ANNUAL REPORT AND FINANCIAL STATEMENTS YEAR ENDED 31 DECEMBER 2012 HIGHLIGHTS Financial Highlights Operational Highlights 2012 2011 Gross profit £65.1m 1 Headline operating profit £7.7m Headline profit before tax £7.0m Headline operating margin2 12.1% Basic headline earnings per share3 6.37p Reported profit before tax £1.4m Reported basic loss per share 0.49p Proposed full year dividend 2.00p Net debt £8.7m £61.8m £7.8m £7.1m 12.6% 6.82p £1.2m 0.81p 1.72p £7.7m • Strong cash conversion of 88.5% (2011: 90.6%) • Earn out settlement in the year of £2.0m • Successful restructuring of the Group into Cello Health and Cello Consumer • Strong performance from Cello Health, underpinned by a unified client proposition • Good recovery in H2 from Cello Consumer • International gross profit increase from 40.6% to 46.1% of total Group gross profit • International gross profit in Cello Health increase from 68.2% to 72.3% • Strong performance from digital products and brands within Cello Consumer • Acquisition of Mash Health Limited in January 2013 and integration into Cello Health • Forward looking deferred consideration minimal • Gross profit in Cello Health up 7.2%; like-for-like 4 gross profit up 2.6% • Headline operating margin in Cello Health 20.8% (2011: 20.9%) 1 Headline measures exclude, where applicable, restructuring costs, amortisation of intangible assets, impairment charges, acquisition accounting adjustments, start-up losses, share option charges and fair value gains and losses on derivative financial instruments. 2 Operating margin is calculated by expressing operating profit as a percentage of gross profit. 3 Headline earnings per share is defined in note 12. 4 Like-for-like measures exclude discontinued operations and the impact of any reclassification of business between reporting segments. • Gross profit and like-for-like in Cello Consumer maintained at similar levels, despite challenging H1 • Headline operating margin in Cello Consumer of 9.1% (2011: 10.4%) • Good start to 2013, with strong bookings momentum continuing from Q4 2012 CONTENTS Chairman’s Statement 2 Cello Health Companies 8 Cello Consumer Companies 10 Case Histories 12 Cello People 14 Talking Taboos 16 Directors’ Report 18 Corporate Governance 22 Report of Remuneration Committee 24 Independent Auditor’s Report – Group 27 Consolidated Financial Statements 28 Accounting Policies 33 Notes to the Consolidated Financial Statements 40 Independent Auditor’s Report – Company 71 Company Balance Sheet 72 Accounting Policies 73 Notes to the Company Financial Statements 75 Notice of Annual General Meeting 80 Directors 84 Group Directory 86 Advisors 88 1 CHAIRMAN’S STATEMENT Overview 2012 saw a solid per formance with the Group reporting a 5.3% increase in gross profi t to £65.1m (2011: £61.8m) and headline prof it before tax1 of £7.0m (2011: £7.1m). The restructuring of the Group into Cello Health and Cello Consumer was successfully completed and the benef its of this are already evident in new client activity. The last quarter of 2012 showed good momentum in forward bookings for the first quarter of 2013, providing good visibility for the start of the current year. Cello Health produced headline operating profit grow th of 6.7% on an increase in gross prof it of 7.2% , ref lecting robust demand from global clients for its highly specialist range of services. Cello Health enjoyed a full year contribution from MedErgy which was acquired in April 2011. This top line growth has allowed for continued investment in qualified staff, the initiation of a range of new services and expansion of international offices to sustain future revenue growth. Like-for-like2 gross profit in Cello Health grew by 2.6%. Cello Health’s profile with global clients continues to grow rapidly, with the recent addition of a central business development team reporting to the Board of Cello Health. The Board of Cello Health are working rapidly to deliver a fully integrated global service, promoted under the Cello Health brand, enabling it to compete effectively against larger US based competitors. The Group’s strategy of increasing the proportion of work won or serviced outside the UK has also made continued progress with international work now accounting for 46.1% of total Group gross profit (2011: 40.6%). Within Cello Health 72.3% of the gross profi t was secured from international clients (2011: 68.2%). The Group now has overseas offices in New York, Philadelphia, San Francisco, Los Angeles, Singapore and Hong Kong. There are plans to open an office in Chicago during the course of the current year. The Group’s top 20 clients accounted for 40.0% of Cello’s overall gross profit (2011: 38.3%) and remain largely unchanged from the prior year. Cello Health continues to benefit from accredited supplier status with the majority of its large pharmaceutical clients, enabling it to increase its service offering to these clients. The Group saw significant new business wins in the last quarter of 2012 which will be active in 2013. Following strong operating cash f low and the settlement of the earn out commitments during the year, net debt at year end was £8.7m (2011: £7.7m). As a consequence of the vastly reduced deferred consideration profile, and continued strong operating cash flow, the Board is pleased to propose Cello Consumer enjoyed a strong recover y in the second half after a marked slowdown in the first half caused by a hiatus in research activity by clients. Cello Consumer’s rapid transition into a dominantly digital proposition suppor ted by a range of web-centric services has enabled it to continue to develop its wide range of blue chip client relationships. With headline operating profi t of £3.0m (2011: £3.4m) on gross profi t of £32.7m (2011: £32.6m), Cello Consumer achieved operating margins of 3 9.1% (2011: 10.4%). Like-for-like gross profit in Cello Consumer grew by 0.6%. 