization (including but not limited to depreciation and amortization of property, plant and equipment, goodwill and other intangibles and amortization and write-off of financing costs) and all other non-cash charges or non-cash losses; (d) any expenses or charges related to any Equity Offering, Investment or Indebtedness permitted by the Indenture (whether or not consummated or incurred); (e) the amount of any minority interest expense; and (f) any consulting or advisory fees and related expenses incurred in connection with any transactions relating to Exceptional Items; less (g) all other non-cash items increasing such Consolidated Net Income for such period (other than the accrual of revenue or the reversal of a reserve for cash charges in a future period in the ordinary course of business), in each case under clauses (a) through (g) as determined on a consolidated basis in accordance with IFRS.
‘‘Consolidated Excess Cash Flow’’ means, for any fiscal year, an amount (if positive) equal to: (a) the sum, without duplication, of the amounts for such period of (i) Consolidated EBITDA, (ii) the Consolidated Working Capital Adjustment, (iii) any receipt of cash with respect to any exceptional items other than any sale, lease, transfer or other disposition of assets and (iv) any non-cash debits included in Consolidated EBITDA; minus (b) the sum, without duplication, of the amounts for such period of (i) Consolidated Debt Service, (ii) Consolidated Capital Expenditures, (iii) cash expenditures in respect of Hedging Obligations and otherwise not included in the calculation of Consolidated EBITDA, (iv) current Taxes based on income of the Company and its Restricted Subsidiaries and paid or payable in cash in such fiscal year, (v) fees, expenses and charges associated with the Transactions to the extent paid in the relevant period, (vi) any payment in cash with respect to any exceptional items, (vii) any non-cash credits included in Consolidated EBITDA, (viii) any required contribution in cash or other required payment in cash into a Pension Scheme, including pension levy payments, (ix) any payments in cash made with respect to stock, stock option or other equity based award plans of the
239 Company and its Restricted Subsidiaries permitted by the covenant described under ‘‘Certain Covenants—Limitation on Restricted Payments’’ and not otherwise deducted in the calculation of Consolidated EBITDA and (x) any proceeds increasing Consolidated EBITDA resulting from the sale, lease, transfer or other disposition of assets other than in the ordinary course of business.
‘‘Consolidated Fixed Charge Coverage Ratio’’ as of any date of determination means the ratio of (i) the aggregate amount of Consolidated EBITDA of the Company and its Restricted Subsidiaries for the period of the most recent four consecutive fiscal quarters ending prior to the date of such determination for which consolidated financial statements of the Company are available to (ii) Consolidated Fixed Charges for such four fiscal quarters; provided that:
(a) if since the beginning of such period the Company or any Restricted Subsidiary has Incurred any Indebtedness that remains outstanding on such date of determination or if the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio is an Incurrence of Indebtedness, Consolidated EBITDA and Consolidated Fixed Charges for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period (except that in making such computation, the amount of Indebtedness under any revolving credit facility outstanding on the date of such calculation shall be computed based on (i) the average daily balance of such Indebtedness during such four fiscal quarters or such shorter period for which such facility was outstanding or (ii) if such facility was created after the end of such four fiscal quarters, the average daily balance of such Indebtedness during the period from the date of creation of such facility to the date of such calculation);
(b) if since the beginning of such period the Company or any Restricted Subsidiary has repaid, repurchased, redeemed, defeased or otherwise acquired, retired or discharged any Indebtedness that is no longer outstanding on such date of determination (each, a ‘‘Discharge’’) or if the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio involves a Discharge of Indebtedness (in each case other than Indebtedness Incurred under any revolving credit facility unless such Indebtedness has been permanently repaid), Consolidated EBITDA and Consolidated Fixed Charges for such period shall be calculated after giving effect on a pro forma basis to such Discharge of such Indebtedness, including with the proceeds of such new Indebtedness, as if such Discharge had occurred on the first day of such period;
(c) if since the beginning of such period the Company or any Restricted Subsidiary shall have disposed of any company, any business or any group of assets constituting an operating unit of a business (any such disposition, a ‘‘Sale’’), the Consolidated EBITDA for such period shall be reduced by an amount equal to the Consolidated EBITDA (if positive) attributable to the assets that are the subject of such Sale for such period or increased by an amount equal to the Consolidated EBITDA (if negative) attributable thereto for such period and Consolidated Fixed Charges for such period shall be reduced by an amount equal to (i) the Consolidated Fixed Charges attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, redeemed, defeased or otherwise acquired, retired or discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Sale for such period (including but not limited to through the assumption of such Indebtedness by another Person) plus (ii) if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Fixed Charges for such period attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such Sale;
(d) if since the beginning of such period the Company or any Restricted Subsidiary (by merger, consolidation or otherwise) shall have made an Investment in any Person that thereby
240 becomes a Restricted Subsidiary, or otherwise acquired any company, any business or any group of assets constituting an operating unit of a business, including any such Investment or acquisition occurring in connection with a transaction causing a calculation to be made hereunder (any such Investment or acquisition, a ‘‘Purchase’’), Consolidated EBITDA and Consolidated Fixed Charges for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any related Indebtedness) as if such Purchase occurred on the first day of such period;
(e) if since the beginning of such period any Person has been designated as a Restricted Subsidiary or was merged or consolidated with or into the Company or any Restricted Subsidiary, Consolidated EBITDA and Consolidated Fixed Charges for such period shall be calculated after giving pro forma effect thereto as if such designation, merger or consolidation occurred on the first day of such period; and
(f) if since the beginning of such period any Person became a Restricted Subsidiary or was merged or consolidated with or into the Company or any Restricted Subsidiary, and since the beginning of such period such Person shall have Discharged any Indebtedness or made any Sale or Purchase that would have required an adjustment pursuant to clause (b), (c) or (d) above if made by the Company or a Restricted Subsidiary since the beginning of such period, Consolidated EBITDA and Consolidated Fixed Charges for such period shall be calculated after giving pro forma effect thereto as if such Discharge, Sale or Purchase occurred on the first day of such period, provided, however, the pro forma calculation of the Consolidated Fixed Charge Coverage Ratio shall not give effect to (i) any Indebtedness incurred on the date of determination pursuant to the provisions described in paragraph (b) under the caption ‘‘—Certain Covenants—Limitation on Indebtedness’’ or (ii) the discharge on the date of determination of any Indebtedness to the extent that such discharge results from the proceeds Incurred pursuant to the provisions described in paragraph (b) under the caption ‘‘—Certain Covenants—Limitation on Indebtedness.’’
For purposes of this definition, whenever pro forma effect is to be given to any Sale, Purchase or other transaction, or the amount of income or earnings relating thereto and the amount of Consolidated Fixed Charges associated with any Indebtedness Incurred or repaid, repurchased, redeemed, defeased or otherwise acquired, retired or discharged in connection therewith, the pro forma calculations in respect thereof (including without limitation in respect of anticipated cost savings or cost reduction synergies relating to any such Sale, Purchase or other transaction) shall be as determined in good faith by the Chief Financial Officer or another responsible accounting or financial officer of the Company. In addition, Consolidated EBITDA for any such period shall include any Consolidated EBITDA attributable to any Restricted Subsidiary that has been designated as an ‘‘asset held for sale’’ in accordance with IFRS and remains a Restricted Subsidiary at the end of such period. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness). If any Indebtedness bears, at the option of the Company or a Restricted Subsidiary, a rate of interest based on a prime or similar rate, a euro currency interbank offered rate or other fixed or floating rate, and such Indebtedness is being given pro forma effect, the interest expense on such Indebtedness shall be calculated by applying such optional rate as the Company or such Restricted Subsidiary may designate. If any Indebtedness that is being given pro forma effect was Incurred under a revolving credit facility, the interest expense on such Indebtedness shall be computed based upon the average daily balance of such Indebtedness during the applicable period. Interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate determined in good faith by the Chief Financial Officer or another responsible accounting or financial officer of the Company to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with IFRS.
241 ‘‘Consolidated Fixed Charges’’ means, for any period, (a) the total interest expense of the Company and its Restricted Subsidiaries to the extent deducted in calculating Consolidated Net Income, net of any interest income of the Company and its Restricted Subsidiaries and after taking into account the net payment or receipt paid or payable or received or receivable under any Interest Rate Agreement or Currency Agreement in respect of Indebtedness, and after excluding any foreign exchange differences that are treated as interest under IFRS and after excluding any fair value movements on any Indebtedness or Hedging Obligations for such period, and after excluding any ‘‘interest cost’’ on pension obligations as defined in IAS 19, and after excluding any costs related to the Transactions (other than for the avoidance of doubt interest incurred on Indebtedness Incurred pursuant to the Transactions) that are classified as interest under IFRS, including without limitation any such interest expense consisting of (i) interest expense attributable to Capitalized Lease Obligations, (ii) amortization of debt discount, (iii) interest in respect of Indebtedness of any other Person that has been guaranteed by the Company or any Restricted Subsidiary, but only to the extent that such interest is actually paid by the Company or any Restricted Subsidiary, (iv) non-cash interest expense on Indebtedness (including any interest expense that was capitalized during such period), (v) the interest portion of any deferred payment obligation and (vi) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing, plus (b) Preferred Stock dividends paid in cash in respect of Disqualified Stock of the Company held by Persons other than the Company or a Restricted Subsidiary and minus (c) to the extent otherwise included in such interest expense referred to in clause (i) above, amortization or write-off of financing costs and non-cash interest relating to employee benefit plans or arrangements or post-retirement benefit arrangements, in each case under clauses (a) through (c) as determined on a Consolidated basis in accordance with IFRS and without limiting the foregoing, taking no account of any applicable Exceptional Items.
‘‘Consolidated Leverage’’ means the sum of the aggregate outstanding Indebtedness of the Company and its Restricted Subsidiaries (excluding Hedging Obligations) minus cash and Cash Equivalents held by the Company and its Restricted Subsidiaries.
‘‘Consolidated Leverage Ratio’’ means, as of any date of determination, the ratio of (a) Consolidated Leverage at such date to (b) the aggregate amount of Consolidated EBITDA for the most recent four fiscal quarters ending prior to the date of such determination for which internal consolidated financial statements of the Company are available. In the event that the Company or any of its Restricted Subsidiaries Incurs, assumes, guarantees, repays, repurchases, redeems, defeases or otherwise discharges any Indebtedness subsequent to the commencement of the period for which the Consolidated Leverage Ratio is being calculated and on or prior to the date on which the event for which the calculation of the Consolidated Leverage Ratio is made (the ‘‘Calculation Date’’), then the Consolidated Leverage Ratio will be calculated giving pro forma effect (as determined in good faith by a responsible accounting or financial officer of the Company) to such Incurrence, assumption, guarantee, repayment, repurchase, redemption, defeasance or other discharge of Indebtedness, and the use of the proceeds therefrom, as if the same had occurred at the beginning of the applicable reference period; provided, however, that the pro forma calculation shall not give effect to (i) any Indebtedness Incurred on the Calculation Date pursuant to the provisions described in paragraph (b) under ‘‘—Certain Covenants—Limitation on Indebtedness’’ or (ii) the discharge on the Calculation Date of any Indebtedness to the extent that such discharge results from the proceeds Incurred pursuant to the provisions described in paragraph (b) under ‘‘—Certain Covenants—Limitation on Indebtedness’’.
In addition, for purposes of calculating the Consolidated EBITDA for such period:
(a) if since the beginning of such period the Company or any Restricted Subsidiary shall have disposed of any company, any business or any group of assets constituting an operating unit of a business (any such disposition, a ‘‘Sale’’), the Consolidated EBITDA for such period shall be reduced by an amount equal to the Consolidated EBITDA (if positive) attributable
242 to the assets that are the subject of such Sale for such period or increased by an amount equal to the Consolidated EBITDA (if negative) attributable thereto for such period and Consolidated Fixed Charges for such period shall be reduced by an amount equal to (i) the Consolidated Fixed Charges attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, redeemed, defeased or otherwise acquired, retired or discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Sale for such period (including but not limited to through the assumption of such Indebtedness by another Person) plus (ii) if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Fixed Charges for such period attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such Sale;
(b) if since the beginning of such period the Company or any Restricted Subsidiary (by merger, consolidation or otherwise) shall have made an Investment in any Person that thereby becomes a Restricted Subsidiary, or otherwise acquired any company, any business or any group of assets constituting an operating unit of a business, including any such Investment or acquisition occurring in connection with a transaction causing a calculation to be made hereunder (any such Investment or acquisition, a ‘‘Purchase’’), Consolidated EBITDA and Consolidated Fixed Charges for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any related Indebtedness) as if such Purchase occurred on the first day of such period;
(c) if since the beginning of such period any Person has been designated as a Restricted Subsidiary or was merged or consolidated with or into the Company or any Restricted Subsidiary, Consolidated EBITDA and Consolidated Fixed Charges for such period shall be calculated after giving pro forma effect thereto as if such designation, merger or consolidation occurred on the first day of such period; and
(d) if since the beginning of such period any Person, became a Restricted Subsidiary or was merged or consolidated with or into the Company or any Restricted Subsidiary, and since the beginning of such period such Person shall have Discharged any Indebtedness or made any Sale or Purchase that would have required an adjustment pursuant to clause (b), (c) or (d) above if made by the Company or a Restricted Subsidiary since the beginning of such period, Consolidated EBITDA and Consolidated Fixed Charges for such period shall be calculated after giving pro forma effect thereto as if such Discharge, Sale or Purchase occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to any Sale, Purchase or other transaction, or the amount of income or earnings relating thereto and the amount of Consolidated Fixed Charges associated with any Indebtedness Incurred or repaid, repurchased, redeemed, defeased or otherwise acquired, retired or discharged in connection therewith, the pro forma calculations in respect thereof (including without limitation in respect of anticipated cost savings or cost reduction synergies relating to any such Sale, Purchase or other transaction) shall be as determined in good faith by the Chief Financial Officer or another responsible accounting or financial officer of the Company. In addition, Consolidated EBITDA for any such period shall include any Consolidated EBITDA attributable to any Restricted Subsidiary that has been designated as an ‘‘asset held for sale’’ in accordance with IFRS and remains a Restricted Subsidiary at the end of such period. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness). If any Indebtedness bears, at the option of the Company or a Restricted Subsidiary, a rate of interest based on a prime or similar rate, a euro currency interbank offered rate or other fixed or floating rate, and such Indebtedness is being given pro forma effect, the interest expense on such Indebtedness shall be calculated by applying such optional rate as the Company or such
243 Restricted Subsidiary may designate. If any Indebtedness that is being given pro forma effect was Incurred under a revolving credit facility, the interest expense on such Indebtedness shall be computed based upon the average daily balance of such Indebtedness during the applicable period. Interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate determined in good faith by the Chief Financial Officer or another responsible accounting or financial officer of the Company to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with IFRS.
‘‘Consolidated Net Income’’ means, for any period, the profit (loss) after taxes of the Company and its Restricted Subsidiaries, determined on a consolidated basis in accordance with IFRS and before any reduction in respect of Preferred Stock dividends; provided that there shall not be included in such Consolidated Net Income:
(a) any net income (loss) of any Person if such Person is not the Company or a Restricted Subsidiary, except that (i) the Company’s equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution or return on investment (subject, in the case of a dividend or other distribution or return on investment to a Restricted Subsidiary, to the limitations contained in clause (b) below) and (ii) the Company’s equity in the net loss of such Person shall be included to the extent of the aggregate Investment of the Company or any of its Restricted Subsidiaries in such Person;
(b) any net income (loss) of any Restricted Subsidiary that is not a Guarantor or the Issuer if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of similar distributions by such Restricted Subsidiary, directly or indirectly, to the Issuer by operation of the terms of such Restricted Subsidiary’s charter or any agreement, instrument, judgment, decree, order, statute or governmental rule or regulation applicable to such Restricted Subsidiary or its stockholders (other than (v) restrictions that have been waived or otherwise released, (w) restrictions pursuant to the Indenture, (x) restrictions permitted pursuant to clauses (a) through (h) of the covenant described under ‘‘—Certain Covenants—Limitation on restrictions on distributions from Restricted Subsidiaries’’, (y) restrictions in effect on the Issue Date with respect to a Restricted Subsidiary (including without limitation pursuant to the Revolving Credit Facility Agreement) and (z) other restrictions with respect to such Restricted Subsidiary that taken as a whole are not materially less favourable to the Holders than such restrictions in effect on the Issue Date), except that (i) the Company’s equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of any dividend or distribution that was or that could have been made by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary (subject, in the case of a dividend that could have been made to another Restricted Subsidiary, to the limitation contained in this clause) and (ii) the net loss of such Restricted Subsidiary shall be included to the extent of the aggregate Investment of the Company or any of its other Restricted Subsidiaries in such Restricted Subsidiary;
(c) any gain or loss realized upon the sale or other disposition of any asset of the Company or any Restricted Subsidiary (including pursuant to any sale/leaseback transaction) that is not sold or otherwise disposed of in the ordinary course of business (as determined in good faith by the Company);
(d) any item classified as an extraordinary, unusual or nonrecurring gain, loss or charge and any exceptional or one-off item (including fees, expenses and charges associated with any restructuring, redundancy or the Transactions and any acquisition, merger or consolidation after the Issue Date, in each case, as determined in good faith by the Company);
(e) the cumulative effect of a change in accounting principles required by IFRS to be applied;
244 (f) all deferred financing costs and unamortized arrangement fees written off and premiums paid in connection with any early extinguishment of Indebtedness and any net gain (loss) from any write-off or forgiveness of Indebtedness;
(g) any unrealized gains or losses in respect of Hedging Obligations and the fair value measurements under IAS 39, which relate to any forward points component of foreign exchange contracts, the time value component of option contracts, and/or any other hedge ineffectiveness, in each case as applied in accordance with IAS 39;
(h) any non-cash compensation charge arising from any grant of stock, stock options or other equity based awards;
(i) any ‘‘interest cost’’ on pension obligations, as defined in IAS 19;
(j) any property, plant and equipment, goodwill or other intangible asset impairment charge or write-off (the items referred to in clauses (c) to (j) hereof are collectively referred to as ‘‘Exceptional Items’’); and
(k) any net income (loss) attributable to discontinued operations, as determined in accordance with IFRS.
Notwithstanding the foregoing, for the purpose of clause (a)(C)(1) of the covenant described under ‘‘—Certain Covenants—Limitation on Restricted Payments’’ only, there shall be excluded from Consolidated Net Income, without duplication, any income consisting of dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers are applied by the Company to increase the amount of Restricted Payments permitted under clauses (a)(C)(3) or (4) of the covenant described under ‘‘—Certain Covenants—Limitation on Restricted Payments.’’
‘‘Consolidated Senior Secured Leverage’’ means the sum of the aggregate outstanding Senior Secured Debt of the Company and its Restricted Subsidiaries (excluding Hedging Obligations permitted by clause (b)(viii)(A) of the covenant described under ‘‘Certain Covenants—Limitation on Indebtedness’’.
‘‘Consolidated Working Capital’’ means, as at any date of determination, the excess (or deficit) of Consolidated Current Assets over Consolidated Current Liabilities.
‘‘Consolidated Working Capital Adjustment’’ means, for any period on a consolidated basis, the amount (which may be a negative number) by which Consolidated Working Capital as of the beginning of such period exceeds (or is less than) Consolidated Working Capital as of the end of such period.
‘‘Consolidation’’ means the consolidation of the accounts of each of the Restricted Subsidiaries with those of the Company in accordance with IFRS; provided that ‘‘Consolidation’’ will not include consolidation of the accounts of any Unrestricted Subsidiary, but the interest of the Company or any Restricted Subsidiary in any Unrestricted Subsidiary will be accounted for as an investment. The term ‘‘Consolidated’’ has a correlative meaning.
‘‘Continuing Directors’’ means, as of any date of determination, any member of the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the Issue Date; or
(2) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board of Directors at the time of such nomination or election.
‘‘Credit Facilities’’ means, with respect to the Company or any of its Subsidiaries, one or more debt facilities, indentures or other arrangements (including the Revolving Credit Facility
245 Agreement, commercial paper facilities, overdraft facilities or arrangements designated by the Company, in each case) with one or more banks or other lenders or institutions or investors providing for revolving credit loans, notes, term loans, receivables financings (including, without limitation, through the sale of receivables to such institutions or to special purpose entities formed to borrow from such institutions against such receivables or the creation of any Liens in respect of such receivables in favour of such institutions), letters of credit, bonding facilities, or other Indebtedness, in each case, including all agreements, instruments and documents executed and delivered pursuant to or in connection with any of the foregoing, including but not limited to any notes and letters of credit issued pursuant thereto and any guarantee and collateral agreement, patent and trademark security agreement, mortgages or letter of credit applications and other guarantees, pledge agreements, security agreements and collateral documents, in each case as the same may be amended, supplemented, novated, restated, waived or otherwise modified from time to time, or refunded, refinanced, restructured, replaced, renewed, repaid, increased or extended from time to time (whether in whole or in part, whether with the original banks, lenders or institutions or other banks, lenders or institutions or otherwise, and whether provided under any original Credit Facility or one or more other credit agreements, indentures, financing agreements or other Credit Facilities or otherwise); provided that any such facilities, indentures or other arrangements or instruments shall not constitute Credit Facilities unless they constitute or are in respect of Indebtedness of the Company or any of its Subsidiaries. Without limiting the generality of the foregoing, the term ‘‘Credit Facility’’ shall include any agreement (i) changing the maturity of any Indebtedness Incurred thereunder or contemplated thereby, (ii) adding Subsidiaries as additional borrowers or guarantors thereunder, (iii) increasing the amount of Indebtedness Incurred thereunder or available to be borrowed thereunder or (iv) otherwise altering the terms and conditions thereof.
‘‘Currency Agreement’’ means, in respect of a Person, any foreign exchange contract, currency swap agreement or other similar agreement or arrangements (including derivative agreements or arrangements), as to which such Person is a party or a beneficiary.
‘‘Default’’ means any event or condition that is, or after notice or passage of time or both would be, an Event of Default under the Indenture.
‘‘Designated Noncash Consideration’’ means the Fair Market Value of noncash consideration received by the Company or one of its Restricted Subsidiaries in connection with an Asset Disposition that is so designated as Designated Noncash Consideration pursuant to an Officer’s Certificate, setting forth the basis of such valuation.
‘‘Disinterested Directors’’ means, with respect to any Affiliate Transaction, one or more members of the Board of Directors of the Company, having no material direct or indirect financial interest in or with respect to such Affiliate Transaction. A member of the Board of Directors of the Company shall not be deemed to have such a financial interest by reason of such member’s holding Capital Stock of the Company, any Capital Stock or other debt or equity securities of any entity formed for the purpose of investing in Capital Stock of the Company, or any options, warrants or other rights in respect of any of the foregoing.
‘‘Disqualified Stock’’ means, with respect to any Person, any Capital Stock (other than Management Stock) that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable) or upon the happening of any event (other than following the occurrence of a Change of Control or other similar event described under such terms as a ‘‘change of control’’ or an Asset Disposition) (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is convertible or exchangeable for Indebtedness or Disqualified Stock or (c) is redeemable at the option of the holder thereof (other than following the occurrence of a Change of Control or other similar event described under such terms as a ‘‘change of control,’’ or an Asset Disposition), in whole or in part, in each case on or prior to the six month anniversary of the final Stated
246 Maturity of the Notes, provided that Capital Stock issues to any employee benefit plan, or by any such plan to any employees of the Company or any Subsidiary, shall not constitute Disqualified Stock solely because it may be required to be repurchased or otherwise acquired or retired in order to satisfy applicable statutory or regulatory obligations.
‘‘dollars’’ or ’’$’’ means United States dollars, the lawful currency for the time being of the United States of America.
‘‘Equity Interests’’ means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchange for, Capital Stock).
‘‘Equity Offering’’ means (a) a sale of Capital Stock of the Company (other than Disqualified Stock) or (b) the sale of Capital Stock or other securities of any direct or indirect parent company of the Company, the proceeds of which are contributed to the equity of the Company or any of its Restricted Subsidiaries.
‘‘Escrowed Proceeds’’ means the gross proceeds from the issuance of the Notes issued on the Issue Date together with an additional amount in pound sterling equivalent to interest on the Notes from the Issue Date up to and including the Escrow Longstop Date that are deposited into the Escrow Account pursuant to the Escrow Agreement and any interest earned on such amounts so deposited.
‘‘euro’’ or ’’g’’ means the single currency of the Participating Member States.
‘‘Euroclear’’ means Euroclear Bank SA/NV or any successor thereof.
‘‘European Union’’ means the European Union as of January 1, 2004, including the countries of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom, but not including any country which became or becomes a member of the European Union after January 1, 2004.
‘‘Event of Default’’ has the meaning set forth under ‘‘—Events of Default and remedies’’.
‘‘Excess Cash Flow Amount’’ means, for any fiscal year, (i) if the Consolidated Leverage Ratio for the Company and its Restricted Subsidiaries is greater than or equal to 2.00 to 1.00 as of the last day of the relevant fiscal year, an amount equal to 80% of Consolidated Excess Cash Flow, if any, for the relevant fiscal year and (ii) if the Consolidated Leverage Ratio for the Company and its Restricted Subsidiaries is less than 2.00 to 1.00 as of the last day of the relevant fiscal year, an amount equal to 50% of Consolidated Excess Cash Flow, if any, for the relevant fiscal year.
‘‘Excess Proceeds’’ has the meaning set forth under ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock’’.
‘‘Excess Proceeds Offer’’ has the meaning set forth under ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock’’.
‘‘Exchange Act’’ means the U.S. Securities Exchange Act of 1934, as amended.
‘‘Existing Facility Agreement’’ means (a) the various bilateral revolving multi-currency credit facility agreements entered into by the Company and guaranteed by certain of its subsidiaries with The Royal Bank of Scotland plc, Lloyds TSB Scotland plc, Barclays Bank plc, National Australia Bank Limited, The Governor and the Company of the Bank of Ireland, Allied Irish Banks p.l.c., Scotiabank (Ireland) Limited, Sumitomo Mitsui Banking Corporation Europe Limited and KBC Bank N.V. pursuant to which revolving multi-currency credit facilities in the amounts of £140 million, £140 million, £100 million, £80 million, £45 million, £45 million, £30 million, £35 million and £15 million, respectively, were made available and (b) the agreement between The Royal Bank of Scotland plc and the Company and Johnston Publishing Limited, dated
247 27 September 2005 and 6 October 2005 in respect of which a £10 million net overdraft (£20 million gross) was made available, each agreement as amended, varied, overridden or supplemented by the Override Agreement.
‘‘Existing Note Purchase Agreement’’ refers to the note purchase agreements both dated 7 January 2003 between the Company and certain institutional purchasers, pursuant to which each institutional purchaser agreed to purchase 6.30% Guaranteed Series B Senior Notes and/or 5.75% Guaranteed Series A Senior Notes (in each case as defined in the relevant note purchase agreement) issued by the Company in aggregate principal amounts of £60 million and $115 million respectively and the note purchase agreement dated 15 June 2006 between the Company and certain institutional purchasers, pursuant to which each institutional purchaser agreed to purchase 6.18% Guaranteed Series A Senior Notes and/or 6.28% Guaranteed Series B Senior Notes (in each case as defined in the relevant note purchase agreement) issued by the Company in aggregate principal amounts of $55 million and $100 million respectively, each note purchase agreement as amended, varied, overridden or supplemented by the Override Agreement.
‘‘Existing Notes’’ means the 6.30% Guaranteed Series B Senior Notes and the 5.75% Guaranteed Series A Senior Notes (in each case as defined in the relevant Existing Note Purchase Agreement) issued by the Company in aggregate principal amounts of £60 million and $115 million respectively under the relevant Existing Note Purchase Agreements and the 6.18% Guaranteed Series A Senior Notes and 6.28% Guaranteed Series B Senior Notes (in each case as defined in the relevant Existing Note Purchase Agreement) issued by the Company in aggregate principal amounts of $55 million and $100 million, respectively, under the relevant Existing Note Purchase Agreement.
‘‘Fair Market Value’’ means, with respect to any asset or property, the fair market value of such asset or property as determined in good faith by the Board of Directors of the Company, whose determination will be conclusive.
‘‘Funded Debt’’, as applied to any Person, means all Indebtedness of that Person (including any current portions thereof) which by its terms or by the terms of any instrument or agreement relating thereto matures more than one year from, or is directly renewable or extendable at the option of that Person to a date more than one year from (including an option of that Person under a revolving credit or similar agreement obligating the lender or lenders to extend credit over a period of one year or more from), the date of the creation thereof.
‘‘Gilt Rate’’ means, with respect to any redemption date, the yield to maturity as of such redemption date of UK Government Securities with a fixed maturity (as compiled by the Office for National Statistics and published in the most recent Financial Statistics that have become publicly available at least two Business Days in London prior to such redemption date (or, if such Financial Statistics are no longer published, any publicly available source of similar market data)) most nearly equal to the period from such redemption date to June 1, 2017; provided, however, that if the period from such redemption date to June 1, 2017, is less than one year, the weekly average yield on actually traded UK Government Securities denominated in pound sterling adjusted to a fixed maturity of one year shall be used.
‘‘guarantee’’ means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person; provided that the term ‘‘guarantee’’ shall not include endorsements for collection or deposit in the ordinary course of business. The term ‘‘guarantee’’ used as a verb has a corresponding meaning.
‘‘Guarantor’’ means the Initial Guarantors and any Restricted Subsidiary that subsequently becomes a Guarantor in accordance with the terms of the Indenture, in each case, together with their respective successors and assigns; provided that upon the release or discharge of any such Person from its Note Guarantee in accordance with the Indenture, such Person shall cease to be a Guarantor.
248 ‘‘Hedging Obligations’’ of any Person means the obligations of such Person pursuant to any Interest Rate Agreement, Currency Agreement or Commodities Agreement.
‘‘Holder’’ means each Person in whose name the Notes are registered on the Registrar’s books, which shall initially be the nominee of a common depositary for Euroclear and Clearstream.
‘‘IFRS’’ means generally accepted accounting principles in accordance with International Financial Reporting Standards as in effect on the date of the Indenture (for purposes of the definitions of the terms ‘‘Consolidated Fixed Charge Coverage Ratio’’, ‘‘Consolidated EBITDA’’, ‘‘Consolidated Fixed Charges’’, ‘‘Consolidated Net Income’’ and all defined terms in the Indenture to the extent used in or relating to any of the foregoing definitions, and all ratios and computations based on any of the foregoing definitions) and as in effect from time to time (for all other purposes of the Indenture).
‘‘Incur’’ means issue, assume, enter into any guarantee of, incur or otherwise become liable for and the terms ‘‘Incurs’’, ‘‘Incurred’’ and ‘‘Incurrence’’ shall have a correlative meaning; provided that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. Accrual of interest, the accretion of accreted value, the payment of interest in the form of additional Indebtedness, and the payment of dividends on Capital Stock constituting Indebtedness in the form of additional shares of the same class of Capital Stock, will not be deemed to be an Incurrence of Indebtedness. Any Indebtedness issued at a discount (including Indebtedness on which interest is payable through the issuance of additional Indebtedness) shall be deemed Incurred at the time of original issuance of the Indebtedness at the initial accreted amount thereof.
‘‘Indebtedness’’ means, with respect to any Person on any date of determination (without duplication):
(a) the principal of indebtedness of such Person for borrowed money;
(b) the principal of obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;
(c) all reimbursement obligations of such Person in respect of letters of credit, bankers’ acceptances or other similar instruments (the amount of such obligations being equal at any time to the aggregate then undrawn and unexpired amount of such letters of credit, bankers’ acceptances or other instruments plus the aggregate amount of drawings thereunder that have not then been reimbursed) (except to the extent such reimbursement obligations relate to trade payables and such obligations are satisfied within 30 days of Incurrence), in each case only to the extent that the underlying obligation in respect of which the instrument was issued would be treated as Indebtedness;
(d) the principal component of all obligations of such Person to pay the deferred and unpaid purchase price of property (except Trade Payables), where the deferred payment is arranged primarily as a means of raising finance, which purchase price is due more than one year after the date of placing such property in final service or taking final delivery and title thereto;
(e) all Capitalized Lease Obligations of such Person;
(f) the redemption, repayment or other repurchase amount of such Person with respect to any Disqualified Stock of such Person or (if such Person is a Subsidiary of the Company other than a Guarantor or the Issuer) any Preferred Stock of such Subsidiary, but excluding, in each case, any accrued dividends (the amount of such obligation to be equal at any time to the maximum fixed involuntary redemption, repayment or repurchase price for such Capital Stock, or if less (or if such Capital Stock has no such fixed price), to the involuntary redemption, repayment or repurchase price therefor calculated in accordance with the
249 terms thereof as if then redeemed, repaid or repurchased, and if such price is based upon or measured by the fair market value of such Capital Stock, such fair market value shall be as determined in good faith by the Board of Directors of the Company or the board of directors or other governing body of the issuer of such Capital Stock);
(g) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of Indebtedness of such Person shall be the lesser of (i) the fair market value of such asset at such date of determination (as determined in good faith by the Company) and (ii) the amount of such Indebtedness of such other Persons;
(h) all guarantees by such Person of Indebtedness of other Persons, to the extent so guaranteed by such Person; and
(i) to the extent not otherwise included in this definition, net Hedging Obligations of such Person (the amount of any such obligation to be equal at any time to the termination value of such agreement or arrangement giving rise to such Hedging Obligation that would be payable by such Person at such time).
The term ‘‘Indebtedness’’ shall not include obligations that are classified and accounted for as an operating lease arrangement for financial reporting purposes in accordance with IFRS as in effect on the Issue Date, any ‘‘parallel debt’’ obligations created in connection with a Lien created to secure indebtedness permitted to be incurred under the Indenture, any prepayments of deposits received from clients or customers in the ordinary course of business, or obligations under any license, permit or other regulatory or governmental approval (or guarantees given in respect of such obligations) Incurred prior to the Issue Date or in the ordinary course of business. For the avoidance of doubt and notwithstanding the above, the term ‘‘Indebtedness’’ excludes any accrued expenses and trade payables.
The amount of Indebtedness of any Person at any date shall be determined as set forth above or otherwise provided in the Indenture, or otherwise shall equal the amount thereof that would appear as a liability on a balance sheet of such Person (excluding any notes thereto) prepared in accordance with IFRS.
Notwithstanding the above provisions, in no event shall the following constitute Indebtedness: (i) contingent obligations Incurred in the ordinary course of business and accrued liabilities Incurred in the ordinary course of business that are not more than 90 days past due; (ii) in connection with the purchase by the Company or any Restricted Subsidiary of any business, any post-closing payment adjustments to which the seller may become entitled to the extent such payment is determined by a final closing balance sheet or such payment depends on the performance of such business after the closing; (iii) for the avoidance of doubt, any obligations in respect of workers’ compensation claims, early retirement or termination obligations, pension fund obligations or contributions or similar claims, obligations or contributions or social security or wage Taxes; or (iv) liabilities in respect of obligations related to standby letters of credit, performance guarantees, warranty guarantees, advanced payment guarantees, bid guarantees or bonds or surety bonds, other bonding requirements and similar facilities (including those issued to governmental entities in connection with self-insurance under applicable workers’ compensation statutes) provided by or at the request of the Company or any Restricted Subsidiary in the ordinary course of business to the extent such letters of credit, guarantees or bonds are not drawn or, if and to the extent drawn upon are honoured in accordance with their terms and if, to be reimbursed, are reimbursed no later than 60 days following receipt by such Person of a demand for such reimbursement following payment on the letter of credit, guarantee or bond; provided that if such amounts due are not reimbursed on or prior to 60 days following receipt by such Person of a demand for such reimbursement, then such amounts shall become Indebtedness incurred on the date that such amounts become due.
250 ‘‘Interest Rate Agreement’’ means, with respect to any Person, any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement (including derivative agreements or arrangements), as to which such Person is party or a beneficiary.
‘‘Intercreditor Agreement’’ means the intercreditor agreement, dated on or about the Issue Date, among, the Issuer, the Company, the Security Agent, the agent under the Revolving Credit Facility Agreement, the Trustee and the other parties named therein, as amended from time to time.
‘‘Investment’’ in any Person by any other Person means any direct or indirect advance, loan or other extension of credit or capital contribution (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others) to (other than to customers, dealers, licensees, franchisees, agents, suppliers, directors, officers or employees of any Person in the ordinary course of business), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by, such Person. For purposes of the definition of ‘‘Unrestricted Subsidiary’’ and the covenant described under ‘‘—Certain Covenants—Limitation on Restricted Payments’’ only, (a) ‘‘Investment’’ shall include the portion (proportionate to the Company’s equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary, provided that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent ‘‘Investment’’ in an Unrestricted Subsidiary in an amount (if positive) equal to (x) the Company’s ‘‘Investment’’ in such Subsidiary at the time of such redesignation less (y) the portion (proportionate to the Company’s equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation and (b) any property transferred to or from an Unrestricted Subsidiary shall be valued at its Fair Market Value at the time of such transfer. Note Guarantees shall not be deemed to be Investments. The amount of any Investment outstanding at any time shall be the original cost of such Investment, reduced (at the Company’s option) by any dividend, distribution, interest payment, return of capital, repayment or other amount or value received in respect of such Investment; provided, that to the extent that the amount of Restricted Payments outstanding at any time pursuant to paragraph (a) of the covenant described under ‘‘—Certain Covenants—Limitation on Restricted Payments’’ is so reduced by any portion of any such amount or value that would otherwise be included in the calculation of Consolidated Net Income, such portion of such amount or value shall not be so included for purposes of calculating the amount of Restricted Payments that may be made pursuant to paragraph (a) of the covenant described under ‘‘—Certain Covenants—Limitation on Restricted Payments.’’
‘‘Investment Grade Status’’ shall occur when the Notes are rated Baa3 or better by Moody’s and BBB-or better by S&P, or the equivalent of such rating by either such rating organization or, if no rating of S&P then exists, the equivalent of such rating by any other Nationally Recognized Statistical Ratings Organization.
‘‘Issue Date’’ means the date of issuance of the Notes (other than Additional Notes).
‘‘Issuer’’ means Johnston Press Bond plc and any successor in interest thereto.
‘‘Lien’’ means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement or lease in the nature thereof).
‘‘Listing Rules’’ means the listing rules as published by the Financial Conduct Authority of the United Kingdom pursuant to their authority under part VI of the Financial Services and Market Act 2000, as amended.
251 ‘‘Management Advances’’ means (a) loans or advances made to directors, officers or employees of the Company or any Restricted Subsidiary (i) in respect of travel, entertainment or moving- related expenses incurred in the ordinary course of business, (ii) in respect of moving-related expenses incurred in connection with any closing or consolidation of any facility, or (iii) in the ordinary course of business and (in the case of this clause (iii)) not exceeding £1.0 million in the aggregate outstanding at any time, (b) promissory notes of Management Investors acquired in connection with the issuance of Management Stock to such Management Investors or (c) Management Guarantees.
‘‘Management Guarantees’’ means guarantees made on behalf of, or in respect of loans or advances made to, directors, officers or employees of the Company or any Restricted Subsidiary (a) in respect of travel, entertainment and moving related expenses incurred in the ordinary course of business, or (b) in connection with their purchase of Management Stock or otherwise in the ordinary course of business and (in the case of this clause (b)) not exceeding £1.0 million in the aggregate outstanding at any time.
‘‘Management Investors’’ means the officers, directors, employees and other members of the management of the Company or any of their respective Subsidiaries, or family members or relatives thereof, or trusts, partnerships or limited liability companies for the benefit of any of the foregoing, or any of their heirs, executors, successors or legal representatives who, at any date, beneficially own or have the right to acquire, directly or indirectly, Equity Interests of the Company or Equity Interests or other debt or equity securities of any entity formed for the purpose of investing in Equity Interests of the Company.
‘‘Management Stock’’ means Capital Stock of the Company (including any options, warrants or other rights in respect thereof) or Capital Stock of any entity formed for the purpose of investing in Capital Stock of the Company held directly or indirectly by any of the Management Investors.
‘‘Moody’s’’ means Moody’s Investors Service, Inc. and any successor to its ratings business
‘‘Nationally Recognized Statistical Rating Organization’’ means a nationally recognized statistical rating organization within the meaning of Rule 15c3-1(c)(2)(vi)(F) under the Exchange Act.
‘‘Net Available Cash’’ from an Asset Disposition means cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or instalment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to the properties or assets that are the subject of such Asset Disposition or received in any other non-cash form) therefrom, in each case net of (a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Taxes required to be paid or to be accrued as a liability under IFRS, as a consequence of such Asset Disposition (including as a consequence of any transfer of funds in connection with the application thereof in accordance with the covenant described under ‘‘—Certain Covenants— Limitation on sales of Assets and Subsidiary Stock’’), (b) all payments made, and all instalment payments required to be made, on any Indebtedness that is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon such assets, (c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition, or to any other Person (other than the Company or a Restricted Subsidiary) owning a beneficial interest in the assets disposed of in such Asset Disposition and (d) any liabilities or obligations associated with the assets disposed of in such Asset Disposition and retained, indemnified or insured by the Company or any Restricted Subsidiary after such Asset Disposition, including without limitation pension and other post-employment benefit liabilities, liabilities related to environmental matters, and liabilities relating to any indemnification obligations associated with such Asset Disposition.
252 ‘‘Net Cash Proceeds’’, with respect to any issuance or sale of any securities of the Company or any Subsidiary by the Company or any Subsidiary, or any capital contribution, means the cash proceeds of such issuance, sale or contribution net of attorneys’ fees, accountants’ fees, underwriters’ or placement agents’ fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance, sale or contribution and net of Taxes (other than value added Taxes) paid or payable as a result thereof (after taking into account any available tax credit or deductions and any tax sharing arrangements).
‘‘Note Guarantee’’ means any guarantee of the obligations of the Issuer under the Indenture and the Notes by any Person in accordance with the provisions of the Indenture.
‘‘Notes’’ means the Issuer’s 8.625% Senior Secured Notes due 2019.
‘‘Notes Proceeds Loan Agreement’’ means the proceeds loan agreement, dated as of the Escrow Release Date, by and between the Issuer and the Company pursuant to which the Notes Proceeds Loan was made, as the same may be amended from time to time in accordance with the terms of the Indenture.
‘‘Obligations’’ means, with respect to any Indebtedness, any principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company or any Restricted Subsidiary whether or not a claim for post-filing interest is allowed in such proceedings), fees, charges, expenses, reimbursement obligations, guarantees of such Indebtedness (or of Obligations in respect thereof), other monetary obligations of any nature and all other amounts payable thereunder or in respect thereof.
‘‘Officer’’ means (a) with respect to any Person, the Chief Executive Officer and the Chief Financial Officer of such Person or a senior accounting or financial officer or director of such Person; and (b) any other individual designated as an ‘‘Officer’’ for the purposes of the Indenture by the Board of Directors of the Company.
‘‘Officer’s Certificate’’ means a certificate signed by two Officers of such Person.
‘‘Opinion of Counsel’’ means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee.
‘‘Override Agreement’’ refers to the override agreement originally dated 28 August 2009 as amended and restated on 24 April 2012 and 23 December 2013, between, among others, the Company, as borrower, and Barclay’s Bank plc as agent, which agreement amends, varies, overrides or supplements the Existing Facility Agreement and the Existing Note Purchase Agreement.
‘‘Participating Member State’’ means any member state of the European Union that has the euro as its lawful currency in accordance with legislation of the European Union relating to Economic and Monetary Union.
‘‘Pension Scheme’’ means any occupational or personal pension scheme of which from time to time the Company or any Restricted Subsidiary is the principal employer or to which the Company or any Restricted Subsidiary has an obligation to contribute.
‘‘Permitted Collateral Liens’’ means:
(a) Liens on the Collateral that are described in one or more of clauses (a), (b), (c), (d), (e), (f), (g), (h), (i)(1)(A) and (B), (l), (m)(i), (ii), (vi), (vii) and (viii), (o), (p), (q), (r) and (s) of the definition of ‘‘Permitted Liens’’;
(b) Liens on the Collateral to secure Indebtedness of the Company or a Restricted Subsidiary that is permitted to be Incurred under clause (b)(i) of the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’; provided that such Indebtedness may
253 receive priority as to the receipt of proceeds from any enforcement with respect to the Collateral as provided for in the Intercreditor Agreement for so long as such Indebtedness remains Incurred under clause (b)(i) of the covenant described under ‘‘Certain Covenants— Limitation on Indebtedness’’ without reclassification;
(c) Liens on the Collateral to secure Hedging Obligations of the Issuer or a Restricted Subsidiary pursuant to an Interest Rate Agreement or Currency Agreement and Incurred under clause (b)(viii)(A) of the second paragraph of the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’ to the extent such Hedging Obligations relate to Indebtedness secured by a Permitted Collateral Lien; provided that such Indebtedness may receive priority as to the receipt of proceeds from any enforcement with respect to the Collateral as provided for in the Intercreditor Agreement;
(d) Liens on the Collateral to secure Indebtedness of the Issuer or a Restricted Subsidiary that is permitted to be Incurred under clauses (iii), (v) (to the extent such guarantee is in respect of Indebtedness otherwise permitted to be secured and specified in this definition of Permitted Collateral Liens), (vii) (covering only the shares and assets of the acquired person the Indebtedness of which is so secured), (viii)(A) or (xi) of clause (b) of the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’ and any Refinancing Indebtedness in respect of such Indebtedness;
provided, however, in the case of this clause (d), that
(i) any such Lien will not give an entitlement to be repaid with proceeds of enforcement of the Collateral in a manner which is inconsistent with the Intercreditor Agreement or any additional intercreditor agreement; and
(ii) any such Lien permitted by this clause (d) ranks either (A) (except to the extent specified above) equal or junior to the Liens on such Collateral securing the Notes and the Note Guarantees, and in the case of Permitted Collateral Liens on the Collateral to secure Additional Notes and the Note Guarantees with respect thereto, all assets that secured the Additional Notes and the Note Guarantees with respect thereto secure the Notes and the Note Guarantees with respect thereto or (B) junior to Liens securing the Notes and the Note Guarantees if the Lien secures a Subordinated Obligation of the Issuer or the relevant Guarantor;
(e) Liens on the Collateral securing Indebtedness Incurred under the clause (a) of the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness;’’ provided that, in the case of this clause (e), after giving effect to such Incurrence on that date, the Senior Secured Leverage Ratio is less than 2.75 to 1.00; and provided, further that any such Lien permitted by this clause (e) ranks either (A) equal or junior to all other Liens on such Collateral securing the Notes and the Note Guarantees, and in the case of Permitted Collateral Liens on the Collateral to secure Additional Notes and the Note Guarantees with respect thereto, all assets and properties that secured the Additional Notes and the Note Guarantees with respect thereto secure the Notes and the Note Guarantees with respect thereto or (B) junior to Liens securing the Notes and the Note Guarantees if the Lien secures Subordinated Obligations of the Issuer or the relevant Guarantor;
(f) Liens on the Collateral that secure Indebtedness on a basis junior to the Notes; provided that such Liens are subject to customary second-lien subordinated provisions, including a 179-day payment block and standstill on enforcement of the Collateral; and
(g) Liens on Collateral existing on the Issue Date. provided that each of the parties to Indebtedness secured by Permitted Collateral Liens pursuant to clauses (b), (c), (d), (e) or (f) above or their agent, representative or trustee will have entered into, or acceded to, the Intercreditor Agreement or an additional intercreditor agreement.
254 ‘‘Permitted Investment’’ means an Investment by the Company or any Restricted Subsidiary in, or consisting of, any of the following:
(a) (i) a Restricted Subsidiary or the Company, or (ii) a Person that will, upon the making of such Investment, become a Restricted Subsidiary (and any Investment held by such Person that was not acquired by such Person in contemplation of so becoming a Restricted Subsidiary);
(b) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, or is liquidated into, the Company or a Restricted Subsidiary (and, in each case, any Investment held by such Person that was not acquired by such Person in contemplation of such merger, consolidation or transfer);
(c) Cash Equivalents;
(d) receivables owing to the Company or any Restricted Subsidiary, if created or acquired in the ordinary course of business;
(e) any securities or other Investments received as consideration in, or retained in connection with, sales or other dispositions of property or assets, including Asset Dispositions made in compliance with the covenant described under ‘‘—Certain Covenants—Limitation on sales of Assets and Subsidiary Stock’’;
(f) securities or other Investments received in settlement of debts created in the ordinary course of business and owing to, or of other claims asserted by, the Company or any Restricted Subsidiary, or as a result of foreclosure, perfection or enforcement of any Lien, or in satisfaction of judgments, including in connection with any bankruptcy proceeding or other reorganization of another Person;
(g) Investments in existence or made pursuant to legally binding written commitments in existence on the Issue Date;
(h) Currency Agreements, Interest Rate Agreements, Commodities Agreements and related Hedging Obligations, which obligations are Incurred in compliance with the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’;
(i) pledges or deposits (x) with respect to leases or utilities provided to third parties in the ordinary course of business or (y) otherwise described in the definition of ‘‘Permitted Liens’’ or made in connection with Liens permitted under the covenant described under ‘‘—Certain Covenants—Limitation on Liens’’;
(j) bonds secured by assets leased to and operated by the Company or any Restricted Subsidiary that were issued in connection with the financing of such assets so long as the Company or any Restricted Subsidiary may obtain title to such assets at any time by paying a nominal fee, cancelling such bonds and terminating the transaction;
(k) the Notes or other Indebtedness of the Company or any Restricted Subsidiary;
(l) any Investment to the extent made using Capital Stock of the Company (other than Disqualified Stock) as consideration;
(m) Management Advances;
(n) other Investments in an aggregate amount outstanding at any time not to exceed the greater of (x) £5.0 million and (y) 0.75% of Total Assets;
(o) guarantees, keepwells and similar arrangements not prohibited by the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’; and
255 (p) any transaction to the extent constituting an Investment that is permitted and made in accordance with paragraph (b) of the covenant described under ‘‘—Certain Covenants— Limitation on transactions with Affiliates.’’
‘‘Permitted Liens’’ means:
(a) Liens for taxes, assessments or other governmental charges not yet delinquent or the non- payment of which in the aggregate would not reasonably be expected to have a material adverse effect on the Company and its Restricted Subsidiaries or that are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company or a Restricted Subsidiary, as the case may be, in accordance with IFRS;
(b) carriers’, warehousemen’s, mechanics’, landlords’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business in respect of obligations that are not overdue for a period of more than 60 days or that are bonded or that are being contested in good faith and by appropriate proceedings;
(c) pledges, deposits or Liens to secure the performance of bids, tenders, trade, government or other contracts (other than for borrowed money), obligations for utilities, leases, licenses, statutory obligations, completion guarantees, surety, judgment, appeal or performance bonds, other similar bonds, instruments or obligations, and other obligations of a like nature incurred in the ordinary course of business;
(d) easements (including reciprocal easement agreements), rights-of-way, building, zoning and similar restrictions, utility agreements, covenants, reservations, restrictions, encroachments, charges, and other similar encumbrances or title defects incurred, or leases or subleases granted to others, in the ordinary course of business, which do not in the aggregate materially interfere with the ordinary conduct of the business of the Company and its Restricted Subsidiaries, taken as a whole;
(e) Liens existing on, or provided for under written arrangements existing on, the Issue Date and which remain in place on the Escrow Release Date after giving effect to the Transactions, or (in the case of any such Liens securing Indebtedness of the Company or any of its Restricted Subsidiaries existing or arising under written arrangements existing on the Issue Date or necessary to complete the Transactions) securing any Refinancing Indebtedness in respect of such Indebtedness so long as the Lien securing such Refinancing Indebtedness is limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or under such written arrangements could secure) the original Indebtedness (which may include Indebtedness under one or more separate agreements or instruments);
(f) (i) mortgages, liens, security interests, restrictions, encumbrances or any other matters of record that have been placed by any developer, landlord or other third party on property over which the Company or any Restricted Subsidiary of the Company has easement rights or on any leased property and subordination or similar agreements relating thereto and (ii) any condemnation or eminent domain proceedings affecting any real property;
(g) Liens arising out of judgments, decrees, orders or awards in respect of which the Company or any Restricted Subsidiary shall in good faith be prosecuting an appeal or proceedings for review, which appeal or proceedings shall not have been finally terminated, or if the period within which such appeal or proceedings may be initiated shall not have expired;
(h) leases, subleases, or sublicenses to third parties in the ordinary course of business;
(i) Liens securing Indebtedness (including Liens securing Obligations in respect thereof) consisting of (1) Indebtedness Incurred in compliance with (A) clause (iv) (but only in respect of assets acquired or financed by such Indebtedness), (B) clause (vi) or
256 (C) clause (viii)(A), in each case of paragraph (b) of the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’, or (2) the Notes or Note Guarantees, in each case including Liens securing any guarantee of any thereof;
(j) Liens existing on property or assets of a Person at the time such Person becomes a Subsidiary of the Company (or at the time the Company or a Restricted Subsidiary acquires such property or assets, including any acquisition by means of a merger or consolidation with or into the Company or any Restricted Subsidiary); provided, however, that such Liens are not created in connection with, or in contemplation of, such other Person becoming such a Subsidiary (or such acquisition of such property or assets), and that such Liens are limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or, under the written arrangements under which such Liens arose, could secure) the obligations to which such Liens relate; provided further that for purposes of this clause (j), if a Person other than the Company is the Successor Company with respect thereto, any Subsidiary thereof shall be deemed to become a Subsidiary of the Company, and any property or assets of such Person or any such Subsidiary shall be deemed acquired by the Company or a Restricted Subsidiary, as the case may be, when such Person becomes such Successor Company;
(k) Liens on Capital Stock, Indebtedness or other securities of an Unrestricted Subsidiary that secure Indebtedness or other obligations of such Unrestricted Subsidiary;
(l) any encumbrance or restriction (including, but not limited to, put and call agreements) with respect to Capital Stock of any joint venture or similar arrangement pursuant to any joint venture or similar agreement;
(m) Liens (i) arising by operation of law (or by agreement to the same effect) in the ordinary course of business, (ii) on property or assets under construction (and related rights) in favour of a contractor or developer or arising from progress or partial payments by a third party relating to such property or assets, (iii) on Receivables (including related rights), (iv) on the Escrowed Proceeds for the benefit of the related holders of debt securities or other Indebtedness (or the underwriters or arrangers thereof) pursuant to the Escrow Agreement or on cash set aside at the time of the Incurrence of any Indebtedness or government securities purchased with such cash, to the extent that such cash or government securities prefund the payment of principal and/or interest on such Indebtedness and are held in an escrow account or similar arrangement to be applied for such purpose, (v) in favour of the Company or any Subsidiary (other than Liens on property or assets of the Company in favour of any Subsidiary that is not a Guarantor or the Issuer), (vi) arising out of conditional sale, title retention, hire purchase, consignment or similar arrangements for the sale of goods entered into in the ordinary course of business, (vii) on inventory or goods and proceeds securing obligations in respect of bankers’ acceptances issued or created to facilitate the purchase, shipment or storage of such inventory or other goods, (viii) attaching to commodity trading or other brokerage accounts incurred in the ordinary course of business or (ix) on bank accounts or cash management arrangements entered in the ordinary course of banking;
(n) other Liens securing Indebtedness (including Liens existing on the Issue Date, after giving effect to the Transactions, securing Indebtedness which remains outstanding at the date of calculation (or securing any Refinancing Indebtedness in respect of such Indebtedness)) which does not exceed £10.0 million at any time outstanding;
(o) any Lien created to secure obligations under worker’s compensation, social security or similar law, or under employment insurance as required by law or regulation;
(p) Liens on cash, Cash Equivalents or other property arising in connection with the defeasance, discharge or redemption of Indebtedness;
257 (q) Liens on property or assets under construction (and related rights) in favour of a contractor or developer or arising from progress or partial payments by a third party relating to such property or assets;
(r) Liens (i) over cash deposits securing the interests of customers which have paid moneys into such cash deposit account subject (expressly or impliedly) to any escrow, trust or similar arrangement or (ii) on cash collateral deposited in favour of any regulatory or governmental body or agency due to a legal or regulatory requirement;
(s) Liens created on or subsisting over any asset held in Euroclear Bank SA/NV as operator of the Euroclear system, Clearstream Banking, societ´ e´ anonyme or any other securities depository or any clearing house pursuant to the standard terms and procedures of the relevant clearing house applicable in the normal course of trading where such asset is held for the investment purposes of the Company or a Restricted Subsidiary;
(t) Liens on assets of a Restricted Subsidiary that is not a Guarantor securing Indebtedness of any Restricted Subsidiary that is not a Guarantor;
(u) any amendment, modification, extension, renewal, refinancing or replacement, in whole or in part, of any Lien described in the foregoing clauses (a) through (t); provided that any such Lien is limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or, under the written arrangements under the original Lien arose, could secure) the Indebtedness being refinanced;
(v) Liens existing on the Issue Date pursuant to the Existing Facility Agreement, the Existing Notes or any Pension Scheme; and
(w) Permitted Collateral Liens.
‘‘Person’’ means any individual, corporation, public limited company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, limited liability company or government or other entity.
‘‘Placing’’ means the expected placement of new and existing ordinary shares in the Company as described under ‘‘Summary—The Transactions’’.
‘‘pound sterling’’ and ‘‘£’’ denote the lawful currency of the United Kingdom.
‘‘Pound Sterling Equivalent’’ means, with respect to any monetary amount in a currency other than pound sterling, at any time of determination thereof by the Company or the Trustee, the amount of pounds sterling obtained by converting such currency other than pound sterling involved in such computation into pounds sterling at the spot rate for the purchase of pounds sterling with the applicable currency other than pound sterling as published in The Financial Times in the ‘‘Currency Rates’’ section (or, if The Financial Times is no longer published, or if such information is no longer available in The Financial Times, such source as may be selected in good faith by the Company) on and for the date of such determination.
‘‘Preferred Stock’’ as applied to the Capital Stock of any corporation means Capital Stock of any class or classes (however designated) that by its terms is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation.
‘‘Public Debt’’ means any Indebtedness consisting of bonds, debentures, notes or other similar debt securities issued in (1) a public offering registered under the Securities Act or (2) a private placement to institutional investors that is underwritten for resale in accordance with Rule 144A or Regulation S under the Securities Act, whether or not it includes registration
258 rights entitling the holders of such debt securities to registration thereof with the SEC for public resale.
‘‘Purchase Money Obligations’’ means any Indebtedness Incurred to finance or refinance the acquisition, leasing, construction or improvement of property (real or personal) or assets, and whether acquired through the direct acquisition of such property or assets or the acquisition of the Capital Stock of any Person owning such property or assets, or otherwise.
‘‘Receivable’’ means a right to receive payment arising from a sale or lease of goods or services by a Person pursuant to an arrangement with another Person pursuant to which such other Person is obligated to pay for goods or services under terms that permit the purchase of such goods and services on credit, as determined in accordance with IFRS.
‘‘refinance’’ means refinance, refund, replace, renew, repay, modify, restate, defer, substitute, supplement, reissue, resell or extend (including pursuant to any defeasance or discharge mechanism); and the terms ‘‘refinances,’’ ‘‘refinanced’’ and ‘‘refinancing’’ as used for any purpose in the Indenture shall have a correlative meaning.
‘‘Refinancing Indebtedness’’ means Indebtedness that is Incurred to refinance any Indebtedness existing on the date of the Indenture or Incurred in compliance with the Indenture (including Indebtedness of the Company or the Issuer that refinances Indebtedness of any Restricted Subsidiary (to the extent permitted in the Indenture) and Indebtedness of any Restricted Subsidiary that refinances Indebtedness of another Restricted Subsidiary or the Company or the Issuer) including Indebtedness that refinances Refinancing Indebtedness; provided that: (a) such Refinancing Indebtedness has (i) a final Stated Maturity that is either (A) no earlier than the final Stated Maturity of the Indebtedness being refinanced or (B) after the final Stated Maturity of the Notes and (ii) has a Weighted Average Life to Maturity that is equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being refinanced; (b) such Refinancing Indebtedness is Incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the sum of (i) the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being refinanced, which may include Indebtedness under one or more separate agreements or instruments that will be refinanced with a single agreement or instrument, plus (ii) fees, underwriting discounts, premiums and other costs and expenses incurred in connection with such Refinancing Indebtedness and; (c) if the Indebtedness being refinanced is expressly, contractually, subordinated in right of payment to the Notes or any Note Guarantee, as the case may be, such Refinancing Indebtedness is subordinated in right of payment to the Notes or such Note Guarantee, as the case may be, as those contained in the documentation governing the Indebtedness being refinanced.
‘‘Related Business’’ means those businesses, services or activities in which the Company or any of its Subsidiaries is engaged on the date of the Indenture, or that are similar, related, complementary, incidental or ancillary thereto or extensions, developments or expansions thereof.
‘‘Restricted Payment Transaction’’ means any Restricted Payment permitted pursuant to the covenant described under ‘‘—Certain Covenants—Limitation on Restricted Payments,’’ any Permitted Payment, any Permitted Investment, or any transaction specifically excluded from the definition of the term ‘‘Restricted Payment.’’
‘‘Restricted Subsidiary’’ means any Subsidiary of the Company (including the Issuer) that is not an Unrestricted Subsidiary.
‘‘Reversion Date’’ means, after the Notes have achieved Investment Grade Status, the date, if any, that such Notes shall cease to have such Investment Grade Status.
‘‘Revolving Credit Facility’’ means the facility established pursuant to the Revolving Credit Facility Agreement.
259 ‘‘Revolving Credit Facility Agreement’’ means the £25.0 million revolving credit facility agreement entered into on or before the Issue Date among, inter alios, the Company, Lloyds Bank plc, as agent and Credit Suisse AG, London Branch, J.P. Morgan Limited and Lloyds Bank plc, as arrangers, as amended from time to time.
‘‘Rights Offering’’ means the offer by way of rights to existing shareholders of the Company and to investors who participate in the Placing to subscribe for new ordinary shares in the Company.
‘‘S&P’’ means Standard & Poor’s Ratings Group, a division of The McGraw-Hill Companies, Inc., and any successor to its ratings business.
‘‘SEC’’ means the U.S. Securities and Exchange Commission.
‘‘Securities Act’’ means the U.S. Securities Act of 1933, as amended.
‘‘Security Agent’’ means Deutsche Bank AG, London Branch, as security agent pursuant to the Intercreditor Agreement, or any successor or replacement security agent acting in such capacity.
‘‘Security Documents’’ means each collateral pledge agreement, security assignment agreement or other document that provides for a Lien over any Collateral for the benefit of the Holders, in each case, as amended, supplemented or restated from time to time.
‘‘Senior Secured Debt’’ means any Indebtedness secured by a Lien on a basis pari passu with or senior to a Lien on the Collateral in favour of the Notes or the Note Guarantees.
‘‘Senior Secured Leverage Ratio’’ means, as of any date of determination the ratio of (1) the Consolidated Senior Secured Leverage on such date to (2) the Consolidated EBITDA for the most recently ended four full fiscal quarters of the Company for which internal consolidated financial statements are available, in each case calculated with such pro forma and other adjustments as are permitted or required when determining the Consolidated Leverage Ratio pursuant to the definition of Consolidated Leverage Ratio.
‘‘Significant Subsidiary’’ means, at the date of determination, any Restricted Subsidiary that meets any of the following conditions:
(a) the Company’s and its Restricted Subsidiaries’ investments in and advances to the Restricted Subsidiary exceed 10% of the total assets of the Company and its Restricted Subsidiaries on a consolidated basis as of the end of the most recently completed financial year;
(b) the Company’s and its Restricted Subsidiaries’ proportionate share of the total assets (after intercompany eliminations) of the Restricted Subsidiary exceeds 10% of the total assets of the Company and its Restricted Subsidiaries on a consolidated basis as of the end of the most recently completed financial year; or
(c) the Company’s and its Restricted Subsidiaries’ equity in the income from Continuing Operations before income taxes, extraordinary items and cumulative effect of a change in accounting principle of the Restricted Subsidiary exceeds 10% of such income of the Company and its Restricted Subsidiaries on a consolidated basis for the most recently completed financial year.
‘‘Stated Maturity’’ means, with respect to any Indebtedness, the date specified in such Indebtedness as the fixed date on which the payment of principal of such Indebtedness is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase or repayment of such Indebtedness at the option of the holder thereof upon the happening of any contingency).
‘‘Subordinated Obligations’’ means any Indebtedness of the Issuer or any Guarantor (whether outstanding on the Issue Date or thereafter Incurred) that is expressly contractually
260 subordinated in right of payment to Indebtedness under the Notes or a Note Guarantee, as the case may be.
