18th Mar 2008 07:01
Cello Group plc18 March 2008 18 March 2008 Cello Group plc Strong acquisitive and organic growth drive profit up 29%. Cello Group plc ("Cello", AIM:CLL "The Group"), the market research andconsulting group, today announces its preliminary audited results for the yearto 31 December 2007. Financial Highlights • Turnover up 45.0% to £108.3m (2006: £74.7m)• Operating income up 46.4% to £56.8m (2006: £38.8m)• Like-for-like operating income growth of 16.1% (2006: 15.7%)• Like-for-like operating profit growth of 7.1% (2006: 27.3%)• Headline profit before tax up 28.8% to £7.6m (2006: £5.9m)• Basic headline earnings per share up 19.8% to 15.06p (2006: 12.57p)• Headline operating cash flow conversion strong at 97%• Net debt of £5.8m (2006: £1.1m)• Full year dividend up 20% to 1.2p (2006: 1.0p)• Encouraging start to year and good forward visibility for 2008• Like-for-like operating income up 13.8% in first two months of 2008 Operational Highlights • Consolidation behind two lead brands: Cello (Research) and Tangible (Response)• Rebranding of a number of Response businesses• Net organic headcount investment of 82 people across Group• Investment in organic international growth• Acquisitions during year grow core offering Kevin Steeds, Chairman, commented: "These results represent another excellent year for the Group with significantgrowth in all key financial metrics. Once again, we are particularly pleasedwith our like-for-like operating income growth which significantly exceedsoverall market growth rates. "Cello is a focused group of scale and quality in Research and Response with asolidly growing international revenue stream. "We have made an encouraging start to 2008, and with a strong pipeline and orderbook, are confident of another successful year." Enquiries: Cello Group plc (www.cellogroup.co.uk)Kevin Steeds, Chairman 020 7812 8460Mark Scott, Chief ExecutiveMark Bentley, Group Finance Director Kaupthing Singer & Friendlander Capital Markets 020 3205 5000Nic How/Marc Young College HillAdrian Duffield/Rozi Morris 020 7457 2020 Chairman's Statement Overview 2007 has been another excellent year for the Group with headline profit beforetax up 28.8% to £7.6m (2006: £5.9m) and operating income up 46.4% to £56.8m(2006: £38.8m). We have taken major strides in simplifying and integrating our two businessesbehind two brands, Cello (Research) and Tangible (Response). This has included arebranding of a number of our operating entities. This is already giving ussignificant advantage as we compete with our global competitor set for bothpeople and clients, particularly on larger contracts. We have continued to invest in our two divisions, Cello (Research) and Tangible(Response), balancing the addition of new professionals to boost our feegeneration capacity with sensible margin management. Across our two divisions weincreased like-for-like headcount by 82 people which helped propel ourlike-for-like growth in operating income to 16.1% whilst maintaining highlycompetitive pre-central cost operating margins at 18.1%. Our top quartile industry margins demonstrate the superior level of value addedservices we are delivering to both existing and new clients. Our total headcountis now nearly 800 people, up from 535 at the start of the year. We continue to focus closely on conservative cash management. Our rate of cashconversion reflects the tight financial management in each of our underlyingbusinesses. As a consequence, the Group remains very prudent in its funding,with net debt at year end of £5.8m (2006: £1.1m). In Cello (Research), our emphasis on international growth has borne fruit, withoverseas revenue now accounting for 21.2% of Group turnover. This has beenachieved by targeting growth in multinational client contracts which representhigher growth opportunities outside the relatively mature UK market. We have noworganically established four international offices, which in aggregate areprofitable, and employ over 25 people. Our research business continues to benefit from selective client sector focusand increasing orientation towards large continuous contracts. Performance hasbeen particularly strong in healthcare which, post the acquisition of MSI inMarch 2007, now accounts for over 35% of our operating income in research. Theaddition of mruk research has also significantly added to our public sectorcapability. The acquisition of Rosenblatt, Digital People and 2CV during thecourse of the year has helped transform us into a top 10 UK domiciled researchbusiness. Our response division has had a particularly satisfying year, benefiting fromthe migration of client spend to response media, including digital and onlinewhere we have a strong offering. This was reinforced in July 2007 with theaddition of CCHM:Ping (now tangible:financial) which expands our financialservices offering in London. Tangible's overall exposure to public sector workhas proved particularly beneficial. Financial Review 2007 was another year of strong growth. Group turnover increased 45.0% from£74.7m to £108.3m, operating income increased 46.4% from £38.8m to £56.8m andheadline profit before tax 28.8% from £5.9m to £7.6m. The growth rates we achieved reflect a highly competitive level of expansion inour core brands towards bigger continuous contracts. Our like-for-like results(adjusting for currency movements) were excellent, with 16.1% growth inoperating income and 7.1% growth in operating profit. Group headline operating margins (before head office costs) were 18.1% (2006:18.8%). This slight reduction reflects the headcount and infrastructureinvestment that has taken place during the year, as well as a change in the mixof operating income towards more continuous and regular contracts. The Group's effective tax charge was 32.2% (2006: 30.0%). Notional interest isnot subject to a tax deduction, if it is excluded the effective rate would be29.3%. Headline basic earnings per share was up 19.8% to 15.06p and headline fullydiluted earnings per share was up 12.2% to 10.2p. Fully diluted earnings pershare reflects the impact of the anticipated future issuance of shares tovendors of companies acquired by the Group under earn out arrangements. The Board is proposing a final dividend of 0.75p per share (2006: 0.60p) givinga total dividend per