20th Mar 2007 07:01
Cello Group plc20 March 2007 20 March 2007 Cello Group plc Organic growth drives profits up 40% Cello Group plc ("Cello", AIM: CLL), the market research and consulting group,today announces its preliminary audited results for the year to 31 December2006. • Turnover up 43% to £74.7m (2005: £52.1m) • Gross profit up 46% to £38.8m (2005: £26.6m) • Headline profit before tax up 40% to £5.9m (2005: £4.2m) • Like-for-like gross profit growth of 16% • Like-for-like operating profit growth of 27% • Basic headline earnings per share up 28% to 12.57p (2005: 9.83p) • Operating cash flow conversion strong at 91% • Net debt of £1.1m (2005: cash: £1.9m) • Full year dividend in 2006 of 1p (2005: nil) • Acquisition of SMT in September boosts consulting capability • Organic growth supplemented by profitable digital start-ups (Blonde/Oomph) • Encouraging start to and good forward visibility for 2007 Kevin Steeds, Chairman, commented: "These results represent a substantial step forward in scale for us as a publiccompany. Our position and focus is clear. Over 75% of our group is in researchand consulting, which is where we are experiencing high levels of organicgrowth. "We start 2007 with real momentum. A healthy level of revenue visibility,combined with a strong balance sheet, will enable us to further invest forfuture growth." Enquiries: Cello Group plc (www.cellogroup.co.uk)Kevin Steeds, Chairman 020 7812 8460Mark Scott, Chief ExecutiveMark Bentley, Group Finance Director College HillAdrian Duffield/Ben Way 020 7457 2020 Chairman's Statement Overview 2006 has been another excellent year for the Group with headline profit beforetax up 40% to £5.9m and gross profits up 46% to £38.8m. The year saw relatively little acquisition activity by the Group. The Board andsenior management has been focused primarily on driving organic growth,including the opening of further international offices and the starting up ofseveral new businesses. Most encouraging were our like for like growth figuresat both operating profit and gross profit level. Our high operating margins demonstrate the superior level of value added we aredelivering to clients. Our rate of cash conversion, which stands at over 100%since IPO, also reflects the tight financial management in each of theunderlying businesses. As a consequence, the Group remains very prudent in itsfunding, with minimal net debt at year end. Our strength in key areas of market research, including healthcare and consumer,has been reinforced by our growth in research based consultancy, which hasenabled us to add incremental value to our client relationships. In addition wehave focused on response medium as client spend migrates to this area. It isthe view of the Board that the focus on research, consulting, and response is anoptimal positioning for the Group. Most encouraging is the high level of motivation and cohesion amongst the morethan 500 professionals who are employed within the Group. Our key executivesshare a common vision for Cello and are also shareholders in the Group. Wecontinue to invest time and resource in developing the Group, including CelloMarketplace, our marketing forum, and Cello Academy, our staff developmentprogramme for emerging senior managers. Financial Review 2006 was a year of strong growth. Group turnover increased 43% from £52.1m to£74.7m, gross profits increased 46% from £26.6m to £38.8m and headline profitbefore tax was up 40% from £4.2m to £5.9m. The growth rates we achieved reflecta highly competitive level of expansion in our core brands. Group headlineoperating margins (before head office costs) at 18.8% also reflect the strategicpositioning of our brands with clients and are firmly in the top quartile of ourindustry. Our like for like results were very impressive, with 16% growth ingross profit and 27% growth in operating profit. The Group's effective taxcharge was 30% (2005: 33%) and is likely to remain at that level given thecurrent domicile and mix of businesses. Headline basic earnings per share was up 28% to 12.57p and headline fullydiluted earnings per share was up 16% to 9.13p. Fully diluted earnings reflectthe impact of