‘‘Subsidiary’’ means, with respect to any specified Person:
(a) any company, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency and after giving effect to any voting agreement or stockholders’ agreement that effectively transfers voting power) to vote in the election of directors, managers or trustees of the company, association or other business entity is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and
(b) any partnership or limited liability company of which (a) more than 50% of the capital accounts, distribution rights, total equity and voting interests or general and limited partnership interests, as applicable, are owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person or a combination thereof, whether in the form of membership, general, special or limited partnership interests or otherwise, and (b) such Person or any Subsidiary of such Person is a controlling general partner or otherwise controls such entity.
‘‘Successor Company’’ has the meaning assigned thereto in clause (a)(i) under ‘‘—Certain Covenants—Merger and consolidation.’’
‘‘Taxes’’ means all present and future taxes, levies, imposts, deductions, charges, duties, assessments and withholdings and any charges of a similar nature (including interest, penalties and other liabilities with respect thereto) that are imposed by any government or other taxing authority.
‘‘Total Assets’’ means the consolidated total assets of the Company and its Restricted Subsidiaries, as determined in accordance with IFRS, as shown in the most recent consolidated financial statements of the Company;
‘‘Trade Payables’’ means, with respect to any Person, any accounts payable or any indebtedness or monetary obligation to trade creditors created, assumed or guaranteed by such Person arising in the ordinary course of business in connection with the acquisition of goods or services.
‘‘Transaction Costs’’ means all costs, fees and expenses (and taxes thereon) and all capital, stamp, documentary, registration or other taxes incurred by or on behalf of the Company or any of its subsidiaries in connection with the Transactions.
‘‘Transactions’’ means, collectively, any or all of the following:
(a) the entry into the Indenture and the issuance of the Notes;
(b) the entry into the Revolving Credit Facility Agreement;
(c) the entry into the Intercreditor Agreement;
(d) the completion of the Placing and the Rights Offering as described in this offering memorandum;
(e) the entry into the Notes Proceeds Loan Agreement;
(f) the repayment of all amounts outstanding under the Existing Facility Agreement and the Existing Notes;
(g) the release of Escrowed Property from the Escrow Account;
(h) the Debt Assumption; and
261 (i) the carrying out of the transactions contemplated by or related to any of the foregoing (including, without limitation, payment of fees and expenses related to any of the foregoing, including without limitation Transaction Costs). ‘‘Trustee’’ means Deutsche Trustee Company Limited, or such successor Trustee as may be appointed under the Indenture. ‘‘UK Government Securities’’ means direct obligations of, or obligations guaranteed by, the United Kingdom, and the payment for which the United Kingdom pledges its full faith and credit. ‘‘UK Listing Rules’’ means the listing rules made under Part VI of the UK Financial Services and Markets Act 2000 (as set out in the Financial Conduct Authority Handbook), as amended. ‘‘Unrestricted Subsidiary’’ means: (a) any Subsidiary of the Company that at the time of determination is an Unrestricted Subsidiary, as designated by the Board of Directors of the Company in the manner provided below, and (b) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company may designate any Subsidiary of the Company other than the Issuer (including any newly acquired or newly formed Subsidiary of the Company or a Person becoming a Subsidiary through merger, consolidation or other business combination transaction, or Investment therein) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Company or any other Restricted Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided that (i) except as permitted by the covenant described above under the caption ‘‘—Certain Covenants—Limitation on transactions with Affiliates,’’ such Subsidiary is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary unless the terms of any such agreement, contract, arrangement or understanding are no less favourable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company, and (ii) such Subsidiary is a Person with respect to which neither the Company nor any Restricted Subsidiary has any direct or indirect obligation (A) to subscribe for additional Equity Interests or (B) to maintain or preserve such Person’s financial condition or to cause such Person to achieve any specified levels of operating results. The Board of Directors of the Company may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that immediately after giving effect to such designation, (i) the Company could Incur at least £1.00 of additional Indebtedness pursuant to paragraph (a) of the covenant described under ‘‘—Certain Covenants—Limitation on Indebtedness’’ or (ii) the Consolidated Fixed Charge Coverage Ratio would be greater than it was immediately prior to giving effect to such designation. Any such designation by the Board of Directors of the Company shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Company’s Board of Directors giving effect to such designation and an Officer’s Certificate of the Company certifying that such designation complied with the foregoing provisions. ‘‘Voting Stock’’ of an entity means all classes of Capital Stock of such entity then outstanding and normally entitled to vote in the election of directors or all interests in such entity with the ability to control the management or actions of such entity. ‘‘Weighted Average Life to Maturity’’ means, when applied to any Indebtedness at any date, the number of years obtained by dividing: (a) the sum of the products obtained by multiplying (i) the amount of each then remaining instalment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect of the Indebtedness, by (ii) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by (b) the then outstanding principal amounts of such Indebtedness.
262 Book-entry, delivery and form General
The Notes sold outside the United States pursuant to Regulation S will initially be represented by a global note in registered form without interest coupons attached (the ‘‘Regulation S Global Note’’). The Regulation S Global Note will be deposited, on the closing date, with a common depository and registered in the name of the nominee of the common depository for the accounts of Euroclear and Clearstream.
The Notes sold within the United States to qualified institutional buyers pursuant to Rule 144A will initially be represented by a global note in registered form without interest coupons attached (the ‘‘144A Global Note’’, and together with the Regulation S Global Note, the ‘‘Global Notes’’). The 144A Global Note will be deposited, on the closing date, with a common depository and registered in the name of the nominee of the common depository for the accounts of Euroclear and Clearstream.
Ownership of interests in the 144A Global Note (the ‘‘144A Book-Entry Interests’’) and ownership of interests in the Regulation S Global Note (the ‘‘Regulation S Book-Entry Interests’’, and, together with the 144A Book-Entry Interests, the ‘‘Book-Entry Interests’’) will be limited to persons that have accounts with Euroclear and/or Clearstream or persons that hold interests through such participants. Book-Entry Interests will be shown on, and transfers thereof will be effected only through, records maintained in book-entry form by Euroclear and Clearstream and their participants. The Book-Entry Interests in the Global Notes will be issued only in denominations of £100,000 and in integral multiples of £1,000 in excess thereof.
The Book-Entry Interests will not be held in definitive form. Instead, Euroclear and Clearstream will credit on their respective book-entry registration and transfer systems the account of a participant with the interest beneficially owned by such participant. The laws of some jurisdictions, including certain states of the United States, may require that certain purchasers of securities take physical delivery of such securities in definitive form. The foregoing limitations may impair the ability to own, transfer or pledge Book-Entry Interests. In addition, while the Notes are in global form, holders of Book-Entry Interests will not have the Notes registered in their names, will not receive physical delivery of the Notes in certificated form and will not be considered the registered owners or ‘‘holders’’ of Notes for any purpose.
So long as the Notes are held in global form, the common depository (or its nominee), will be considered the sole holder of the Global Notes for all purposes under the Indenture governing the Notes. As such, participants must rely on the procedures of Euroclear and/or Clearstream, and indirect participants must rely on the procedures of Euroclear and/or Clearstream and the participants through which they own Book-Entry Interests, in order to transfer their interests or to exercise any rights of holders of the Notes under the Indenture.
Neither the Issuer nor the Trustee under the Indenture nor any of their respective agents will have any responsibility or be liable for any aspect of the records relating to the Book-Entry Interests.
Issuance of Definitive Registered Notes
Under the terms of the Indenture governing the Notes, owners of Book-Entry Interests will receive Notes in definitive registered form (the ‘‘Definitive Registered Notes’’):
• if Euroclear or Clearstream notifies the Issuer that it is unwilling or unable to continue to act as depository and a successor depository is not appointed by the Issuer within 120 days; or
• if the owner of a Book-Entry Interest requests such exchange in writing delivered through either Euroclear or Clearstream following an event of default under the Indenture.
263 In such an event, the registrar will issue Definitive Registered Notes, registered in the name or names and issued in any approved denominations, requested by or on behalf of Euroclear or Clearstream, as applicable (in accordance with their respective customary procedures and based upon directions received from participants reflecting the beneficial ownership of Book-Entry Interests), and such Definitive Registered Notes will bear the restrictive legend referred to in ‘‘Notice to investors’’, unless that legend is not required by the Indenture or applicable law.
The Issuer will not be required to register the transfer or exchange of Definitive Registered Notes for a period of 15 calendar days preceding (i) the record date for any payment of interest on the Notes, (ii) any date fixed for redemption of the Notes or (iii) the date fixed for selection of the Notes to be redeemed in part. Also, the Issuer is not required to register the transfer or exchange of any Notes selected for redemption. In the event of the transfer of any Definitive Registered Note, the Trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents as described in the Indenture. The Issuer may require a holder to pay any taxes and fees required by law and permitted by the Indenture and the Notes.
If Definitive Registered Notes are issued and a holder thereof claims that any such Definitive Registered Note has been lost, destroyed or wrongfully taken, or if any such Definitive Registered Note is mutilated and is surrendered to the registrar or at the office of the transfer agent, the Issuer will issue and the Trustee will authenticate a replacement Definitive Registered Note if the Trustee’s and the Issuer’s requirements are met. The Issuer or the Trustee may require a holder requesting replacement of a Definitive Registered Note to furnish an indemnity bond sufficient in the judgment of both to protect the Issuer, the Trustee or the paying agent appointed pursuant to the Indenture from any loss which any of them may suffer if a Definitive Registered Note is replaced. The Issuer may charge for any expenses incurred by it in replacing a Definitive Registered Note.
In case any such mutilated, destroyed, lost or stolen Definitive Registered Note has become or is about to become due and payable, or is about to be redeemed or purchased by the Issuer pursuant to the provisions of the Indenture, the Issuer, in its discretion, may, instead of issuing a new Definitive Registered Note, pay, redeem or purchase such Definitive Registered Note, as the case may be.
Definitive Registered Notes may be transferred and exchanged only after the transferor first delivers to the Trustee a written certification (in the form provided in the Indenture) to the effect that such transfer will comply with the transfer restrictions applicable to such Notes. See ‘‘Notice to investors’’.
Redemption of Global Notes
In the event any Global Note, or any portion thereof, is redeemed, Euroclear and/or Clearstream (or their respective nominees), as applicable, will distribute the same amount received by it in respect of the Global Note so redeemed to the holders of the Book-Entry Interests in such Global Note from the amount received by it in respect of the redemption of such Global Note. The redemption price payable in connection with the redemption of such Book-Entry Interests will be equal to the amount received by Euroclear or Clearstream, as applicable, in connection with the redemption of such Global Note (or any portion thereof). The Issuer understands that under existing practices of Euroclear and Clearstream, if fewer than all the Notes are to be redeemed at any time, Euroclear and Clearstream will credit their respective participants’ accounts on a proportionate basis (with adjustments to prevent fractions), on a pro rata basis or on such other basis as they deem fair and appropriate.
Payments on Global Notes
The Issuer will make payments of amounts owing in respect of the Global Notes (including principal, premium, if any, interest, additional interest and any additional amounts) to the
264 principal paying agent. The principal paying agent will, in turn, make such payments to the order of the common depository or its nominee for Euroclear and Clearstream, which will distribute such payments to participants in accordance with their respective procedures. The Issuer will make payments of all such amounts without deduction or withholding for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature, except as may be required by law and as described under ‘‘Description of the Notes—Additional Amounts’’. If any such deduction or withholding is required to be made, then, to the extent described under ‘‘Description of the Notes—Additional Amounts’’, the Issuer will pay additional amounts as may be necessary in order that the net amounts received by any holder of the Global Notes or of Book-Entry Interests after such deduction or withholding will equal the net amounts that such holder or owner would have otherwise received in respect of such Global Note or Book-Entry Interest, as the case may be, absent such withholding or deduction. The Issuer expects that standing customer instructions and customary practices will govern payments by participants to owners of Book-Entry Interests held through such participants.
Under the terms of the Indenture governing the Notes, the Issuer and the Trustee will treat the registered holders of the Global Notes (e.g., the common depository or its nominee) as the owners thereof for the purpose of receiving payments and for all other purposes. Consequently, none of the Issuer, the Trustee or any of their respective agents has or will have any responsibility or liability for:
• any aspect of the records of Euroclear, Clearstream or any participant or indirect participant relating to, or payments made on account of, a Book-Entry Interest, for any such payments made by Euroclear, Clearstream or any participant or indirect participant, or for maintaining, supervising or reviewing the records of Euroclear, Clearstream or any participant or indirect participant relating to, or payments made on account of, a Book-Entry Interest;
• Euroclear, Clearstream or any participant or indirect participant; or
• payments by participants to owners of Book-Entry Interests held through participants which are the responsibility of such participants, as is now the case with securities held for the accounts of customers registered in ‘‘street name’’.
Currency and payment for the Global Notes
The principal of, premium, if any, and interest on, and all other amounts payable in respect of, the Global Notes will be paid to holders of interest in such Notes through Euroclear and/or Clearstream in pounds sterling.
Payments will be subject in all cases to any fiscal or other laws and regulations (including any regulations of the applicable clearing system) applicable thereto. None of the Issuer, the Trustee, the Initial Purchasers or any of their respective agents will be liable to any holder of a Global Note or any other person for any commissions, costs, losses or expenses in relation to or resulting from any currency conversion or rounding effected in connection with any such payment.
Action by owners of Book-Entry Interests
Euroclear and Clearstream have advised the Issuer that they will take any action permitted to be taken by a holder of Notes only at the direction of one or more participants to whose account the Book-Entry Interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. Euroclear and Clearstream will not exercise any discretion in the granting of consents or waivers or the taking of any other action in respect of the Global Notes. Nevertheless, if there is an event of default under the Notes, each of Euroclear and Clearstream reserves the right to exchange the Global Notes for Definitive Registered Notes in
265 certificated form and to distribute such Definitive Registered Notes to their respective participants.
Transfers
Transfers between participants in Euroclear and Clearstream will be effected in accordance with Euroclear and Clearstream rules and will be settled in immediately available funds. If a holder requires physical delivery of Definitive Registered Notes for any reason, including to sell the Notes to persons in states which require physical delivery of such securities or to pledge such securities, such holder must transfer its interest in the Global Notes in accordance with the normal procedures of Euroclear and Clearstream and in accordance with the provisions of the Indenture governing the Notes.
The Rule 144A Global Note will bear a legend to the effect set forth in ‘‘Notice to investors’’. Book-Entry Interests in the Global Notes will be subject to the restrictions on transfer discussed in ‘‘Notice to investors’’.
Beneficial interests in a Rule 144A Global Note may be transferred to a person who takes delivery in the form of a beneficial interest in the Regulation S Global Note only upon receipt by the Trustee of a written certification (in the form provided in the Indenture governing the Notes) from the transferor to the effect that such transfer is being made in accordance with Regulation S or Rule 144 under the U.S. Securities Act or any other exemption (if available under the U.S. Securities Act).
Subject to the foregoing, and as set forth in ‘‘Notice to investors’’, Book-Entry Interests may be transferred and exchanged as described under ‘‘Description of the Notes—Transfer and exchange’’. Any Book-Entry Interest in one of the Global Notes that is transferred to a person who takes delivery in the form of a Book-Entry Interest in the other Global Note of the same denomination will, upon transfer, cease to be a Book-Entry Interest in the first-mentioned Global Note and become a Book-Entry Interest in the other Global Note, and accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to Book-Entry Interests in such other Global Note for as long as it remains such a Book-Entry Interest.
Definitive Registered Notes may be transferred and exchanged for Book-Entry Interests in a Global Note only as described under ‘‘Description of the Notes—Transfer and exchange’’ and, if required, only if the transferor first delivers to the Trustee a written certificate (in the form provided in the Indenture) to the effect that such transfer will comply with the appropriate transfer restrictions applicable to such Notes. See ‘‘Notice to investors’’.
Information concerning Euroclear and Clearstream
All Book-Entry Interests will be subject to the operations and procedures of Euroclear and Clearstream. The Issuer provides the following summaries of those operations and procedures solely for the convenience of investors. The operations and procedures of each settlement system are controlled by that settlement system and may be changed at any time. Neither the Issuer nor the Initial Purchasers are responsible for those operations or procedures.
Euroclear and Clearstream hold securities for participating organisations. They also facilitate the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in the accounts of such participants. Euroclear and Clearstream provide various services to their participants, including the safekeeping, administration, clearance, settlement, lending and borrowing of internationally traded securities. Euroclear and Clearstream interface with domestic securities markets. Euroclear and Clearstream participants are financial institutions such as underwriters, securities brokers and dealers, banks, trust companies and certain other organisations. Indirect access to Euroclear and Clearstream is also available to others such as banks, brokers, dealers and trust companies that
266 clear through or maintain a custodial relationship with a Euroclear or Clearstream participant, either directly or indirectly.
As Euroclear and Clearstream can only act on behalf of participants, who in turn act on behalf of indirect participants and certain banks, the ability of an owner of a beneficial interest to pledge such interest to persons or entities that do not participate in the Euroclear or Clearstream systems, or otherwise take actions in respect of such interest, may be limited by the lack of a definitive certificate for that interest. The laws of some jurisdictions require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer beneficial interests to such persons may be limited. In addition, owners of beneficial interests through the Euroclear or Clearstream systems will receive distributions attributable to the 144A Global Note only through Euroclear or Clearstream participants.
Global clearance and settlement under the book-entry system
Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Global Exchange Market. The Issuer expects that secondary trading in any certificated Notes will also be settled in immediately available funds. Euroclear participants and Clearstream participants may not deliver instructions directly to the common depository.
Although Euroclear and Clearstream are expected to follow the foregoing procedures in order to facilitate transfers of interests in the Global Notes among participants in Euroclear or Clearstream, as the case may be, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued or modified at any time. None of the Issuer, any Guarantor, the Trustee or the principal paying agent will have any responsibility for the performance by Euroclear or Clearstream, or their respective participants or indirect participants, of their respective obligations under the rules and procedures governing their operations.
267 Tax considerations If you are a prospective investor, you should consult your tax advisor as to the possible tax consequences of buying, holding or selling any Notes under the laws of your country of citizenship, residence or domicile, including the effect of any local taxes applicable to you. The discussions that follow do not purport to be a comprehensive description of all tax considerations that may be relevant to a decision to purchase, hold or sell Notes. In particular, these discussions do not consider any specific facts or circumstances that may apply to you. The discussions that follow for each jurisdiction are based upon the applicable laws and interpretations thereof as in effect as of the date of this offering memorandum. These tax laws and interpretations are subject to change, possibly with retroactive or retrospective effect.
EU Savings Directive
Under EC Council Directive 2003/48/EC on the taxation of savings income in the form of interest payments (the ‘‘Savings Directive’’), each Member State is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a paying agent (within the meaning of the Savings Directive) located within its jurisdiction to, or for the benefit of, an individual resident or certain limited types of entities established in that other Member State; however, for a transitional period, Austria and Luxembourg will instead apply a withholding system in relation to such payments unless during such period they elect otherwise, deducting tax at a rate of 35% (subject to a procedure whereby, on meeting certain conditions, the beneficial owner of the interest or other income may request that no tax be withheld). The transitional period is to terminate at the end of the first full financial year following agreement by certain non-EU countries to the exchange of information relating to such payments. The Luxembourg government has announced its intention to replace the current withholding tax regime under the Savings Directive with an automatic exchange of information system as of 1 January 2015.
A number of non-EU countries have adopted similar measures (either provision of information or transitional withholding) in relation to payments made by a person within its jurisdiction to, or for the benefit of, an individual resident or certain limited types of entities established in a Member State. In addition, the Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a Member State to, or collected by such a person for, an individual resident or Residual Entities established in one of those territories.
The Council of the European Union adopted certain changes to the Savings Directive on 24 March 2014. EU Member States have until 1 January 2016 to adopt national laws to implement these changes. The changes, when implemented will broaden the scope of the requirements described above. Investors who are in any doubt as to their position should consult their professional advisers.
Certain United Kingdom taxation considerations
The comments below are of a general nature based on United Kingdom tax law as applied in England and Wales and HM Revenue and Customs practice at the date on the front cover of this Offering Memorandum and are not intended to be exhaustive. They do not necessarily apply where, for instance, income is deemed for tax purposes to be the income of any other person. They relate only to the position of persons who are the absolute beneficial owners of their Notes and any interest payable on their Notes and may not apply to certain classes of persons such as dealers, certain professional investors, or persons connected with the Issuer. Any holders of Notes who are in doubt as to their own tax position, or who may be subject to tax in a jurisdiction other than the United Kingdom, should consult their professional advisers.
268 Withholding or deduction of tax on payments of interest by the Issuer or under a Note Guarantee (i) Payments of interest by the Issuer Interest on the Notes may be paid by the Issuer without withholding or deduction for or on account of United Kingdom income tax if the Notes in respect of which the U.K. interest is paid constitute ‘‘quoted Eurobonds’’ within the meaning of Section 987 of the Income Tax Act 2007. The Notes should constitute quoted Eurobonds provided they are and continue to be listed on a recognised stock exchange within the meaning of Section 1005 of the Income Tax Act 2007.
Securities will be treated as listed on a recognised stock exchange where those securities are admitted to trading on that exchange and are officially listed in accordance with provisions corresponding to those generally applicable in countries in the European Economic Area. The Irish Stock Exchange is a recognised stock exchange for these purposes. Current HM Revenue and Customs practice is that securities which are officially listed and admitted to trading on the Global Exchange Market of the Irish Stock Exchange may be regarded as ‘‘listed on a recognised stock exchange’’ for these purposes.
If the Notes are not or cease to be so listed, interest on the Notes will generally be paid by the Issuer under deduction of United Kingdom income tax at the basic rate (currently 20%) unless (i) any other relief applies, or (ii) the Issuer has received a direction to the contrary from HM Revenue and Customs in respect of such relief as may be available pursuant to the provisions of any applicable double taxation treaty.
If interest were paid under deduction of United Kingdom income tax (e.g. if the Notes lost their listing), holders of Notes who are not resident in the United Kingdom may be able to recover all or part of the tax deducted if there is an appropriate provision in an applicable double taxation treaty.
(ii) Payments under a Note Guarantee If a Guarantor makes any payments in respect of interest on the Notes (or other amounts due under the Notes other than the repayment of amounts subscribed for the Notes), such payments may be subject to United Kingdom withholding tax at the basic rate (currently 20%), subject to the availability of reliefs or exemptions or to any direction to the contrary from HM Revenue and Customs in respect of such relief as may be available pursuant to the provisions of any applicable double taxation treaty. Such payments by a Guarantor may not be eligible for the exemption from withholding tax described above in respect of the Notes being issued on a recognised stock exchange.
(iii) Treatment of any premium payable on redemption Any premium on redemption of the Notes may constitute a payment of interest that would be subject to the rules of United Kingdom withholding tax outlined above and the rules outlined below under the headings ‘‘Information reporting’’ and ‘‘Direct assessment’’.
Information reporting HM Revenue and Customs has powers to obtain information relating to securities in certain circumstances. This may include details of the beneficial owners of the Notes (or the persons for whom the Notes are held), details of the persons to whom payments derived from the Notes are or may be paid and information and documents in connection with transactions relating to the Notes. Information may be required to be provided by, amongst others, the holders of the Notes, persons by (or via) whom payments derived from the Notes are made or who receive (or would be entitled to receive) such payments, persons who effect or are a party to transactions relating to the Notes on behalf of others and certain registrars or administrators. In certain circumstances, the information obtained by HM Revenue and Customs may be provided to tax authorities in other countries.
269 Direct assessment The interest has a United Kingdom source and accordingly may be chargeable to United Kingdom tax by direct assessment irrespective of the residence of the holder of the Notes. However, where U.K. interest is paid without withholding or deduction, U.K. interest will generally not be assessed to United Kingdom tax in the hands of holders of the Notes who are not resident in the United Kingdom, except where the holder of Notes carries on a trade, profession or vocation through a branch or agency in the United Kingdom, or, in the case of a corporate holder, carries on a trade through a permanent establishment in the United Kingdom, in connection with which the interest is received or to which the Notes are attributable, in which case (subject to exemptions for interest received by certain categories of agent) tax may be levied on the United Kingdom branch or agency, or permanent establishment.
Holders of Notes should note that the provisions relating to additional amounts referred to in ‘‘Description of the Notes’’ above would not apply if HM Revenue and Customs sought to assess directly the person entitled to the relevant interest to United Kingdom tax. However exemption from, or reduction of, such United Kingdom tax liability might be available under an applicable double taxation treaty.
Stamp duty and stamp duty reserve tax No United Kingdom stamp duty, stamp duty reserve tax or other similar tax is payable in connection with the issue of the Notes. No requirement to pay U.K. stamp duty should arise in respect of a document relating to any transfer of the Notes in any case where the document is executed outside, and does not relate to anything to be done within, the United Kingdom. No stamp duty will be payable on a document relating to a transfer of the Notes, and no stamp duty reserve tax will be payable in respect of any agreement to transfer Notes, if the Notes do not carry and have not carried any of the following:
(a) a right to interest the amount of which exceeds a reasonable commercial return on the nominal amount of the capital; or
(b) a redemption premium at a level which is not reasonably comparable with what is generally repayable (in respect of a similar nominal amount of capital) under the terms of issue of loan capital listed in the Official List of the London Stock Exchange.
Material United States federal income tax consequences
To ensure compliance with Internal Revenue Service Circular 230, you are hereby notified that any discussion of tax matters set forth in this Offering Memorandum was written in connection with the promotion or marketing of the transactions or matters addressed herein and was not intended or written to be used, and cannot be used by any prospective investor, for the purpose of avoiding tax-related penalties under federal, state or local tax law. Each prospective investor should seek advice based on its particular circumstances from an independent tax advisor.
The following is a summary of material United States federal income tax consequences of the purchase, ownership and disposition of Notes as of the date hereof. This summary deals only with Notes that are held as capital assets by a U.S. holder (as defined below) who acquires the Notes upon original issuance at their initial offering price.
As used herein, a ‘‘U.S. holder’’ means a beneficial owner of Notes that is for United States federal income tax purposes any of the following:
• an individual citizen or resident of the United States;
270 • a corporation (or any other entity treated as a corporation for United States federal income tax purposes) created or organised in or under the laws of the United States, any state thereof or the District of Columbia;
• an estate the income of which is subject to United States federal income taxation regardless of its source; or
• a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury Regulations (‘‘Treasury Regulations’’) to be treated as a United States person.
This summary is based upon provisions of the United States Internal Revenue Code of 1986, as amended (the ‘‘Code’’), and Treasury Regulations, rulings and judicial decisions as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income tax consequences different from those summarised below. This summary does not address all aspects of United States federal income taxes and does not deal with non-U.S., state, local or other tax considerations that may be relevant to U.S. holders in light of their personal circumstances, including the Medicare tax. In addition, it does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws. For example, this summary does not address:
• tax consequences to holders who may be subject to special tax treatment, such as dealers in securities or currencies, traders in securities that elect to use the mark-to-market method of accounting for their securities, financial institutions, regulated investment companies, real estate investment trusts, investors in partnerships or other pass-through entities for United States federal income tax purposes, tax-exempt entities or insurance companies;
• tax consequences to persons holding the Notes as part of a hedging, integrated, constructive sale or conversion transaction or a straddle;
• tax consequences to U.S. holders whose ‘‘functional currency’’ is not the United States dollar; or
• alternative minimum tax consequences, if any.
If a partnership (or other entity treated as a partnership for United States federal income tax purposes) holds the Notes, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of an entity treated as a partnership for United States federal income tax purposes, you should consult your tax advisors concerning the United States federal income tax consequences to you of the acquisition, ownership and disposition of Notes by the partnership.
If you are considering the purchase of Notes, you should consult your own tax advisors concerning the particular United States federal income tax consequences to you of the ownership of the Notes, as well as the consequences to you arising under the laws of any other taxing jurisdiction.
Characterisation of the Notes Although the proper characterisation of the Notes for United States federal income tax purposes is not entirely free from doubt, the Issuer intends to treat the Notes as indebtedness for United States federal income tax purposes. This characterisation is binding on all U.S. holders unless the U.S. holder discloses on its United States federal income tax return that it is treating the Notes in a manner inconsistent with the Issuer’s characterisation. However, the Issuer’s characterisation is not binding on the Internal Revenue Service (the ‘‘IRS’’) or the courts, and no ruling is being requested from the IRS with respect to the proper characterisation of the Notes for United States federal income tax purposes. No assurance can be given that the
271 IRS will not assert that the Notes should not be treated as indebtedness but rather as equity interests in the Issuer. The following discussion assumes that the Notes will be characterised as indebtedness for United States federal income tax purposes. Prospective purchasers of the Notes should consult their own tax advisors regarding the consequences in the event that the Notes are treated as equity for United States federal income tax purposes.
Payments of stated interest Subject to the discussion below, stated interest on a Note will generally be taxable to you as ordinary income at the time it is received or accrued in accordance with your method of accounting for tax purposes. In addition to interest on the Notes, you will be required to include any non-U.S. tax withheld from the interest payments you receive in income and any additional amounts paid in respect of such tax withheld. You may be entitled to deduct or credit this tax, subject to certain limitations (including that the election to deduct or credit foreign taxes applies to all of your applicable foreign taxes for a particular tax year). Stated interest income (including any additional amounts) on a Note generally will be considered foreign source income and, for purposes of the United States foreign tax credit, generally will be considered passive category income. You generally will be denied a foreign tax credit for foreign taxes imposed with respect to the Notes where you do not meet a minimum holding period requirement during which you are not protected from risk of loss. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.
If you use the cash basis method of accounting for United States federal income tax purposes, you will be required to include in income the United States dollar value of the stated interest received, determined by translating the pounds sterling received at the ‘‘spot rate’’ on the date such payment is received regardless of whether the payment is in fact converted into United States dollars. You will not recognise exchange gain or loss with respect to the receipt of such payment, but you may recognise U.S. source exchange gain or loss attributable to the actual disposal of the pounds sterling received.
If you use the accrual method of accounting for United States federal income tax purposes, you may determine the amount of income recognised with respect to such stated interest in accordance with either of two methods. Under the first method, you will be required to include in income for each taxable year the United States dollar value of the stated interest that has accrued during such year, determined by translating such interest at the average spot rate of exchange for the period or periods during which such interest accrued or, in the case of an accrual period that spans two taxable years of a U.S. holder, the part of the period within the taxable year. Under the second method, you may elect to translate stated interest income at the spot rate on:
• the last day of the accrual period,
• the last day of the taxable year, in the case of a partial accrual period, or
• the date the stated interest payment is actually received if such date is within five business days of the end of the accrual period.
This election will apply to all debt obligations you hold from year to year and cannot be changed without the consent of the IRS. You should consult your own tax advisor as to the availability of making the above election.
Upon receipt of a stated interest payment on a Note (including, upon the sale, exchange, retirement or other taxable disposition of a Note, the receipt of proceeds which include amounts attributable to accrued interest previously included in income), if you use the accrual method of accounting for United States federal income tax purposes you will recognise U.S. source ordinary gain or loss in an amount equal to the difference, if any, between the United States dollar value of such payment (determined by translating the pounds sterling received at
272 the spot rate on the date such payment is received) and the United States dollar value of the stated interest income you previously included in income with respect to such payment.
Original Issue Discount
The Notes will be treated as issued with ordinary issue discount (‘‘OID’’) for U.S. federal income tax purposes. A U.S. Holder of a Note treated as issued with OID must include the OID in income as ordinary income for U.S. federal income tax purposes as it accrues under a constant yield method in advance of receipt of the cash payments attributable to such income, regardless of such U.S. Holder’s regular method of tax accounting. In general, the amount of OID included in income by the U.S. Holder with respect to a Note is the sum of the ‘‘daily portions’’ of OID with respect to the Note for each day during the taxable year (or portion thereof) on which the U.S. Holder held the Note. The daily portion of OID on any Note is determined by allocating to each day in any accrual period a ratable portion of the OID allocable to that accrual period. The amount of OID allocable to each accrual period is generally equal to the difference between (i) the product of the Note’s ‘‘adjusted issue price’’ at the beginning of such accrual period and its yield to maturity (determined on the basis of compounding at the close of each accrual period and appropriately adjusted to take into account the length of the particular accrual period) and (ii) the amount of any qualified stated interest payments allocable to such accrual period. The adjusted issue price of a Note at the beginning of any accrual period is the sum of the issue price of the Note plus the amount of OID allocable to all prior accrual periods minus the amount of any prior payments on the Note that were not qualified stated interest payments. Under these rules, a U.S. Holder generally will have to include in taxable income increasingly greater amounts of OID in successive accrual periods.
A U.S. Holder of a Note must (i) determine the amount of OID allocable to each accrual period in pounds sterling using the constant yield method described above and (ii) translate the amount of such OID into U.S. dollars and recognize exchange gain or loss in the same manner as described above under ‘‘—Payments of stated interest’’ for stated interest accrued by an accrual basis U.S. Holder. U.S. Holders should note that because the cash payment in respect of accrued OID on a Note will not be made until maturity or other disposition of the Note, a greater possibility exists for fluctuations in foreign currency exchange rates (and the required recognition of exchange gain or loss) than is the case for foreign currency instruments issued without OID. Prospective investors are urged to consult their tax advisors regarding the interplay between the application of the OID and foreign currency exchange gain or loss rules.
Sale, exchange, retirement and other taxable disposition of Notes Upon the sale, exchange, retirement or other taxable disposition of a Note, you will recognise gain or loss equal to the difference between the amount realised upon the sale, exchange, retirement or other taxable disposition (less an amount equal to any accrued but unpaid stated interest that you did not previously include in income, which will be treated as a payment of interest for United States federal income tax purposes) and your adjusted tax basis in the Note. Your adjusted tax basis in a Note generally will be your United States dollar cost for that Note reduced by any cash payments on the Note other than stated interest. If you purchased your Note with pounds sterling, your cost generally will be the United States dollar value of the purchase price on the date of such purchase. If your Note is sold, exchanged, retired or otherwise disposed of in a taxable transaction for an amount in pounds sterling, the amount realised generally will be the United States dollar value of such pounds sterling amount received on the date of sale, exchange, retirement or other taxable disposition. If you are a cash method taxpayer and the Notes are traded on an established securities market, pounds sterling paid or received will be translated into United States dollars at the spot rate on the settlement date of the taxable disposition of your Notes. An accrual method taxpayer may elect the same treatment with respect to the taxable disposition of Notes traded on an established securities market, provided that the election is applied consistently to all debt
273 instruments from year to year. Such election cannot be changed without the consent of the IRS.
Subject to the foreign currency rules discussed below, your gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if, at the time of sale, exchange, retirement or other taxable disposition, you have held the Note for more than one year. Capital gains of non-corporate U.S. holders, including individuals, derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to significant limitations. Gain or loss realised by you on the sale, exchange, retirement or other taxable disposition of a Note generally would be treated as United States source gain or loss.
A portion of your gain or loss may be treated as exchange gain or loss with respect to the principal amount of a Note. Exchange gain or loss will be treated as ordinary income or loss and generally will be United States source gain or loss. For these purposes, the principal amount of the Note is your purchase price for the Note calculated in pounds sterling on the date of purchase, and the amount of exchange gain or loss recognised is equal to the difference between (i) the United States dollar value of the principal amount determined on the date of the sale, exchange, retirement or other taxable disposition of the Note and (ii) the United States dollar value of the principal amount determined on the date you purchased the Note. The amount of exchange gain or loss (including any exchange gain or loss with respect to the receipt of accrued but unpaid interest) will be limited to the amount of overall gain or loss realised on the sale, exchange, retirement or other taxable disposition of the Note.
Exchange gain or loss with respect to pounds sterling Your tax basis in the pounds sterling received as interest on a Note will be the United States dollar value thereof at the spot rate in effect on the date the pounds sterling are received. Upon the sale, taxable exchange, retirement or other taxable disposition of a Note, if the Notes are traded on an established securities market, a cash basis taxpayer (or, upon election, an accrual basis taxpayer) will have a basis in the pounds sterling received equal to the United States dollar value thereof at the spot rate in effect on the settlement date of such disposition (that is, the same date that the pounds sterling are valued for purposes of determining the amount realised on the Note). In all other cases, since the amount realised is based on the spot rate in effect on the date of the taxable disposition of the Note (including the trade date if the Notes are traded on an established securities market), (i) the taxpayer will realise foreign exchange gain or loss to the extent the United States dollar value of the pounds sterling received (based on the spot rate in effect on the date of receipt) differs from the United States dollar value of the pounds sterling on the date of the taxable disposition of the Note, and (ii) the taxpayer’s basis in the pounds sterling received will equal the United States dollar value of the pounds sterling, based on the spot rate in effect on the date of receipt.
Any gain or loss recognised by you on a sale, exchange or other taxable disposition of the pounds sterling will be ordinary income or loss and generally will be United States source gain or loss.
Reportable transactions Treasury Regulations meant to require the reporting of certain tax shelter transactions could be interpreted to cover transactions generally not regarded as tax shelters, including certain foreign currency transactions. Under the Treasury Regulations, certain transactions are required to be reported to the IRS including, in certain circumstances, a sale, exchange, retirement or other taxable disposition of a foreign currency note or foreign currency received in respect of a foreign currency note, in each case, to the extent that such sale, exchange, retirement or other taxable disposition results in a tax loss in excess of a threshold amount. Holders considering the purchase of Notes should consult with their own tax advisor to determine the tax return
274 obligations, if any, with respect to an investment in the Notes, including any requirement to file IRS Form 8886 (Reportable Transaction Disclosure Statement).
Backup withholding and information reporting Generally, information reporting requirements will apply to all payments of principal and interest on, or the proceeds from a sale or other disposition of, a Note, unless you are an exempt recipient, such as a corporation. Additionally, if you fail to provide your taxpayer identification number, or in the case of interest payments, fail either to report in full your dividend and interest income or to make certain certifications, you may be subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against your United States federal income tax liability, provided that the required information is timely furnished to the IRS. You are urged to consult your own tax advisors regarding backup withholding and information reporting requirements relating to your ownership of the Notes.
United States return disclosure requirements for individual U.S. holders Certain U.S. holders are required to report information relating to interests in the Notes, subject to certain exceptions (including an exception for Notes held in accounts maintained by certain financial institutions), by attaching a complete IRS Form 8938 (Statement of Specified Foreign Financial Assets), with their tax return for each year in which they hold an interest in the Notes. Penalties may apply for failure to properly complete and file IRS Form 8938. You are urged to consult your own tax advisors regarding information reporting requirements relating to your ownership of the Notes.
U.S. holders of Notes are advised to consult their own professional advisers if they require any advice or further information relating to the tax consequences of purchasing, holding or disposing of Notes.
275 Limitations on validity and enforceability of the Note Guarantees and security interests Set out below is a summary of certain limitations on the enforceability of the Note Guarantees and the security interests and a brief description of certain aspects of insolvency law in England and Wales, Scotland, Northern Ireland and the European Union.
European Union
The Issuer and the Guarantors are organised under the laws of Member States of the European Union.
Pursuant to Council Regulation (EC) no. 1346/2000 on insolvency proceedings (the ‘‘EC Insolvency Regulation’’), which applies within the European Union (other than Denmark and other than in respect of certain insurance, credit institution and investment undertakings), the courts of the Member State in which a company’s ‘‘centre of main interests’’ (as that term is used in Article 3(1) of the EC Insolvency Regulation) is situated have jurisdiction to open main insolvency proceedings. The determination of where a company has its centre of main interests is a question of fact on which the courts of the different Member States may have differing views.
Although there is a presumption under Article 3(1) of the EC Insolvency Regulation that a company has its centre of main interests in the Member State in which it has its registered office in the absence of proof to the contrary, Preamble 13 of the EC Insolvency Regulation states that the centre of main interests of a ‘‘debtor should correspond to the place where the debtor conducts the administration of its interests on a regular basis and is therefore ascertainable by third parties.’’ The courts have taken into consideration a number of factors in determining the centre of main interests of a company, but the key to rebutting the presumption with respect to the registered office is that the centre of main interests must be objectively ascertainable by third parties. A company’s centre of main interests may change from time to time but is determined for the purposes of deciding which courts have competent jurisdiction to open main insolvency proceedings at the time of the filing of the insolvency petition.
The EC Insolvency Regulation applies to insolvency proceedings that are collective insolvency proceedings of the types referred to in Annexes A and B to the EC Insolvency Regulation.
If the centre of main interests of a company is in one Member State (other than Denmark) under Article 3(2) of the EC Insolvency Regulation, the courts of another Member State (other than Denmark) have jurisdiction to open insolvency proceedings against that company only if such company has an ‘‘establishment’’ in the territory of such other Member State (such proceedings being referred to as ‘‘territorial insolvency proceedings’’ or ‘‘secondary insolvency proceedings’’). An ‘‘establishment’’ is defined as a place of operations where the company carries on non-transitory economic activity with human means and goods. The effects of those insolvency proceedings opened in that other Member State are restricted to the assets of the company situated in such other Member State.
Where main proceedings have been opened in the Member State in which the company has its centre of main interests, any insolvency proceedings opened subsequently in another Member State in which the company has an establishment are limited to ‘‘winding-up insolvency proceedings being referred to as ‘‘secondary proceedings’’). Where main proceedings in the Member State in which the company has its centre of main interests have not yet been opened, territorial insolvency proceedings can be opened in another Member State where the company has an establishment only where either: (a) insolvency proceedings cannot be opened in the Member State in which the company’s centre of main interests is situated as a result of conditions laid down by that Member State’s law; or (b) the territorial insolvency proceedings
276 are opened at the request of a creditor that is domiciled, habitually resident or has its registered office in the Member State in which the company has an establishment or whose claim arises from the operation of that establishment.
The courts of all Member States (other than Denmark) must recognise the judgment of the court opening main proceedings and, subject to the exceptions provided for in the EC Insolvency Regulation, that judgment will be given the same effect in the other Member States so long as no secondary proceedings have been opened there. The liquidator appointed by a court in a Member State that has jurisdiction to open main proceedings (because the company’s centre of main interests is there) may exercise the powers conferred on him by the law of that Member State in another Member State (such as to remove assets of the company from that other Member State), subject to certain limitations, so long as no insolvency proceedings have been opened in that other Member State or any preservation measure taken to the contrary further to a request to open insolvency proceedings in that other Member State where the company has assets.
England
The Issuer and certain of the Guarantors are companies incorporated under the laws of England and Wales (the ‘‘Obligors’’) and each of them will represent on closing that its centre of main interests is in this jurisdiction. Therefore, any insolvency proceedings by or against the Obligors would likely be based on English insolvency laws subject to the comments made under ‘‘English, Scottish and Northern Irish insolvency laws and other jurisdictions may provide you with less protection than U.S. bankruptcy law’’.
Fixed and floating charges Fixed-charge security has a number of advantages over floating charge security: (a) an administrator appointed to the company that granted the floating charge can generally dispose of floating charge assets for cash or collect receivables charged by way of floating charge and use the proceeds and/or cash subject to a floating charge, to meet administration expenses (which can include the costs of continuing to operate the charging company’s business while in administration and the administrator’s remuneration) in priority to the claims of the floating charge holder; (b) a fixed charge, even if created after the date of a floating charge, may have priority as against the floating charge over the charged assets; (c) general costs and expenses (including the insolvency office holder’s remuneration) properly incurred in a winding-up or administration are generally payable out of floating charge assets to the extent the assets of the company available for unsecured creditors generally are otherwise insufficient to meet them in priority to floating charge claims; (d) until the floating charge security crystallises, a company is entitled to deal with assets that are subject to floating charge security in the ordinary course of its business, meaning that such assets can be effectively disposed of by the charging company so as to give a third party good title to the assets free of the floating charge and so as to give rise to the risk of security being granted over such assets in priority to the floating charge security; (e) floating charge security is generally subject to certain challenges under English insolvency law (please see ‘‘—Challenges to guarantees and security—Grant of floating charge’’); (f) floating charge security is generally subject to the claims of preferential creditors (such as certain occupational pension scheme contributions and salaries owed to employees (subject to a cap per employee) and holiday pay owed to employees) and to the claims of unsecured creditors in respect of a ring-fenced amount of the proceeds (please see ‘‘—Administration and floating charges’’); and (g) the administrator of a company may dispose of or take action relating to any property which is subject to a floating charge as if it were not subject to that charge; the holder of the floating charge will, however, then have the same priority over the property of the company which directly or indirectly represents the property disposed of (e.g. the proceeds of the sale).
277 The general statements in the preceding paragraph will not necessarily apply if the floating charge is a security financial collateral arrangement (such as a charge over cash or financial instruments such as shares, bonds or tradable capital market debt instruments) under the Financial Collateral Arrangements (No. 2) Regulations 2003 (the ‘‘Financial Collateral Regulations’’).
Under English law there is a possibility that a court could recharacterise as floating charges any security interests expressed to be created by a security document as fixed charges where the chargee does not have the requisite degree of control over the relevant chargor’s ability to deal with the relevant assets and the proceeds thereof or does not exercise such control in practice, as the description given to the charges in the relevant security document as fixed charges is not determinative. Where the chargor is free to deal with the secured assets without the consent of the chargee, the court is likely to hold that the security interest in question constitutes a floating charge, notwithstanding that it may be described as a fixed charge.
Administration and floating charges Under English insolvency law, English courts are empowered to order the appointment of an administrator in respect of an English company in certain circumstances. An administrator can also be appointed out of court by an English company, its directors or the holder of a qualifying floating charge and different procedures apply according to the identity of the appointor. During the administration, in general no proceedings or other legal process may be commenced or continued against such company, or security enforced over such company’s property, except with leave of the court or the consent of the administrator. The moratorium does not, however, apply to a security financial collateral arrangement. During the administration of an English company, a creditor would not be able to enforce any security interest (other than security financial collateral arrangements) granted by it without the consent of the administrator or the court. In addition, a secured creditor cannot appoint an administrative receiver.
The Security Agent can appoint its choice of administrator by the out-of-court route or in specific circumstances appoint an administrative receiver if it is the holder of a qualifying floating charge (as defined in paragraph 14 of Schedule B1 of the U.K. Insolvency Act 1986, as amended). The essential characteristics of a qualifying floating charge are that (a) the charge must by its terms give the holder power to appoint an administrator (or an administrative receiver) and (b) the charge (or that and other charges taken together) must relate to the whole or substantially the whole of the relevant Obligor’s property. Even if the Security Agent holds a qualifying floating charge, it can only appoint an administrative receiver if one of the exceptions to the general prohibition of appointing an administrative receiver applies. The most relevant exception to the prohibition on the appointment of an administrative receiver by the Security Agent is likely to be the ability to appoint an administrative receiver under security forming part of a ‘‘capital market arrangement’’ (as defined in the U.K. Insolvency Act 1986, as amended), which is the case if a party incurs debt of at least £50,000,000 during the life of the arrangement and the arrangement involves the issue of a ‘‘capital markets investment’’ (which is defined in the U.K. Insolvency Act 1986, as amended). If an administrative receiver is appointed by the Security Agent the company or its directors will not be able to appoint an administrator by the out-of-court route and a court will only appoint an administrator if the charge under which the administrative receiver appointed is successfully challenged or the Security Agent agrees. If an administrator is appointed to a company, any administrative receiver then in office must vacate office and any receiver of part of the company’s property must resign if requested to do so by the administrator.
An administrator, receiver (including administrative receiver) or liquidator of the company will be required to ring-fence a certain percentage of the proceeds of enforcement of floating charge security for the benefit of unsecured creditors (except where the floating charge security is a security financial collateral arrangement under the Financial Collateral
278 Regulations). Under current law, this applies to 50% of the first £10,000 of floating charge realisations and 20% of the remainder over £10,000, with a maximum aggregate cap of £600,000.
Challenges to guarantees and security There are circumstances under English insolvency law in which the granting by a company of security and guarantees can be challenged.
The following paragraphs discuss potential grounds for challenge that may apply to guarantees and security interest.
Transaction at an undervalue Under English insolvency law, a liquidator or an administrator of a company could apply to the court for an order to set aside a security interest (in certain cases) or a guarantee granted by the company (or give other relief) on the grounds that the creation of such security interest or guarantee constituted a transaction at an undervalue. The grant of a security interest or guarantee will only be a transaction at an undervalue if, at the time of the transaction or as a result of the transaction, the English company is unable to pay its debts (as defined in the U.K. Insolvency Act 1986, as amended). For a challenge to be made, the guarantee or security must be granted within a period of two years ending with the onset of insolvency (as defined in section 240 of the U.K. Insolvency Act 1986, as amended). A transaction might be subject to being set aside as a transaction at an undervalue if the company makes a gift to a person, if the company receives no consideration or if the company receives consideration of significantly less value, in money or money’s worth, then the consideration given by such company. A court will not intervene in respect of a transaction at an undervalue if it is satisfied that the company entered into the transaction in good faith and for the purpose of carrying on its business and that, at the time it did so, there were reasonable grounds for believing the transaction would benefit the company. Subject to this, if the court determines that the transaction was a transaction at an undervalue the court can make such order as it thinks fit to restore the position to what it would have been if the transaction had not been entered into. In any challenge proceedings, it is for the administrator or liquidator to demonstrate that the English company was insolvent unless a beneficiary of the transaction was a ‘‘connected person’’ (as defined in the U.K. Insolvency Act 1986, as amended), in which case there is a presumption that the company was unable to pay its debts at the time of the transaction and the connected person must rebut the presumption.
Preference Under English insolvency law, a liquidator or administrator of a company could apply to the court for an order to set aside a security interest or a guarantee granted by such company (or give other relief) on the grounds such security interest or such guarantee constituted a preference. A transaction may constitute a preference if it has the effect of placing a creditor (or a surety or guarantor) of the company in a better position in the event of the company’s insolvent liquidation than such creditor, surety or guarantor would otherwise have been in had that transaction not been entered into. For a challenge to be made, the decision to prefer must be made within the period of six months ending with the onset of insolvency (as defined in section 240 of the U.K. Insolvency Act 1986, as amended) if the beneficiary of the security interest or the guarantee is not a connected person, or two years if the beneficiary is a connected person. In addition, the company must have been unable to pay its debts at the time of the transaction or became so as a result. A court may not make an order in respect of a preference of a person unless it is satisfied that the company in deciding to give the preference was influenced by a desire to put that person in a better position. If the court determines that the transaction was a preference, the court can make such order as it thinks fit to restore the position to what it would have been if that preference had not been given (which could include reducing payments under the guarantees or setting aside the security
279 interests or guarantees). There is protection for a third party that benefits from the transaction if they acted in good faith and without notice. In any proceedings, it is for the administrator or liquidator to demonstrate that the company was insolvent and that the company was influenced by a desire to produce the preferential effect, unless the beneficiary of the transaction was a connected person, in which case there is a presumption that the company was influenced by a desire to produce the preferential effect and the connected person must demonstrate in such proceedings that there was no such influence.
Transaction defrauding creditors Under English insolvency law, a liquidator or an administrator of a company, or a person who is a victim of the relevant transaction can apply to the court for an order to set aside a security interest or guarantee granted by that company on the grounds the security interest or guarantee was a transaction defrauding creditors.
A transaction will constitute a transaction defrauding creditors if it is a transaction at an undervalue (as outlined above) and the court is satisfied the purpose of a party to the transaction was to put assets beyond the reach of actual or potential claimants against it or to prejudice the interest of such persons.
If the court determines that the transaction was a transaction defrauding creditors, then it may make such order as it may deem fit to restore the position to what it was prior to the transaction or protect the victims of the transaction (including reducing payments under the guarantee or setting aside the security interest or guarantees). Any ‘‘victim’’ of the transaction (with the leave of the court if the company is in liquidation or administration) may apply to court under this provision and not just liquidators or administrators. There is no time limit in the English insolvency legislation within which the challenge must be made and the relevant company does not need to have been insolvent at the time of the transaction.
Avoidance of floating charge With the exception of a security financial collateral arrangement under the Financial Collateral Regulations, a floating charge created within 12 months of the onset of insolvency, at a time when the company was unable to pay its debts, is invalid except to the extent of the value of the consideration provided for the creation of the charge as consists of money paid to, or goods or services supplied to, or any discharge or reduction of any debt of, the relevant English company at the same time as or after the creation of the floating charge plus interest payable on such amounts (section 245 of the U.K. Insolvency Act 1986, as amended). Where the floating charge is granted to a ‘‘connected person’’, the relevant time period is within two years of the onset of insolvency, and the company need not be unable to pay its debts.
Scotland
Certain of the Guarantors are companies incorporated under Scots law. As a general rule, insolvency proceedings with respect to a Scottish company should be commenced in Scotland based on Scottish insolvency laws, although insolvency proceedings in respect of Scottish companies could also be based in other jurisdictions under certain circumstances (see ‘‘Cross Border Insolvency’’).
Formal insolvency proceedings under the laws of Scotland may be initiated in a number of ways, including by the debtor or any of its creditors making an application to court for administration proceedings or (in the case of the debtor’s directors or any creditor holding a floating charge over substantially all of the debtor’s assets) through an out of court process, or by a creditor filing a petition to wind up the company or the company’s shareholders resolving to go into liquidation. A company may be wound up by the court or pursuant to a resolution of its shareholders if it is unable to pay its debts, and may be placed into administration if it is, or is likely, to become unable to pay its debts, and the administration is reasonably likely to achieve one of the three statutory purposes described below.
280 A company is unable to pay its debts if it is insolvent either on a ‘‘cash-flow’’ or ‘‘balance-sheet’’ basis. A company is cash-flow insolvent if it is unable to pay its debts as they fall due. A company is balance-sheet insolvent if the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.
Administration and floating charges Under Scottish insolvency law, Scottish courts are empowered to order the appointment of an administrator in respect of a Scottish company in certain circumstances. An administrator can also be appointed out of court by a Scottish company, its directors or the holder of a qualifying floating charge and different procedures apply according to the identity of the appointor. During the administration, in general, no proceedings or other legal process may be commenced or continued against such company, or security enforced over such company’s property, except with leave of the court or the consent of the administrator. The moratorium does not, however, apply to a ‘‘security financial collateral arrangement’’ (such as a charge over cash or financial instruments such as shares, bonds or tradable capital market debt instruments) under the Financial Collateral Arrangements (No. 2) Regulations 2003 (the ‘‘Financial Collateral Regulations’’). During the administration of a Scottish company, a creditor would not be able to enforce any security interest (other than security financial collateral arrangements) granted in its favour without the consent of the administrator or the leave of the court. In addition, a floating chargeholder cannot appoint a receiver during administration.
A floating chargeholder can appoint its choice of administrator by the out-of-court route (or, in specific circumstances, appoint a receiver) if it is the holder of a qualifying floating charge (as defined in paragraph 14 of Schedule B1 of the UK Insolvency Act 1986 (as amended)). The essential characteristics of a qualifying floating charge are that (a) the charge must by its terms give the holder power to appoint an administrator (or a receiver over the whole or substantially the whole of the property and undertaking of the company) and (b) the charge (or that and other charges taken together) must relate to the whole or substantially the whole of the relevant grantor’s property. Even if a creditor holds a qualifying floating charge, it can only appoint a receiver if one of the exceptions to the general prohibition of appointing a receiver applies. The most relevant exception to the prohibition on the appointment of a receiver by the floating chargeholder is likely to be the ability to appoint a receiver under security forming part of a ‘‘capital market arrangement’’ (as defined in the UK Insolvency Act 1986, as amended), which is the case if a party incurs debt of at least £50,000,000 during the life of the arrangement and the arrangement involves the issue of a ‘‘capital markets investment’’ (which is defined in the UK Insolvency Act 1986, as amended).
If a receiver is appointed by the holder of a qualifying floating charge, the company or its directors will not be able to appoint an administrator by the out-of-court route and a court will only appoint an administrator if the charge under which the receiver is appointed is successfully challenged or if the chargeholder agrees. If an administrator is appointed to a company, any receiver then in office must vacate office and any receiver of part of the company’s property must resign if requested to do so by the administrator.
An administrator, receiver or liquidator of the company will be required to ring-fence a certain percentage of the proceeds of enforcement of floating charge security for the benefit of unsecured creditors. Under current law, this applies to 50% of the first £10,000 of floating charge realisations and 20% of the remainder over £10,000, with a maximum aggregate cap of £600,000.
Administration The Insolvency Act 1986, as amended (the ‘‘UK Insolvency Act’’) empowers Scottish courts to make an administration order in respect of a Scottish company in certain circumstances or, as noted above, the company’s directors or floating chargeholders to commence administration through an out-of-court process. During the administration, in general, no proceedings or
281 other legal process may be commenced or continued against the debtor, or security enforced over the company’s property, except with the leave of the court or the consent of the administrator. The administration of a company must achieve one of the following statutory objectives: (1) the rescue of the company (as distinct from the business carried on by the company) as a going concern (the ‘‘primary objective’’); (2) the achievement of a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration) (the ‘‘second objective’’); or (3) the realisation of some or all of the company’s property to make a distribution to one or more secured or preferential creditors (the ‘‘third objective’’). An administrator must attempt to achieve the objectives of administration in order, unless he thinks either that it is not reasonably practicable to achieve the primary objective, or that the secondary objective would achieve a better result for the company’s creditors as a whole. Therefore, the administrator cannot pursue the third objective unless he thinks that it is not reasonably practicable to achieve either the first objective or the second objective and that it will not unnecessarily harm the interests of the creditors of the company as a whole to pursue the third objective.
Liquidation/winding-Up Liquidation is a company dissolution procedure under which the assets of the company are realised and distributed by the liquidator to creditors in the statutory order of priority prescribed by the UK Insolvency Act and the relevant statutory regulations made in connection with, or under, that Act. At the end of the liquidation process the company will be dissolved. In the case of a liquidation commenced by way of a court order, no proceedings or other actions may be commenced or continued against the company (security enforcement is not affected although certain enforcement rights may be curtailed).
Section 178 of the UK Insolvency Act which is the statutory power conferred on English liquidators to disclaim onerous property does not apply under Scots law.
Challenges to guarantees and security There are circumstances under Scottish insolvency law in which the granting by a Scottish company of security and guarantees can be challenged. In most cases, this will only arise if the company is placed into administration or liquidation within a specified period of the granting of the guarantee or security. Therefore, if during the specified period an administrator or liquidator is appointed by a Scottish company, the administrator or liquidator may challenge the validity of the security or guarantee given by such company.
The following potential grounds for challenge may apply under Scottish insolvency law to charges and guarantees:
Gratuitous alienations (Scots common law and statute) At Scots common law, a gratuitous alienation (which may include the grant of a guarantee or security interest by a Scottish company) arises, irrespective of intention to defraud, where it can be shown that (1) the company making the alienation is insolvent at the time of challenge and was either insolvent at the time of the alienation or was made insolvent by it; (2) the alienation was made without adequate consideration; and (3) the alienation was to the prejudice of the challenging creditor. There is no time limit at common law for such a challenge however the burden of proving that the grant of the guarantee or security interest constitutes a gratuitous alienation is on the challenger.
Under section 242 of the UK Insolvency Act, a liquidator, administrator or creditor of a Scottish company could apply to the court for an order to set aside the creation of a guarantee and potentially also a security interest if such liquidator, administrator or creditor believed that the creation of such guarantee or security interest constituted an alienation by the company for no consideration or no adequate consideration. The courts will not set aside the creation of a guarantee or a security interest by a company under section 242 of the UK Insolvency Act if the
282 person seeking to uphold the guarantee or security interest can establish that either (i) immediately, or at any other time, after the grant of the guarantee or security interest the company’s assets were greater than its liabilities or (ii) the grant of the guarantee or security interest was made for adequate consideration. The transaction can be challenged under section 242 of the UK Insolvency Act if the company enters liquidation or administration proceedings within a period of two years from the date that the Scottish company grants the guarantee or security interest or a period of five years where the guarantee or security interest has the effect of favouring an associate (within the meaning of section 74 of the Bankruptcy (Scotland) Act 1985) of the Scottish company. If the court determines that the transaction constituted a gratuitous alienation whether at Scots common law or under section 242 of the UK Insolvency Act the court can make such order as it thinks fit to restore the position to what it would have been if the transaction had not been entered into.
Fraudulent and unfair preferences At Scots common law a fraudulent preference is a voluntary transaction by which, after the insolvency of a debtor and when the debtor is aware of its insolvency a creditor obtains a preference over other creditors. A preference may include a creditor receiving the benefit of a guarantee or security interest. There is no time limit at common law for such a challenge however as with gratuitous alienations the burden of proving that the grant of the guarantee or security interest constitutes an unfair preference is on the challenger. The following are generally viewed as not being challengeable at common law: (1) involuntary transactions, (2) payment in cash of debts actually due, (3) transactions in the ordinary course of business where there is no collusion between the debtor and the creditor, and (4) where the preference is granted for fair and present consideration.
Under section 243 of the UK Insolvency Act, the grant of a guarantee or security interest by a Scottish company may be challenged by a liquidator, administrator or creditor of a Scottish company where the grant of such guarantee or security interest has the effect of creating an unfair preference in favour of a creditor to the prejudice of the general body of creditors and such guarantee or security interest was granted by the Scottish company not earlier than six months before the commencement of the winding up of the Scottish company or the making of an administration order in respect of the Scottish company. The following cannot be challenged as unfair preferences under section 243 of the UK Insolvency Act: (i) a transaction in the ordinary course of trade or business; (2) a payment in cash for a debt which when it was paid had become payable, unless the transaction was collusive with the purpose of prejudicing the general body of creditors; (3) a transaction whereby the parties to it undertake reciprocal obligations unless the transaction was collusive as aforesaid; and (4) the granting of a mandate by a Scottish company authorising an arrestee to pay over the arrested funds or part thereof where (a) there has been a decree for payment or a warrant for summary diligence and (b) the decree or warrant has been preceded by an arrestment on the dependence of the action or followed by an arrestment in execution. If the court determines that the transaction constituted a fraudulent preference at Scots common law or an unfair preference under section 243 of the UK Insolvency Act the court can make such order as it thinks fit to restore the position to what it would have been if the transaction had not been entered into.
Grant of floating charge Under Scottish insolvency law, if a Scottish company is unable to pay its debts at the time of (or as a result of) granting a floating charge then such floating charge can be avoided on the action of a liquidator or administrator if it was granted in the period of one year ending with the onset of insolvency (as defined in section 245 of the UK Insolvency Act 1986, as amended). The floating charge, however, will be valid to the extent of the value of the consideration provided for the creation of the charge in the form of money paid to, or goods or services supplied to, or any discharge or reduction of any debt of, the relevant Scottish company at the same time as or after the creation of the floating charge (plus interest payable on such
283 amounts). Where the floating charge is granted to a ‘‘connected person,’’ the charge can be challenged if given within two years of the onset of insolvency and the prerequisite to challenge that the company is unable to pay its debts does not apply. However, if the floating charge qualifies as a ‘‘security financial collateral arrangement’’ under the Financial Collateral Regulations, the floating charge will not be subject to challenge as described in this paragraph.
Cross Border Insolvency Pursuant to the EU Insolvency Regulation, where a company incorporated in Scotland has its ‘‘centre of main interests’’ in a Member State of the EU other than the United Kingdom, then the main insolvency proceedings for that company may be opened in the Member State in which its centre of main interest is located (rather than Scotland) and be subject to the laws of that Member State. There is a rebuttable presumption that the centre of main interests will be in the jurisdiction where the company’s registered office is located.
In addition, the Cross Border Insolvency Regulations 2006 (SI 2006/1030) (the ‘‘CBIR’’) implements the United Nations Commission on International Trade Law Model Law on Cross Border Insolvency (the ‘‘UNCITRAL Model Law’’) in Great Britain (being England, Scotland, Northern Ireland and Wales). Certain jurisdictions other than England, Scotland, Northern Ireland and Wales have also adopted legislation implementing the UNCITRAL Model Law. The CBIR provides that where courts in foreign jurisdictions have opened insolvency proceedings in respect of a Scottish company, provided that the relevant company has its centre of main interests in such foreign jurisdiction, or where has an ‘‘establishment’’ (being any place of operations in such foreign jurisdiction, where it carries out a non-transitory economic activity with human means and assets or services), the Scottish court, as the case may be, will recognise the foreign insolvency proceedings and give effect to certain stays and suspensions on any proceedings or attachment attempted against the company in Scotland. To the extent that the CBIR conflicts with an obligation of the United Kingdom under the EU Insolvency Regulation, however, the requirements of the EU Insolvency Regulation will prevail.