share of 1.2p (2006: 1.0p), an increase of 20.0%. Thisdividend will be paid on 18 June 2008 to all shareholders on the register at 23May 2008. The Group's net debt position at 31 December 2007 was £5.8m (2006: £1.1m). £8.5mwas invested during the year as initial consideration for acquisitions.Operating cash flow of £7.9m during the year represents an excellent 97%conversion of headline operating profit. The Group agreed a new £22.0m, three year committed rolling credit and workingcapital facility with the Royal Bank of Scotland plc during the year, andentered into a cap and collar interest rate arrangement which reduces exposureto fluctuations in LIBOR. The earn out provisions are a total of £29.6m at 31 December 2007. Earn outobligations of £14.4m are payable in April 2008, to be satisfied by £8.0m incash or loan notes and £6.4m in ordinary shares. The Group regularly calculates and examines all of the above financialindicators and as such they can be considered to be key performance indicators. The main impact of the transition to IFRS is the treatment of intangible assetssuch as licences and acquired client contracts which are now amortised overtheir useful life. The reconciliation of reported profit before tax to headlineprofit before tax therefore includes these adjustments as well as share optioncosts; deemed remuneration and notional interest. There is no cash impact from these notional charges. The total effect of thesecharges is presented below: 2007 2006 £'000 £'000Headline operating profit 8,143 5,988Net interest payable (559) (135)Headline PBT 7,584 5,853Share option costs (449) (65)Deemed remuneration (1,179) (1,336)Amortisation of intangibles (904) (691)Notional interest (468) (234)Reported PBT 4,584 3,527 Operational Review We have now substantially completed the first stage integration of our researchbusiness behind the Cello brand and our response business behind the Tangiblebrand. This means we can demonstrate greater scale and a broader range of skillsand services with both clients and professionals as we compete for largercontracts. Cello (Research) had another good year, delivering a headline operating profitup 34.8% to £6.2m (2006: £4.6m) from operating income of £32.9m (2006: £22.0m).With an employee base of some 460 people and turnover of £50.9m (2006: £37.1m),Cello (Research) now ranks in the top 10 of such businesses based in the UK andis the only such business which is not part of a much larger group. The business is now organised along client sector lines which gives us a realadvantage as multi-specialists. The research business has continued to growinternationally. We opened a second office in New York and established an officein Chicago to serve a wider section of the US market. Healthcare has shown particularly strong growth, now representing approximately35% of operating income in this division. Our online data capture business alsogrew apace. We continue to affirm the value opportunity that can arise from combininginsight generation with consulting advisory services. Cello (Research) isuniquely placed to exploit this natural synergy with clients and thereby achievecompetitive advantage versus the much larger networks against which we are nowcompeting directly. Tangible (Response) continued to benefit from the growth of response media,particularly online, as clients become more demanding to achieve measurablereturn on marketing expenditure. Tangible delivered a headline operating profitof £4.1m (2006: £2.7m) up 51.9% on operating income of £23.9m (2006: £16.8m).With an employee base of 330 people and turnover of £57.4m (2006: £37.6m),Tangible now ranks in the top three of such businesses based in the UK and againis the only such business which is not part of a large international group. The vertical client focus on the public sector, charities, financial servicesand business-to-business sectors continued to prove successful with clientsseeking out industry expertise as they increasingly migrate budgets intoresponse solutions. The successful combination of our digital capability with response experienceand database knowledge has put us at the forefront of online direct marketing.As with our research business, this gives us competitive advantage with clientswho are seeking large, stable but innovative suppliers. We continue to focus much attention on competitive remuneration for our staffwith appropriate incentive schemes and annual performance related bonusplanning. Combined with active promotion and hiring of senior professionals, weaim to ensure that we have a sustainable, well incentivised professionalstructure beyond the limited life of legacy earn out structures. We are nowconfident this is the case. The four businesses which completed their earn outs this year (Leith, Target,Insight and Navigator) have each grown substantially in headcount and clientbase over the last three years. They now have enlarged, refreshed managementteams who are highly motivated to continue to drive this level of growth. Themanagement teams that came into the Group through acquisition have now beenintegrated into the larger divisional structures which has allowed for thepromotion of managers from within as well as hiring additional seniorprofessionals from outside the Group. The result is an experienced and highlyaligned group of individuals who are determined to establish Cello as a majorforce. Growth Strategy The Group's growth plans remain highly focused. Given our relatively low levelof gearing, we intend to continue our strategy of selectively developing our UKbased research and consulting capabilities. International expansion will remain largely organic and in response to clientled demand. We plan to open an office in San Francisco in April 2008 and arealso appraising the European and Asian markets. Following our investments during 2007 in Digital People, Blonde, nqual, andHeadbox, the Group will also continue to expand its various digital and onlineproduct offerings across both divisions. Current Trading and Prospects We have experienced an encouraging start to 2008. Our growth in like-for-likeoperating income in the first two months of the year was 13.8%. Our new business pipeline and top line revenue visibility is strong. Since thestart of the year we have continued to win