the anticipated issuance of shares to vendors of companiesacquired by Cello under earn out arrangements. The Group reviews expectations of deferred consideration payments under earnouts on an annual basis. This review has necessitated a £0.4m increase in theearn out provisions to a total of £21.9m at the end of the year. The Board is proposing a final dividend of 0.6p per share (2005: nil) giving atotal dividend per share of 1.0p (2005: nil). It is proposed that this dividendbe paid on 15 June 2007 to all shareholders on the register at 25 May 2007. During the year the Group agreed a £12m, 3 year committed rolling creditfacility with the Royal Bank of Scotland. This facility is priced at 1% aboveLIBOR. Net debt for the Group at 31 December 2006 was £1.1m. The results for the year ended 31 December 2006 also reflect the impact ofaccounting changes to which the Group has been subject, in common with itspeers. These UK GAAP changes mirror some of the changes that will affect theGroup in 2007 with the introduction of International Accounting Standards. In2006 the Group is obliged to adopt the provisions of FRS20, which covershare-based payments, including the accounting for share options and also forequity based deferred consideration. In particular, where amounts payable underacquisition agreements are due to non-equity holding employees of thosebusinesses, then the treatment has been revised in line with the basis ofconclusions behind FRS20 so that these amounts are expensed to the profit andloss account over the period of the earn out rather than treated as cost ofacquisition. This accounting change results in an additional charge for the yearof £1.3m, and £1.0m for 2005. The Group has also taken a notional interest charge on the contingent cashconsideration which the Board believes is likely to be payable. This amounts toa notional interest charge for the year of £0.2m, and a prior year adjustment of£0.2m. All of these prior year adjustments were disclosed in our interimannouncement on 5 September 2006. There is no cash impact from these notional charges. The total effect of this,and a reconciliation of reported profit before tax to headline profit beforetax, is presented below: 2006 2005 £'000 £'000Headline PBT 5,853 4,162Share option costs (65) (9)Deemed remuneration (1,336) (952)Notional interest (234) (204)Reported PBT (restated) 4,218 2,997 All of these accounting changes relate to the changed financial reportingrequirements which the Group now faces. The underlying operating performance andcash generation profile of the Group remains unchanged and the deemedremuneration and notional interest charges will not occur once the earn outs towhich they relate have been completed. Financial reporting for the year ended 31 December 2006 reflects the previousstructure of Cello which was split into 3 divisions, Research and Planning,Consulting and Response. We have continued to report 2006 in this fashion, toensure comparability with the results for 2005. However, going forward we willreport the financial results as two divisions - Research and Consulting, andResponse - reflecting the current organisational structure of the business whichhas been in place for more than six months. Operational Review Our market research business ("Cello Planning and Research") had an excellentyear, delivering a headline operating profit of £3.5m (2005: £2.0m) from grossprofit of £16.3m (2005: £9.3m). Healthcare and consumer research wereparticularly dynamic, reflecting strong market positioning in these areas.Overall, our research business has continued to grow internationally, withoverseas work contributing almost half of revenues. We opened a second officein New York. Our data capture operation, which now employs thirty people,continued to expand its online research offer. Our consulting brands ("Cello Consulting") also had an exciting year deliveringheadline operating profit of £2.0m (2005: £1.6m) on gross profit of £12.7m(2005: £8.3m). This includes a contribution of £0.2m from SMT who joined inOctober. Our core consulting proposition (The Value Engineers brand) addedsubstantial consumer research capability in the