Priority of claims One of the primary functions of liquidation (and, where the company cannot be rescued as a going concern, one of the possible functions of administration) under United Kingdom law is to realise the assets of the insolvent company and to distribute the cash realisations made from those assets to its creditors. Under the Insolvency (Scotland) Rules 1986 (in respect of a Scottish company), creditors are placed into different classes and, with the exceptions and adjustments noted below, the proceeds from the realisation of the insolvent company’s property will be applied in descending order of priority, as set out below. With the exception of the prescribed part (see ‘‘Prescribed Part’’), distributions cannot be made to a class of creditors until the claims of the creditors in a prior ranking class have been repaid in full. Unless creditors have agreed otherwise, distributions are made on a pari passu basis, that is, the cash is distributed in proportion to the debts due to each creditor within a class.
The general priority of claims in insolvency is broadly as follows (in descending order of priority):
First-ranking claims: holders of fixed charge security and creditors with a proprietary interest in specific assets in the possession (but not full legal and beneficial ownership) of the debtor but only to the extent of the realisations from those secured assets or with respect to the asset in which they have a proprietary interest.
Second-ranking claims: expenses of the insolvent estate incurred during the relevant insolvency proceedings (including the remuneration of the relevant insolvency practitioners) (there is a further statutory order of priority setting out the order in which expenses are paid);
Third-ranking claims: preferential creditors. Preferential debts include (but are not limited to) debts owed by the insolvent company in relation to: (i) contributions to occupational and state
284 pension schemes; (ii) wages and salaries of employees for work done in the four months before the insolvency date, up to a maximum of £800 per person; and (iii) holiday pay due to any employee whose contract has been terminated, whether the termination takes place before or after the insolvency date;
Fourth ranking claims: holders of floating charge security to the extent of the realisations from those secured assets, according to the priority of their security. However, before distributing asset realisations to the holders of floating charges, the prescribed part must be set aside for distribution to unsecured creditors (see ‘‘Prescribed Part’’);
Fifth ranking claims: general unsecured creditors. However, any secured creditor not repaid in full from the realisation of assets subject to its security can also claim the remaining debt due to it (a shortfall) from the insolvent estate as an unsecured claim (but is not entitled to rank in the prescribed part);
Sixth ranking claims: postponed creditors. Creditors whose claims are postponed to the payment of all of the company’s other creditors.
Seventh ranking claims: shareholders. If after the repayment of all unsecured creditors in full, any remaining funds exist, these will be distributed to the shareholders of the insolvent company.
Prescribed Part An administrator, receiver (including administrative receiver) or liquidator of the company will be required to ring-fence a certain percentage of the proceeds of enforcement of floating charge security for the benefit of unsecured creditors (the ‘‘Prescribed Part’’). Under current law, this applies to 50% of the first £10,000 of floating charge realisations and 20% of the remainder over £10,000, and the Prescribed Part is subject to a maximum aggregate cap of £600,000. The Prescribed Part must be made available to unsecured creditors unless the cost of doing so would be disproportionate to the resulting benefit to creditors. The Prescribed Part will not be available for any shortfall claims of secured creditors.
Foreign currency Under Scottish insolvency law, any debt of a company payable in a currency other than British Pounds must be converted into British Pounds at the rate of exchange for that other currency at the mean of the buying and selling spot rates prevailing in the London market at the close of business on the date of commencement of the winding up of the Scottish company or on the date on which the Scottish company entered administration.
Northern Ireland
Insolvency Some of the Guarantors namely, The Derry Journal Limited, Morton Newspapers Limited, Local Press Limited and Century Newspapers Limited, are incorporated under the laws of Northern Ireland (the ‘‘Northern Irish Guarantors’’). Accordingly, insolvency proceedings in respect of the Northern Irish Guarantors are likely to be governed by the laws of Northern Ireland. However, pursuant to the EU Insolvency Regulation (EC Reg 1346/2000), where a Northern Irish company conducts business in another member state of the European Union, the jurisdiction of the Northern Irish courts may be limited if the company’s ‘‘centre of main interests’’ is found to be in another Member State (please see ‘‘—European Union’’). There are a number of factors that are taken into account to ascertain the centre of main interests. The centre of main interests should correspond to the place where the company conducts the administration of its interests on a regular basis and is therefore ascertainable by third parties. The place of the registered office of the company is presumed to be the centre of main interests in the absence of proof to the contrary. The point at which this issue falls to be determined is at the time that the relevant insolvency proceedings are opened.
285 Insolvency laws in Northern Ireland may not be as favourable to your interests as the laws of the United States and other jurisdictions with which you are familiar with. Where the Northern Irish Guarantors experience financial difficulties, it is not possible to predict with certainty the outcome of insolvency or similar proceedings. Northern Irish insolvency laws and other limitations could limit the enforceability of a guarantee provided by the Northern Irish Guarantors and any security interests granted by the Northern Irish Guarantors.
The following is a brief description of certain aspects of Northern Irish insolvency laws relating to certain limitations on the Note Guarantees and security interests in respect of the Notes, insofar as they are provided by the Northern Irish Guarantors. The application of these laws could adversely affect your ability to enforce your rights under the Note Guarantees or the Collateral securing the Notes and limit any amounts that you may receive. The following also contains an analysis of the typical forms of security interests in Northern Ireland which are commonly created in Northern Ireland over a company’s assets, namely fixed and floating charges.
General The laws relating to insolvency and the validity/enforceability of guarantees and security are broadly the same as those in England and Wales but differ in certain respects from those equivalent laws in Ireland.
Fixed and floating charges There are a number of ways in which fixed charge security has an advantage over floating charge security:
(a) an administrator appointed to a charging company can (without the floating charge holder’s consent) convert floating charge assets to cash and use such cash, or use cash subject to a floating charge, to meet administration expenses (which can include the costs of continuing to operate the business of the charging company) while in administration in priority to the claims of the floating charge holder; (b) a fixed charge, even if created after the date of a floating charge, may have priority as against the floating charge over the charged assets; (c) general costs and expenses (including the remuneration of the liquidator) properly incurred in a winding-up are payable out of the assets of the charging company (including the assets the subject of the floating charge) in priority to floating charge claims; (d) until the floating charge security crystallises, a company is entitled to deal with assets that are subject to floating charge security in the ordinary course of business, meaning that such assets can be effectively disposed of by the charging company so as to give a third party good title to the assets free of the floating charge and so as to give rise to the risk of security being granted over such assets in priority to the floating charge security; (e) there are particular challenge risks in relation to floating charge security; and (f) floating charge security is subject to the claims of preferential creditors (such as occupational pension scheme contributions and salaries owed to employees) and to ring-fencing. See ‘‘—Northern Ireland—Administration and floating charges’’.
Under insolvency laws in Northern Ireland, there is a possibility that a court could find that the fixed security interests expressed to be created by a security document could take effect as floating charges; the description given to them as fixed charges is not determinative. Whether fixed security interests will be upheld as fixed rather than floating security interests will depend, among other things, on whether the chargee has the requisite degree of control over the ability of the relevant chargor to deal in the relevant assets and the proceeds thereof and, if so, whether such control is exercised by the chargee in practice. Where the chargor is free to deal with the secured assets without the consent of the chargee, the court is likely to hold that the security interest in question constitutes a floating charge, notwithstanding that it may be described as a fixed charge in the security document.
286 Administration and floating charges The Insolvency (Northern Ireland) Order 1989 (as amended by the Insolvency (Northern Ireland) Order 2005 and as otherwise amended) empowers courts in Northern Ireland to make an administration order in respect of a Northern Irish company in certain circumstances.
An administration order can be made if the court is satisfied that the relevant company is or is likely to become ‘‘unable to pay its debts’’ as defined in Article 103 of the Insolvency (Northern Ireland) Order 1989 and that the administration order is reasonably likely to achieve the statutory purpose of administration.
An administrator can also be appointed out of court by the company, its directors or the holder of a qualifying floating charge which has become enforceable. During the administration, no proceedings or other legal process may be commenced or continued against the company in administration, or security enforced over the company’s property, except with leave of the court or the consent of the administrator (the statutory moratorium). Certain creditors of a company in administration may be able to realise their security over that company’s property notwithstanding the statutory moratorium. The statutory moratorium does not apply to security interests created or arising under a ‘‘financial collateral agreement’’ (generally, security/ collateral in respect of cash or financial instruments, such as shares, bonds or tradable capital market debt instruments) under the Financial Collateral Arrangements (No. 2) Regulations 2003 (as amended). If a Northern Irish company were to enter administration, it is possible that the security or the guarantee granted by it may not be enforced while it is in administration, without the leave of court or consent of the administrator. There can be no assurance that the Security Agent would obtain this leave of court or consent of the administrator. In addition, other than in limited circumstances, no administrative receiver can be appointed by a secured creditor in preference to an administrator, and any already appointed must resign if requested to do so by the administrator. Where the company is already in administration no other receiver may be appointed over that company’s fixed assets (commonly referred to as a Fixed Charge Receiver) without the leave of the Court or the administrator’s consent.
Liquidation The Northern Irish Guarantors may be wound up under the laws of Northern Ireland. ‘‘Wound up’’ means placed into either Creditors’ Voluntary Liquidation or Compulsory Liquidation, both of which are insolvent liquidations. The process of Members’ Voluntary Liquidation is a solvent winding up and outside the scope of this analysis.
On the liquidation of a Northern Irish company, there is no automatic statutory moratorium in place preventing, amongst other things, the holders of security interests from taking steps to enforce those security interests (with the exception of the appointment of an administrator which is not permitted once a liquidator has been appointed). Where the Northern Irish Guarantors are placed into Creditors’ Voluntary Liquidation, there are no restrictions on the holder of security either by way of fixed or floating charge from taking steps to enforce those security interests unless the liquidator or any creditor has applied to a court for a stay. However, where the Northern Irish Guarantors are placed into Compulsory Liquidation, the consent of the Court is strictly required before any security interest can be enforced. In addition, with compulsory liquidation where the obligations under the Note Guarantee are unsecured because of some inherent defect in the security interest, that Guarantor cannot take action or commence proceedings to recover the amounts on foot of the Note Guarantee without the consent of the Court by virtue of Article 110 of the Insolvency (Northern Ireland) Order 1989.
Challenges to Note Guarantees and security interests There are circumstances under Northern Irish insolvency law in which the granting by a Northern Irish company of security and guarantees can be challenged. Under insolvency law in Northern Ireland, the liquidator or administrator of a company may apply to the court to set
287 aside the granting of security or the giving of a guarantee within two years prior of the grantor entering into relevant insolvency proceedings, if the grantor was unable to pay its debts, as defined in Article 103 of the Insolvency (NI) Order 1989 at the time of, or becomes unable to pay its debts as a consequence of, the grant of security or giving the guarantee.
A transaction might be subject to a challenge if a company received consideration of significantly less value than the benefit given by that company or if it puts a person into a position which is better than the position that person would be in if the company proceeded into insolvent liquidation or if made for the purpose of putting assets beyond the reach of creditors (each as defined in Articles 202 and 203 of the Insolvency (Northern Ireland) Order 1989). A court generally will not intervene, however, if a company entered into the transaction in good faith for the purpose of carrying on its business and if at the time it did so there were reasonable grounds for believing the transaction would benefit the company. The Issuer cannot assure holders of the Notes that in the event of insolvency, the granting of the security by companies incorporated under the laws of Northern Ireland would not be challenged by a liquidator or administrator or that a court would support the analysis that (in any event) the Note Guarantee was entered into in good faith for the purposes described above.
In general terms, in such circumstances the Courts of Northern Ireland have the power to make void, among other things, such transactions or restore the position to what it would have been if the company had not entered into the transaction. If a court voided any grant of security or giving of any Note Guarantee as a result of a transaction at an undervalue or preference, or held it unenforceable for any other reason, you would cease to have any security over the relevant Collateral or a claim against the relevant Guarantor giving such Note Guarantee.
288 Plan of distribution Subject to the terms and conditions set forth in a purchase agreement to be dated as of the date on the front of this offering memorandum (the ‘‘Purchase Agreement’’), the Issuer has agreed to sell to the Initial Purchasers, and the Initial Purchasers have agreed to purchase from the Issuer, the entire principal amount of the Notes.
The obligations of the Initial Purchasers under the Purchase Agreement, including their agreement to purchase Notes from the Issuer, are several and not joint. The Purchase Agreement provides that the Initial Purchasers will purchase all the Notes if they purchase any of them.
The Initial Purchasers initially propose to offer the Notes for resale at the issue price that appears on the front cover of this offering memorandum. The Initial Purchasers may change the price at which the Notes are offered and any other selling terms at any time without notice. The Initial Purchasers may offer and sell Notes through certain of their affiliates, including in respect of sales into the United States.
The Purchase Agreement provides that the obligations of the Initial Purchasers to pay for and accept delivery of the Notes are subject to, among other conditions, the delivery of certain legal opinions by their counsel and the Group’s counsel. The Purchase Agreement also provides that, if an Initial Purchaser defaults, the purchase commitments of the non-defaulting Initial Purchaser may be increased or, in some cases, the Offering may be terminated.
The Purchase Agreement provides that the Group will indemnify and hold harmless the Initial Purchasers against certain liabilities, including liabilities under the Securities Act, and will contribute to payments that the Initial Purchasers may be required to make in respect thereof. The Issuer has agreed, subject to certain limited exceptions, that during the period from the date the Purchase Agreement is executed through and including the date that is 90 days after the date the Purchase Agreement is executed, to not, without having received the prior written consent provided for in the Purchase Agreement, offer, sell, contract to sell or otherwise dispose of any debt securities issued or guaranteed by the Company or any of its subsidiaries.
The Issuer has agreed to pay the Initial Purchasers certain customary fees for their services in connection with the Offering and to reimburse them for certain out-of-pocket expenses.The Notes and the Note Guarantees have not been, and will not be, registered under the U.S. Securities Act and may not be offered or sold within the United States except to qualified institutional buyers in reliance on Rule 144A and outside the United States in reliance on Regulation S. Terms used in this paragraph have the meanings given to them by Regulation S. Resales of the Notes are restricted as described under ‘‘Notice to investors’’. Each purchaser of the Notes will be deemed to have made acknowledgments, representations and agreements as described under ‘‘Notice to investors’’.
In the Purchase Agreement, each of the Initial Purchasers, severally and not jointly, has represented, warranted and agreed to the Issuer that it:
• has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which section 21(1) of the FSMA does not apply to the Issuer or any Guarantor; and
• has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.
289 No action has been taken in any jurisdiction, including the United States, by the Issuer, the Guarantors, any other member of the Group or the Initial Purchasers that would permit a public offering of the Notes or the possession, circulation or distribution of this offering memorandum or any other material relating to the Issuer, the Group or the Notes in any jurisdiction where action for this purpose is required. Accordingly, the Notes may not be offered or sold, directly or indirectly, and neither this offering memorandum nor any other offering material or advertisements in connection with the Notes may be distributed or published, in or from any country or jurisdiction, except in compliance with any applicable rules and regulations of any such country or jurisdiction. This offering memorandum does not constitute an offer to sell or a solicitation of an offer to purchase in any jurisdiction where such offer or solicitation would be unlawful. Persons into whose possession this offering memorandum comes are advised to inform themselves about and to observe any restrictions relating to the Offering, the distribution of this offering memorandum and resale of the Notes. See ‘‘Notice to investors’’.
The Issuer has agreed and the Guarantors will agree that neither will at any time offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any securities under circumstances in which such offer, sale, pledge, contract or disposition would cause the exemption afforded by Section 4(a)(2) of the Securities Act or the safe harbours of Rule 144A and Regulation S to cease to be applicable to the offer and sale of the Notes.
The Notes are a new issue of securities for which there currently is no market. The Issuer has applied, through its listing agent, for the Notes to be admitted to the Official List and trading on the Global Exchange Market. The Issuer cannot assure you, however, that such listing will be approved or maintained.
The Initial Purchasers have advised the Group that they intend to make a market in the Notes as permitted by applicable law. The Initial Purchasers are not obligated, however, to make a market in the Notes, and any market-making activity may be discontinued at any time at the sole discretion of the Initial Purchasers without notice. In addition, any such market-making activity will be subject to the limits imposed by the U.S. Securities Act and the U.S. Exchange Act. Accordingly, the Group cannot assure you that any market for the Notes will develop, that it will be liquid if it does develop or that you will be able to sell any Notes at a particular time or at a price that will be favourable to you.
The Company, the Issuer and the Initial Purchasers have entered into a backstop commitment letter (the ‘‘Backstop Agreement’’) in respect of the issuance of the Notes. Under the terms of the Backstop Agreement, the Initial Purchasers have agreed that, in certain circumstances, the Initial Purchasers will subscribe for up to the full proposed principal amount of the Notes (on a several and not a joint basis), subject to certain conditions and a commission payable by the Issuer or the Company to the Initial Purchasers.
The Initial Purchasers or any person acting on their behalf may engage in over-allotment, stabilising transactions, covering transactions and penalty bids in accordance with applicable laws and regulations. Over-allotment involves sales in excess of the offering size, which creates a short position for the relevant Initial Purchaser. Stabilising transactions permit bidders to purchase the underlying security so long as the stabilising bids do not exceed a specified maximum. Covering transactions involve purchases of the Notes in the open market after the distribution has been completed in order to cover short positions. Penalty bids permit the Initial Purchasers to reclaim a selling concession from a broker or dealer when the Notes originally sold by that broker or dealer are purchased in a stabilising or covering transaction to cover short positions. These stabilising transactions, covering transactions and penalty bids may cause the price of the Notes to be higher than it would otherwise be in the absence of these transactions. These transactions, if commenced, may be discontinued at any time.
The Initial Purchasers and their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial investment banking, financial
290 advising, investment management, principal investment, hedging, financing and brokerage activities. The Initial Purchasers or their respective affiliates from time to time have provided in the past and may provide in the future investment banking, financial advisory and commercial banking services to the Issuer, the Group and its affiliates in the ordinary course of business for which they have received or may receive customary fees and commissions. Lloyds Bank plc (or certain of its affiliates) is a lender to the Group under the Existing Lending Facilities and/or Private Placement Notes and may receive a portion of the proceeds from the sale of the Notes in connection with the repayment of the Existing Lending Facilities and/or Private Placement Notes as part of the Transactions. Lloyds Bank plc (or certain affiliates) has also entered into hedging arrangements with the Group. J.P. Morgan Securities plc, Credit Suisse Securities (Europe) Limited and Lloyds Bank plc, (or their respective affiliates) will be lenders to the Group under the New Revolving Credit Facility and will be parties to the Backstop Agreement for the Notes. J.P. Morgan Securities plc will be a joint underwriter and joint bookrunner in respect of the Placing and Rights Issue. Certain of the Initial Purchasers are affiliates of shareholders of the Company. In connection therewith, such entities will receive customary fees and commissions. The Initial Purchasers or their affiliates may also receive allocations of the Notes. In connection with the provision of the Backstop Agreement by the Initial Purchasers, certain lenders under the Existing Lending Facilities (including Lloyds Bank plc or certain of its affiliates) have committed to purchase from the Initial Purchasers a significant aggregate principal amount of the Notes and have also agreed not to dispose of such Notes, if any are purchased, for a period terminating upon the earlier of the date that is seven days following the end of stabilisation activities by the Stabilising Manager in respect of the Notes and either 21 days or 30 days after the Issue Date based upon the terms of such lenders’ commitment. Such lenders will receive a rollover-fee which will be set-off in part against the commissions received by the Initial Purchasers’ with respect to their purchase of the Notes pursuant to the Purchase Agreement.
291 Notice to investors Because of the following restrictions, purchasers are advised to consult legal counsel prior to making any offer, sale, resale, pledge or other transfer of the Notes. The Notes and the Note Guarantees have not been registered under the U.S. Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act. Accordingly, the Notes and the Note Guarantees are being offered and sold only (i) to ‘‘qualified institutional buyers’’ (as defined in Rule 144A under the U.S. Securities Act) (‘‘QIBs’’) in compliance with Rule 144A and (ii) to persons other than U.S. persons (as defined in Rule 902 under the U.S. Securities Act) (‘‘Foreign Purchasers’’) in offshore transactions (as defined in Rule 902 under the U.S. Securities Act) in compliance with Regulation S.
In addition, until 40 days after the later of the commencement of the Offering and the closing date of this Offering an offer or sale of the Notes (including the Note Guarantees) within the United States by a dealer (whether or not participating in this Offering) may violate the registration requirements of the U.S. Securities Act if such offer or sale is made otherwise than pursuant to Rule 144A.
Each purchaser of the Notes hereunder (other than each of the Initial Purchasers) will be deemed to have represented and agreed as follows (terms used in this paragraph that are defined in Rule 144A and Regulation S are used herein as defined therein):
(1) it is not an ‘‘affiliate’’ (as defined in Rule 144 under the U.S. Securities Act) of the Issuer or acting on behalf of the Issuer and it is either:
(i) a QIB and is aware that any sale of the Notes to it will be made in reliance on Rule 144A and the acquisition of the Notes will be for its own account or for the account of another QIB; or
(ii) a Foreign Purchaser purchasing the Notes outside the United States in an offshore transaction in accordance with Regulation S.
(2) it is purchasing the Notes (including the Note Guarantees) for its own account or an account with respect to which it exercises sole investment discretion: in each case for investment, and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the U.S. Securities Act or any state securities laws and it and any such account (i) is a QIB, and is aware that the sale to it is being made in reliance on Rule 144A or (ii) is a Foreign Purchaser and is aware that the sale is being made in accordance with Regulation S;
(3) it acknowledges that the Notes (including the Note Guarantees) have not been and will not be registered under the U.S. Securities Act or with any securities regulatory authority of any jurisdiction and may not be offered or sold except as set forth below;
(4) it acknowledges that neither the Group nor the Initial Purchasers, nor any person representing the Group or the Initial Purchasers, has made any representation to it with respect to the Offering or sale of any Notes, other than the information contained in this offering memorandum, which offering memorandum has been delivered to it and upon which it is relying in making its investment decision with respect to the Notes. It acknowledges that neither the Initial Purchasers nor any person representing the Initial Purchasers makes any representation or warranty as to the accuracy or completeness of the information contained in this offering memorandum. It also acknowledges that it has had access to such financial and other information concerning the Group and the Notes as it has deemed necessary in connection with its decision to purchase any of the Notes;
292 (5) it understands and agrees that if in the future it decides to resell, pledge or otherwise transfer any Notes (including the Note Guarantees) or any beneficial interests in any Notes (including the Note Guarantees) prior to the date which is one year (or such shorter period of time as permitted by Rule 144 under the U.S. Securities Act or any successor provision thereunder) after the later of the date of original issue and the last date on which the Issuer or any affiliate of the Issuer was the owner of the Notes (or any predecessor thereto), it will do so only (A)(i) to the Issuer, the Guarantors or any subsidiary thereof, (ii) to a person whom the seller, and any person acting on its behalf, reasonably believes is a QIB that is purchasing for its own account or for the account of a QIB or QIBs, in a transaction complying with Rule 144A, (iii) in an offshore transaction in compliance with Regulation S or (iv) pursuant to any other available exemption from registration under the U.S. Securities Act, or (B) pursuant to an effective registration statement under the U.S. Securities Act, and in each of such cases in accordance with any applicable securities law of any state of the United States;
(6) it agrees to, and each subsequent holder is required to, notify any purchaser of the Notes from it of the resale restrictions referred to in clause (3) above, if then applicable;
(7) if it is a person other than a Foreign Purchaser, it understands and agrees that the Notes initially offered to QIBs in reliance on Rule 144A will be represented by a Rule 144A Global Note, and that before any interest in the Rule 144A Global Note may be offered, sold, pledged or otherwise transferred to a person who is not a QIB, the transferee will be required to provide the Trustee with a written certification (the form of which certification can be obtained from the Trustee as to compliance with the transfer restriction referred to above);
(8) if it is a Foreign Purchaser in a sale that occurs outside the United States within the meaning of Regulation S, it acknowledges that until the expiration of the ‘‘distribution compliance period’’ (as defined below), it shall not make any offer or sale of the Notes to a U.S. person or for the account or benefit of a U.S. person within the meaning of Rule 902 under the U.S. Securities Act. The ‘‘distribution compliance period’’ means the 40-day period following the issue date for the Notes;
(9) it understands that the Notes will bear a legend to the following effect:
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘U.S. SECURITIES ACT’’), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD, EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER FOR THE BENEFIT OF THE ISSUER AND THE GUARANTORS AND ANY OF THEIR SUCCESSORS IN INTEREST (1) REPRESENTS THAT (A) IT IS A ‘‘QUALIFIED INSTITUTIONAL BUYER’’ (AS DEFINED IN RULE 144A UNDER THE U.S. SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT PRIOR TO THE DATE WHICH IS [IN THE CASE OF RULE 144A NOTES: ONE YEAR] [IN THE CASE OF REGULATION S NOTES: 40 DAYS] (OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY [RULE 144] [REGULATION S] UNDER THE U.S. SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE DATE OF ORIGINAL ISSUE AND THE LAST DATE ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THE NOTES (OR ANY PREDECESSOR THERETO) (THE ‘‘RESALE RESTRICTION TERMINATION DATE’’) RESELL, PLEDGE OR OTHERWISE TRANSFER THIS NOTE OR A BENEFICIAL INTEREST IN THIS NOTE EXCEPT (A) TO THE ISSUER, THE GUARANTORS OR ANY SUBSIDIARY THEREOF, (B) TO A PERSON THAT THE SELLER, AND ANY PERSON ACTING ON ITS BEHALF, REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION COMPLYING WITH RULE 144A UNDER THE U.S. SECURITIES ACT, (C) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE U.S. SECURITIES ACT, (D) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM REGISTRATION UNDER
293 THE U.S. SECURITIES ACT OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE U.S. SECURITIES ACT, AND IN EACH OF SUCH CASES IN COMPLIANCE WITH ANY APPLICABLE SECURITIES LAW OF ANY STATE OF THE UNITED STATES AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. PROVIDED THAT THE ISSUER, THE TRUSTEE AND THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C) PRIOR TO THE END OF THE 40-DAY DISTRIBUTION COMPLIANCE PERIOD WITHIN THE MEANING OF REGULATION S UNDER THE U.S. SECURITIES ACT OR PURSUANT TO CLAUSE (D) PRIOR TO THE RESALE RESTRICTION TERMINATION DATE TO REQUIRE THAT AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO THE ISSUER, THE TRUSTEE AND THE REGISTRAR IS COMPLETED AND DELIVERED BY THE TRANSFEROR. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS. AS USED HEREIN, THE TERMS ‘‘OFFSHORE TRANSACTION’’, ‘‘UNITED STATES’’, AND ‘‘U.S. PERSON’’ HAVE THE MEANING GIVEN TO THEM BY REGULATION S UNDER THE U.S. SECURITIES ACT;
THIS NOTE WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE HOLDER OF THIS NOTE MAY OBTAIN THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO MATURITY BY CONTACTING THE ISSUER AT THE FOLLOWING PHONE NUMBER: +44 (0)131 225 3361.
(10) it acknowledges that prior to any proposed transfer of Notes or beneficial interests in Global Notes (in each case other than pursuant to an effective registration statement) the holder of such Notes or beneficial interests in Global Notes may be required to provide an opinion of counsel, certifications and other documentation relating to the manner of such transfer and submit such certifications and other documentation as provided in the Indenture;
(11) it acknowledges that the Issuer, the Guarantors and the Initial Purchasers and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements and agrees that if any of the acknowledgments, representations or agreements deemed to have been made by it by virtue of its purchase of Notes is no longer accurate, it shall promptly notify the Issuer, the Guarantors and the Initial Purchasers. If it is acquiring any Notes as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the foregoing acknowledgments, representations and agreements on behalf of each such account;
(12) it acknowledges that the transfer agent will not be required to accept for registration of transfer any Notes except upon presentation of evidence satisfactory to the Group and the Trustee that the restrictions set forth therein have been complied with; and
(13) it represents and warrants that: (a) either (i) no portion of the assets used by it to acquire and hold the Notes constitutes assets of any employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (‘‘ERISA’’), any plan, individual retirement account or other arrangement subject to Section 4975 of the Internal Revenue Code of 1986, as amended (the ‘‘Internal Revenue Code’’) or provisions under any federal, state, local, non-U.S. or other laws or regulations that are similar to such provisions of ERISA or the Internal Revenue Code (collectively, ‘‘Similar Law’’), or any entity whose underlying assets are considered to include ‘‘plan assets’’ of any such plan, or account, within the meaning of U.S. Department of Labor Regulations, 29 C.F.R. §2510.3-101, as modified by Section 3(42) of ERISA or otherwise, or (ii) its purchase and holding of the Notes will not constitute a non-exempt prohibited transaction under Section 406 of ERISA
294 or Section 4975 of the Internal Revenue Code or a violation under any applicable Similar Law; and (b) it will not transfer the Notes to any person or entity, unless such person or entity could itself truthfully make the foregoing representation and warranty.
For further discussion of the requirements (including the presentation of transfer certificates) under the Indentures to effect exchanges or transfer of interests in Global Notes, see ‘‘Book-entry, delivery and form’’.
295 Legal matters Certain legal matters relating to the validity of the Notes and the Note Guarantees offered hereby will be passed upon for the Issuer and the Guarantors by Cravath, Swaine & Moore LLP, with respect to U.S. federal and New York law; by Ashurst LLP, with respect to English law; by MacRoberts LLP, with respect to Scottish law; and by Cleaver Fulton Rankin, with respect to Northern Irish law. Certain legal matters in connection with the Offering will be passed upon for the Initial Purchasers by Linklaters LLP, with respect to U.S. federal and New York law and English law; by Dundas & Wilson, CS LLP, with respect to Scottish law; and by A&L Goodbody, with respect to Northern Irish law.
296 Independent auditors The Group Consolidated Financial Statements of the Company as at and for the 52 weeks ended 28 December 2013, as at and for the 52 weeks ended 29 December 2012 and as at and for the 52 weeks ended 31 December 2011 prepared in accordance with IFRS and contained herein have been audited by Deloitte LLP, independent auditors, as set forth in their reports appearing herein. Deloitte LLP is a current member of the Institute of Chartered Accountants in England and Wales.
In respect of the audit reports relating to the annual financial statements reproduced herein, Deloitte LLP, the Group’s independent auditor provides: ‘‘This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.’’
Investors in the Notes should understand that these statements are intended to disclaim any liability to parties (such as purchasers of the Notes) other than to the Company with respect to those reports. The SEC would not permit such limiting language to be included in a registration statement or a prospectus used in connection with an offering of securities registered under the U.S. Securities Act, or in a report filed under the U.S. Exchange Act. If a U.S. court (or any other court) were to give effect to the language quoted above, the recourse that investors in the Notes may have against the independent auditors based on their reports or the consolidated financial statements to which they relate could be limited. The extent to which auditors have responsibility or liability to third parties is unclear under the laws of many jurisdictions, including the United Kingdom, and the legal effect of these statements in the audit reports is untested in the context of an offering of securities. The inclusion of the language referred to above, however, may limit the ability of holders of the Notes to bring any action against the Group’s auditors for damages arising out of an investment in the Notes.
297 Where to find additional information Each purchaser of the Notes from the Initial Purchasers will be furnished with a copy of this offering memorandum and, to the extent provided to the Initial Purchasers by the Group for such purpose, any related amendments or supplements to this offering memorandum. Each person receiving this offering memorandum and any related amendments or supplements to this offering memorandum acknowledges that:
(1) such person has been afforded an opportunity to request from the Group, and to review and has received, all additional information considered by it to be necessary to verify the accuracy and completeness of the information herein;
(2) such person has not relied on the Initial Purchasers or any person affiliated with the Initial Purchasers in connection with its investigation of the accuracy of such information or its investment decision; and
(3) except as provided pursuant to paragraph (1) above, no person has been authorised to give any information or to make any representation concerning the Notes or each Note Guarantee offered hereby other than those contained herein and, if given or made, such other information or representation should not be relied upon as having been authorised by the Group or the Initial Purchasers.
Each person receiving this offering memorandum and any related amendments or supplements to this offering memorandum may make a written request to receive a copy of the Intercreditor Agreement. Moreover, for so long as any of the Notes remain outstanding and are ‘‘restricted securities’’ within the meaning of Rule 144(a)(3) under the U.S. Securities Act, the Issuer will, during any period in which the Issuer is not subject to the reporting requirements of Section 13 or 15(d) under the U.S. Exchange Act, nor exempt from the reporting requirements under Rule 12g3-2(b) of the U.S. Exchange Act, make available to any holder or beneficial holder of a Note, or to any prospective purchaser of a Note designated by such holder or beneficial holder, the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the U.S. Securities Act upon the written request of any such holder or beneficial owner. Any such request should be directed to the Company. All the above documents will be available at the registered office of the Company.
The Issuer is not currently subject to the periodic reporting and other information requirements of the U.S. Exchange Act. However, pursuant to the Indenture and so long as the Notes are outstanding, the Issuer will furnish periodic information to holders of the Notes. See ‘‘Description of the Notes—Certain covenants—Reports’’. For so long as the Notes are listed on the Official List of the Irish Stock Exchange and are admitted to trading on the Global Exchange Market of that exchange and the rules and regulations of the Irish Stock Exchange so require, copies of such information will be available for review during normal business hours on any business day at the registered office of the Company. See ‘‘Listing and general information’’.
298 Enforcement of civil liabilities The Issuer is incorporated as a public limited company under the laws of England and Wales. The Guarantors are organised or incorporated (as applicable) under the laws of England and Wales, Scotland and Northern Ireland. Substantially all of the directors and executive officers of each of the Issuer and the Guarantors are non-residents of the United States. Substantially all of the assets of each of the Issuer and the Guarantors, and their respective directors and executive officers, are located outside the United States. As a result, any judgment obtained in the United States against an Issuer or a Guarantor or any such other person, including judgments with respect to the payment of principal, premium (if any) and interest on the Notes or any judgment of a U.S. court predicated upon civil liabilities under U.S. federal or state securities laws, may not be collectible in the United States. Furthermore, although each of the Issuer and the Guarantors will appoint an agent for service of process in the United States and will submit to the jurisdiction of New York courts, in each case, in connection with any action in relation to the Indenture, it may not be possible for investors to effect service of process on the Issuer or on such other persons as mentioned above within the United States in any action, including actions predicated upon the civil liability provisions of U.S. federal securities laws. If a judgment is obtained in a U.S. court against the Issuer, any Guarantor, or any of their respective directors or executive officers, investors will need to enforce such judgment in jurisdictions where the relevant company or individual has assets. Even though the enforceability of U.S. court judgments outside the United States is described below for England, Scotland and Northern Ireland, you should consult with your own advisors in any pertinent jurisdictions as needed to enforce a judgment in those countries or elsewhere outside the United States.
England
The executive officers of the Issuer and the directors and executive officers of the Guarantors are resident in the United Kingdom; none of the directors or executive officers for the Issuer or the Guarantors is resident or citizen of the United States and all of the assets of the Issuer and the Guarantors are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon the Issuer, a Guarantor or such persons or to enforce against any of them judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the United States, and there is doubt as to the enforceability in England and Wales of civil liabilities predicated upon the federal securities laws of the United States, either in original actions or in actions for enforcement of judgments of U.S. courts.
The United States and England currently do not have a treaty providing for the reciprocal recognition and enforcement of judgments (as opposed to arbitration awards) in civil and commercial matters. Consequently, a final judgment for payment rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon U.S. federal securities laws, would not automatically be recognised or enforceable in England. In order to enforce any such U.S. judgment in England, proceedings must first be initiated before a court of competent jurisdiction in England. In such an action, the English court would not generally reinvestigate the merits of the original matter decided by the U.S. court (subject to what is described below) and it would usually be possible to obtain summary judgment on such a claim (assuming that there is no good defence to it). Recognition and enforcement of a U.S. judgment by an English court in such an action is conditional upon (among other things) the following:
• the U.S. court having had jurisdiction over the original proceedings according to English conflicts of laws principles;
• the U.S. judgment being final and conclusive on the merits in the sense of being final and unalterable in the court which pronounced it and being for a definite sum of money;
299 • the U.S. judgment not being for a sum payable in respect of taxes, or other charges of a like nature or in respect of a penalty or fine;
• the U.S. judgment not contravening English public policy;
• the U.S. judgment not having been arrived at by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damages sustained and is not being otherwise in breach of Section 5 of the Protection of Trading Interests Act 1980;
• the U.S. judgment not having been obtained by fraud or in breach of English principles of natural justice;
• the U.S. judgment is not a judgment on a matter previously determined by an English court or another court whose judgment is entitled to recognition in England or conflicts with an earlier judgment of such court; or
• the English enforcement proceedings being commenced within the relevant limitation period).
Subject to the foregoing, investors may be able to enforce in England judgments that have been obtained from U.S. federal or state courts. Notwithstanding the preceding, Johnston Press cannot assure you that those judgments will be recognised or enforceable in England. In addition, Johnston Press cannot assure you whether an English court would accept jurisdiction and impose civil liability if the original action was commenced in England, instead of the United States, and predicated solely upon U.S. federal securities laws.
Scotland
The United States and Scotland are not currently bound by a treaty providing for reciprocal recognition and enforcement of judgments issued by either country’s civil courts. Accordingly, a judgment pronounced by a U.S. federal or state court based on civil liability would not be directly recognised or enforced in Scotland. However, a party who has obtained a favourable judgment in the U.S. may initiate enforcement proceedings in Scotland by lodging with the Court of Session, which has exclusive jurisdiction over such matters in Scotland, a Summons seeking Decree Conform in terms of the judgment of the U.S. court.
Decree Conform is a common-law remedy and there are few authoritative statements of the law in Scotland in this regard. On the basis of the authorities which currently exist, the Scottish Court will recognise the judgment of the U.S. court if it is satisfied that the following conditions are met:
• That the U.S. court had jurisdiction in terms of the rules of Scottish private international law;
• That the judgment is not one for multiple damages under section 5 of the Protection of Trading Interests Act 1980;
• That the U.S. court acted judicially and was not misled by fraud of one of the parties;
• That the U.S. judgment is final;
• That the U.S. judgment is enforceable in the United States;
• That the judgment, if enforced in Scotland, would not be contrary to public policy or to the laws of the United Kingdom and in particular the terms of the Human Rights Act 1988.
In determining whether the U.S. court had jurisdiction under Scottish private international law, the Scottish court will have regard to the residence of the party against whom the judgment was granted and also whether there was prorogation of, or submission to, the jurisdiction of the U.S. court. As the United States has both federal and state legal systems, it has been said that where the basis of the judgment is the law of a state, then the relevant connection, in
300 private international law terms, must be with that part of the country. If, however, the basis of the judgment is the law of the country as a whole, then the connection should also be with the country as a whole.
In determining whether a defender has submitted to the jurisdiction of the U.S. court, the Scottish Court will look objectively at the defender’s actions in each particular case. It will consider whether the defender took steps which were only necessary or only useful if an objection to the jurisdiction of the U.S. court had been waived. Scottish private international law does not require that a defender appear or be represented in the U.S. court for that party to have submitted to the U.S. court’s jurisdiction.
In determining whether a judgment is one of multiple damages, the Scottish Court will give a wide meaning to section 5 of the 1980 Act. In a recent case, the Scottish courts decided that the statutory prohibition under section 5 prohibited the enforcement of a U.S. judgment which was not a direct claim for multiple damages, but related to an earlier judgment in favour of the creditor, which was a judgment for multiple damages under U.S. anti-trust legislation.
In determining whether a judgment would be contrary to public policy and the European Convention on Human Rights, the Scottish court will consider whether the judgment being sought would be disproportionate.
If the Scottish court is satisfied that these conditions are met, it will grant decree in U.S. dollars if that is the money of account, or the pursuer may select a currency which most closely expresses his loss. It will then be for the enforcing party to provide to the Court a currency exchange certificate in terms of the Rules of the Court of Session prior to decree being extracted (extract being the stage at which the enforcing party may begin to take steps to enforce a decree). Lodging a currency conversion certificate will allow the enforcing party to obtain the decree in pounds sterling which, in turn, will assist the enforcing party in their efforts to enforce the decree using the usual forms of diligence.
Northern Ireland
The following discussion with respect to the enforceability of certain U.S. court judgments in Northern Ireland is based upon advice provided to the Issuer and the Guarantors by their Northern Irish counsel. The United States and the United Kingdom (including Northern Ireland) do not have a treaty providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters (although the United States and the United Kingdom (including Northern Ireland) are both parties to the New York Convention on Arbitral Awards). Any judgment rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon U.S. federal securities law, would not be directly enforceable in Northern Ireland. In order to enforce any such judgment in Northern Ireland, proceedings must be initiated by way of civil law action on the judgment debt before a court of competent jurisdiction in Northern Ireland. In this type of action, a court in Northern Ireland generally will not (subject to the matters identified below) reinvestigate the merits of the original matter decided by a U.S. court if:
• the relevant U.S. court had jurisdiction (under the rules of private international law in Northern Ireland) to give the judgment; and
• the judgment is final and conclusive on the merits of the claim and is for a definite sum of money (not being a sum payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty or otherwise based on a U.S. law that a court in Northern Ireland considers to be a penal, revenue or other public law).
301 A court in Northern Ireland may refuse to enforce such a judgment on a number of grounds, including, if it is established that:
• the relevant U.S. court lacked jurisdiction (under the rules of private international law in Northern Ireland) or the judgment is not final and conclusive;
• the enforcement of such judgment would contravene public policy or statute in Northern Ireland;
• the enforcement of the judgment is prohibited by statute (including, without limitation, if the amount of the judgment has been arrived at by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damage sustained);
• the Northern Irish proceedings were not commenced within the relevant limitation period;
• before the date on which the U.S. court gave judgment, the issues in question had been the subject of a judgment of a court in Northern Ireland or of a court of another jurisdiction whose judgment is enforceable in Northern Ireland;
• the judgment has been obtained by fraud or in proceedings in which the principles of natural justice were breached;
• the bringing of proceedings in the relevant U.S. court was contrary to an agreement under which the dispute in question was to be settled otherwise than by proceedings in that court (to whose jurisdiction the judgment debtor did not submit), for example by way of arbitration or proceedings in a different court;
• the bringing of proceedings in the relevant U.S. court was contrary to an agreement that any dispute would be settled by reference to a different governing law than that applied by the U.S. court; or
• an order has been made and remains effective under section 9 of the U.K. Foreign Judgments (Reciprocal Enforcement) Act 1933 applying that section to U.S. courts including the relevant U.S. court.
If a court in Northern Ireland gives judgment for the sum payable under a U.S. judgment, the Northern Irish judgment will be enforceable by methods generally available for this purpose. It may not be possible to obtain a Northern Irish judgment or to enforce that judgment if the judgment debtor is subject to any insolvency or similar proceedings, or if the judgment debtor has any set-off or counterclaim against the judgment creditor.
Subject to the foregoing, investors may be able to enforce in Northern Ireland judgments in civil and commercial matters obtained from U.S. federal or state courts in the manner described above.
It is, however, uncertain whether a court in Northern Ireland would impose liability on the Group in an action predicated upon the U.S. federal securities law brought in Northern Ireland.
302 Listing and general information Listing information
Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and trading on the Global Exchange Market. There are no assurances that the Notes will be listed on the Official List of the Irish Stock Exchange and admitted to trading on the Global Exchange Market of the Irish Stock Exchange. For so long as the Notes are listed on the Official List of the Irish Stock Exchange and admitted for trading on the Global Exchange Market and to the extent required by the Irish Stock Exchange, notice of any change of control, change in the rate of interest payable on the Notes or early redemption of the Notes will be published in a newspaper having a general circulation in Dublin (which is expected to be The Irish Times) or, to the extent and in the manner permitted by the Irish Stock Exchange, on the official website of the Irish Stock Exchange (www.ise.ie).
The expenses in relation to the admission of the Notes to trading on the Irish Stock Exchange’s Global Exchange Market and to listing on the Official List of the Irish Stock Exchange are expected to be approximately e7,000.
For so long as the Notes are listed on the Official List of the Irish Stock Exchange and admitted to trading on the Global Exchange Market of the Irish Stock Exchange and the rules and regulations of the Irish Stock Exchange so require, physical copies of the following documents (together with English translations thereof, as applicable) may be inspected and obtained by holders at the registered office of the Company during normal business hours on any business day:
• the organisational documents of the Issuer;
• the organisational documents of each of the Guarantors;
• the Indenture (which includes the form of the Notes and notation of guarantee);
• the Intercreditor Agreement and the Security Documents;
• the financial statements included in this offering memorandum; and
• the Company’s most recent annual consolidated financial statements and any interim consolidated financial statements published by the Company (and any other, if any, additional reports required to be provided to the holders of the Notes pursuant to the terms of the Indenture).
Except as disclosed herein, there has been no material adverse change in the Company’s consolidated financial position since 28 December 2013 or the Issuer’s financial position since its incorporation. Except as disclosed herein, there has been no material adverse change in the prospects of the Group and there has been no significant change in financial or trading position of the Group, in each case since 28 December 2013.
Neither Issuer nor the Group is or has been been engaged in or, so far as it is aware, has pending or threatened, any governmental, legal or arbitration proceedings which may have, or have had, a significant effect on its financial position or profitability during the 12 months preceding the date of this offering memorandum, except as disclosed herein.
The Issuer will maintain a paying agent, registrar and transfer agent in Ireland for as long as any of the Notes are listed on the Official List of the Irish Stock Exchange and admitted to trading on the Global Exchange Market of the Irish Stock Exchange. The Issuer reserves the right to vary such appointment and for so long as the Notes are listed on the Official List of the Irish Stock Exchange and admitted for trading on the Global Exchange Market and to the extent required by the Irish Stock Exchange, it will publish notice of such change of appointment in a newspaper having a general circulation in Dublin (which is expected to be
303 The Irish Times) or, to the extent and in the manner permitted by the Irish Stock Exchange, on the official website of the Irish Stock Exchange (www.ise.ie).
Arthur Cox Listing Services Limited is acting solely in its capacity as listing agent for the Issuer in relation to the Notes and is not itself seeking admission to the Official List of the Irish Stock Exchange or to trading on the Global Exchange Market of the Irish Stock Exchange.
For the avoidance of doubt, any website referred to in this offering memorandum and the information on the referenced website does not form part of this offering memorandum prepared in connection with the Offering.
Clearing information
The Notes sold pursuant to Regulation S and the Notes sold pursuant to Rule 144A in the Offering have been accepted for clearance through the facilities of Euroclear and Clearstream under common codes 102895444 and 102895452, respectively. The international securities identification number (‘‘ISIN’’) for the Notes sold pursuant to Regulation S is XS1028954441 and the ISIN for the Notes sold pursuant to Rule 144A is XS1028954524.
Issuer legal information
Johnston Press Bond Plc (the ‘‘Issuer’’) was incorporated as a public limited company under the laws of England and Wales on March 18, 2014, and is registered with the Registrar of Companies for England and Wales under number 08945271. The registered office of the Issuer is at 2 London Wall Buildings, London, EC2M 5UU, United Kingdom. From the issue date of the Notes until the Escrow Release Date, the telephone number of the Issuer will be +44 20 3292 1372. On and from the Escrow Release Date, the telephone number of the Issuer will be +44 131 225 3361.
The Issuer has obtained all necessary consents, approvals and authorisations in the jurisdiction of its incorporation in connection with the issuance and performance of the Notes. The creation and issuance of the Notes will be authorised by the Issuer’s board of directors prior to the closing of the Offering.
The Issuer will not be a subsidiary of the Company until consummation of the Debt Assumption and was not represented in the financial statements referred to above. See ‘‘Risk Factors’’.
Company legal information
Johnston Press plc (the ‘‘Company’’) is a public limited company and was incorporated in Scotland on 31 December 1928. The registered office of the Company is at 108 Holyrood Road, Edinburgh, EH8 8AS.
Guarantor information
Subject to relevant local law restrictions, all Guarantees will be full, unconditional and joint and several. All Guarantors are wholly-owned subsidiaries of the Group.
During the 52 week period ended 28 December 2013 the Guarantors represented £276.8 million and £60.7 million of Adjusted Group revenue and Adjusted Group EBITDA, respectively. Those figures represented 94.5% and 97.0% of Adjusted Group revenue and Adjusted Group EBITDA, respectively. As at 28 December 2013, the Guarantors represented £60.2 million of the Group’s total tangible fixed assets, representing 99.1% of the Group’s total tangible fixed assets.
During the 52 week period ended 28 December 2013 the non-Guarantor subsidiaries represented £16.0 million and £1.9 million of Adjusted Group revenue and Adjusted Group
304 EBITDA, respectively. Those figures represented 5.5% and 3.0% of Adjusted Group revenue and Adjusted Group EBITDA, respectively. As at 28 December 2013, the non-Guarantor subsidiaries represented £0.5 million of the Group’s tangible fixed assets, representing 0.9% of the Group’s tangible fixed assets.
The Group has one material company, Johnston Publishing Ltd (‘‘Johnston Publishing’’), which will be a Guarantor on and from the Escrow Release Date. Johnston Publishing, on a consolidated basis, represented £276.8 million and £67.8 million of Adjusted Group revenue and Adjusted Group EBITDA, respectively, for the 52 weeks ended 28 December 2013 which represented 94.5% and 108.3% of Adjusted Group revenue and Adjusted Group EBITDA, respectively. As at 28 December 2013, Johnston Publishing had total tangible fixed assets of £58.0 million, representing 95.3% of the Group’s total tangible fixed assets.
Johnston Press plc was incorporated as a public limited company under the laws of Scotland on 31 December 1928 with registration number SC015382. The registered office of Johnston Press plc is at 108 Holyrood Road, Edinburgh EH8 8AS.
F. Johnston & Company Limited was incorporated as a private limited company under the laws of Scotland on 13 January 1988 with registration number SC108666. The registered office of F Johnston & Company Limited is at 108 Holyrood Road, Edinburgh EH8 8AS.
The Scotsman Publications Limited was incorporated as a private limited company under the laws of Scotland on 31 March 1939 with registration number SC020911. The registered office of The Scotsman Publication Limited is at 108 Holyrood Road, Edinburgh EH8 8AS.
Johnston (Falkirk) Limited was incorporated as a private limited company under the laws of Scotland on 12 December 1949 with registration number SC027417. The registered office of Johnston (Falkirk) Limited is at 108 Holyrood Road, Edinburgh EH8 8AS.
Strachan & Livingston Limited was incorporated as a private limited company under the laws of Scotland on 13 May 1920 with registration number SC011226. The registered office of Strachan & Livingston Limited is at UNIT 4A, Gateway Business Park, Beancross Road, Grangemouth, Stirlingshire, FK3 8WX.
The Tweeddale Press Limited was incorporated as a private limited company under the laws of Scotland on 27 April 1939 with registration number SC020984. The registered office of The Tweeddale Press Limited is at 108 Holyrood Road, Edinburgh EH8 8AS.
Angus County Press Limited was incorporated as a private limited company under the laws of Scotland on 26 February 1982 with registration number SC077730. The registered office of Angus County Press Limited is at 108 Holyrood Road, Edinburgh EH8 8AS.
Galloway Gazette Limited was incorporated as a private limited company under the laws of Scotland on 9 May 1917 with registration number SC009855. The registered office of Galloway Gazette Limited is at 108 Holyrood Road, Edinburgh EH8 8AS.
Stornoway Gazette Limited was incorporated as a private limited company under the laws of Scotland on 18 January 1954 with registration number SC029826. The registered office of Stornoway Gazette Limited is at 108 Holyrood Road, Edinburgh EH8 8AS.
Score Press Limited was incorporated as a private limited company under the laws of Scotland on 29 July 1994 with registration number SC152233. The registered office of Score Press Limited is at 108 Holyrood Road, Edinburgh EH8 8AS.
Caledonian Offset Limited was incorporated as a private limited company under the laws of Scotland on 10 December 1996 with registration number SC170526. The registered office of Caledonian Offset Limited is at 108 Holyrood Road, Edinburgh EH8 8AS.
305 The Derry Journal Limited was incorporated as a private limited company under the Companies Acts, 1862 to 1900 on 16 January 1908 and registered in Northern Ireland under the Companies (Reconstitution of Records) Act (Northern Ireland) 1923 with registration number R000179. The registered office of the Derry Journal Limited is at 113/118 Duncreggan Road, Londonderry, Northern Ireland, BT48 0AA.
Morton Newspapers Limited was incorporated as a private limited company under the laws of Northern Ireland on 31 October 1946 with registration number NI002197. The registered office of Morton Newspapers Limited is at 2 Esky Drive, Carn Industrial Estate, Portadown, Northern Ireland, BT63 5YY.
Local Press Limited was incorporated as a private limited company under the laws of Northern Ireland on 3 November 2003 with registration number NI48525. The Registered Office of Local Press Limited is at 2 Esky Drive, Carn Industrial Estate, Portadown, Northern Ireland, BT63 5YY.
Century Newspapers Limited was incorporated as a private limited company under the laws of Northern Ireland on 30 May 1989 with registration number NI22768. The Registered Office of Century Newspapers Limited is at 2 Esky Drive, Carn Industrial Estate, Portadown, Northern Ireland, BT63 5YY.
Halifax Courier Holdings Limited was incorporated as a private limited company under the laws of England and Wales on 13 October 1937 with registration number 00332514. The registered office of Halifax Courier Holdings Limited is Courier Buildings, Kings Cross, Halifax, Yorkshire.
Johnston Publishing Limited was incorporated as a private limited company under the laws of England and Wales on 4 June 1985 with registration number 01919088. The registered office of Johnston Publishing Limited is Media House, Oundle Road, Woodston, Peterborough, PE2 9QR.
Yorkshire Post Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 8 March 1866 with registration number 00002899. The registered office of Yorkshire Post Newspapers Limited is 26 Whitehall Road, Leeds, LS12 1BE.
Ackrill Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 12 May 1982 with registration number 01635068. The registered office of Ackrill Newspapers Limited is 26 Whitehall Road, Leeds, LS12 1BE.
Sheffield Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 14 November 1963 with registration number 00780919. The registered office of Sheffield Newspapers Limited is 26 Whitehall Road, Leeds, LS12 1BE.
Northeast Press Limited was incorporated as a private limited company under the laws of England and Wales on 3 May 1967 with registration number 00905215. The registered office of Northeast Press Limited is Echo House, Pennywell, Sunderland, SR4 9ER.
Halifax Courier Limited was incorporated as a private limited company under the laws of England and Wales on 28 November 1978 with registration number 01402428. The registered office of Halifax Courier Limited is Courier Buildings, King Cross Street, Halifax, HX1 2SF.
Yorkshire Weekly Newspaper Group Limited was incorporated as a private limited company under the laws of England and Wales on 12 January 1922 with registration number 00179021. The registered office of Yorkshire Weekly Newspaper Group Limited is 26 Whitehall Road, Leeds, England, LS12 1BE.
Yorkshire Regional Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 14 February 1929 with registration number 00237165. The registered office of Yorkshire Regional Newspapers Limited is 17-23 Aberdeen Walk, Scarborough, North Yorkshire, YO11 1BB.
306 Wilfred Edmunds Limited was incorporated as a private limited company under the laws of England and Wales on 27 April 1899 with registration number 00061775. The registered office of Wilfred Edmunds Limited is 1st Floor Spire Walk off Derby Road, Chesterfield, SW40 2WG.
North Notts Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 22 May 1969 with registration number 00954796. The registered office of North Notts Newspapers Limited is 121 Newgate Lane, Mansfield, Nottinghamshire, NG18 2PA.
South Yorkshire Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 20 September 1995 with registration number 03103977. The registered office of South Yorkshire Newspapers Limited is Sunny Bar, Doncaster, South Yorkshire, DN1 1NB.
Lancashire Evening Post Limited was incorporated as a private limited company under the laws of England and Wales on 16 December 1977 with registration number 01344614. The registered office of Lancashire Evening Post Limited is Oliver’s Place, Fulwood, Preston, Lancashire, PR2 9ZA.
Lancashire Publications Limited was incorporated as a private limited company under the laws of England and Wales on 26 May 1952 with registration number 00508284. The registered office of Lancashire Publications Limited is Martlan Mill, Martland Mill Lane, Wigan, Lancashire, WN5 0LX.
Blackpool Gazette and Herald Limited was incorporated as a private limited company under the laws of England and Wales on 18 October 1894 with registration number 00042125. The registered office of Blackpool Gazette and Herald Limited is Avroe House Avroe Crescent, Blackpool Business Park, Blackpool, Lancashire, FY4 2DP.
Lancaster & Morecambe Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 11 October 1906 with registration number 00090399. The registered office of Lancaster & Morecambe Newspapers Limited is 41 Northgate, White Lund Industrial Estate, Morecambe, Lancashire, LA3 3PA.
East Lancashire Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 14 June 1913 with registration number 00129579. The registered office of East Lancashire Newspapers Limited is Bull Street, Burnley, Lancashire, BB11 1DP.
Northamptonshire Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 14 January 1991 with registration number 02573421. The registered office of Northamptonshire Newspapers Limited is Albert House, Victoria Street, Northampton, NN1 3NR.
East Midlands Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 1 October 1981 with registration number 01588799. The registered office of East Midlands Newspapers Limited is 57 Priestgate, Peterborough, Cambridgeshire, PE1 1JW.
Lincolnshire Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 4 October 1963 with registration number 00776226. The registered office of Lincolnshire Newspapers Limited is 57 Priestgate, Peterborough, Cambridgeshire, PE1 1JW.
Anglia Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 17 January 1972 with registration number 01038578. The registered office of Anglia Newspapers Limited is Kings Road, Bury St Edmunds, Suffolk, IP33 3ET.
Premier Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 28 May 1985 with registration number 01916792. The registered office
307 of Premier Newspapers Limited is Napier House, Auckland Park, Mount Farm Bletchley, Milton Keynes, Buckinghamshire, MK1 1BU.
Central Counties Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 1 June 1909 with registration number 00103807. The registered office of Central Counties Newspapers Limited is Ground Floor, The Gatehouse, Gatehouse Way, Aylesbury, Buckinghamshire, HP19 8DB.
Welland Valley Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 23 July 1996 with registration number 03228461. The registered office of Welland Valley Newspapers Limited is Times House, 43 South Street, Oakham, Rutland, LE15 6BG.
Portsmouth Publishing and Printing Limited was incorporated as a private limited company under the laws of England and Wales on 10 March 1976 with registration number 01248289. The registered office of Portsmouth Publishing and Printing Limited is 1000 Lakeside, North Harbour, Portsmouth, PO6 3EN.
T R Beckett Limited was incorporated as a private limited company under the laws of England and Wales on 15 December 1908 with registration number 00100701. The registered office of T R Beckett Limited is 1000 Lakeside, North Harbour, Portsmouth, PO6 3EN.
Sussex Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 30 November 1964 with registration number 00829253. The registered office of Sussex Newspapers Limited is Springfield House, Springfield Road, Horsham, RH12 2RG.
Peterboro’ Web Limited was incorporated as a private limited company under the laws of England and Wales on 14 November 1960 with registration number 00674979. The registered office of Peterboro’ Web Limited is Printworks, Oundle Road, Woodston, Peterborough, Cambridgeshire, PE2 9QH.
Northampton Web Limited was incorporated as a private limited company under the laws of England and Wales on 28 June 1976 with registration number 01265807. The registered office of Northampton Web Limited is Printworks, Oundle Road, Woodston, Peterborough, Cambridgeshire, PE2 9QH.
Minthill Limited was incorporated as a private limited company under the laws of England and Wales on 22 December 1995 with registration number 03141239. The registered office of Minthill Limited is South Yorkshire Newspaper Ltd, Sunny Bar Doncaster, South Yorkshire, DN1 1NB.
Portsmouth & Sunderland Newspapers Limited was incorporated as a private limited company under the laws of England and Wales on 27 October 1932 with registration number 00269663. The registered office of Portsmouth & Sunderland Newspapers Limited is 1000 Lakeside, North Harbour, Portsmouth, PO6 3EN.
Regional Independent Media Group Limited was incorporated as a private limited company under the laws of England and Wales on 19 February 1998 with registration number 03516655. The registered office of Regional Independent Media Group Limited is 26 Whitehall Road, Leeds, LS12 1BE.
Regional Independent Media Holdings Limited was incorporated as a private limited company under the laws of England and Wales on 6 February 1998 with registration number 03508958. The registered office of Regional Independent Media Holdings Limited is 26 Whitehall Road, Leeds, LS12 1BE.
Regional Independent Media Funding 1 Limited was incorporated as a private limited company under the laws of England and Wales on 19 February 1998 with registration number 03516643.
308 The registered office of Regional Independent Media Funding 1 Limited is 26 Whitehall Road, Leeds, LS12 1BE.
Regional Independent Media Funding 2 Limited was incorporated as a private limited company under the laws of England and Wales on 19 February 1998 with registration number 03516612. The registered office of Regional Independent Media Funding 2 Limited is 26 Whitehall Road, Leeds, LS12 1BE.
Johnston Letterbox Direct Limited was incorporated as a private limited company under the laws of England and Wales on 22 April 1980 with registration number 01492610. The registered office of Johnston Letterbox Direct Limited is 26 Whitehall Road, Leeds, LS12 1BE.
Johnston Publishing (North) Limited was incorporated as a private limited company under the laws of England and Wales on 26 June 1997 with registration number 03392487. The registered office of Johnston Publishing (North) Limited is 26 Whitehall Road, Leeds, LS12 1BE.
The Reporter Limited was incorporated as a private limited company under the laws of England and Wales on 2 January 1897 with registration number 00050742. The registered office of The Reporter Limited is 26 Whitehall Road, Leeds, LS12 1BE.
Financial year and accounts
The Group’s consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to the Saturday closest to 31 December each year for either a 52 or 53 week period. The Company prepares and publishes annual audited consolidated financial statements. Any future published consolidated financial statements of the Company will be made available, during normal business hours, at the executive offices of the Company at 108 Holyrood Road, Edinburgh, EH8 8AS.
309 Index to financial statements Page Johnston Press plc consolidated financial statements as at and for the 52 weeks ended 28 December 2013 Independent auditor’s report ...... F-2 Consolidated income statement ...... F-7 Consolidated statement of comprehensive income ...... F-8 Consolidated statement of changes in equity ...... F-9 Consolidated statement of financial position ...... F-10 Consolidated cash flow statement ...... F-11 Notes to the consolidated financial statements ...... F-12 Johnston Press plc consolidated financial statements as at and for the 52 weeks ended 29 December 2012 Independent auditor’s report ...... F-69 Consolidated income statement ...... F-71 Consolidated statement of comprehensive income ...... F-72 Consolidated statement of changes in equity ...... F-73 Consolidated statement of financial position ...... F-74 Consolidated cash flow statement ...... F-75 Notes to the consolidated financial statements ...... F-76 Johnston Press plc consolidated financial statements as at and for the 52 weeks ended 31 December 2011 Independent auditor’s report ...... F-126 Consolidated income statement ...... F-128 Consolidated statement of comprehensive income ...... F-129 Consolidated statement of changes in equity ...... F-130 Consolidated statement of financial position ...... F-131 Consolidated cash flow statement ...... F-132 Notes to the consolidated financial statements ...... F-133
F-1 Independent auditor’s report to the members of Johnston Press plc Opinion on financial statements of Johnston Press plc
In our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 28 December 2013 and of the Group’s loss for the 52 week period then ended;
• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
The financial statements comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group Statement of Changes in Equity, the Group Statement of Financial Position, the Parent Company Balance Sheet, the Group Cash Flow Statement and the related notes 1 to 44. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
Emphasis of matter—going concern
As required by the Listing Rules we have considered the adequacy of the disclosures in the strategic report (within the 2013 Annual Report) in respect of the Group’s ability to continue as a going concern.
Note 3 to the financial statements explains the need to comply with various bank covenants. The directors have prepared a base case model which indicates covenant compliance throughout the forecast period. However, a reasonable downside scenario, which includes a further deterioration in trading conditions combined with the risk that the proposed refinancing could be aborted, could lead to a covenant breach in the cash flow to debt service covenant.
Whilst we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate, these conditions indicate the existence of a material uncertainty which may give rise to significant doubt over the Group’s ability to continue as a going concern. We describe below how the scope of our audit has responded to this risk. Our opinion is not modified in respect of this matter.