1 Headline measures exclude, where applicable, restructuring costs, amortisation of intangible assets, impairment charges, acquisition accounting adjustments, start-up losses, share option charges and fair value gains and losses on derivative financial instruments. 2 Like-for-like measures exclude discontinued operations and the impact of any reclassification of business between reporting segments. 2 CHAIRMAN’S STATEMENT Overview continued an increase in the full year dividend of 16.3% to 2.00p per share (2011: 1.72p). The dividend has now grown every year since 2006. In January 2013 the Group completed the acquisition of Mash Health Limited ( “Mash” ), for a total maximum consideration of £1.5m, payable over the next 18 months. Mash has joined the Consumer Health division of Cello Health. Financial Review Total Group gross profit was £65.1m (2011: £61.8m) on revenues of £135.1m (£127.7m). Headline profit before tax was £7.0m (2011: £7.1m). The Group’s results reflect a solid performance by Cello Health and a markedly improved performance by Cello Consumer in the second half. Reported profit before tax was £1.4m (2011: £1.2m) after the impact of restructuring costs of £1.3m (2011: £0.9m); amortisation of £0.9m (2011: £1.2m); s tar t-up losses of £0.8m (2011: £0.2m) ; and impairment charges of £2.5m (2011: £2.5m). The Group’s headline operating margin was 12.1% (2011: 12.6%) with a headline operating margin of 20.8% in Cello Health (2011: 20.9%), and 9.1% in Cello Consumer (2011: 10.4%). Headline finance costs were £0.7m (2011: £0.7m). The Group’s tax charge was £1.2m (2011: £1.6m) reflecting a normalised tax rate on taxable profi ts of 31.5% (2011: 31.7%). Headline basic earnings per share4 was 6.37p (2011: 6.82p). The Board is proposing a final dividend of 1.42p per share (2011: 1.17p), giving a total dividend per share of 2.00p (2011: 1.72p), an increase of 16.3% . The final dividend will be paid, subject to shareholder approval, on 5 July 2013 to all shareholders on the register at 31 May 2013 and will be recognised in the year ending 31 December 2013. The Group’s net debt position at 31 December 2012 was £8.7m (2011: £7.7m). This debt figure is well within existing debt facilities of £29.0m which are in place until March 2016. Operating cash flow before tax of £6.8m (2011: £7.0m) during the year represented an 88.5% conversion of headline operating profit (2011: 90.6%). In April and May 2012 £3.3m of acquisition related liabilities were settled. These were settled by £2.0m in cash and loan notes and £1.3m in shares issued at an average price of 37p per share. Following these 3 Operating margin is calculated by expressing operating profit as a percentage of gross profit. 4 Headline earnings per share is defined in note 12. 3 CHAIRMAN’S STATEMENT Financial Review continued payments, deferred consideration commitments now stand at £0.4m, all payable in 2013. In January 2013, the Group acquired Mash for a maximum potential consideration of £1.5m. This consideration will all be paid by May 2014 with a maximum of 20% payable in shares. The Group has invested in a number of new startup activities in 2012, most notably the start-up of a quantitative research activity in Cello Health; the opening of new offices in Singapore, Hong Kong and Los Angeles; the creation of Cello Business Sciences, a web-enabled analytics offering; and expansion in New York. This incurred a net investment cost of £0.8m which has been added back to earnings for purposes of headline operating profit so as not to distort the reporting of underlying operational performance. We are confident about the majority of these activities being profitable in 2013. We were pleased to earn £1.0m of gross profi t from these activities in their first year of operations. As indicated in the interim results, Cello Consumer suffered from a marked slowdown of cer tain research activities in the first half of 2012. As a result the Group took action to reduce costs in certain areas, some of which have been closed and are therefore accounted for as discontinued operations. There was a restructuring charge of £1.3m for 2012 of which £0.6m related to a vacant property provision. The restructuring also necessitated an impairment charge of £2.5m. 4 The Group incurs a number of charges in the income statement below headline operating profi t, detailed below: Headline operating profit Net interest payable Headline profit before tax Acquisition costs Restructuring costs Start-up losses Fair value gain on financial instruments* Acquisition related employee remuneration expenses* Share option charges* Impairment of goodwill and intangibles* Amortisation of intangibles* 2012 £’000 2011 £’000 7,720 7,756 (686) (694) 7,034 7,062 – (211) (1,328) (928) (787) (163) 50 64 (82) (631) (134) (97) (2,497) (2,499) (876) (1,198) Finance costs on deferred consideration* – (58) Facility fees written off* – (111) 1,380 1,230 Reported profit before tax *no cash