9th Mar 2006 07:02
Chime Communications PLC09 March 2006 9th March 2006 CHIME COMMUNICATIONS PLC ("Chime" or "the Group") AUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31ST DECEMBER 2005 2005 2004Operating Income £63.0m £52.1m + 21% Operating profit Headline £9.5m £7.3m + 30% Statutory £8.2m £7.3m + 13% Profit before Tax Headline £8.6m £6.4m + 34% Statutory £7.3m £6.4m + 14% Earnings per Share Headline 2.9p 2.2p + 32% Statutory 2.5p 2.2p + 14% Dividend per Share 0.48p 0.30p + 60% Headline Operating Profit Margin 15.3% 13.7% Net Debt £3.0m £6.3m Note: 1. Headline figures are shown prior to restructuring costs (£1.3m) and discontinued operations. 2. Organic growth (excluding both acquisitions and disposals) in operating income was 7% and 16% in operating profit. Commenting on the results, Lord Bell, Chairman of Chime Communications, said: "We have had a very successful year and exceeded the City's expectations for2005. This strong performance has continued in to the first quarter of 2006. Weare very optimistic about our future prospects". For further information please contact: Lord Bell, Chairman Tel: 020 7861 8515Chime Communications plc Chris Satterthwaite, Chief Executive Tel: 020 7861 8515Chime Communications plc Charles Cook/Robin Tozer Tel: 020 7861 3232Bell Pottinger Corporate and Financial CHAIRMAN'S STATEMENT SUMMARY OF 2005 The progress we made in 2004 has continued through 2005. Our Advertising andMarketing Services Division has started to deliver on our expectations with thevery successful acquisition of VCCP. Each of our three divisions has delivereddouble digit growth in operating income and profit. Our operating income grew by 21% from £52.1 million to £63.0 million and ourheadline operating profit grew by 30% from £7.3 million to £9.5 million. Despiteincurring restructuring costs of £1.3 million in 2005, the statutory profitbefore tax grew by 14% from £6.4 million to £7.3 million. Organic growth (excluding both acquisitions and disposals) in operating incomewas 7% and 16% in operating profit. Headline earnings per share grew by 32% from 2.2p per share to 2.9p per share. The Board is proposing a final dividend of 0.26p per share giving a totaldividend per share of 0.48p compared to 0.30p in 2004 an increase of 60%. Our net debt position at 31st December 2005 was £3.0 million compared to £6.3million at 31st December 2004. REVIEW OF OPERATIONS (All operating income and profit items in this section are shown prior torestructuring costs, discontinued operations and share of results ofassociates). In 2005 Public Relations represented 63% (2004 - 70%) of our operating income,Advertising and Marketing Services 30% (24%) and Research 7% (6%). PUBLIC RELATIONS Operating income for 2005 increased by 11% from £36.2 million to £40.1 millionand operating profit increased by 24% from £5.5 million to £6.8 million.Operating profit margin increased from 15.2% in 2004 to 17.1% in 2005. Bell Pottinger Sans Frontieres continued to be our most successful business andexpanded further its geopolitical practice. Bell Pottinger Corporate andFinancial, our financial public relations firm, under its new Managing DirectorStephen Benzike has returned to growth and reconfirmed itself in the top 10.Bell Pottinger Public Affairs continued to be the number one public affairsconsultancy. Harvard and Insight grew beyond our expectations. Our operations inGermany, the USA and Dubai all grew. The downturn in consumer marketing had aneffect on our consumer brands. New business wins in 2005 included Cadbury Trebor Bassett, Budget, CliffordChance, Criminal Justice I.T., DP World, Dubai Aerospace, Green CrossInternational, Hero, GSK, Johnson and Johnson, Kimberley Clark, NuclearDecommissioning Agency, The Food and Drink Federation, 118 118, Petrofac, QatarFinancial Centre and Taylor Woodrow. ADVERTISING AND MARKETING SERVICES Operating income for 2005 increased by 48% from £12.6 million to £18.6 millionand operating profit increased by 94% from £1.4 million to £2.4 million.Operating profit margin was 13% in 2005 compared to 11% in 2004. Following the successful acquisition of VCCP, VCCP management took over fourexisting Chime businesses, Heresy, Rare Digital (now renamed VCCP Digital), PureMedia and Gasoline. Heresy has been merged in to VCCP and we have sold 76% ofRare Publishing which was a loss making business. Since acquisition VCCP hasentered the top 20 advertising agencies in the UK. Our specialist Financial Services business, Teamspirit, and our specialistproperty business TTA, had strong performances in 2005. New business wins in 2005 included Callaway, e bookers, Financial ServicesAuthority, Gala Bingo, GSK, Hyundai, More Th>n, Nestea, Samsung and Skinny Cow. RESEARCH Operating income for 2005 increased by 31% from £3.3 million to £4.3 million andoperating profit increased by 26% from £0.7 million to £0.9 million. Operatingprofit margin decreased slightly from 21% to 20%. Both Opinion Leader Researchand The Smart Company (our Corporate and Social Responsibility Consultancy)showed good growth. New business wins in 2005 included London Stock Exchange, Bank of England,Cancer Research UK, Home Office, KPMG, Age Concern, Scottish & Newcastle and BBCGovernors. BUSINESS ACTIVITY The Group acted for 1,069 clients in 2005 compared to 1,012 in 2004. 124 clientspaid us over £100,000 compared to 116 in 2004. Our top 30 clients represented38% of total operating income (2004 - 34%) and our largest client represented8.6% of total income (2004 - 3.1%). 183 of our clients were shared with at leasttwo of our businesses. The top four industry sectors in which we operated were: % of Total Income 2005 2004 Government and Political 18 12 Technology, Media and Telecoms 17 17 Financial Services 12 12 Property 8 10 Average fee income per client was £60,000 compared to £53,000 in 2004. 30% of our operating income came from international work outside the UK comparedto 24% in 2004. Productivity improved with operating income per head at £98,000 compared to£91,000 in 2004. HIGH PROFILE ACTIVITIES Some of the high profile activities we were involved in during 2005 include: • DP World's £3.9 billion contested bid for P&O Ports • The sale of Marconi's telecoms business to Sweden's Ericsson for £1.2 billion • BAE Systems' £2.1 billion purchase of United Defense Industries • Two major IPO's creating new FTSE 250 companies - Petrofac and 888.com as well as a range of AIM admissions • Your health, your care, your say - UK's first ever Citizens' Summit and the largest public consultation ever conducted • The NDA's decommissioning strategy • The largest ever order for Boeing 777 aircraft for Emirates Airline worth $9.7 billion • The £100 million sponsorship of Arsenal and its new Emirates Stadium • Launch of a new Quality Standard Mark for English Beef and Lamb • The Vodafone Working Nation Study • The 80th anniversary celebrations of Winnie the Pooh for Walt Disney • New guide books for Madame Tussauds, Warwick Castle, Alton Towers and Chessington World of Adventure • The £50 million sponsorship of Chelsea by Samsung featuring Jose Mourinho in TV advertising • Launch of 02 i-mode, the world's most popular mobile internet service • The launch of "The Ball", Dyson's latest ground breaking vacuum cleaner • The promotion of new IT systems for the Criminal Justice Board CORPORATE