F-2 Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team:
Risk How the scope of our audit responded to the risk Going concern We examined management’s assumptions used in The Group must comply with the terms of its their going concern projections and considered banking covenants, which is explained further in reasonably possible sensitivities for each significant the strategic report (within the 2013 Annual assumption, as well as the ability of the directors to Report) and above in the emphasis of matter. mitigate the effect of certain unanticipated events. We tested the mechanical accuracy of the forecast model and agreed the output to the underlying covenant definitions. We identified the key assumptions and measurement points in the forecasts which have the potential to lead to a covenant breach, specifically the risks of further revenue declines and the impact of an aborted refinancing. We also reviewed the going concern disclosures made by the directors for consistency with our understanding of the Group’s current position. We include above the conclusion of our review of the directors’ statement in respect of the Group’s ability to continue as a going concern. Valuation of publishing titles We challenged the key assumptions used in the The directors’ assessment of the value of publishing directors’ impairment model for the publishing titles involves making assumptions about future titles by focusing on the identification of Cash revenue growth, cash generation and the Generating Units and the assumptions regarding applicable discount rate. future print advertising and digital revenues, the long term growth rate and the discount rate used There are inherent uncertainties in the modelling to determine the present values. Where relevant of future cash flows which requires management we compared the directors’ forecasts to those of to exercise judgement. Note 15 of the financial independent market analysts or alternatively, statements include details of the judgements made. developed our own independent forecasts. We also examined the directors’ sensitivities applied to the model in the light of these forecasts. We then considered whether the Group’s disclosures in note 4 and 15 appropriately convey the principal risks inherent in the valuation of the Group’s publishing titles. Valuation of the print presses We adopted an approach similar to that for the The directors’ were required to assess the carrying publishing titles. We considered whether each print value of the Group’s print presses given significant press had been assessed separately and challenged recent declines in third party contract print revenue the projected cashflows attributed to each press by and the continued actual and forecast decline in comparing forecasts against historical performance printed newspaper circulation. Management and examining the robustness of expected future considered these to be impairment indicators which revenue streams. We challenged the directors’ print resulted in the need for an impairment review. volume assumptions in relation to both future expected internal volume and third party contract There are inherent uncertainties in the modelling print revenues. of future cash flows which require the exercise of management judgement which is detailed in We examined the discount rate, print volume and note 16 to the financial statements. cost forecasts for consistency with the assumptions used in the publishing title assessment. We considered the age of the presses and any future maintenance requirements. We also considered whether the disclosures in note 4 and 16 appropriately convey the principal risks inherent in the valuation of the Group’s print presses.
F-3 Risk How the scope of our audit responded to the risk Pension liability We evaluated the appropriateness of the principal The actuarial assumptions used in the measurement actuarial assumptions used in the calculation of the of the Group’s pension commitments involve Group’s pension commitments prepared by the judgment in relation to mortality, price inflation, Group’s actuary using our own actuarial experts discount rates, and rate of pension and salary and we compared the directors’ assumptions to increases. market practice. Presentation of exceptional items We examined each of the exceptional items The disclosure of exceptional items in the Income presented on the face of the income statement Statement requires management to exercise including all restructuring costs. We assessed the judgement as to which items of revenue or appropriateness of the separate disclosure in the expense should be disclosed separately on the face context of IAS 1 and recent FRC guidance. We also of the Income Statement and how those items are considered whether there was a consistent described elsewhere in the financial statements or application of policy period on period and how the in the Strategic Report. presentation adopted by the directors’ impacted their judgement as to the strategic report and financial statements being fair, balanced and understandable.
The Audit Committee’s consideration of these risks is set out in the Audit Committee Report within the 2013 Annual Report.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
We determined materiality for the Group to be £1.0 million, which is below 7.5% of adjusted pre-tax profit, and is 1% of equity. This figure was determined based on an adjusted pre-tax profit which excluded those items presented as exceptional and for the adjustments associated with IAS 21 and IAS 39 given the significant fluctuation in the level of these items year on year.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £22,000, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
An overview of the scope of our audit
Our Group audit work incorporated all trading businesses in the United Kingdom and Ireland as well as the ultimate parent company. All accounting records of the Group are available in two locations and, as part of our controls work, we visited both accounting centres and also a number of operational locations.
All our work was performed at a statutory level which includes all of the Group’s assets, revenue and profit before tax. Our audit work for the statutory audits was executed at levels of materiality applicable to each individual entity which were lower than Group materiality.
All of our audit work was performed by one team, with no use of component auditors; and was led by the Senior Statutory Auditor.
F-4 Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters.
Corporate Governance Statement Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the company’s compliance with nine provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.
Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:
• materially inconsistent with the information in the audited financial statements; or
• apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or
• otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.
Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial
F-5 statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team, strategically focused second partner reviews and independent partner reviews.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Senior Statutory Auditor David Bell CA for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 28 March 2014
F-6 Group income statement For the 52 week period ended 28 December 2013
2013 2012 Before Before Revised(1) exceptional Exceptional IAS exceptional exceptional IAS and IAS 21/39 items 21/39 Total and IAS 21/39 items 21/39 Total Notes items £’000 £’000 £’000 £’000 items £’000 £’000 £’000 £’000 Revenue ...... 6 292,799 10,000 — 302,799 328,691 30,000 — 358,691 Cost of sales ...... (173,710) — — (173,710) (207,868) — — (207,868) Gross profit ...... 119,089 10,000 — 129,089 120,823 30,000 — 150,823 Operating expenses ..... 7 (64,210) (39,756) — (103,966) (63,778) (21,824) — (85,602) Impairment of intangibles, property, plant and equipment and assets held for sale(1) ...... 7 — (270,793) — (270,793) — (24,780) — (24,780) Total operating expenses . (64,210) (310,549) — (374,759) (63,778) (46,604) — (110,382) Operating (loss)/profit ... 8 54,879 (300,549) — (245,670) 57,045 (16,604) — 40,441 Financing Investment income ..... 10 394 — — 394 148 — — 148 Net finance expense on pension assets/liabilities . 11a (1,576) — — (1,576) (2,471) — — (2,471) Change in fair value of hedges ...... 11c — — (1,691) (1,691) — — (7,297) (7,297) Retranslation of USD debt 11c — — 1,749 1,749 — — 4,275 4,275 Retranslation of Euro debt 11c — — (235) (235) — — 262 262 Finance costs ...... 11b (39,808) — — (39,808) (42,129) — — (42,129) Net finance costs ...... (40,990) — (177) (41,167) (44,452) — (2,760) (47,212) Share of results of associates ...... 18 2——2 6——6 (Loss)/profit before tax .. 13,891 (300,549) (177) (286,835) 12,599 (16,604) (2,760) (6,765) Tax...... 12 3,420 71,394 55 74,869 8,825 2,875 676 12,376 (Loss)/profit for the period ...... 17,311 (229,155) (122) (211,966) 21,424 (13,729) (2,084) 5,611 Earnings per share (p) ... 14 Earnings per share—Basic . 2.65 (35.37) (0.02) (32.74) 3.42 (2.20) (0.34) 0.88 Earnings per share— Diluted ...... 2.65 (35.37) (0.02) (32.74) 3.40 (2.19) (0.34) 0.87 (1) The presentation of the 29 December 2012 exceptional item numbers has been revised to split out separately exceptional operating expenses of £21,824,000 and exceptional impairment of £24,780,000 to be consistent with the format of current year disclosures.
The above revenue and (loss)/profit are derived from continuing operations. The accompanying notes are an integral part of these financial statements.
The comparative period is for the 52 week period ended 29 December 2012.
F-7 Group statement of comprehensive income For the 52 week period ended 28 December 2013
Revaluation Translation Retained reserve reserve earnings Total £’000 £’000 £’000 £’000 Loss for the period ...... — — (211,966) (211,966) Other items of comprehensive loss Items that will not be reclassified subsequently to profit or loss Actuarial gain on defined benefit pension schemes (net of tax)(1) ...... — — 28,935 28,935 Total items that will not be reclassified subsequently to profit or loss ...... — — 28,935 28,935 Items that may be reclassified subsequently to profit or loss Revaluation adjustment ...... (46) — 46 — Exchange differences on translation of foreign operations ...... — 500 — 500 Deferred tax on exchange differences ...... — (188) — (188) Change in deferred tax rate to 20% ...... — — 1,131 1,131 Total items that may be reclassified subsequently to profit or loss ...... (46) 312 1,177 1,443 Total other comprehensive (loss)/profit for the period .. (46) 312 30,112 30,378 Total comprehensive loss for the period ...... (46) 312 (181,854) (181,588)
For the 52 week period ended 29 December 2012 Profit for the period ...... — — 5,611 5,611 Other items of comprehensive loss Items that will not be reclassified subsequently to profit or loss Actuarial loss on defined benefit pension schemes (net of tax)(1) ...... — — (15,877) (15,877) Total items that will not be reclassified subsequently to profit or loss ...... — — (15,877) (15,877)
Items that may be reclassified subsequently to profit or loss Revaluation adjustment ...... (377) — 377 — Exchange differences on translation of foreign operations ...... — (645) — (645) Deferred tax on exchange differences ...... — 133 — 133 Change in deferred tax rate to 23.0% ...... — — (421) (421) Total items that may be reclassified subsequently to profit or loss ...... (377) (512) (44) (933) Total other comprehensive (loss)/profit for the period . . (377) (512) (15,921) (16,810) Total comprehensive loss for the period ...... (377) (512) (10,310) (11,199) (1) Relates to actuarial gain of £29,025,000 (2012: loss of £15,877,000) for the Johnston Press Pension Plan (refer note 24), and a net actuarial loss of £90,000 (2012: £nil) (refer note 26) for two other pension related liabilities.
F-8 Group statement of changes in equity For the 52 week period ended 28 December 2013
Share-based Share Share payments Revaluation Own Translation Retained capital premium reserve reserve shares reserve earnings Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Opening balances ...... 65,081 502,818 18,959 1,783 (5,589) 9,267 (318,402) 273,917 Total comprehensive loss for the period ...... — — — (46) — 312 (181,854) (181,588) Recognised directly in equity: Preference share dividends paid (Note 13) ...... — — — — — — (152) (152) Share-based payments charge (Note 30) ...... — — 512 — — — — 512 Deferred tax on share-based payment transactions ...... — — 20 — — — — 20 Share capital issued (Note 27) ..... 4,460 11 — — — — — 4,471 Release on exercise of warrants .... — — (5,541) — — — 5,541 — Release of deferred bonus shares . . . — — (374) — 374 — — — Own shares purchased ...... — — — — (97) — — (97) Net changes directly in equity ..... 4,460 11 (5,383) — 277 — 5,389 4,754 Total movements ...... 4,460 11 (5,383) (46) 277 312 (176,465) (176,834) Equity at the end of the period .... 69,541 502,829 13,576 1,737 (5,312) 9,579 (494,867) 97,083
For the 52 week period ended 29 December 2012
Opening balances ...... 65,081 502,818 17,845 2,160 (5,379) 9,779 (307,940) 284,364 Total comprehensive loss for the period ...... — — — (377) — (512) (10,310) (11,199) Recognised directly in equity: Preference share dividends paid (Note 13) ...... — — — — — — (152) (152) Share-based payments charge (Note 30) ...... — — 606 — — — — 606 Share warrants issued ...... — — 551 — — — — 551 Release of deferred bonus shares . . . — — (43) — 43 — — — Own shares purchased ...... — — — — (253) — — (253) Net changes directly in equity ..... — — 1,114 — (210) — (152) 752 Total movements ...... — — 1,114 (377) (210) (512) (10,462) (10,477) Equity at the end of the period .... 65,081 502,818 18,959 1,783 (5,589) 9,267 (318,402) 273,917
The accompanying notes are an integral part of these financial statements.
F-9 Group statement of financial position At 28 December 2013
2013 2012 Notes £’000 £’000 Non-current assets Intangible assets ...... 15 541,360 742,294 Property, plant and equipment ...... 16 54,181 127,223 Available for sale investments ...... 17 970 970 Interests in associates ...... 18 22 20 Trade and other receivables ...... 21 6 6 Derivative financial instruments ...... 23/32 — 2,742 596,539 873,255 Current assets Assets classified as held for sale ...... 19 6,625 7,601 Inventories ...... 20 2,545 2,850 Trade and other receivables ...... 21 36,718 41,628 Cash and cash equivalents ...... 21 29,075 32,789 Derivative financial instruments ...... 23/32 1,108 155 76,071 85,023 Total assets ...... 672,610 958,278 Current liabilities Trade and other payables ...... 21 74,013 50,934 Current tax liabilities ...... 752 2,947 Retirement benefit obligation ...... 24 5,700 5,700 Borrowings ...... 22/33 8,553 8,520 Derivative financial instruments ...... 23/32 — 99 Short-term provisions ...... 26 1,796 1,327 90,814 69,527 Non-current liabilities Borrowings ...... 22/33 314,863 334,220 Retirement benefit obligation ...... 24 72,634 115,619 Deferred tax liabilities ...... 25 92,776 160,584 Trade and other payables ...... 21 136 142 Long-term provisions ...... 26 4,304 4,269 484,713 614,834 Total liabilities ...... 575,527 684,361 Net assets ...... 97,083 273,917 Equity Share capital ...... 27 69,541 65,081 Share premium account ...... 502,829 502,818 Share-based payments reserve ...... 13,576 18,959 Revaluation reserve ...... 1,737 1,783 Own shares ...... (5,312) (5,589) Translation reserve ...... 9,579 9,267 Retained earnings ...... (494,867) (318,402) Total equity ...... 97,083 273,917
The comparative numbers are as at 29 December 2012.
The financial statements of Johnston Press plc, registered in Scotland (number 15382), were approved by the Board of Directors and authorised for issue on 28 March 2014.
They were signed on its behalf by:
Ashley Highfield David King Chief Executive Officer Chief Financial Officer
The accompanying notes are an integral part of these financial statements.
F-10 Group cash flow statement For the 52 week period ended 28 December 2013
Revised(1)(3) 2013 2012 Notes £’000 £’000 Cash flow from operating activities Cash generated from operations(2)(3) ...... 28 54,537 80,692 Income tax paid ...... (2,800) (4,809) Net cash inflow from operating activities ...... 51,737 75,883 Investing activities Interest received ...... 16 120 Dividends received from available for sale investments ...... 378 22 Proceeds on disposal of publishing titles ...... 15 1,965 — Proceeds on disposal of property, plant and equipment ...... 3,697 8,936 Expenditure on digital intangible assets ...... 15 (3,033) — Purchases of property, plant and equipment ...... 16 (4,320) (5,171) Net cash (used in)/received from investing activities ...... (1,297) 3,907 Financing activities Dividends paid ...... 13 (152) (152) Interest paid(3) ...... (24,803) (21,837) Repayment of borrowings ...... (26,586) (2,697) Repayment of loan notes ...... (6,473) (23,841) Financing fees ...... (514) (11,826) Net cash flow from derivatives ...... — 198 Issue of shares ...... 27 4,471 — Cash movement relating to own shares held ...... (97) (253) Net cash used in financing activities ...... (54,154) (60,408) Net (decrease)/increase in cash and cash equivalents ...... (3,714) 19,382 Cash and cash equivalents at the beginning of period ...... 32,789 13,407 Cash and cash equivalents at the end of the period ...... 29,075 32,789 (1) The presentation of the 29 December 2012 ‘cash generated from operations’ number has been revised to be consistent with current year disclosures.
(2) Includes exceptional cash receipts of £10.0 milllion (2012: £30.0 million) due to the termination of the News International printing contract in 2012 and 2013.
(3) Interest paid in 2012 has been revised to include £4,594,000 that in the prior year was incorrectly classified as ‘cash generated from operations’. A subsequent amendment has also been made to note 28 (refer therein). This adjustment did not in any way impact the prior year income statement, assets, liabilities or equity and is purely presentational in nature.
The comparative period is for the 52 week period ended 29 December 2012.
The accompanying notes are an integral part of these financial statements.
F-11 Notes to the consolidated financial statements For the 52 week period ended 28 December 2013 1. General information
Johnston Press plc (‘‘Johnston Press’’ or ‘‘the Group’’) is a limited liability company incorporated in Scotland under the Companies Act 2006 and listed on the London Stock Exchange. The address of the registered office is 108 Holyrood Road, Edinburgh, EH8 8AS. The principal activities of the Group are discussed in the Operational and Financial Review sections of the Strategic Report.
2. Basis of accounting
These financial statements have been prepared in accordance with International Financial Reporting Standards (‘‘IFRS’’) and International Financial Reporting Committee (‘‘IFRIC’’) interpretations as adopted by the European Union and comply with Article 4 of the EU IAS Regulation and with those parts of the Companies Act 2006 applicable to groups reporting under IFRS that are effective for the 52 week period ended 28 December 2013.
These financial statements have been prepared on a going concern basis (discussed further in the Financial Review) and under the historical cost convention, except for the revaluation of certain properties and financial instruments, share-based payments and defined benefit pension obligations that are measured at revalued amounts or fair value at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36.
In addition, for financial reporting purposes, fair value measurements are categorised into Level 1,2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;
• Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and
• Level 3 inputs are unobservable inputs for the asset or liability.
The principal accounting policies applied in the preparation of the financial information presented in this document are set out below. These policies have been applied consistently to the periods presented unless otherwise stated.
F-12 Adoption of new or amended standards and interpretations in the current year The following new and revised Standards and Interpretations have been adopted for the 52 week period ended 28 December 2013. Their adoption has not had any significant impact on the amounts reported in these financial statements but may impact the accounting for future transactions and arrangements.
• IAS 1 (amended) Presentation of Items of Other Comprehensive Income
• IFRS 1 (amended) First time adoption of IFRS—Government Loans
• IFRS 1 (amended) First time adoption of IFRS—Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters
• IAS 12 (amended) Deferred Tax: Recovery of Underlying Assets
• IFRS 7 (amended) Disclosures—Offsetting Financial Assets and Financial Liabilities
• IAS 32 (amended) Offsetting Financial Assets and Financial Liabilities
• Annual Improvements to IFRS 2009 - 2011 Cycle
• IFRS 10 Consolidated Financial Statements
• IFRS 11 Joint Arrangements
• IFRS 12 Disclosure of Interests in Other Entities
• IAS 27 (revised) Separate Financial Statements
• IAS 28 (revised) Investments in Associates and Joint Ventures
The following new standards, amendments to standards and interpretations that are expected to impact the Group, which have not been applied in these financial statements, were in issue, and endorsed and applicable to reporting periods commencing from 1 January 2013. These standards will be applied to the financial statements for the 53 week period commencing 29 December 2013:
IAS 19 (revised 2011)—Employee benefits: is effective for annual periods beginning on or after 1 January 2013. The key changes are the deferral of actuarial gains and losses will no longer be permitted and the deficit should be recognised in full on the balance sheet (subject to any restrictions in IFRIC 14); the finance cost, which is currently the difference between the interest on liabilities and expected return on assets will be replaced by a net interest cost. In most cases the finance cost will increase as the expected return on assets will effectively be based on the discount rate (i.e. the returns available on AA-rated corporate bonds) with no allowance made for any outperformance expected from the Plan’s actual asset holding. More disclosure will be required about the risks posed by the Plan. Had the Standard been applied in the current financial year, the Group’s loss before tax would have been increased by approximately £5.2 million.
IFRS 13 Fair Value Measurement: is mandatory for annual periods beginning on or after 1 January 2013 with earlier application permitted. Once adopted, IFRS 13 Fair Value Measurement applies whenever another IFRS requires or permits fair value measurements, or disclosures about fair value measurements, with some limited exceptions. The IFRS also applies to measurements such as fair value less costs to sell that are clearly based upon fair value, as well as to disclosures about such items. IFRS 13 provides a consistent framework with a single definition of fair value as ‘the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date’. IFRS 13 includes extensive disclosure requirements. The impact on the amounts recognised in the consolidated financial statements has not yet been assessed.
F-13 At the date of 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 endorsed by the EU).
• Amendments to IFRS 10, IFRS 12 and IAS 27—Investment Entities (endorsed 20 November 2013):
• IAS 36 (amendments)—Recoverable Amount Disclosures for Non-Financial Assets (endorsed 19 December 2013):
• IAS 39—Novation of Derivatives and Continuation of Hedge Accounting (endorsed 19 December 2013)
• IFRIC 21—Levies (Issued 20 May 2013, endorsement expected Q2 ‘14 to be effective 1 January 2014)
• IFRS 9 Financial Instruments amendments (Issued 19 November 2013, endorsement postponed). IFRS 9 will impact the presentation of certain disclosures in the financial statements.
• IFRS 14 Regulatory Deferral Accounts (Issued 30 January 2014, endorsement expected Q1 ‘15 to be effective 1 January 2016)
• Annual Improvements to IFRS’s 2010 - 2012 Cycle (Issued 12 December 2013, endorsement expected Q4 ‘14)
• Annual Improvements to IFRS’s 2011 - 2013 Cycle (Issued 12 December 2013, endorsement expected Q4 ‘14)
The directors do not expect that the adoption of the standards listed will have a material impact on the financial statements of the Group in future periods.
Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed.
The Group continues to assess the impact of adopting the above new or amended standards and interpretations in future accounting periods.
3. Significant accounting policies
Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to the Saturday closest to 31 December each year for either a 52 or 53 week period. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the Group Income Statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Basis of preparation The Group’s business activities, together with factors likely to affect its future development, performance and financial position and commentary on the Group’s financial results, its cash flows, liquidity requirements and borrowing facilities are set out in the Financial Review. In addition, Note 32 to the financial statements includes the Group’s objectives, policies and
F-14 processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities, and its exposures to liquidity risk and credit risk.
The financial statements have been prepared for the 52 week period ended 28 December 2013. The 2012 information relates to the 52 week period ended 29 December 2012.
Going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements.
The Group’s bank facilities and private placement loan notes contain three quarterly covenant tests, Consolidated EBITDA to Consolidated Net Borrowing Costs, Consolidated Net Borrowings to Consolidated EBITDA, and Consolidated Net Cash Flow to Total Debt Service, in addition to a Consolidated Net Worth covenant which is tested at the half year and year end. In December 2013 the Company and its lenders agreed to reset financial covenants until September 2015, providing the Company with the opportunity to pursue a full refinancing in 2014. When tested throughout the year and at 28 December 2013, the covenants were all met.
The Group has continued to report improving trends in underlying profitability, has reduced its net debt from £319.3m at 29 December 2012 to £302.0m at 28 December 2013, and is now exploring the opportunity to repay its existing bank facilities and private placement loan notes, through a combined debt and equity capital refinancing during 2014.
The Board has undertaken a recent and thorough review of its forecasts and associated risks. These forecasts extend for a period of 12 months from the date of approval of these financial statements and demonstrate anticipated compliance with financial covenants over this forecast period, albeit with limited headroom. The Directors are satisfied that it is reasonable to adopt the going concern basis of accounting following this review, further details of which are set out below.
The forecasts make key assumptions, based on information available to the Directors, on a number of items including:
• External advertising forecasts;
• Current print advertising run rates;
• Growth in digital revenues;
• The impact of newspaper cover price increases on circulation revenues;
• Existing and planned cost reduction measures;
• Planned disposals of non-strategic assets;
• Projected debt service and interest costs over the next 12 months;
• Expected future cost of the PPF levy; and
• The levels of advisory fees and other costs incurred in exploring refinancing if it were subsequently delayed or aborted.
The Directors recognise that some of the assumptions referred to above are not within the Group’s control, and around which therefore there remains some uncertainty. Good progress has been and continues to be made against all of the key assumptions: the overall economic environment is improving, digital revenues are growing strongly, circulation revenues are stabilising, cost savings targets have been met, good progress has been made on planned asset
F-15 disposals, and debt reduction continued, as evidenced by underlying increases in operating profits and margins, and debt reduction.
The risks described are not new. However, in the event that a number of the following were to happen concurrently, before the Group has successfully refinanced—a deteriorating economic climate, a lack of successful execution of the strategy by the Group, the delay or inability to continue to make cost savings, unexpected increase in raw materials, a lack of success or delays in completing the sale of non-core property and other assets and the Group incurred significant additional adviser and other costs in connection with a refinancing without the benefit of a successful refinancing—and thus the Group were to breach its financial covenants, then this would give lenders, acting in their majority, the ability to demand repayment of the facilities. As discussed, the Group has renegotiated its covenants and is in constructive discussion with its existing lenders and Pension Trustees with a view to achieving a successful refinancing during 2014.
Despite the covenant reset, the Group forecasts show limited headroom and therefore in accordance with Accounting Standards and the UK Financial Reporting Council guidance for Directors on going concern, it is appropriate for the Directors to recognise a material uncertainty, which may give rise to significant doubt over the Group’s and the Company’s ability to continue as a going concern, and if the majority of lenders chose to exercise their rights in such an event, the Group and the Company may be unable to realise assets and discharge their liabilities in the normal course of business. The consolidated financial statements do not include any adjustments that would result from the going concern basis of preparation being inappropriate.
Nevertheless, after making enquiries and considering the uncertainties above, the Directors have a reasonable expectation that the Group and the Company will continue to trade within the terms of its existing financial arrangements and will have adequate resources to continue operating in the normal course of business for the foreseeable future. Thus the Directors continue to adopt the going concern basis of accounting in preparing the consolidated and parent company financial statements.
Exceptional items Items which are deemed to be exceptional by virtue of their nature or size are included under the statutory classification appropriate to their nature but are separately disclosed on the face of the Group Income Statement to assist in understanding the financial performance of the Group.
Business combinations The acquisition of subsidiaries is accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the fair values at the date of exchange of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in the Income Statement as incurred. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3, including publishing titles, are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 ‘Non-Current Assets Held for Sale and Discontinued Operations’, which are recognised and measured at fair value less costs to sell.
Investment in associates An associate is an entity over which the Group is in a position to exercise significant influence and is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
F-16 The results and assets and liabilities of associates are incorporated in these Group financial statements using the equity method of accounting. Investments in associates are carried in the Group Statement of Financial Position at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments.
Publishing titles The Group’s principal intangible assets are publishing titles. The Group does not capitalise internally generated publishing titles. Titles separately acquired after 1 January 1989 are stated at cost and titles owned by subsidiaries acquired after 1 January 1996 are recorded at the Directors’ valuation at the date of acquisition. These publishing titles have no finite life and consequently are not amortised. The carrying value of the titles is reviewed for impairment at least annually with testing undertaken to determine any diminution in the recoverable amount below carrying value. The recoverable amount is the higher of the fair value less costs to sell and the value in use is based on the net present value of estimated future cash flows. Any impairment loss is recognised as an expense immediately. When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in the Group Income Statement given these assets are not carried at revalued amounts.
For the purpose of impairment testing, publishing titles are allocated to each of the Group’s cash generating units. Cash generating units are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of the value of publishing titles and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.
Other intangible assets Other intangible assets in respect of digital activities are amortised using the straight-line method over the expected life, of two to five years over which those assets will generate revenues and profits for the Group and are tested for impairment at each reporting date or more frequently where there is an indication that the recoverable amount is less than the carrying amount.
Costs incurred in the development and maintenance of websites are only capitalised if the criteria specified in IAS 38 are met.
Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes.
Print advertising revenue is recognised on publication and circulation revenue is recognised at the point of sale. Digital revenues are recognised on publication for advertising or delivery of service for other digital revenues. Printing revenue is recognised when the service is provided.
Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in pounds Sterling, which is the functional currency of the Company and the presentation currency for the consolidated financial statements.
F-17 In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each period end, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at the close of business on the last working day of the period. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items carried at historical cost in respect of which gains and losses are recognised directly in equity.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the period end date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classified as equity and transferred to the Group’s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.
Fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
Property, plant and equipment Property, plant and equipment balances are shown at cost, net of depreciation and any provision for impairment. In certain cases, the amounts of previous revaluations of properties conducted in 1996 or 1997 or the fair value of the property at the date of the acquisition by the Group have been treated as the deemed cost on transition to IFRSs. Depreciation is provided on all property, plant and equipment, excluding land, at varying rates calculated to write-off cost over the useful lives. The principal rates employed are:
Heritable and freehold property (excluding land) ...... 2.5% on written down value Leasehold land and buildings ...... Equal annual instalments over lease term Web offset presses (excluding press components) ...... 5% straight-line basis Mailroom equipment ...... 6.67% straight-line basis Pre-press systems ...... 20% straight-line basis Other plant and machinery ...... 6.67%, 10%, 20%, 25% and 33% straight-line basis Motor vehicles ...... 25% straight-line basis
Assets classified as held for sale Assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
Assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale. Where the sale is expected to qualify for recognition as a completed sale within one year from the date of classification, the assets are shown as current and when the sale is anticipated to complete more than one year from date of classification the assets are shown as non-current.
F-18 Inventories Inventories are stated at the lower of cost and net realisable value. Cost incurred in bringing materials to their present location and condition comprises; (a) raw materials and goods for resale at purchase cost on a first-in first-out basis; and (b) work in progress at cost of direct materials, labour and certain overheads. Net realisable value comprises selling price less any further costs expected to be incurred to completion and disposal.
Financial instruments Financial assets and financial liabilities are recognised in the Group’s Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument.
Financial assets Investments are recognised and derecognised on the trade date in accordance with the terms of the purchase or sale contract and are initially measured at fair value, plus transaction costs.
Available for sale financial assets Listed and unlisted investments are shown as available for sale and are stated at fair value. Fair value of listed investments is determined with reference to quoted market prices. Fair value of unlisted investments is determined by the Directors. Gains and losses arising from changes in fair value are recognised directly in equity, with the exception of impairment losses which are recognised directly in the Income Statement. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in equity is included in the Income Statement for the period.
Dividends on available for sale equity investments are recognised in the Income Statement when the Group’s right to receive the payment is established.
Trade receivables Trade receivables do not carry any interest. They are stated at their nominal value as reduced by appropriate allowance for estimated irrecoverable amounts. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. Other trade receivables are provided for on an individual basis where there is evidence that an amount is no longer recoverable.
Impairment of financial assets Financial assets are assessed for indicators of impairment at each period end date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance for estimated irrecoverable amounts. Changes in the carrying value of this allowance are recognised in the Income Statement.
Derivative financial instruments The Group’s activities and funding structure give rise to some exposure to the financial risks of changes in interest rates and foreign currency exchange rates. The Group enters into a number of derivative financial instruments to manage its exposure to these risks, including interest rate swaps and caps, cross currency swaps, foreign exchange options and forward foreign exchange contracts. Further details of derivative financial instruments are given in Note 32.
The Group re-measures each derivative at its fair value at the period end date with the resultant gain or loss being recognised in profit or loss immediately. All such changes in the fair value of the Group’s derivatives are shown in a separate column on the face of the Group Income Statement.
F-19 A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.
Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with the changes in fair value recognised in profit or loss.
Financial liabilities and equity Debt and equity instruments issued by the Group are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs.
The Company has issued share warrants over 12.5% of its issued share capital to lenders (with 5.0% issued 28 August 2009, 2.5% issued 24 April 2012 and 5.0% issued 21 September 2012). All of the share warrants have an exercise price of 10p and expire 30 September 2017. The warrant instruments will be settled by the Company delivering a fixed number of ordinary shares and receiving a fixed amount of cash in return and so qualify as equity under IAS 39. The Binomial Option pricing model was used to assess the fair value of the share warrants issued in the financial year that they were issued. See Note 27 for details of warrants exercised during the period.
Trade payables Trade payables are not interest-bearing and are stated at their nominal value.
Borrowings Interest-bearing loans and bank overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premium payable on settlement or redemption and direct issue costs, are charged to the Income Statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Fees incurred in negotiating borrowings are held on the Statement of Financial Position and amortised to the Income Statement over the term of the underlying debt.
Leases Rentals payable under operating leases are charged to the Group Income Statement on a straight-line basis over the term of the relevant lease. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis over the term of the lease.
Operating (loss)/profit Operating (loss)/profit is stated after charging restructuring or other exceptional costs but before investment income, other finance income, finance costs and the share of the results of associates.
Provisions Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to settle that obligation. Provisions are
F-20 measured at the Directors’ best estimate of the expenditure required to settle the obligation at the reporting date and are discounted to present value where the effect is material.
Taxation The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the period end date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax based values used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited directly to other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income.
The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when the relevant requirements of IAS 12 are satisfied.
Retirement benefit costs The Group provides pensions to employees through various schemes.
Payments to defined contribution retirement benefit schemes are charged to the Income Statement as an expense as they fall due. Payments made to the industry-wide retirement benefit schemes in the Republic of Ireland are dealt with as payments to defined contribution schemes where the Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme.
For defined benefit retirement benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each period end date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the Income Statement and presented in the Statement of Comprehensive Income. Past service cost is recognised immediately to the extent that the benefits are already vested and otherwise is amortised on a straight line basis over the average period until the benefits become vested.
F-21 The retirement benefit obligation recognised in the Statement of Financial Position represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the scheme.
Share-based payments The Group issues equity settled share-based benefits to certain employees. These share-based payments are measured at their fair value at the date of grant and the fair value of share options is expensed to the Income Statement on a straight-line basis over the vesting period. Fair value is measured by use of the Black-Scholes model, as amended to take account of the Directors’ best estimate of probable share vesting and exercise.
4. Critical accounting judgements and key sources of estimation uncertainty
Critical judgements in applying the Group’s accounting policies In the process of applying the Group’s accounting policies, which are described in Note 3, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements (apart from those involving estimations, which are dealt with below).
The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
Exceptional items Exceptional items include significant transactions such as the costs associated with restructuring of businesses along with material items including for example revenue received on the termination of significant print contracts, significant pension related costs, the disposal of a significant property directly linked to restructuring and impairment of intangible and tangible assets together with the associated tax impact. The Company considers such items are material to the Income Statement and their separate disclosure is necessary for an appropriate understanding of the Group’s financial performance. These items have been presented as a separate column in the Group Income Statement.
Valuation of publishing titles on acquisition The Group’s policies require that a fair value at the date of acquisition be attributed to the publishing titles owned by each acquired entity. The Group’s management uses its judgement to determine the fair value attributable to each acquired publishing title taking into account the consideration paid, the earnings history and potential of the title, any recent similar transactions, industry statistics such as average earnings multiples and any other relevant factors.
The publishing titles are considered to have indefinite economic lives due to the historic longevity of the brands and the ability to evolve the brands in the changing media environment.
Assets held for sale Where a property or a significant item of equipment (such as a print press or property no longer required as part of Group operations) is marketed for sale, management is highly committed to the sale and the asset is available for immediate sale, the Group classifies that asset as held for sale. If the asset is expected to be sold within twelve months, the asset is classed as a current asset. The value of the asset is held at the lower of the net book value or the expected realisable sale value. The Directors have estimated the sale values based on the current price that the asset is being marketed at and advice from independent property agents. The actual sale proceeds may differ from the estimate.
F-22 Provisions for onerous leases and dilapidations Where the Group exits a rented property, an estimate of the anticipated total future cost payable under the terms of the operating lease, including rentals, rates and other related expenses, is charged to the Income Statement at the point of exit as an onerous lease. Where there is a break clause in the contract, rentals are provided for up to that point. In addition, an estimate is made of the likelihood of sub-letting the premises and any rentals that would be receivable from a sub tenant. Where receipt of sub-lease rentals is considered reasonable, these amounts are deducted from the rentals payable by the Group under the lease and provision charged for the net amount.
Under the terms of a number of property leases, the Group is required to return the property to its original condition at the lease expiry date. The Group has estimated the expected costs of these dilapidations and charged these costs to the Income Statement. No discounting has been applied to the provision as the effect of the discounting is not considered material.
Valuation of share-based payments The Group estimates the expected value of equity-settled share-based payments and this is charged through the Income Statement over the vesting periods of the relevant awards. The cost is estimated using a Black-Scholes valuation model. The Black-Scholes calculations are based on a number of assumptions that are set out in Note 30 and are amended to take account of estimated levels of share vesting and exercise.
Key sources of estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the period end date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.
Impairment of publishing titles and print presses Determining whether publishing titles are impaired requires an estimation of the value in use of the cash generating units (CGUs) to which these assets are allocated. Key areas of judgement in the value in use calculation include the identification of appropriate CGUs, estimation of future cash flows expected to arise from each CGU, the long-term growth rates and a suitable discount rate to apply to cash flows in order to calculate present value. The Group has identified its CGUs based on the seven geographic regions in which it operates. This is considered to be the lowest level at which cash inflows generated are largely independent of the cash inflows from other groups of assets and has been consistently applied in the current and prior periods. £202.4 million impairment loss has been recognised in 2013 (2012: nil). The carrying value of publishing titles at 28 December 2013 was £538.5 million (2012: £742.3 million). Details of the impairment reviews that the Group performs are provided in Note 15.
Determining whether print presses are impaired requires an estimation of the value in use of each print site. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the print sites and a suitable discount rate in order to calculate present value (Note 16).
Valuation of pension liabilities The Group records in its Statement of Financial Position a liability equivalent to the deficit on the Group’s defined benefit pension schemes. This liability is determined with advice from the Group’s actuarial advisers each year and can fluctuate based on a number of factors, some of which are outside the control of management. The main factors that can impact the valuation include:
• the discount rate used to discount future liabilities back to the present date, determined each year from the yield on corporate bonds;
F-23 • the actual returns on investments experienced as compared to the expected rates used in the previous valuation;
• the actual rates of salary and pension increase as compared to the expected rates used in the previous valuation;
• the forecast inflation rate experienced as compared to the expected rates used in the previous valuation; and
• mortality assumptions.
Details of the assumptions used to determine the liability at 28 December 2013 are set out in Note 24.
5. Business segments
Information reported to the Chief Executive Officer for the purpose of resource allocation and assessment of segment performance is focussed on the two areas of Publishing (in print and online) and Contract Printing. Geographical segments are not presented as the primary segment is the UK which is greater than 90% of Group activities.
6. Segment information a) Segment revenues and results The following is an analysis of the Group’s revenue and results by reportable segment:
Revised(1) Contract Contract Publishing printing Eliminations Group Publishing printing Eliminations Group 2013 2013 2013 2013 2012 2012 2012 2012 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Revenue Print advertising ...... 157,057 — — 157,057 181,257 — — 181,257 Digital advertising ...... 24,529 — — 24,529 20,606 — — 20,606 Newspaper sales ...... 87,658 — — 87,658 91,763 — — 91,763 Contract printing ...... — 11,206 — 11,206 — 18,371 — 18,371 Other ...... 10,759 1,590 — 12,349 14,812 1,882 — 16,694 Total external sales ...... 280,003 12,796 — 292,799 308,438 20,253 — 328,691 Inter-segment sales(2) ...... — 39,436 (39,436) — — 53,019 (53,019) — Exceptionals ...... — 10,000 — 10,000 — 30,000 — 30,000 Total revenue ...... 280,003 62,232 (39,436) 302,799 308,438 103,272 (53,019) 358,691
Operating (loss)/profit Segment result before exceptional items ...... 50,495 4,384 — 54,879 51,554 5,491 — 57,045 Exceptional items ...... (246,458) (54,091) — (300,549) (22,667) 6,063 — (16,604) Net segment result ...... (195,963) (49,707) — (245,670) 28,887 11,554 — 40,441 Investment income ...... 394 148 Net finance expense on pension assets/liabilities ...... (1,576) (2,471) IAS 21/39 adjustments ...... (177) (2,760) Finance costs ...... (39,808) (42,129) Share of results of associates . . . 2 6 Loss before tax ...... (286,835) (6,765) Tax...... 74,869 12,376 (Loss)/profit for the period .... (211,966) 5,611 (1) The presentation of the 29 December 2012 exceptional item numbers has been revised to be consistent with current year disclosures.
(2) Inter-segment sales are charged at prevailing market prices.
F-24 The accounting policies of the reportable segments are the same as the Group’s accounting policies described in Note 3. The segment result represents the (loss)/profit earned by each segment without allocation of the share of results of associates, investment income, finance costs (including in relation to pension assets and liabilities) and income tax expense. This is the measure reported to the Group’s Chief Executive Officer for the purpose of resource allocation and assessment of segment performance. b) Segment assets
2013 2012 £’000 £’000 Assets Publishing ...... 638,679 855,372 Contract printing ...... 32,823 99,039 Total segment assets ...... 671,502 954,411 Unallocated assets ...... 1,108 3,867 Consolidated total assets ...... 672,610 958,278
For the purposes of monitoring segment performance and allocating resources between segments, the Group’s Chief Executive Officer monitors the tangible, intangible and financial assets attributable to each segment. All assets are allocated to reportable segments with the exception of available-for-sale investments and derivative financial instruments. c) Other segment information
Contract Contract Publishing printing Group Publishing printing Group 2013 2013 2013 2012 2012 2012 £’000 £’000 £’000 £’000 £’000 £’000 Additions to property, plant and equipment ...... 4,320 — 4,320 4,912 180 5,092 Depreciation and amortisation expense ...... 4,108 3,644 7,752 5,077 7,638 12,715 Impairment of property, plant and equipment ...... 1,443 62,252 63,695 — 17,239 17,329 Net impairment of intangibles . . 202,427 — 202,427 ———
F-25 7. Exceptional items
2013 2012 £’000 £’000 Revenue Termination of print contract ...... 10,000 30,000 Total revenue—exceptional items ...... 10,000 30,000 Operating expenses Operating expenses—pensions Pension protection fund contribution ...... (4,408) — Section 75 pension debt ...... (1,268) — IAS 19 past service gain (Note 24) ...... — 1,540 Operating expenses—restructuring costs Redundancy costs ...... (24,444) (21,582) Lease termination costs, empty property and dilapidations ...... (5,843) (1,610) Other restructuring costs ...... (2,773) (1,211) Operating expenses—gain on disposal Gain on sale of assets ...... 199 986 Operating expenses—other ...... (1,219) 53 Total exceptional expenses ...... (39,756) (21,824) Impairment of intangible assets, property, plant and equipment and assets held for sale Intangible assets (Note 15) ...... (202,427) — Property, plant and equipment (Note 16) ...... (63,695) (17,239) Assets held for sale (Note 19) ...... (4,671) (7,541) Total impairment of intangible assets, property, plant and equipment and assets held for sale ...... (270,793) (24,780) Total operating expenses and impairment ...... (310,549) (46,604) Total exceptional items ...... (300,549) (16,604)
Revenue The Group has recognised revenue of £10.0 million (2012: £30.0 million) during the period as a result of a termination fee payable on the final aspect of a long-term contract with News International. The prior year income represents an earlier termination of aspects of the contract.
Operating expenses—pensions During 2013, the pension regulator has requested payment of PPF levies amounting to £3.1 million and £3.2 million for the years ending 31 March 2013 and 31 March 2014 respectively, £1.3 million of which will be settled by the Johnston Press Pension Plan, leaving £6.3 million (2012: nil) payable by the Company, in accordance with the agreed Schedule of Contributions £4.4 million has been charged to the income statement for the period to 28 December 2013. Additionally, the Group incurred a Section 75 debt amounting to £1.3 million (2012: nil) following the wind up of certain companies in prior years. In 2012, the Group offered a number of existing pensioners the opportunity to take part in a pension exchange where, for a higher pension today, they forgo a proportion of future increases. This resulted in a gain of £1.5 million.
Operating expenses—restructuring costs Restructuring costs primarily relate to various reorganisation processes designed to reduce the size and cost of overhead functions (2013: £24.4 million, 2012: £21.6 million), early lease termination costs (2013: £3.0 million, 2012: £nil), empty property costs (2013: £1.4 million, 2012:
F-26 £1.4 million), dilapidations (2013: £1.4m, 2012: £0.2 million) and other associated legal and consulting fees (2013: £2.8 million, 2012: £1.2 million) .
Operating expenses—gain on disposal During 2012, the Group recognised a gain of £1.0 million from the disposal of a significant property.
Operating expenses—other The Group incurred other operating expenses of £0.7 million (2012: £nil) relating to legal fees in relation to the exploration of refinancing and £0.5 million (2012: £nil) relating to legal fees for an aborted disposal.
Impairment of intangible assets, property, plant and equipment and assets held for sale In the period ended 28 December 2013, an impairment of £202.4 million (2012: £nil) was recognised by the Group for publishing titles largely due to changes in the discount and growth rate assumptions applicable to the business and sector as a whole. The Group also incurred charges for write down in the value of presses and property assets (2013: £68.4 million, 2012: £24.8 million) brought about as a result of structural rationalisations, increased centralisation, divisional and title reorganisations and closures of certain internal operations, such as print presses.
Tax-effect of exceptional items The Group has disclosed a £71.3 million tax credit in relation to the total exceptional items of £300.5 million. The tax credit is primarily attributable to the deferred tax adjustment relating to the impairment of intangible assets of £64.6 million (including credit relating to reduction in deferred tax rate to 20%), and deductible restructuring costs tax credit of £7.7 million.
8. Operating (loss)/profit
2013 2012 £’000 £’000 Operating (loss)/profit is shown after charging/(crediting): Depreciation of property, plant and equipment (Note 16) ...... 7,543 12,715 Exceptional write down in value of presses (Note 16) ...... 63,695 17,239 Write down of assets classified as held for sale (Note 19) Exceptionals ...... 4,671 7,541 Operating ...... — 276 Profit on disposal of property, plant and equipment: Operating disposals ...... (1,068) (695) Exceptional disposals ...... (199) (986) Assets held for sale disposals ...... — (390) Movement in allowance for doubtful debts (Note 21) ...... (1,019) (2,069) Staff costs excluding redundancy costs (Note 9) ...... 113,461 131,526 Redundancy costs (Note 9) ...... 24,444 21,582 Auditor’s remuneration: Audit services Company and Group accounts ...... 173 120 Subsidiaries ...... 240 240 Operating lease charges: Plant and machinery ...... 1,887 1,847 Other ...... 5,040 3,841 Rentals received on sub-let property ...... (115) (221) Net foreign exchange gains ...... (146) (59) Cost of inventories recognised as expense ...... 27,720 36,111 Write down of inventories ...... — 647
F-27 Profit on disposal of property, plant and equipment—operating disposals The Group operates a large portfolio of properties, and regularly exits and renews leases, as well as sale and leaseback of freehold properties. Profits of £0.6 million in 2013 (2012: £0.7 million) were included in operating profits from property sales. There were nine such sales in 2013. Similar profits are expected to be earned in 2014.
Staff costs shown above include £1,410,000 (2012: £2,284,000) relating to remuneration of Directors. In addition to the auditor’s remuneration shown above, the auditor received the following fees for non-audit services.
2013 2012 £’000 £’000 Audit-related assurance services ...... 55 95 Taxation compliance services ...... 68 49 Other taxation advisory services ...... 5 28 Other services ...... 6 69 134 241
All non-audit services were approved by the Audit Committee. The Audit Committee considers that these non-audit services have not impacted the independence of the audit process. In addition, an amount of £19,000 (2012: £19,000) was paid to the external auditor for the audit of the Group’s pension scheme.
9. Employees
The average monthly number of employees, including Executive Directors, was:
2013 2012 No. No. Editorial and photographic ...... 1,577 1,786 Sales and distribution ...... 1,891 2,134 Production ...... 418 551 Administration ...... 302 326 Average number of employees ...... 4,188 4,797
£’000 £’000 Staff costs: Wages and salaries ...... 99,247 113,901 Social security costs ...... 9,152 10,295 Redundancy costs ...... 24,444 21,582 Other pension costs(1) ...... 4,550 6,724 Cost of share-based awards (Note 30) ...... 512 606 Total staff costs ...... 137,905 153,108 (1) Other pension costs relates to Company pension contributions to the defined contribution scheme. Refer note 24.
Full details of the Directors’ emoluments, pension benefits and share options are included in the audited part of the Directors’ Remuneration Report.
F-28 10. Investment income
2013 2012 £’000 £’000 Income from available for sale investments ...... 378 22 Interest receivable ...... 16 126 394 148
11. Finance costs
2013 2012 £’000 £’000 a) Net finance expense on pension assets/liabilities Interest on pension liabilities (Note 24) ...... 22,227 22,708 Expected return on pension assets (Note 24) ...... (20,651) (20,237) 1,576 2,471 b) Finance costs Interest on bank overdrafts and loans ...... 23,504 26,944 Payment-in-kind interest accrual ...... 12,148 11,048 Amortisation of term debt issue costs ...... 4,156 4,137 39,808 42,129
Refer to Note 22 for further details. c) IAS 21/39 items All movements in the fair value of derivative financial instruments are recorded in the Income Statement. In the current period, this movement was a net charge of £1.7 million (2012: charge of £7.3 million), consisting of a realised net credit of £nil million (2012: £0.2 million) and an unrealised charge of £1.7 million (2012: £7.5 million). The retranslation of foreign denominated debt at the period end resulted in a net credit of £1.5 million (2012: £4.5 million) being recorded in the Income Statement. The retranslation of the Euro denominated publishing titles held at fair value is shown in the Statement of Comprehensive Income.
12. Tax
2013 2012 £’000 £’000 Current tax Charge for the period ...... — 3,541 Adjustment in respect of prior periods ...... 617 130 617 3,671 Deferred tax (Note 25) Credit for the period ...... (12,693) (4,168) Adjustment in respect of prior periods ...... (1,629) 191 Deferred tax adjustment relating to the impairment of publishing titles .... (41,667) — Credit relating to reduction in deferred tax rate to 20% (2012: 23.0%) ..... (19,497) (12,070) (75,486) (16,047) Total tax credit for the period ...... (74,869) (12,376)
UK corporation tax is calculated at 23.25% (2012: 24.5%) of the estimated assessable loss for the period. The 23.25% basic tax rate applied for the 2013 period was a blended rate due to
F-29 the tax rate of 24.0% in effect for the first quarter of 2013, changing to 23.0% from 1 April 2013 under the 2012 Finance Act. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdiction. The Group has recognised a £19.5 million tax credit as a result of the change to the UK deferred tax rate from 23% to 20%, being the substantively enacted rate at the balance sheet date.
The tax credit for the period can be reconciled to the loss per the Income Statement as follows:
2013 2012 £’000 % £’000 % Loss before tax ...... (286,835) 100.0 (6,765) 100.0 Tax at 23.25% (2012: 24.5%) ...... (66,689) 23.3 (1,657) 24.5 Tax effect of expenses that are non-deductible in determining taxable profit ...... 7,125 (2.5) 2,130 (31.5) Tax effect of income that is non-taxable in determining taxable profit ...... —— (793) 11.7 Tax effect of investment income ...... (88) — (5) — Effect of other tax rates ...... 2,780 (1.0) (302) (4.5) Adjustment in respect of prior periods ...... (1,008) 0.4 321 (4.7) Unrecognised deferred tax assets ...... 2,508 (0.9) —— Effect of reduction in deferred tax rate to 20.0% (2012: 23.0%) ...... (19,497) 6.8 (12,070) 178.4 Tax credit for the period and effective rate ...... (74,869) 26.1 (12,376) 182.8
13. Dividends
2013 2012 £’000 £’000 Amounts recognised as distributions to equity holders in the period: Preference Dividends 13.75% Cumulative Preference Shares (13.75p per share) ...... 104 104 13.75% ‘A’ Preference Shares (13.75p per share) ...... 48 48 152 152
No ordinary dividend is to be recommended to shareholders at the Annual General Meeting making a total for 2013 of £nil (2012: £nil).
The Directors have been advised that certain distributions made on the 13.75% Cumulative Preference Shares and 13.75% ‘‘A’’ Cumulative Preference Shares in the financial years ending 28 December 2013, 29 December 2012 and 31 December 2011 and in the period ended June 2012 have been made without fully complying with the relevant requirements of the Companies Act 2006. A course of action has been determined to remedy this position without the Company pursuing any rights that it may have to seek repayment of the relevant funds. Further details of this course of action will be put to shareholders in due course.
F-30 14. Earnings per share
The calculation of earnings per share is based on the following (losses)/profits and weighted average number of shares:
2013 2012 £’000 £’000 Earnings (Loss)/profit for the period ...... (211,966) 5,611 Preference dividend ...... (152) (152) Earnings for the purposes of basic and diluted earnings per share ...... (212,118) 5,459 Exceptional and IAS 21/39 items (after tax) ...... 229,277 15,813 Earnings for the purposes of adjusted earnings per share ...... 17,159 21,272
2013 2012 No. of shares No. of shares Number of shares Weighted average number of ordinary shares for the purposes of basic earnings per share ...... 647,803,578 621,758,744 Effect of dilutive potential ordinary shares: —warrants and employee share options ...... — 2,594,333 —deferred bonus shares ...... — 1,788,822 Number of shares for the purposes of diluted earnings per share . . 647,803,578 626,141,899 Earnings per share (p) Basic ...... (32.74) 0.88 Adjusted ...... 2.65 3.42 Diluted—see below ...... (32.74) 0.87
The weighted average number of ordinary shares above are shown excluding owns shares held. Adjusted EPS figures are presented to show the effect of excluding exceptional and IAS 21/39 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 explained in Note 27, the preference shares qualify as 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.
F-31 15. Intangible assets
Publishing Digital intangible titles assets Total £’000 £’000 £’000 Cost Opening balance ...... 1,308,677 — 1,308,677 Additions ...... — 3,033 3,033 Disposals ...... (7,034) — (7,034) Exchange movements ...... 634 — 634 Closing balance ...... 1,302,277 3,033 1,305,310
Accumulated impairment losses and amortisation Opening balance ...... 566,383 — 566,383 Amortisation for the period ...... — 209 209 Disposals ...... (5,069) — (5,069) Impairment losses for the period ...... 202,427 — 202,427 Closing balance ...... 763,741 209 763,950
Carrying amount Opening balance ...... 742,294 — 742,294 Closing balance ...... 538,536 2,824 541,360
The exchange movement above reflects the impact of the exchange rate on the valuation of publishing titles denominated in Euros at the period end date.
During 2013, the Group disposed of Petersfield Post, Goole Courier and Selby Times publishing titles for total consideration of £1.9m. At the time of disposal, the Directors assessed these titles were held at their fair value due to previous impairment write-downs incurred.
Publishing titles The carrying amount of publishing titles by cash generating unit (CGU) is as follows:
2012 Impairment Disposal Translation 2013 £’000 £’000 £’000 £’000 £’000 Scotland ...... 56,013 (3,886) — — 52,127 North ...... 272,190 (53,418) (1,541) — 217,231 Northwest ...... 93,201 (31,689) — — 61,512 Midlands ...... 168,190 (48,108) — — 120,082 South ...... 60,602 (13,887) (424) — 46,291 Northern Ireland ...... 73,422 (37,597) — 62 35,887 Republic of Ireland ...... 18,676 (13,842) — 572 5,406 Total carrying amount of publishing titles ...... 742,294 (202,427) (1,965) 634 538,536
The Group tests the carrying value of publishing titles held within the publishing operating segment for impairment annually or more frequently if there are indications that they might be impaired. The publishing titles are grouped by CGUs, being the lowest levels for which there are separately identifiable cash flows independent of the cash inflows from other groups of assets.
The recoverable amounts of the CGUs are determined from value in use calculations, with the exception of the Republic of Ireland publishing titles which are valued at fair value less cost of sales, due to the intended disposal of these publishing titles. The publishing titles have not
F-32 been reported as assets held for sale as the completion of the transaction does not meet the strict criteria to deem it highly probable. The key assumptions for the value in use calculations are:
• the discount rate; • expected changes in underlying revenues and direct costs during the period; and • growth rates.
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. The discount rate applied to the future cash flows in 2013 was 12.0% (2012:11.0%) for the CGUs in the United Kingdom and 15.9% (2012:11.0%) for the CGU in the Republic of Ireland. The discount rate reflects management’s view of the current risk profile of the underlying assets being valued with regard to the current economic environment and the risks that the regional media industry is facing.
Changes in underlying revenue and direct costs are based on past practices and expectations of future changes in the market. These include changes in demand for print and digital, circulation, cover prices, advertising rates as well as movement in newsprint and production costs and inflation.
Discounted cash flow forecasts are prepared using:
• the most recent financial budgets and projections approved by management for 2014 which reflect management’s current experience and future expectations of the markets the CGUs operate in;
• net cash inflows for 2015 to 2033 that are extrapolated based on an estimated annual long-term growth rate of 1.0%;
• a discounted residual value of 5 times the final year’s cash flow; and
• capital expenditure cash flows to reflect the cycle of capital investment required.
The present value of the cash flows is then compared to the carrying value of the asset to determine if there is any impairment loss.
The total net impairment charge recognised in 2013 was £202.4 million (2012: net impairment charge of £nil). The Impairment charge for the period comprises £53.4 million in the North, £48.1 million in Midlands, £37.6 million in Northern Ireland, £31.7 million in the Northwest, £13.9 million in the South, £13.8 million in the Republic of Ireland and £3.9 million in Scotland.
The Group has conducted 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 an impairment for the Group of £10.3 million and an increase in the discount rate of 0.5% would result in an impairment of £20.0 million.
Growth rate Discount rate sensitivity sensitivity £’000 £’000 Scotland ...... 1,092 2,110 North ...... 3,997 7,720 Northwest ...... 1,081 2,087 Midlands ...... 2,114 4,084 South ...... 1,098 2,121 Northern Ireland ...... 734 1,417 Republic of Ireland ...... 219 461 Total potential impairment from sensitivity analysis ...... 10,335 20,000
F-33 Digital intangible assets Digital intangible assets primarily relates to the new design of the Group’s 196 local websites and the development of a Customer Relationship Management (CRM) capability. The websites form the core platform for the Group’s digital revenue activities whereas the CRM capability will enable the Group to accelerate the growth of its subscriber base. These assets are being amortised over a period of three years. Amortisation for the year has been charged through cost of sales.
16. Property, plant and equipment
Freehold land and Leasehold Plant and Motor buildings buildings machinery vehicles Total £’000 £’000 £’000 £’000 £’000 Cost At 31 December 2011 ...... 92,678 4,391 219,292 10,167 326,528 Additions ...... — 1,258 3,829 5 5,092 Disposals ...... (2,904) (55) (58,659) (4,180) (65,798) Transferred to assets held for sale during the period ...... (20,968) — (20,607) — (41,575) Exchange differences ...... (14) — (53) (9) (76) At 29 December 2012 ...... 68,792 5,594 143,802 5,983 224,171 Additions ...... — 649 3,671 — 4,320 Disposals ...... — (13) (22,458) (1,147) (23,618) Transferred to assets held for sale during the period ...... (5,011) (81) (786) — (5,878) Reclassification ...... (11) 98 (87) — — Exchange differences ...... 12 — 43 5 60 At 28 December 2013 ...... 63,782 6,247 124,185 4,841 199,055 Depreciation At 31 December 2011 ...... 13,848 1,746 130,120 9,660 155,374 Disposals ...... (964) (55) (56,539) (4,156) (61,714) Charge for the period ...... 3,954 168 8,214 379 12,715 Exceptional write down in period ...... — — 17,239 — 17,239 Transferred to assets held for sale during the period ...... (6,707) — (19,886) — (26,593) Exchange differences ...... (27) — (38) (8) (73) At 29 December 2012 ...... 10,104 1,859 79,110 5,875 96,948 Disposals ...... — (12) (22,108) (1,145) (23,265) Charge for the period ...... 990 173 6,296 84 7,543 Exceptional write down in period ...... 25,566 444 37,685 — 63,695 Transferred to assets held for sale during the period ...... (673) 1,364 (800) — (109) Reclassification ...... (145) 9 136 — — Exchange differences ...... 17 (1) 42 4 62 At 28 December 2013 ...... 35,859 3,836 100,361 4,818 144,874 Carrying amount At 29 December 2012 ...... 58,688 3,735 64,692 108 127,223 At 28 December 2013 ...... 27,923 2,411 23,824 23 54,181
F-34 During the period, as a result of structural rationalisations, increased centralisation, divisional and title reorganisations and closure of specific operations particularly presses, the Group carried out a review of the recoverable amount of its print manufacturing plant and related equipment. These assets are used in the Group’s print segment. The review led to the recognition of an impairment loss of £62.3 million which has been recognised in the Income Statement. The Group also estimated the fair value less costs to sell of its print plant and related equipment, which is based on the recent market prices of assets with similar age and obsolescence. The fair value less costs to sell is less than the value in use and hence the recoverable amount of the relevant assets has been determined on the basis of their value in use. The discount rate used in measuring value in use was 12% per annum.
Additional impairment losses recognised in respect of property, plant and equipment in the period amounted to £1.4 million. These losses reflect the Group’s future expected use of the asset, resulting in value in use reflecting the cash flows from proposed disposal of the asset. Those assets have been impaired in full and belong to the Group’s publishing segment. The impairment losses have been included in the Income Statement in the cost of sales line item.
17. Available for sale investments
The Group’s available for sale investments are:
2013 2012 £’000 £’000 Listed investments at fair value ...... 2 2 Unlisted investments Cost ...... 4,494 4,494 Provision for impairment ...... (3,526) (3,526) Unlisted investments carrying amount ...... 968 968 Total investments ...... 970 970
Listed investments at fair value represents investments in listed equity securities that present the Group with opportunity for return through dividend income and trading gains. The Group holds a strategic non-controlling interest of 3.53% in Press Association Group Limited. These shares are not held for trading and accordingly are classified as available for sale. The fair values of all equity securities are based on quoted market prices.
The fair value of unlisted investments is determined by the Directors, as set out in the accounting policies in Note 3.
18. Interests in associates
The Group’s associated undertakings at the period end are:
Place of Proportion of Proportion of Method of incorporation ownership voting accounting Name and operation interest power held for investment Classified Periodicals Ltd ...... England 50% 50% Equity method
F-35 The aggregate amounts relating to associates are:
2013 2012 £’000 £’000 Total assets ...... 47 43 Total liabilities ...... (3) (3) Revenues ...... 26 26 Profit after tax ...... 2 6
19. Assets classified as held for sale
Freehold land and Leasehold Plant and buildings buildings machinery Total £’000 £’000 £’000 £’000 Cost At 31 December 2011 ...... 10,591 745 666 12,002 Disposals ...... (9,666) — (535) (10,201) Transferred from property, plant and equipment during period ...... 20,968 — 20,607 41,575 Exchange differences ...... (12) (16) — (28) At 29 December 2012 ...... 21,881 729 20,738 43,348 Disposals ...... (4,036) — (17,947) (21,983) Transferred from property, plant and equipment during period ...... 5,011 81 786 5,878 Exchange differences ...... 10 14 — 24 At 28 December 2013 ...... 22,866 824 3,577 27,267 Depreciation At 31 December 2011 ...... 7,456 745 563 8,764 Disposals ...... (6,921) — (483) (7,404) Write down in carrying value(1) ...... 7,680 — 137 7,817 Transferred from property, plant and equipment during period ...... 6,707 — 19,886 26,593 Exchange differences ...... (7) (16) — (23) At 29 December 2012 ...... 14,915 729 20,103 35,747 Disposals ...... (2,026) — (17,879) (19,905) Write down in carrying value ...... 3,249 1,409 13 4,671 Transferred from property, plant and equipment during period ...... 673 (1,364) 800 109 Reclassification ...... (291) — 291 — Exchange differences ...... 6 14 — 20 At 28 December 2013 ...... 16,526 788 3,328 20,642 Carrying amount At 29 December 2012 ...... 6,966 — 635 7,601 At 28 December 2013 ...... 6,340 36 249 6,625 (1) £7.8 million of write-down in carrying value consists of £7.5 million reported as non-recurring Exceptional items (Note 7) and £0.3m reported as Operating expense.
Assets classified as held for sale consists of land and buildings in the UK and Republic of Ireland that are no longer in use by the Group and print presses that have ceased production. All of the assets are being marketed for sale and are expected to be sold within the next year.
F-36 20. Inventories
2013 2012 £’000 £’000 Raw materials ...... 2,545 2,850
21. Other financial assets and liabilities
Trade and other receivables
2013 2012 £’000 £’000 Current: Trade receivables ...... 29,534 34,800 Allowance for doubtful debts ...... (2,538) (3,557) 26,996 31,243 Prepayments ...... 3,693 4,740 Other debtors ...... 6,029 5,645 Total current trade and other receivables ...... 36,718 41,628 Non-current: Trade receivables ...... 6 6
Trade receivables The average credit period taken on sales is 39 days (2012: 41 days). No interest is charged on trade receivables. The Group has provided for estimated irrecoverable amounts in accordance with the accounting policy described in Note 3.
Before accepting any new credit customer, the Group obtains a credit check from an external agency to assess the potential customer’s credit quality and then defines credit terms and limits on a by-customer basis. These credit terms are reviewed regularly. In the case of one-off customers or low value purchases, pre-payment for the goods is required under the Group’s policy. The Group reviews trade receivables past due but not impaired on a regular basis and considers, based on past experience, that the credit quality of these amounts at the period end date has not deteriorated since the transaction was entered into and so considers the amounts recoverable. Regular contact is maintained with all such customers and, where necessary, payment plans are in place to further reduce the risk of default on the receivable.