year and amply demonstrated thevalue opportunity that can arise from combining insight generation withconsulting solution delivery. Cello is uniquely placed amongst competitorgroups to exploit this natural synergy with clients. TMI, our employee relatedresearch and consulting business experienced a difficult year, though recentcontract wins and managerial changes bode well for the future. The Group's digital, direct marketing and data group ("Cello Response")continued to benefit from the growth of response media, particularly online.Cello Response delivered a headline operating profit of £1.8m (2005: £1.5m) ongross profit of £9.8m (2005: £9.0m). The vertical client focus on financialservices and charities continued to be potent with clients seeking out industryexpertise as they increasingly migrate budgets into response solutions. Thesuccessful combination of our digital capability (Oomph and Blonde) withresponse experience and database knowledge has put us at the forefront of onlinedirect marketing. Post Year End Developments At the end of January we announced the acquisition of a controlling interest inboth Rosenblatt Limited and Digital People Online Limited. These strengthenboth our consumer research offering and online research capability. Growth Strategy The Group's growth plans remain highly focused. We intend to build on the coreresearch offer, in both quantitative and qualitative areas in the UK.International expansion will remain largely organic. We are also seeking toaggressively build our consulting capability, to further leverage our insightgeneration for clients, in healthcare, the public sector and a range of otherclient verticals. Finally, we intend to expand our response capability, mostnotably by expanding our presence in the London market. The Group will continueto push its digital and online capabilities in both research and response. Current Trading and Prospects We start 2007 with real momentum. A healthy level of revenue visibility,combined with a strong balance sheet, will enable us to further invest forfuture growth. I would like to take this opportunity to thank all staff and colleagues fortheir excellent commitment and contribution to the Group during the last year. Kevin SteedsChairman19 March 2007 Cello Group plcCONSOLIDATED PROFIT AND LOSS ACCOUNTfor the year ended 31 December 2006 Notes Year ended 31 December 2006 Year ended 31 December 2005 Continuing Acquisitions Total As restated operations £ £ £ £TURNOVER 1 73,526,694 1,175,286 74,701,980 52,087,515Cost of sales (35,632,359) (237,735) (35,870,094) (25,473,654) GROSS PROFIT 37,894,335 937,551 38,831,886 26,613,861 ADMINISTRATIVE EXPENSESAcquisition related employeeremuneration expenses (1,314,147) (21,628) (1,335,775) (952,000)Other administrative expenses (32,188,840) (720,077) (32,908,917) (22,639,584) TOTAL ADMINISTRATIVE EXPENSES (33,502,987) (741,705) (34,244,692) (23,591,584) OPERATING PROFIT 4,391,348 195,846 4,587,194 3,022,277 Interest receivable and similar income 2 210,978 279,597 Interest payableNotional finance costs on futuredeferred consideration payments (234,218) (204,046)Other interest payable (345,880) (100,830) Total interest payable 3 (580,098) (304,876) PROFIT ON ORDINARY ACTIVITIES BEFORE 4 4,218,074 2,996,998TAXATIONTax on profit on ordinary activities (1,264,678) (985,882) PROFIT FOR THE YEAR BEFORE MINORITY 2,953,396 2,011,116INTEREST Equity minority interest (5,878) - PROFIT FOR THE FINANCIAL YEAR 2,947,518 2,011,116 Basic earnings per share 6 8.90p 6.85pDiluted earnings per share 6 8.73p 6.71p Details of paid and proposed dividends are given in note 5 to the financialstatements. Cello Group plcCONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINES AND LOSSESfor the year ended 31 December 2006 Notes Year ended Year ended 31 December 2006 31 December 2005 £ As restated £ Profit for the financial year 2,947,518 2,011,116 Prior year adjustments 7 (1,004,130) Total recognised gains and losses recognised since last annual 1,943,388report Cello Group plcCONSOLIDATED BALANCE SHEET31 December 2006 Notes 31 December 2006 31 December 2005 As restated £ £FIXED ASSETSIntangible assets 58,234,100 