significant additional mandates fromour global healthcare clients, and several new continuous research projects. Inaddition our strong franchise in the public sector across both research andresponse has produced a large number of new project wins. Whilst we are monitoring closely the macro-economic environment, so far we arenot seeing any signs of detrimental impact on our business. As a matter ofprudence, we will continue our regular vigilant review of the Group's variablecost base. Our strategic positioning in research and response will also serve uswell in the event of any deterioration in the overall market. Given our performance at this stage of the year, and based on the commentsabove, we are confident of another successful year for the Group. I would like to take this opportunity to thank my fellow Cellists for theirstrong commitment and contribution to the Group in 2007 and I look forward to anexciting year ahead. Kevin SteedsChairman18 March 2008 Cello Group plcCONSOLIDATED INCOME STATEMENTfor the year ended 31 December 2007 Year ended Year ended 31 December 2007 31 December 2006 Notes £'000 £'000 Continuing operations:Revenue 1 108,315 74,702Cost of sales (51,503) (35,870) Operating income 1 56,812 38,832 Administration expenses (48,669) (32,844) Headline operating profit 1 8,143 5,988 Amortisation of intangible assets (904) (691)Acquisition related employee expenses 7 (1,179) (1,336)Share option charges (449) (65) Operating profit 1 5,611 3,896 Financing income 2 211 211Finance cost of deferred consideration 3 (468) (234)Other finance costs 3 (770) (346) Profit before taxation 4 4,584 3,527 Tax (1,478) (1,058) Profit for the year 3,106 2,469 Attributable to:Equity holders of parent 3,074 2,463Minority interest 32 6 3,106 2,469 Earnings per shareBasic earnings per share 6 8.44p 7.44pDiluted earnings per share 6 7.28p 7.29p Cello Group plcCONSOLIDATED BALANCE SHEET31 December 2007 31 December 2007 31 December 2006 Notes £'000 £'000 Goodwill 77,912 55,519Intangible assets 3,005 3,187Property, plant and equipment 3,277 2,304Available for sale investments 227 65Deferred tax assets 1,549 1,047 Non-current assets 85,970 62,122 Trade and other receivables 28,720 18,550Cash and cash equivalents 6,986 7,010 Current assets 35,706 25,560 Trade and other payables (26,829) (18,740)Current tax liabilities (2,037) (1,245)Borrowings (950) (1,820)Consideration payable in respect ofacquisitions 7 (15,436) (1,362)Obligations under finance leases (70) (87) Current liabilities (45,322) (23,254) Net current (liabilities)/assets (9,616) 2,306 Total assets less current liabilities 76,354 64,428 Non-current liabilitiesBorrowings (11,750) (6,050)Provisions 7 (15,145) (18,228)Obligations under finance leases (50) (81)Deferred tax liability (950) (988) Net assets 48,459 39,081 EquityShare capital 3,884 3,448Share premium 25,776 19,981Profit and loss account 7,692 5,026Equity reserves 11,069 10,620 Equity attributable to equity holders ofparent 48,421 39,075 Minority interest 38 6 Total equity 48,459 39,081 Cello Group plcCONSOLIDATED CASH FLOW STATEMENTfor the year ended 31 December 2007 Year ended Year ended 31 December 2007 31 December 2006 Notes £'000 £'000 Net cash inflow from operating activities before taxation 8a 7,917 4,184 Tax paid (2,047) (1,489) Net cash inflow from operating activities after taxation 5,870 2,695 Investing activitiesInterest received 211 180Purchase of property, plant and equipment (1,773) (1,005)Sale of property, plant and equipment 22 80Expenditure on intangible assets (111) -Proceeds from sale of available-for-sale investments 50 50Purchase of available-for-sale investments (137) (50)Purchase of subsidiary undertakings 8c (8,543) (4,400)Net cash acquired with subsidiaries 3,130 780Payment of deferred consideration (510) (90)Expenses paid in connection with purchase of subsidiary (664) (622)undertakings Net cash outflow from investing activities (8,325) (5,077) Financing activitiesDividends paid to equity holders of the parent (382) (131)Repayment of bank loan (3,525) (500)Repayment of loan notes (1,986) (196)Drawdown of borrowings 9,225 4,250Capital element of finance lease payments (72) (73)Repayment of obligations under finance lease (24) (22)Interest paid (743) (289)Purchase of own shares (26) - Net cash inflow from financing 2,467 3,039 Movements in cash and cash equivalentsNet increase in cash and cash equivalents 12 657Cash and cash equivalents at the beginning of the year 6,974 6,317 Cash and cash equivalents at end of the year 8b 6,986 6,974 Cello Group plcSTATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2007 Statement of changes in equity for the year ended 31 December 2007(consolidated): Capital Profit Share Share Redemption Merger Capital and Loss Minority Total Equity Capital Premium Reserve Reserve Reserve Account Total Interest £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2007 3,448 19,981 50 10,496 74 5,026 39,075 6 39,081 Profit for the year - - - - - 3,074 3,074 32 3,106 Shares issued 436 5,795 - - - - 6,231 - 6,231 Own shares purchased - - - - - (26) (26) - (26) Credit for share - - - - 449 - 449 - 449based incentiveschemes Dividends - - - - - (382) (382) - (382) As at 31 December 2007 3,884 25,776 50 10,496 523 7,692 48,421 38 48,459 Statement of changes in equity for the year ended 31 December 2006(consolidated): Capital Profit Share Share Redemption Merger Capital and Loss Minority Total Equity Capital Premium Reserve Reserve Reserve Account Total Interest £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1 January 2006 3,244 17,652 50 10,496 9 2,694 34,145 - 34,145 Profit for the year - - - - - 2,463 2,463 6 2,469 Shares issued 204 2,329 - - - - 2,533 - 2,533 Credit for share - - - - 65 - 65 - 65based incentiveschemes Dividends - - - - - (131) (131) - (131) As at 31 December 2006 3,448 19,981 50 10,496 74 5,026 39,075 6 39,081 Cello Group plcCONSOLIDATED FINANCIAL STATEMENTS - ACCOUNTING POLICIES31 December 2007 GENERAL INFORMATION Cello Group plc is a company incorporated in the United Kingdom under theCompanies Act 1985. The Group's operations consist principally of research,consulting and direct marketing. These financial statements are presented in pounds sterling as this is thecurrency of the primary economic environment in which the Group