Included in the Group’s trade receivable balance are debtors with a carrying amount of £12.6 million (2012: £14.6 million) which are past due at the reporting date but for which the Group has not provided as there has not been a significant change in credit quality and the Group believes that the amounts are still recoverable. The Group does not hold any security over these balances. The weighted average past due period of these receivables is 26 days (2012: 26 days).
Ageing of past due but not impaired trade receivables
2013 2012 £’000 £’000 0 - 30 days ...... 9,003 10,093 30 - 60 days ...... 2,956 3,956 60 - 90 days ...... 236 108 90+ days ...... 378 406 Total ...... 12,573 14,563
F-37 Movement in the allowance for doubtful debts
2013 2012 £’000 £’000 Balance at the beginning of the period ...... 3,557 5,626 Bad debts written off during the year as uncollectible ...... (1,510) (3,430) Amounts provided for during the year as uncollectible ...... 468 1,379 Foreign exchange translation gains and losses ...... 23 (18) Movement in the period (Note 8) ...... (1,019) (2,069) Balance at the end of the period ...... 2,538 3,557
In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the balance sheet date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the Directors believe that there is no further credit provision required in excess of the allowance for doubtful debts.
Ageing of impaired trade receivables Impaired trade receivables are those that have been provided for under the Group’s bad debt provisioning policy, as described in the accounting policy in Note 3. The ageing of impaired trade receivables is shown below.
2013 2012 £’000 £’000 0 - 30 days ...... 541 443 30 - 60 days ...... 20 21 60 - 90 days ...... 359 501 90+ days ...... 1,618 2,592 Total ...... 2,538 3,557
The Directors consider that the carrying amount of trade and other receivables at the balance sheet date approximate to their fair value.
Cash and cash equivalents Cash and cash equivalents totalling £29,075,000 (2012: £32,789,000) comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.
Trade and other payables
2013 2012 £’000 £’000 Current: Trade creditors and accruals ...... 34,330 32,244 Accrual for redundancy costs ...... 20,437 2,617 Other creditors ...... 19,246 16,073 Total current trade and other payables ...... 74,013 50,934 Non-current trade and other creditors ...... 136 142
Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 27 days (2012: 33 days). The Group has financial risk management policies in place to ensure all payables are paid within the agreed credit terms.
F-38 The redundancy accrual has been made for terminations agreed ahead of the year end and to be paid during 2014.
The Directors consider that the carrying amount of trade payables at the balance sheet date approximate to their fair value.
22. Borrowings
Borrowings shown at amortised cost at the period end were:
2013 2012 £’000 £’000 Bank loans ...... 200,851 227,316 Private placement loan notes ...... 110,994 119,162 Payment-in-kind interest accrual ...... 20,372 8,535 Total borrowings excluding term debt issue costs ...... 332,217 355,013 Term debt issue costs ...... (8,801) (12,273) Total borrowings ...... 323,416 342,740
The borrowings are disclosed in the financial statements as:
2013 2012 £’000 £’000 Current borrowings ...... 8,553 8,520 Non-current borrowings ...... 314,863 334,220 Total borrowings ...... 323,416 342,740
The Group’s net debt(1) is:
2013 2012 £’000 £’000 Gross borrowings as above ...... 323,416 342,740 Cash and cash equivalents ...... (29,075) (32,789) Impact of currency hedge instruments ...... (1,104) (2,854) Net debt including currency hedge instruments ...... 293,237 307,097 Term debt issue costs ...... 8,801 12,273 Net debt excluding term debt issue costs ...... 302,038 319,370 (1) Net debt is a non statutory term presented to show the Group’s borrowings net of cash equivalents, fair value of foreign exchange options and term debt issue costs.
F-39 Analysis of borrowings by currency:
Total Sterling Euros US dollars £’000 £’000 £’000 £’000 At 28 December 2013 Bank loans ...... 200,851 188,318 12,533 — Private placement loan notes ...... 110,994 32,179 — 78,815 Term debt issue costs ...... (8,801) (8,801) — — Payment-in-kind interest accrual ...... 20,372 15,084 — 5,288 323,416 226,780 12,533 84,103 At 29 December 2012 Bank loans ...... 227,316 215,015 12,301 — Private placement loan notes ...... 119,162 33,956 — 85,206 Term debt issue costs ...... (12,273) (12,273) — — Payment-in-kind interest accrual ...... 8,535 6,342 — 2,193 342,740 243,040 12,301 87,399
Bank loans The Group has credit facilities with a number of banks. The total facility at 28 December 2013 is £225.2 million (2012: £237.5 million) of which £24.4 million is unutilised at the balance sheet date (2012: £10.0 million). The credit facilities are provided under two separate tranches as detailed below.
• Facility A—a revolving credit facility of £55.0 million. This facility includes a bank overdraft facility of £10.0 million (2012: £10.0 million). The loans can be drawn down for three month terms with interest payable at LIBOR plus a maximum cash margin of 5.00% (2012: 5.00%).
• Facility B—a term loan facility of £170.2 million (2012: £182.5 million), which can be drawn in Sterling or Euros. Interest is payable quarterly at LIBOR plus a cash margin of up to 5.00% (2012: 5.00%).
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 and interest rate caps. At the balance sheet date, borrowings of £nil million (2012: £30.0 million) were arranged at fixed rate, while a further £180.0 million borrowings (2012: £180.0) were hedged through interest rate caps. Further details on all of the Group’s derivative instruments can be found in Note 32.
Private placement loan notes The Group has total private placement loan notes at 28 December 2013 of £32.3 million and $130.7 million (2012: £34.0 million and $137.8 million). Interest is payable quarterly at fixed coupon rates up to 10.30% (2012: 10.30%) depending on covenants.
The private placement loan notes consist of:
• £32.3 million at a coupon rate of up to 10.30% (2012: £34.0 million at a coupon rate of up to 10.30%)
• $55.7 million at a coupon rate of up to 9.75% (2012: $58.7 million at a coupon rate of up to 9.75%)
• $26.6 million at a coupon rate of up to 10.18% (2012: $28.1 million at a coupon rate of up to 10.18%)
• $48.4 million at a coupon rate of up to 10.28% (2012: $51.0 million at a coupon rate of up to 10.28%)
F-40 In order to hedge the Group’s exposure to US dollar exchange rate fluctuations, the Group has in place foreign exchange options. These options allow the Group to purchase US dollars at a set exchange rate, hedging the Group’s cash flow risk if the market rate falls below the set rate. The options are in place to cover all interest payments and scheduled principal repayments due on the US denominated private placement notes.
Repayments All facilities are due for full repayment on 30 September 2015.
Scheduled repayments are due every six months in relation to both the bank loans and private placement loan notes. Scheduled repayments total £70.0 million from 30 June 2012 to 30 June 2015. As at 28 December 2013 £30.0 million remained payable, with £5.0 million paid on 31 December 2013.
A schedule of pay-if-you-can (PIYC) repayments are also agreed for both the bank loans and private placement notes totalling £60.0 million up to 30 June 2015. As at 28 December 2013 £52.5 million remained payable, with £7.5 million paid on 31 December 2013.
In addition, the Company is required to make mandatory repayments equivalent to 75% of the net proceeds of certain asset disposals with the remaining 25% payable to the Johnston Press Pension Plan (note 24). During the period, the Company made repayments totalling £3.5 million in respect of asset disposals.
Covenant reset On 27 December 2013, the Company and its lenders agreed to reset its financial covenants until maturity in September 2015. A fee of £0.5 million was paid to the lenders on completion of this agreement. This fee has been capitalised and amortised over the period to maturity.
Payment-in-kind interest In addition to the cash margin payable on the bank facilities and private placement loan notes, a payment-in-kind (PIK) margin accumulates and is payable at the end of the facility. The PIK accrues at a maximum margin of 4.0% depending on the absolute amount of debt outstanding and leverage multiples. If the facilities are fully repaid prior to 31 December 2014, the rate at which the PIK margin accrued throughout the period of the agreement will be recalculated at a substantially reduced rate.
Refinancing The Company announced on 27 December 2013 that it had reset its financial covenants through to the maturity of its debt facilities in September 2015 and intends to pursue a refinancing of its debt facilities in 2014. On 3 March 2014 the Company announced that as part of a proposed refinancing of its debt facilities it is considering a range of options including a potential equity fundraising. Since then, the Company has made good progress evaluating a number of options, including a potential equity fund-raising which would be interconditional with a refinancing of its debt facilities and restructuring its pension arrangements. There can be no certainty that a refinancing of its debt facilities will be concluded in 2014, nor that an equity fundraising will proceed.
No adjustments have been made to the financial statements to reflect any early repayment that may arise from a refinancing.
F-41 Interest rates: The weighted average interest rates paid over the course of the year were as follows:
2013 2012 %% Bank overdrafts ...... 5.5 5.5 Bank loans ...... 10.6 11.3 Private placement loan notes ...... 13.9 12.5 11.7 11.7
23. Derivative financial instruments
Derivatives that are carried at fair value are as follows:
2013 2012 £’000 £’000 Interest rate swaps—current liability ...... — (99) Interest rate caps—current asset ...... 4 — Interest rate caps—non-current asset ...... — 43 Foreign exchange options—current asset ...... 1,104 155 Foreign exchange options—non-current asset ...... — 2,699 Total derivative financial instruments ...... 1,108 2,798
24. Retirement benefit obligation
Throughout 2013 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.
• An ROI industry-wide final salary scheme for journalists which was closed on 31 October 2012 and a final salary scheme for a small number of employees in Limerick which has been closed to future accruals since 2010. Consequently, the Group’s obligation 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 and closed to future accrual in 2010. 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 to the defined benefit scheme are fixed annual amounts with the intention of eliminating the deficit. Based on the outcome of the triennial valuation at 31 December 2010, the fixed annual contribution amount is £5.7 million from 1 June 2012 under the schedule of contributions agreed between the Company and the JPPP Trustees. These were paid in full during the period. In accordance with the amended and restated finance agreement dated 24 April 2012, the Company is required to make additional contributions equivalent to 25% of the net proceeds of certain asset disposals. During the period, the Company made additional contributions of £1.2 million following the disposal of such qualifying assets. As the defined benefit scheme has been closed to new members for a considerable period the last deferred member is scheduled to retire in 35 years with, at current mortality assumptions, the last pension paid in around 80 years (based on the mortality assumptions used for the 2010 triennial valuation). 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.
F-42 During 2011 and 2012, the Company carried out pension exchange exercises whereby a number of pensioner members were made an offer by the Company to exchange some of their future pension increases for a one-off increase in pension, where the new uplifted amount would no longer be eligible for increases in payment. There was no such exercise in 2013.
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 employees and pensioner members. The trustees appoint their own advisers and administrators of the Plan. Discussions take place with the Executive Directors of the Company to agree matters such as the contribution rates.
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 for the defined contribution schemes and Irish schemes in 2013 was £4,550,000 (2012: £6,724,000) (Note 9).
Major assumptions re JPPP pension scheme:
2013 2012 Discount rate ...... 4.65% 4.5% Expected return on scheme assets ...... 5.5% 5.6% Future pension increases Deferred revaluations (CPI) ...... 2.4% 1.9% Pensions in payment (RPI) ...... 3.4% 2.8% Life expectancy Male...... 22.1 23.1 years Female...... 24.1 23.1 years
The valuation of the defined benefit scheme’s 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:
• A change in the discount rate of 0.1% pa would change the value of liabilities by approximately 1.5% or £7.6 million.
• A change in the life expectancy by a 10% adjustment to the base table mortality rates would change liabilities by approximately 2.4% or £11.9 million.
• A change in the inflation rate of 0.1% pa would change the value of the liabilities by 0.8% or £4.0 million.
Amounts recognised in the Income Statement in respect of defined benefit schemes:
2013 2012 £’000 £’000 Net interest expense ...... 1,576 2,471 Past service gain (note 7) ...... — (1,540) 1,576 931
There was no current service cost in 2013 (2012: £nil) as the Defined Benefit scheme was closed to future accrual in 2010.
An actuarial gain of £37,695,000 (2012: loss of £21,065,000) has been recognised in the Group Statement of Comprehensive Income in the current period. This has been shown net of deferred tax of £8,670,000 (2012: £5,188,000). The cumulative amount of actuarial gains and
F-43 losses recognised in the Group Statement of Comprehensive Income since the date of transition to IFRS is a loss of £67,835,000 (2012: loss of £105,530,000). The actual return on scheme assets was a £50,989,000 profit (2012: £28,494,000 profit).
Amounts included in the Statement of Financial Position:
2013 2012 £’000 £’000 Present value of defined benefit obligations ...... 498,640 504,111 Fair value of plan assets ...... (420,306) (382,792) Total liability recognised in the Statement of Financial Position ...... 78,334 121,319 Amount included in current liabilities ...... (5,700) (5,700) Amount included in non-current liabilities ...... 72,634 115,619
The amounts of contributions committed to be paid to the scheme during 2014 is £5,700,000 (2013: £5,700,000) plus share of asset disposal proceeds, as agreed as part of the formal actuarial valuation undertaken as at 31 December 2010.
The Pension Fund Trustees are taking professional advice, including actuarial input, to determine whether any employer debt is payable to the Plan following the previous cessation of five participating employers. At period end, £1.3 million has been provided for.
The levy payable by the Pension Fund to the Pension Protection Fund for the year to 31 March 2013 was £3.1 million and for the year to 31 March 2014 is £3.2 million. The Group has committed to the Pension Fund to underwrite any annual charge in excess of £0.7 million. The Group has paid £1.5 million during the period and at period end has accrued £1.0 million in connection with the year to 31 March 2013 and a further £1.9 million has been provided for the nine month period to 28 December 2013 within trade and other payables. It is expected that this levy will continue in 2014. The level of increase in charges is not known at this point.
During the period the Pension Fund Trustees have agreed to carry out a formal actuarial valuation at 31 December 2012 effective as at one year ahead of the next planned valuation date of 31 December 2013. The outcome of the review will not be formalised until after the reporting date. The Trustees have indicated that they will seek an increase in the committed annual contributions. The Trustees are also consulting with the Group about planned changes to the Investment strategy of the Plan to reduce the level of risk.
Movements in the present value of defined benefit obligations:
2013 2012 £’000 £’000 Balance at the start of the period ...... 504,111 472,708 Interest costs ...... 22,227 22,708 Age related rebates ...... 511 630 Changes in assumptions underlying the defined benefit obligations ...... (7,357) 29,322 Past service gain ...... — (1,540) Benefits paid ...... (20,852) (19,717) Balance at the end of the period ...... 498,640 504,111
F-44 Movements in the fair value of plan assets:
2013 2012 £’000 £’000 Balance at the start of the period ...... 382,792 368,718 Expected return on plan assets ...... 20,651 20,237 Actual return less expected return on plan assets ...... 30,338 8,257 Contributions from the sponsoring companies ...... 6,866 4,667 Age related rebates ...... 511 630 Benefits paid ...... (20,852) (19,717) Balance at the end of the period ...... 420,306 382,792
Analysis of the plan assets and the expected rate of return:
Expected return Fair value of assets 2013 2012 2013 2012 % % £’000 £’000 Equity instruments ...... 6.8 6.8 268,394 240,011 Debt instruments ...... 3.6 3.8 115,370 100,674 Property ...... 4.8 4.8 11,366 17,991 Other assets ...... 1.7 2.7 25,176 24,116 5.5 5.6 420,306 382,792
Five year history:
2013 2012 2011 2010 2009 £’000 £’000 £’000 £’000 £’000 Fair value of scheme assets ...... 420,306 382,792 368,718 385,309 362,006 Present value of defined benefit obligations ...... (498,640) (504,111) (472,708) (446,095) (446,114) Deficit in the plan ...... (78,334) (121,319) (103,990) (60,786) (84,108) Experience adjustments on scheme liabilities Amount (£’000) ...... 7,357 (29,332) (22,524) 2,925 (100,425) Percentage of plan liabilities (%) ...... 1.5% (5.8%) (4.8%) 0.7% (22.5%) Experience adjustments on scheme assets Amounts (£’000) ...... 30,338 8,257 (27,060) 11,139 29,137 Percentage of plan assets (%) ...... 7.5% 2.2% (7.3%) 2.9% 8.0%
F-45 25. Deferred tax
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods.
Share-based Properties Accelerated tax Intangible Pension Other timing payments not eligible depreciation assets balances differences Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 At 31 December 2011 ...... — 13,233 9,679 185,713 (25,997) (1,019) 181,609 (Credit)/charge to income statement ...... — (1,437) (3,866) — 934 392 (3,977) Credit to equity ...... — — — — (5,266) — (5,266) Reduction in tax rate—income statement ...... — (852) (474) (12,787) 2,005 38 (12,070) Reduction in tax rate—equity .... — — — — 421 — 421 Currency movements ...... — — 3 (140) — 4 (133) At 29 December 2012 ...... — 10,944 5,342 172,786 (27,903) (585) 160,584 (Credit)/charge to income statement ...... (202) (4,392) (9,909) (41,667) 1,217 (1,037) (55,990) Credit to equity ...... (20) — — — 8,642 — 8,622 Reduction in tax rate—income statement ...... — (801) 584 (22,972) 3,481 211 (19,497) Reduction in tax rate—equity .... — — — — (1,131) — (1,131) Currency movements ...... — — (1) 189 — — 188 At 28 December 2013 ...... (222) 5,751 (3,984) 108,336 (15,694) (1,411) 92,776
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (before offset) for financial reporting purposes:
2013 2012 £’000 £’000 Deferred tax liabilities ...... 114,087 189,072 Deferred tax assets ...... (21,311) (28,488) 92,776 160,584
Temporary differences arising in connection with interests in associates are insignificant.
26. Provisions
Onerous leases and dilapidations Pensions Total £’000 £’000 £’000 At 29 December 2012 ...... 3,870 1,726 5,596 Charge to income statement ...... 1,607 — 1,607 Actuarial valuation loss(1) ...... — 223 223 Actuarial valuation gain(1) ...... — (97) (97) Utilisation of provision ...... (1,229) — (1,229) At 28 December 2013 ...... 4,248 1,852 6,100 The provisions are disclosed in the financial statements as: Current provisions ...... 1,796 — 1,796 Non-current provisions ...... 2,452 1,852 4,304 Total provisions ...... 4,248 1,852 6,100 (1) Net actuarial loss of £126,000 relates to two unfunded pension schemes. Deferred tax impact of these relate to £36,000. Consequently, £90,000 has been recognised on the Statement of Comprehensive Income.
F-46 Onerous leases and dilapidations Where the Group exits a rented property, an estimate of the anticipated total future cost payable under the terms of the operating lease, including rentals, rates and other related expenses is provided for at the point of exit as an onerous lease.
Under the terms of a number of property leases, the Group is required to return the property to its original condition at the lease expiry date. The Group has estimated the expected costs of leases expiring or expected to be terminated and has also assessed the entire portfolio and made provisions depending on the state of the property and the duration of the lease and likely rectification requirements.
All amounts are expected to be utilised within the next ten years.
Pensions The closing provision relates to unfunded pensions of £1.4 million (2012: £1.2 million), post-retirement medical benefit pension related liabilities for former Portsmouth and Sunderland members £0.2 million (2012: £0.2 million) and obligations to an Irish industry sponsored pension scheme £0.2 million (2012: £0.3 million). The unfunded pension provision and obligations to industry sponsored pension schemes are assessed by a qualified actuary at each period end. The post retirement health costs represent management’s estimate of the liability concerned.
27. Share capital
2013 2012 £’000 £’000 Issued 684,352,165 Ordinary Shares of 10p each (2012: 639,746,083) ...... 68,435 63,975 756,000 13.75% Cumulative Preference Shares of £1 each (2012: 756,000) .... 756 756 349,600 13.75% ‘A’ Preference Shares of £1 each (2012: 349,600) ...... 350 350 Total issued share capital ...... 69,541 65,081
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.
During the period 44,428,306 ordinary shares of 10p each were issued following the exercise of share warrants, generating £4,443,000 of cash for the Company.
At the balance sheet date 35,193,717 warrants were outstanding.
In addition, 177,776 ordinary shares of 10p each were issued during the period following exercises under the Group Savings Related Share Option Scheme, generating £28,000 of cash for the Company.
F-47 28. Notes to the cash flow statement
Revised(1) 2013 2012 Note £’000 £’000 Operating (loss)/profit ...... (245,670) 40,441 Adjustments for: Impairment of publishing titles ...... 7 202,427 — Write down of printing presses ...... 7 63,695 17,239 Write down of assets held for sale ...... 7 4,671 7,817 Amortisation of intangible assets ...... 209 — Depreciation of Depreciation charges ...... 8 7,543 12,715 Currency differences ...... 8 (146) (59) Charge from share-based payments ...... 512 606 Gain on disposal of property, plant and equipment ...... (1,267) (2,047) Exceptional pension protection fund contribution ...... 2,908 — Exceptional Section 75 pension debt ...... 1,268 — Exceptional redundancy costs(2) ...... 17,820 2,617 Exceptional legal and other professional fees ...... 1,169 — Pension funding contributions ...... 24 (6,866) (4,668) IAS 19 past service gain (exceptional) ...... — (1,540) Movement in long-term provisions ...... 377 119 Working capital changes: Decrease in inventories ...... 305 1,859 Decrease in receivables ...... 4,910 6,769 Increase/(decrease) in payables(2)(3) ...... 672 (1,176) Cash generated from operations ...... 54,537 80,692 (1) The presentation of the 29 December 2012 ‘exceptional redundancy costs’ and ‘increase/(decrease) in payables’ numbers has been revised to be consistent with current year disclosures.
(2) Amounts decreased by £2,617,000 to correct prior year classification. This has been accounted for as a non cash item, as ‘exceptional redundancy costs’.
(3) Amounts increased by £4,594,000 to correct prior year classification. This has been recorded as ‘interest paid’ on the face of the primary cash flow statement. This adjustment did not in any way impact the prior year income statement, assets, liabilities or equity and is purely presentational in nature.
Cash and cash equivalents (which are presented as a single class of assets on the face of the Statement of Financial Position comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.
29. Commitments, guarantees and contingent liabilities
Lease commitments The Group has entered into non-cancellable operating leases in respect of motor vehicles and land and buildings, the payments for which extend over a period of years.
2013 2012 £’000 £’000 Minimum lease payments under operating leases recognised as an expense in the year ...... 6,927 5,688
F-48 At the period end date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows:
2013 2012 £’000 £’000 Within one year ...... 5,951 4,709 In the second to fifth years inclusive ...... 16,905 15,239 After five years ...... 25,415 23,191 Total future minimum lease payments ...... 48,271 43,139
The Group has entered into agreements with certain printers for periods up to 2015 at competitive prices and to secure supply. At the year end, the commitment to purchase printing capacity over this period was £1.8 million (2012: £nil)
Operating lease payments represent rentals payable by the Group for certain of its office properties and motor vehicle fleet. Leases are negotiated for an average term of 10 years in the case of properties and 4 years for vehicles. The rents payable under property leases are subject to renegotiation at various intervals specified in the lease contracts. The Group pays insurance, maintenance and repairs of these properties. The rents payable for the vehicle fleet are fixed for the full rental period.
Assets pledged as security Under the refinancing agreement signed on 28 August 2009 and amended and extended on 24 April 2012, the Group and all its material subsidiaries have entered into a security agreement with the Group’s bankers and private placement loan note holders. The security provided includes a fixed charge over the assets of the Group including investments, fixed assets, goodwill, intellectual property and a floating charge over its present and future undertakings.
Contingent liabilities Johnston Press Pension Plan The Johnston Press Pension Plan is subject to a potential increase in its liabilities due to benefit equalisation not having taken effect for a specific group of members. The Group’s lawyers have advised that an application to court be made and expect a successful outcome in the case. The Group is aiming to issue an application to court in the first half of 2014 with the expectation that the hearing would take place before the end of 2014. No provision has been made in the financial statements as the Group’s management does not consider that there is any probable loss however the maximum obligation in relation to this matter is expected to be in the region of £8 million, based on the most recent calculations.
Johnston Press Ireland Limited A number of contingent liabilities exist at 31 December 2013, regarding libel claims. Including legal costs to defend claims, total contingent liabilities are estimated at Euro 300,000.
Newspaper Society Pension Scheme The Company is a member of the Newspaper Society (the ‘‘Society’’), an unincorporated body representing the interests of local newspaper publishers. The Society has proposed plans to incorporate itself as a company limited by guarantee and to merge with the Newspaper Publishers’ Association (a body representing the interests of publishers of national newspapers). As part of those plans, it has proposed that existing members enter into a deed of covenant in respect of the deficit to the Society’s defined benefit pension scheme. Under that proposal, the members would agree to make agreed contributions over a period of 25 years or until such time as the deficit has been addressed. The Company anticipates being requested to enter into
F-49 such a deed of covenant and to make annual contributions thereunder in the region of £90,000.
As currently constituted, voting by members of the Society is proportionate to the their share of total subscriptions, which are based on the Eligible Revenue (as defined in the Rules of the Society). The Company has a c.21% voting interest in the Society. The deed of covenant will require the support of members of the Society controlling 90% of the votes in order to become effective. In the event that the deed of covenant does not become effective and/or the merger with the Newspaper Publishers’ Association does not take place, there is a risk that the Society will cease to continue its operations, potentially crystalising outstanding liabilities under its defined benefit pension scheme.
30. Share-based payments
Equity-Settled Share Option Scheme Options over ordinary shares are granted under the Executive Share Option Scheme. Options are exercisable at a price equal to the closing quoted market price of the Company’s shares on the day prior to the date of grant. The vesting period is 3 years. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. No options have been granted under the Executive Share Option Scheme since 2005.
Details of the share options outstanding during the period:
2013 2012 Weighted Weighted Number average Number average of share exercise of share exercise options price (in p) options price (in p) Outstanding at the beginning of period ...... 136,481 265 245,947 266 Lapsed/forfeited during the period ...... (136,481) 265 (109,466) 268 Outstanding at the end of the period ...... ——136,481 265 Exercisable at the end of the period ...... ——136,481 265
No share options were exercised during the period.
Previous grants were valued using the Black-Scholes model. As far as the assumptions were concerned, expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous full year. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
The Group recognised a charge of £nil related to equity-settled share-based payment transactions in 2013 for the Executive Share Option Scheme (2012: charge of £nil).
Group Savings-Related Share Option Scheme The Company operates a Group Savings-Related Share Option Scheme. This has been approved by the Inland Revenue and is based on eligible employees being granted options and their agreeing to save weekly or monthly in a sharesave account with Computershare Plan Managers for a period of either 3, 5 or 7 years. The 2013 invitation is with Yorkshire Building Society and under a change in HMRC rules is for a period of 3 or 5 years. The right to exercise is at the discretion of the employee within six months following the end of the period of saving.
F-50 Options outstanding under the Savings-Related Scheme at the period end:
Number of Issue price Option grant date shares per share 29 September 2006 ...... 13,278 224.76p 29 September 2006 ...... 4,002 228.80p 27 September 2007 ...... 24,259 226.41p 27 September 2007 ...... 2,566 220.17p 26 September 2008 ...... 709,488 37.60p 26 September 2008 ...... 16,655 37.60p 25 September 2009 ...... 501,358 28.60p 25 September 2009 ...... 37,699 28.60p 28 September 2010 ...... 4,446,570 15.75p 28 September 2010 ...... 11,459 15.75p 27 September 2013 ...... 13,041,770 13.28p 31 October 2013 ...... 73,327 12.04p
The Group recognised a net charge of £206,000 in 2013 (2012: charge of £220,000) related to equity-settled share-based payment transactions for the Savings-Related Share Option Scheme.
The above options granted on 29 September 2006 and earlier were issued to employees at a price equivalent to the average mid-market price for the 30 days prior to 27 August 2004, 2 September 2005 and 1 September 2006 respectively. The subsequent options were granted at the closing mid-market price on the day prior to the invitation being sent to employees on 3 September 2007, 1 September 2008, 1 September 2009, 1 September 2010, 30 August 2013 and 9 October 2013 respectively. This follows the approval of the revised Sharesave Scheme at the Annual General Meeting in April 2007. A discount of 20% to the average mid-market price was applied to the issues up to and including 2009. No discount was applied to the 2010 issue and a discount of 10% was applied to the 2013 issue.
There were no options granted under the Savings-Related Share Option Scheme in either 2011 or 2012.
Performance Share Plan The Company makes awards to Executive Directors and certain senior employees on an annual basis under the Performance Share Plan. The awards vest after three years if certain performance criteria are met during that period.
Awards outstanding under the Performance Share Plan at the period end:
Number of Market price Grant date shares on award Vesting dates 21 April 2011 ...... 4,026,742 7.40p 21 April 2014 31 May 2011 ...... 720,000 7.00p 31 May 2014 11 November 2011 ...... 10,471,204 4.78p 11 November 2014 14 September 2012 ...... 11,998,916 6.00p 14 September 2015 21 December 2012 ...... 180,000 14.50p 21 December 2015 5 June 2013 ...... 6,120,000 17.40p 5 June 2016
The Group recognised a net charge of £14,000 in 2013 (2012: net charge of £260,000) related to equity-settled share-based payment transactions for the Performance Share Plan.
Company Share Option Plan The Company granted options to certain senior managers to purchase shares in the Company at a certain market price, under the Company Share Option Plan. The awards vest after three years provided the employee remains employed by the Group.
F-51 Options outstanding under the Company Share Option Plan at the period end:
Number of Market price Grant date shares on award Vesting dates 28 June 2012 ...... 5,065,868 5.05p 28 June 2015 5 June 2013 ...... 6,059,177 17.40p 5 June 2016
The Group recognised a net charge of £95,000 in 2013 (2012: net charge of £12,000) related to equity-settled share-based payment transactions for the Company Share Option Plan.
Deferred Share Bonus Plan It is the Company’s policy that a proportion of any bonus paid to Executive Directors and certain senior employees is paid in shares deferred for three years. Shares are purchased at the time the bonus is awarded and held by the Company until either the three years are completed or the employee leaves and is treated as a good leaver. 2,333,591 shares are held by the Company in relation to the Deferred Share Bonus Plan.
The Group recognised a net charge of £197,000 in 2013 (2012: £114,000) related to equity- settled bonus payments for the Deferred Share Bonus Plan.
31. Related party transactions
Associated parties The Group undertook transactions, all of which were on an arms’ length basis, and had balances outstanding at the period end with related parties as shown below.
Purchases Creditors Sales Debtors 2013 2012 2013 2012 2013 2012 2013 2012 Related party £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Classified Periodicals Ltd ...... 20 22 5 3 — — — —
Classified Periodicals Ltd is an associated undertaking of Johnston Press plc, which re-publishes in a separate publication classified advertisements that appear in the Group’s titles and those of certain other publishers.
The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.
Transactions with Directors There were no material transactions with Directors of the Company during the year, except for those relating to remuneration and shareholdings, disclosed in the Directors’ Remuneration Report.
For the purposes of IAS 24, Related Party Disclosures, management executives below the level of the Company’s Board are not regarded as related parties.
The remuneration of the Directors at the year end, who are the key management personnel of the Group, is set out in aggregate in the audited part of the Directors’ Remuneration Report.
32. Financial instruments a) Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from 2012.
F-52 The capital structure of the Group consists of debt, which includes the borrowings disclosed in Note 22, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued share capital, reserves and retained earnings as disclosed in Note 27 and in the Group Statement of Changes in Equity. b) Gearing ratio The Board of Directors formally reviews the capital structure of the Group when considering any major corporate transactions. As part of these reviews, the Board considers the cost of capital and the risks associated with each class of capital. Based on the recommendations of the Board, the Group will balance its overall capital structure when appropriate through new share issues and share buy-backs as well as the issue of new debt or the redemption of existing debt.
The gearing ratio at the period end is as follows:
2013 2012 £’000 £’000 Debt ...... 323,416 342,740 Cash and cash equivalents ...... (29,075) (32,789) Net debt (excluding the impact of cross-currency hedges) ...... 294,341 309,951 Equity ...... 97,083 273,917 Gearing ratio ...... 75.2% 53.0%
Debt is defined as long and short-term borrowings as detailed in Note 22. Equity includes all capital and reserves of the Group attributable to equity holders of the parent. c) Externally imposed capital requirements The Group is not subject to externally imposed capital requirements. d) Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 3 to the financial statements. e) Categories of financial instruments
2013 2012 £’000 £’000 Financial assets (current and non-current) Derivative instruments ...... 1,108 2,897 Trade receivables ...... 26,996 31,243 Cash and cash equivalents ...... 29,075 32,789 Available for sale financial assets ...... 970 970 Financial liabilities (current and non-current) Derivative instruments ...... — (99) Trade payables ...... (14,475) (14,531) Borrowings at amortised cost ...... (323,416) (342,740) f) Financial risk management objectives The Group’s Corporate Treasury function provides services to the business and monitors and manages the financial risks relating to the operations of the Group through assessment of the exposures by degree and magnitude of risk. These risks include market risk (including currency risk and interest rate risk), credit risk, liquidity risk and cash flow interest rate risk.
F-53 The Group seeks to minimise the effects of these risks by using derivative financial instruments to hedge these risk exposures. The use of financial derivatives is governed by the Group’s policies approved by the Board and guidelines agreed with the Group’s lenders that must be operated within. The Group does not enter into or trade in financial instruments, including derivative financial instruments, for speculative purposes.
The Corporate Treasury function reports regularly to the Executive Directors and the Board. g) Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates (refer to section h) and interest rates (refer to section i). The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including:
• Borrowings in Euros to manage the foreign currency risk associated with the Group’s net investment in its foreign operations;
• Interest rate swaps and caps to mitigate the risk of rising interest rates; and
• Foreign currency options to manage the foreign currency risk associated with the US dollar denominated private placement loan notes.
At a Group and Company level, market risk exposures are assessed using sensitivity analyses.
There have been no significant changes to the Group’s exposure to market risks or the manner in which it manages and measures risk. h) Foreign currency risk management The Group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise.
The Group utilises currency derivatives to hedge significant future transactions and cash flows. In particular, the Group has a cash flow exposure to fluctuations in the US dollar on the private placement borrowings and interest payments. At the balance sheet date, the Group had in place a number of foreign exchange options which allow the Group to purchase US dollars at a set exchange rate when interest and principal payments are due on the borrowings. This protects the Group’s cashflows if the US dollar rate falls below the agreed option rate.
The following table details the forward foreign currency options outstanding as at the period end:
Average US $ value Notional value Fair value exchange rate 2013 2012 2013 2012 2013 2012 2013 2012 $’000 $’000 £’000 £’000 £’000 £’000 Within 1 year ...... 1.55 1.55 146,300 24,400 94,387 15,742 1,104 155 1 to 2 years ...... 1.55 1.55 — 153,800 — 99,226 — 2,699 1.55 1.55 146,300 178,200 94,387 114,968 1,104 2,854
F-54 The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:
Liabilities Assets 2013 2012 2013 2012 £’000 £’000 £’000 £’000 Euro Trade receivables ...... — — 1,546 1,239 Cash and cash equivalents ...... — — 2,980 1,845 Trade payables ...... (1,565) (1,730) — — Borrowings ...... (12,533) (12,301) — — US dollar Cash and cash equivalents ...... — — 4,895 94 Borrowings ...... (84,103) (87,399) — —
Foreign currency sensitivity As noted above, the Group is mainly exposed to movements in Euros and US Dollars rates. The following table details the Group’s sensitivity to a 5% change in pounds Sterling against the Euro and a 5% change in pounds Sterling against the US Dollar. These percentages are the rates used by management when assessing sensitivities internally and represent management’s assessment of the possible change in foreign currency rates.
The sensitivity analysis of the Group’s exposure to foreign currency risk at the reporting date has been determined based on the change taking place at the beginning of the financial year and held constant throughout the reporting period. A positive number indicates an increase in profit or loss and other equity where pounds Sterling strengthens against the respective currency. For a 5% weakening of the Sterling against the relevant currency, there is an equal and opposite impact on profit or loss and other equity, and the balances below reverse signs.
Euro US Dollar currency currency impact impact 2013 2012 2013 2012 £’000 £’000 £’000 £’000 Profit or loss ...... 436 462 3,959 4,262 Other equity ...... — — — —
Of the impact on profit or loss an increase of £597,000 (2012: increase of £586,000) relates to the retranslation of the Group’s Euro denominated borrowings. The £3,959,000 (2012: £4,262,000) impact on profit or loss from US Dollar exposure relates to the retranslation of US Dollar private placement loan notes. i) Interest rate risk management The Group is exposed to interest rate risk as the parent company borrows funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings and by the use of interest rate swap contracts and interest rate caps. Hedging activities are evaluated regularly to align interest rate views, define risk appetite and the requirements of the funding agreements in place, ensuring optimal hedging strategies are applied, by either positioning the balance sheet or interest expense through different interest rate cycles.
Interest rate sensitivity The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the period end date. For floating rate
F-55 liabilities, the analysis is prepared assuming the amount of the liability outstanding at the period end date was outstanding for the whole year. A 50 basis points increase is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the possible change in interest rates.
At the reporting date, if interest rates had been 50 basis points higher and all other variables were held constant, the Group’s:
• net profit would decrease by £682,000 (2012: net profit would decrease by £499,000), mainly due to the impact of increased interest on Sterling denominated borrowings; and
• net profit would increase by £nil (2012: net profit would increase by £36,000) as a result of the changes in the fair value of the Group’s cash flow hedges.
For a decrease of 50 bps, the numbers shown above would have the opposite effect.
Interest rate swap contracts Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the fair value of issued fixed rate debt held and the cash flow exposures on the issued floating rate debt held.
The following tables detail the notional principal amounts and remaining terms of interest rate swap contracts outstanding as at the reporting date. The average interest rate is based on the outstanding balances at the end of the financial year. In the tables below, positive values in the fair value columns denote financial assets and negative values denote financial liabilities.
Cash flow hedges (outstanding receive floating: pay fixed contracts)
Average contract Notional fixed interest principal amount Fair value 2013 2012 2013 2012 2013 2012 % % £’000 £’000 £’000 £’000 Within 1 year ...... — 1.90 — 30,000 — (99) — 1.90 — 30,000 — (99)
The interest rate swaps settle on a quarterly basis with interest being paid monthly or quarterly on the underlying principal amount. The floating rate on the interest rate swaps is 3 months LIBOR. The Group settles the difference between the fixed and floating interest rates on a net basis. All interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest rate amounts are entered into in order to reduce the Group’s cash flow exposure resulting from variable interest rates on borrowings.
All of the hedges shown in the table above matured during 2013.
Interest rate caps Under interest rate caps, the Group has previously capped the floating 3 month LIBOR rate through a one-off upfront payment. This protects the Group from interest rates rising above
F-56 the cap, while continuing to pay floating LIBOR while it remains below the cap. The interest rate caps settle on a quarterly basis.
Notional Interest rate cap principal amount Fair value 2013 2012 2013 2012 2013 2012 % % £’000 £’000 £’000 £’000 Within 1 year(1) ...... 2.0 — 180,000 — 4 — 2 to 5 years ...... — 2.0 — 180,000 — 43 2.0 2.0 180,000 180,000 4 43 (1) Expires on 31 December 2014
Measurement Financial instruments that are measured subsequent to initial recognition at fair value are grouped into 3 levels based on the extent to which the fair value is observable. The levels are classified as follows:
Level 1: fair value is based on quoted prices in active markets for identified financial assets and liabilities.
Level 2: fair value is determined using directly observable inputs other than level 1 inputs.
Level 3: fair value is determined on inputs not based on observable market data.
In the current and prior period, the foreign currency options and interest rate caps are classified as level 2 financial instruments. The available for sale investments are classified as level 3 financial instruments. There have been no transfers between the various levels of the fair value hierarchy during the period. j) Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties as a way of mitigating the risk of financial loss from defaults. The Group’s policy on dealing with trade customers is described in Notes 3 and 21.
The Group’s exposure and the credit ratings of its counterparties are continuously monitored. As far as possible, the aggregate value of transactions is spread across a number of approved counterparties.
Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable.
The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics, the latter being defined as connected entities, other than with some of the larger advertising agencies. In the case of the latter, a close relationship exists between the Group and the agencies and appropriate allowances for doubtful debts are in place. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies, and the funds and financial instruments are held with a number of banks to spread the risk.
F-57 The following table shows the total estimated exposure to credit risk for all of the Group’s financial assets, excluding trade receivables which are discussed in Note 21:
2013 2012 Carrying Exposure to Carrying Exposure to value credit risk value credit risk £’000 £’000 £’000 £’000 Available for sale investments ...... 970 — 970 — Cash and cash equivalents ...... 29,075 — 32,789 — Derivative instruments ...... 1,108 — 2,897 — 31,153 — 36,656 — k) Liquidity risk management Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has agreed an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Included in Note 22 is a description of additional undrawn facilities that the Group has at its disposal to further reduce liquidity risk.
Liquidity risk is further discussed in the Financial Review.
Liquidity and interest risk tables The following tables detail the Group’s remaining contractual maturity for its non-derivative financial liabilities as at 28 December 2013. The tables have been drawn up on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows.
Period ended 28 December 2013
Private Bank placement Trade loans notes payables Total £’000 £’000 £’000 £’000 Within 1 year ...... 17,612 14,372 14,475 46,459 In 1 to 2 years ...... 205,073 118,899 — 323,972 222,685 133,271 14,475 370,431
Period ended 29 December 2012
Private Bank placement Trade loans notes payables Total £’000 £’000 £’000 £’000 Within 1 year ...... 19,025 15,236 14,531 48,792 In 1 to 2 years ...... 18,704 14,870 — 33,574 In 2 to 5 years ...... 225,882 123,753 — 349,635 263,611 153,859 14,531 432,001
F-58 The maturity profile of the Group’s financial derivatives (which include interest rate and foreign currency caps, swaps and options), using undiscounted cash flows, is as follows:
2013 2012 Payable Receivable Payable Receivable £’000 £’000 £’000 £’000 Within 1 year ...... ——284 75 In 1-2 years ...... ———— ——284 75
The Group has access to financial facilities, the total unutilised amount of which is £24.0 million (2012: £10.0 million) at the reporting date. The Group expects to meet its obligations from operating cash flows and proceeds of maturing financial assets. l) Fair value of financial instruments The fair values of financial assets and financial liabilities are provided by the counterparty to the instrument.
Interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates. Foreign exchange options are valued based on future cash flows, estimated based on forward exchange rates (from observable forward exchange rates at the end of the reporting period) and contract forward rates, discounted at a rate that reflects the credit risk of various counterparties.
Interest rate caps are valued by projecting the future floating cash flows that will occur for the remainder of the term of the interest rate cap contract and then discounting the cash-flows to the valuation date using a discount factor interpolated off a zero-coupon yield curve. The future cash-flows are determined by taking into account the probability of the cap being exercised based on implied forward rates calculated with reference to the interest rate volatilities.
The fair value of unlisted investments is determined by the Directors (Note 17).
33. Post balance sheet events
Discussions are at an advanced stage in relation to the possible sale of the Group’s 14 regional newspapers in the Republic of Ireland which include the Leinster Leader, the Donegal Democrat, the Limerick Leader and the Kilkenny People, and certain freehold property interests, fixtures, fittings and vehicles as announced on 2 December 2013.
The value in use for the Irish assets reflects expected disposal proceeds on the basis that at the balance sheet date, discussions were well progressed and management’s intention was committed to selling the assets.
The assets, included in the proposed disposal, have not been reported as assets held for sale given the sale does not meet the strict criteria that the sale must be deemed ‘‘highly probable’’ and neither Board or bank approval has been achieved.
F-59 Group five-year summary(1) 2009(1) 2010(1) 2011(1) 2012(1) 2013(1) £’000 £’000 £’000 £’000 £’000 Income statement Revenue ...... 427,996 398,084 373,845 328,691 302,799 Operating profit on ordinary activities(2) 71,784 71,991 64,552 57,045 54,879 Share of associates’ operating profit . . . 22 10 10 6 2 Exceptional items ...... (162,398) (17,133) (171,531) (16,604) (300,549) (Loss)/profit before interest and taxation ...... (90,592) 54,868 (106,969) 40,441 (245,670) Net finance costs ...... (28,465) (41,505) (36,158) (44,446) (40,988) Exceptional finance costs and IAS 21/39 items ...... 5,282 3,166 (676) (2,760) (177) (Loss)/profit before taxation ...... (113,775) 16,529 (143,803) (6,765) (286,835) Taxation ...... 26,517 19,535 54,866 12,376 74,869 (Loss)/profit for the year ...... (87,258) 36,064 (88,937) 5,611 (211,966) Statistics Basic (loss)/earnings per share ...... (13.66p) 5.61p (14.24p) 0.88p (32.74p) Adjusted earnings per share ...... 5.53p 3.67p 3.50p 3.42p 2.65p Operating profit(2) to turnover ...... 16.8% 18.1% 17.3% 17.4% 18.1%
Balance sheet Intangible assets ...... 923,377 907,455 742,851 742,294 541,360 Property, plant and equipment ...... 219,608 195,091 171,154 127,223 54,181 Investments ...... 1,000 982 984 990 992 Derivative financial instruments ...... 15,794 15,757 — 2,742 — 1,159,779 1,119,285 914,989 873,255 596,533 Net current assets/(liabilities) ...... (41,473) 11,483 (340,805) 16,823 (14,737) Total assets and current assets/ (liabilities) ...... 1,118,306 1,130,768 574,184 890,078 581,796 Non-current liabilities ...... (405,973) (403,404) (454) (334,362) (314,999) Long-term provisions ...... (342,309) (316,177) (289,366) (281,799) (169,714) Net assets ...... 370,024 411,187 284,364 273,917 97,083 Shareholders’ Funds Ordinary Shares ...... 63,974 63,975 63,975 63,975 68,435 Preference Shares ...... 1,106 1,106 1,106 1,106 1,106 Reserves ...... 304,944 346,106 219,283 208,836 27,542 Capital employed ...... 370,024 411,187 284,364 273,917 97,083 (1) All periods related to 52 trading weeks with the exception of 2009 which was a 53 week period.
(2) Before exceptional and IAS21/39 items.
F-60 Company balance sheet At 28 December 2013 2013 2012 Notes £’000 £’000 Fixed assets Tangible ...... 35 27 3 Investments ...... 36 381,764 529,598 381,791 529,601 Current assets Debtors—due within one year ...... 37 88,628 86,007 Debtors—due after more than one year ...... 37 440,178 441,798 Cash at bank and in hand ...... 18,688 23,972 547,494 551,777 Creditors: amounts falling due within one year ...... 38 (165,500) (117,374) Net current assets ...... 381,994 434,403 Total assets less current liabilities ...... 763,785 964,004 Creditors: amounts falling due after more than one year ...... 39 (314,863) (334,220) Provisions for liabilities ...... 42 (1,412) (1,189) Net assets ...... 447,510 628,595 Capital and reserves Called-up share capital Ordinary ...... 27 68,435 63,975 Preference ...... 27 1,106 1,106 69,541 65,081 Reserves ...... 43 377,969 563,514 Shareholders’ funds ...... 44 447,510 628,595
The comparative numbers are as at 29 December 2012.
The financial statements of Johnston Press plc, registered in Scotland (number 15382), were approved by the Board of Directors on 28 March 2014 and were signed on its behalf by:
Ashley Highfield David King Chief Executive Officer Chief Financial Officer
The accompanying notes are an integral part of these financial statements.
F-61 Notes to the Company financial statements For the 52 week period ended 28 December 2013 34. Significant accounting policies
Basis of accounting and preparation The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by that Act, the separate financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards. No Profit and Loss Account is presented as permitted by section 408 of the Companies Act 2006. The Company’s result for the period, determined in accordance with the Act, was a loss of £185,819,000 (2012: profit of £61,727,000). The financial statements have been prepared on the historical cost basis except for financial instruments, unlisted investments and share-based payments as explained in the principal accounting policies adopted set out below.
The 2013 period was for the 52 weeks ended 28 December 2013 with the prior year being for the 52 weeks ended 29 December 2012.
Going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that both the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in Note 3 within the section on ‘going concern’.
Tangible fixed assets Tangible fixed asset balances are shown at cost or valuation, net of depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment, excluding land, at varying rates calculated to write-off cost over the useful lives. The principal rates employed are:
Plant and machinery ...... 20% straight-line basis
Investments Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment. Unlisted investments are shown at Directors’ valuation. Upward revaluations are credited to the revaluation reserve. Downward revaluations in excess of any previous upward revaluations are taken to the Profit and Loss Account.
Borrowings Interest-bearing loans and bank overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premia payable on settlement or redemption and direct issue costs, are charged to the Profit and Loss Account using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Fees incurred in negotiating borrowings are held on the Balance Sheet and amortised to the Profit and Loss Account over the term of the underlying debt.
Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the period end date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the period end date. Timing differences are differences between the Company’s taxable profits and its
F-62 results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the period end date.
Share-based payments The Company issues equity settled share-based benefits to certain employees. These share- based payments are measured at their fair value at the date of grant and the fair value of expected shares is expensed to the Profit and Loss Account on a straight-line basis over the vesting period. Fair value is measured by use of the Black-Scholes model, as amended to take account of the Directors’ best estimate of probable share vesting and exercise.
Dividends Dividends payable to the Company’s shareholders are recorded as a liability in the period in which the dividends are approved. In the Company’s financial statements, dividends receivable from subsidiaries are recognised as assets in the period in which the dividends are approved.
Financial instruments Financial assets and financial liabilities are recognised on the Balance Sheet when the Company becomes a party to the contractual provisions of that instrument.
The Company’s activities and funding structure give rise to some exposure to the financial risks of changes in interest rates and foreign currency exchange rates. The Company uses interest rate swaps and cross currency interest rate swaps to manage these exposures. The Company does not use derivative financial instruments for speculative purposes.
Changes in the fair value of derivative financial instruments are recognised directly in the Profit and Loss Account.
Full details of the Group policy are summarised in Note 32.
Retirement benefit obligations The Company participates in a Group-wide scheme, the Johnston Press Pension Plan, which has a defined benefit section (providing benefits based on final pensionable pay) and a defined contribution section (see Note 24). The assets of the scheme are held separately from those of the Company. The pension costs for the defined contribution section are charged to the Profit and Loss Account on the basis of contributions due in respect of the financial year. In relation to the defined benefit section of the scheme, the Company is unable to identify its share of the underlying assets and liabilities on a consistent and reliable basis and therefore, as required by FRS 17, the Company accounts for this scheme as a defined contribution scheme. As a result, the amount charged to the Profit and Loss Account in respect of the defined benefit section represents the contributions payable to the scheme in respect of the period.
F-63 35. Tangible fixed assets
Plant and machinery £’000 Cost At 29 December 2012 ...... 8 Additions ...... 27 At 28 December 2013 ...... 35 Depreciation At 29 December 2012 ...... 5 Charge for the period ...... 3 At 28 December 2013 ...... 8 Carrying amount At 29 December 2012 ...... 3 At 28 December 2013 ...... 27
36. Investments
Subsidiary Unlisted undertakings investments Total £’000 £’000 £’000 Cost At the start of the period ...... 1,106,146 3,526 1,109,672 Amounts relating to share-based payments ...... 230 — 230 At the end of the period ...... 1,106,376 3,526 1,109,902 Provisions for impairment At the start of the period ...... (576,548) (3,526) (580,074) Provision for impairment ...... (148,064) — (148,064) At the end of the period ...... (724,612) (3,526) (728,138) Net book value At the start of the period ...... 529,598 — 529,598 At the end of the period ...... 381,764 — 381,764
An impairment charge has been reflected in the financial statements of the Group. Full details are explained in Note 15. Inevitably this affects the value of the investments held by the parent company and the element of the impairment of intangible assets relating to the investments held by the Company only has been processed as an impairment of investments.
F-64 The Company’s principal subsidiary undertakings are as follows:
Country of Proportion incorporation and of ownership Name of company operation interest Nature of business Johnston Publishing Ltd ...... England 100% Newspaper publishers Johnston Press Ireland Ltd* ..... Republic of Ireland 100% Newspaper publishers Isle of Man Newspapers Ltd* .... Isle of Man 100% Newspaper publishers Score Press Ltd ...... Scotland 100% Holding company Score Press Ireland* ...... Republic of Ireland 100% Holding company The Scotsman Publications Ltd . . . Scotland 100% Newspaper publishers Johnston (Falkirk) Ltd ...... Scotland 100% Newspaper publishers Strachan & Livingston Ltd ...... Scotland 100% Newspaper publishers The Tweeddale Press Ltd* ...... Scotland 100% Newspaper publishers Angus County Press Ltd* ...... Scotland 100% Newspaper publishers Galloway Gazette Ltd* ...... Scotland 100% Newspaper publishers Stornoway Gazette Ltd* ...... Scotland 100% Newspaper publishers Northeast Press Ltd* ...... England 100% Newspaper publishers Yorkshire Post Newspapers Ltd* . . England 100% Newspaper publishers Ackrill Newspapers Ltd* ...... England 100% Newspaper publishers Yorkshire Weekly Newspaper Group Ltd ...... England 100% Newspaper publishers Halifax Courier Ltd* ...... England 100% Newspaper publishers Yorkshire Regional Newspapers Ltd ...... England 100% Newspaper publishers Lancashire Evening Post Ltd* .... England 100% Newspaper publishers Lancashire Publications Ltd* .... England 100% Newspaper publishers Lancaster & Morecambe Newspapers Ltd* ...... England 100% Newspaper publishers Blackpool Gazette & Herald Ltd* . England 100% Newspaper publishers East Lancashire Newspapers Ltd* . England 100% Newspaper publishers Johnston Letterbox Direct Ltd* . . England 100% Newspaper publishers Wilfred Edmunds Ltd ...... England 100% Newspaper publishers South Yorkshire Newspapers Ltd . England 100% Newspaper publishers East Midlands Newspapers Ltd* . . England 100% Newspaper publishers Lincolnshire Newspapers Ltd .... England 100% Newspaper publishers Anglia Newspapers Ltd ...... England 100% Newspaper publishers Northamptonshire Newspapers Ltd ...... England 100% Newspaper publishers Central Counties Newspapers Ltd . England 100% Newspaper publishers Premier Newspapers Ltd ...... England 100% Newspaper publishers Sheffield Newspapers Ltd* ...... England 100% Newspaper publishers and printers Peterboro’ Web Ltd ...... England 100% Contract printers Northampton Web Ltd* ...... England 100% Contract printers Portsmouth Publishing & Printing Ltd* ...... England 100% Newspaper publishers and printers Sussex Newspapers Ltd ...... England 100% Newspaper publishers T R Beckett Ltd ...... England 100% Newspaper publishers Morton Newspapers Ltd* ...... Northern Ireland 100% Newspaper publishers and printers Derry Journal Ltd* ...... Northern Ireland 100% Newspaper publishers Donegal Democrat Ltd* ...... Republic of Ireland 100% Newspaper publishers Longford Leader Ltd* ...... Republic of Ireland 100% Newspaper publishers Leitrim Observer Ltd* ...... Republic of Ireland 100% Newspaper publishers Leinster Leader Ltd* ...... Republic of Ireland 100% Newspaper publishers Leinster Express Newspapers Ltd* . Republic of Ireland 100% Newspaper publishers Dundalk Democrat Ltd* ...... Republic of Ireland 100% Newspaper publishers Limerick Leader Ltd* ...... Republic of Ireland 100% Newspaper publishers Clonnad Ltd* ...... Republic of Ireland 100% Newspaper publishers Kilkenny People Publishing Ltd* . . Republic of Ireland 100% Newspaper publishers * Held through a subsidiary.
F-65 There is no difference in the proportions of ownership interest shown above and the voting power held. All investments in subsidiary undertakings are held at cost less, where appropriate, provisions for impairment.
37. Debtors
2013 2012 £’000 £’000 Amounts falling due within one year Amounts owed by subsidiary undertakings ...... 86,366 83,399 Group relief receivable ...... 1,896 1,896 Trade and other debtors and prepayments ...... 366 557 Derivative financial instruments (Note 32) ...... — 155 88,628 86,007 Amounts falling due after more than one year Amounts owed by subsidiary undertakings ...... 438,702 438,708 Derivative financial instruments (Note 32) ...... 1,108 2,742 Deferred tax asset—see below ...... 368 348 440,178 441,798
The following are the major deferred tax assets recognised by the Company and movements thereon during the year:
Accelerated tax Pension Other timing depreciation balances differences Total £’000 £’000 £’000 £’000 At the start of the period ...... 11 273 64 348 Charge to profit and loss account ...... (2) 51 26 75 Reduction in tax rate ...... (1) (42) (12) (55) At the end of the period ...... 8 282 78 368
38. Creditors: amounts falling due within one year
2013 2012 £’000 £’000 Borrowings (Note 22) ...... 8,553 8,520 Amounts owed to subsidiary undertakings ...... 144,376 98,706 Other taxes and social security costs ...... 3,749 448 Accruals and deferred income ...... 8,822 9,524 Other creditors ...... — 77 Derivative financial instruments (Note 32) ...... — 99 165,500 117,374
39. Creditors: amounts falling due after more than one year
2013 2012 £’000 £’000 Borrowings (Note 22) ...... 314,863 334,220
F-66 40. Borrowings
The Company’s bank overdrafts and loans comprise:
2013 2012 £’000 £’000 Bank loans ...... 200,851 227,316 Private placement loan notes ...... 110,994 119,162 Payment-in-kind interest accrual ...... 20,372 8,535 Total borrowings excluding term debt issue costs ...... 332,217 355,013 Term debt issue costs ...... (8,801) (12,273) Total borrowings ...... 323,416 342,740
The borrowings are repayable as follows:
2013 2012 £’000 £’000 On demand or within one year ...... 8,553 8,520 Within one to two years ...... 314,863 334,220 323,416 342,740
Other details relating to the bank overdrafts and loans are set out in Note 22.
41. Lease commitments
The Company leases certain buildings on short-term operating leases. The rental expense on these leases during 2013 was £111,523 (2012: £21,000). The Company pays all insurance, maintenance and repairs of these properties.
Annual commitments under non-cancellable operating leases are as follows:
Operating leases which expire:
2013 2012 £’000 £’000 Within 1 year ...... — 68 After more than five years ...... 283 — 283 68
42. Provisions for liabilities
Unfunded Pensions £’000 At the start and end of the period ...... 1,412
The unfunded pension provision is assessed by a qualified actuary at each period end. Refer to Note 26 for further details.
F-67 43. Reserves
Share-based Share payments Retained Other Own premium reserve earnings reserves shares Total £’000 £’000 £’000 £’000 £’000 £’000 Opening balance ...... 502,818 18,959 27,816 19,510 (5,589) 563,514 Loss for the period ...... — — (185,819) — — (185,819) Transfer from other reserves to retained earnings(1) ...... — — 19,510 (19,510) — — Dividends (Note 13) ...... — — (152) — — (152) Provision for share-based payments ...... — 512 — — — 512 Issue of share capital ...... 11 — — — — 11 Release on exercise of warrants(2) ...... — (5,541) 5,541 — — — Release of deferred bonus shares ...... — (374) — — 374 — Own shares purchased ...... — — — — (97) (97) At the end of the period ..... 502,829 13,556 (133,104) — (5,312) 377,969 (1) The transfer from other reserves to retained earnings relates to a part of the impairment of intangible asset recognised in the year. Refer to Note 36.
(2) During the period 4,428,306 ordinary shares of 10p each were issued following the exercise of share warrants (Note 27). The transfer of £5.5 million between the share based payments reserve and retained earnings represents the original valuation of the warrants being exercised, which was recognised as a cost when the warrants were issued.
Further details of share-based payments are shown in Note 30.
The own shares reserve represents the cost of shares in Johnston Press plc purchased in the market and held by the Johnston Press plc Employee Share Trust (the ‘JP EST’) to satisfy options under the Group’s share options schemes (see Note 30). The number of ordinary shares held by the JP EST as at 28 December 2013 was 12,707,321 (2012: 16,198,517). In addition to the JP EST, a further 554,493 shares are held regarding the deferred share bonus plan (2012: 1,788,822).
44. Shareholders’ funds
2013 2012 £’000 £’000 (Loss) / Profit for the year after taxation ...... (185,819) 61,727 Dividends (Note 13) ...... (152) (152) Provision for share-based payments (Note 30) ...... 512 606 Issue of share capital ...... 11 551 Own shares purchased ...... (97) (253) Proceeds of issue of ordinary shares (Note 27) ...... 4,460 — Net (decrease) / increase in shareholders’ funds ...... (181,085) 62,479 Opening shareholders’ funds ...... 628,595 566,116 Closing shareholders’ funds ...... 447,510 628,595
F-68 Independent auditor’s report to the members of Johnston Press plc We have audited the financial statements of Johnston Press plc for the 52 week period ended 29 December 2012 which comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group Statement of Changes in Equity, the Group Statement of Financial Position and the Parent Company Balance Sheet, the Group Cash Flow Statement, and the related Notes 1 to 42. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibility Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 29 December 2012 and of the group’s profit for the 52 week period then ended;
• the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
F-69 • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
• the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
• the directors’ statement, contained within the business review, in relation to going concern;
• the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and
• certain elements of the report to shareholders by the Board on directors’ remuneration.
28MAR201406595743
David Bell CA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Edinburgh, United Kingdom 19 March 2013
F-70 Group income statement For the 52 week period ended 29 December 2012
2012 2011 Before Before non- non- recurring recurring and IAS Non- and IAS Non- 21/39 recurring IAS 21/39 recurring IAS items items 21/39 Total items items 21/39 Total Notes £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Revenue ...... 6 328,691 30,000 — 358,691 373,845 — — 373,845 Cost of sales ...... (207,868) — — (207,868) (235,143) — — (235,143) Gross profit ...... 120,823 30,000 — 150,823 138,702 — — 138,702 Operating expenses ...... 7 (63,778) (46,604) — (110,382) (74,150) (7,836) — (81,986) Impairment of intangibles ...... 7/15 ————— (163,695) — (163,695) Total operating expenses ...... (63,778) (46,604) — (110,382) (74,150) (171,531) — (245,681) Operating profit/(loss) ...... 8 57,045 (16,604) — 40,441 64,552 (171,531) — (106,979) Investment income ...... 10 148 — — 148 67 — — 67 Net finance (expense)/ income on pension assets/liabilities ...... 11a (2,471) — — (2,471) 2,250 — — 2,250 Change in fair value of hedges . . 11c — — (7,297) (7,297) — — (676) (676) Retranslation of USD debt ..... 11c — — 4,275 4,275 — — (285) (285) Retranslation of Euro debt ..... 11c — — 262 262 — — 285 285 Finance costs ...... 11b (42,129) — — (42,129) (38,475) — — (38,475) Share of results of associates .... 18 6——610 — — 10 Profit/(loss) before tax ...... 12,599 (16,604) (2,760) (6,765) 28,404 (171,531) (676) (143,803) Tax...... 12 8,825 2,875 676 12,376 (6,371) 61,058 179 54,866 Profit/(loss) for the period ..... 21,424 (13,729) (2,084) 5,611 22,033 (110,473) (497) (88,937) Earnings per share (p) ...... 14 Earnings per share—Basic ...... 3.42 (2.20) (0.34) 0.88 3.50 (17.66) (0.08) (14.24) Earnings per share—Diluted .... 3.40 (2.19) (0.34) 0.87 3.50 (17.66) (0.08) (14.24)
The above revenue and profit/(loss) are derived from continuing operations.
The comparative period is for the 52 week period ended 31 December 2011.
The accompanying notes are an integral part of these financial statements.
F-71 Group statement of comprehensive income For the 52 week period ended 29 December 2012
Hedging and Revaluation translation Retained reserve reserve earnings Total £’000 £’000 £’000 £’000 Profit for the period ...... — — 5,611 5,611 Actuarial loss on defined benefit pension schemes (net of tax) ...... — — (15,877) (15,877) Revaluation adjustment ...... (377) — 377 — Exchange differences on translation of foreign operations ...... — (645) — (645) Deferred tax on exchange differences ...... — 133 — 133 Change in deferred tax rate to 23.0% ...... — — (421) (421) Total comprehensive loss for the period ..... (377) (512) (10,310) (11,199)
For the 52 week period ended 31 December 2011 Loss for the period ...... — — (88,937) (88,937) Actuarial loss on defined benefit pension schemes (net of tax) ...... — — (36,306) (36,306) Revaluation adjustment ...... (85) — 85 — Exchange differences on translation of foreign operations ...... — (847) — (847) Deferred tax on exchange differences ...... — 214 — 214 Change in deferred tax rate to 25.0% ...... — — (992) (992) Total comprehensive loss for the period ..... (85) (633) (126,150) (126,868)
The accompanying notes are an integral part of these financial statements.