flow impact The Group monitors many financial measures on a regular basis but our key performance indicators are headline operating profit, headline operating margin, like-for-like gross profit, headline operating cash flow conversion and headline basic earnings per share. CHAIRMAN’S STATEMENT Operational Review Cello Health The Group’s healthcare business enjoyed another year of strong performance, delivering headline operating profit of £6.5m (2011: £6.1m) from gross profit of £31.3m (2011: £29.2m). This has been driven by continued spend from the business’s large, long term, global client relationships. The professional employee base has increased to 305 during the year (2011: 280) reflecting the addition of senior resource, particularly in the USA, to enable continued growth. Despite this senior headcount increase, operating margins have remained static at 20.8% (2011: 20.9%) which represents competitive levels versus the larger competitor set. Cello Health has increased the propor tion of pharmaceutical assignments won on the basis of joint pitches across multiple Cello Health companies. These are often won in competition with larger, consolidated healthcare services providers, often domiciled in the USA . It has also responded effectively to the increasing demand by clients for scientifically based data input into their marketing efforts based on actual patient outcomes. Cello Health is managed by a single executive Board comprising Stephen Highley (Chair), Julia Ralston (CEO USA) and Jane Shirley (CEO Europe and Asia), supported by a leadership team. The business has a central senior business development function. During the course of 2013 the board of Cello Health plans to transition its core operating brands into a single brand format reflecting the Cello Health positioning, as Cello Health transitions into the lead client facing identity. This will enable it to compete more effectively, with better sharing of professional resource, and to raise Cello Health’s market profile. The international prof ile of Cello Health has progressed considerably. In July 2012 Cello Health moved to new, enlarged premises in New York, complemented by the Philadelphia of f ice of MedErgy. During the course of 2013 the business will open an office in Chicago to service the North West of the US and the Philadelphia office is being materially expanded to allow fur ther growth in headcount. All of Cello Health’s core businesses are now represented in the US market, which is by far the largest market for such services globally. The business continues to invest in organic expansion. In 2012 investments were made in quantitative research to complement the dominant qualitative research focus of the business ; geogr aphical expansion ; the development of an integrated Market Access proposition; and the development of a focused Consumer Health of fering. The recent acquisition of Mash in ear ly 2013 has been a significant addition to the effor t to build a major global offering in the Consumer Health space. The Board of Cello Health is charged with demonstrating profi table revenue flow from these investment activities. Innovation is at the cor e of Cello Heal th’s proposition. Cello Health’s digital capabilities have continued to gain market traction. eVillage, the division’s social media research product for the pharmaceutical industr y, made a material contribution to revenues in 2012. In 2012 Cello Health also launched Cello Business Sciences, 5 CHAIRMAN’S STATEMENT Operational Review continued a bespoke web-based analytical tool for marketing directors in the pharmaceutical industry. Notable, disclosable client wins in 2012 included: Actelion, Ahlstrom, Airwave, Alix Partners, Allergan, Amgen, AVEBE, Aver y Dennison, Boehringer Ingelheim, Boots Opticians, Centro, CooperVision, EE, GE Healthcare, General Mills, Infineum, Johnson and Johnson, Mundiphar ma , NEST, Novar tis, Shionogi, Synergy, TATA Group, Tunstall Healthcare, and Vision Care. Cello Consumer Cello Consumer delivered headline operating profit of £3.0m (2011: £3.4m) on gross profi t of £32.7m (2011: £32.6m). This represented a solid recovery following a challenging first half in 2012 caused by a temporary slowdown of research activity by a range of large clients, consistent with that experienced by the market overall. Operating margins were 9.1% (2011: 10.4%). Cello Consumer is based on three core capabilities, Insight: helping clients identify market and customer issues and oppor tuni ties ; Cr eative : helping clients solve their customer issues and capture opportunities through communications processes; and Logistics: helping clients execute these plans mos t cos t ef fec tively. These capabilities ar e represented by 2CV and Face on the research side; Leith Group on the creative side; and by Bright Group on the logistics side. These core brands are in turn supported by a number of specialist sub brands. Cello Consumer is managed by an executive Board led by Mark Scott (Chair) and John Rowley (CEO) along with six other executives. The mission of the Board is to establish Cello Consumer as a leading global advisor to marketing clients, enabling them to better manage relationships with customers in an increasingly digital context. Cello Consumer responds to clients increasing need for speed of response, need to drive down cost and need to show immediate return on marketing investment. As par t of