47,423,211Tangible assets 2,303,486 1,950,350Investments 65,140 15,120 60,602,726 49,388,681 CURRENT ASSETSWork in progress 928,111 604,344Debtors 18,669,691 11,850,092Cash at bank and in hand 7,009,785 6,716,888 26,607,587 19,171,324 CREDITORS: Amounts falling due within one year (21,891,972) (20,005,414) NET CURRENT ASSETS/(LIABILITIES) 4,715,615 (834,090) TOTAL ASSETS LESS CURRENT LIABILITIES 65,318,341 48,554,591 CREDITORS: Amounts falling due after more than one year (6,130,894) (120,173) PROVISIONS FOR LIABILITIES (19,622,294) (14,289,162) NET ASSETS 39,565,153 34,145,256 CAPITAL AND RESERVESCalled up share capital 3,448,503 3,244,455Share premium account 19,980,642 17,652,075Capital redemption reserve 50,000 50,000Merger reserve 10,496,153 10,496,153Share-based payment reserve 74,357 9,352Profit and loss account 5,509,290 2,693,221 EQUITY SHAREHOLDERS' FUNDS 8 39,558,945 34,145,256 Minority interest 6,208 - TOTAL SHAREHOLDERS' FUNDS 39,565,153 34,145,256 Cello Group plcCONSOLIDATED CASH FLOW STATEMENTfor the year ended 31 December 2006 Year ended Year ended Notes 31 December 2006 31 December 2005 £ £ Net cash inflow from operating activities 9a 4,184,400 5,691,561 Returns on investments and servicing of finance 9b (131,174) 191,755 Taxation 9b (1,488,808) (1,289,411) Capital expenditure and financial investment 9b (925,002) (644,144) Acquisitions 9b (4,332,354) (7,666,043) Equity dividends paid 9b (131,449) - Cash outflow before financing 9c (2,824,387) (3,716,282) Financing 9b 3,480,955 1,072,380 INCREASE/(DECREASE) IN CASH IN THE YEAR 656,568 (2,643,902) RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET FUNDS Year ended Year ended 31 December 2006 31 December 2005 £ £Increase/(decrease) in cash in the year 656,568 (2,643,902) Cash inflow from increase in debt and lease financing (3,480,955) (1,122,380) Change in net debt resulting from cash flows 9c (2,824,387) (3,766,282) New finance leases - (91,485) Issue of loan notes 9c (150,000) (515,128) Loans and finance leases acquired with subsidiary - (163,873) (2,974,387) (4,536,768) NET FUNDS AT 1 JANUARY 2006 9c 1,910,064 6,446,832 NET FUNDS AT 31 DECEMBER 2006 9c (1,064,323) 1,910,064 Cello Group plc ACCOUNTING POLICIES (1) Basis Of Accounting The financial statements have been prepared under the historical cost conventionand in accordance with applicable accounting standards in the United Kingdom.As discussed in accounting policy (4) below, in order to give a true and fairview, where goodwill is treated as having indefinite economic life, thefinancial statements depart from the requirement of companies' legislation toamortise goodwill over a finite period. (2) Basis Of Consolidation The Group's financial statements consolidate the accounts of the Company and allof its subsidiary undertakings. The results of subsidiary undertakings acquiredin the year are included in the consolidated profit and loss account from theeffective date of acquisition. (3) TURNOVER, 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. (4) Goodwill AND INTANGIBLE ASSETS Goodwill arising on the acquisition of businesses or subsidiary undertakings iscalculated as the excess of the fair value of the consideration given and costsof acquisition over the fair value of the net assets acquired. In accordance with FRS10 Goodwill and intangible assets, goodwill arising onacquisitions is capitalised as an intangible fixed asset and amortised over itsestimated useful economic life. Each acquisition is assessed with reference toits durability and ability to sustain long term profitability. Based on theirassessment of acquisitions made during the year, the directors are of theopinion that the goodwill arising in respect of the acquisitions made during theyear is sufficiently durable that it has an indefinite economic life due, interalia, to the strength of its market position, its long term profitabilityprospects, and the Group's ongoing commitment to maintain and enhance its value,the goodwill arising on acquisition will therefore not be amortised. In accordance with FRS10 and FRS11 Impairment of fixed assets and goodwill, thecarrying values of intangible fixed assets