ACTIVITIES In June 2005 we announced the acquisition of VCCP Limited for an initialconsideration of £14.5 million with deferred consideration of up to £15.5million. Considerations, both initial and deferred, are satisfied one half incash and one half by the issue of new ordinary shares in Chime. The initial cashconsideration of £7.25 million was satisfied partly by the issue of 20.4 millionshares at 26p and partly from within the Group's own resources. Following thetransaction the VCCP Group has taken over the management of four of Chime'sexisting marketing services businesses. Deferred consideration is payable basedon the pre-tax profit performance of the enlarged Group in the 6 years to 31stDecember 2010. In July 2005 we acquired Baxter Hulme, a public relations consultancy based inthe north of England for an initial consideration of £307,500 (£153,750 paid incash and £153,750 payable in shares subject to achieving the agreed profittarget for the year to 31st March 2006) with deferred consideration payable ofup to £692,500 dependent on the pre-tax profits in the two years to 31st March2008. The acquisition has strengthened Bell Pottinger North, which was launchedin 2004. In September 2005 we exercised our option to acquire the remaining 60% of DeFacto Communications. De Facto is a leading healthcare and life science publicrelations consultancy based in London and extends Chime's involvement in theimportant health sector. £182,706 was paid on the exercise of the option withdeferred consideration of up to £1.8 million payable dependent on the post-taxprofits of De Facto for the four years to 31st December 2008. On 31st December 2005 we sold the remaining 51% of shares that we held in HHCLGroup Limited to WPP Group for £2.75 million. We also announced that we woulduse some of the proceeds from the sale to begin a programme to purchase ChimeOrdinary Shares over the next four years. In December we sold 76% of the shares of Rare Publishing to PSP CommunicationsLimited. The performance of Rare Publishing has been disappointing and it isexpected that this will improve when it is part of a specialist publishinggroup. Consideration of up to £382,000 will be receivable based on the pretaxprofit performance to 31st December 2008. In January we acquired 55% of Ledbury Research which provides research andadvice to brands and businesses which market to high net worth consumers. Theinitial market investment was £120,000 with further consideration of up to160,000 new Chime shares dependent on the two vendors remaining with the Groupand the pre-tax profit performance over the next four years. We announced on 1st February that we had cancelled the warrants over 8,280,320Ordinary Shares (3.3% of total share capital) held by The Royal Bank of Scotlandin return for a payment of £800,000. The cancellation payment equated to a shareprice of 0.34p. These warrants were issued in September 2003 as part of ourrefinancing arrangements at an exercise price of 24p and entitled The Royal Bankof Scotland to subscribe for the shares at any time up to 30th September 2006. BANKING ARRANGEMENTS We have agreed a new 3 year facility with The Royal Bank of Scotland for £15million until March 2009. Principal terms and covenants remain as before. The Group continues to operate comfortably within its banking covenants. Net debt at 31st December 2005 was £3.0 million compared to £6.3 million at 31stDecember 2004. As was the case in 2004 the Group continues to have unusuallyhigh levels of cash paid in advance from clients. Whilst this may well continueit is estimated that if it returned to more normal levels, net debt wouldincrease by about £4.0 million. RESTRUCTURING COSTS In 2005 we incurred restructuring costs of £1.3 million. These related primarilyto the integration of four of our existing marketing services businesses in tothe VCCP Group leading to excess property and redundancy costs. Agreement has now been reached to sublet or assign almost all of the Group'sexcess property. There remain some properties sublet at rental levels below theamounts paid by the Group but provision has been made at 31st December 2005 forthe expected future costs. DIVIDEND The Board is proposing a final dividend of 0.32p giving a total dividend perShare of 0.48p (2004 - 0.30p). The Board, subject to the trading conditions at the time, expects to continue topay dividends in the future in line with the Group's policy of 5 times coverwith two thirds of the value being paid as a final dividend and one third as aninterim dividend. INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) The results for 2005 and the comparative results for 2004 have been set outunder IFRS. The three principal changes that have resulted from this are: 1. Share based payments, reflecting the costs of options with a charge in 2005 of £235,000 compared to £162,000 in 2004. (This change is now also required under UK Accounting Standards). 2. The reversal of the share of profits of associates until brought forward losses have been covered. This was nil in 2005 and a cost of £453,000 (prior to tax) in 2004. 3. The costs of discounting deferred acquisition provisions which are included in finance costs. This amounted to a charge of £222,000 in 2005 compared to £87,000 in 2004. TAXATION The headline rate for the Group remains at 31%. However, there has been a oneoff reduction in the first half year of £560,000 as a result of agreeing someprior year tax charges. This reduction together with some further reductions in the second half year hasresulted in an effective tax charge for the year of 22%. We expect the rate for future years to return to our normal rate of 31%. CORPORATE AND SOCIAL RESPONSIBILITIES In July 2005 we issued our first Corporate Responsibility Report which reviewedour practices relating to people, clients, the communities in which we operateand the natural environment. The report states our aim for the year ahead. We take Corporate and Social Responsibility seriously and will continue todevelop and improve our approach. RETIREMENT OF NON- EXECUTIVE DIRECTOR We are today announcing the retirement from the Board of Alan Chamberlain. Alanhas been associated with the Group since 1989 both as a Director and aConsultant. He has provided the board and management of Chime with invaluablesupport and advice on corporate strategy, acquisitions, finance and generalmanagement. Alan will continue to act as a Consultant to the Group. OUTLOOK Our Advertising and Marketing Services Division is now achieving growth andprofits ahead of our expectation and there is market momentum in both the PublicRelations and Research Divisions. This is confirmed by the Group's performancefor the first quarter of 2006 and we expect it to be another successful year. We have recently agreed a three year forward strategy with the Board. Thehighlights of this strategy are:- •To re-position Chime as the leading Modern Communications Group. •To continue our progress in margin enhancement with a target of 18% within three years (currently 15.3%). •To continue to reduce debt as well as implementing a share buy back programme as appropriate within market conditions. •To increase the number of clients shared between more than one company in the Group, both across the three divisions and within each division. •In new business to increase