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OVERVIEW 
In the year to 30 September 2002, profit before interest,
amounts written off investments and tax from continuing
businesses rose to £52.5m from a loss of £4.0m in 2001.
Reported profit before tax from continuing operations
was £32.3m compared to a loss of £39.6m in 2001.
PROFIT ANALYSIS
Continuing operations profit before amortisation, interest,
tax, exceptional items and amounts written off investments
was £65.3m in 2002 (2001: £65.8m).
Results for 2001 have been restated to reflect the closure
of ITV Digital and ITV Sport Channel and the sale of other
digital media businesses in discontinued operations in
accordance with FRS 3.
Loss before interest and tax for 2001 as restated is
reconciled in the table above.
Analysis of net cash movement
EBITDA from continuing operations, before operating exceptional
items, was £91.7m, down 5 per cent on 2001 (£96.6m).
The corresponding figures for the second half of the year
show an increase from £22.0m to £48.0m. EBITDA
is calculated as operating profit before interest, tax,
depreciation, amortisation, amounts written off investments
and the share of results from associates and joint ventures.
The changes in EBITDA before operating exceptional items
from 2001 to 2002 is reconciled in the following table.
Capital Employed
The slowdown in advertising revenues and increased network
schedule costs (resulting from both higher investment in
the ITV schedule and stock adjustments) were the primary
reasons for the fall in earnings in the year. These were largely
offset by a series of cost saving initiatives and the scaling
down of loss-making internet and digital channel activities.
Operating costs and overheads were reduced by £54.2m,
a 10 per cent reduction against 2001 excluding network costs
and licence fees. This total comprises savings of £18.1m from
operating costs and overheads and £36.1m from the scaling
down of businesses.
EBITA before operating exceptional items decreased by
7 per cent to £68.7m (2001: £74.2m). This was primarily due
to the reduction in television advertising revenues in the first
half of the year. In the second half EBITA increased from
£11.2m in 2001 to £36.0m in 2002.
TURNOVER
A breakdown of revenues from continuing operations is set
out above.
Like-for-like turnover from continuing operations, adjusted for
the additional month of HTV revenue (£7.6m) and excluding
Screenvision during the time that it was a 100 per cent
owned subsidiary in 2001 (£28.3m), fell by 5 per cent. This
was mainly due to a weaker television advertising market in
the first half (down 12 per cent), partially offset by recovery
in the second half (up 2 per cent). Reported turnover from
continuing operations was £964.6m in 2002, 7 per cent lower
than 2001 (£1,040.1m restated).
BROADCASTING
Broadcasting profits were reduced primarily due to lower NAR
and increased network programme budget costs. This was partly
offset by reduced licence payments, increased profits from
Carlton Screen Advertising and cost savings achieved from
the scaling-down of loss-making digital channel operations.
Licence payments
Payments to the Government for the Group’s wholly owned
broadcasting licences are a significant element of the costs.
In 2002 these payments totalled £100.8m before digital
satellite costs (2001: £119.5m) and were made up of cash
bids of £26.0m (2001: £19.9m) and Percentage of Qualifying
Revenue ("PQR") payments of £74.8m (2001: £99.6m).
The PQR rates applicable to advertising and sponsorship
revenue during the year were 20 per cent for Carlton
London, 17 per cent for Carlton Midlands, 13 per cent for
Carlton West Country and 7 per cent for HTV.
Carlton London’s cash bid was £16.9m, Carlton West
Country’s £1.2m, Carlton Midland’s £5.7m (this rose from
£2,600 per annum, plus RPI, as of 1 January 2002) and HTV’s
£2.2m. No PQR is payable on the proportion of revenues
attributed to the viewing of digital ITV services. As digital
penetration increases in the future, the proportion of the
advertising and sponsorship revenues attracting PQR will fall.
The effect of this was to reduce PQR payments by £35m
(2001: £10m). This benefit was partly offset by digital satellite
transmission costs that commenced in November 2001 at a
cost of £10.3m (2001: nil).
CONTENT
Content mainly consists of Carlton Productions and Carlton
International. The improved profits have been achieved mainly
through cost savings and the scaling-down of loss-making
internet businesses.