this process Cello Consumer will be 6 changing its name in 2013 into a client facing brand to help drive additional revenue into the core branded engines of the business. Cello Consumer has a very high quality, blue chip, client list that will underpin global business growth. The primar y client segments ser ved by Cello Consumer are fmcg, mobile telephony, computer games, financial services, as well as charities. The largest client accounted for less than 3% of total revenues for Cello Consumer. Cello Consumer has continued to develop a strong digital footprint. Through its brand Face, the Group has established an industry leading capability in social media based advisor y work , backed by software enabled analytical products. Through its brand Blonde, it also has a highly successful offering in digital communications and web-based marketing. In addition, through its brand Brightsource, it has developed an industry leading capability in digital based print management, communications planning and delivery. Cello Consumer has been rapidly transforming itself from a UK focused business into a global business. With offices in San Francisco, Los Angeles, New York, Singapore and Hong Kong, it can truly offer global coverage. International gross profits have grown from 18.2% in 2011 to 20.6% in 2012 and this trend is accelerating. CHAIRMAN’S STATEMENT Operational Review continued Notable, disclosable client wins in 2012 included: AB Inbev, Aer Lingus, Air Malta, Airwick, Aldi, ANZ, AOL, Arla, Asia Pacific Breweries, Avon, Bang and Olufsen, Barnes and Noble, BBC Global business, Ben & Jerry’s, Berry Bros, BHF furniture stores, British Gas, British Red Cross, Britvic, Camelot, Church & Dwight, Coutts, Dairy Crest, Debenhams, Delhaize Group, Edring ton, Elec trolux, EMC , Eurostar, Fitflop, Forestry Commission, General Motors, Glasgow 2014 Commonwealth Games, Hallmark, Heathrow Express, HSBC, ING, Johnson The Par tnership meets regularly and forms subgroups to address areas critical to the future of the business, notably innovation, international expansion and cross group wor king. Many Par tner s and Associates are alumni of Cello Academy. Cello Academy is the Group’s well respected and proprietary training programme which has been in place for seven years, and through which over 150 people have passed during that time. In addition there is a Cello graduate forum for the substantial annual graduate in-take of the Group. In 2012 33 new graduate trainees were recruited over the course of the year (2011: 28). In order to properly incentivise the Partnership the Group administers a robust and demanding annual bonus scheme that rewards based on performance. As par t of making a difference, Cello invests in he lping i t s pr ofes siona ls e ng age in socia lly contributive activities with a health orientation. In particular, Cello has invested in creating Talking Taboos, a research programme aimed at supporting selected charities to further develop their positions and raise their profile supported by market data. In 2013 Cello aims to launch Talking Taboos as a charitable foundation led by Vincent Nolan. & Johnson, Land Securities, Liberty Mutual, Lipton, Magic Radio, Magnum, Malaysia Airlines, Marie Curie Cancer Care, Marriott, Montpelier Group, Mortein, NBC , NHS, Nokia, O2, Odeon, Pf izer, Philips, Phones 4U, Powerade, Pronova, Quaker, RBK, RBS, Royal Mail, Save the Children, Scottish Widows, Sky, Skyscanner, Stansted Airpor t, Strategic Defence, Tesco, The Alzheimers Society, Timberland, Toyota, and Veolia Water. People Cello maintains a range of initiatives that span the entire Group, encompassing both Cello Health and Cello Consumer, which are aimed at developing and retaining the Group’s professional resource. At the heart of this is the Cello Partnership which comprises 44 Associates, 31 Partners and 13 Managing Partners. Current Trading and Outlook Cello began 2013 with a good level of secured forward bookings and has also seen encouraging levels of new business wins so far in 2013. This solid start to 2013 means that the Group is in a good position to progress against its growth goals. The strong balance sheet position of the Group means it is able to materially increase the full year dividend, as well as further invest in the growth strategy of the Group. At this early stage of the year, the Board is confident that current expectations for 2013 can be met. Allan Rich Non-Executive Chairman 12 March 2013 7 CELLO HEALTH COMPANIES Insight Research Group • Significant expansion of the US office including 50% growth in headcount and a move to bigger offices in Manhattan. • Closer and more sustained business relationships with significant Swiss, German, US and UK based pharmaceutical company clients. • Major new multiple project wins within a client base that continues to expand in Europe and the Far East. • A broadening and deepening of Insight’s digital footprint with more than £1m revenue generated from eVillage® projects started this year and a range of digital innovations in the pipeline. • Significant investment in quantitative research capabilities and partnering with advanced analytics company. • I mpor t a nt developme nt s in Cello H eal t h collaboration with MSI, MedErgy and The Value Engineers. MedErgy • Ongoing geographic expansion, with the opening of an office in New York, in addition to existing European and main Philadelphia offices. • Exceedingly strong growth year, suppor ted by broadening of the existing client base. • Broadening of the service offering with evidence as core, including market access and sales training in addition to medical communications. • Cello Health collaboration led to more integrated working with Insight and MSI to provide deeper, insight-driven, and evidence-based strategies to client assignments. • Addition of a substantial number of professionals to ensure support of both the current business and the infrastructure necessary for ongoing growth. MSI • Global strategic business continued to increase with 40% of revenues now generated from the USA, following the opening of a US office. 