operates. At the date of authorisation of these financial statements, the followingstandards and interpretations, which are issued but not yet effective, have notbeen applied: • IFRS 8 Operating Segments• IFRIC 11 Group and Treasury Share Transactions• IFRIC 12 Service Concession Arrangements• IFRIC 13 Customer Loyalty Programmes• IFRIC 14 IAS19: The limit on a defined benefit asset, minimum funding requirements of their interaction• Amendments to IAS1 and IAS23 The directors anticipate that the adoption of these Standards andInterpretations as appropriate in future periods will have no material impact onthe financial statements of the Group when the relevant standards come intoeffect for periods commencing on or after 1 January 2008. SIGNIFICANT ACCOUNTING POLICIES (1) Basis of accounting The consolidated financial statements have been prepared under the historicalcost convention, as modified by the revaluation of available-for-saleinvestments and in accordance with applicable International Financial ReportingStandards (IFRS) for the first time. The disclosures required by IFRS 1 FirstTime Adoption of International Reporting Standards concerning the transitionfrom UK GAAP to IFRS are given in note 9. The financial statements have alsobeen prepared in accordance with IFRS adopted by the European Union andtherefore the Group financial statements comply with Article 4 of the EU IASregulation. In preparing the consolidated financial statements the Group has adopted theexemption in IFRS 1 not to restate business combinations prior to 1 December2005. (2) Basis of consolidation The Group's financial statements consolidate the financial statements of theCompany and all of its subsidiary undertakings. The results of subsidiaryundertakings acquired in the year are included in the consolidated incomestatement from the effective date of acquisition. All intra-group transactionsand balances are eliminated on consolidation. (3) Revenue, cost of sales and revenue recognition Turnover is recognised as contract activity progresses, in accordance with theterms of the contractual agreement and the stage of completion of the work. Itis in respect of the provision of services including fees, commissions,rechargeable expenses and sales of materials performed subject to specificcontract. Where recorded turnover exceeds amounts invoiced to clients, theexcess is classified as accrued income. Cost of sales include amounts payable to external suppliers where they areretained at the Group's discretion to perform part of a specific client projector service where the Group has full exposure to the benefits and risks of thecontract with the client. Cello Group plcCONSOLIDATED FINANCIAL STATEMENTS - ACCOUNTING POLICIES31 December 2007 (4) Goodwill and intangible assets In accordance with IFRS 3 Business Combinations, goodwill arising onacquisitions is capitalised as an intangible fixed asset. Other intangibleassets are also then identified and amortised over their useful economic lives.Examples of these are licences to trade, and client contracts. The usefuleconomic lives vary from 3 months to 8 years. Goodwill is not amortised. Under IAS 36 Impairment of assets, the carrying values of all intangible assetsare reviewed annually for impairment on the basis stipulated in IAS 36 andadjusted to the recoverable amount. Typically, such a review will entail anassessment of the present value of projected returns from the asset over a 3-5year projection period, and RPI based growth assumptions for subsequent years. (5) Property, plant and equipment Property, plant and equipment are stated at historical cost. Depreciation isprovided at rates calculated to write off the cost, less estimated residualvalue, of each asset, over their estimated useful economic lives as follows:- Leasehold improvements Over the remaining term of the leaseMotor vehicles 25% pa. straight lineComputer equipment 33% pa. straight lineFixtures, fittings and office equipment 25% pa. straight line (6) Available-for-sale investments Investments classified as available-for-sale are initially recorded at fairvalue including transaction costs. Such instruments are subsequently measured atfair value with gains and losses being recognised directly in equity until theinstrument is disposed of or is determined to be impaired, at which time thecumulative gain or loss previously recognised in equity is recycled to theincome statement and recognised in profit or loss for the period. Impairmentlosses are recognised in the income statement when there is objective evidenceof impairment. (7) Internally generated intangible assets - research and developmentexpenditure Expenditure on research activities are recognised as an expense in the period inwhich they are incurred. An internally generated intangible asset arising from the Group's developmentexpenditure is recognised only when the following conditions are met: • an asset is created that can be identified (such as software or a new process)• it is probable that the asset created will generate future economic benefit; and• the development cost of the asset can be measured reliably Internally generated assets are amortised on a straight line basis over theiruseful lives. Where no internally generated intangible asset can be recognised,the development expenditure is recognised as an expense in the period in whichit is incurred. Under IAS 36 Impairment of assets, the carrying values of all internallygenerated intangible assets are reviewed annually for impairment on the basisstipulated in IAS 36 and adjusted to the recoverable amount. Typically, such areview will entail an assessment of the present value of projected returns fromthe asset over a 3-5 year projection period, and an RPI based growth assumptionsfor subsequent years. Cello Group plcCONSOLIDATED FINANCIAL STATEMENTS - ACCOUNTING POLICIES31 December 2007 (8) Deferred taxation Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying value of assets and liabilities in the financial statementsand the corresponding tax bases used in the computation of taxable profit, andis accounted for using the balance sheet liability method. Deferred taxliabilities are generally recognised for all taxable temporary differences anddeferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from