OTHER
Group overheads net of rental income and Group foreign
exchange differences amount to a net cost of £8.8m
(2001: £10.5m net of £3.5m profits from Screenvision as
a subsidiary).
JOINT VENTURES AND ASSOCIATES
Losses from joint ventures and associated companies before
interest reduced to £3.4m before amortisation (2001: £8.4m).
Amortisation costs were £2.1m (2001: £nil).
The improvement in the year resulted principally from
reduced losses in ITV2 and the return to profitability of ITN.
The Group’s share of ITV2 losses was £7.2m (2001: £9.7m)
and ITN profits were £1.8m (2001: loss £1.5m).
EXCEPTIONAL ITEMS
Exceptional items relating to the period can be analysed
in the table above.
AMOUNTS WRITTEN OFF INVESTMENTS
A provision of £8.2m was made against Carlton shares held
by the Group in various employee share schemes, reducing
the carrying value to the year end share price.
INTEREST
Net interest charges were £12.0m (2001: £35.6m). The tables
below show the constituent elements of the net interest
charge and a reconciliation from the 2001 figure.
The main reason for the lower net interest charge in 2002
was the benefit gained from swapping fixed rate sterling debt
into floating rate dollar cost of finance (without currency risk)
prior to September 2001, before short-term US interest rates
were cut to historically low levels. The low financing cost of
the Exchangeable bond and lower net interest bearing
balances were the other primary reasons.
DISCONTINUED OPERATIONS
Discontinued operations relate to the pre-closure results and
closure cost provisions for ITV Digital and ITV Sport Channel,
further receipts from the disposal of Technicolor and other
business disposals. The 2001 results have been restated to
include ITV Digital and ITV Sport Channel in discontinued
operations. The exceptional charges relating to ITV Digital and
ITV Sport Channel in 2002 comprise £34.6m of balances
written-off and a provision for closure costs of £64.0m of
which cash costs to date are £14.1m.
EARNINGS PER SHARE
Earnings per share from continuing operations, before
exceptional items, amortisation and investment write-downs
were 4.8p compared to 2.0p in 2001. Earnings are defined
as profits after tax and preference dividends.
After amortisation and investment write-downs the figure was
1.0p (2001: (0.6)p).
DIVIDENDS
The proposed final dividend of 5.0p per Ordinary share,
together with the interim dividend of 3.275p per Ordinary
share already paid, makes a total for the year of 8.275p per
Ordinary share (2001: 8.275p).
CASH FLOW
Net cash inflow in 2002 was £245.9m (2001: £65.0m) after
tax, interest and preference dividend payments but before
all investment. The increase was primarily due to the sale of
loan notes in the year (£179.0m).Working capital increased
by £11.6m (2001: £7.3m) primarily due to reductions in
creditors as a result of the scaling down of loss-making
digital ventures.
Cash outflows included capital expenditure of £11.7m
and loan funding and closure cost payments relating to the
ITV Digital and ITV Sport Channel businesses of £96.8m.
Net interest paid was £18.0m (2001: £32.5m). The
decrease in financing costs was due to interest rate swap
benefits as a result of lower interest rates offset by the
purchase of a euro currency call option. The cash cost
of preference dividends was £10.5m (2001: £10.5m).
Tax repaid was £4.2m (2001: £3.1m).
Capital expenditure of £11.7m (2001: £43.1m) was
significantly reduced following the sale of Technicolor in
March 2001.
Net outflows from acquisitions and disposals totalled
£7.8m (2001: £273.5m inflow). In 2002 this related to the
purchase of Screenvision Europe (£31.0m), partly offset by
further consideration following the sale of Technicolor
(£23.2m).
Equity dividends, primarily the final dividend for 2001,
were £55.5m (2001: £89.2m).
Overall there was a net cash inflow of £322.7m, a
negative exchange movement on the sterling value of
net debt of £6.4m and an increase in long-term funding
of £269.6m, resulting in net borrowings at the year end
of £459.9m (2001: £506.6m).
BALANCE SHEET
At 30 September 2002 the balance sheet showed net assets
of £433.5m, a decrease of £230.2m since 1 October 2001.