8 • Focus on new client wins in areas of high growth such as Specialit y Phar ma , Mar ket Access, Biotechnology and Diagnostics. • Continued success in collaboration in Cello Health collaboration with significant work delivered with MedErgy, Insight and Cello Business Sciences in areas such as Positioning, Segmentation and Value Proposition. Cello Business Sciences • Seamless Marketing Tools successfully deployed on Plan Optimisation projects with three major pharmaceutical partners. • Launched Patient Flow Analysis App and ROI Optimiser App, with Strategy and Forecast Apps being completed in Q1 2013. • New business opportunities realised with Cello Health collaborations. • Appointed Business Development professional as Head of Europe. • New cloud based Seamless Marketing Tools won Wirehive Best Tech Award for 2012. • Starting to expand offering into the USA. CELLO HEALTH COMPANIES The Value Engineers • Establishment of The Value Engineers Consumer Health brings proven brand consultancy tools and techniques to OTC brand owners. • Celebrated 20 years continuous track record of delivery of successful projects for Unilever. • Successful launch of new tools and techniques, including a new approach to concept testing and brand tracking. • New York off ice continuing to f lourish and increasingly winning and working for US domiciled clients. RS Consulting • Work with NHS and the health sector grew significantly, including large-scale and groundbreaking work on sensitive issues such as mental health and wellbeing. • Growing third sector business, with papers delivered at the SRA and MRS Charity and Third Sector conferences. • The majority of work continued to be global in scope, with emerging markets a key strength with Turkey and South Africa joining the BRIC nations in seeing considerable growth. • Successful integration of Leapfrog, with significant projects completed for GSK and Pfizer. Kudos • Kudos continued to consolidate their reputation as the premium data-collection resource for highlevel business research internationally. • 20 % increase in new business wins for 2012, including Market Strategies. • Increased business from wellbeing, healthcare and corporate health clients. • Significant growth in 2012 in emerging markets China, Korea, Brazil, Russia, India and the Middle East, with international work now accounting for 75% of overall revenue. 9 CELLO CONSUMER COMPANIES Brightsource 2CV • Very strong growth year, allowing the business to compete for much larger contract sizes. • Commitment to continued US grow th with investment in senior sales personnel, together with the opening of two fur ther sales offices in New York and Los Angeles, complementing s t r o n g g r ow t h f r o m co r e S a n F r a n ci s co operations. • Brightsource won Best in Print Production for 3rd year running at the Recommended Agency Register Awards and won awards at the Financial Services Forum and the DMA for its contribution tow a r d s b u ild i ng a n ew co m m u n i c a t io ns infrastructure for Lloyds Banking Group. • Technolog y and other time-based ser vices now account for 40% of GP, with a continued diversification away from traditional ‘managed services’ base. • Continued investment in graduate recruitment, 18 graduates have now joined in the last two years, bringing staff numbers up to 100. Face • Face US office achieved profit in first year of trading, with major global client wins from General Motors, NBC and Johnson and Johnson. • Face successfully launched its new off ices in Singapore and Hong Kong. • Face’s proprietary social media insight platform, Pulsar, helped it secure Tesco and Reck it t Benckiser as new clients to join O2, ING, RBS, Royal Mail and Unilever. 10 • Expanded focus on Asia with new sales office opening in Hong Kong early 2013, supplementing the existing Singapore base. • A continued focus on emerging markets with research projects conducted in Africa on behalf of the Girl Hub Foundation in Rwanda and PZ Cussons in Nigeria. • EXP, 2CV’s experiential measurement product, gained a significant upswing from 2012 London Olympics and owing to clients’ wider interest in establishing ROI on brand engagement. CELLO CONSUMER COMPANIES Leith Group Stripe The Leith Agency • Won ‘Outstanding Consultancy of the Year’ at the CIPR Awards 2012. • Major new business wins included Aldi (Scotland), Glasgow 2014 Commonwealth Games and Scottish Widows. • T he Sunday T imes B es t Compa nies 2013 shortlisted Leith under their “Ones to Watch” category. • Expanded the Stripe team – adding 9 new staff. • Major new business wins included Scottish Power, AG BARR, Glasgow 2014 and various Scottish Government projects. TMI • Leith further strengthened its reputation outside Scotland