F-72 Group statement of changes in equity For the 52 week period ended 29 December 2012
Share- based Hedging and Share Share payments Revaluation Own translation Retained capital premium reserve reserve shares reserve earnings Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Opening balances ...... 65,081 502,818 17,845 2,160 (5,379) 9,779 (307,940) 284,364 Total comprehensive profit for the period ...... — — — (377) — (512) (10,310) (11,199) Recognised directly in equity: Preference share dividends paid (Note 13) ...... — — — — — — (152) (152) Share-based payments charge (Note 30) ...... — — 606 — — — — 606 Share warrants issued ...... — — 551 — — — — 551 Release of deferred bonus payments ...... — — (43) — 43 — — — Own shares purchased ...... — — — — (253) — — (253) Net changes directly in equity . . . — — 1,114 — (210) — (152) 752 Total movements ...... — — 1,114 (377) (210) (512) (10,462) (10,447) Equity at the end of the period .. 65,081 502,818 18,959 1,783 (5,589) 9,267 (318,402) 273,917
For the 52 week period ended 31 December 2011 Opening balances ...... 65,081 502,818 17,273 2,245 (5,004) 10,412 (181,638) 411,187 Total comprehensive loss for the period ...... — — — (85) — (633) (126,150) (126,868) Recognised directly in equity: Preference share dividends paid (Note 13) ...... — — — — — — (152) (152) Share-based payments charge (Note 30) ...... — — 572 — — — — 572 Own shares purchased ...... — — — — (375) — — (375) Net changes directly in equity . . . — — 572 — (375) — (152) 45 Total movements ...... — — 572 (85) (375) (633) (126,302) (126,823) Equity at the end of the period .. 65,081 502,818 17,845 2,160 (5,379) 9,779 (307,940) 284,364
The accompanying notes are an integral part of these financial statements.
F-73 Group statement of financial position At 29 December 2012
2012 2011 Notes £’000 £’000 Non-current assets Intangible assets ...... 15 742,294 742,851 Property, plant and equipment ...... 16 127,223 171,154 Available for sale investments ...... 17 970 970 Interests in associates ...... 18 20 14 Trade and other receivables ...... 21 6 6 Derivative financial instruments ...... 23/32 2,742 — 873,255 914,995 Current assets Assets classified as held for sale ...... 19 7,601 3,238 Inventories ...... 20 2,850 4,709 Trade and other receivables ...... 21 41,628 48,730 Cash and cash equivalents ...... 21 32,789 13,407 Derivative financial instruments ...... 23/32 155 11,657 85,023 81,741 Total assets ...... 958,278 996,736 Current liabilities Trade and other payables ...... 21 50,934 42,958 Current tax liabilities ...... 2,947 4,244 Retirement benefit obligation ...... 24 5,700 2,200 Borrowings ...... 22/33 8,520 372,094 Derivative financial instruments ...... 23/32 99 1,056 Short-term provisions ...... 26 1,327 — 69,527 422,552 Non-current liabilities Borrowings ...... 22/33 334,220 — Derivative financial instruments ...... 23/32 — 306 Retirement benefit obligation ...... 24 115,619 101,790 Deferred tax liabilities ...... 25 160,584 181,609 Trade and other payables ...... 21 142 148 Long-term provisions ...... 26 4,269 5,967 614,834 289,820 Total liabilities ...... 684,361 712,372 Net assets ...... 273,917 284,364 Equity Share capital ...... 27 65,081 65,081 Share premium account ...... 502,818 502,818 Share-based payments reserve ...... 18,959 17,845 Revaluation reserve ...... 1,783 2,160 Own shares ...... (5,589) (5,379) Hedging and translation reserve ...... 9,267 9,779 Retained earnings ...... (318,402) (307,940) Total equity ...... 273,917 284,364
The comparative numbers are as at 31 December 2011.
The financial statements of Johnston Press plc, registered number 15382, were approved by the Board of Directors and authorised for issue on 19 March 2013.
They were signed on its behalf by:
28MAR201406594722 28MAR201407000173 Ashley Highfield Grant Murray Chief Executive Officer Chief Financial Officer
The accompanying notes are an integral part of these financial statements.
F-74 Group cash flow statement For the 52 week period ended 29 December 2012
2012 2011 Notes £’000 £’000 Cash generated from operations ...... 28 76,098 71,207 Income tax paid ...... (4,809) (3,282) Net cash in from operating activities ...... 71,289 67,925 Investing activities Interest received ...... 120 51 Dividends received from available for sale investments ...... 22 — Dividends received from associated undertakings ...... — 25 Proceeds on disposal of property, plant and equipment ...... 8,936 2,589 Purchases of property, plant and equipment ...... (5,171) (1,802) Net cash received from investing activities ...... 3,907 863 Financing activities Dividends paid ...... (152) (152) Interest paid ...... (17,243) (25,629) Repayment of borrowings ...... (2,697) (28,371) Repayment of loan notes ...... (23,841) (6,363) Financing fees ...... (11,826) (53) Net cash flow from derivatives ...... 198 — Purchase of own shares ...... (253) (375) Decrease in bank overdrafts ...... — (5,550) Net cash used in financing activities ...... (55,814) (66,493) Net increase in cash and cash equivalents ...... 19,382 2,295 Cash and cash equivalents at the beginning of period ...... 13,407 11,112 Cash and cash equivalents at the end of the period ...... 32,789 13,407
The comparative period is for the 52 week period ended 31 December 2011.
The accompanying notes are an integral part of these financial statements.
F-75 Notes to the consolidated financial statements For the 52 week period ended 29 December 2012 1. General information
Johnston Press plc is a company incorporated in the United Kingdom under the Companies Act. The registered office is at 108 Holyrood Road, Edinburgh, EH8 8AS. The nature of the Group’s operations and its principal activities are set out in Notes 5 and 6 and in the Business Review on pages 12 to 29.
These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with the policies set out in Note 3.
2. Adoption of new and revised standards
The following new and revised Standards and Interpretations have been adopted for the period ended 29 December 2012. Their adoption has not had any significant impact on the amounts reported in these financial statements but may impact the accounting for future transactions and arrangements.
• Amendments to IFRS 7 Financial Instruments: Disclosures—The amendments increase the disclosure requirements for transactions involving the transfer of financial assets in order to provide greater transparency around risk exposures when financial assets are transferred. There has been no impact on the financial position or performance of the Group.
At the date of 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) Government Loans • IFRS 7 (amended) Disclosures—Offsetting Financial Assets and Financial Liabilities • IAS 19 (revised) Employee Benefits • IFRS 9 Financial Instruments • IFRS 10 Consolidated Financial Statements • IFRS 10, IFRS 12 and IAS 27 (amended) Investment entities • IFRS 11 Joint Arrangements • IFRS 12 Disclosure of Interests in Other Entities • IFRS 13 Fair Value Measurement • IAS 1 Presentation of Financial Statements • IAS 27 (revised) Separate Financial Statements • IAS 28 (revised) Investments in Associates and Joint Ventures • IAS 32 (amended) Offsetting Financial Assets and Financial Liabilities
The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the Group in future periods, except as follows:
• IFRS 7 (amended) will increase the disclosure requirements where netting arrangements are in place for financial assets and financial liabilities;
• IFRS 9 will impact both the measurement and disclosures of Financial Instruments;
• IFRS 12 will impact the disclosure of interests the Group has in other entities;
• IFRS 13 will impact the measurement of fair value for certain assets and liabilities as well as the associated disclosures; and
F-76 • IAS 19 (revised) will impact the measurement of the various components representing movements in the defined benefit pension obligation and associated disclosures, but not the Group’s total obligation. It is likely that following the replacement of expected returns on plan assets with a net finance cost in the Income Statement, the profit for the period will be reduced and accordingly other comprehensive income increased.
Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed.
3. Significant accounting policies
Basis of accounting The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) adopted by the European Union and therefore comply with Article 4 of the EU IAS Regulation.
The financial statements have been prepared on the historical cost basis, except for the revaluation of certain properties and financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The principal accounting policies adopted are set out below.
Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to the Saturday closest to 31 December each year for either a 52 or 53 week period. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the Group Income Statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Basis of preparation The Group’s business activities, together with factors likely to affect its future development, performance and financial position and commentary on the Group’s financial results, its cash flows, liquidity requirements and borrowing facilities are set out in the Business Review on pages 12 to 29. In addition, Note 32 to the financial statements includes the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities, and its exposures to liquidity risk and credit risk.
The financial statements have been prepared for the 52 week period ended 29 December 2012. The 2011 information relates to the 52 week period ended 31 December 2011.
Going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in the Business Review on pages 12 to 29.
Non-recurring items Items which are deemed to be non-recurring by virtue of their nature or size are included under the statutory classification appropriate to their nature but are separately disclosed on
F-77 the face of the consolidated income statement to assist in understanding the financial performance of the Group.
Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values at the date of exchange of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in the Income Statement as incurred. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3, including publishing titles, are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 ‘Non-Current Assets Held for Sale and Discontinued Operations’, which are recognised and measured at fair value less costs to sell.
Investment in associates An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
The results and assets and liabilities of associates are incorporated in these Group financial statements using the equity method of accounting. Investments in associates are carried in the Group Statement of Financial Position at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments.
Publishing titles The Group’s principal intangible assets are publishing titles. The Group does not capitalise internally generated publishing titles. Titles separately acquired after 1 January 1989 are stated at cost and titles owned by subsidiaries acquired after 1 January 1996 are recorded at Directors’ valuation at the date of acquisition. These publishing titles have no finite life and consequently are not amortised. The carrying value of the titles is reviewed for impairment at least annually with testing undertaken to determine any diminution in the recoverable amount below carrying value. The recoverable amount is the higher of the fair value less costs to sell and the value in use is based on the net present value of estimated future cash flows. Any impairment loss is recognised as an expense immediately. An impairment loss recognised for publishing titles can be reversed in a subsequent period if the discounted cash flows justify the treatment.
For the purpose of impairment testing, publishing titles are allocated to each of the Group’s cash generating units. Cash generating units are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of the value of publishing titles and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.
Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes.
Print advertising revenue is recognised on publication and circulation revenue is recognised at the point of sale. Digital revenues are recognised on publication for advertising or delivery of service for other digital revenues. Printing revenue is recognised when the service is provided.
F-78 Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in pounds sterling, which is the functional currency of the Company and the presentation currency for the consolidated financial statements.
In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each period end, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at the close of business on the last working day of the period. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items carried at historical cost in respect of which gains and losses are recognised directly in equity.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the period end date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classified as equity and transferred to the Group’s hedging and translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.
Fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
Property, plant and equipment Property, plant and equipment balances are shown at cost, net of depreciation and any provision for impairment. In certain cases, the amounts of previous revaluations of properties conducted in 1996 or 1997 or the fair value of the property at the date of the acquisition by the Group have been treated as the deemed cost on transition to IFRSs. Depreciation is provided on all property, plant and equipment, excluding land, at varying rates calculated to write-off cost over the useful lives. The principal rates employed are:
Heritable and freehold property (excluding land) ...... 2.5% on written down value Leasehold land and buildings ...... Equal annual instalments over lease term Web offset presses (excluding press components) ...... 5% straight-line basis Mailroom equipment ...... 6.67% straight-line basis Pre-press systems ...... 20% straight-line basis Other plant and machinery ...... 6.67%, 10%, 20%, 25% and 33% straight-line basis Motor vehicles ...... 25% straight-line basis
Assets held for sale Assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
Assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when
F-79 the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale. Where the sale is expected to qualify for recognition as a completed sale within one year from the date of classification, the assets are shown as current and when the sale is anticipated to complete after one year from date of classification the assets are shown as non-current.
Inventories Inventories are stated at the lower of cost and net realisable value. Cost incurred in bringing materials to their present location and condition comprises; (a) raw materials and goods for resale at purchase cost on a first-in first-out basis; and (b) work in progress at cost of direct materials, labour and certain overheads. Net realisable value comprises selling price less any further costs expected to be incurred to completion and disposal.
Financial instruments Financial assets and financial liabilities are recognised in the Group’s Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument.
Financial assets Investments are recognised and derecognised on the trade date in accordance with the terms of the purchase or sale contract and are initially measured at fair value, plus transaction costs.
Available for sale financial assets Listed and unlisted investments are shown as available for sale and are stated at fair value. Fair value of listed investments is determined with reference to quoted market prices. Fair value of unlisted investments is determined by the Directors. Gains and losses arising from changes in fair value are recognised directly in equity, with the exception of impairment losses which are recognised directly in the Income Statement. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in equity is included in the Income Statement for the period.
Dividends on available for sale equity investments are recognised in the Income Statement when the Group’s right to receive the payment is established.
Trade receivables Trade receivables do not carry any interest. They are stated at their nominal value as reduced by appropriate allowance for estimated irrecoverable amounts. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. Other trade receivables are provided for on an individual basis where there is evidence that an amount is no longer recoverable.
Impairment of financial assets Financial assets are assessed for indicators of impairment at each period end date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance for estimated irrecoverable amounts. Changes in the carrying value of this allowance are recognised in the Income Statement.
Derivative financial instruments The Group’s activities and funding structure give rise to some exposure to the financial risks of changes in interest rates and foreign currency exchange rates. The Group enters into a number of derivative financial instruments to manage its exposure to these risks, including interest rate swaps and caps, cross currency swaps, foreign exchange options and forward foreign exchange contracts. Further details of derivative financial instruments are given in Note 32.
F-80 The Group re-measures each derivative at its fair value at the period end date with the resultant gain or loss being recognised in profit or loss immediately. All such changes in the fair value of the Group’s derivatives are shown in a separate column on the face of the Group Income Statement.
A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.
Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with the changes in fair value recognised in profit or loss.
Financial liabilities and equity Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs.
The Company has issued share warrants over 12.5% of its issued share capital to lenders (with 5.0% issued 28 August 2009, 2.5% issued 24 April 2012 and 5.0% issued 21 September 2012). All of the share warrants expire 30 September 2017. The warrant instruments will be settled by the Company delivering a fixed number of ordinary shares and receiving a fixed amount of cash in return and so qualify as equity under IAS 39. The Binomial Option pricing model was used to assess the fair value of the share warrants issued in the financial year that they were issued.
Trade payables Trade payables are not interest-bearing and are stated at their nominal value.
Borrowings Interest-bearing loans and bank overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premia payable on settlement or redemption and direct issue costs, are charged to the Income Statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Fees incurred in negotiating borrowings are held on the Statement of Financial Position and amortised to the Income Statement over the term of the underlying debt.
Leases Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis over the term of the lease.
Where the Group is a lessor, rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease.
F-81 Where the Group leases a property but is no longer using the premises, full provision is made for the rentals payable over the remaining term of the lease (up to any break clauses where relevant).
Operating profit/(loss) Operating profit/(loss) is stated after charging restructuring or other non-recurring costs but before investment income, other finance income, finance costs and the share of the results of associates.
Provisions Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group will be required to settle that obligation. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation at the reporting date and are discounted to present value where the effect is material.
Taxation The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the period end date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax based values used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
On transition to IFRS, a deferred tax liability was recorded in respect of publishing titles and properties that do not qualify for any tax allowances that were acquired through business combinations. Given that the Group elected, under IFRS 1, not to restate pre-transition business combinations under IFRS 3, this pre-transition deferred tax element was charged against retained earnings. Any such fair value on future business combinations will form part of the goodwill on acquisition and both the goodwill and related deferred tax liability will be included in any impairment test in relation to the relevant cash generating unit.
Deferred tax assets and liabilities are offset when the relevant requirements of IAS 12 are satisfied.
Retirement benefit costs The Group provides pensions to employees through various schemes.
Payments to defined contribution retirement benefit schemes are charged to the Income Statement as an expense as they fall due. Payments made to the industry-wide retirement benefit schemes in the Republic of Ireland are dealt with as payments to defined contribution schemes where the Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme.
F-82 For defined benefit retirement benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each period end date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the Income Statement and presented in the Statement of Comprehensive Income. Past service cost is recognised immediately to the extent that the benefits are already vested and otherwise is amortised on a straight line basis over the average period until the benefits become vested.
The retirement benefit obligation recognised in the Statement of Financial Position represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the scheme.
Share-based payments The Group issues equity settled share-based benefits to certain employees. The Group has elected to apply IFRS 2 to all share-based awards and options granted post 7 November 2002 but not vested at 31 December 2004. These share-based payments are measured at their fair value at the date of grant and the fair value of share options is expensed to the Income Statement on a straight-line basis over the vesting period. Fair value is measured by use of the Black-Scholes model, as amended to take account of the Directors’ best estimate of probable share vesting and exercise.
4. Critical accounting judgements and key sources of estimation uncertainty
Critical judgements in applying the Group’s accounting policies In the process of applying the Group’s accounting policies, which are described in Note 3, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements (apart from those involving estimations, which are dealt with below).
The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
Non-recurring items Non-recurring items include significant exceptional transactions, the restructuring of businesses and material one-off items such as revenue received on the termination of significant print contracts, the disposal of a significant property and impairment of intangible and tangible assets together with the associated tax impact. The Company considers such items are material to the Income Statement and their separate disclosure is necessary for an appropriate understanding of the Group’s financial performance.
Valuation of publishing titles on acquisition The Group’s policies require that a fair value at the date of acquisition be attributed to the publishing titles owned by each acquired entity. The Group’s management uses its judgement to determine the fair value attributable to each acquired publishing title taking into account the consideration paid, the earnings history and potential of the title, any recent similar transactions, industry statistics such as average earnings multiples and any other relevant factors.
The publishing titles are considered to have indefinite economic lives due to the historic longevity of the brands and the ability to evolve the brands in the changing media environment.
Assets held for sale Where a property or a significant item of equipment (such as a print press) is marketed for sale, management is highly committed to the sale and the asset is available for immediate sale,
F-83 the Group classifies that asset as held for sale. If the asset is expected to be sold within twelve months, the asset is classed as a current asset. The value of the asset is held at the lower of the net book value or the expected realisable sale value. The Directors’ have estimated the sale values based on the current price that the asset is being marketed at and advice from independent property agents. The actual sale proceeds may differ from the estimate.
Provisions for onerous leases and dilapidations Where the Group exits a rented property, an estimate of the anticipated total future cost payable under the terms of the operating lease, including rentals, rates and other related expenses, is charged to the Income Statement at the point of exit as an onerous lease. Where there is a break clause in the contract, rentals are provided for up to that point. In addition, an estimate is made of the likelihood of sub-letting the premises and any rentals that would be receivable from a sub tenant. Where receipt of sub-lease rentals is considered reasonable, these amounts are deducted from the rentals payable by the Group under the lease and provision charged for the net amount.
Under the terms of a number of property leases, the Group is required to return the property to its original condition at the lease expiry date. The Group has estimated the expected costs of these dilapidations and charged these costs to the Income Statement. The costs have been discounted to the net present value given the length of some of the leases.
Valuation of share-based payments The Group estimates the expected value of equity-settled share-based payments and this is charged through the Income Statement over the vesting periods of the relevant payments. The cost is estimated using a Black-Scholes valuation model. The Black-Scholes calculations are based on a number of assumptions that are set out in Note 30 and are amended to take account of estimated levels of share vesting and exercise. This method of estimating the value of the share-based payments is intended to ensure that the actual value transferred to employees is provided in the share-based payments reserve by the time the payments are made.
Key sources of estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the period end date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.
Impairment of publishing titles Determining whether publishing titles are impaired requires an estimation of the value in use of the cash generating units (CGUs) to which these assets are allocated. Key areas of judgement in the value in use calculation include the identification of appropriate CGUs, estimation of future cash flows expected to arise from each CGU, the long-term growth rates and a suitable discount rate to apply to cash flows in order to calculate present value. The Group has identified its CGUs based on the seven geographic regions in which it operates. This is considered to be the lowest level at which cash inflows generated are largely independent of the cash inflows from other groups of assets and has been consistently applied in the current and prior periods. No impairment loss has been recognised in 2012 (2011: loss of £163,695,000). The carrying value of publishing titles at 29 December 2012 was £742,294,000 (2011: £742,851,000). Details of the impairment reviews that the Group performs are provided in Note 15.
Valuation of pension liabilities The Group records in its Statement of Financial Position a liability equivalent to the deficit on the Group’s defined benefit pension schemes. This liability is determined with advice from the Group’s actuarial advisers each year and can fluctuate based on a number of factors, some of
F-84 which are outwith the control of management. The main factors that can impact the valuation include:
• the discount rate used to discount future liabilities back to the present date, determined each year from the yield on corporate bonds;
• the actual returns on investments experienced as compared to the expected rates used in the previous valuation;
• the actual rates of salary and pension increase as compared to the expected rates used in the previous valuation;
• the forecast inflation rate experienced as compared to the expected rates used in the previous valuation; and
• mortality assumptions.
Details of the assumptions used to determine the liability at 29 December 2012 are set out in Note 24.
Bad debt allowance The trade receivables balance recorded in the Group’s Statement of Financial Position comprises a large number of relatively small balances. An allowance is made for the estimated irrecoverable amounts from debtors and this is determined by reference to past default experience. Further details are shown in Note 21.
5. Business segments
Information reported to the Chief Executive Officer for the purpose of resource allocation and assessment of segment performance is focussed on the two areas of Publishing (in print and online) and Contract Printing. Geographical segments are not presented as the primary segment is the UK which is greater than 90% of Group activities.
6. Segment information a) Segment revenues and results The following is an analysis of the Group’s revenue and results by reportable segment:
Contract Contract Publishing printing Eliminations Group Publishing printing Eliminations Group 2012 2012 2012 2012 2011 2011 2011 2011 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Revenue External sales ...... 308,438 20,253 — 328,691 344,863 28,982 — 373,845 Inter-segment sales* ...... — 53,019 (53,019) — — 61,030 (61,030) — Total revenue before non-recurring items ..... 308,438 73,272 (53,019) 328,691 344,863 90,012 (61,030) 373,845 Result Segment result before non-recurring items ..... 51,554 5,491 — 57,045 57,026 7,526 — 64,552 Non-recurring items ...... (22,667) 6,063 — (16,604) (164,656) (6,875) — (171,531) Net segment result ...... 28,887 11,554 — 40,441 (107,630) 651 — (106,979) Investment income ...... 148 67 Net finance (expense)/income on pension assets/liabilities (2,471) 2,250 IAS 21/39 adjustments ..... (2,760) (676) Finance costs ...... (42,129) (38,475) Share of results of associates . 6 10 Loss before tax ...... (6,765) (143,803) Tax...... 12,376 54,866 Profit/(loss) for the period .. 5,611 (88,937) * Inter-segment sales are charged at prevailing market prices.
F-85 The accounting policies of the reportable segments are the same as the Group’s accounting policies described in Note 3. The segment result represents the profit/(loss) earned by each segment without allocation of the share of results of associates, investment income, finance costs (including in relation to pension assets and liabilities) and income tax expense. This is the measure reported to the Group’s Chief Executive Officer for the purpose of resource allocation and assessment of segment performance. b) Segment assets
2012 2011 £’000 £’000 Assets Publishing ...... 855,372 851,548 Contract printing ...... 99,039 132,561 Total segment assets ...... 954,411 984,109 Unallocated assets ...... 3,867 12,627 Consolidated total assets ...... 958,278 996,736
For the purposes of monitoring segment performance and allocating resources between segments, the Group’s Chief Executive Officer monitors the tangible, intangible and financial assets attributable to each segment. All assets are allocated to reportable segments with the exception of available-for-sale investments and derivative financial instruments. c) Other segment information
Contract Contract Publishing printing Group Publishing printing Group 2012 2012 2012 2011 2011 2011 £’000 £’000 £’000 £’000 £’000 £’000 Additions to property, plant and equipment ...... 4,912 180 5,092 1,604 192 1,796 Depreciation expense (inc. non-recurring items) .... 5,077 24,877 29,954 7,618 15,529 23,147 Net impairment of intangibles . . ———163,695 — 163,695
7. Non-recurring items
2012 2011 £’000 £’000 Revenue Termination of print contract ...... 30,000 — Expenses Impairment of intangible assets (Note 15) ...... — (163,695) Gain on sale of assets ...... 986 — Gain on sale of assets held for sale ...... — 288 Write down in value of assets held for sale (Note 19) ...... (7,541) (600) Costs from the termination of print contract ...... (92) — Return on previously written down available for sale investments ...... 145 — Restructuring costs of existing business including redundancy costs ...... (24,403) (4,293) Write down in value of presses in existing businesses (Note 16) ...... (17,239) (5,161) IAS 19 past service gain (Note 24) ...... 1,540 1,930 Total non-recurring expenses ...... (46,604) (171,531) Total non-recurring items ...... (16,604) (171,531)
F-86 The Group received £30.0 million during the year from News International for the partial termination of a long-term contract to provide printing facilities. The write down of value in presses of £17.2 million represents accelerated depreciation charges from the closure of the Peterborough and Sunderland printing presses to record these at their net realisable sale values.
8. Operating profit/(loss)
2012 2011 £’000 £’000 Operating profit/(loss) is shown after charging/(crediting): Depreciation of property, plant and equipment (Note 16) ...... 12,715 17,986 Non-recurring write down in value of presses (Note 16) ...... 17,239 5,161 Write down of assets classified as held for sale (Note 19) Non-recurring ...... 7,541 600 Recurring ...... 276 — Profit on disposal of property, plant and equipment: Operating disposals ...... (695) (487) Non-recurring disposals ...... (986) — Assets held for sale disposals ...... (390) (288) Movement in allowance for doubtful debts (Note 21) ...... (2,069) (1,852) Redundancy costs (Note 9) ...... 21,582 3,938 Staff costs excluding redundancy costs (Note 9) ...... 131,526 147,806 Auditors’ remuneration: Audit services Group ...... 120 110 Subsidiaries ...... 240 240 Operating lease charges: Plant and machinery ...... 1,847 1,301 Other ...... 3,841 4,510 Rentals received on sub-let property ...... 221 313 Net foreign exchange gains ...... (59) (30) Cost of inventories recognised as expense ...... 36,111 43,494 Write down of inventories ...... 647 —
Staff costs shown above include £2,284,000 (2011: £2,517,000) relating to remuneration of Directors.
In addition to the auditors’ remuneration shown above, the auditors received the following fees for non-audit services.
2012 2011 £’000 £’000 Audit-related assurance services ...... 95 54 Taxation compliance services ...... 49 85 Other taxation advisory services ...... 28 58 Other services ...... 69 72 241 269
All non-audit services were approved by the Audit Committee. The Audit Committee considers that these non-audit services have not impacted the independence of the audit process.
In addition, an amount of £19,000 (2011: £18,000) was paid to the external auditors for the audit of the Group’s pension scheme.
F-87 9. Employees
The average monthly number of employees, including Executive Directors, was:
2012 2011 No. No. Editorial and photographic ...... 1,786 1,913 Sales and distribution ...... 2,134 2,648 Production ...... 551 740 Administration ...... 326 456 Average number of employees ...... 4,797 5,757
£’000 £’000 Staff costs: Wages and salaries ...... 113,901 127,693 Social security costs ...... 10,295 12,198 Redundancy costs ...... 21,582 3,938 Other pension costs (Note 24) ...... 6,724 7,343 Cost of share-based awards (Note 30) ...... 606 572 Total staff costs ...... 153,108 151,744
Full details of the Directors’ emoluments, pension benefits and share options are included in the audited part of the Directors’ Remuneration Report on pages 39 to 51.
10. Investment income
2012 2011 £’000 £’000 Income from available for sale investments ...... 22 18 Interest receivable ...... 126 49 148 67
11. Finance costs
2012 2011 £’000 £’000 a) Net finance expense/(income) on pension assets/liabilities Interest on pension liabilities (Note 24) ...... 22,708 23,612 Expected return on pension assets (Note 24) ...... (20,237) (25,862) 2,471 (2,250) b) Finance costs Interest on bank overdrafts and loans ...... 26,944 25,496 Payment-in-kind interest accrual ...... 11,048 7,693 Amortisation of term debt issue costs ...... 4,137 5,286 42,129 38,475 c) IAS 21/39 items All movements in the fair value of derivative financial instruments are recorded in the Income Statement. In the current period, this movement was a net charge of £7.3 million (2011: charge of £0.7 million), consisting of a realised net credit of £0.2 million and an unrealised charge of £7.5 million.
F-88 The retranslation of foreign denominated debt at the period end resulted in a net credit of £4.5 million (2011: net credit of £nil) being recorded in the Income Statement. The retranslation of the Euro denominated publishing titles is shown in the Statement of Comprehensive Income.
12. Tax
2012 2011 £’000 £’000 Current tax Charge for the period ...... 3,541 5,527 Adjustment in respect of prior periods ...... 130 (1,657) 3,671 3,870 Deferred tax (Note 25) Credit for the period ...... (4,168) (16) Adjustment in respect of prior periods ...... 191 231 Deferred tax adjustment relating to the impairment of publishing titles .... — (44,041) Credit relating to reduction in deferred tax rate to 23.0% (2011: 25.0%) . . . (12,070) (14,910) (16,047) (58,736) Total tax credit for the period ...... (12,376) (54,866)
UK corporation tax is calculated at 24.5% (2011: 26.5%) of the estimated assessable profit/(loss) for the period. The 24.5% basic tax rate applied for the 2012 period was a blended rate due to the tax rate of 26.0% in effect for the first quarter of 2012, changing to 24.0% from 1 April 2012 under the 2012 Finance Act. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdiction.
The Group has recognised a £12.1 million tax credit as a result of the change to the UK deferred tax rate from 25% to 23%.
The tax credit for the period can be reconciled to the loss per the Income Statement as follows:
2012 2011 £’000 % £’000 % Loss before tax ...... (6,765) 100.0 (143,803) 100.0 Tax at 24.5% (2011: 26.5%) ...... (1,657) (24.5) (38,108) (26.5) Tax effect of share of results of associate ...... —— (5) — Tax effect of expenses that are non-deductible in determining taxable profit ...... 2,130 (31.5) —— Tax effect of income that is non-taxable in determining taxable profit ...... (793) 11.7 (65) — Tax effect of investment income ...... (5) — 7— Effect of different tax rates of subsidiaries ...... (302) (4.5) (359) (0.2) Adjustment in respect of prior periods ...... 321 (4.7) (1,426) (1.0) Effect of reduction in deferred tax rate to 23.0% (2011: 25.0%) ...... (12,070) 178.4 (14,910) (10.4) Tax credit for the period and effective rate ...... (12,376) 182.8 (54,866) (38.1)
F-89 13. Dividends
Amounts recognised as distributions to equity holders in the period:
2012 2011 £’000 £’000 Preference Dividends 13.75% Cumulative Preference Shares (13.75p per share) ...... 104 104 13.75% ‘A’ Preference Shares (13.75p per share) ...... 48 48 152 152
No dividend is to be recommended to shareholders at the Annual General Meeting making a total for 2012 of £nil (2011: £nil).
14. Earnings per share
The calculation of earnings per share is based on the following profits/(losses) and weighted average number of shares:
2012 2011 £’000 £’000 Earnings Profit/(loss) for the period ...... 5,611 (88,937) Preference dividend ...... (152) (152) Earnings for the purposes of basic and diluted earnings per share ...... 5,459 (89,089) Non-recurring and IAS 21/39 items (after tax) ...... 15,813 110,970 Earnings for the purposes of underlying earnings per share ...... 21,272 21,881
2012 2011 No. of shares No. of shares Number of shares Weighted average number of ordinary shares for the purposes of basic earnings per share ...... 621,758,744 625,711,881 Effect of dilutive potential ordinary shares: —warrants and employee share options ...... 2,594,333 — —deferred bonus shares ...... 1,788,822 — Number of shares for the purposes of diluted earnings per share . . 626,141,899 625,711,881 Earnings per share (p) Basic ...... 0.88 (14.24) Underlying ...... 3.42 3.50 Diluted—see below ...... 0.87 (14.24)
The weighted average number of ordinary shares above are shown excluding treasury shares.
Underlying figures are presented to show the effect of excluding non-recurring and IAS 21/39 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 explained in Note 27, the preference shares qualify as 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.
F-90 15. Intangible assets
Publishing titles £’000 Cost Opening balance ...... 1,309,234 Exchange movements ...... (557) Closing balance ...... 1,308,677 Accumulated impairment losses Opening balance ...... (566,383) Impairment losses for the period ...... — Closing balance ...... (566,383) Carrying amount Opening balance ...... 742,851 Closing balance ...... 742,294
The exchange movement above reflects the impact of the exchange rate on the valuation of publishing titles denominated in Euros at the period end date. It is partially offset by a decrease in the euro borrowings.
The carrying amount of publishing titles by cash generating unit (CGU) is as follows:
2012 2011 £’000 £’000 Scotland ...... 56,013 58,575 North ...... 272,190 279,223 Northwest ...... 93,201 104,561 Midlands ...... 168,190 168,731 South ...... 60,602 45,267 Northern Ireland ...... 73,422 63,042 Republic of Ireland ...... 18,676 23,452 Total carrying amount of publishing titles ...... 742,294 742,851
The Group tests the carrying value of publishing titles held within the publishing operating segment for impairment annually or more frequently if there are indications that they might be impaired. The publishing titles are grouped by CGUs, being the lowest levels for which there are separately identifiable cash flows independent of the cash inflows from other groups of assets.
The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are:
• the discount rate; • expected changes to selling prices and direct costs during the period; and • growth rates.
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. The discount rate applied to future cash flows in 2012 was 11.0% (2011: 11.0%). The discount rate reflects management’s view of the current risk profile of the underlying assets being valued with regard to the current economic environment and the risks that the regional media industry are facing.
F-91 Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. These include changes in cover prices, advertising rates as well as movement in newsprint and production costs and inflation.
Discounted cash flow forecasts are prepared using:
• the most recent financial budgets and projections approved by management for 2013—2015 which reflect management’s current experience and future expectations of the markets the CGUs operate in;
• cash flows for 2016 to 2032 that are extrapolated based on an estimated annual long-term growth rate of 1.0%;
• a discounted residual value of 5 times the final year’s cash flow; and
• capital expenditure cash flows to reflect the cycle of capital investment required.
The present value of the cash flows are then compared to the carrying value of the asset to determine if there is any impairment loss.
The total net impairment charge recognised in 2012 was £nil (2011: net impairment charge of £163.7 million).
The net nil impairment charge in the period comprises further impairment of £25.8 million primarily in the North and North West of England, offset by the reversal of past impairment in the South of England and Northern Ireland.
The Group has conducted 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 an impairment for the Group of £18.8 million and an increase in the discount rate of 0.5% would result in an impairment of £31.0 million.
Growth rate Discount rate sensitivity sensitivity £’000 £’000 Scotland ...... 1,238 2,032 North ...... 7,163 11,756 Northwest ...... 2,103 3,451 Midlands ...... 3,814 6,260 South ...... 2,432 3,991 Northern Ireland ...... 1,732 2,843 Republic of Ireland ...... 367 693 Total potential impairment from sensitivity analysis ...... 18,849 31,027
F-92 16. Property, plant and equipment
Freehold land Leasehold Plant and Motor and buildings buildings machinery vehicles Total £’000 £’000 £’000 £’000 £’000 Cost At 1 January 2011 ...... 95,881 4,382 227,232 13,984 341,479 Additions ...... 62 10 1,724 — 1,796 Disposals ...... (1,331) (1) (8,994) (3,809) (14,135) Exchange differences ...... (13) — (4) (8) (25) Transferred to assets held for sale during the period ...... (1,921) — (666) — (2,587) At 31 December 2011 ...... 92,678 4,391 219,292 10,167 326,528 Additions ...... — 1,258 3,829 5 5,092 Disposals ...... (2,904) (55) (58,659) (4,180) (65,798) Exchange differences ...... (14) — (53) (9) (76) Transferred to assets held for sale during the period ...... (20,968) — (20,607) — (41,575) At 29 December 2012 ...... 68,792 5,594 143,802 5,983 224,171 Depreciation At 1 January 2011 ...... 12,817 1,608 119,689 12,274 146,388 Disposals ...... (424) (1) (8,977) (3,766) (13,168) Charge for the period ...... 1,873 139 14,814 1,160 17,986 Non-recurring write down in period . . — — 5,161 — 5,161 Exchange differences ...... (10) — (4) (8) (22) Transferred to assets held for sale during the period ...... (408) — (563) — (971) At 31 December 2011 ...... 13,848 1,746 130,120 9,660 155,374 Disposals ...... (964) (55) (56,539) (4,156) (61,714) Charge for the period ...... 3,954 168 8,214 379 12,715 Non-recurring write down in period . . — — 17,239 — 17,239 Exchange differences ...... (27) — (38) (8) (73) Transferred to assets held for sale during the period ...... (6,707) — (19,886) — (26,593) At 29 December 2012 ...... 10,104 1,859 79,110 5,875 96,948 Carrying amount At 31 December 2011 ...... 78,830 2,645 89,172 507 171,154 At 29 December 2012 ...... 58,688 3,735 64,692 108 127,223
F-93 17. Available for sale investments
The Group’s available for sale investments are:
2012 2011 £’000 £’000 Listed investments at fair value ...... 2 2 Unlisted investments Cost ...... 4,494 4,494 Provision for impairment ...... (3,526) (3,526) Unlisted investments carrying amount ...... 968 968 Total investments ...... 970 970
18. Interests in associates
The Group’s associated undertakings at the period end are:
Place of Proportion of Proportion of Method of incorporation ownership voting power accounting Name and operation interest held for investment Classified Periodicals Ltd ...... England 50% 50% Equity method
The aggregate amounts relating to associates are:
2012 2011 £’000 £’000 Total assets ...... 43 32 Total liabilities ...... (3) (4) Revenues ...... 26 37 Profit after tax ...... 6 10
F-94 19. Assets classified as held for sale
Freehold land Leasehold Plant and and buildings buildings machinery Total £’000 £’000 £’000 £’000 Cost At 1 January 2011 ...... 8,685 762 4,069 13,516 Disposals ...... — — (4,069) (4,069) Transferred from property, plant and equipment during period ...... 1,921 — 666 2,587 Exchange differences ...... (15) (17) — (32) At 31 December 2011 ...... 10,591 745 666 12,002 Disposals ...... (9,666) — (535) (10,201) Transferred from property, plant and equipment during period ...... 20,968 — 20,607 41,575 Exchange differences ...... (12) (16) — (28) At 29 December 2012 ...... 21,881 729 20,738 43,348 Depreciation At 1 January 2011 ...... 6,461 762 3,222 10,445 Disposals ...... — — (3,222) (3,222) Non-recurring write down in carrying value . . . 600 — — 600 Transferred from property, plant and equipment during period ...... 408 — 563 971 Exchange differences ...... (13) (17) — (30) At 31 December 2011 ...... 7,456 745 563 8,764 Disposals ...... (6,921) — (483) (7,404) Write down in carrying value ...... 7,680 — 137 7,817 Transferred from property, plant and equipment during period ...... 6,707 — 19,886 26,593 Exchange differences ...... (7) (16) — (23) At 29 December 2012 ...... 14,915 729 20,103 35,747 Carrying amount At 31 December 2011 ...... 3,135 — 103 3,238 At 29 December 2012 ...... 6,966 — 635 7,601
Assets classified as held for sale consists of land and buildings in the UK and Republic of Ireland that are no longer in use by the Group and print presses that have ceased production. All of the assets are being marketed for sale and are expected to be sold within the next year.
20. Inventories
2012 2011 £’000 £’000 Raw materials ...... 2,850 4,709
F-95 21. Other financial assets and liabilities
Trade and other receivables
2012 2011 £’000 £’000 Current: Trade receivables ...... 34,800 42,967 Allowance for doubtful debts ...... (3,557) (5,626) 31,243 37,341 Prepayments ...... 4,740 6,132 Other debtors ...... 5,645 5,257 Total current trade and other receivables ...... 41,628 48,730 Non-current: Trade receivables ...... 6 6
Trade receivables The average credit period taken on sales is 41 days (2011: 44 days). No interest is charged on trade receivables. The Group has provided for estimated irrecoverable amounts in accordance with the accounting policy described in Note 3.
Before accepting any new credit customer, the Group obtains a credit check from an external agency to assess the potential customer’s credit quality and then defines credit terms and limits on a by-customer basis. These credit terms are reviewed regularly. In the case of one-off customers or low value purchases, pre-payment for the goods is required under the Group’s policy. The Group reviews trade receivables past due but not impaired on a regular basis and considers, based on past experience, that the credit quality of these amounts at the period end date has not deteriorated since the transaction was entered into and so considers the amounts recoverable. Regular contact is maintained with all such customers and, where necessary, payment plans are in place to further reduce the risk of default on the receivable.
Included in the Group’s trade receivable balance are debtors with a carrying amount of £14.6 million (2011: £19.9 million) which are past due at the reporting date but for which the Group has not provided as there has not been a significant change in credit quality and the Group believes that the amounts are still recoverable. The Group does not hold any security over these balances. The weighted average age of these receivables (past due) is 26 days (2011: 25 days).
Ageing of past due but not impaired trade receivables
2012 2011 £’000 £’000 0 - 30 days ...... 10,093 14,417 30 - 60 days ...... 3,956 4,798 60 - 90 days ...... 108 192 90+ days ...... 406 471 Total ...... 14,563 19,878
F-96 Movement in the allowance for doubtful debts
2012 2011 £’000 £’000 Balance at the start of the year ...... 5,626 7,478 Decrease in the allowance recognised in the Income Statement (Note 8) ..... (2,069) (1,852) Balance at the end of the year ...... 3,557 5,626
In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the balance sheet date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the Directors believe that there is no further credit provision required in excess of the allowance for doubtful debts.
Ageing of impaired trade receivables Impaired trade receivables are those that have been provided for under the Group’s bad debt provisioning policy, as described in the accounting policy in Note 3. The ageing of impaired trade receivables is shown below.
2012 2011 £’000 £’000 0 - 30 days ...... 443 26 30 - 60 days ...... 21 199 60 - 90 days ...... 501 732 90+ days ...... 2,592 4,669 Total ...... 3,557 5,626
The Directors consider that the carrying amount of trade and other receivables at the balance sheet date approximate to their fair value.
Cash and cash equivalents Cash and cash equivalents totalling £32,789,000 (2011: £13,407,000) comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.
Trade and other payables
2012 2011 £’000 £’000 Current: Trade creditors and accruals ...... 34,861 29,638 Other creditors ...... 16,073 13,320 Total current trade and other payables ...... 50,934 42,958 Non-current trade and other creditors ...... 142 148
Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 33 days (2011: 30 days). The Group has financial risk management policies in place to ensure all payables are paid within the agreed credit terms.
The Directors consider that the carrying amount of trade payables at the balance sheet date approximate to their fair value.
F-97 22. Borrowings
Borrowings shown at amortised cost at the period end were:
2012 2011 £’000 £’000 Bank loans ...... 227,316 218,252 Private placement loan notes ...... 119,162 141,556 Term debt issue costs ...... (12,273) (4,041) Payment-in-kind interest accrual ...... 8,535 16,327 Total borrowings ...... 342,740 372,094
The borrowings are disclosed in the financial statements as:
2012 2011 £’000 £’000 Current borrowings ...... 8,520 372,094 Non-current borrowings ...... 334,220 — Total borrowings ...... 342,740 372,094
The Group’s borrowings at the end of the previous period were classed as current borrowings, due to the lending facilities maturing on 30 September 2012. These facilities were renegotiated in April 2012 and now expire on 30 September 2015.
The Group’s net debt is:
2012 2011 £’000 £’000 Gross borrowings as above ...... 342,740 372,094 Cash and cash equivalents ...... (32,789) (13,407) Impact of currency hedge instruments ...... (2,854) (11,065) Net debt including currency hedge instruments ...... 307,097 347,622 Term debt issue costs ...... 12,273 4,041 Net debt excluding term debt issue costs ...... 319,370 351,663
Analysis of borrowings by currency:
Total Sterling Euros US dollars £’000 £’000 £’000 £’000 At 29 December 2012 Bank loans ...... 227,316 215,015 12,301 — Private placement loan notes ...... 119,162 33,956 — 85,206 Term debt issue costs ...... (12,273) (12,273) — — Payment-in-kind interest accrual ...... 8,535 6,342 — 2,193 342,740 243,040 12,301 87,399 At 31 December 2011 Bank loans ...... 218,252 205,689 12,563 — Private placement loan notes ...... 141,556 39,050 — 102,506 Term debt issue costs ...... (4,041) (4,041) — — Payment-in-kind interest accrual ...... 16,327 12,094 — 4,233 372,094 252,792 12,563 106,739
F-98 Finance facilities On 24 April 2012, the Group entered into an amended and restated finance agreement for credit facilities with bank lenders and private placement loan note holders until 30 September 2015. The facility is secured (see Note 29) and share warrants over 12.5% of the Company’s share capital have been issued to the lenders and note holders. 5.0% of the warrants were issued in August 2009, and a further 7.5% were issued in 2012, with all warrants expiring 30 September 2017. Interest rates are based on the absolute amount of debt outstanding and leverage multiples, with reductions based on agreed ratchets.
Bank loans The Group has credit facilities with a number of banks. The total facility at 29 December 2012 is £237.5 million (2011: £273.9 million) of which £10.0 million is unutilised at the balance sheet date (2011: £55.0 million). The credit facilities are provided under two separate tranches as detailed below.
• Facility A—a revolving credit facility of £55.0 million. This facility includes a bank overdraft facility of £10.0 million (2011: £10.0 million). The loans can be drawn down for three month terms with interest payable at LIBOR plus a maximum cash margin of 5.00% (2011: 4.15%).
• Facility B—a term loan facility of £182.5 million (2011: £218.9 million), which can be drawn in Sterling or Euros. Interest is payable quarterly at LIBOR plus a cash margin of up to 5.00% (2011: 4.15%).
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 and interest rate caps. At the balance sheet date, borrowings of £30.0 million (2011: £200.0 million) were arranged at fixed rate, while a further £180.0 million borrowings (2011: £nil) were hedged through interest rate caps. Further details on all of the Group’s derivative instruments can be found in Note 32.
Private placement loan notes The Group has total private placement loan notes at 29 December 2012 of £34.0 million and $137.8 million (2011: £39.1 million and $158.2 million). Interest is payable quarterly at fixed coupon rates up to 10.30% (2011: 9.45%) depending on covenants.
The private placement loan notes consist of:
• £34.0 million at a coupon rate of up to 10.30% (2011: £39.1 million at a coupon rate of up to 9.45%)
• $58.7 million at a coupon rate of up to 9.75% (2011: $67.4 million at a coupon rate of up to 8.9%)
• $28.1 million at a coupon rate of up to 10.18% (2011: $32.2 million at a coupon rate of up to 9.33%)
• $51.0 million at a coupon rate of up to 10.28% (2011: $58.6 million at a coupon rate of up to 9.43%)
In order to hedge the Group’s exposure to US dollar exchange rate fluctuations, the Group has in place foreign exchange options. These options allow the Group to purchase US dollars at a set exchange rate, hedging the Group’s cash flow risk if the market rate falls below the set rate. The options are in place to cover all interest payments and scheduled principal repayments due on the US denominated private placement notes.
Repayments All facilities are due for full repayment on 30 September 2015.
F-99 Scheduled repayments are due every six months in relation to both the bank loans and private placement loan notes. Scheduled repayments total £70.0 million from 30 June 2012 to 30 June 2015; however following the News International receipt, part of the scheduled repayments were brought forward to November 2012 with only £40.0 million scheduled repayments remaining.
In addition, there is a pay-if-you-can (PIYC) repayment schedule agreed for both the bank loans and private placement notes totalling £60.0 million up to 30 June 2015. £2.0 million of the PIYC payments were made ahead of schedule in 2012.
Payment-in-kind interest In addition to the cash margin payable on the bank facilities and private placement loan notes, a payment-in-kind (PIK) margin accumulates and is payable at the end of the facility. The PIK accrues at a maximum margin of 4.0% depending on the absolute amount of debt outstanding and leverage multiples. If the facilities are fully repaid prior to 31 December 2014, the rate at which the PIK margin accrued throughout the period of the agreement will be recalculated at a substantially reduced rate.
At the date of the refinancing, previously accrued PIK totalling £18.8 million was capitalised and added to the outstanding borrowings under the bank loans and private placement loan notes. Accordingly, the PIK accrual at 29 December 2012 only reflects PIK accrued since 24 April 2012.
Interest rates: The weighted average interest rates paid over the course of the year were as follows:
2012 2011 %% Bank overdrafts ...... 5.5 4.6 Bank loans ...... 11.3 10.4 Private placement loan notes ...... 12.5 9.0 11.7 9.9
23. Derivative financial instruments
Derivatives that are carried at fair value are as follows:
2012 2011 £’000 £’000 Interest rate swaps—current liability ...... (99) (1,056) Interest rate swaps—non-current liability ...... — (306) Interest rate caps—non-current asset ...... 43 — Cross currency swaps—current asset ...... — 11,657 Foreign exchange options—current asset ...... 155 — Foreign exchange options—non-current asset ...... 2,699 — Total derivative financial instruments ...... 2,798 10,295
24. Retirement benefit obligation
Throughout 2012 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.
F-100 • An ROI industry-wide final salary scheme for journalists which was closed on 31 October 2012 and a final salary scheme for a small number of employees in Limerick which has been closed to future accruals since 2010. There are no additional financial implications to the Group if these schemes are terminated. Consequently, the Group’s obligation 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 and closed to future accrual. 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 to the defined benefit scheme are fixed annual amounts with the intention of eliminating the deficit. Based on the outcome of the triennial valuation at 31 December 2010, the fixed annual contribution amount is £5.7 million from 1 June 2012 under the schedule of contributions agreed between the Company and the JPPP Trustees. As the defined benefit scheme has been closed to new members for a considerable period the last deferred member is scheduled to retire in 35 years with, at current mortality assumptions, the last pension paid in around 80 years (based on the mortality assumptions used for the 2010 triennial valuation). 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.
During 2012 and 2011, the Company carried out pension exchange exercises whereby a number of pensioner members were made an offer by the Company to exchange some of their future pension increases for a one-off increase in pension, where the new uplifted amount would no longer be eligible for increases in payment. The impact of this was a non-recurring credit in the Group Income Statement of £1.5 million in the year (2011: credit of £1.9 million).
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 employees and pensioner members. The trustees appoint their own advisers and administrators of the Plan. Discussions take place with the Executive Directors of the Company to agree matters such as the contribution rates.
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 for the defined contribution schemes and Irish schemes in 2012 was £6,724,000 (2011: £7,343,000).
Major assumptions:
2012 2011 Discount rate ...... 4.5% 4.9% Expected return on scheme assets ...... 5.6% 5.6% Future pension increases Deferred revaluations (CPI) ...... 1.9% 2.0% Pensions in payment (RPI) ...... 2.8% 2.9% Life expectancy Male...... 23.1 years 3.1 years Female ...... 23.1 years 3.3 years
F-101 The valuation of the defined benefit scheme’s 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:
• A change in the discount rate of 0.1% pa would change the value of liabilities by approximately 1.7% or £8.1 million.
• A change in the life expectancy by one year would change liabilities by approximately 3.0% or £14.6 million.
• A change in the inflation rate of 0.1% pa would change the value of the liabilities by 1.1% or £5.6 million. Amounts recognised in the Income Statement in respect of defined benefit schemes:
2012 2011 £’000 £’000 Net interest expense/(income) ...... 2,471 (2,250) Past service gain ...... (1,540) (1,930) 931 (4,180)
There was no current service costs in 2012 (2011: £nil) as the Defined Benefit scheme was closed to future accrual in 2010.
An actuarial loss of £21,065,000 (2011: loss of £49,584,000) has been recognised in the Group Statement of Comprehensive Income in the current period. This has been shown net of deferred tax of £5,188,000 (2011: £13,278,000). The cumulative amount of actuarial gains and losses recognised in the Group Statement of Comprehensive Income since the date of transition to IFRS is a loss of £5,530,000 (2011: loss of £84,465,000). The actual return on scheme assets was a £28,494,000 profit (2011: £1,198,000 loss).
Amounts included in the Statement of Financial Position:
2012 2011 £’000 £’000 Present value of defined benefit obligations ...... 504,111 472,708 Fair value of plan assets ...... (382,792) (368,718) Total liability recognised in the Statement of Financial Position ...... 121,319 103,990 Amount included in current liabilities ...... (5,700) (2,200) Amount included in non-current liabilities ...... 115,619 101,790
The amounts of contributions expected to be paid to the scheme during 2013 is £5,700,000 (2011: £2,200,000 annually rising to £5,700,000 annually from 1 June 2012).
Movements in the present value of defined benefit obligations:
2012 2011 £’000 £’000 Balance at the start of the period ...... 472,708 446,095 Interest costs ...... 22,708 23,612 Age related rebates ...... 630 74 Changes in assumptions underlying the defined benefit obligations ...... 29,322 22,524 Past service gain ...... (1,540) (1,930) Benefits paid ...... (19,717) (17,667) Balance at the end of the period ...... 504,111 472,708
F-102 Movements in the fair value of plan assets:
2012 2011 £’000 £’000 Balance at the start of the period ...... 368,718 385,309 Expected return on plan assets ...... 20,237 25,862 Actual return less expected return on plan assets ...... 8,257 (27,060) Contributions from the sponsoring companies ...... 4,667 2,200 Age related rebates ...... 630 74 Benefits paid ...... (19,717) (17,667) Balance at the end of the period ...... 382,792 368,718
Analysis of the plan assets and the expected rate of return:
Expected return Fair value of assets 2012 2011 2012 2011 % % £’000 £’000 Equity instruments ...... 6.8 6.8 240,011 224,549 Debt instruments ...... 3.8 3.8 100,674 98,816 Property ...... 4.8 4.8 17,991 21,754 Other assets ...... 2.7 2.6 24,116 23,599 5.6 5.6 382,792 368,718
Five year history:
2012 2011 2010 2009 2008 £’000 £’000 £’000 £’000 £’000 Present value of defined benefit obligations ...... 504,111 472,708 446,095 446,114 340,060 Fair value of scheme assets ...... (382,792) (368,718) (385,309) (362,006) (321,849) Deficit in the plan ...... 121,319 103,990 60,786 84,108 18,211 Experience adjustments on scheme liabilities Amount (£’000) ...... (29,332) (22,524) 2,925 (100,425) 80,193 Percentage of plan liabilities (%) ...... (5.8%) (4.8%) 0.7% (22.5%) 23.6% Experience adjustments on scheme assets Amounts (£’000) ...... 8,257 (27,060) 11,139 29,137 (92,340) Percentage of plan assets (%) ...... 2.2% (7.3%) 2.9% 8.0% (28.7%)
F-103 25. Deferred tax
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods.
Accelerated Properties tax Intangible Pension Other timing not eligible depreciation assets balances differences Total £’000 £’000 £’000 £’000 £’000 £’000 At 1 January 2011 ...... 14,802 12,226 244,193 (16,412) (1,854) 252,955 (Credit)/charge to income .... (502) (1,764) (44,041) 1,723 758 (43,826) Credit to equity ...... — — — (13,388) — (13,388) Reduction in tax rate—income . (1,067) (785) (14,212) 1,088 66 (14,910) Reduction in tax rate—equity . — — — 992 — 992 Currency movements ...... — 2 (227) — 11 (214) At 31 December 2011 ...... 13,233 9,679 185,713 (25,997) (1,019) 181,609 (Credit)/charge to income .... (1,437) (3,866) — 934 392 (3,977) Credit to equity ...... — — — (5,266) — (5,266) Reduction in tax rate—income . (852) (474) (12,787) 2,005 38 (12,070) Reduction in tax rate—equity . — — — 421 — 421 Currency movements ...... — 3 (140) — 4 (133) At 29 December 2012 ...... 10,944 5,342 172,786 (27,903) (585) 160,584
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (before offset) for financial reporting purposes:
2012 2011 £’000 £’000 Deferred tax liabilities ...... 189,072 208,625 Deferred tax assets ...... (28,488) (27,016) 160,584 181,609
Temporary differences arising in connection with interests in associates are insignificant.
The Group estimates that the future rate changes to 21.0% would reduce its UK actual deferred tax liability provided at 29 December 2012 by £13,402,000, however the impact will be dependent on our deferred tax position at that time.
F-104 26. Provisions
Obligations to industry Onerous Post sponsored leases and Unfunded retirement pension dilapidations pensions health costs schemes Total £’000 £’000 £’000 £’000 £’000 At 31 December 2011 ...... 4,213 1,189 203 362 5,967 Credit to income ...... 98 — — — 98 Actuarial valuation ...... — — — 21 21 Utilisation of provision ...... (441) — (49) — (490) At 29 December 2012 ...... 3,870 1,189 154 383 5,596
The provisions are disclosed in the financial statements as: Current provisions ...... 1,278 — 49 — 1,327 Non-current provisions ...... 2,592 1,189 105 383 4,269 Total provisions ...... 3,870 1,189 154 383 5,596
The unfunded pension provision and obligations to industry sponsored pension schemes are assessed by a qualified actuary at each period end. The post retirement health costs represent management’s estimate of the liability concerned. The provision for onerous leases and dilapidations represent management’s estimate of the liability for future lease obligations.
27. Share capital
2012 2011 £’000 £’000 Issued 639,746,083 Ordinary Shares of 10p each (2011: 639,746,083) ...... 63,975 63,975 756,000 13.75% Cumulative Preference Shares of £1 each (2011: 756,000) .... 756 756 349,600 13.75% ‘A’ Preference Shares of £1 each (2011: 349,600) ...... 350 350 Total issued share capital ...... 65,081 65,081
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.
Since the balance sheet date, 2,796,518 ordinary shares of 10p each have been issued following the exercise of a number of share warrants.
At the balance sheet date 79,622,023 warrants were outstanding.
F-105 28. Notes to the cash flow statement
2012 2011 £’000 £’000 Operating profit/(loss) ...... 40,441 (106,979) Adjustments for: Impairment of intangibles—non-recurring ...... — 163,695 Depreciation of property, plant and equipment (including write-downs) . . 29,954 23,147 Write down in carrying value of assets held for sale ...... 7,817 600 Currency differences ...... (59) (360) Charge from share-based payments ...... 606 572 Profit on disposal of property, plant and equipment ...... (2,047) (775) Movement in long-term provisions ...... 119 (679) Net pension funding contributions ...... (4,668) (2,200) IAS 19 past service gain (non-recurring) ...... (1,540) (1,930) Operating cash flows before movements in working capital ...... 70,623 75,091 Decrease/(increase) in inventories ...... 1,859 (178) Decrease in receivables ...... 6,769 1,431 Decrease in payables ...... (3,153) (5,137) Cash generated from operations ...... 76,098 71,207
Cash and cash equivalents (which are presented as a single class of assets on the face of the Statement of Financial Position) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.
29. Guarantees and other financial commitments
Lease commitments The Group has entered into non-cancellable operating leases in respect of motor vehicles and land and buildings, the payments for which extend over a period of years.
2012 2011 £’000 £’000 Minimum lease payments under operating leases recognised as an expense in the year ...... 5,688 5,798
At the period end date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows:
2012 2011 £’000 £’000 Within one year ...... 4,709 6,170 In the second to fifth years inclusive ...... 15,239 17,011 After five years ...... 23,191 20,622 Total future minimum lease payments ...... 43,139 43,803
Operating lease payments represent rentals payable by the Group for certain of its office properties and motor vehicle fleet. Leases are negotiated for an average term of 10 years in the case of properties and 4 years for vehicles. The rents payable under property leases are subject to renegotiation at various intervals specified in the lease contracts. The Group pays insurance, maintenance and repairs of these properties. The rents payable for the vehicle fleet are fixed for the full rental period.
F-106 Assets pledged as security Under the refinancing agreement signed on 28 August 2009 and amended and extended on 24 April 2012, the Group and all its material subsidiaries have entered into a security agreement with the Group’s bankers and private placement loan note holders. The security provided includes a fixed charge over the assets of the Group including investments, fixed assets, goodwill, intellectual property and a floating charge over its present and future undertakings.
30. Share-based payments
Equity-Settled Share Option Scheme Options over ordinary shares are granted under the Executive Share Option Scheme. Options are exercisable at a price equal to the closing quoted market price of the Company’s shares on the day prior to the date of grant. The vesting period is 3 years. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are forfeited if the employee leaves the Group before the options vest. No options have been granted under the Executive Share Option Scheme since 2005.
Details of the share options outstanding during the period:
2012 2011 Weighted Weighted Number average Number average of share exercise of share exercise options price (in p) options price (in p) Outstanding at the beginning of period ...... 245,947 266 312,657 246 Lapsed/forfeited during the period ...... (109,466) 268 (66,710) 229 Outstanding at the end of the period ...... 136,481 265 245,947 266 Exercisable at the end of the period ...... 136,481 265 245,947 266
No share options were exercised during the period. The options outstanding at the period end had a weighted average exercise price of 265p and a weighted average remaining contractual life of 0.2 years.
Previous grants were valued using the Black-Scholes model. As far as the assumptions were concerned, expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous full year. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
The Group recognised a charge of £nil related to equity-settled share-based payment transactions in 2012 for the Executive Share Option Scheme (2011: charge of £nil).
Group Savings-Related Share Option Scheme The Company operates a Group Savings-Related Share Option Scheme. This has been approved by the Inland Revenue and is based on eligible employees being granted options and their agreeing to save weekly or monthly in a sharesave account with Computershare Plan Managers for a period of either 3, 5 or 7 years. The right to exercise is at the discretion of the employee within six months following the end of the period of saving.
F-107 Options outstanding under the Savings-Related Scheme at the period end:
Number of Issue price Option grant date shares per share 29 September 2005 ...... 16,635 291.60p 29 September 2006 ...... 14,214 224.76p 29 September 2006 ...... 4,002 228.80p 27 September 2007 ...... 101,217 226.41p 27 September 2007 ...... 3,165 220.17p 26 September 2008 ...... 813,152 37.60p 26 September 2008 ...... 16,655 37.60p 25 September 2009 ...... 2,125,558 28.60p 25 September 2009 ...... 51,270 28.60p 28 September 2010 ...... 6,429,706 15.75p 28 September 2010 ...... 11,459 15.75p
The Group recognised a net charge of £220,000 in 2012 (2011: charge of £391,000) related to equity-settled share-based payment transactions for the Savings-Related Share Option Scheme.
The above options granted on 29 September 2006 and earlier were issued to employees at a price equivalent to the average mid-market price for the 30 days prior to 27 August 2004, 2 September 2005 and 1 September 2006 respectively. The subsequent options were granted at the closing mid-market price on the day prior to the invitation being sent to employees on 3 September 2007, 1 September 2008, 1 September 2009 and 1 September 2010 respectively. This follows the approval of the revised Sharesave Scheme at the Annual General Meeting in April 2007. A discount of 20% to the average mid-market price was applied to the issues up to and including 2009. No discount was applied to the 2010 issue.
There were no options granted under the Savings-Related Share Option Scheme in either 2012 or 2011.
Performance Share Plan The Company makes awards to Executive Directors and certain senior employees on an annual basis under the Performance Share Plan. The awards vest after three years if certain performance criteria are met during that period.
Awards outstanding under the Performance Share Plan at the period end:
Number of Market price Grant date shares on award Vesting dates 16 April 2010 ...... 3,152,454 31.75p 16 April 2013 21 April 2011 ...... 4,026,742 7.40p 21 April 2014 31 May 2011 ...... 720,000 7.00p 31 May 2014 11 November 2011 ...... 10,471,204 4.78p 11 November 2014 14 September 2012 ...... 11,998,916 6.00p 14 September 2015 21 December 2012 ...... 180,000 14.50p 21 December 2015
The Group recognised a net charge of £260,000 in 2012 (2011: net credit of £30,000) related to equity-settled share-based payment transactions for the Performance Share Plan.
Company Share Option Plan The Company granted options to certain senior managers to purchase shares in the Company at a certain market price, under the Company Share Option Plan. The awards vest after three years provided the employee remains employed by the Group.
F-108 Options outstanding under the Company Share Option Plan at the period end:
Number of Market price Grant date shares on award Vesting dates 28 June 2012 ...... 7,229,018 5.05p 28 June 2015
The Group recognised a net charge of £12,000 in 2012 (2011: £nil) related to equity-settled share-based payment transactions for the Company Share Option Plan.
Deferred Share Bonus Plan It is the Company’s policy that a proportion of any bonus paid to Executive Directors and certain senior employees is paid in shares deferred for three years. Shares are purchased at the time the bonus is awarded and held by the Company until either the three years are completed or the employee leaves and is treated as a good leaver. 5,650,530 shares are held by the Company in relation to the Deferred Share Bonus Plan.