Fixed asset investments include an investment in Thomson SA
("Thomson") shares at a carrying value of £401.4m, details of
the market value of which are set out below. Current asset
investments include Thomson loan notes at a carrying value
of £32.8m. Loan notes with a nominal value of £175.0m were
sold or redeemed in the year.
Overall net debt at 30 September 2002 was £459.9m,
compared with net debt at the start of the year of £506.6m.
Details are analysed below, together with the carrying value
and 30 September 2002 market values of Thomson assets
acquired in relation to the Technicolor sale.
Analysis of net debt
Thomson assets
The Thomson shares are carried at €41.2 compared with
a year-end price of €15.9. The shares have traded between
€15.7 and €36.7 in the last year and the closing price on
22 November 2002 was €20.3. The table above indicates
that effective net debt, i.e. net debt adjusted for the market
value of the Thomson assets, was £271.8m at 30 September
2002 (2001: £7.0m).
On 30 November 2001 the Group issued a €638.6m
(£397.6m) exchangeable bond, raising £389.6m ( €627.4m)
that was received in January 2002. The bond has a maturity
date of 2007 and is exchangeable into Thomson shares at a
fixed exchange price of €41.2. The investors also hold the
right to put the bonds back to the Company in January 2005.
Shareholders’ Funds at 30 September 2002 were
£433.5m compared with £663.7m at the end of 2001.
Goodwill written off on acquisitions prior to the adoption
of FRS 10 has not been re-instated and the cumulative
total of goodwill charged against reserves was £937.6m
(2001: £937.6m).
TAX
The tax rate on profits from continuing operations, before
exceptional operating credits and amortisation, of £45.1m is
23.9 per cent (2001 restated: 42.4 per cent). Exceptional
operating credits in continuing operations include net income
from litigation, to which no tax has been attributed, and
exceptional costs on some of which tax relief is recognised,
giving rise to a tax credit of £2.0m. This results in tax on
continuing operations of £8.6m, the UK corporation tax
element of which is offset by consortium and other tax relief
from discontinued operations including exceptional charges
and by foreign exchange differences that are debited to
reserves. Tax of £0.2m has been attributed to the profit on
sale of businesses included in discontinued operations.
In the US, federal tax has been provided at 35 per cent
and state taxes have been provided at rates between 5 per
cent and 10 per cent.
EXCHANGE RATES
The principal exchange rate affecting Carlton’s translation
of overseas results was the US dollar although the effect
on the Group was greatly reduced following the disposal
of Technicolor in 2001. The average rate of the US dollar
in 2002 was US$1.48/£ compared with US$1.44/£ in 2001.
At 30 September 2002 the rate was US$1.57/£ compared
with US$1.47/£ at 30 September 2001.
FINANCING
Carlton’s policy is to finance itself long-term using debt
instruments with a range of maturities. Carlton has
traditionally raised fixed rate debt from the US and European
Capital Markets, as well as obtaining bank facilities from the
UK Syndicated Market.
In November 2001 Carlton issued €638.6m (£395.4m
net of issue costs) exchangeable bonds which mature in 2007,
carry a coupon of 2.25 per cent per annum, and have a fixed
exchange price of €41.2. The bonds are exchangeable into
15.5m ordinary shares in Thomson representing Carlton’s
total equity interest in the company. A more detailed
summary of terms is set out in note 21.
In March 2002 Carlton completed the sale of US$175m
nominal amount of loan notes issued by Thomson which
were unguaranteed.
In February 2002 Carlton reduced the size of its £300m
Syndicated bank facility (which matures in April 2006) to
£100m. The facility has not been drawn to date.
OBJECTIVES, POLICIES AND STRATEGIES
The most significant treasury exposures faced by Carlton are
raising finance, managing interest rate and currency positions
and investing surplus cash in high quality assets. Clear
parameters have been established, including levels of authority,
on the type and use of financial instruments to manage these
exposures. Transactions are only undertaken if they relate to
underlying exposures. Regular reports are provided to senior
management and treasury operations are subject to periodic
independent reviews and internal audit.