by winning Creative Agency of The Year in the North of England. • Another strong year for TMI, with significant business wins including Britvic, Malaysia Airlines, AER Lingus and the NHS. • The brand consultancy arm of Leith, called Leithal Thinking, opened offices in London and New York. • Over half of revenue came from outside of UK. Blonde • 2012 saw a mar ked increase in the size of contracts serviced. • Doubled employees in Blonde London through 2012. Tangible • Multiple awards won for IRN-BRU and Royal Mail digital campaigns. • Secured a number of wins in 2012 including: Multiple Sclerosis Society, Farm Africa, Visit England, Vanguard Investments, Nestle and NCP. • Launched MyRoyalMail employee portal for the UK’s second largest employer. • Delivered Social Media strateg y and digital suppor t for Royal Mail’s Olympic gold medal stamps and gold post box campaigns. • Won the project to build the Glasgow 2014 Commonwealth Games website. • Insight and data offering provided the focus for new projects from Visit England, Nandos and SEAT. • Continued grow th in the Royal Mail account saw Tangible engage with three of its business areas – Philatellic, MarketReach and Internal Communications. • Tangible won a DMA Gold for its Royal British Legion work, 2 FSF Commendations for BM Savings and Lloyds Banking Group and has been shortlisted for 5 data strategy awards in 2013. Opticomm • Established paid search engine marketing offering, now actively managing Google campaigns both in UK and localised across EMEA. • Online media planning and buying platforms established, allowing scalable growth and real time optimisation and reporting for our clients. • Secured major account win with British Red Cross legacy. 11 CASE HISTORIES Insight Research Group Discovery By using eVillage® over a 9 month period, with carers of a very rare condition, our client was better able to understand the market and close knowledge gaps, thereby shaping the commercial strategy for their product in this area. Delivery Topics were explored using a variety of tools and a mix of private vs. public tasks. This community was open for one week every month for nine months providing an opportunity to bring together an otherwise hard-to-reach audience. This longerterm community allowed us to respond to our client’s evolving objectives over time, and the flexibility in outputs offered (newsletters/formal presentations/client access to platform) helped to engage the broader client team in the results. MSI Discovery Working in collaboration with Cello Business Sciences, MSI won a project with a diagnostic imaging brand in a therapy area of huge growth, helping them to define their global launch strategy and segmentation for the brand and providing an optimised t ac tical plan including f inancial forecasts. Delivery The Cello approach combined the strategic and commercial skills of MSI with the analytics and web-based tools of Cello Business Sciences. The project benefi ted from added depth, using powerful processes to uncover insights and strategy, complemented by rigorous research and modelling techniques to add the robustness required by the client. The project was under taken in a pivotal six month period where the client turned their compound into a commercial asset. This resulted in a clear direction for the brand, a fully engaged and aligned internal team, and a new benchmark for product planning within the organisation. Cello Business Sciences Discovery Allergan, a global pharmaceutical co m p a ny, w a n t e d t o l a u n c h a medical aesthetic product in Europe and invited Cello Business Sciences to help optimise their marketing strategy and develop a compelling value proposition. 12 Delivery Cello Business Sciences helped Allergan develop a differentiated positioning and optimal route to market. Our new award winning Seamless Marketing Tools were used to pinpoint the opportunities and challenges for the brand and identify the critical path to success. “Fantastic work, you have really robustly given us what we needed” – Caroline Van Hove: Senior Director, Allergan. CASE HISTORIES 2CV Discovery As the proliferation and usage of smar tphones continues to grow, brands see huge potential in apps – not just for recruitment and retention of consumers, but also enabling them to interact with the brand in a very personal way. However, it can be difficult to understand the impact apps have in terms of brand perceptions, consumer behaviour and ultimately purchase and return on investment. Heineken Ireland developed an app around the Murphy’s stout brand which gave consumers the chance of a free pint when it rained – a first such foray into apps for the brand. To establish the ROI, Heineken commissioned the EXP (experiential) team at 2CV to research what the app was achieving in terms of driving positivity around the brand and delivering increased consumption. Delivery The approach utilised EXP’s bespoke digital platform; it looked at the impact of the app for regular versus non-regular consumers of the brand, and delivered a unique insight into the true consumer benefit of the app in the competitive market context. The research helped the app win two initiative awards for the Heineken team and is now the standardised measurement tool of choice for future app deployment. Blonde Discovery The aspiration for MyRoyalMail.com was to create a much more interactive and engaging site, which