The Group recognised a net charge of £114,000 in 2012 (2011: £211,000) related to equity- settled bonus payments for the Deferred Share Bonus Plan.
31. Related party transactions
Associated parties The Group undertook transactions, all of which were on an arms’ length basis, and had balances outstanding at the period end with related parties as shown below.
Purchases Creditors Sales Debtors 2012 2011 2012 2011 2012 2011 2012 2011 Related party £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Classified Periodicals Ltd ...... 22 34 3 4 — — — —
Classified Periodicals Ltd is an associated undertaking of Johnston Press plc, which re-publishes in a separate publication classified advertisements that appear in the Group’s titles and those of certain other publishers.
The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.
Key management personnel The remuneration of the Executive Directors, who are the key management personnel of the Group, is set out in the audited section of the Directors’ Remuneration Report.
32. Financial instruments a) Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from 2011.
The capital structure of the Group consists of debt, which includes the borrowings disclosed in Note 22, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued share capital, reserves and retained earnings as disclosed in Note 27 and in the Group Statement of Changes in Equity.
F-109 b) Gearing ratio The Board of Directors formally reviews the capital structure of the Group when considering any major corporate transactions. As part of these reviews, the Board considers the cost of capital and the risks associated with each class of capital. Based on the recommendations of the Board, the Group will balance its overall capital structure when appropriate through new share issues and share buy-backs as well as the issue of new debt or the redemption of existing debt.
The gearing ratio at the period end is as follows:
2012 2011 £’000 £’000 Debt ...... 342,740 372,094 Cash and cash equivalents ...... (32,789) (13,407) Net debt (excluding the impact of cross-currency hedges) ...... 309,951 358,687 Equity ...... 273,917 284,364 Gearing ratio ...... 53.0% 55.8%
Debt is defined as long and short-term borrowings as detailed in Note 22. Equity includes all capital and reserves of the Group attributable to equity holders of the parent. c) Externally imposed capital requirements The Group is not subject to externally imposed capital requirements. d) Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 3 to the financial statements. e) Categories of financial instruments
2012 2011 £’000 £’000 Financial assets (current and non-current) Derivative instruments ...... 2,897 11,657 Trade receivables ...... 31,243 37,341 Cash and cash equivalents ...... 32,789 13,407 Available for sale financial assets ...... 970 970 Financial liabilities (current and non-current) Derivative instruments ...... (99) (1,362) Trade payables ...... (14,531) (13,632) Borrowings at amortised cost ...... (342,740) (372,094) f) Financial risk management objectives The Group’s Corporate Treasury function provides services to the business and monitors and manages the financial risks relating to the operations of the Group through assessment of the exposures by degree and magnitude of risk. These risks include market risk (including currency risk and interest rate risk), credit risk, liquidity risk and cash flow interest rate risk.
The Group seeks to minimise the effects of these risks by using derivative financial instruments to hedge these risk exposures. The use of financial derivatives is governed by the Group’s policies approved by the Board and guidelines agreed with the Group’s lenders that must be operated within. The Group does not enter into or trade in financial instruments, including derivative financial instruments, for speculative purposes.
F-110 The Corporate Treasury function reports regularly to the Executive Directors and the Board. g) Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates (refer to section h) and interest rates (refer to section i). The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including:
• Borrowings in Euros to manage the foreign currency risk associated with the Group’s net investment in its foreign operations;
• Interest rate swaps and caps to mitigate the risk of rising interest rates; and
• Foreign currency options and currency swaps to manage the foreign currency risk associated with the US dollar denominated private placement loan notes.
At a Group and Company level, market risk exposures are assessed using sensitivity analyses.
There have been no changes to the Group’s exposure to market risks or the manner in which it manages and measures risk. h) Foreign currency risk management The Group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise.
The Group utilises currency derivatives to hedge significant future transactions and cash flows. In particular, the Group has a cash flow exposure to fluctuations in the US dollar on the private placement borrowings and interest payments. At the balance sheet date, the Group had in place a number of foreign exchange options which allow the Group to purchase US dollars at a set exchange rate when interest and principal payments are due on the borrowings. This protects the Group’s cashflows if the US dollar rate falls below the agreed option rate.
The following table details the forward foreign currency options outstanding as at the period end:
Average exchange US $ value Notional value Fair value rate 2012 2011 2012 2011 2012 2011 2012 2011 $’000 $’000 £’000 £’000 £’000 £’000 Within 1 year ...... 1.55 — 24,400 — 15,742 — 155 — 1 to 2 years ...... 1.55 — 153,800 — 99,226 — 2,699 — 1.55 — 178,200 — 114,968 — 2,854 —
F-111 The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:
Liabilities Assets 2012 2011 2012 2011 £’000 £’000 £’000 £’000 Euro Trade receivables ...... — — 1,239 1,766 Cash and cash equivalents ...... — — 1,845 1,349 Trade payables ...... (1,730) (2,170) — — Borrowings ...... (12,301) (12,563) — — US dollar Cash and cash equivalents ...... — — 94 142 Borrowings ...... (87,399) (106,739) — —
Foreign currency sensitivity As noted above, the Group is mainly exposed to movements in Euros and US dollars rates. The following table details the Group’s sensitivity to a 5% change in pounds sterling against the euro and a 5% change in pounds sterling against the US dollar. These percentages are the rates used by management when assessing sensitivities internally and represent management’s assessment of the possible change in foreign currency rates.
The sensitivity analysis of the Group’s exposure to foreign currency risk at the reporting date has been determined based on the change taking place at the beginning of the financial year and held constant throughout the reporting period. A positive number indicates an increase in profit or loss and other equity where pounds sterling strengthens against the respective currency. For a 5% weakening of the sterling against the relevant currency, there is an equal and opposite impact on profit or loss and other equity, and the balances below reverse signs.
Euro US Dollar currency currency impact impact 2012 2011 2012 2011 £’000 £’000 £’000 £’000 Profit or loss ...... 462 450 4,262 183 Other equity ...... — — — —
Of the impact on profit or loss an increase of £586,000 (2011: increase of £598,000) relates to the retranslation of the Group’s euro denominated borrowings. The £4,262,000 (2011: £183,000) impact on profit or loss from US dollar exposure relates to the retranslation of US dollar private placement loan notes. i) Interest rate risk management The Group is exposed to interest rate risk as the Parent Company borrows funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings and by the use of interest rate swap contracts and interest rate caps. Hedging activities are evaluated regularly to align interest rate views, define risk appetite and the requirements of the funding agreements in place, ensuring optimal hedging strategies are applied, by either positioning the balance sheet or interest expense through different interest rate cycles.
Interest rate sensitivity The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the period end date. For floating rate
F-112 liabilities, the analysis is prepared assuming the amount of the liability outstanding at the period end date was outstanding for the whole year. A 50 basis points increase is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the possible change in interest rates.
At the reporting date, if interest rates had been 50 basis points higher and all other variables were held constant, the Group’s:
• net profit would decrease by £499,000 (2011: net profit would decrease by £374,000), mainly due to the impact of increased interest on sterling denominated borrowings; and
• net profit would increase by £36,000 (2011: net profit would increase by £377,000) as a result of the changes in the fair value of the Group’s cash flow hedges.
For a decrease of 50 bps, the numbers shown above would have the opposite effect.
Interest rate swap contracts Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the fair value of issued fixed rate debt held and the cash flow exposures on the issued floating rate debt held.
The following tables detail the notional principal amounts and remaining terms of interest rate swap contracts outstanding as at the reporting date. The average interest rate is based on the outstanding balances at the end of the financial year. In the tables below, positive values in the fair value columns denote financial assets and negative values denote financial liabilities.
Cash flow hedges (outstanding receive floating: pay fixed contracts and receive fixed: pay fixed contracts)
Average contract Notional fixed principal interest amount Fair value 2012 2011 2012 2011 2012 2011 % % £’000 £’000 £’000 £’000 Within 1 year ...... 1.90 3.79 30,000 223,548 (99) 6,101 1 to 2 years ...... — 1.90 — 30,000 — (306) 1.90 3.57 30,000 253,548 (99) 5,795
The interest rate swaps settle on a quarterly basis with interest being paid monthly or quarterly on the underlying principal amount. The floating rate on the interest rate swaps is 3 months LIBOR. The Group settles the difference between the fixed and floating interest rates on a net basis. All interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest rate amounts are entered into in order to reduce the Group’s cash flow exposure resulting from variable interest rates on borrowings.
Fair value hedges (outstanding receive fixed: pay floating contracts)
Average contract Notional fixed principal interest amount Fair value 2012 2011 2012 2011 2012 2011 % % £’000 £’000 £’000 £’000 Within 1 year ...... — 8.85 — 37,758 — 4,500
All of the hedges shown in the table above matured during 2012.
F-113 Interest rate caps Under interest rate caps, the Group has capped the floating 3 month libor rate through a one-off upfront payment. This protects the Group from interest rates rising above the cap, while continuing to pay floating libor while it remains below the cap. The interest rate caps settle on a quarterly basis.
Notional Interest principal rate cap amount Fair value 2012 2011 2012 2011 2012 2011 % % £’000 £’000 £’000 £’000 2 to 5 years ...... 2.0 — 180,000 — 43 —
Measurement Financial instruments that are measured subsequent to initial recognition at fair value are grouped into 3 levels based on the extent to which the fair value is observable. The levels are classified as follows:
Level 1: fair value is based on quoted prices in active markets for identified financial assets and liabilities. Level 2: fair value is determined using directly observable inputs other than level 1 inputs. Level 3: fair value is determined on inputs not based on observable market data.
In the current and prior period, the interest rate and cross currency swaps, foreign currency options and interest rate caps are classified as level 2 financial instruments. The available for sale investments are classified as level 3 financial instruments. There have been no transfers between the various levels of the fair value hierarchy during the period. j) Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties as a way of mitigating the risk of financial loss from defaults. The Group’s policy on dealing with trade customers is described in Notes 3 and 21.
The Group’s exposure and the credit ratings of its counterparties are continuously monitored. As far as possible, the aggregate value of transactions is spread across a number of approved counterparties.
Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable.
The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics, the latter being defined as connected entities, other than with some of the larger advertising agencies. In the case of the latter, a close relationship exists between the Group and the agencies and appropriate allowances for doubtful debts are in place. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit- ratings assigned by international credit-rating agencies, and the funds and financial instruments are held with a number of banks to spread the risk.
F-114 The following table shows the total estimated exposure to credit risk for all of the Group’s financial assets, excluding trade receivables which are discussed in Note 21:
2012 2011 Carrying Exposure to Carrying Exposure to value credit risk value credit risk £’000 £’000 £’000 £’000 Available for sale investments ...... 970 — 970 — Cash and cash equivalents ...... 32,789 — 13,407 — Derivative instruments ...... 2,897 — 11,657 — 36,656 — 26,034 — k) Liquidity risk management Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has agreed an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Included in Note 22 is a description of additional undrawn facilities that the Group has at its disposal to further reduce liquidity risk.
Liquidity risk is further discussed in the Business Review on page 23.
Liquidity and interest risk tables The following tables detail the Group’s remaining contractual maturity for its non-derivative financial liabilities as at 29 December 2012. The tables have been drawn up on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows.
Period ended 29 December 2012
Private Bank placement Trade loans notes payables Total £’000 £’000 £’000 £’000 Within 1 year ...... 19,025 15,236 14,531 48,792 In 1 to 2 years ...... 18,704 14,870 — 33,574 In 2 to 5 years ...... 225,882 123,753 — 349,635 263,611 153,859 14,531 432,001
Period ended 31 December 2011
Private Bank placement Trade loans notes payables Total £’000 £’000 £’000 £’000 Within 1 year ...... 237,722 157,413 13,632 408,767 237,722 157,413 13,632 408,767
F-115 The maturity profile of the Group’s financial derivatives (which include interest rate and foreign currency caps, swaps and options), using undiscounted cash flows, is as follows:
2012 2011 Payable Receivable Payable Receivable £’000 £’000 £’000 £’000 Within 1 year ...... 284 75 94,852 105,650 In 1-2 years ...... ——141 124 284 75 94,993 105,774
The Group has access to financial facilities, the total unutilised amount of which is £10.0 million (2011: £55.0 million) at the reporting date. The Group expects to meet its obligations from operating cash flows and proceeds of maturing financial assets. l) Fair value of financial instruments The fair values of financial assets and financial liabilities are provided by the counterparty to the instrument.
Interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates.
F-116 Group five-year summary
2008 2009(1) 2010 2011 2012 £’000 £’000 £’000 £’000 £’000 Income statement Revenue ...... 531,899 427,996 398,084 373,845 328,691 Operating profit on ordinary activities(2) ...... 128,414 71,784 71,991 64,552 57,045 Share of associates’ operating profit . . 85 22 10 10 6 Non-recurring items ...... (528,090) (162,398) (17,133) (171,531) (16,604) (Loss)/profit before interest and taxation ...... (399,591) (90,592) 54,868 (106,969) 40,441 Net finance costs ...... (29,667) (28,465) (41,505) (36,158) (44,446) Non-recurring finance costs and IAS 21/39 items ...... — 5,282 3,166 (676) (2,760) (Loss)/profit before taxation ...... (429,258) (113,775) 16,529 (143,803) (6,765) Taxation ...... 63,788 26,517 19,535 54,866 12,376 (Loss)/profit for the year ...... (365,470) (87,258) 36,064 (88,937) 5,611 Statistics Basic (loss)/earnings per share ...... (67.99p) (13.66p) 5.61p (14.24p) 0.88p Underlying earnings per share ...... 13.41p 5.53p 3.67p 3.50p 3.42p Operating profit(2) to turnover ...... 24.1% 16.8% 18.1% 17.3% 17.4% Balance sheet Intangible assets ...... 1,057,886 923,377 907,455 742,851 742,294 Property, plant and equipment ...... 260,498 219,608 195,091 171,154 127,223 Investments ...... 2,772 1,000 982 984 990 Derivative financial instruments ..... 36,488 15,794 15,757 — 2,742 1,357,644 1,159,779 1,119,285 914,989 873,255 Net current assets/(liabilities) ...... 8,400 (41,473) 11,483 (340,805) 16,823 Total assets and current assets/ (liabilities) ...... 1,366,044 1,118,306 1,130,768 574,184 890,078 Non-current liabilities ...... (519,728) (405,973) (403,404) (454) (334,362) Long-term provisions ...... (332,496) (342,309) (316,177) (289,366) (281,799) Net assets ...... 513,820 370,024 411,187 284,364 273,917 Shareholders’ Funds Ordinary Shares ...... 63,974 63,974 63,975 63,975 63,975 Preference Shares ...... 1,106 1,106 1,106 1,106 1,106 Reserves ...... 448,740 304,944 346,106 219,283 208,836 Capital employed ...... 513,820 370,024 411,187 284,364 273,917 (1) All periods related to 52 trading weeks with the exception of 2009 which was a 53 week period.
(2) Before non-recurring and IAS21/39 items.
F-117 Company balance sheet At 29 December 2012
2012 2011 Notes £’000 £’000 Fixed assets Tangible ...... 34 3 5 Investments ...... 35 529,598 529,292 529,601 529,297 Current assets Debtors—due within one year ...... 36 86,007 83,343 —due after more than one year ...... 36 441,798 443,754 Cash at bank and in hand ...... 23,972 6,968 551,777 534,065 Creditors: amounts falling due within one year ...... 37 (117,374) (495,751) Net current assets ...... 434,403 38,314 Total assets less current liabilities ...... 964,004 567,611 Creditors: amounts falling due after more than one year ...... 38 (334,220) (306) Provisions for liabilities ...... 41 (1,189) (1,189) Net assets ...... 628,595 566,116 Capital and reserves Called-up share capital Ordinary ...... 27 63,975 63,975 Preference ...... 27 1,106 1,106 65,081 65,081 Reserves ...... 42 563,514 501,035 Shareholders’ funds ...... 628,595 566,116
The comparative numbers are as at 31 December 2011.
The financial statements of Johnston Press plc, registered number 15382, were approved by the Board of Directors on 19 March 2013 and were signed on its behalf by:
28MAR201406594722 28MAR201407000173 Ashley Highfield Grant Murray Chief Executive Officer Chief Financial Officer
The accompanying notes are an integral part of these financial statements.
F-118 Notes to the Company financial statements For the 52 week period ended 29 December 2012 33. Significant accounting policies
Basis of accounting and preparation The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by that Act, the separate financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards. No Profit and Loss Account is presented as permitted by section 408 of the Companies Act 2006. The Company’s result for the period, determined in accordance with the Act, was a profit of £61,727,000 (2011: loss of £70,184,000). The financial statements have been prepared on the historical cost basis except for derivative financial instruments. The principal accounting policies adopted are set out below.
The 2012 period was for the 52 weeks ended 29 December 2012 with the prior year being for the 52 weeks ended 31 December 2011.
Going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that both the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis in preparing the financial statements.
Tangible fixed assets Tangible fixed asset balances are shown at cost or valuation, net of depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment, excluding land, at varying rates calculated to write-off cost over the useful lives. The principal rates employed are:
Plant and machinery ...... 6.67%, 10%, 20%, 25% and 33% straight-line basis
Investments Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment. Unlisted investments are shown at Directors’ valuation. Upward revaluations are credited to the revaluation reserve. Downward revaluations in excess of any previous upward revaluations are taken to the Profit and Loss Account.
Borrowings Interest-bearing loans and bank overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premia payable on settlement or redemption and direct issue costs, are charged to the Profit and Loss Account using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Fees incurred in negotiating borrowings are held on the Balance Sheet and amortised to the Profit and Loss Account over the term of the underlying debt.
Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the period end date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the period end date. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in
F-119 tax assessments in periods different from those in which they are recognised in the financial statements.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the period end date.
Share-based payments The Company issues equity settled share-based benefits to certain employees. These share- based payments are measured at their fair value at the date of grant and the fair value of expected shares is expensed to the Profit and Loss Account on a straight-line basis over the vesting period. Fair value is measured by use of the Black-Scholes model, as amended to take account of the Directors’ best estimate of probable share vesting and exercise.
Dividends Dividends payable to the Company’s shareholders are recorded as a liability in the period in which the dividends are approved. In the Company’s financial statements, dividends receivable from subsidiaries are recognised as assets in the period in which the dividends are approved.
Financial instruments Financial assets and financial liabilities are recognised on the Balance Sheet when the Company becomes a party to the contractual provisions of that instrument.
The Company’s activities and funding structure give rise to some exposure to the financial risks of changes in interest rates and foreign currency exchange rates. The Company uses interest rate swaps and cross currency interest rate swaps to manage these exposures. The Company does not use derivative financial instruments for speculative purposes.
Changes in the fair value of derivative financial instruments are recognised directly in the Profit and Loss Account.
Full details of the Group policy are summarised on page 66.
Retirement benefit obligations The Company participates in a Group-wide scheme, the Johnston Press Pension Plan, which has a defined benefit section (providing benefits based on final pensionable pay) and a defined contribution section (see Note 24). The assets of the scheme are held separately from those of the Company. The pension costs for the defined contribution section are charged to the Profit and Loss Account on the basis of contributions due in respect of the financial year. In relation to the defined benefit section of the scheme, the Company is unable to identify its share of the underlying assets and liabilities on a consistent and reliable basis and therefore, as required by FRS 17, the Company accounts for this scheme as a defined contribution scheme. As a result, the amount charged to the Profit and Loss Account in respect of the defined benefit section represents the contributions payable to the scheme in respect of the period.
F-120 34. Tangible fixed assets
Plant and machinery £’000 Cost At 31 December 2011 ...... 8 Disposals ...... — At 29 December 2012 ...... 8 Depreciation At 31 December 2011 ...... 3 Charge for the period ...... 2 At 29 December 2012 ...... 5 Carrying amount At 31 December 2011 ...... 5 At 29 December 2012 ...... 3
35. Investments
Subsidiary Unlisted undertakings investments Total £’000 £’000 £’000 Cost At the start of the period ...... 1,105,840 3,526 1,109,366 Amounts relating to share-based payments ...... 306 — 306 At the end of the period ...... 1,106,146 3,526 1,109,672 Provisions for impairment At the start of the period ...... (576,548) (3,526) (580,074) Provision for impairment ...... — — — At the end of the period ...... (576,548) (3,526) (580,074) Net book value At the start of the period ...... 529,292 — 529,292 At the end of the period ...... 529,598 — 529,598
An impairment charge has been reflected in the financial statements of the Group. Full details are explained in Note 15. Inevitably this affects the value of the investments held by the Parent Company and the element of the impairment of intangible assets relating to the investments held by the Company only has been processed as an impairment of investments.
F-121 The Company’s principal subsidiary undertakings are as follows:
Country of Proportion incorporation of ownership Name of company and operation interest Nature of business Johnston Publishing Ltd ...... England 100% Newspaper publishers Johnston Press Ireland Ltd* ..... Republic of Ireland 100% Newspaper publishers Isle of Man Newspapers Ltd* .... Isle of Man 100% Newspaper publishers and printers Score Press Ltd ...... Scotland 100% Holding company Score Press Ireland* ...... Republic of Ireland 100% Holding company The Scotsman Publications Ltd . . . Scotland 100% Newspaper publishers Johnston (Falkirk) Ltd ...... Scotland 100% Newspaper publishers Strachan & Livingston Ltd ...... Scotland 100% Newspaper publishers The Tweeddale Press Ltd* ...... Scotland 100% Newspaper publishers Angus County Press Ltd* ...... Scotland 100% Newspaper publishers Galloway Gazette Ltd* ...... Scotland 100% Newspaper publishers Stornoway Gazette Ltd* ...... Scotland 100% Newspaper publishers Northeast Press Ltd* ...... England 100% Newspaper publishers and printers Yorkshire Post Newspapers Ltd* . . England 100% Newspaper publishers and printers Ackrill Newspapers Ltd* ...... England 100% Newspaper publishers Yorkshire Weekly Newspaper Group Ltd ...... England 100% Newspaper publishers Halifax Courier Ltd* ...... England 100% Newspaper publishers Yorkshire Regional Newspapers Ltd ...... England 100% Newspaper publishers Lancashire Evening Post Ltd* .... England 100% Newspaper publishers Lancashire Publications Ltd* .... England 100% Newspaper publishers Lancaster & Morecambe Newspapers Ltd* ...... England 100% Newspaper publishers Blackpool Gazette & Herald Ltd* . England 100% Newspaper publishers East Lancashire Newspapers Ltd* . England 100% Newspaper publishers Johnston Letterbox Direct Ltd* . . England 100% Newspaper publishers Wilfred Edmunds Ltd ...... England 100% Newspaper publishers South Yorkshire Newspapers Ltd . England 100% Newspaper publishers East Midlands Newspapers Ltd* . . England 100% Newspaper publishers Lincolnshire Newspapers Ltd .... England 100% Newspaper publishers Anglia Newspapers Ltd ...... England 100% Newspaper publishers Northamptonshire Newspapers Ltd ...... England 100% Newspaper publishers Central Counties Newspapers Ltd . England 100% Newspaper publishers Premier Newspapers Ltd ...... England 100% Newspaper publishers Sheffield Newspapers Ltd* ...... England 100% Newspaper publishers and printers Peterboro’ Web Ltd ...... England 100% Contract printers Northampton Web Ltd* ...... England 100% Contract printers Portsmouth Publishing & Printing Ltd* ...... England 100% Newspaper publishers and printers Sussex Newspapers Ltd ...... England 100% Newspaper publishers T R Beckett Ltd ...... England 100% Newspaper publishers Morton Newspapers Ltd* ...... Northern Ireland 100% Newspaper publishers and printers Derry Journal Ltd* ...... Northern Ireland 100% Newspaper publishers Donegal Democrat Ltd* ...... Republic of Ireland 100% Newspaper publishers Longford Leader Ltd* ...... Republic of Ireland 100% Newspaper publishers Leitrim Observer Ltd* ...... Republic of Ireland 100% Newspaper publishers Leinster Leader Ltd* ...... Republic of Ireland 100% Newspaper publishers Leinster Express Newspapers Ltd* . Republic of Ireland 100% Newspaper publishers Dundalk Democrat Ltd* ...... Republic of Ireland 100% Newspaper publishers Limerick Leader Ltd* ...... Republic of Ireland 100% Newspaper publishers Clonnad Ltd* ...... Republic of Ireland 100% Newspaper publishers Kilkenny People Publishing Ltd* . . Republic of Ireland 100% Newspaper publishers * Held through a subsidiary.
F-122 There is no difference in the proportions of ownership interest shown above and the voting power held. All investments in subsidiary undertakings are held at cost less, where appropriate, provisions for impairment.
36. Debtors
2012 2011 £’000 £’000 Amounts falling due within one year Amounts owed by subsidiary undertakings ...... 83,399 60,459 Corporation tax recoverable ...... 1,896 9,611 Trade and other debtors and prepayments ...... 557 1,616 Derivative financial instruments (Note 23) ...... 155 11,657 86,007 83,343 Amounts falling due after more than one year Amounts owed by subsidiary undertakings ...... 438,708 443,400 Derivative financial instruments (Note 23) ...... 2,742 — Deferred tax asset—see below ...... 348 354 441,798 443,754
The following are the major deferred tax assets recognised by the Company and movements thereon during the year:
Accelerated tax Pension Other timing depreciation balances differences Total £’000 £’000 £’000 £’000 At the start of the period ...... 15 297 42 354 Charge to profit and loss account ...... (3) — 27 24 Reduction in tax rate ...... (1) (24) (5) (30) At the end of the period ...... 11 273 64 348
37. Creditors: amounts falling due within one year
2012 2011 £’000 £’000 Borrowings (Note 39) ...... 8,520 372,094 Amounts owed to subsidiary undertakings ...... 98,706 117,068 Other taxes and social security costs ...... 448 421 Accruals and deferred income ...... 9,524 5,106 Other creditors ...... 77 6 Derivative financial instruments (Note 23) ...... 99 1,056 117,374 495,751
38. Creditors: amounts falling due after more than one year
2012 2011 £’000 £’000 Borrowings (Note 39) ...... 334,220 — Derivative financial instruments (Note 23) ...... — 306 334,220 306
F-123 39. Borrowings
The Company’s bank overdrafts and loans comprise:
2012 2011 £’000 £’000 Bank loans ...... 227,316 218,252 Private placement loan notes ...... 119,162 141,556 Term debt issue costs ...... (12,273) (4,041) Payment-in-kind interest accrual ...... 8,535 16,327 Total borrowings ...... 342,740 372,094
The borrowings are repayable as follows:
2012 2011 £’000 £’000 On demand or within one year ...... 8,520 372,094 Within one to two years ...... 334,220 — 342,740 372,094
All borrowings at the prior period end were classed as current borrowings, due to the lending facilities maturing on 30 September 2012. These facilities were renegotiated in April 2012 and now expire on 30 September 2015.
Other details relating to the bank overdrafts and loans are set out in Note 22.
40. Lease commitments
The Company leases certain buildings on short-term operating leases. The rental expense on these leases during 2012 was £21,000 (2011: £nil). The Company pays all insurance, maintenance and repairs of these properties.
Annual commitments under non-cancellable operating leases are as follows:
Operating leases which expire:
2012 2011 £’000 £’000 Within 1 year ...... 68 —
41. Provisions for liabilities
Unfunded pensions £’000 At the start and end of the period ...... 1,189
The unfunded pension provision is assessed by a qualified actuary at each period end.
F-124 42. Reserves
Share-based Share payments Retained Other Own premium reserve earnings reserves shares Total £’000 £’000 £’000 £’000 £’000 £’000 Opening balance ...... 502,818 17,845 (33,759) 19,510 (5,379) 501,035 Profit for the period ...... — — 61,727 — — 61,727 Dividends (Note 13) ...... — — (152) — — (152) Provision for share-based payments ...... — 606 — — — 606 Share warrants issued ...... — 551 — — — 551 Release of deferred bonus payments ...... — (43) — — 43 — Own shares purchased ...... — — — — (253) (253) At the end of the period ...... 502,818 18,959 27,816 19,510 (5,589) 563,514
Further details of share-based payments are shown in Note 30.
The own shares reserve represents the cost of shares in Johnston Press plc purchased in the market and held by the Johnston Press plc Employee Share Trust (the ‘JP EST’) to satisfy options under the Group’s share options schemes (see Note 30). The number of ordinary shares held by the JP EST as at 29 December 2012 was 16,198,517 (2011: 11,958,165). In addition to the JP EST, a further 1,788,822 shares are held regarding the deferred share bonus plan (2011: 2,076,037).
F-125 Independent auditor’s report to the members of Johnston Press plc We have audited the financial statements of Johnston Press plc for the 52 week period ended 31 December 2011 which comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group Reconciliation of Shareholders’ Equity, the Group Statement of Financial Position and Parent Company Balance Sheet, the Group Statement of Cash Flows and the related notes 1 to 43. The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2011 and of the group’s loss for the year then ended;
• the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
F-126 • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
• the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
• the directors’ statement, contained within the Business Review, in relation to going concern;
• the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and
• certain elements of the report to the shareholders by the Board on directors’ remuneration.
28MAR201406595257
Colin Gibson CA (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Edinburgh 25 April 2012
F-127 Group income statement For the 52 week period ended 31 December 2011
2011 2010 Before Before non- non- recurring recurring and IAS Non- and IAS Non- 21/39 recurring IAS 21/39 recurring IAS items items 21/39 Total items items 21/39 Total Notes £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Revenue ...... 6 373,845 — — 373,845 398,084 — — 398,084 Cost of sales ...... (235,143) — — (235,143) (241,605) — — (241,605) Gross profit ...... 138,702 — — 138,702 156,479 — — 156,479 Operating expenses ...... 7 (74,150) (7,836) — (81,986) (84,488) (4,047) — (88,535) Impairment of intangibles ...... 7/15 — (163,695) — (163,695) — (13,086) — (13,086) Total operating expenses ...... (74,150) (171,531) — (245,681) (84,488) (17,133) — (101,621) Operating profit/(loss) ...... 8 64,552 (171,531) — (106,979) 71,991 (17,133) — 54,858 Investment income ...... 10 67 — — 67 43 — — 43 Net finance income on pension assets/liabilities ...... 11a 2,250 — — 2,250 373 — — 373 Change in fair value of hedges . . . 11c — — (676) (676) — — 2,573 2,573 Retranslation of USD debt ...... 11c — — (285) (285) — — (2,030) (2,030) Retranslation of Euro debt ...... 11c — — 285 285 — — 2,623 2,623 Finance costs ...... 11b (38,475) — — (38,475) (41,921) — — (41,921) Share of results of associates ..... 18 10 — — 10 10 — — 10 Profit/(loss) before tax ...... 28,404 (171,531) (676) (143,803) 30,496 (17,133) 3,166 16,529 Tax...... 12 (6,371) 61,058 179 54,866 (6,866) 27,287 (886) 19,535 Profit/(loss) for the period ...... 22,033 (110,473) (497) (88,937) 23,630 10,154 2,280 36,064 Earnings per share (p) ...... 14 Earnings per share—Basic ...... 3.50 (17.66) (0.08) (14.24) 3.67 1.58 0.36 5.61 Earnings per share—Diluted ..... 3.50 (17.66) (0.08) (14.24) 3.58 1.55 0.35 5.48
The above revenue and profit/(loss) are derived from continuing operations.
The comparative period is for the 52 week period ended 1 January 2011.
The accompanying notes are an integral part of these financial statements.
F-128 Group statement of comprehensive income For the 52 week period ended 31 December 2011
Hedging and Revaluation translation Retained reserve reserve earnings Total £’000 £’000 £’000 £’000 Loss for the period ...... — — (88,937) (88,937) Actuarial loss on defined benefit pension schemes (net of tax) ...... — — (36,306) (36,306) Revaluation adjustment ...... (85) — 85 — Exchange differences on translation of foreign operations ...... — (847) — (847) Deferred tax ...... — 214 — 214 Change in deferred tax rate to 25% ...... — — (992) (992) Total comprehensive loss for the period ..... (85) (633) (126,150) (126,868)
For the 52 week period ended 1 January 2011 Profit for the period ...... — — 36,064 36,064 Actuarial gain on defined benefit pension schemes (net of tax) ...... — — 9,976 9,976 Revaluation adjustment ...... (63) — 63 — Exchange differences on translation of foreign operations ...... — (3,456) — (3,456) Deferred tax ...... — 710 — 710 Change in deferred tax rate to 27% ...... — (48) 141 93 Total comprehensive income for the period ... (63) (2,794) 46,244 43,387
The accompanying notes are an integral part of these financial statements.
F-129 Group reconciliation of shareholders’ equity For the 52 week period ended 31 December 2011
Share- based Hedging and Share Share payments Revaluation Own translation Retained capital premium reserve reserve shares reserve earnings Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Opening balances ...... 65,081 502,818 17,273 2,245 (5,004) 10,412 (181,638) 411,187 Total comprehensive loss for the period ...... — — — (85) — (633) (126,150) (126,868) Recognised directly in equity: Dividends (note 13) ...... — — — — — — (152) (152) Share-based payments charge (note 30) ...... — — 572 — — — — 572 Own shares purchased ...... — — — — (375) — — (375) Net changes directly in equity . . . — — 572 — (375) — (152) 45 Total movements ...... — — 572 (85) (375) (633) (126,302) (126,823) Equity at the end of the period .. 65,081 502,818 17,845 2,160 (5,379) 9,779 (307,940) 284,364
For the 52 week period ended 1 January 2011 Opening balances ...... 65,080 502,818 19,346 2,308 (5,004) 13,206 (227,730) 370,024 Total comprehensive income for the period ...... — — — (63) — (2,794) 46,244 43,387 Recognised directly in equity: Dividends (note 13) ...... — — — — — — (152) (152) New share capital subscribed . . . 1 — — — — — — 1 Share-based payments credit (note 30) ...... — — (2,073) — — — — (2,073) Net changes directly in equity . . . 1 — (2,073) — — — (152) (2,224) Total movements ...... 1 — (2,073) (63) — (2,794) 46,092 41,163 Equity at the end of the period .. 65,081 502,818 17,273 2,245 (5,004) 10,412 (181,638) 411,187
The accompanying notes are an integral part of these financial statements.
F-130 Group statement of financial position At 31 December 2011
2011 2010 Notes £’000 £’000 Non-current assets Goodwill ...... 15 — — Other intangible assets ...... 15 742,851 907,455 Property, plant and equipment ...... 16 171,154 195,091 Available for sale investments ...... 17 970 970 Interests in associates ...... 18 14 12 Trade and other receivables ...... 21 6 35 Derivative financial instruments ...... 23/32 — 15,757 914,995 1,119,320 Current assets Assets held for sale ...... 19 3,238 3,071 Inventories ...... 20 4,709 4,531 Trade and other receivables ...... 21 48,730 49,481 Cash and cash equivalents ...... 21 13,407 11,112 Derivative financial instruments ...... 23/32 11,657 — 81,741 68,195 Total assets ...... 996,736 1,187,515 Current liabilities Trade and other payables ...... 21 42,958 47,682 Current tax liabilities ...... 4,244 3,642 Retirement benefit obligation ...... 24 2,200 4,444 Borrowings ...... 22/33 372,094 251 Derivative financial instruments ...... 23/32 1,056 728 422,552 56,747 Non-current liabilities Borrowings ...... 22/33 — 399,736 Derivative financial instruments ...... 23/32 306 3,513 Retirement benefit obligation ...... 24 101,790 56,342 Deferred tax liabilities ...... 25 181,609 252,955 Trade and other payables ...... 21 148 155 Long term provisions ...... 26 5,967 6,880 289,820 719,581 Total liabilities ...... 712,372 776,328 Net assets ...... 284,364 411,187 Equity Share capital ...... 27 65,081 65,081 Share premium account ...... 502,818 502,818 Share-based payments reserve ...... 17,845 17,273 Revaluation reserve ...... 2,160 2,245 Own shares ...... (5,379) (5,004) Hedging and translation reserve ...... 9,779 10,412 Retained earnings ...... (307,940) (181,638) Total equity ...... 284,364 411,187
The comparative numbers are as at 1 January 2011.
The financial statements of Johnston Press plc, registered number 15382, were approved by the Board of Directors and authorised for issue on 25 April 2012.
They were signed on its behalf by:
28MAR201406594722 28MAR201407000173 Ashley Highfield, Grant Murray, Chief Executive Officer Chief Financial Officer
The accompanying notes are an integral part of these financial statements.
F-131 Group statement of cash flows For the 52 week period ended 31 December 2011
2011 2010 Notes £’000 £’000 Cash generated from operations ...... 28 71,207 79,338 Income tax paid ...... (3,282) (9,750) Net cash in from operating activities ...... 67,925 69,588 Investing activities Interest received ...... 51 43 Dividends received from associated undertakings ...... 25 25 Proceeds on disposal of property, plant and equipment ...... 2,589 5,097 Purchases of property, plant and equipment ...... (1,802) (4,522) Net cash received from investing activities ...... 863 643 Financing activities Dividends paid ...... (152) (152) Interest paid ...... (25,629) (30,576) Repayment of borrowings ...... (28,371) (27,408) Repayment of loan notes ...... (6,363) (17,498) Financing fees ...... (53) (294) Issue of shares ...... — 2 Purchase of own shares ...... (375) — (Decrease)/increase in bank overdrafts ...... (5,550) 4,528 Net cash used in financing activities ...... (66,493) (71,398) Net increase/(decrease) in cash and cash equivalents ...... 2,295 (1,167) Cash and cash equivalents at the beginning of period ...... 11,112 12,279 Cash and cash equivalents at the end of the period ...... 13,407 11,112
The comparative period is for the 52 week period ended 1 January 2011.
The accompanying notes are an integral part of these financial statements.
F-132 Notes to the consolidated financial statements For the 52 week period ended 31 December 2011 1. General information
Johnston Press plc is a company incorporated in the United Kingdom under the Companies Act. The address of the registered office is given on the back page. The nature of the Group’s operations and its principal activities are set out in notes 5 and 6 and in the Business Review on pages 2 to 15.
These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with the policies set out in note 3.
2. Adoption of new and revised standards
The following new and revised Standards and Interpretations have been adopted in the current year. Their adoption has not had any significant impact on the amounts reported in these financial statements but may impact the accounting for future transactions and arrangements.
IFRIC 19 Extinguishing The Interpretation provides guidance on the accounting for Financial Liabilities with Equity ‘debt for equity’ swaps from the perspective of the borrower. Instruments IAS 24 (2009) Related Party The revised Standard has a new, clearer definition of a Disclosures related party, with inconsistencies under the previous definition having been removed. Amendment to IAS 32 Under the amendment, rights issues of instruments issued to Classification of Rights Issues acquire a fixed number of an entity’s own non-derivative equity instruments for a fixed amount in any currency and which otherwise meet the definition of equity are classified as equity. Amendments to IFRIC 14 The amendments now enable recognition of an asset in the Prepayments of a Minimum form of prepaid minimum funding contributions. Funding Requirement
The following amendments were made as part of Improvements to IFRSs (2010):
Amendment to IFRS 3 Business IFRS has been amended such that only those non-controlling Combinations interests which are current ownership interests and which entitle their holders to a proportionate share of net assets upon liquidation can be measured at fair value or the proportionate share of net identifiable assets. Other non-controlling interests are measured at fair value, unless another measurement basis is required by IFRSs. Amendment to IFRS 7 Financial The amendment clarifies the required level of disclosure Instruments: Disclosures around credit risk and collateral held and provides relief from disclosure of renegotiated financial assets.
The amendments made to Standards under the 2010 improvements to IFRSs have had no impact on the Group.
F-133 At the date of 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) Severe Hyperinflation and Removal of Fixed Dates FOR First-time Adopters IFRS 7 (amended) Disclosures—Transfers of Financial Assets IFRS 9 Financial Instruments IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IFRS 13 Fair Value Measurement IAS 1 (amended) Presentation of Items of Other Comprehensive Income IAS 12 (amended) Deferred Tax: Recovery of Underlying Assets IAS 19 (revised) Employee Benefits IAS 27 (revised) Separate Financial Statements IAS 28 (revised) Investments in Associates and Joint Ventures
The Directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Group in future periods, except as follows:
• IFRS 9 will impact both the measurement and disclosures of Financial Instruments;
• IFRS 12 will impact the disclosure of interest the Group has in other entities;
• IFRS 13 will impact the measurement of fair value for certain assets and liabilities as well as the associated disclosures; and
• IAS 19 (revised) will impact the measurement of the various components representing movements in the defined benefit pension obligation; and associated disclosures, but not the Group’s total obligation. It is likely that following the replacement of expected returns on plan assets with a net finance cost in the Income Statement, the profit for the period will be reduced and correspondingly other comprehensive income increased.
Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed.
3. Significant accounting policies
Basis of accounting The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) adopted by the European Union and therefore comply with Article 4 of the EU IAS Regulation.
The financial statements have been prepared on the historical cost basis, except for the revaluation of certain properties and financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The principal accounting policies adopted are set out below.
Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to the Saturday closest to 31 December each year for either a 52 or 53 week period. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the Group Income Statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.
F-134 Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Basis of preparation The Group’s business activities, together with factors likely to affect its future development, performance and financial position and commentary on the Group’s financial results, its cash flows, liquidity requirements and borrowing facilities are set out in the Business Review on pages 8 to 15. In addition, note 32 to the financial statements includes the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities, and its exposures to liquidity risk and credit risk.
The financial statements have been prepared for the 52 week period ended 31 December 2011. The 2010 information relates to the 52 week period ended 1 January 2011.
Going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is contained in the Business Review on pages 2 to 15.
Non-recurring items Non-recurring items include significant exceptional transactions, the restructuring of businesses and material one-off items such as the disposal of a significant property and impairment of intangible and tangible assets together with the associated tax impact. The Company considers such items are material to the Income Statement and their separate disclosure is necessary for an appropriate understanding of the Group’s financial performance.
Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of the fair values at the date of exchange of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in the Income Statement as incurred. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3, including publishing titles, are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 ‘Non Current Assets Held for Sale and Discontinued Operations’, which are recognised and measured at fair value less costs to sell.
Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss.
Investment in associates An associate is an entity over which the Group is in a position to exercise significant influence, but not control or joint control, through participation in the financial and operating policy decisions of the investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
The results and assets and liabilities of associates are incorporated in these Group financial statements using the equity method of accounting. Investments in associates are carried in the
F-135 Group Statement of Financial Position at cost as adjusted by post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments.
Publishing titles The Group’s principal intangible assets are publishing titles. The Group does not capitalise internally generated goodwill or publishing titles. Titles separately acquired after 1 January 1989 are stated at cost and titles owned by subsidiaries acquired after 1 January 1996 are recorded at Directors’ valuation at the date of acquisition. These publishing titles have no finite life and consequently are not amortised. The carrying value of the titles is reviewed for impairment at least annually with testing undertaken, as outlined below for goodwill, to determine any diminution in the recoverable amount below carrying value. The recoverable amount is the higher of the fair value less costs to sell and the value in use is based on the net present value of estimated future cash flows discounted at the Group’s pre-tax weighted average cost of capital. Any impairment loss is recognised as an expense immediately. An impairment loss recognised for publishing titles can be reversed in a subsequent period if the discounted cash flows justify the treatment.
Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities of a subsidiary or associate at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss and cannot be subsequently reversed.
For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash generating units expected to benefit from the synergies of the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit, second to the value of publishing titles and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.
Goodwill can also arise as an equal and opposite offset to deferred tax on publishing titles acquired after 1 January 2005 under the technical provisions of IAS 12.
On disposal of a subsidiary or associate, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Goodwill arising on acquisitions before the date of transition to IFRSs has been retained at the previous UK GAAP valuation subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal.
Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes.
Advertising revenue is recognised on publication and circulation revenue is recognised at the point of sale. Printing revenue is recognised when the service is provided.
Foreign currencies The individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the
F-136 purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in pounds sterling, which is the functional currency of the Company and the presentation currency for the consolidated financial statements.
In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each period end, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at the close of business on the last working day of the period. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items carried at historical cost in respect of which gains and losses are recognised directly in equity.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the period end date. Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classified as equity and transferred to the Group’s hedging and translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
Property, plant and equipment Property, plant and equipment balances are shown at cost, net of depreciation and any provision for impairment. In certain cases, the amounts of previous revaluations of properties conducted in 1996 or 1997 or the fair value of the property at the date of the acquisition by the Group have been treated as the deemed cost on transition to IFRSs. Depreciation is provided on all property, plant and equipment, excluding land, at varying rates calculated to write-off cost over the useful lives. The principal rates employed are:
Heritable and freehold property (excluding land) ...... 2.5% on written down value Leasehold land and buildings ...... equal annual instalments over lease term Web offset presses (excluding press components) ...... 5% straight line basis Mailroom equipment ...... 6.67% straight line basis Pre-press systems ...... 20% straight line basis Other plant and machinery ...... 6.67%, 10%, 20%, 25% and 33% straight line basis Motor vehicles ...... 25% straight line basis
Assets held for sale Assets classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
Assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale. Where the sale is expected to qualify for recognition as a completed sale within one year from the date of classification, the assets are
F-137 shown as current and when the sale is anticipated to complete after one year from date of classification the assets are shown as non-current.
Inventories Inventories are stated at the lower of cost and net realisable value. Cost incurred in bringing materials to their present location and condition comprises; (a) raw materials and goods for resale at purchase cost on a first-in first-out basis; and (b) work in progress at cost of direct materials, labour and certain overheads. Net realisable value comprises selling price less any further costs expected to be incurred to completion and disposal.
Financial instruments Financial assets and financial liabilities are recognised in the Group’s Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument.
Financial assets Investments are recognised and derecognised on the trade date in accordance with the terms of the purchase or sale contract and are initially measured at fair value, plus transaction costs.
Available for sale financial assets Listed and unlisted investments are shown as available for sale and are stated at fair value. Fair value of listed investments is determined with reference to quoted market prices. Fair value of unlisted investments is determined by the Directors. Gains and losses arising from changes in fair value are recognised directly in equity, with the exception of impairment losses which are recognised directly in the Income Statement. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in equity is included in the Income Statement for the period.
Dividends on available for sale equity investments are recognised in the Income Statement when the Group’s right to receive the payment is established.
Trade receivables Trade receivables do not carry any interest. They are stated at their nominal value as reduced by appropriate allowance for estimated irrecoverable amounts. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. Other trade receivables are provided for on an individual basis where there is evidence that an amount is no longer recoverable.
Impairment of financial assets Financial assets are assessed for indicators of impairment at each period end date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance for estimated irrecoverable amounts. Changes in the carrying value of this allowance are recognised in the Income Statement.
Derivative financial instruments The Group’s activities and funding structure give rise to some exposure to the financial risks of changes in interest rates and foreign currency exchange rates. The Group enters into a number of derivative financial instruments to manage its exposure to these risks, including interest rate swaps, cross currency swaps and forward foreign exchange contracts. Further details of derivative financial instruments are given in note 32.
The Group re-measures each derivative at its fair value at the period end date with the resultant gain or loss being recognised in profit or loss immediately. All such changes in the fair
F-138 value of the Group’s derivatives are shown in a separate column on the face of the Group Income Statement.
A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities.
Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with the changes in fair value recognised in profit or loss.
Financial liabilities and equity Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs.
On 28 August 2009, the Company issued share warrants over 5% of its issued share capital to lenders as part of the refinancing package agreed on that date. The warrant instruments will be settled by the Company delivering a fixed number of ordinary shares and receiving a fixed amount of cash in return and so qualify as equity under IAS 39. The Binomial Option pricing model was used to assess the fair value of the warrants issued and the full cost was recognised as a non-recurring finance cost in the Income Statement in 2009.
Trade payables Trade payables are not interest-bearing and are stated at their nominal value.
Borrowings Interest-bearing loans and bank overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premia payable on settlement or redemption and direct issue costs, are charged to the Income Statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Fees incurred in negotiating borrowings are held on the Statement of Financial Position and amortised to the Income Statement over the term of the underlying debt.
Leases Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis over the term of the lease.
Where the Group is a lessor, rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease.
Where the Group leases a property but is no longer using the premises, full provision is made for the rentals payable over the remaining term of the lease (up to any break clauses where relevant).
F-139 Development grants Development grants for revenue expenditure are recognised as income over the periods necessary to match them with the related costs and are deducted in reporting the related expense. Grants relating to property, plant and equipment are treated as deferred income and released to the Income Statement over the expected useful lives of the related assets.
Operating profit/(loss) Operating profit/(loss) is stated after charging restructuring or other non-recurring costs but before investment income, other finance income, finance costs and the share of the results of associates.
Taxation The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the Income Statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the period end date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax based values used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the Income Statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.
On transition to IFRS, a deferred tax liability was recorded in respect of publishing titles and properties that do not qualify for any tax allowances that were acquired through business combinations. Given that the Group elected, under IFRS 1, not to restate pre-transition business combinations under IFRS 3, this pre-transition deferred tax element was charged against retained earnings. Any such fair value on future business combinations will form part of the goodwill on acquisition and both the goodwill and related deferred tax liability will be included in any impairment test in relation to the relevant cash generating unit.
Deferred tax assets and liabilities are offset when the relevant requirements of IAS 12 are satisfied.
Retirement benefit costs The Group provides pensions to employees through various schemes.
Payments to defined contribution retirement benefit schemes are charged to the Income Statement as an expense as they fall due. Payments made to the industry-wide retirement benefit schemes in the Republic of Ireland are dealt with as payments to defined contribution schemes where the Group’s obligations under the schemes are equivalent to those arising in a defined contribution retirement benefit scheme.
For defined benefit retirement benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each
F-140 period end date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the Income Statement and presented in the Statement of Comprehensive Income. Past service cost is recognised immediately to the extent that the benefits are already vested and otherwise is amortised on a straight line basis over the average period until the benefits become vested.
The retirement benefit obligation recognised in the Statement of Financial Position represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the scheme.
Share-based payments The Group issues equity settled share-based benefits to certain employees. The Group has elected to apply IFRS 2 to all share-based awards and options granted post 7 November 2002 but not vested at 31 December 2004. These share-based payments are measured at their fair value at the date of grant and the fair value of share options is expensed to the Income Statement on a straight-line basis over the vesting period. Fair value is measured by use of the Black-Scholes model, as amended to take account of the Directors’ best estimate of probable share vesting and exercise.
4. Critical accounting judgements and key sources of estimation uncertainty
Critical judgements in applying the Group’s accounting policies In the process of applying the Group’s accounting policies, which are described in note 3, management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements (apart from those involving estimations, which are dealt with below).
The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
Deferred tax balances on publishing titles and properties not eligible for tax allowances Deferred tax amounting to £185,713,000 at 31 December 2011 (1 January 2011: £244,193,000), has been provided pursuant to IAS 12 (Income Taxes) on the values of the publishing titles in the Group’s Statement of Financial Position.
Management has considered it appropriate to provide this entire deferred tax balance in order to comply with the technical requirements of IAS 12 despite the fact that management cannot foresee any future circumstances in which such a tax liability would arise. If a decision was taken to dispose of any of the assets concerned, it is unlikely that the titles would be sold separately from the legal entities that own the assets. As such, management is confident that this tax provision will never be required to be paid.
Valuation of publishing titles on acquisition The Group’s policies require that a fair value at the date of acquisition be attributed to the publishing titles owned by each acquired entity. The Group’s management uses its judgement to determine the fair value attributable to each acquired publishing title taking into account the consideration paid, the earnings history and potential of the title, any recent similar transactions, industry statistics such as average earnings multiples and any other relevant factors.
The publishing titles are considered to have indefinite economic lives due to the historic longevity of the brands and the ability to evolve the brands in the changing media environment.
F-141 Provisions for onerous leases Where the Group exits a rented property, an estimate of the anticipated total future cost payable under the terms of the operating lease, including rentals, rates and other related expenses, is charged to the Income Statement at the point of exit. Where there is a break clause in the contract, rentals are provided for up to that point. In addition, an estimate is made of the likelihood of sub letting the premises and any rentals that would be receivable from a sub tenant. Where receipt of sub lease rentals is considered reasonable, these amounts are deducted from the rentals payable by the Group under the lease and provision charged for the net amount. Valuation of share-based payments The Group estimates the expected value of equity-settled share-based payments and this is charged through the Income Statement over the vesting periods of the relevant payments. The cost is estimated using a Black-Scholes valuation model. The Black-Scholes calculations are based on a number of assumptions that are set out in note 30 and are amended to take account of estimated levels of share vesting and exercise. This method of estimating the value of the share-based payments is intended to ensure that the actual value transferred to employees is provided in the share-based payments reserve by the time the payments are made. Key sources of estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the period end date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. Impairment of goodwill and publishing titles Determining whether goodwill or publishing titles are impaired requires an estimation of the value in use of the cash generating units (CGUs) to which these assets are allocated. Key areas of judgement in the value in use calculation include the identification of appropriate CGUs, estimation of future cash flows expected to arise from each CGU, the long-term growth rates and a suitable discount rate to apply to cashflows in order to calculate present value. The Group has identified its CGUs based on the seven geographic regions in which it operates. This is considered to be the lowest level at which cash inflows generated are largely independent of the cash inflows from other groups of assets and has been consistently applied in the current and prior periods. An impairment loss of £163,695,000 has been recognised in 2011 (2010: loss of £13,068,000). The carrying value of publishing titles at 31 December 2011 was £742,851,000 (2010: £907,455,000). Details of the impairment reviews that the Group performs are provided in note 15. Valuation of pension liabilities The Group records in its Statement of Financial Position a liability equivalent to the deficit on the Group’s defined benefit pension schemes. This liability is determined with advice from the Group’s actuarial advisers each year and can fluctuate based on a number of factors, some of which are outwith the control of management. The main factors that can impact the valuation include: • the discount rate used to discount future liabilities back to the present date, determined each year from the yield on corporate bonds; • the actual returns on investments experienced as compared to the expected rates used in the previous valuation; • the actual rates of salary and pension increase as compared to the expected rates used in the previous valuation; • the forecast inflation rate experienced as compared to the expected rates used in the previous valuation; and • mortality assumptions.
F-142 Details of the assumptions used to determine the liability at 31 December 2011 are set out in note 24.
Bad debt allowance The trade receivables balance recorded in the Group’s Statement of Financial Position comprises a large number of relatively small balances. An allowance is made for the estimated irrecoverable amounts from debtors and this is determined by reference to past default experience. Further details are shown in note 21.
5. Business segments
Information reported to the Chief Executive Officer for the purpose of resource allocation and assessment of segment performance is focussed on the two areas of Newspaper Publishing (in print and online) and Contract Printing. Geographical segments are not presented as the primary segment is the UK which is greater than 90% of Group activities.
6. Segment information a) Segment revenues and results The following is an analysis of the Group’s revenue and results by reportable segment:
Newspaper Contract Newspaper Contract publishing printing Eliminations Group publishing printing Eliminations Group 2011 2011 2011 2011 2010 2010 2010 2010 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Revenue External sales ...... 344,863 28,982 — 373,845 369,344 28,740 — 398,084 Inter-segment sales* ..... — 61,030 (61,030) — — 60,303 (60,303) — Total revenue ...... 344,863 90,012 (61,030) 373,845 369,344 89,043 (60,303) 398,084 Result Segment result before non-recurring items .... 57,026 7,526 — 64,552 66,862 5,129 — 71,991 Non-recurring items ..... (164,656) (6,875) — (171,531) (12,694) (4,439) — (17,133) Net segment result ...... (107,630) 651 — (106,979) 54,168 690 — 54,858 Investment income ...... 67 43 Net finance income on pension assets/liabilities . 2,250 373 IAS 21/39 adjustments .... (676) 3,166 Finance costs ...... (38,475) (41,921) Share of results of associates ...... 10 10 (Loss)/profit before tax ... (143,803) 16,529 Tax...... 54,866 19,535 (Loss)/profit after tax .... (88,937) 36,064 * Inter-segment sales are charged at prevailing market prices.
The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 3. The segment result represents the (loss)/profit earned by each segment without allocation of the share of results of associates, investment income, finance costs (including in relation to pension assets and liabilities) and income tax expense. This is the measure reported to the Group’s Chief Executive Officer for the purpose of resource allocation and assessment of segment performance.
F-143 b) Segment assets
2011 2010 £’000 £’000 Assets Newspaper publishing ...... 851,548 1,024,403 Contract printing ...... 132,561 146,385 Total segment assets ...... 984,109 1,170,788 Unallocated assets ...... 12,627 16,727 Consolidated total assets ...... 996,736 1,187,515
For the purposes of monitoring segment performance and allocating resources between segments, the Group’s Chief Executive Officer monitors the tangible, intangible and financial assets attributable to each segment. All assets are allocated to reportable segments with the exception of available-for-sale investments and derivative financial instruments. c) Other segment information
Newspaper Contract Newspaper Contract publishing printing Group publishing printing Group 2011 2011 2011 2010 2010 2010 £’000 £’000 £’000 £’000 £’000 £’000 Additions to property, plant and equipment ...... 1,604 192 1,796 3,794 620 4,414 Depreciation expense (inc. non-recurring items) ...... 7,618 15,529 23,147 8,988 13,234 22,222 Net impairment of intangibles . 163,695 — 163,695 13,086 — 13,086
7. Non-recurring items
2011 2010 £’000 £’000 Non-recurring items: Impairment of intangible assets (note 15) ...... 163,695 13,086 Gain on sale of assets ...... — (1,350) Gain on sale of assets held for sale ...... (288) — Write down in value of assets held for sale (note 19) ...... 600 — Restructuring costs of existing business including redundancy costs ...... 4,293 9,238 Write down of value of presses in existing businesses (note 16) ...... 5,161 2,459 IAS 19 past service gain (note 24) ...... (1,930) — Total non-recurring items ...... 171,531 17,133
In addition to the non-recurring items above, the Group has treated a £14.9 million tax credit from the change to the UK deferred tax rate as non-recurring and recognised a £44.0 million tax credit following the release of the deferred tax liability on the impaired intangible assets. In 2010, an £8.9 million tax credit and the release of £13.6 million tax provision were treated as non-recurring.
F-144 8. Operating (loss)/profit
2011 2010 £’000 £’000 Operating (loss)/profit is shown after charging/(crediting): Depreciation of property, plant and equipment (note 16) ...... 17,986 19,763 Non-recurring write down of value of presses (note 16) ...... 5,161 2,459 Profit on disposal of property, plant and equipment: Operating disposals ...... (487) (396) Non-recurring disposals ...... — (1,350) Assets held for sale disposals ...... (288) — Movement in allowance for doubtful debts (note 21) ...... (1,852) (577) Redundancy costs ...... 3,938 7,683 Staff costs (note 9) ...... 147,806 154,062 Auditors’ remuneration: Audit services Group ...... 110 100 Subsidiaries ...... 240 240 Operating lease charges: Plant and machinery ...... 1,301 496 Other ...... 4,510 5,367 Rentals received ...... 313 318 Net foreign exchange (gains)/losses ...... (30) 44 Cost of inventories recognised as expense ...... 43,494 41,243
Staff costs shown above include £2,517,000 (2010: £2,814,000) relating to remuneration of Directors.
In addition to the auditors’ remuneration shown above, the auditors received the following fees for non-audit services.
2011 2010 £’000 £’000 Audit-related assurance services ...... 54 35 Taxation compliance services ...... 85 85 Other taxation advisory services ...... 58 34 Other services ...... 72 — 269 154
All non-audit services were approved by the Audit Committee. The Audit Committee considers that these non-audit services have not impacted the independence of the audit process.
In addition, an amount of £17,800 (2010: £17,800) was paid to the external auditors for the audit of the Group’s pension scheme.
F-145 9. Employees
The average monthly number of employees, including Executive Directors, was:
2011 2010 No. No. Editorial and photographic ...... 1,913 1,993 Sales and distribution ...... 2,648 2,850 Production ...... 740 791 Administration ...... 456 575 5,757 6,209
£’000 £’000 Staff costs: Wages and salaries ...... 127,693 35,771 Social security costs ...... 12,198 12,896 Other pension costs (note 24) ...... 7,343 7,468 Cost of share-based awards (note 30) ...... 572 (2,073 147,806 54,062
Full details of the Directors’ emoluments, pension benefits and share options are included in the audited part of the Directors’ Remuneration Report on pages 37 to 39.
10. Investment income
2011 2010 £’000 £’000 Income from available for sale investments ...... 18 1 Interest receivable ...... 49 42 67 43
11. Finance costs
2011 2010 £’000 £’000 a) Net finance income on pension assets/liabilities Interest on pension liabilities ...... 23,612 24,979 Expected return on pension assets ...... (25,862) (25,352) (2,250) (373) b) Finance costs Interest on bank overdrafts and loans ...... 25,496 30,194 Payment-in-kind interest accrual ...... 7,693 6,441 Amortisation of term debt issue costs ...... 5,286 5,286 38,475 41,921 c) IAS 21/39 items All movements in the fair value of derivative financial instruments are recorded in the Income Statement. In the current period, this movement was a net charge of £0.7 million (2010: credit of £2.6 million), consisting of a realised credit of £0.5 million and an unrealised charge of £1.2 million.
F-146 The retranslation of foreign denominated debt at the period end resulted in a net credit of £nil (2010: credit of £0.6 million) being recorded in the Income Statement. The retranslation of the Euro denominated publishing titles is shown in the Statement of Comprehensive Income.
12. Tax
2011 2010 £’000 £’000 Current tax Charge for the year ...... 5,527 5,903 Adjustment in respect of prior periods ...... (1,657) (13,806) 3,870 (7,903) Deferred tax (note 25) (Credit)/charge for the year ...... (16) 657 Adjustment in respect of prior periods ...... 231 89 Deferred tax adjustment relating to the impairment of publishing titles .... (44,041) (3,471) Credit relating to reduction in deferred tax rate to 25.0% (2010: 27.0%) . . . (14,910) (8,907) (58,736) (11,632) Total tax credit for the year ...... (54,866) (19,535)
UK corporation tax is calculated at 26.5% (2010: 28.0%) of the estimated assessable profit/(loss) for the period. The 26.5% basic tax rate applied for the 2011 period was a blended rate due to the tax rate of 28.0% in effect for the first quarter of 2011, changing to 26.0% from 1 April 2011 under the 2011 Finance Act. Taxation for other jurisdictions is calculated at the rates prevailing in the relevant jurisdiction.
The tax credit for the period can be reconciled to the (loss)/profit per the Income Statement as follows:
2011 2010 £’000 % £’000 % (Loss)/profit before tax ...... (143,803) 100.0 16,529 100.0 Tax at 26.5% (2010: 28%) ...... (38,108) (26.5) 4,628 28.0 Tax effect of share of results of associate ...... (5) — (3) — Tax effect of (income)/expenses that are (non-taxable)/ non-deductible in determining taxable profit ...... (65) — (1,866) (11.3) Tax effect of investment income ...... 7— 7— Effect of different tax rates of subsidiaries ...... (359) (0.2) 323 2.0 Adjustment in respect of prior years ...... (1,426) (1.0) (13,717) (83.0) Effect of reduction in deferred tax rate to 25% (2010: 27%) ...... (14,910) (10.4) (8,907) (53.9) Tax credit for the period and effective rate ...... (54,866) (38.1) (19,535) (118.2)
F-147 13. Dividends
Amounts recognised as distributions to equity holders in the period:
2011 2010 £’000 £’000 Final dividend for the period ended 31 December 2011 of £nil (2010: £nil) ...... — — Preference Dividends 13.75% Cumulative Preference Shares ...... 104 104 13.75% ‘‘A’’ Preference Shares ...... 48 48 152 152
No dividend is to be recommended to shareholders at the Annual General Meeting making a total for 2011 of £nil (2010: £nil).
14. Earnings per share
The calculation of earnings per share is based on the following (losses)/profits and weighted average number of shares:
2011 2010 £’000 £’000 Earnings (Loss)/profit after tax for the period ...... (88,937) 36,064 Preference dividend ...... (152) (152) Earnings for the purposes of basic and diluted earnings per share ...... (89,089) 35,912 Non-recurring and IAS 21/39 items (after tax) ...... 110,970 (12,434) Earnings for the purposes of underlying earnings per share ...... 21,881 23,478
2011 2010 No. of shares No. of shares Number of shares Weighted average number of ordinary shares for the purposes of basic earnings per share ...... 625,711,881 639,743,875 Effect of dilutive potential ordinary shares: —warrants ...... — 15,708,618 Number of shares for the purposes of diluted earnings per share . . 625,711,881 655,452,493 Earnings per share (p) Basic ...... (14.24) 5.61 Underlying ...... 3.50 3.67 Diluted—see below ...... (14.24) 5.48
Underlying figures are presented to show the effect of excluding non-recurring and IAS 21/39 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.