the average value of our wins. •To continue our productivity improvement by increasing the average income per head. •To continue our international expansion and grow the share from its current level of 30% of operating income. This expansion will come from the Public Affairs sector, Corporate and Financial and Advertising and Marketing Services. This strategy will be fulfilled by organic activities including start-ups andpossibly small strategic, non dilutive acquisitions. Lord BellChairman9th March 2006 Consolidated Income Statement Year ended 31 December 2005 2005 2004* £'000 £'000 Note CONTINUING OPERATIONSTurnover 116,403 92,186Cost of sales (53,371) (40,110) ----------- ----------- OPERATING INCOME 63,032 52,076 Operating expenses (53,410) (44,948) ----------- ----------- 9,622 7,128 Share of results of associates (111) 55Share of results of equityaccounted joint ventures - 120Restructuring costs (1,286) - ----------- ----------- OPERATING PROFIT 3 8,225 7,303 Profit on disposal of fixed assetinvestment - 164Investment income 152 125Finance costs (830) (1,081)Finance cost of deferredconsideration (222) (87) ----------- ----------- PROFIT BEFORE TAX 7,325 6,424 Tax (1,608) (2,051) ----------- ----------- PROFIT FOR THE PERIOD FROMCONTINUING OPERATIONS 5,717 4,373 DISCONTINUED OPERATIONSLoss for the period fromdiscontinued operations (660) (73)Profit for the period fromsale of associate 2,662 - ----------- ----------- PROFIT FOR THE YEAR 7,719 4,300 =========== =========== Attributable to:Equity holders of the parent 7,536 4,123Minority interest 183 177 ----------- ----------- 7,719 4,300 =========== =========== EARNINGS PER SHARE 4From continuing operationsBasic 2.5p 2.2pDiluted 2.5p 2.1pFrom continuing and discontinuedoperationsBasic 3.4p 2.2pDiluted 3.3p 2.1p *Restated under IFRS (see note 9) Consolidated Statement of Total Recognised Income and Expense Year ended 31 December 2005 2005 2004* £'000 £'000 Exchange differences on translation of foreignSubsidiaries (137) (2) ---------- ----------Net loss recognised directly in equity (137) (2)Profit for the period 7,719 4,300 ---------- ----------Total recognised income and expense for the year 7,582 4,298 ---------- ---------- Attributable to:Equity holders of the parent 7,399 4,121Minority interest 183 177 ---------- ----------Total recognised gains and losses relating to the year 7,582 4,298 ---------- ----------*Restated under IFRS (see note 9) Consolidated Balance Sheet as at 31 December 2005 2005 2004* £'000 £'000 Non-current assetsGoodwill 68,606 45,099Other intangible assets 140 264Property, plant and equipment 2,305 2,079Investments in associates 891 807Investments in equity accounted joint ventures - 15Available for sale investments - 3Due from deferred consideration 950 -Deferred tax asset 1,338 784 ---------- ---------- 74,230 49,051 ---------- ---------- Current assetsWork in progress 565 426Trade and other receivables 27,098 18,714Cash and cash equivalents 6,997 6,056 ---------- ---------- 34,660 25,196 ---------- ----------Total assets 108,890 74,247 ---------- ---------- Current liabilitiesTrade and other payables (34,964) (23,422)Current tax liabilities (1,865) (2,470)Obligations under finance leases (142) (100)Bank overdraft - (1,500)Short-term provisions (690) (996) ---------- ---------- (37,661) (28,488) ---------- ---------- ---------- ----------Net current liabilities (3,001) (3,292) ---------- ---------- Non-current liabilitiesBank loans (8,485) (8,895)Long-term provisions (8,880) (2,025)Obligations under finance leases (129) (136) ---------- ---------- (17,494) (11,056) ---------- ----------Total liabilities (55,155) (39,544) ---------- ---------- ---------- ----------Net assets 53,735 34,703 ---------- ---------- EquityShare capital 12,654 10,312Share premium account 26,475 16,548Own shares (6,961) (6,969)Equity reserve 32,817 32,582Translation reserve (139) (2)Accumulated losses (11,375) (18,027) ---------- ----------Equity attributable to equity holders of theparent 53,471 34,444Equity minority interest 264 259 ---------- ----------Total equity 53,735 34,703 ---------- ----------*Restated under IFRS (see note 9) Consolidated cash flow statement Year ended 31 December 2005 2005 2004* £'000 £'000 NoteNet cash inflow from operatingactivities 6 8,239 6,140 Investing activitiesInterest received 147 353Dividends received from associates 5 5Proceeds on disposal of property, plantand equipment 218 188Purchases of property, plant and equipment (1,090) (706)Purchases of other intangible assets (5) (15)Proceeds from disposal of investment 266 -Acquisition of investment in anAssociate (72) (40)Disposal of investment in an associate (50) -Loans granted to associates (411) (5)Loans granted to joint ventures - (69)Acquisition of subsidiary (7,191) (950)Disposal of subsidiary (98) -Net cash outflow from returns on ----------- -----------investment and servicing of finance (8,281) (1,239) ----------- ----------- Financing activitiesDividend paid (1,009) -Dividends paid to minorities (122) (56)Repayments of borrowing (410) (10,911)Repayment of loan notes (527) (1,239)Repayments of obligations underfinance leases (143) (83)Proceeds on issue of ordinary sharecapital 4,692 18,375Sale of own shares 2 2Expenses of capital reduction - (90)Net cash (used in)/from financing ----------- -----------Activities 2,483 5,998 ----------- ----------- Net increase in cash and cashequivalents 2,441 10,899 Cash and cash equivalents atbeginning of year 4,556 (6,343) ----------- -----------Cash and cash equivalents at end of period 6,997 4,556 =========== =========== Cash and cash equivalents comprise cash at bank, loan note deposits lessoverdrafts and does not take into account the following borrowings: Bank loans (8,485) (8,895)Finance leases (271) (236)Loan notes outstanding (1,254) (1,748) ----------- -----------Overall net debt (3,013) (6,323) =========== ===========*Restated under IFRS (see note 9) Notes: 1. Business Segments For management purposes, the group is currently organised into three operatingdivisions - Public Relations, Advertising and Marketing Services and Research.These divisions are the basis on which the group reports its primary segmentinformation. Principal activities are as follows: Public Relations The public relations division comprises some of the leading names in theindustry, including Bell Pottinger, Good Relations, QBO Bell Pottinger, Harvardand Insight, which together advise the owners and promoters of more than 300major UK and international brands. The public relations division is ranked firstin the PR Week public relations consultancy league table for 2004. Advertising and Marketing Services ('AMS') The AMS division possesses specialist skills in marketing services -advertising, sales promotion, direct marketing, design, media planning andbuying and digital online content creation, and specialises in the niche marketsof property, financial services and healthcare. Research The research division is made up of Opinion Leader Research and The SmartCompany.NET. Opinion Leader Research is one of the UK's leading researchconsultancies and The Smart Company is a consultancy, which specialises incorporate social responsibility and related public policy issues. The group's operations are located in the United Kingdom, Germany and USA. Thegroup's Advertising and