the initial recognition of goodwill or from the initialrecognition of other assets and liabilities in a transaction that affectsneither the tax profit or the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement, except where it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. (9) Leasing and hire purchase commitments When the Group enters into a lease which entails taking substantially all therisks and rewards of ownership of an asset, the lease is treated as a financelease or similar hire purchase contract. The asset is recorded in the balancesheet as property, plant and equipment and is depreciated over the estimateduseful life or the term of the lease, whichever is shorter. Future instalmentsunder such leases, net of finance charges, are included within creditors.Rentals payable are apportioned between the finance element, which is charged tothe income statement, and the capital element which reduces the outstandingobligation for future instalments. All other leases are treated as operating leases and rentals payable are chargedto the income statement on a straight line basis over the lease terms. (10) Foreign currencies Assets and liabilities in foreign currencies are translated into sterling at therates of exchange ruling at the balance sheet date. Transactions in foreigncurrencies are translated into sterling at the rate of exchange ruling at thedate of the transaction. Exchange differences are taken into the incomestatement for the year. (11) Pension contributions Subsidiaries operate defined contribution pension schemes and contribute to thepersonal pension schemes of certain employees or to a Group personal pensionplan. The assets of the schemes are held separately from those of the subsidiarycompanies in independently administered funds. The amount charged againstprofits represents the contributions payable to the scheme in respect of theaccounting period. Cello Group plcCONSOLIDATED FINANCIAL STATEMENTS - ACCOUNTING POLICIES31 December 2007 (12) Share-based payments The Group has applied the requirements of IFRS 2 Share-based payment whichrequires the fair value of share-based payments to be recognised as an expense.In accordance with the transitional provisions, IFRS 2 has been applied to suchequity instruments that were granted after 7 November 2002 and which had notvested by 1 January 2006. This standard has been applied to various types of share-based payments asfollows: i. Share options Certain employees receive remuneration in the form of share options. The fairvalue of the equity instruments granted is measured on the date at which theyare granted by using the Black-Scholes model, and is expensed to the incomestatement over the appropriate vesting period. ii. Acquisition related employee remuneration expenses In accordance with IFRS 3 Business Combinations and IFRS 2 Share-based Payment,certain payments to employees in respect of earn out arrangements are treated asremuneration within the income statement. (13) Financial instruments Financial assets and financial liabilities are recognised on the Group's balancesheet when the Group has become a party to the contractual provisions of theinstrument. (i) Trade receivables Trade receivables are classified as loans and receivables and are initiallyrecognised at fair value in accordance with IAS 39 Financial Investments:Recognition and Measurement. A provision for impairment is made where there isobjective evidence, (including customers with financial difficulties or indefault on payments) that amounts will not be recovered in accordance withoriginal terms of the agreement. A provision for impairment is established whenthe carrying value of the receivable exceeds the present value of the futurecash flow discounted using the original effective interest rate. The carryingvalue of the receivable is reduced through the use of an allowance account andany impairment loss is recognised in the income statement. (ii) Cash and cash equivalents Cash and cash equivalents comprise cash in hand and at bank and other short-termdeposits held by the Group with maturities of less than three months. (iii) Financial liabilities and equity Financial liabilities and equity instruments are classified according to thesubstance of the contractual arrangements entered into. An equity instrument isany contract that evidences a residual interest in the assets of the Group afterdeducting all of its liabilities. (iv) Bank borrowings Interest-bearing bank loans and overdrafts are recorded initially at their fairvalue, net of direct transaction costs. Such instruments are subsequentlycarried at their amortised cost and finance charges, including premiums payableon settlement or redemption, are recognised in the income statement over theterm of the instrument using an effective rate of interest. Cello Group plcCONSOLIDATED FINANCIAL STATEMENTS - ACCOUNTING POLICIES31 December 2007 (13) Financial instruments (continued) (v) Trade payables Trade payables are initially recognised at fair value. (vi) Derivative financial instruments and hedge accounting The Group's activities expose the entity primarily to foreign currency andinterest rate risk. The Group uses interest rate swap contracts to hedgeinterest rate exposures. (14) Accounting estimates and judgements The directors consider the critical accounting estimates and judgements used inthe financial statements and concluded that the main areas of judgements are: i. Revenue recognition policies in respect of contracts which straddle the year end. ii. Contingent deferred consideration payments in respect of acquisitions. iii. Recognition of share based payments. iv. Valuation of intangible assets These estimates are based on historical experience and various other assumptionsthat management and the board of directors believe are reasonable under thecircumstances and are discussed in more detail in their respective notes. TheGroup also makes estimates and judgements concerning the future and theresulting estimate may, by definition, vary from the related actual results. Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 1 SEGMENTAL INFORMATION For management purposes, the Group is organised into two operating groups; CelloResearch and Consulting, and Cello Response Communications. These groups are thebasis on which the Group reports its primary segment information. The principal activities are as follows: Cello Research and Consulting The Research and Consulting Group provide both qualitative and quantitativeresearch to a global range of clients across a range of sectors. This researchcombined with a consulting capability, to define positioning, puts the Group ina unique position to add real value to client relationships. Cello Response Communications The Response Group offers direct communication solutions from a mixture ofdirect mail, email and related response media with a focus on the key deliveryareas of response, Direct, Digital and Data. Segmental information is presented below: Research and Response Consulting Communications Head Office Eliminations Consolidated2007 £'000 £'000 £'000 £'000 £'000 Revenue 50,894 57,421 - - 108,315 Operating income 32,891 23,921 - - 56,812 Headline operating profit 6,204 4,072 (2,133) - 8,143 Operating profit 5,502 3,417 (3,308) - 5,611Financing income 139 51 21 - 211Financing costs of deferredconsideration - - (468) - (468)Other financing costs (26) - (744) - (770) Profit before tax 5,615 3,468 (4,499) - 4,584 Capital expenditure 924 844 5 - 1,773 Capitalisation of intangible - 111 611 - 722assets Depreciation of property, plantand equipment (688) (415) (13) - (1,116) Amortisation of intangibles - - (904) - (904) Assets 31,459 24,040 78,130 (11,953) 121,676Liabilities (14,520) (17,141) (53,509) 11,953 (73,217) Net assets 16,939 6,899 24,621 - 48,459 Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 1 SEGMENTAL INFORMATION (continued) Research and Response Head Office Eliminations Consolidated Consulting Communications £'000 £'000 £'000 £'000 £'0002006 Revenue 37,095 37,607 - - 74,702 Operating income 21,982 16,850 - - 38,832 Headline operating profit 4,624 2,667 (1,303) - 5,988 Operating profit 3,468 2,487 (2,059) - 3,896Financing income 82 84 45 - 211Financing costs of deferredconsideration - - (234) - (234)Other financing costs (22) (36) (288) - (346) Profit before tax 3,528 2,535 (2,536) - 3,527 Capital expenditure 569 434 2 - 1,005 Capitalisation of intangible assets - - 655 - 655 Depreciation of property, plantand equipment (446) (254) (13) - (713) Amortisation of intangibles - - (691) - (691) Assets 22,936 16,030 57,267 (8,551) 87,682Liabilities (12,405) (12,722) (32,025) 8,551 (48,601) Net assets 10,531 3,308 25,242 - 39,081 The Group's operations are located in the United Kingdom, USA and Switzerland.All material assets and liabilities of the Group are held solely in the UnitedKingdom. The following table provides an analysis of the Group's turnover by geographicalmarket, based on the billing location of the client: 2007 2006Geographical £'000 £'000 UK 85,339 55,777Rest of Europe 16,195 10,576USA 4,471 6,996Rest of the World 2,310 1,353 108,315 74,702 Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 2 INTEREST RECEIVABLE AND SIMILAR INCOME Year ended Year ended 31 December 2007 31 December 2006 £'000 £'000Interest receivable:Bank deposits 211 211 3 INTEREST PAYABLE AND SIMILAR CHARGES Year ended Year ended 31 December 2007 31 December 2006 £'000 £'000 Notional finance costs on future deferred consideration 468 234 payments On bank loans and overdrafts 703 296 On loan notes 43 29 In respect of finance leases 24 21 1,238 580 All interest payable is in respect of liabilities classified at amortised cost. 4 PROFIT FOR THE YEAR Year ended Year ended 31 December 2007 31 December 2006 £'000 £'000 Profit for the year has been arrived at after charging/(crediting): Net foreign exchange (gains)/losses (43) 198 Depreciation of property, plant and equipment 1,116 713 Profit on disposal of property, plant and equipment (13) (31) Profit on disposal of available for sale investments (10) (90) Amortisation of intangible assets 904 691 Operating lease rentals : land and buildings 1,945 1,434 : other leases 214 224 Auditors' remuneration: Fees payable to Baker Tilly UK Audit LLP for: - audit services to the parent company 70 - - audit services to subsidiary companies 219 - Fees payable to Baker Tilly for: - audit services to the parent company 0 45 - audit services to subsidiary companies - 156 Total audit fees: 289 201 Non audit fees: - taxation services 99 80 - interim review 68 41 - other services not included above 20 - Total non audit fees 187 121 Total auditors' remuneration 476 322 In addition to the non-audit fees above charged to the income statement,£112,000 (2006: £39,000) of services were provided in relation to due diligenceadvice on acquisitions. These costs have been capitalised within goodwill in theyear. All auditors' remuneration was payable to Baker Tilly UK Audit LLP and itsassociates for the year ended 31 December 2007 and to Baker Tilly for the yearended 31 December 2006. Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 5 EQUITY DIVIDENDS An interim dividend of 0.45p (2006: 0.40p) per ordinary share was paid on 12October 2007 to all shareholders on the register on 21 September 2007. The totalamount of the dividend paid was £167,000 (2006: £132,000). A final dividend of 0.75p (2006: 0.60p) is proposed and will be paid on 18 June2008 to all shareholders on the register at 23 May 2008. In accordance with IAS10 Events after the balance sheet date this dividend has not been recognised inthe consolidated financial statements at 31 December 2007, but if approved willbe recognised in the year ending 31 December 2008. 6 EARNINGS PER SHARE Year ended Year ended 31 December 2007 31 December 2006 £'000 £'000Earnings attributable to ordinary shareholders 3,074 2,463 Adjustments to earnings:Amortisation of intangible assets 904 691Share-based payments expense 449 65Acquisition related employee remuneration expenses 1,179 1,336Notional finance costs on future deferred consideration payments 468 234Tax thereon (589) (627) Adjusted earnings attributable to ordinary shareholders 5,485 4,162 Number Number Weighted average number of ordinary shares 36,426,361 33,106,006 Dilutive effect of securities:Share options 600,000 600,000Contingent consideration shares to be issued 5,198,646 62,986 Diluted weighted average number of ordinary shares 42,225,007 33,768,992 Further dilutive effect of securities:Share options 1,966,057 563,168Contingent consideration shares to be issued 9,385,087 11,263,368 Fully diluted weighted average number of ordinary shares 53,576,151 45,595,528 Basic earnings per share 8.44p 7.44pDiluted earnings per share 7.28p 7.29pFully diluted earnings per share 5.74p 5.40p Headline basic earnings per share 15.06p 12.57pHeadline diluted earnings per share 12.99p 12.33pHeadline fully diluted earnings per share 10.24p 9.13p Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 6 EARNINGS PER SHARE (continued) Headline earnings per share and fully diluted earnings per share have beenpresented to provide additional information which may be useful to the readersof this statement. Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary shares in issueduring the period, determined in accordance with the provisions of IAS 33Earnings per share. Diluted earnings per share is calculated by adjusting the weighted averagenumber of ordinary shares in issue on the assumption of conversion of all thepotential dilutive ordinary shares for which all the conditions of issue havebeen met. Fully diluted earnings per share is calculated by adjusting the weighted averagenumber of ordinary shares in issue on the assumption of conversion of all thepotentially dilutive ordinary shares. The Group has two categories of potential dilutive shares; being share optionsgranted where the exercise price is less than the average price of the Company'sordinary shares during the period and shares to be issued as contingentconsideration on completed acquisitions. Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 7 PROVISIONS 2007 2006 £'000 £'000 Contingent consideration for acquisitions 15,145 19,590 Contingent consideration for acquisitions At 1 January 2007 19,590 12,890 Payments made in the year (1,485) (148) Additions in the year 13,109 3,548 Adjustment to provision for additions in prior years (2,280) 368 Acquisition related employee remuneration expense 1,179 1,336 Notional finance costs on future deferred consideration payments 468 234 Consideration for which all the conditions have been met (15,436) - At 31 December 2007 15,145 18,228 In one year or less - - In more than one year but not more than five years 15,145 18,228 At 31 December 2007 15,145 18,228 Make up of the contingent consideration in the financial statements is as follows: 2007 2006 £'000 £'000 Earn out related cash 5,685 6,012 liabilities Shares to be issued 9,460 12,216 15,145 18,228 Acquisitions made by the Group typically involve an earn out agreement wherebythe consideration payable includes a deferred element that is contingent on thefuture financial performance of the acquired entity. Earn out payments are to be in cash (or loan notes) and shares; in the analysisabove the minimum percentage of cash (or loan notes) has been assumed. However,at the Group's sole discretion, this percentage can be increased. During the year, conditions have substantially been met on £15.4m of earn outand other consideration which is payable in 2008. The provision for contingent consideration for acquisitions represents thedirectors' best estimate of the amount expected to be payable in cash or loannotes and shares to be issued. The provision is discounted to present value atthe company's borrowing rate. If the remaining earn out conditions are met, £7.5m of the consideration willbecome payable in 2009, £2.0m in 2010 and the remaining £5.6m is payable in 2011or later. As a result of a review of contingent consideration at the year end, thedirectors' best estimate of contingent consideration payable in respect ofacquisitions prior to 1 January 2007 has decreased the provision forconsideration payable by £2,280,000. Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT 8(a) Reconciliation of profit for the year to net cash Year ended Year endedinflow from operating activities 31 December 2007 31 December 2006 £'000 £'000 Profit for the year 3,106 2,469Financing income (211) (211)Finance costs of deferred consideration 468 234Other finance costs 770 346Tax 1,478 1,058Depreciation 1,116 713Amortisation 904 691Share-based payment expense 449 65Acquisition related employee remuneration expense 1,179 1,336Profit on disposal of property, plant and equipment (13) (31)Profit on disposal of available-for-sale investments (10) (90)Increase in receivables (4,617) (5,355)Increase in payables 3,298 2,959 Net cash inflow from operating activities 7,917 4,184 (b) Analysis of net debt At 1 January At 31 2007 December 2007 Cash flow Acquisition £'000 £'000 £'000 £'000 Cash and cash equivalents 7,010 (24) - 6,986Bank overdrafts (36) 36 - - 6,974 12 - 6,986Loan notes (1,820) 1,986 (1,116) (950)Bank loans (6,050) (5,700) - (11,750)Finance leases (168) 72 (24) (120) (1,064) (3,630) (1,140) (5,834) Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued) 8 (c) Purchase of subsidiary undertakings Year ended Year ended 31 December 2007 31 December 2006 £'000 £'000 Fair value of assets and liabilities acquired: Property, plant and equipment 325 112 Receivables 5,747 1,286 Cash and cash equivalents 3,130 810 Bank overdraft - (30) Payables (5,546) (1,539) Goodwill 24,673 9,765 Intangible assets 611 655 28,940 11,059 Consideration satisfied by: Cash 8,543 4,400 Loan notes issued 906 150 Shares allotted 5,466 2,477 Deferred consideration 13,085 3,549 Costs of acquisition 940 483 28,940 11,059 Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 9 EXPLANATION OF THE TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS "IFRS" Key impacts of the transition to IFRS The analysis below sets out the most significant adjustments arising from thetransition to IFRS. 1) Intangible Assets (a) Goodwill and acquired intangible asset amortisation IFRS 3 Business combinations requires that, when businesses are acquired, anyintangible assets acquired with the business are valued separately andcapitalised as an intangible asset. Any residual difference between theconsideration paid or payable and the net fair value of the identifiable assets,liabilities and contingent liabilities acquired is recognised as goodwill. IFRS3 also requires that goodwill is not amortised but is instead subject to anannual impairment review, whereas intangible assets are amortised over theiruseful lives which range from 3 months to 8 years. The Group has recognised intangible assets on acquisition in relation tolicences and customer contracts. The amount in the Group balance sheet inrespect of all intangible assets under IFRS was £3.2 million at 31 December2006. Under IFRS, these intangible assets are amortised over their useful lives.Management has assessed their useful lives and the effect of amortising theseassets was £0.7 million for the year ended 31 December 2006. 