The Group’s average share price in 2011 was below the option price for any potential dilutive shares, accordingly no dilutive shares are shown.
As explained in note 27, the preference shares qualify as 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.
F-148 15. Goodwill and other intangible assets
Publishing Goodwill titles £’000 £’000 Cost Opening balance ...... 145,254 1,310,143 Exchange movements ...... — (909) Closing balance ...... 145,254 1,309,234 Accumulated impairment losses Opening balance ...... (145,254) (402,688) Impairment losses for the period ...... — (163,695) Closing balance ...... (145,254) (566,383) Carrying amount Closing balance ...... — 742,851 Opening balance ...... — 907,455
The exchange movement above reflects the impact of the exchange rate on the valuation of publishing titles denominated in Euros at the period end date. It is partially offset by a decrease 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 amount of publishing titles by cash generating unit (CGU) is as follows:
2011 2010 £’000 £’000 Scotland ...... 58,575 82,423 North ...... 279,223 337,810 Northwest ...... 104,561 139,867 Midlands ...... 168,731 175,128 South ...... 45,267 71,540 Northern Ireland ...... 63,042 69,510 Republic of Ireland ...... 23,452 31,177 Total carrying amount of publishing titles ...... 742,851 907,455
The Group tests the carrying value of publishing titles held within the publishing operating segment for impairment annually or more frequently if there are indications that they might be impaired. The publishing titles are grouped by CGUs, being the lowest levels for which there are separately identifiable cash flows independent of the cash inflows from other groups of assets which were arrived at by considering the cash inflows for the publishing titles and how they are generated across portfolios of complementary titles in various geographic markets.
The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are the discount rate; expected changes to selling prices and direct costs during the period; and growth rates.
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 relevant underlying assets. The discount rate applied to future cash flows in 2011 was 11.0% (2010: 8.94%). In 2011, management updated its assessment of the discount rate, to reflect their views of the current risk profile of the underlying publishing title assets. In the absence of asset specific rates for the Group’s intangible assets, management determined the discount rate with regard to the
F-149 current economic environment and the risks that the regional media industry is facing. The rate was compared against the rate being applied by publicly traded competitors for similar groups of assets, and the Group’s weighted average costs of capital. Given the operating activities across the Group’s portfolio, and within the individual CGU’s, have similar trading characteristics and risk profiles, it is considered appropriate to use the same estimated discount rate for each of the CGU’s.
Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market. These include changes in cover prices and advertising rates as well as movement in newsprint and production costs and inflation.
Discounted cash flow forecasts are prepared using:
• the most recent financial budgets and projections approved by management for 2012 - 2016 which reflect management’s current experience and future expectations on revenues and costs for the markets in which the CGUs operate, and consider external analysts’ views of revenue trends;
• cashflows for 2017 to 2031 that are extrapolated based on an estimated annual long-term growth rate of 1.0%;
• a discounted residual value of 5 times the final year’s cashflow; and
• capital expenditure cashflows to reflect the cycle of capital investment required.
The present values of the cash flows are then compared to the carrying value of the assets to determine if there is any impairment loss.
The total impairment charge recognised in 2011 was £163.7 million (2010: net impairment charge of £13.1 million). This was primarily due to the increase in the discount rate applied to all CGUs and changes to the short term growth rates. The impairment charge by CGU was Scotland £23.8 million; North £58.6 million; North West £35.3 million; Midlands £6.4 million; South £26.3 million; Northern Ireland £6.3 million; and Republic of Ireland £7.0 million.
The Group has conducted a sensitivity analysis on the impairment test of each CGU’s carrying value. The following table illustrates the additional impairment charge for each CGU that would result if the long-term growth rate decreased by 0.5% or if the discount rate was increased by 0.5%.
Growth rate Discount rate sensitivity sensitivity £’000 £’000 Scotland ...... 1,493 2,435 North ...... 7,272 11,860 Northwest ...... 2,528 4,123 Midlands ...... 4,035 6,580 South ...... 2,329 3,798 Northern Ireland ...... 1,536 2,505 Republic of Ireland ...... 483 907 Total potential impairment from sensitivity analysis ...... 19,676 32,208
F-150 16. Property, plant and equipment
Freehold land Leasehold Plant and Motor and buildings buildings machinery vehicles Total £’000 £’000 £’000 £’000 £’000 Cost At 2 January 2010 ...... 105,391 5,198 293,083 16,779 420,451 Reclassified to assets held for sale at start of period ...... (9,437) — (34,327) — (43,764) Additions ...... 45 — 4,282 87 4,414 Disposals ...... (86) (15) (31,329) (2,854) (34,284) Exchange differences ...... (32) (39) (401) (28) (500) Transferred to assets held for sale during the period ...... — (762) (4,076) — (4,838) At 1 January 2011 ...... 95,881 4,382 227,232 13,984 341,479 Additions ...... 62 10 1,724 — 1,796 Disposals ...... (1,331) (1) (8,994) (3,809) (14,135) Exchange differences ...... (13) — (4) (8) (25) Transferred to assets held for sale during the period ...... (1,921) — (666) — (2,587) At 31 December 2011 ...... 92,678 4,391 219,292 10,167 326,528 Depreciation At 2 January 2010 ...... 17,608 1,648 168,279 13,308 200,843 Reclassified to assets held for sale at start of period ...... (6,624) — (31,544) — (38,168) Disposals ...... (40) (15) (31,194) (2,805) (34,054) Charge for the period ...... 1,925 744 15,305 1,789 19,763 Non-recurring write down in period . . — — 2,459 — 2,459 Exchange differences ...... (52) (7) (311) (18) (388) Transferred to assets held for sale during the period ...... — (762) (3,305) — (4,067) At 1 January 2011 ...... 12,817 1,608 119,689 12,274 146,388 Disposals ...... (424) (1) (8,977) (3,766) (13,168) Charge for the period ...... 1,873 139 14,814 1,160 17,986 Non-recurring write down in period . . — — 5,161 — 5,161 Exchange differences ...... (10) — (4) (8) (22) Transferred to assets held for sale during the period ...... (408) — (563) — (971) At 31 December 2011 ...... 13,848 1,746 130,120 9,660 155,374 Carrying amount At 31 December 2011 ...... 78,830 2,645 89,172 507 171,154 At 1 January 2011 ...... 83,064 2,774 107,543 1,710 195,091
Assets in the course of construction There were no assets in the course of construction at the start or end of the period.
F-151 17. Available for sale investments
The Group’s available for sale investments are:
2011 2010 £’000 £’000 Listed investments at fair value ...... 2 2 Unlisted investments Cost ...... 4,494 4,494 Provision for impairment ...... (3,526) (3,526) Unlisted investments carrying amount ...... 968 968 Total investments ...... 970 970
18. Interests in associates
The Group’s associated undertakings at the period end are:
Place of Proportion of Proportion of Method of incorporation ownership voting power accounting Name and operation interest held for investment Classified Periodicals Ltd ...... England 50% 50% Equity method
The aggregate amounts relating to associates are:
2011 2010 £’000 £’000 Total assets ...... 32 46 Total liabilities ...... (4) (22) Revenues ...... 37 42 Profit after tax ...... 10 10
F-152 19. Assets held for sale
Freehold land Leasehold Plant and and buildings buildings machinery Total £’000 £’000 £’000 £’000 Cost At 2 January 2010 ...... — — — — Reclassified from property, plant and equipment at start of period ...... 9,437 — 34,327 43,764 Disposals ...... (722) — (34,219) (34,941) Transferred from property, plant and equipment during period ...... — 762 4,076 4,838 Exchange differences ...... (30) — (115) (145) At 1 January 2011 ...... 8,685 762 4,069 13,516 Disposals ...... — — (4,069) (4,069) Transferred from property, plant and equipment during period ...... 1,921 — 666 2,587 Exchange differences ...... (15) (17) — (32) At 31 December 2011 ...... 10,591 745 666 12,002 Depreciation At 2 January 2010 ...... — — — — Reclassified from property, plant and equipment at start of period ...... 6,624 — 31,544 38,168 Disposals ...... (180) — (31,640) (31,820) Transferred from property, plant and equipment during period ...... — 762 3,305 4,067 Exchange differences ...... 17 — 13 30 At 1 January 2011 ...... 6,461 762 3,222 10,445 Disposals ...... — — (3,222) (3,222) Non-recurring write down in carrying value . . . 600 — — 600 Transferred from property, plant and equipment during period ...... 408 — 563 971 Exchange differences ...... (13) (17) — (30) At 31 December 2011 ...... 7,456 745 563 8,764 Carrying amount At 31 December 2011 ...... 3,135 — 103 3,238 At 1 January 2011 ...... 2,224 — 847 3,071
Assets held for sale consists of land and buildings in the UK and Republic of Ireland that are no longer in use by the Group and print presses that have ceased production. All of the assets are being marketed for sale and are expected to be sold within the next year.
20. Inventories
2011 2010 £’000 £’000 Raw materials ...... 4,709 4,531
F-153 21. Other financial assets and liabilities
Trade and other receivables
2011 2010 £’000 £’000 Current: Trade receivables ...... 42,967 46,408 Allowance for doubtful debts ...... (5,626) (7,478) 37,341 38,930 Prepayments ...... 6,132 4,610 Other debtors ...... 5,257 5,941 Total current trade and other receivables ...... 48,730 49,481 Non-current: Trade receivables ...... 6 35
Trade receivables The average credit period taken on sales is 44 days (2010: 52 days). No interest is charged on trade receivables. The Group has provided for estimated irrecoverable amounts in accordance with the accounting policy described in note 3.
Before accepting any new credit customer, the Group obtains a credit check from an external agency to assess the potential customer’s credit quality and then defines credit terms and limits on a by-customer basis. These credit terms are reviewed regularly. In the case of one-off customers or low value purchases, pre-payment for the goods is required under the Group’s policy. The Group reviews trade receivables past due but not impaired on a regular basis and considers, based on past experience, that the credit quality of these amounts at the period end date has not deteriorated since the transaction was entered into and so considers the amounts recoverable. Regular contact is maintained with all such customers and, where necessary, payment plans are in place to further reduce the risk of default on the receivable.
Included in the Group’s trade receivable balance are debtors with a carrying amount of £19.9 million (2010: £19.9 million) which are past due at the reporting date but for which the Group has not provided as there has not been a significant change in credit quality and the Group believes that the amounts are still recoverable. The Group does not hold any security over these balances. The weighted average age of these receivables (past due) is 25 days (2010: 27 days).
Ageing of past due but not impaired trade receivables
2011 2010 £’000 £’000 0 - 30 days ...... 14,417 13,905 30 - 60 days ...... 4,798 4,745 60 - 90 days ...... 192 630 90+ days ...... 471 621 Total ...... 19,878 19,901
F-154 Movement in the allowance for doubtful debts
2011 2010 £’000 £’000 Balance at the start of the year ...... 7,478 8,055 Decrease in the allowance recognised in the Income Statement (note 8) ...... (1,852) (577) Balance at the end of the year ...... 5,626 7,478
In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the balance sheet date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the Directors believe that there is no further credit provision required in excess of the allowance for doubtful debts.
Ageing of impaired trade receivables Impaired trade receivables are those that have been provided for under the Group’s bad debt provisioning policy, as described in the accounting policy in note 3. The ageing of impaired trade receivables is shown below.
2011 2010 £’000 £’000 0 - 30 days ...... 26 412 30 - 60 days ...... 199 145 60 - 90 days ...... 732 584 90+ days ...... 4,669 6,337 Total ...... 5,626 7,478
The Directors consider that the carrying amount of trade and other receivables at the balance sheet date approximate to their fair value.
Cash and cash equivalents Cash and cash equivalents totalling £13,407,000 (2010: £11,112,000) comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. The carrying amount of these assets approximates their fair value.
Trade and other payables
2011 2010 £’000 £’000 Current: Trade creditors and accruals ...... 29,638 33,458 Other creditors ...... 13,320 14,224 Total current trade and other payables ...... 42,958 47,682 Non-current: Trade and other creditors ...... 148 155
Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases is 30 days (2010: 23 days). The Group has financial risk management policies in place to ensure all payables are paid within the agreed credit terms.
The Directors consider that the carrying amount of trade payables at the balance sheet date approximate to their fair value.
F-155 22. Borrowings
2011 2010 £’000 £’000 Bank overdrafts ...... — 5,550 Bank loans—sterling denominated ...... 205,689 234,060 Bank loans—euro denominated ...... 12,563 12,848 2003 Private placement loan notes ...... 82,715 86,626 2006 Private placement loan notes ...... 58,841 61,542 Term debt issue costs ...... (4,041) (9,273) Payment-in-kind interest accrual ...... 16,327 8,634 Total borrowings ...... 372,094 399,987
The borrowings are disclosed in the financial statements as:
2011 2010 £’000 £’000 Current borrowings ...... 372,094 251 Non-current borrowings ...... — 399,736 372,094 399,987
The Group’s borrowings as at 31 December 2011 have been classed as current borrowings, due to the lending facilities maturing on 30 September 2012. Subsequent to the balance sheet date, the Group has entered into an amended and restated finance agreement, details of which are shown in note 33, with a new maturity date of 30 September 2015.
The Group’s net debt is:
Gross borrowings as above ...... 372,094 399,987 Cash and cash equivalents ...... (13,407) (11,112) Impact of currency hedge contracted rates ...... (11,065) (11,481) Net debt at currency hedge contracted rates ...... 347,622 377,394 Term debt issue costs ...... 4,041 9,273 Net debt excluding term debt issue costs ...... 351,663 386,667
F-156 Analysis of borrowings by currency:
Total Sterling Euros US Dollars £’000 £’000 £’000 £’000 At 2011 period end Bank loans ...... 218,252 205,689 12,563 — 2003 Private placement loan notes ...... 82,715 39,050 — 43,665 2006 Private placement loan notes ...... 58,841 — — 58,841 Term debt issue costs ...... (4,041) (4,041) — — Payment-in-kind interest accrual ...... 16,327 12,094 — 4,233 372,094 252,792 12,563 106,739 At 2010 period end Bank overdrafts ...... 5,550 5,550 — — Bank loans ...... 246,908 234,060 12,848 — 2003 Private placement loan notes ...... 86,626 40,957 — 45,669 2006 Private placement loan notes ...... 61,542 — — 61,542 Term debt issue costs ...... (9,273) (9,273) — — Payment-in-kind interest accrual ...... 8,634 6,413 — 2,221 399,987 277,707 12,848 109,432
The following finance facility details are as at 31 December 2011 and do not reflect the new finance agreements signed in April 2012, as detailed in note 33.
Credit facilities The Group has credit facilities in place with bank lenders and private placement loan note holders until 30 September 2012. The facility is secured (see note 29) and share warrants over 5% of the Company’s share capital have been issued to the lenders and note holders. Interest rates payable on all facilities are based on leverage multiples and reduce based on agreed ratchets relating to the Group’s ratio of net debt to EBITDA.
Bank loans The Group has credit facilities with a number of banks. The total facility is £273.9 million (2010: £287.2 million) of which £55.0 million is unutilised at the balance sheet date (2010: £40.3 million). The credit facilities are provided under two separate tranches as detailed below.
Facility A Facility A is a revolving credit facility of £55.0 million, available to be drawn down up to 30 September 2012. This facility includes a bank overdraft facility of £10.0 million (2010: £10.0 million). The loans can be drawn down on a one, two or three monthly basis. Interest is payable at LIBOR plus a maximum cash margin of 4.15% (2010: 4.15%).
Facility B Facility B is a term loan facility of £218.9 million (2010: £232.2 million) with full repayment due on 30 September 2012. Interest is payable quarterly at LIBOR plus a cash margin of up to 4.15% (2010: 4.15%), depending on covenants.
Under the terms of the finance agreement, committed reductions of the facilities were due in 6 monthly intervals from 30 June 2010. However, all of the scheduled reductions were brought forward at the request of the Group, with the 2010 reductions executed on 30 September 2010 and the June 2012 facility reduction executed on 28 April 2011. No further scheduled facility reductions remain.
F-157 Hedging 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. At the balance sheet date, borrowings of £200.0 million (2010: £245.0 million) were arranged at fixed rates and expose the Group to fair value interest rate risk. Further details on all of the Group’s derivative instruments can be found in note 32. Private placement loan notes The Group has total private placement loan notes of £39.1 million and $158.2 million (2010: £41.0 million and $165.9 million). The notes are repayable in full on 30 September 2012. Interest is payable quarterly at fixed coupon rates up to 9.45% (2010: 9.45%) depending on covenants. As noted with Facility B, committed reductions of the facilities were due in 6 monthly intervals from 30 June 2010. However all of the 2010 and 2011 reductions were made during 2010, and the 2012 facility reduction was executed in 2011.
2003 Private placement loan notes The 2003 Private placement loan notes are made up of: • £39.1 million at a coupon rate of up to 9.45% (2010: £41.0 million at a coupon rate of up to 9.45%); and • $67.4 million at a coupon rate of up to 8.9% (2010: $70.7 million at a coupon rate of up to 8.90%). Of the $67.4 million, $32.4 million has been swapped into floating sterling of £20.5 million and $35.0 million has been swapped into fixed sterling of £22.2 million to hedge the Group’s exposure to US dollar interest rates (2010: $35.7 million into floating sterling of £22.6 million and $35.0 million into fixed sterling of £22.2 million).
2006 Private placement loan notes The 2006 Private placement loan notes are made up of: • $32.2 million at a coupon rate of up to 9.33% (2010: $33.8 million at a coupon rate of up to 9.33%); and • $58.6 million at a coupon rate of up to 9.43% (2010: $61.4 million at a coupon rate of up to 9.43%). The total amount of $90.8 million has been swapped back into fixed sterling of £31.4 million (2010: £32.9 million) and floating sterling of £17.3 million (2010: £18.1 million), again to hedge the Group’s exposure to US dollar interest rates. Payment-in-kind interest In addition to the cash margin payable on the bank facilities and private placement loan notes, a payment-in-kind (PIK) margin accumulates and is payable at the end of the facility. This margin increases throughout the period of the facility. The PIK margin is eliminated if £85.0 million is repaid on the facilities excluding the scheduled facility reductions. The PIK accrues at a margin of between 1.35% and 3.05%. Interest rates: The weighted average interest rates paid over the course of the year, were as follows:
2011 2010 %% Bank overdrafts ...... 4.6 4.6 Bank loans ...... 10.4 10.7 2003 Private placement loan notes ...... 9.1 8.9 2006 Private placement loan notes ...... 8.7 8.7 9.9 10.0
F-158 23. Derivative financial instruments
Derivatives that are carried at fair value are as follows:
2011 2010 £’000 £’000 Interest rate swaps—current liability ...... (1,056) (728) Interest rate swaps—non-current liability ...... (306) (3,513) Cross currency swaps—current asset ...... 11,657 — Cross currency swaps—non-current asset ...... — 15,757 10,295 11,516
24. Retirement benefit obligation
Throughout 2011 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.
• An ROI industry-wide final salary scheme and a final salary scheme for a small number of employees in Limerick which has been closed to future accruals. A third ROI industry wide final salary scheme was contributed to prior to February 2011 when the Group ceased contributions and this scheme is being wound up. 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 and closed to future accrual. A curtailment credit of £6.3 million was recognised in the Group Income Statement in the prior period reflecting the closure to future accrual. 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 to the defined benefit scheme are fixed annual amounts with the intention of eliminating the deficit. Based on the outcome of the triennial valuation at 31 December 2010, the fixed annual amounts increase to £5.7 million from 1 June 2012 under the schedule of contributions agreed between the Company and the JPPP Trustees. As the defined benefit scheme has been closed to new members for a considerable period the last active member is scheduled to retire in 35 years with, at current mortality assumptions, the last pension paid in 55 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.
During 2011, the Company carried out a pension exchange exercise whereby a number of pensioner members were made an offer by the Company to exchange some of their future pension increases for a one-off increase in pension, where the new uplifted amount would no longer be eligible for increases in payment. The impact of this was a non-recurring credit in the Group Income Statement of £1.9 million in the year.
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 advisers and administrators of the Plan. Discussions take place with the Executive Directors of the Company to agree matters such as the contribution rates.
F-159 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:
2011 2010 £’000 £’000 Defined benefit schemes ...... — 1,064 Defined contribution schemes and Irish schemes ...... 7,343 6,404 7,343 7,468
Major assumptions:
2011 2010 Discount rate ...... 4.9% 5.4% Expected return on scheme assets ...... 5.6% 6.8% Expected rate of salary increases ...... n/a n/a Future pension increases Deferred revaluations (CPI) ...... 2.0% 2.6% Pensions in payment (RPI) ...... 2.9% 3.3% Life expectancy Male...... 23.1 years 19.9 years Female...... 23.3 years 23.0 years
The expected rate of salary increases is no longer relevant to the calculation of Plan liabilities given its closure to future accrual and so is noted as ‘not applicable’ in the table above.
The valuation of the defined benefit scheme’s 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:
• A change in the discount rate of 0.1% pa would change the value of liabilities by approximately 1.7% or £8.5 million.
• A change in the life expectancy by one year would change liabilities by approximately 3.0% or £14.0 million.
Amounts recognised in the Income Statement in respect of defined benefit schemes:
2011 2010 £’000 £’000 Current service cost ...... — 1,064 Interest cost ...... 23,612 24,979 Expected return on scheme assets ...... (25,862) (25,352) Gain on curtailment ...... — (6,300) Past service gain ...... (1,930) — (4,180) (5,609)
There was no current service cost in 2011 as the Defined Benefit scheme has been closed to future accrual (2010: £1,064,000 current service cost, of which £798,000 was included in cost of sales and £266,000 included in operating expenses). An actuarial loss of £49,584,000 (2010: gain of £14,064,000) has been recognised in the Group Statement of Comprehensive Income in the current period. The cumulative amount of actuarial gains and losses recognised in the Group Statement of Comprehensive Income since the date of transition to IFRS is a loss of £84,465,000 (2010: loss of £34,881,000). The actual return on scheme assets was a £1,198,000 loss (2010: £36,491,000 return).
F-160 Amounts included in the Statement of Financial Position:
2011 2010 £’000 £’000 Present value of defined benefit obligations ...... 472,708 446,095 Fair value of plan assets ...... (368,718) (385,309) Total liability recognised in the Statement of Financial Position ...... 103,990 60,786 Amount included in current liabilities ...... (2,200) (4,444) Amount included in non-current liabilities ...... 101,790 56,342
As at 31 December 2011 the required amounts of contributions to be paid to the scheme during 2012 was £2,200,000 (2010: £4,444,000); following the completion of the triennial valuation, these contributions increase to £5,700,000 from 1 June 2012.
Movements in the present value of defined benefit obligations:
2011 2010 £’000 £’000 Balance at the start of the period ...... 446,095 446,114 Service costs ...... — 1,064 Interest costs ...... 23,612 24,979 Contribution from scheme members ...... — 927 Age related rebates ...... 74 565 Changes in assumptions underlying the defined benefit obligations ...... 22,524 (2,925) Gain on curtailment ...... — (6,300) Past service gain ...... (1,930) — Benefits paid ...... (17,667) (18,329) Balance at the end of the period ...... 472,708 446,095
Movements in the fair value of plan assets:
2011 2010 £’000 £’000 Balance at the start of the period ...... 385,309 362,006 Expected return on plan assets ...... 25,862 25,352 Actual return less expected return on plan assets ...... (27,060) 11,139 Contributions from the sponsoring companies ...... 2,200 3,649 Contributions from plan members ...... — 927 Age related rebates ...... 74 565 Benefits paid ...... (17,667) (18,329) Balance at the end of the period ...... 368,718 385,309
Analysis of the plan assets and the expected rate of return:
Expected return Fair value of assets 2011 2010 2011 2010 % % £’000 £’000 Equity instruments ...... 6.8 8.0 224,549 250,836 Debt instruments ...... 3.8 4.8 98,816 90,162 Property ...... 4.8 6.0 21,754 20,807 Other assets ...... 2.6 3.3 23,599 23,504 5.6 6.9 368,718 385,309
F-161 Five year history:
2011 2010 2009 2008 2007 £’000 £’000 £’000 £’000 £’000 Present value of defined benefit obligations ...... 472,708 446,095 446,114 340,060 406,900 Fair value of scheme assets ...... (368,718) (385,309) (362,006) (321,849) (393,757) Deficit in the plan ...... 103,990 60,786 84,108 18,211 13,143 Experience adjustments on scheme liabilities Amount (£’000) ...... (22,524) 2,925 (100,425) 80,193 30,179 Percentage of plan liabilities (%) ...... (4.8%) 0.7% (22.5%) 23.6% 7.4% Experience adjustments on scheme assets Amounts (£’000) ...... (27,060) 11,139 29,137 (92,340) (4,895) Percentage of plan assets (%) ...... (7.3%) 2.9% 8.0% (28.7%) (1.2%)
25. Deferred tax
The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting periods.
Accelerated Properties tax Intangible Pension Other timing not eligible depreciation assets balances differences Total £’000 £’000 £’000 £’000 £’000 £’000 At 2 January 2010 ...... 13,551 15,478 257,372 (23,551) (1,396) 261,454 (Credit)/charge to income .... (460) (531) (3,854) 2,628 (508) (2,725) Debit to equity ...... — — — 3,936 — 3,936 Reduction in tax rate—income . (552) (457) (8,664) 716 50 (8,907) Reduction in tax rate—equity . — — 48 (141) — (93) Transfer between categories . . 2,263 (2,263) — — — — Currency movements ...... — (1) (709) — — (710) At 1 January 2011 ...... 14,802 12,226 244,193 (16,412) (1,854) 252,955 (Credit)/charge to income .... (502) (1,764) (44,041) 1,723 758 (43,826) Credit to equity ...... — — — (13,388) — (13,388) Reduction in tax rate—income . (1,067) (785) (14,212) 1,088 66 (14,910) Reduction in tax rate—equity . — — — 992 — 992 Currency movements ...... — 2 (227) — 11 (214) At 31 December 2011 ...... 13,233 9,679 185,713 (25,997) (1,019) 181,609
Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (before offset) for financial reporting purposes:
2011 2010 £’000 £’000 Deferred tax liabilities ...... 208,625 271,221 Deferred tax assets ...... (27,016) (18,266) 181,609 252,955
Temporary differences arising in connection with interests in associates are insignificant.
F-162 The Group estimates that the future rate changes to 22.0% would reduce its UK actual deferred tax liability provided at 31 December 2011 by £20.8 million, however the impact will be dependent on our deferred tax position at that time.
26. Long term provisions
Obligations to industry Onerous Post sponsored leases and Unfunded retirement pension dilapidations pensions health costs schemes Total £’000 £’000 £’000 £’000 £’000 At 1 January 2011 ...... 5,187 1,189 250 254 6,880 Credit to income ...... (679) — — — (679) Actuarial valuation ...... — — — 108 108 Paid during the period ...... (295) — (47) — (342) At 31 December 2011 ...... 4,213 1,189 203 362 5,967
The unfunded pension provision and obligations to industry sponsored pension schemes are assessed by a qualified actuary at each period end. The post retirement health costs represent management’s estimate of the liability concerned. The provision for onerous leases and dilapidations represent management’s estimate of the liability for future lease obligations.
27. Share capital
2011 2010 £’000 £’000 Issued 639,746,083 Ordinary Shares of 10p each (2010: 639,746,083) ...... 63,975 63,975 756,000 13.75% Cumulative Preference Shares of £1 each (2010: 756,000) .... 756 756 349,600 13.75% ‘‘A’’ Preference Shares of £1 each (2010: 349,600) ...... 350 350 65,081 65,081
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.
F-163 28. Notes to the cash flow statement
2011 2010 £’000 £’000 Operating (loss)/profit ...... (106,979) 54,858 Adjustments for: Impairment of intangibles—non-recurring ...... 163,695 13,086 Depreciation of property, plant and equipment (including write-downs) . . 23,147 22,222 Write down in carrying value of assets held for sale ...... 600 — Currency differences ...... (360) (39) Charge/(credit) from share based payments ...... 572 (2,073) Profit on disposal of property, plant and equipment ...... (775) (1,746) Movement in long-term provisions ...... (679) 1,555 Net pension funding contributions ...... (2,200) (1,373) IAS 19 pension curtailment gain (non-recurring) ...... — (6,300) IAS 19 past service gain (non-recurring) ...... (1,930) — Operating cash flows before movements in working capital ...... 75,091 80,190 Increase in inventories ...... (178) (1,668) Decrease in receivables ...... 1,431 1,546 Decrease in payables ...... (5,137) (730) Cash generated from operations ...... 71,207 79,338
Cash and cash equivalents (which are presented as a single class of assets on the face of the Statement of Financial Position) comprise cash at bank and other short-term highly liquid investments with a maturity of three months or less.
29. Guarantees and other financial commitments a) Lease commitments The Group has entered into non-cancellable operating leases in respect of motor vehicles and land and buildings, the payments for which extend over a period of years.
2011 2010 £’000 £’000 Minimum lease payments under operating leases recognised as an expense in the year ...... 5,798 5,863
At the period end date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases which fall due as follows:
2011 2010 £’000 £’000 Within one year ...... 6,170 5,664 In the second to fifth years inclusive ...... 17,011 16,689 After five years ...... 20,622 21,849 43,803 44,202
Operating lease payments represent rentals payable by the Group for certain of its office properties and motor vehicle fleet. Leases are negotiated for an average term of 10 years in the case of properties and 4 years for vehicles. The rents payable under property leases are subject to renegotiation at various intervals specified in the lease contracts. The Group pays insurance, maintenance and repairs of these properties. The rents payable for the vehicle fleet are fixed for the full rental period.
F-164 b) Assets pledged as security Under the refinancing agreement signed on 28 August 2009, the Group and all its material subsidiaries have entered into a security agreement with the Group’s bankers and Private Placement loan note holders. The security provided includes a fixed charge over the assets of the Group including investments, fixed assets, goodwill, intellectual property and a floating charge over its present and future undertakings.
30. Share-based payments
Equity-settled share option scheme Options over ordinary shares are granted under the Executive Share Option Scheme. Options are exercisable at a price equal to the closing quoted market price of the Company’s shares on the day prior to the date of grant. The vesting period is 3 years. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are forfeited if the employee leaves the Group before the options vest. No options have been granted under the Executive Share Option Scheme since 2005.
Details of the share options outstanding during the period:
2011 2010 Weighted Weighted Number average Number average of share exercise of share exercise options price (in p) options price (in p) Outstanding at the beginning of period ...... 312,657 246 321,888 232 Lapsed/forfeited during the period ...... (66,710) 229 (9,231) 214 Outstanding at the end of the period ...... 245,947 266 312,657 246 Exercisable at the end of the period ...... 245,947 266 312,657 246
No share options were exercised during the period. The options outstanding at the period end had a weighted average exercise price of 266p, and a weighted average remaining contractual life of 0.7 years.
Previous grants were valued using the Black-Scholes model. As far as the assumptions were concerned, expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous full year. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
The Group recognised a charge of £nil related to equity-settled share-based payment transactions in 2011 for the Executive Share Option Scheme (2010: net credit of £2,123,000).
Group Savings-Related Share Option Scheme The Company operates a Group Savings-Related Share Option Scheme. This has been approved by the Inland Revenue and is based on eligible employees being granted options and their agreeing to save weekly or monthly in a sharesave account with Computershare Plan Managers for a period of either 3, 5 or 7 years. The right to exercise is at the discretion of the employee within six months following the end of the period of saving.
F-165 Options outstanding under the Savings-Related Scheme at the period end:
Number of Issue price Option grant date shares per share 29.09.04 ...... 29,097 304.46p 29.09.05 ...... 17,103 291.60p 29.09.06 ...... 74,827 224.76p 29.09.06 ...... 10,404 228.80p 27.09.07 ...... 108,358 226.41p 27.09.07 ...... 3,165 220.17p 26.09.08 ...... 3,187,766 37.60p 26.09.08 ...... 65,894 37.60p 25.09.09 ...... 2,794,333 28.60p 25.09.09 ...... 54,412 28.60p 28.09.10 ...... 10,192,490 15.75p 28.09.10 ...... 11,459 15.75p
The Group recognised a net charge of £391,000 in 2011 (2010: £964,000) related to equity- settled share-based payment transactions for the Savings-Related Share Option Scheme.
The above options granted on 29 September 2006 and earlier were issued to employees at a price equivalent to the average mid-market price for the 30 days prior to 27 August 2004, 2 September 2005 and 1 September 2006 respectively. The subsequent options were granted at the closing mid-market price on the day prior to the invitation being sent to employees on 3 September 2007, 1 September 2008, 1 September 2009 and 1 September 2010 respectively. This follows the approval of the revised Sharesave Scheme at the Annual General Meeting in April 2007. A discount of 20% to the average mid-market price was applied to the issues up to and including 2009. No discount was applied to the 2010 issue.
There were no options granted under the Savings-Related Share Option Scheme in 2011.
Share Matching Plan The Group recognised a total charge of £nil in 2011 (2010: credit of £1,357,000) in relation to the Share Matching Plan. The performance conditions for the matching awards granted prior to 1 January 2007, when the plan was suspended, were not met and all awards lapsed in 2010.
Performance Share Plan The Company makes awards to Executive Directors and certain senior employees on an annual basis under the Performance Share Plan. The awards vest after three years if certain performance criteria are met during that period.
Awards outstanding under the Performance Share Plan at the period end:
Number of Market price Grant date shares on award Vesting dates 30.06.09 ...... 6,227,606 16.50p 30.06.12 16.04.10 ...... 5,200,900 31.75p 16.04.13 21.04.11 ...... 5,962,068 7.40p 21.04.14 31.05.11 ...... 720,000 7.00p 31.05.14 11.11.11 ...... 10,471,204 4.78p 11.11.14
The Group recognised a net credit of £30,000 in 2011 (2010: £443,000) related to equity-settled share-based payment transactions for the Performance Share Plan.
F-166 Deferred Share Bonus Plan It is the Company’s policy that a proportion of any bonus paid to Executive Directors and certain senior employees is paid in shares deferred for three years. Shares are purchased at the time the bonus is awarded and held by the Company until either the three years are completed or the employee leaves and is treated as a good leaver. 2,076,037 shares are held by the Company in relation to the Deferred Share Bonus Plan.
The Group recognised a net charge of £211,000 in 2011 (2010: £500,000) related to equity- settled bonus payments for the Deferred Share Bonus Plan.
31. Related party transactions a) Associated parties The Group undertook transactions, all of which were on an arms’ length basis, and had balances outstanding at the period end with related parties as shown below.
Purchases Creditors Sales Debtors 2011 2010 2011 2010 2011 2010 2011 2010 Related party £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Classified Periodicals Ltd ...... 34 43 4 9 — — — —
Classified Periodicals Ltd is an associated undertaking of Johnston Press plc, which re-publishes in a separate publication classified advertisements that appear in the Group’s titles and those of certain other publishers.
The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties. b) Key management personnel The remuneration of the Executive Directors, who are the key management personnel of the Group, is set out in the audited section of the Directors’ Remuneration Report.
32. Financial instruments a) Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the return to shareholders through the optimisation of the debt and equity balance.
The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 22, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued share capital, reserves and retained earnings as disclosed in note 27 and in the Group Reconciliation of Shareholders’ Equity. b) Gearing ratio The Board of Directors formally reviews the capital structure of the Group twice each year and also when considering any major corporate transactions such as the 2012 refinancing. As part of these reviews, the Board considers the cost of capital and the risks associated with each class of capital. Based on the recommendations of the Board, the Group will balance its overall capital structure when appropriate through the payment of dividends, new share issues and share buy-backs as well as the issue of new debt or the redemption of existing debt.
F-167 The gearing ratio at the period end is as follows:
2011 2010 £’000 £’000 Debt ...... 372,094 399,987 Cash and cash equivalents ...... (13,407) (11,112) Net debt (excluding the impact of cross-currency hedges) ...... 358,687 388,875 Equity ...... 284,364 411,187 Gearing ratio ...... 55.8% 48.6%
Debt is defined as long and short-term borrowings as detailed in note 22. Equity includes all capital and reserves of the Group attributable to equity holders of the parent. c) Externally imposed capital requirements The Group is not subject to externally imposed capital requirements. d) Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 3 to the financial statements. e) Categories of financial instruments
2011 2010 £’000 £’000 Financial assets (current and non-current) Derivative instruments ...... 11,657 15,757 Trade receivables ...... 37,341 38,930 Cash and cash equivalents ...... 13,407 11,112 Available for sale financial assets ...... 970 970 Financial liabilities (current and non-current) Derivative instruments ...... (1,362) (4,241) Trade payables ...... (13,632) (11,182) Borrowings at amortised cost ...... (372,094) (399,987) f) Financial risk management objectives The Group’s Corporate Treasury function provides services to the business and monitors and manages the financial risks relating to the operations of the Group through assessment of the exposures by degree and magnitude of risk. These risks include market risk (including currency risk and interest rate risk), credit risk, liquidity risk and cash flow interest rate risk.
The Group seeks to minimise the effects of these risks by using derivative financial instruments to hedge these risk exposures. The use of financial derivatives is governed by the Group’s policies approved by the Board and requirements of the bank loan and private placement funding agreements, which provide guidelines which must be operated within. The Group does not enter into or trade in financial instruments, including derivative financial instruments, for speculative purposes.
The Corporate Treasury function reports regularly to the Executive Directors and the Board. g) Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates (refer to section h) and interest rates (refer to section i). The Group enters into
F-168 a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including:
• Currency swaps to manage the foreign currency risk associated with foreign currency denominated borrowings, namely the US dollar denominated private placement loan notes;
• Borrowings in Euros to manage the foreign currency risk associated with the Group’s net investment in its foreign operations; and
• Interest rate swaps to mitigate the risk of rising interest rates.
At a Group and Company level, market risk exposures are assessed using sensitivity analyses.
There have been no changes to the Group’s exposure to market risks or the manner in which it manages and measures risk. h) Foreign currency risk management The Group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise.
The Group utilises currency derivatives to hedge significant future transactions and cash flows. The Group is a party to a number of cross currency interest rate swaps at the year end in the management of its exchange rate exposures. The instruments purchased are primarily denominated in US dollars in order to hedge the risks associated with the US dollar denominated private placement loan notes. There were no open foreign currency forward contracts at the year end (2010: nil).
The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:
Liabilities Assets 2011 2010 2011 2010 £’000 £’000 £’000 £’000 Euro Trade receivables ...... — — 1,766 3,018 Cash and cash equivalents ...... — — 1,349 1,487 Trade payables ...... (2,170) (2,467) — — Borrowings ...... (12,563) (12,848) — — US Dollar Cash and cash equivalents ...... — — 142 174 Borrowings ...... (106,739) (109,432) — —
Foreign currency sensitivity As noted above, the Group is mainly exposed to movements in Euros and US dollars rates. The following table details the Group’s sensitivity to a 5% change in pounds sterling against the euro and a 5% change in pounds sterling against the US dollar. These percentages are the rates used by management when assessing sensitivities internally and represent management’s assessment of the possible change in foreign currency rates.
The sensitivity analysis of the Group’s exposure to foreign currency risk at the reporting date has been determined based on the change taking place at the beginning of the financial year and held constant throughout the reporting period. A positive number indicates an increase in profit or loss and other equity where pounds sterling strengthens against the respective
F-169 currency. For a 5% weakening of the sterling against the relevant currency, there is an equal and opposite impact on profit or loss and other equity, and the balances below reverse signs.
Euro US Dollar currency currency impact impact 2011 2010 2011 2010 £’000 £’000 £’000 £’000 Profit or loss ...... 450 466 183 103 Other equity ...... — — — —
Of the impact on profit or loss an increase of £598,000 (2010: £612,000) relates to the retranslation of the Group’s euro denominated borrowings. The £183,000 (2010: £103,000) impact on profit or loss from US Dollar exposure relates to the retranslation of that element of the PIK accrual. i) Interest rate risk management The Group is exposed to interest rate risk as the Parent Company borrows funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings and by the use of interest rate swap contracts. Hedging activities are evaluated regularly to align interest rate views, define risk appetite and the requirements of the funding agreements in place, ensuring optimal hedging strategies are applied, by either positioning the balance sheet or interest expense through different interest rate cycles.
The Group’s exposures to interest rates on financial assets and financial liabilities are detailed in section k.
Interest rate sensitivity The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the period end date. For floating rate liabilities, the analysis is prepared assuming the amount of the liability outstanding at the period end date was outstanding for the whole year. A 50 basis points decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the possible change in interest rates.
At the reporting date, if interest rates had been 50 basis points lower and all other variables were held constant, the Group’s:
• net profit would increase by £374,000 (2010: net profit would increase by £409,000), mainly due to the impact of the Group’s fair value hedges; and
• net profit would decrease by £377,000 (2010: net profit would decrease by £664,000) as a result of the changes in the fair value of the Group’s cash flow hedges.
For an increase of 50 bps, the numbers shown above would have the opposite effect.
Interest rate swap contracts Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the fair value of issued fixed rate debt held and the cash flow exposures on the issued floating rate debt held.
The following tables detail the notional principal amounts and remaining terms of interest rate swap contracts outstanding as at the reporting date. The average interest rate is based on the outstanding balances at the end of the financial year. In the tables below, positive values in the fair value columns denote financial assets and negative values denote financial liabilities.
F-170 Table 1 Cash flow hedges—outstanding receive floating: pay fixed contracts and receive fixed: pay fixed contracts
Average contract Notional fixed principal interest amount Fair value 2011 2010 2011 2010 2011 2010 % % £’000 £’000 £’000 £’000 Within 1 year ...... 3.79 4.59 223,548 75,000 6,101 (727) 2 to 5 years ...... 1.90 3.83 30,000 225,047 (306) 5,174 3.57 4.02 253,548 300,047 5,795 4,447
Contracts with a nominal value of £170.0 million have fixed interest payments at an average of 2.55% for periods up to 2012, contracts with a nominal value of £30.0 million have fixed interest payments at an average of 1.9% for periods up to 2013, and contracts with a nominal value of $93.6 million have fixed interest payments at an average of 7.74% for periods up to 2012.
The interest rate swaps settle on a quarterly basis with interest being paid monthly or quarterly on the underlying principal amount. The floating rate on the interest rate swaps is 3 months LIBOR. The Group settles the difference between the fixed and floating interest rates on a net basis. All interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest rate amounts are entered into in order to reduce the Group’s cash flow exposure resulting from variable interest rates on borrowings.
Table 2 Fair value hedges—outstanding receive fixed: pay floating contracts
Average contract Notional fixed principal interest amount Fair value 2011 2010 2011 2010 2011 2010 % % £’000 £’000 £’000 £’000 Within 1 year ...... 8.85 — 37,758 — 4,500 — 2 to 5 years ...... — 8.84 — 40,704 — 7,068
The interest rate swaps settle on a quarterly basis. The average floating rate on the interest rate swaps is 3 month LIBOR plus a margin of 3.90%. The Group settles the difference between the fixed and floating interest rates on a net basis.
Financial instruments that are measured subsequent to initial recognition at fair value are grouped into 3 levels based on the extent to which the fair value is observable. The levels are classified as follows:
Level 1: fair value is based on quoted prices in active markets for identified financial assets and liabilities. Level 2: fair value is determined using directly observable inputs other than level 1 inputs. Level 3: fair value is determined on inputs not based on observable market data.
In the current and prior period, the interest rate and cross currency swaps are classified as level 2 financial instruments. The available for sale investments are classified as level 3 financial instruments. There have been no transfers between the various levels of the fair value hierarchy during the period.
F-171 j) Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties as a way of mitigating the risk of financial loss from defaults. The Group’s policy on dealing with trade customers is described in notes 3 and 21.
The Group’s exposure and the credit ratings of its counterparties are continuously monitored. As far as possible, the aggregate value of transactions is spread across a number of approved counterparties.
Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable.
The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics, the latter being defined as connected entities, other than with some of the larger advertising agencies. In the case of the latter, a close relationship exists between the Group and the agencies and appropriate allowances for doubtful debts are in place. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies, and the funds and financial instruments are held with a number of banks to spread the risk.
The following table shows the total estimated exposure to credit risk for all of the Group’s financial assets, excluding trade receivables which are discussed in note 21:
2011 2010 Carrying Exposure to Carrying Exposure to value credit risk value credit risk £’000 £’000 £’000 £’000 Available for sale investments ...... 970 — 970 — Cash and cash equivalents ...... 13,407 — 11,112 — Derivative instruments ...... 11,657 — 15,757 — 26,034 — 27,839 — k) Liquidity risk management Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has agreed an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Included in note 22 is a description of additional undrawn facilities that the Group has at its disposal to further reduce liquidity risk.
Liquidity risk is further discussed in the Business Review on page 12.
Liquidity and interest risk tables The following tables detail the Group’s remaining contractual maturity for its non-derivative financial liabilities as at 31 December 2011. The tables have been drawn up on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows.
F-172 Period ended 31 December 2011
2003 2006 Bank Bank private private Trade overdraft loans placement placement payables Total £’000 £’000 £’000 £’000 £’000 £’000 Within 1 year ...... — 237,722 91,918 65,495 13,632 408,767 — 237,722 91,918 65,495 13,632 408,767
Period ended 1 January 2011
2003 2006 Bank Bank private private Trade overdraft loans placement placement payables Total £’000 £’000 £’000 £’000 £’000 £’000 Within 1 year ...... 5,550 11,593 7,878 5,744 11,182 41,947 In 1-2 years ...... — 262,412 94,239 67,060 — 423,711 5,550 274,005 102,117 72,804 11,182 465,658
The maturity profile of the Group’s financial derivatives (which include interest rate and foreign currency swaps), using undiscounted cash flows, is as follows:
2011 2010 Payable Receivable Payable Receivable £’000 £’000 £’000 £’000 Within 1 year ...... 94,852 105,650 11,107 11,091 In 1-2 years ...... 141 124 102,533 116,008 94,993 105,774 113,640 127,099
The Group has access to financial facilities, the total unutilised amount of which is £55.0 million (2010: £40.3 million) at the reporting date. The Group expects to meet its obligations from operating cash flows and proceeds of maturing financial assets. l) Fair value of financial instruments The fair values of financial assets and financial liabilities are provided by the counterparty to the instrument.
Interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates.
33. Post balance sheet event
As explained in note 22, the Group currently meets its day-to-day and long term funding requirements through facilities that were due to expire on 30 September 2012. In April 2012, the Group announced the amendment and restatement of these finance facilities until 30 September 2015. The facilities consist of a revolving credit facility, a term loan facility and private placement loan notes, with a total available facility of £393.0 million.
Interest margins The starting and maximum cash margin in the case of the bank facilities is LIBOR plus 5.00% and, in the case of the loan notes, a cash interest coupon rate of up to 10.30%. The interest rates are based on the absolute amount of debt outstanding and leverage multiples and reduce based on agreed ratchets.
F-173 Payment-in-kind In addition to the cash margin, a payment-in-kind (PIK) margin of a maximum rate of 4.0% will accumulate and is payable at the end of the facility. The PIK margin rate is again based on the absolute amount of debt outstanding and leverage multiples and reduces based on agreed ratchets. Further, if the loan facilities are fully repaid prior to 31 December 2014, the rate at which the PIK margin accrued throughout the period of the agreement will be recalculated at a substantially reduced rate.
Repayment There is an agreed repayment schedule of £70.0 million over the three years. Repayments are due every six months with the first scheduled for 30 June 2012. In addition, a pay-if-you-can (PIYC) repayment schedule has also been agreed totalling £60.0 million over the three years, beginning 30 June 2012.
Warrants New 5 year share warrants over the Company’s share capital will be issued. On completion of the new arrangements, warrants over a further 2.5% of the Company’s share capital will be issued with the issue of a further 5.0% in September 2012. In the event that the Company does not obtain the necessary authority to grant those warrants due to be issued in September 2012, the lenders would instead become entitled to an equity based fee at the maturity of the facility, the terms of which would be materially worse than if the warrants were issued as proposed. In addition, the exercise period for the 5.0% warrants issued to the lenders in August 2009 has been extended to make the expiry of all warrants coterminous in September 2017.
Covenant tests The new facilities include the same types of financial covenants as were within the previous facilities.
Fees Fees payable are approximately £11.5 million. This represents a significant reduction on the fees associated with the 2009 refinancing.
F-174 Company balance sheet At 31 December 2011
2011 2010 Notes £’000 £’000 Fixed assets Tangible ...... 35 5 9 Investments ...... 36 529,292 624,728 529,297 624,737 Current assets Debtors—due within one year ...... 37 83,343 77,092 —due after more than one year ...... 37 443,754 456,185 Cash at bank and in hand ...... 6,968 179 534,065 533,456 Creditors: amounts falling due within one year ...... 38 (495,751) (117,500) Net current assets ...... 38,314 415,956 Total assets less current liabilities ...... 567,611 1,040,693 Creditors: amounts falling due after more than one year ..... 39 (306) (403,249) Provisions for liabilities ...... 41 (1,189) (1,189) Net assets ...... 566,116 636,255 Capital and reserves Called-up share capital Ordinary ...... 27 63,975 63,975 Preference ...... 27 1,106 1,106 65,081 65,081 Reserves ...... 42 501,035 571,174 Shareholders’ funds ...... 566,116 636,255
The comparative numbers are as at 1 January 2011.
The financial statements of Johnston Press plc, registered number 15382, were approved by the Board of Directors on 25 April 2012 and were signed on its behalf by:
28MAR201406594722 28MAR201407000173 Ashley Highfield, Grant Murray, Chief Executive Officer Chief Financial Officer
The accompanying notes are an integral part of these financial statements.
F-175 Notes to the Company financial statements For the 52 week period ended 31 December 2011 34. Significant accounting policies
Basis of accounting and preparation The separate financial statements of the Company are presented as required by the Companies Act 2006. As permitted by that Act, the separate financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards. No Profit and Loss Account is presented as permitted by section 408 of the Companies Act 2006. The Company’s result for the period, determined in accordance with the Act, was a loss of £70,184,000 (2010: profit of £20,328,000). The financial statements have been prepared on the historical cost basis except for derivative financial instruments. The principal accounting policies adopted are set out below.
The 2011 period was for the 52 weeks ended 31 December 2011 with the prior year being for the 52 weeks ended 1 January 2011.
Going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis in preparing the financial statements.
Tangible fixed assets Tangible fixed asset balances are shown at cost or valuation, net of depreciation and any provision for impairment. Depreciation is provided on all property, plant and equipment, excluding land, at varying rates calculated to write-off cost over the useful lives. The principal rates employed are:
Plant and machinery ...... 6.67%, 10%, 20%, 25% and 33% straight line basis Motor vehicles ...... 25% straight line basis
Investments Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment. Unlisted investments are shown at Directors’ valuation. Upward revaluations are credited to the revaluation reserve. Downward revaluations in excess of any previous upward revaluations are taken to the Profit and Loss Account.
Borrowings Interest-bearing loans and bank overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premia payable on settlement or redemption and direct issue costs, are charged to the Profit and Loss Account using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Fees incurred in negotiating borrowings are held on the Balance Sheet and amortised to the Profit and Loss Account over the term of the underlying debt.
Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the period end date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the period end date. Timing differences are differences between the Company’s taxable profits and its
F-176 results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the period end date.
Share-based payments The Company issues equity settled share-based benefits to certain employees. These share- based payments are measured at their fair value at the date of grant and the fair value of expected shares is expensed to the Profit and Loss Account on a straight-line basis over the vesting period. Fair value is measured by use of the Black-Scholes model, as amended to take account of the Directors’ best estimate of probable share vesting and exercise.
Dividends Dividends payable to the Company’s shareholders are recorded as a liability in the period in which the dividends are approved. In the Company’s financial statements, dividends receivable from subsidiaries are recognised as assets in the period in which the dividends are approved.
Financial instruments Financial assets and financial liabilities are recognised on the Balance Sheet when the Company becomes a party to the contractual provisions of that instrument.
The Company’s activities and funding structure give rise to some exposure to the financial risks of changes in interest rates and foreign currency exchange rates. The Company uses interest rate swaps and cross currency interest rate swaps to manage these exposures. The Company does not use derivative financial instruments for speculative purposes.
Changes in the fair value of derivative financial instruments are recognised directly in the Profit and Loss Account.
Full details of the Group policy are summarised on page 53.
Retirement benefit obligations The Company participates in a Group-wide scheme, the Johnston Press Pension Plan, which has a defined benefit section (providing benefits based on final pensionable pay) and a defined contribution section (see note 24). The assets of the scheme are held separately from those of the Company. The pension costs for the defined contribution section are charged to the Profit and Loss Account on the basis of contributions due in respect of the financial year. In relation to the defined benefit section of the scheme, the Company is unable to identify its share of the underlying assets and liabilities on a consistent and reliable basis and therefore, as required by FRS 17, the Company accounts for this scheme as a defined contribution scheme. As a result, the amount charged to the Profit and Loss Account in respect of the defined benefit section represents the contributions payable to the scheme in respect of the period.
F-177 35. Tangible fixed assets
Plant and Motor machinery vehicles Total £’000 £’000 £’000 Cost At 1 January 2011 ...... 164 42 206 Disposals ...... (156) (42) (198) At 31 December 2011 ...... 8—8 Depreciation At 1 January 2011 ...... 157 40 197 Disposals ...... (156) (40) (196) Charge for the year ...... 2 — 2 At 31 December 2011 ...... 3—3 Carrying amount At 31 December 2011 ...... 5—5 At 1 January 2011 ...... 7 2 9
36. Investments
Subsidiary Unlisted undertakings investments Total £’000 £’000 £’000 Cost At the start of the period ...... 1,105,182 3,526 1,108,708 Amounts relating to share based payments ...... 658 — 658 At the end of the period ...... 1,105,840 3,526 1,109,366 Provisions for impairment At the start of the period ...... (480,454) (3,526) (483,980) Provision for impairment ...... (96,094) — (96,094) At the end of the period ...... (576,548) (3,526) (580,074) Net book value At the end of the period ...... 529,292 — 529,292 At the start of the period ...... 624,728 — 624,728
An impairment charge has been reflected in the financial statements of the Group. Full details are explained in note 15. Inevitably this affects the value of the investments held by the Parent Company and the element of the impairment of intangible assets relating to the investments held by the Company only has been processed as an impairment of investments.
F-178 The Company’s principal subsidiary undertakings are as follows:
Country of Proportion incorporation of ownership Name of company and operation interest Nature of business Johnston Publishing Ltd ...... England 100% Newspaper publishers Johnston Press Ireland Ltd* ..... Republic of Ireland 100% Newspaper publishers Isle of Man Newspapers Ltd* .... Isle of Man 100% Newspaper publishers and printers Score Press Ltd ...... Scotland 100% Holding company Score Press Ireland* ...... Republic of Ireland 100% Holding company The Scotsman Publications Ltd . . . Scotland 100% Newspaper publishers Johnston (Falkirk) Ltd ...... Scotland 100% Newspaper publishers Strachan & Livingston Ltd ...... Scotland 100% Newspaper publishers The Tweeddale Press Ltd* ...... Scotland 100% Newspaper publishers Angus County Press Ltd* ...... Scotland 100% Newspaper publishers Galloway Gazette Ltd* ...... Scotland 100% Newspaper publishers Stornoway Gazette Ltd* ...... Scotland 100% Newspaper publishers Northeast Press Ltd* ...... England 100% Newspaper publishers and printers Yorkshire Post Newspapers Ltd* . . England 100% Newspaper publishers and printers Ackrill Newspapers Ltd* ...... England 100% Newspaper publishers Yorkshire Weekly Newspaper Group Ltd ...... England 100% Newspaper publishers Halifax Courier Ltd* ...... England 100% Newspaper publishers Yorkshire Regional Newspapers Ltd ...... England 100% Newspaper publishers Lancashire Evening Post Ltd* .... England 100% Newspaper publishers Lancashire Publications Ltd* .... England 100% Newspaper publishers Lancaster & Morecambe Newspapers Ltd* ...... England 100% Newspaper publishers Blackpool Gazette & Herald Ltd* . England 100% Newspaper publishers East Lancashire Newspapers Ltd* . England 100% Newspaper publishers Johnston Letterbox Direct Ltd* . . England 100% Newspaper publishers Wilfred Edmunds Ltd ...... England 100% Newspaper publishers South Yorkshire Newspapers Ltd . England 100% Newspaper publishers East Midlands Newspapers Ltd* . . England 100% Newspaper publishers Lincolnshire Newspapers Ltd .... England 100% Newspaper publishers Anglia Newspapers Ltd ...... England 100% Newspaper publishers Northamptonshire Newspapers Ltd ...... England 100% Newspaper publishers Central Counties Newspapers Ltd . England 100% Newspaper publishers Premier Newspapers Ltd ...... England 100% Newspaper publishers Sheffield Newspapers Ltd* ...... England 100% Newspaper publishers and printers Peterboro’ Web Ltd ...... England 100% Contract printers Northampton Web Ltd* ...... England 100% Contract printers Portsmouth Publishing & Printing Ltd* ...... England 100% Newspaper publishers and printers Sussex Newspapers Ltd ...... England 100% Newspaper publishers T R Beckett Ltd ...... England 100% Newspaper publishers Morton Newspapers Ltd* ...... Northern Ireland 100% Newspaper publishers and printers Derry Journal Ltd* ...... Northern Ireland 100% Newspaper publishers Donegal Democrat Ltd* ...... Republic of Ireland 100% Newspaper publishers Longford Leader Ltd* ...... Republic of Ireland 100% Newspaper publishers Leitrim Observer Ltd* ...... Republic of Ireland 100% Newspaper publishers Leinster Leader Ltd* ...... Republic of Ireland 100% Newspaper publishers Leinster Express Newspapers Ltd* . Republic of Ireland 100% Newspaper publishers Dundalk Democrat Ltd* ...... Republic of Ireland 100% Newspaper publishers Limerick Leader Ltd* ...... Republic of Ireland 100% Newspaper publishers Clonnad Ltd* ...... Republic of Ireland 100% Newspaper publishers Kilkenny People Publishing Ltd* . . Republic of Ireland 100% Newspaper publishers * Held through a subsidiary.
F-179 There is no difference in the proportions of ownership interest shown above and the voting power held. All investments in subsidiary undertakings are held at cost less, where appropriate, provisions for impairment.
37. Debtors
2011 2010 £’000 £’000 Amounts falling due within one year Amounts owed by subsidiary undertakings ...... 60,459 66,713 Corporation tax recoverable ...... 9,611 9,999 Trade and other debtors and prepayments ...... 1,616 380 Derivative financial instruments ...... 11,657 — 83,343 77,092 Amounts falling due after more than one year Amounts owed by subsidiary undertakings ...... 443,400 440,062 Derivative financial instruments (note 23) ...... — 15,757 Deferred tax asset—see below ...... 354 366 443,754 456,185
The following are the major deferred tax assets recognised by the Company and movements thereon during the year.
Accelerated tax Pension Other timing depreciation balances differences Total £’000 £’000 £’000 £’000 At the start of the period ...... 27 321 18 366 Charge to profit and loss account ...... (11) — 27 16 Reduction in tax rate ...... (1) (24) (3) (28) At the end of the period ...... 15 297 42 354
38. Creditors: amounts falling due within one year
2011 2010 £’000 £’000 Borrowings (note 40) ...... 372,094 430 Amounts owed to subsidiary undertakings ...... 117,068 110,125 Other taxes and social security costs ...... 421 498 Accruals and deferred income ...... 5,106 5,719 Other creditors ...... 6 — Derivative financial instruments (note 23) ...... 1,056 728 495,751 117,500
39. Creditors: amounts falling due after more than one year
2011 2010 £’000 £’000 Borrowings (note 40) ...... — 399,736 Derivative financial instruments (note 23) ...... 306 3,513 306 403,249
F-180 40. Borrowings
The Company’s bank overdrafts and loans comprise:
2011 2010 £’000 £’000 Bank overdrafts ...... — 5,729 Bank loans—sterling denominated ...... 205,689 234,060 Bank loans—euro denominated ...... 12,563 12,848 2003 Private placement loan notes ...... 82,715 86,626 2006 Private placement loan notes ...... 58,841 61,542 Payment-in-kind interest accrual ...... 16,327 8,634 Term debt issue costs ...... (4,041) (9,273) 372,094 400,166
The borrowings are repayable as follows:
2011 2010 £’000 £’000 On demand or within one year ...... 372,094 5,729 Within one to two years ...... — 403,710 372,094 409,439 Less amount due for settlement within one year ...... (372,094) (5,729) Amount due for settlement after more than one year ...... — 403,710
Borrowings are shown in the Balance Sheet net of term debt issue costs of £4,041,000 (2010: net of £9,273,000 term debt issue costs of which £5,299,000 is deducted from current liabilities).
All borrowings as at 31 December 2011 have been classed as current borrowings, due to the lending facilities maturing on 30 September 2012.
Other details relating to the bank overdrafts and loans are set out in note 22.
41. Provisions for liabilities
Unfunded pensions £’000 At the start and end of the period ...... 1,189
The unfunded pension provision is assessed by a qualified actuary at each period end.
F-181 42. Reserves
Share-based Share payments Retained Other Own premium reserve earnings reserves shares Total £’000 £’000 £’000 £’000 £’000 £’000 Opening balance ...... 502,818 17,273 36,577 19,510 (5,004) 571,174 Loss for the period ...... — — (70,184) — — (70,184) Dividends (note 13) ...... — — (152) — — (152) Provision for share-based payments ...... — 572 — — — 572 Own shares purchased ...... — — — — (375) (375) At the end of the period ...... 502,818 17,845 (33,759) 19,510 (5,379) 501,035
Further details of share-based payments are shown in note 30.
The own shares reserve represents the cost of shares in Johnston Press plc purchased in the market and held by the Johnston Press plc Employee Share Trust (the ‘JP EST’) to satisfy options under the Group’s share options schemes (see note 30). The number of ordinary shares held by the JP EST as at 31 December 2011 was 11,958,165 (2010: 11,851,179). In addition, 2,076,037 shares are held regarding the deferred share bonus plan.
43. Post balance sheet event
Subsequent to the year end date, the Company has signed an amended and restated finance agreement, extending the maturity of its borrowings to 30 September 2015. Further details are shown in note 33.
F-182 THE ISSUER
Johnston Press Bond Plc 2 London Wall Buildings London EC2M 5UU United Kingdom
LEGAL ADVISORS TO THE ISSUER
As to matters of U.S. Law As to matters of English Law As to matters of As to matters of Northern Scottish Law Irish Law Cravath, Swaine & Moore LLP Ashurst LLP MacRoberts LLP Cleaver Fulton Rankin CityPoint Broadwalk House Excel House 50 Bedford Street One Ropemaker Street 5 Appold Street 30 Semple Street Belfast BT2 7FW London EC2Y 9HR London EC2A 2HA Edinburgh EH3 8BL United Kingdom United Kingdom
LEGAL ADVISORS TO THE INITIAL PURCHASERS
As to matters of U.S. Law and English Law As to matters of Scottish Law As to matters of Northern Irish Law Linklaters LLP Dundas & Wilson, CS LLP A&L Goodbody One Silk Street Saltire Court 6th Floor, 42/46 Fountain Street London EC2Y 8HQ 20 Castle Terrace Belfast BT1 5EF United Kingdom Edinburgh EH1 2EN
INDEPENDENT ACCOUNTANT
Deloitte LLP 2 New Street Square London EC4A 3BZ United Kingdom
PRINCIPAL PAYING AGENT, SECURITY AGENT AND ESCROW AGENT
Deutsche Bank AG, London Branch Winchester House 1 Great Winchester Street London EC2N 2DB United Kingdom
TRUSTEE
Deutsche Trustee Company Limited Winchester House 1 Great Winchester Street London EC2N 2DB United Kingdom
REGISTRAR AND TRANSFER AGENT
Deutsche Bank Luxembourg S.A. 2, Boulevard Konrad Adenauer L-1115 Luxembourg Grand Duchy of Luxembourg
IRISH LISTING AGENT
Arthur Cox Listing Services Limited Earlsfort Centre Earlsfort Terrace Dublin 2 Ireland
LEGAL ADVISOR TO THE TRUSTEE, SECURITY AGENT AND ESCROW AGENT
Allen & Overy LLP One Bishops Square London E1 6AD United Kingdom 3APR201423052883
Merrill Corporation Ltd, London 14ZBN18001