INTEREST RATE MANAGEMENT
Carlton uses interest rate swaps, options and forward rate
agreements to manage its interest rate exposures on its debt
and cash positions with the objective of minimising its net
interest cost.
The interest rate profile of Carlton’s interest bearing
assets and liabilities at the year end are detailed in notes
17, 18 and 24(a) respectively.
Net interest payable was £12.0m (2001: £35.6m). The
main reason for the lower net interest charge in 2002 was
the benefit gained from swapping fixed rate sterling debt
into initially lower floating rate dollar cost of finance (without
currency risk) in June 2001. During September 2001 and
thereafter the Federal Open Market Committee cut US
interest rates to historically low levels, significantly below
the rates implied in the yield curve at the time that the
swaps were entered into. The low financing cost of the
Exchangeable bond relative to the interest earned on its
proceeds and lower net interest bearing balances were the
other primary reasons.
Borrowings are denominated in currencies that match
Carlton’s net assets as described below. The fair values of
borrowings and cash at the year-end are compared to their
book values in note 24(b).
CURRENCY MANAGEMENT
Carlton faces currency exposure on trading transactions
undertaken by its subsidiaries in foreign currencies. In addition,
Carlton is also subject to currency exposures arising on its
15.5m shares in Thomson (quoted in euros), loan notes
issued by Thomson (denominated in dollars) and cash and
debt instruments denominated in dollars and euros.
Carlton hedges a proportion of its transactional
exposures by taking out forward foreign exchange contracts
of up to four years forward against its anticipated and known
sales and purchases. The decision to hedge is influenced by
the size of exposure, the certainty of it arising, the trading and
market position of the company in which the exposure arises
and the current exchange rate.
At the year-end Carlton estimated that its net purchases
of foreign currency in 2003 relating to trading transactions
would total less than £30m after taking into account foreign
currency hedging in place. The year-end fair value of foreign
exchange contracts maturing in 2003 was negative £2.9m due
to forward purchases of Swiss francs to match Champions’
League payments undertaken in previous years when sterling
was weaker.
Carlton’s balance sheet translation exposure is managed
by partially matching currency assets with a combination of
currency borrowings and forward foreign exchange option
contracts.
Carlton’s largest single balance sheet currency exposure
in economic terms is in euro. The exposure relates to a
€638.6m Exchangeable bond (£395.4m net of issue costs)
which is offset by the value of the 15.5m shares in Thomson
(worth £155.4m at year end) and the purchase of a €425m
(£266.5m at the strike rate) currency call option with a strike
rate of 1.5947 (at a cost of £11.0m) which matures in January
2005 and had a fair market value of £10.8m at the year end.
The cost of the call option is being written off on a straight
line basis over its life (32 months) and to the extent that the
written down value exceeds the fair market value further
provision will be made. In 2002 £1.7m of premium cost was
written off.
INVESTMENT OF CASH
Carlton operates strict investment guidelines with respect to
surplus cash and the emphasis is on preservation of capital.
Consequently, discretionary investments with maturity greater
than one year must be rated AA or better and discretionary
investments of less than one year must be rated A1 or P1 by
the major credit rating agencies. There are also conservative
limits for individual counter-parties. The maturity profile of
investments is managed according to the forecast cash needs
of the Group.
PROPOSED MERGER WITH GRANADA
On 16 October 2002, Carlton and Granada announced they
had agreed the terms of a proposed merger. The merger is
conditional on clearance by the competition authorities and
the ITC. Carlton Ordinary shareholders will, upon completion
of the merger, receive 32 per cent of the ordinary share
capital of the merged group, potentially increasing to 34 per
cent in 2006 dependent on the achievement of two
conditions. The first condition is that the share price of the
merged group reaches the equivalent to 140 pence per
Granada Ordinary share, implying a Carlton Ordinary share
price equivalent to 271 pence; and the second condition is
that an agreed earnings target for the year ending September
2005 is met. This potential increase to 34 per cent will be
effected through the issue of convertible shares to Carlton
Ordinary shareholders upon completion of the merger.
Granada shareholders will receive the balance of the ordinary
share capital of the merged group and £200 million of cash
on completion.
Paul Murray
Finance Director
26 November 2002
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