are reviewed annually for impairmenton the basis stipulated in FRS11 and adjusted to the recoverable amount ifrequired. Where goodwill is treated as having indefinite economic life, in order to give atrue and fair view for the reasons outlined above, the financial statementsdepart from the requirement of companies' legislation to amortise goodwill overa finite period. Capitalised goodwill regarded as having indefinite usefuleconomic life amounted to £58,234,100 (2005 as restated: £47,423,211) as at 31December 2006. (5) TANGIBLE FIXED ASSETS Tangible fixed assets are stated at historical cost. Depreciation is providedat rates calculated to write off the cost, less estimated residual value, ofeach 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) INVESTMENTS Fixed asset investments are stated at cost less provision for any impairment invalue. (7) WORK IN PROGRESS Work in progress comprises third party costs incurred on behalf of clients andis stated at the lower of cost and net realisable value. (8) DEFERRED TAXATION Deferred tax is recognised in respect of all timing differences that haveoriginated but not reversed at the balance sheet date where transactions orevents that result in an obligation to pay more tax in the future or a right topay less tax in the future have occurred at the balance sheet date. Timingdifferences are differences between the Group's taxable profits and its resultsas stated in the financial statements that arise from the inclusion of gains andlosses in tax assessments in periods different from those in which they arerecognised in the financial statements. Deferred tax assets are recognised to the extent that it is regarded as morelikely than not that they will be recoverable against suitable taxable profitsin the future. Deferred tax is measured at the average tax rates that are expected to apply inthe periods in which timing differences are expected to reverse, based on taxrates and laws that have been enacted or substantially enacted by the balancesheet date. Deferred tax is measured on a non-discounted basis. (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 a tangible fixed asset and is depreciated over the estimated usefullife or the term of the lease, whichever is shorter. Future instalments undersuch leases, net of finance charges, are included within creditors. Rentalspayable are apportioned between the finance element, which is charged to theprofit and loss account, 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 profit and loss account 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 profit andloss account for the year. (11) PENSIONS 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. (12) SHARE-BASED PAYMENTS The group has applied the requirements of FRS20 Share-based payment whichrequires the fair value of share-based payments to be recognised as an expense.In accordance with the transitional provisions, FRS20 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 profit andloss account over the appropriate vesting period. ii. Acquisition related employee remuneration expenses Having regard to the basis for conclusions behind FRS20 and in accordance withFRS18 Accounting policies, the Group has revised its accounting policy forcertain payments made to employees in respect of earn out arrangements. Thesepayments are now treated as remuneration within the profit and loss account. 1 SEGMENTAL INFORMATION The Group's turnover, gross profit and operating profit on ordinary activitiesbefore taxation were all derived from the following activities: 2006 Cello Planning Cello Brand Cello Response Head Office Total and Research Consulting £ £ £ £ £Business type Turnover 29,252,680 18,550,893 26,898,407 - 74,701,980 Gross profit 16,317,753 12,707,260 9,806,873 - 38,831,886 Operatingprofit 2,351,367 2,088,125 1,515,965 (1,368,263) 4,587,194 Adjustments to operating profitAcquisition related employee remunerationexpense 1,134,152 (51,477) 253,100 - 1,335,775Share-basedpayment expense - - - 65,005 65,005 Headlineoperating profit 3,485,519 2,036,648 1,769,065 (1,303,258) 5,987,974 Net assets 6,098,875 5,296,293 2,444,203 25,725,782 39,565,153 2005 Cello