2) Deferred and current taxes The scope of IAS 12 Income taxes is wider than the corresponding UK GAAPstandards, and requires deferred tax to be provided on the majority of temporarydifferences, rather than just on timing differences as under UK GAAP. Inparticular this has resulted in deferred tax assets and liabilities being set upin respect of differences between the net book value and the tax base ofintangible assets. A deferred tax liability has been set up on creation of these intangibles and isreleased over the period over which the assets are amortised. The impact on theincome statement of releasing elements of the liability is £0.2 million for theyear ended 31 December 2006. The deferred tax liability in respect ofintangibles stood at £1.0 million at 31 December 2006. The consolidated cash flow statement presented under IFRS presents substantiallythe same information as that required under UK GAAP. Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 Reconciliation of profit for the year ended 31 December 2006 Previously IFRS 3 IAS 12 Restated under stated UK GAAP adopted IFRS £'000 £'000 £'000 £'000 Revenue 74,702 - - 74,702Cost of sales (35,870) - - (35,870) Operating income 38,832 - - 38,832 Administration expenses before amortisation (32,844) - - (32,844) Headline operating profit 5,988 - - 5,988 Amortisation of intangible assets - (691) - (691)Acquisition related employee expenses (1,336) - - (1,336)Share option charges (65) - - (65) Operating profit 4,587 (691) - 3,896 Financing income 211 - - 211Finance cost of deferred consideration (234) - - (234)Other finance costs (346) - - (346) Profit before taxation 4,218 (691) - 3,527 Tax (1,265) - 207 (1,058) Profit for the year 2,953 (691) 207 2,469 Attributable to:Equity holders of the parent 2,947 (691) 207 2,463Minority interest 6 - - 6 2,953 (691) 207 2,469 Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 Reconciliation of consolidated balance sheet at 31 December 2006 Previously IFRS 3 IAS 12 Restated under stated UK GAAP adopted IFRS £'000 £'000 £'000 £'000 Goodwill 58,234 (3,878) 1,163 55,519Intangible assets - 3,187 - 3,187Property, plant and equipment 2,304 - - 2,304Available-for-sale investments 65 - - 65Deferred tax assets 1,047 - - 1,047 Non-current assets 61,650 (691) 1,163 62,122 Trade and other receivables 18,550 - - 18,550Cash and cash equivalents 7,010 - - 7,010 Current assets 25,560 - - 25,560 Trade and other payables (18,740) - - (18,740)Current tax liabilities (1,245) - - (1,245)Borrowings (1,820) - - (1,820)Consideration payable in respect of (1,362) - - (1,362)acquisitionsObligations under finance leases (87) - - (87) Current liabilities (23,254) - - (23,254) Net current assets 2,306 - - 2,306 Total assets less current liabilities 63,956 (691) 1,163 64,428 Non current liabilitiesBank loans (6,050) - - (6,050)Provisions (18,228) - - (18,228)Obligations under finance leases (81) - - (81)Deferred tax liability (32) - (956) (988) Net assets 39,565 (691) 207 39,081 EquityShare capital 3,448 - - 3,448Share premium 19,981 - - 19,981Retained earnings 5,510 (691) 207 5,026Other reserves 10,620 - - 10,620 Equity attributable to equity holders of parent 39,559 (691) 207 39,075 Minority interest 6 - - 6 Total equity 39,565 (691) 207 39,081 Cello Group plc NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2007 Reconciliation of consolidated balance sheet at date of the transition to IFRS,at 1 January 2006 Previously IFRS 3 IAS 12 Restated under stated UK GAAP adopted IFRS £'000 £'000 £'000 £'000 Goodwill 47,423 (3,223) 967 45,167Intangible assets - 3,223 - 3,223Property, plant and equipment 1,951 - - 1,951Available-for-sale investments 15 - - 15Deferred tax assets 586 - - 586 Non-current assets 49,975 - 967 50,942 Trade and other receivables 11,868 - - 11,868Cash and cash equivalents 6,717 - - 6,717 Current assets 18,585 - - 18,585 Trade and other payables (14,773) - - (14,773)Current tax liabilities (946) - - (946)Borrowings (4,166) - - (4,166)Consideration payable in respect of acquisitions (1,362) - - (1,362)Obligations under finance leases (121) - - (121) Current liabilities (21,368) - - (21,368) Net current liabilities (2,783) - - (2,783) Total assets less current liabilities 47,192 - 967 48,159 Non-current liabilitiesProvisions (12,890) - - (12,890)Obligations under finance leases (120) - - (120)Deferred tax liabilities (37) - (967) (1,004) Net assets 34,145 - - 34,145 EquityShare capital 3,244 - - 3,244Share premium 17,652 - - 17,652Retained earnings 2,694 - - 2,694Other reserves 10,555 - - 10,555 Equity attributable to equity holders of parent 34,145 - - 34,145 Total equity 34,145 - - 34,145 Cello Group plcNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2007 10 FINANCIAL INFORMATION The financial information contained in this document does not constitutestatutory financial statements within the meaning of section 240 Companies Act1985. The figures for the year ended 31 December 2007 have been extracted fromthe audited statutory financial statements. The financial statements for theyear ended 31 December 2007 (under IFRS) and the year ended 31 December 2006(under UK GAAP) received an unqualified auditors' reports which did not containa statement under section 237 (2) or (3) Companies Act 1985. Copies of the Company's financial statements will be posted to shareholders inApril and after approval at the Annual General Meeting on 20 May 2008, will bedelivered to the Registrar of Companies. Further copies will be available fromthe registered office of the Company or the Company's Nominated Adviser andBroker, Kaupthing Singer & Friedlander Capital Markets Limited, One HanoverStreet, London, W1S 1AX. 11 OTHER INFORMATION Other information regarding Cello Group plc can be found at the Company'swebsite, www.cellogroup.co.uk This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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