improved the provision of Royal Mail Group information, operations and news and also introduced and promoted a two-way dialogue between Royal Mail Group and its employees, in order to create a truly vibrant site that would become a genuine part of an employee’s working life. Delivery “Blonde have proved themselves to be an absolute asset to the Royal Mail Digital team. The experience and knowledge, which they bring to every project, is second to none. The MyRoyalMail project was incredibly sensitive with a number of unique challenges and requirements which the team needed to overcome. Blonde approached this project with enthusiasm and creativity, while at all times staying true to the objectives of the project and the primary audience the site was aimed at. The results speak for themselves, Blonde have transformed the extranet and made it an engaging place for frontline colleagues to engage with Royal Mail.” Abby Guthkelch: Head of Digital Communications, Royal Mail Group. Face Discovery As a global business, General Motors had identified a need for an efficient and cost effective method of screening, evaluating and optimising ad concepts at script stage across markets, in order to aid advertising development. Delivery Face developed a streamlined global process using its Global Community Platform. This has now become a standard methodology for General Motors, starting to replace traditional focus groups for more multi-market qualitative advertising development. General Motors especially value the cost effectiveness, speed, flexibility and robustness of the method, enabling them to turn round major multi-country projects (up to 10 countries and languages) in just 2 weeks from recruit to report. 13 CELLO PEOPLE A key focus for the Cello Group continues to be our People and Talent which are core to our success and future growth. The Group has a small central team driving various Talent initiatives across the company, and in 2012, this focused on a number of initiatives: The Cello Partnership Since i t s beginning , Cello ha s placed gr eat importance on the concept of Partnership, linking like-minded peers around the Group to enable collaboration at all levels. Cello believes this scheme puts the Group at a distinct advantage. Our vision for the Partnership is to: allow collaboration of the best minds, freshest ideas and breadth and depth of skill sets, and to apply these to our clients’ business challenges. Currently the Par tnership represents 11% of the Cello Group across 3 levels, Associate, Par tner and Managing Par tner. The Group currently has 4 4 Associates, 31 Par tner s and 13 Managing Par tners. Nomination to the Par tnership occurs once a year through a formal appointment process. Associates Partners Managing Partners By bringing together this group of like-minded individuals, Cello’s culture is being embedded throughout the organisation and creating important links between the different companies within the Group. This scheme encompasses Cello Health and Cello Consumer. The Par tnership enables innovation to be driven at a cross company, cross vocational level. 14 Member ship of the Par tner ship is something the Group’s employees aspire to, and Cello is committed to continuing to build the Partnership, both as a tool enabling cross company interaction and innovation, and as a retention tool. CELLO PEOPLE MasterClasses An exciting development for Cello during 2012 has been the development of a series of MasterClasses designed to run alongside the Academy. These are aimed at senior members around the Group, offering a range of Master Classes in different geographic locations. Recent MasterClasses included ‘Negotiating with Procurement’ and ‘Customer Relationship Management’. Each year, building on feedback from our operating companies, the Group expands the scope of the MasterClasses to ensure focus on local business requirements and to suppor t employees growth and personal development. Graduate Intake In 2011 the Group launched a ‘Class of ’ initiative, designed to provide the annual Graduate intake with both an overview of the organisation and effective networking with fellow graduates. In 2012, the Group employed 33 graduates, who, shortly after they joined, met on the Leith barge in Edinburgh for a networking event. A second event with Graduates and Academy Alumni took place in November and included an external Futurologist speaker. Cello Academy For the coming year the focus continues to be to offer a varied and valuable range of events and initiatives for those at different levels within the organisation. Cellos’ people remain its key differentiator and the Group will continue to ensure a flow of initiatives motivate and help retain the Talent with the Cello Group. Under the Cello Talent umbrella, the Cello Academy continues to flourish, with over 150 Cellists having now passed through the Academy. Its reputation has been cemented as a valuable training and net wor k ing envir onment wor k ing alongside individual company schemes. In preparation for its launch in 2013, the Group commenced planning for Cello Academy USA. This reflects the growing size of the international business. 