Planning Cello Brand Cello Response Head Office Total and Research Consulting 2005 2005 2005 2005 2005 As restated As restated As restated As restated As restated £ £ £ £ £Business type Turnover 15,583,991 14,355,874 22,147,650 52,087,515 Gross profit 9,295,121 8,321,087 8,997,653 - 26,613,861 Operatingprofit 1,400,180 1,415,152 1,218,106 (1,011,161) 3,022,277 Adjustments to operating profitAcquisition relatedemployee remunerationexpense 553,000 159,000 240,000 - 952,000Share-basedpayment expense - - - 9,352 9,352 Headlineoperating profit 1,953,180 1,574,152 1,458,106 (1,001,809) 3,983,629 Net assets 5,326,960 2,129,245 1,922,642 24,766,409 34,145,256 The Group's turnover was earned from clients based in the following geographicalmarkets: 2006 2005Geographical £ £UK 55,777,351 42,339,957Rest of Europe 10,575,863 6,666,651USA 6,995,819 2,498,346Rest of the World 1,352,947 582,561 74,701,980 52,087,515 Profit before tax on all sales is earned in the UK and all Groups net assets areheld in the UK. INTEREST RECEIVABLE AND SIMILAR INCOME Year ended Year ended2 31 December 2006 31 December 2005 £ £ Interest receivable: Bank deposits 210,978 279,597 3 Interest payable AND SIMILAR CHARGES Year ended Year ended 31 December 2006 31 December 2005 As restated £ £ Notional finance costs on future deferred consideration payments 234,218 204,046 On bank loans and overdrafts 295,581 45,637 On loan notes 28,548 40,762 In respect of finance leases 21,751 14,431 580,098 304,876 4 PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION Year ended Year ended 31 December 2006 31 December 2005 £ £ Profit on ordinary activities before taxation is stated after charging/(crediting): Depreciation of owned tangible fixed assets 622,234 469,863 Depreciation of tangible fixed assets held under finance leases 90,411 102,906 Profit on disposal of tangible fixed assets (29,137) (34,621) Profit on disposal of fixed asset investment (90,000) - Operating lease rentals : land and buildings 1,433,625 877,386 : other leases 224,323 171,161 Auditors' remuneration : audit services to parent company 44,500 30,000 : audit services to subsidiary companies 156,006 94,706 : non-audit services - interim review 41,000 20,000 : non-audit services - taxation 80,147 86,754 In addition to the amounts above, £39,150 (2005: £25,000) of services wereprovided by the company's auditors in relation to due diligence advice onacquisitions. These costs have been capitalised within goodwill. All auditors'remuneration was payable to Baker Tilly. 5 EQUITY DIVIDENDS An interim dividend of 0.4p (2005: nil) per ordinary share was paid on 13 October 2006 to all shareholders on the register on 22 September 2006. The total amount of the dividend paid was £131,449. A final dividend of 0.6p (2005: nil) is proposed and will be paid on 15 June 2007 to all shareholders on the register at 25 May 2007. In accordance with FRS21 Events after the balance sheet date, this dividend has not been recognised in the accounts at 31 December 2006, but if approved will be recognised in the year ending 31 December 2007. 6 EARNINGS PER SHARE Year to Year to 31 December 2006 31 December 2005 As restated £ £ Basic and diluted earnings attributable to ordinary shareholders 2,947,518 2,011,116 Adjustments to earnings: Share-based payment expense 65,005 9,352 Acquisition related employee remuneration expense 1,335,775 952,000 Notional finance costs on future deferred consideration payments 234,218 204,046 Tax thereon (420,235) (288,406) Headline earnings attributable to ordinary shareholders 4,162,281 2,888,108 Number Number Weighted average number of ordinary shares 33,106,006 29,366,404 Dilutive effect of securities: Share options 600,000 600,000 Consideration shares to be issued 62,986 - Diluted weighted average number of ordinary shares 33,768,992 29,966,404 Further dilutive effect of securities: Share options 563,168 163,266 Contingent consideration shares to be issued 11,263,368 6,435,270 Fully diluted weighted average number of ordinary shares 45,595,528 36,564,940 Basic earnings per share 8.90p 6.85p Diluted earnings per share 8.73p 6.71p Fully diluted earnings per share 6.46p 5.50p Headline basic earnings per share 12.57p 9.83p Headline diluted earnings per share 12.33p 9.64p Headline fully diluted earnings per share 9.13p 7.90p 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 FRS22:Earnings 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. 