Marketing Services and Research divisions are locatedsolely in the United Kingdom. Public Relations is carried out in the UnitedKingdom, Germany and USA. 1. Business segments (continued) Operating Income Operating Profit 2005 2004* 2005 2004* £'000 £'000 £'000 £'000 Class of business Public Relations:Continuing operations 39,281 36,203 6,401 5,494Acquisitions 769 - 140 - --------- --------- --------- --------- 40,050 36,203 6,541 5,494 Advertising and MarketingServices:Continuing operations 12,021 12,553 254 1,339Acquisitions 6,616 - 1,228 - --------- --------- --------- --------- 18,637 12,553 1,482 1,339 Research:Continuing operations 4,345 3,320 808 689 --------- --------- --------- --------- 63,032 52,076 8,831 7,522 Chime Central Costs - - (495) (394)Associates and joint ventures - - (111) 175 --------- --------- --------- --------- 63,032 52,076 8,225 7,303 --------- --------- --------- --------- Operating Profit(before Operating Margin (before restructuring costs) restructuring costs) 2005 2004* 2005 2004* £'000 £'000 % % Class ofbusiness Public Relations: Continuing operation 6,688 5,494 17.0% 15.2%Acquisitions 144 - 18.7% - --------- --------- --------- --------- 6,832 5,494 17.1% 15.2% Advertising and Marketing Services: Continuing operations 1,161 1,339 9.7% 10.7%Acquisitions 1,259 - 19.0% - --------- --------- --------- --------- 2,420 1,339 13.0% 10.7% Research: Continuing operations 865 689 19.9% 20.8% --------- --------- --------- --------- 10,117 7,522 16.1% 14.4% Chime Central Costs (495) (394) - - Associatesand joint ventures (111) 175 --------- --------- --------- --------- 9,511 7,303 15.3% 13.7% --------- --------- --------- ---------*Restated under IFRS (see note 9) 2. Basis of preparation The financial information set out in the announcement does not constitute thegroup's statutory accounts for the years ended 31 December 2005 or 2004 but isderived from those accounts. The financial information for the year ended 31December 2004 is derived from the statutory accounts for that year which havebeen delivered to the Registrar of Companies, as subsequently restated underIFRS. The auditors have reported on the accounts to 31 December 2004 and 31December 2005; their reports were unqualified and did not contain a statementunder s.237 (2) or (3) Companies Act 1985. Copies of the full accounts for 2005will be circulated to shareholders and after approval at the Annual GeneralMeeting will be delivered to the Registrar of Companies. Whilst the financialinformation included in this preliminary announcement has been computed inaccordance with International Financial Reporting Standards (IFRSs) thisannouncement does not in itself contain sufficient information to comply withIFRSs. The Company expects to publish full financial statements that comply with IFRSs in March 2006. The information in this preliminary announcement was approved by the board on9th March 2006. 3. Headline operating profit 2005 2004* £'000 £'000 Operating profit 8,225 7,303Add back Restructuring costs 1,286 - ---------- ----------Headline operating profit 9,511 7,303 ---------- ----------*Restated under IFRS (see note 9) Restructuring costs relate to redundancy £348,000, other property related costs£601,000 and other costs £337,000. There were no restructuring costs in 2004. 4. Earnings per share From continuing and discontinued operations The calculation of the basic and diluted earnings per share is based on thefollowing data: 2005 2004* £'000 £'000EarningsEarnings for the purpose of basic earnings pershare being net profit attributable to the equityholders of the parent 7,536 4,123 --------- --------- Number of sharesWeighted average number of ordinary shares for thepurposes of basic earnings per share 222,362,754 189,947,802 Effect of dilutive potential ordinary shares:Share options 1,895,423 2,590,300Warrants 1,075,622 2,348,000 --------- ---------Weighted average number of ordinary shares for thepurposes of diluted earnings per share 225,333,799 194,886,102 --------- --------- 4. Earnings per share(continued) From continuing operations 2005 2004* £'000 £'000EarningsNet profit attributable to equity holders of the parent 7,536 4,123 Adjustments to exclude loss for the year from discontinuedoperations 660 73Adjustment to exclude profit for the year from sale ofassociates (2,662) - --------- ---------Earnings from continuing operations for the purposes ofbasic earnings per share excluding discontinued operations 5,534 4,196 --------- --------- The denominators used are the same as those detailed above for both the basicand diluted earnings per share from continuing and discontinued operations. Headline from continuing operations 2005 2004* Basic 2.9p 2.2pDiluted 2.9p 2.1p £'000 £'000EarningsNet profit attributable to equity holders of the parent 7,536 4,123 Adjustments to exclude loss for the year from discontinued operations 660 73Adjustment to exclude profit for the year from sale ofassociates (2,662) -Adjustment to exclude restructuring costs net of tax 900 - --------- ---------Earnings from continuing operations for the purposes ofbasic earnings per share excluding discontinued operations and restructuring costs 6,434 4,196 --------- --------- The denominators used are the same as those detailed above for both the basicand diluted earnings per share from continuing and discontinued operations. From discontinued operations 2005 2004* Basic 0.9p -Diluted 0.9p - The denominators used are the same as those detailed above for both the basicand diluted earnings per share from continuing and discontinued operations. *Restated under IFRS (see note 9) 5. Dividends 2005 2004* £'000 £'000 Amounts recognised as distributions to equity holdersin the year: Final dividend for the year ended 31 December 2004 of0.30p (2004:Nil) per share 614 -Interim dividend for the year ended 31 December 2005 of0.16p (2004:Nil) per share 395 - --------- --------- 1,009 - --------- --------- Amounts not recognised as distributions to equityholders in the Period (declared): Proposed final dividend for the year ended 31 December2005 of 0.32p (2004:0.30p) per share 793 614 --------- --------- *Restated under IFRS (see note 9) The proposed final dividend is subject to shareholder approval at the AnnualGeneral Meeting and has not been included as a liability as at 31 December 2005. Under an agreement dated 3 April 1996, The Chime Communications Employee Trustwhich holds 5,265,003 ordinary shares representing 2.54% of the company'scalled-up share capital, has agreed to waive all dividends. 