6 EARNINGS PER SHARE (continued) Fully diluted earnings per share is calculated by adjusting the weighted averagenumber of ordinary shares in issue on the assumption of conversion of thepotentially dilutive ordinary shares that are expected to be issued in thefuture, based on directors' current best estimates. 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. 7 PRIOR YEAR ADJUSTMENTS The total impact of prior year adjustments on the Group's profit and lossreserve is set out below: Pre tax adjustment Tax relief Total £ £ £Share options (a(i)) 9,352 (2,806) 6,546Acquisition related employeeremuneration expenses (a(ii)) 1,094,000 (328,200) 765,800Notional finance costs (c) 231,784 - 231,784 1,335,136 (331,006) 1,004,130 a. FRS20 Share-based payment As described on page 26, the Group adopted FRS20 Share based payment in theyear. The effect of each of these is given below. i. Share options The effect of this change in accounting policy is to create a charge to theprofit and loss account of £65,005 in the year to 31 December 2006 (2005:£9,352). Deferred tax is based upon the expected future tax deductions as a result ofthese transactions. ii. Acquisition related employee remunerationexpenses The cumulative effect of this to the balance sheet is to reduce provisions by£1,842,847 and goodwill at 31 December 2006 by £4,272,722. The effect to theprofit and loss account is to increase the administration costs in the year to31 December 2006 by £1,335,775 (2005: £952,000). Deferred tax is provided based upon the expected future tax deductions as aresult of these transactions. b. FRS25 Financial instruments: presentation and disclosure The Group has adopted the presentational requirements of FRS25 Financialinstruments: presentation and disclosure. The adoption of this standard resultsin the estimated value of contingent consideration payable by issue of newordinary shares in the Company, previously included in the balance sheet withincapital and reserves as "shares to be issued", has now been included as aliability within provisions. 7 PRIOR YEAR ADJUSTMENTS (continued) The effect of the change in this policy is to reduce net assets and capital andreserves at 31 December 2006 by £13,761,519. The effect of this on prior years'figures is to reduce net assets and capital and reserves by £10,350,125. c. Notional finance costs on future deferred consideration payments As a result of this change in accounting policy interest payable has increasedby £234,218 in the year to 31 December 2006 (2005: £204,046). 8 RECONCILIATION OF MOVEMENT IN EQUITY SHAREHOLDERS' FUNDS Group Group Company Company 2006 2005 2006 2005 As Restated As restated £ £ £ £ Profit/(loss) for the year to 31 December 2006 2,947,518 2,011,116 (843,784) (374,618) New share capital subscribed 204,048 490,266 204,048 490,266 Dividends paid (131,449) - (131,449) - Dividends received from group companies - - 4,002,000 - Premium on shares issued in the year (net of 2,328,567 5,328,658 2,328,567 5,328,658 expenses) Share capital redeemed - (50,000) - (50,000) Credit for share-based incentive schemes 65,005 9,352 65,005 9,352 Net addition to equity shareholders' funds 5,413,689 7,789,392 5,624,387 5,403,658 Opening equity shareholders' funds (see below) 34,145,256 26,355,864 30,875,149 25,471,491 Closing equity shareholders' funds 39,558,945 34,145,256 36,499,536 30,875,149 Opening equity shareholders' funds for the Group were originally £45,490,159 before deducting prior year adjustments of £11,344,903 and opening equity shareholders' funds for the Company were originally £41,454,252 before deducting prior year adjustments of £10,579,103. 