6. Notes to the consolidated cash flow statement 2005 2004* £'000 £'000 Profit from operations 8,225 7,303Adjustments for:Loss from discontinued operation (757) (73)Share of associates and joint venture results 111 (175)Share based payment expense 235 162Translation differences 6 22Depreciation of property, plant and equipment 1,343 1,142Amortisation of other intangible assets 130 129Gain on disposal of property, plant and equipment (33) (63)Decrease in provisions (10) (845) ---------- ---------- Operating cash flows before movements in working capital 9,250 7,602Decrease/(increase) in work in progress (80) 109Increase in receivables (1,724) (1,195)(Decrease)/increase in payables 2,929 2,462 ---------- ---------- Cash generated by operations 10,375 8,978 Income taxes paid (1,291) (1,383)Interest paid (845) (1,455) ---------- ---------- Net cash from operating activities 8,239 6,140 ========== ========== *Restated under IFRS (see note 9) 7. Reconciliation of equity attributable to equity holders of parent 2005 2004 £'000 £'000 Balance at 1 January (as restated*) 34,444 11,442Dividends paid (1,009) -Disposal of own equity shares held in treasury (6) (3)Deferred tax benefit in respect of share based payments 131 -Credit in relation to share based payments 235 162Own shares disposed of on exercise of options 8 15Net profit for the year attributable to equity holders ofthe parent 7,399 4,121Increase in share capital 12,269 18,707 --------- --------- Balance at 31 December 53,471 34,444 ========= =========*Restated under IFRS (see note 9) 8. Events after the balance sheet date On 27 January 2006 we acquired 55% of Ledbury Research which provides researchand advice to brands who market to high net worth consumers. The initial marketinvestment was £120,000 with further consideration of up to 160,000 new Chimeshares dependent on the two vendors remaining with the group, and the pre taxprofit performance over the next four years. On 1 February 2006 we cancelled the warrants over 8,280,320 ordinary shares heldby The Royal Bank of Scotland in return for a payment of £800,000. Thesewarrants were issued in September 2003 as part of our refinancing arrangementsat an exercise price of 24p and entitled The Royal Bank of Scotland to subscribefor the Shares at any time up to 30 September 2006. In March 2006 a new 3 year facility with the Royal Bank of Scotland for £15million has been agreed until March 2009. Principal terms and covenants remainas before. 9. Explanation of transition to IFRS This is the first year that the group has presented its financial statementsunder IFRS. The following disclosures are required in the year of transition.The last financial statements under UK GAAP were for the year ended 31 December2004 and the date of transition to IFRSs was therefore 1 January 2004. 9. Explanation of transition to IFRS (continued)Reconciliation from UK GAAP to IFRSBalance sheet As at 1 January 2004 IFRS Effect of (opening transition IFRS Previous to balance GAAP IFRSs sheet) Note £'000 £'000 £'000 Non-current assetsGoodwill 1,2,11 44,985 (35) 44,950Other intangible assets 3 - 378 378Property, plant and equipment 3 2,830 (378) 2,452Investments in associates 4,5,7 423 60 483Investments in equity accounted joint ventures - - -Available for sale investments 3 - 3Deferred tax asset 1,024 - 1,024 -------- ---------- ---------- 49,265 25 49,290 -------- ---------- ----------Current assetsWork in progress 535 - 535Trade and other receivables 4 17,450 (379) 17,071Cash and cash equivalents 2,987 - 2,987 -------- ---------- ---------- 20,972 (379) 20,593 -------- ---------- ----------Total assets 70,237 (354) 69,883 -------- ---------- ---------- Current liabilitiesTrade and other payables 9 (22,240) - (22,240)Current tax liabilities 7 (2,040) - (2,040)Obligations under finance leases (41) - (41)Bank overdraft (9,330) - (9,330)Short-term provisions 6 (1,285) (544) (1,829) -------- ---------- ---------- (34,936) (544) (35,480) -------- ---------- ---------- -------- ---------- ----------Net current liabilities (13,964) (898) (14,887) -------- ---------- ---------- Non-current liabilitiesBank loans (19,806) - (19,806)Long-term provisions 5,6,7,11,12 (3,197) 266 (2,931)Obligations under finance leases (86) - (86) -------- ---------- ---------- (23,089) 266 (22,823) -------- ---------- ----------Total liabilities (58,025) (278) (58,303) -------- ---------- ---------- -------- ---------- ----------Net assets 12,212 (632) 11,580 -------- ---------- ---------- EquityShare capital 7,980 - 7,980Share premium account 173 - 173Shares to be issued 6 1,359 (1,359) -Own shares (6,984) - (6,984)Equity reserve 8 32,385 35 32,420Translation reserve 10 - - -Accumulated losses 8,12 (22,839) 692 (22,147) -------- ---------- ----------Equity attributable to equity holders of theParent 12,074 (632) 11,442 -------- ---------- ----------Equity minority interest 138 - 138 -------- ---------- ----------Total equity 12,212 (632) 11,580 -------- ---------- ---------- 9. Explanation of transition to IFRS (continued)Reconciliation from UK GAAP to IFRSBalance sheet As at 31 December 2004 Effect of Transition Previous to GAAP IFRSs IFRS Note £'000 £'000 £'000 Non-current assetsGoodwill 1,2,11 45,110 (11) 45,099Other intangible assets 3 - 264 264Property, plant and equipment 3 2,343 (264) 2,079Investments in associates 4,5,7 822 (15) 807Investments in equity accounted joint ventures 15 - 15Available for sale investments 3 - 3Deferred tax asset 784 - 784 -------- ---------- ---------- 49,077 (26) 49,051 -------- ---------- ----------Current assetsWork in progress 426 - 426Trade and other receivables 4 18,714 - 18,714Cash and cash equivalents 6,056 - 6,056 -------- ---------- ---------- 25,196 - 25,196 -------- ---------- ----------Total assets 74,273 (26) 74,247 -------- ---------- ---------- Current liabilitiesTrade and other payables 9 (24,025) 603 (23,422)Current tax liabilities 7 (2,612) 142 (2,470)Obligations under finance leases (100) - (100)Bank overdraft (1,500) - (1,500)Short-term provisions 6 (641) (355) (996) -------- ---------- ---------- (28,878) 390 (28,488) -------- ---------- ---------- -------- ---------- ----------Net current liabilities (3,682) 390 (3,292) -------- ---------- ---------- Non-current liabilitiesBank loans (8,895) - (8,895)Long-term provisions 5,6,7,11,12 (1,782) (243) (2,025)Obligations under finance leases (136) - (136) -------- ---------- ---------- (10,813) (243) (11,056) -------- ---------- ----------Total liabilities (39,691) 147 (39,544) -------- ---------- ---------- -------- ---------- ----------Net assets 34,582 121 34,703 -------- ---------- ---------- EquityShare capital 10,312 - 10,312Share premium account 16,548 - 16,548Shares to be issued 6 848 (848) -Own shares (6,969) - (6,969)Equity reserve 8 32,385 197 32,582Translation reserve 10 - (2) (2)Accumulated losses 8,12 (18,801) 774 (18,027) -------- ---------- ----------Equity attributable to equity holders of theParent 34,323 121 34,444 -------- ---------- ----------Equity minority interest 259 - 259 -------- ---------- ----------Total equity 34,582 121 34,703 -------- ---------- ---------- 9. Explanation of transition to IFRS (continued)Reconciliation from UK GAAP to IFRSBalance sheetReconciliation of equity at 1 January 2004 and 31 December 2004Notes 1 January 31 December 2004 2004 £'000 £'000 Total equity previous GAAP 12,212 34,582 1. Goodwill not amortised after date of transition - 422. Translation differences in relation to foreign goodwill 282 2773. Reclassification of software to intangibles - -4. Reclassification of loan from short term currentassets to non current assets - -5. Reclassification of loss from associate to noncurrent asset where long term loans exceed loss - -6. Reclassification of shares to be issued to currentand non current liabilities (1,359) (848)7. Derecognition of losses of associates with netliabilities 445 1348. Cost of share based payments - -9. Derecognition of final dividend - 60310. Foreign exchange movement on foreign subsidiaries - -11. Adjustment to deferred consideration to net presentvalue - -12. Interest charge on deferred consideration in - -relation to net present value - (87) ---------- ----------Total adjustment to equity (632) 121 ---------- ----------Total equity IFRS 11,580 34,703 ========== ========== 9. Explanation of transition to IFRS (continued)Reconciliation from UK GAAP to IFRSIncome StatementYear ended 31 December 2004 Effect of transition to UK GAAP IFRSs IFRS Note £'000 £'000 £'000 CONTINUING OPERATIONSTurnover 2,5 95,701 (259) 95,442Cost of sales 2,5 (41,767) 86 (41,681) --------- --------- ------- OPERATING INCOME 53,934 (173) 53,761 Other operating incomeOperating expenses 1,2,4,5 (46,737) 49 (46,688) --------- --------- ------- 7,197 (124) 7,073 Share of results of associates 3 508 (453) 55Share of results of equity accounted jointventures 120 - 120 --------- --------- ------- OPERATING PROFIT 7,825 (577) 7,248 Profit on disposal of fixed asset investment 164 - 164Investment income 125 - 125Finance costs (1,081) - (1,081)Finance costs of deferred consideration 6 - (87) (87) --------- --------- ------- PROFIT BEFORE TAX 7,033 (664) 6,369 Tax 3 (2,193) 142 (2,051) --------- --------- ------- PROFIT FOR THE PERIOD FROMCONTINUING OPERATIONS 4,840 (522) 4,318 DISCONTINUED OPERATIONSLoss for the period from discontinued operations 2 - (18) (18) --------- --------- -------PROFIT FOR THE PERIOD 4,840 (540) 4,300 ========= ========= ======= 9. Explanation of transition to IFRS (continued)Reconciliation from UK GAAP to IFRSReconciliation of income statement for the year ended 31 December 2004Notes Operating Profit Profit Profit Before For the tax period £'000 £'000 £'000 Profit per previous GAAP 7,825 7,033 4,840 1. Goodwill not amortised after date oftransition 42 42 422. Loss on discontinued operations shownafter profit after tax 18 18 -3. Derecognition of losses of associates withnet liabilities (453) (453) (311)4. Share based payments (162) (162) (162)5. Change in foreign exchange rate used toconvert foreign subsidiaries (22) (22) (22)6. Interest charge on deferred considerationin relation to net present value - (87) (87) --------- ------- --------Total adjustment to profit (577) (664) (540) --------- ------- --------Profit per IFRS 7,248 6,369 4,300 ========= ======= ======== The comparative figures as presented above, and as disclosed in our Interimstatement, have been reclassified to extract comparative information foroperations discontinued during the year, in accordance with IFRS 5. This hashad no impact on the result for the period but has led to a decrease in turnoverof £2,846,000, operating income of £1,685,000 and an increase to operatingprofit of £55,000. Reconciliation from UK GAAP to IFRSCashflow StatementYear ended 31 December 2004 Effect of Transition To IFRSs IFRS £'000 £'000 £'000 Cashflow from operating activities 6,140 - 6,140Cashflow from investing activities (1,239) - (1,239) -------- -------- -------- 4,901 - 4,901 Cashflow from financing activities 18,038 (12,040) 5,998 -------- -------- -------- Net increase/(decrease) in cash and cashequivalents 22,939 (12,040) 10,899 Cash and cash equivalents at the beginningof the period (29,263) 22,920 (6,343) -------- -------- -------- Cash and cash equivalents at the endof the period (6,324) 10,880 4,556 ======== ======== ======== The effect of transition on the cashflow noted above relates to changes in thecomposition of cash and cash equivalents as detailed below. 9. Explanation of transition to IFRS (continued)Reconciliation from UK GAAP to IFRSReconciliation of cashflow for period to 31 December 2004Notes As at 31 December 2004 Net debt under UK GAAP (6,324) Loan notes excluded from cash and cash equivalents 1,748Long term loans excluded from cash and cash equivalents 8,895Finance leases excluded from cash and cash equivalents 237 ----------Total adjustment due to IFRS 10,880 ----------Cash and cash equivalents under IFRS 4,556 ========== Cash and cash equivalents consists of Cash at hand and in bank 4,308Loan note cash deposits 1,748Bank overdrafts (1,500) ---------- 4,556 ========== 10. Significant accounting policies The accounting policies adopted by the group are as follows: Basis of accounting The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRSs) for the first time. The disclosuresrequired by IFRS 1 concerning the transition from UK GAAP to IFRSs are given innote 44. The financial statements have also been prepared in accordance withIFRSs adopted for use in the European Union and therefore comply with Article 4of the EU IAS Regulation. The financial statements have been prepared on the historical cost basis exceptfor certain financial instruments that are carried at fair value in accordancewith the accounting policies set out below. The principal accounting policiesadopted are set out below. In preparing the group's IFRS balance sheet at 31 December 2005, the followingexemptions from full retrospective application of IFRS accounting policies havebeen adopted: (i) Business combinations - in accordance with IFRS 1, the group has chosen not to restate business combinations that took place before the date of transition (1 January 2004). (ii) Translation of foreign subsidiaries - in accordance with IFRS 1, the group has chosen to reduce all translation reserves arising prior to transition into IFRS to a nil balance. (iii)Share based payments - in accordance with IFRS 2 Share-based payments granted before 7 November 2002 or that had vested by the transition date have not been restated. 10. Significant accounting policies (continued) Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and entities controlled by the Company (its subsidiaries) made up to31 December each year. Control is achieved where the Company has the power togovern the financial and operating policies of an investee entity so as toobtain benefits from its activities. On acquisition, the assets and liabilities and contingent liabilities of asubsidiary are measured at their fair values at the date of acquisition. Anyexcess of the cost of acquisition over the fair values of the identifiable netassets acquired is recognised as goodwill. Any deficiency of the cost ofacquisition below the fair values of the identifiable net assets acquired (i.e.discount on acquisition) is credited to income statement in the period ofacquisition. The interest of minority shareholders is stated at the minority'sproportion of the fair values of the assets and liabilities recognised. The results of subsidiaries acquired or disposed of during the year are includedin the consolidated income statement from the effective date of acquisition orup to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used bythe group. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. Investments in associates An associate is an entity over which the group is in a position to exercisesignificant influence, but not control or joint control, through participationin the financial and operating policy decisions of the investee. The results, assets, and liabilities of associates are incorporated in thesefinancial statements using the equity method of accounting except whenclassified as held for sale. Investments in associates are carried in thebalance sheet at cost carried in the balance sheet at cost as adjusted bypost-acquisition changes in the group's share of the net assets of theassociate, less any impairment in the value of individual investments. Losses ofthe associates in excess of the group's interest in those associates are notrecognised. Any excess of the cost of acquisition over the group's share of the fair valuesof the identifiable net assets of the associate at the date of acquisition isrecognised as goodwill and is included in the carrying value of the investment.Any deficiency of the cost of acquisition below the group's share of the fairvalues of the identifiable net assets of the associate at the date ofacquisition (i.e. discount on acquisition) is credited in income statement inthe period of acquisition. Where a group company transacts with an associate of the group, unrealisedprofits and losses are eliminated to the extent of the group's interest in therelevant associate. Investments in joint ventures A joint venture is an entity in which the Group holds an interest on a long-termbasis and which is jointly controlled by the Group and one or more otherventurers under a contractual arrangement. The results, assets, and liabilities of joint ventures are incorporated in thesefinancial statements using the equity method of accounting. Investments in jointventures are carried in the balance sheet at cost as adjusted bypost-acquisition changes in the group's share of the net assets of the jointventure, less any impairment in the value of individual investments. Losses ofthe joint venture in excess of the group's interest in those joint ventures arenot recognised. Any excess of the cost of acquisition over the group's share of the fair valuesof the identifiable net assets of the joint venture at the date of acquisitionis recognised as goodwill and is included in the carrying value of the jointventure. Any deficiency of the cost of acquisition below the group's shareof the fair values of the identifiable net assets of the joint venture at thedate of acquisition (i.e. discount on acquisition) is credited in incomestatement in the period of acquisition. Where a group company transacts with a joint venture of the group, unrealisedprofits and losses are eliminated to the extent of the group's interest in therelevant joint venture. Goodwill Goodwill arising on consolidation represents the excess of the cost ofacquisition over the group's interest in the fair value of the identifiableassets, liabilities and contingent liabilities recognised. Goodwill is recognised as an asset and reviewed for impairment at leastannually. Any impairment is recognised in the income statement and is notsubsequently reversed. On disposal of a subsidiary, associate or jointly controlled entity, theattributable amount of goodwill is included in the determination of the profitor loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRSs has beenretained at the previous UK GAAP amounts subject to being tested for impairmentat that date. Goodwill written off to reserves under UK GAAP prior to 1998 hasnot been reinstated and is not included in determining any subsequent profit orloss on disposal. Goodwill impairment is assessed by comparing the carrying value of goodwill tothe net present value of future cash flows derived from the underlying assetsconsidering forecast cash flows over an initial projection period of up to threeyears for each cash-generating unit. After this period, growth rates of nominalGDP are generally assumed for each cash-generating unit. In certain instances,accelerated growth rates higher than the nominal GDP may be used for the initialprojection period if management believes the higher rate is more appropriate toreflect the economic cycles that occur within the market which thecash-generating unit operates. The weighted average cost of capital used by the Group to discount the futurecash flows to their present value is 7.9%. For two acquisitions with a combined value of £4.8 million (out of a totalgoodwill value of £68.6 million) we have used accelerated growth rates. Furtherchanges in assumptions around growth rates of businesses will be disclosed inthe year end financial statements. Future anticipated payments to vendors in respect of earnouts are based on thedirectors' best estimates of future obligations, which are dependent on futureperformance of the interests acquired and assume the operating companies improveprofits in line with directors' estimates and are included in liabilitiesgreater or less than one year as appropriate. When earnouts are to be settled incash consideration or shares with a fixed monetary value, the fair value of theconsideration is obtained by discounting to present value the amounts expectedto be payable in the future. The resulting interest charge is included withinfinance costs. Turnover recognition Turnover is measured at the fair value of the consideration received orreceivable and comprises the gross amounts billed to clients in respect of feesearned, expenses recharged and commission-based income. Operating incomecomprises commission and fees earned in respect of turnover. Cost of salesinclude fees paid to external suppliers where they are retained to perform partor all of a specific project for a client, and the resulting expenditure isdirectly attributable to the revenue earned. Turnover and Operating income arestated exclusive of VAT, sales taxes and trade discounts. 10. Significant accounting policies (continued) Public Relations Operating income is typically derived from retainer fees and services performedsubject to specific agreement. Operating income is recognised when the serviceis performed in accordance with the contractual arrangement. Operating income isrecognised on long-term contracts, if the outcome can be assessed with reasonable certainty, by including in the income statementrevenue and related costs as contract activity progresses. Advertising and Marketing Services and Research Operating income is recognised on each market research contract in proportion tothe level of services performed. Costs, including an appropriate proportion ofoverheads relating to contracts in progress at the balance sheet date, arecarried forward in work in progress. Losses are recognised as soon as they areforeseen. Leasing Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. Assets held under finance leases and the related lease obligations are recordedin the balance sheet at the fair value of the leased assets at the inception ofthe leases or, if lower the present value of minimum lease payments. The excessof the lease payments over the recorded lease obligations is treated as financecharges which are amortised over each lease term to give a constant rate ofcharge on the remaining balance of the obligation. Rental costs under operating leases are charged to the income statement in equalannual amounts over the periods of the leases. Benefits received and receivable as an incentive to enter into an operatinglease are also spread on a straight-line basis over the lease term or the periodto the next review. Foreign currencies Transactions in UK companies denominated in currencies other than poundssterling are recorded at the rates of exchange prevailing on the dates of thetransactions. At each balance sheet date, monetary assets and liabilities thatare denominated in foreign currencies are retranslated at the rates prevailingon the balance sheet date. Gains and losses arising on retranslation areincluded in net profit or loss for the period. On consolidation, the assets and liabilities of the Group's overseas operationsare translated at the exchange rates prevailing on the balance sheet date.Income and expenses are translated at the average exchange rates for the periodunless exchange rates fluctuate significantly. Exchange differences arising, ifany, are classified as equity and transferred to the Group's translationreserve. Such translation reserve differences are recognised as income or asexpenses in the period in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate. Finance costs Finance costs which include interest, bank charges and the unwinding thediscount on deferred consideration, are recognised in profit or loss in theperiod in which they are incurred. Operating profit Profit from operations is stated after charging restructuring costs and afterthe share of post tax results of associates and equity accounted joint venturesbut before investment income and finance costs. 