9 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT Year ended Year ended 31 December 2006 31 December 2005 As restated £ £a Reconciliation of operating profit to net cash inflow from operating activities Operating profit 4,587,194 3,022,277 Depreciation 712,645 572,769 Share-based payment expense 65,005 9,352 Acquisition related employee remuneration expense 1,335,775 952,000 Profit on disposal of fixed assets (29,137) (34,621) Profit on disposal of fixed asset investments (90,000) - (Increase)/decrease in work in progress (323,767) 1,947,944 (Increase)/decrease in debtors (5,032,346) 1,605,262 Increase/(decrease) in creditors 2,959,031 (2,383,422) Net cash inflow from operating activities 4,184,400 5,691,561 Year ended Year ended 31 December 2006 31 December 2005 £ £b Analysis of cash flows for headings netted in the cash flow statement Returns on investments and servicing of finance Interest received 179,851 279,597 Interest paid (289,274) (73,411) Finance lease interest (21,751) (14,431) Net cash (outflow)/inflow from returns on investments and (131,174) 191,755 servicing of finance Capital expenditure and financial investment Purchase of tangible fixed assets (1,004,853) (700,539) Sale of tangible fixed assets 79,871 56,395 Sale of fixed asset investments 50,000 - Purchase of fixed asset investments (50,020) - Net cash outflow from capital expenditure and financial (925,002) (644,144) investment Acquisitions Purchase of subsidiary undertakings (4,400,000) (7,731,666) Payments of deferred consideration (90,393) (889,900) Net cash acquired with subsidiaries 779,935 1,352,423 Expenses paid in connection with purchase of subsidiary (621,896) (396,900) undertakings Net cash outflow from acquisitions (4,332,354) (7,666,043) 9 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued) Year ended Year ended 31 December 2006 31 December 2005 £ £ Redemption of share capital - (50,000) Receipt of bank loan 4,250,000 2,300,000 Repayment of bank loan (500,000) (95,786) Redemption of loan notes (196,329) (954,392) Capital element of finance lease payments (72,716) (127,442) Net cash inflow from financing 3,480,955 1,072,380 NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued) 9 Year ended Year ended 31 December 2006 31 December 2005 As restated £ £d Purchase of subsidiary undertakings Fair value of assets and liabilities acquired: Tangible fixed assets 111,662 615,836 Investments - 15,120 Work in progress - 229,544 Debtors 1,286,324 4,085,691 Cash at bank and in hand 809,921 1,592,179 Overdraft (29,986) (298,752) Creditors (1,538,931) (4,158,860) Goodwill 10,420,165 18,100,922 Minority interest (330) - Consideration 11,058,825 20,181,680 Satisfied by: Cash 4,400,000 7,731,666 Loan notes issued 150,000 269,028 Shares allotted 2,476,923 5,818,924 Deferred consideration 3,548,745 5,800,592 Costs of acquisition 483,157 561,470 11,058,825 20,181,680 The subsidiary undertakings acquired in the year contributed the following to the cash flows of the Group in the year to 31 December 2006: £ Cash inflow from operating activities 322,573 Returns on investment or servicing of finance 8,285 Taxation (18,427) Capital expenditure and financial investment (22,327) Increase in cash in the year 290,104 10 FINANCIAL INFORMATION The financial information contained in this document does not constitute statutory financial statements within the meaning of section 240 Companies Act 1985. The figures for the year ended 31 December 2006 and the year ended 31 December 2005 have been extracted from the audited statutory financial statements. The financial statements for both year ended 31 December 2006 and the year ended 31 December 2005 received an unqualified auditors' report which did not contain a statement under section 237 (2) or (3) Companies Act 1985. Copies of the Company's financial statements will be posted to shareholders in April and after approval at the Annual General Meeting on 22 May 2007, will be delivered to the Registrar of Companies. Further copies will be available from the registered office of the Company or the Company's Nominated Adviser and Broker, Evolution Securities Limited, 100 Wood Street, London, EC2V 7AN. 11 OTHER INFORMATION Other information regarding Cello Group plc can be found at www.cellogroup.co.uk the Company's website. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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