10. Significant accounting policies (continued) Retirement benefit costs The pension cost is the amount of contributions payable by the Group to thedefined contribution pension scheme and to personal pension schemes of certainemployees during the accounting period. These are charged as an expense as theyfall due. Taxation The tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. Thegroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred 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 goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. 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 when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. Property, plant and equipment Property, plant and equipment are stated at cost net of depreciation and anyprovision for impairment. Depreciation is provided in equal instalments over theestimated useful economic lives of assets, using the following rates: Short term leasehold improvements - 20% Motor vehicles - 16 2/3% Fixtures, fittings and equipment - 25% Assets held under finance leases are depreciated over their expected usefullives on the same basis as owned assets or, where shorter, the term of therelevant lease. The gain or loss arising on the disposal of an asset is determined as thedifference between the sales proceeds and the carrying amount of the asset andis recognised in the income statement. 10. Significant accounting policies (continued) Other intangible assets Acquired computer software is capitalised based on the cost incurred to acquireand bring to use the specific software. Software is stated at cost net ofamortisation and any provision for impairment. The costs are amortised overtheir estimated useful lives (four years). Impairment of property, plant and equipment and intangible assets excludinggoodwill At each balance sheet date, the group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset is estimated in order to determine theextent of the impairment loss (if any). Where the asset does not generate cashflows that are independent from other assets, the group estimates therecoverable amount of the cash-generating unit to which the asset belongs. Anintangible asset with an indefinite useful life is tested for impairmentannually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated future cashflows are discounted totheir present value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset forwhich estimates of future cashflows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverable amount. An impairment lossis immediately recognised as an expense in the income statement. Where an impairment loss subsequently reverses, the carrying amount of the asset(cash-generating unit) is increased to the revised estimate of its recoverableamount, but so that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. Work in progress Work in progress is stated at the lower of invoiced cost and net realisablevalue, net of payments received on account. Cost represents work supplied fromoutside the Group awaiting billing to clients at the year-end. Financial instruments Financial assets and financial liabilities are recognised on the group's balancesheet when the group becomes a party to the contractual provisions of theinstrument. Cash and cash equivalents Cash comprises cash, overdrafts and cash held on short-term deposit (up to threemonths). Cash equivalents are cash deposits held on three months deposit at theRoyal Bank of Scotland plc. The deposits guarantee the loan note creditors.Interest accruing on the deposits are payable to the holders of the loan notesless any costs arising. Trade receivables Trade receivables do not carry any interest and are stated at their nominalvalue as reduced by appropriate allowances for estimated irrecoverable amounts. 10. Significant accounting policies (continued) Investments Investments are recognised and derecognised on a trade date where a purchase orsale of an investment is under contract whose terms require the delivery of theinvestment within the timeframe established by the market concerned, and areinitially measured at cost, including transaction costs. Investments are classified as available for sale, and are measured at subsequentreporting dates at fair value. Gains and losses arising from changes in fairvalue are recognised directly in equity, until the security is disposed of or isdetermined to be impaired, at which time the cumulative gain or loss previouslyrecognised in equity is included in the net profit or loss for the period. Bank Borrowings Interest bearing bank loans and overdrafts are recorded at the fair value ofproceeds received, net of direct issue costs. Trade payables Trade payables are not interest-bearing and are stated at their nominal value. Equity instruments Equity instruments issued by the Company are recorded at the fair value ofproceeds received, net of direct issue costs. Share-based payments The group has applied the requirements of IFRS 2 Share-based Payments. Inaccordance with the transitional provisions, IFRS 2 has been applied to allgrants of equity instruments after 7 November 2002 that were unvested as of 1January 2005. The group issues equity-settled share-based payments to certain employees.Equity-settled share-based payments are measured at fair value at the date ofgrant. The fair value determined at the grant date of the equity-settledshare-based payments is expensed on a straight-line basis over the vestingperiod, based on the group's estimate of shares that will eventually vest andadjusted for the effect of non-market based vesting conditions. Fair value is measured for all schemes with market-based conditions by use ofthe Monte Carlo model. For all other schemes, fair value is measured by use ofthe Black-Scholes model. 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. A liability equal to the portion of the goods or services received is recognisedat the current fair value determined at each balance sheet date for cash-settledshare-based payments. The group also provides employees with the ability to purchase the group'sordinary shares at 80% of the current market value. The group records anexpense, based on its estimate of the 20% discount related to shares expected tovest on a straight-line basis over the vesting period. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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