15 TALKING TABOOS It’s called ‘Talking Taboos’ Talking Taboos, a campaigning brand, was born out of a whole company view to give something back to society and to tackle health and social issues using Cello’s experience and resources in the healthcare space. Cello Group is a progressive business which takes its responsibilities to society extremely seriously. The Group aims to consider all the impacts of the business, from environmental to social, and look for ways in which it can minimise its environmental impact and maximise the benefit it brings to society. Cello gener ates consumer insight s , deliver s marketing advice and communications in Health and Consumer markets that touch many people’s lives. The Group feels it is its duty to do this ethically and responsibly. Cello is for tunate to be able to use its skills to have a positive impac t on society in its daily activity; Leith’s award winning campaigns tackling cancer screening, knife crime, drug and alcohol abuse; 2CV’s insights delivering behaviour change around teen road safety for TfL and teenage risk behaviours for the Department of Health; Insight’s extensive work into a range of new drugs that will improve the lives of people with breast cancer, HIV and diabetes; Brightsource/Tangible’s work with numerous charitable organisations including British Red Cross and British Heart Foundation. Cello has developed an initiative that will allow its skills and exper tise to be utilised in areas where clients don’t currently have the resources or remit... It enables the best of our people to contribute in an area where Cello believes it can have the greatest impact. Maximising contribution to society, but also building a stronger, more coherent, motivated business. For the initial project, Talking Taboos focused on self-harm, par tnering with YoungMinds, the UK’s leading young people’s mental health and wellbeing charity. YoungMinds identified a clear lack of knowledge and support out there about young people and self-harm amongst parents, schools, NHS staff and youth services. Pooling resources across the Group, a groundbreaking research repor t ‘Talking self-harm’ was produced. The research used a suite of services including advanced qualitative research, professional online community forums and social media discourse research, integrated with a nationally representative quantitative sample of 2, 50 0, maximising the expertise of each operating company. The report highlighted some astonishing statistics which revealed a real problem surrounding the perceptions of self-harm and young people in the UK. • 3 in 4 young people don’t know where to turn to talk about self-harm. • A third of parents would not seek professional help if their child was self-harming. • A l m os t ha l f of G Ps fe e l t ha t t h ey d o n’ t understand young people who self-harm and their motivations. • 2 in 3 teachers don’t know what to say to young people who self-harm. 16 TALKING TABOOS President of the Royal College of Psychiatrists, Professor Sue Bailey said “This report is a brave and timely call to action for us to set aside the rhetoric about self-harm.” Engaging stakeholders was crucial to the success of the project to help establish the credibility of the research within the sector. A stakeholder briefing event was held at the Houses of Parliament, chaired by Claire Perry MP, which was attended by 150 key stakeholders including the Samaritans, Mental Health Foundation, Department of Health, Stonewall and Paul Hamlyn Foundation. The event included a compelling post presentation debate around self-harm with opinion formers from across the UK. Creating a national conversation was one of the key objectives of Talking Taboos. Stripe Communications delivered a successful media strategy to get people talking about self-harm and how to better support young people. This led to cover age on BBC Breakfast, BBC Newsbeat, ITV, The Times and Metro, as well as sector coverage in the Lancet, Special Education Needs and Net Doctor. Social media played an impor tant par t in star ting the dialogue online about self-harm – a Talking Taboos twitter page and handle were created, gaining 346 followers in the lead up to and following the launch. High profile tweeters like Stephen Fry and Dr Christina Jensen were targeted to increase awareness about the project through their twitter followers. Cello staff were also key to the success contributing to the conversation on social media and inviting key clients to the event. Talking Taboos has opened up a holistic dialogue amongst professionals and young people about self-harm. The project has been mentioned in the Welsh Assembly, the Parenting UK conference and Cello was invited to be a keynote speaker at the Safeguarding Children conference in February 2013. This project has star ted a conversation which wouldn’t have existed otherwise and that’s something really exciting to replicate in the future. “Thank you for bringing wider attention to the issue of self-harming young people. Our daughter, now 16 has been engaged in self-harming for 2 years. She is receiving counselling, etc but importantly your report and the BBC coverage this morning should go a long way towards helping parents better understand what is going on and maybe why. Once again, thank you!” Gerry Cello Operating Companies involved in the research: 2CV – Led and delivered the overall project from design to delivery – specifically providing advanced qualitative techniques to understand how teachers respond to the issue in schools, analytics to analyse helpline data, quantitative research to provide direction and highlight the scale of the issues. Blonde – Digital support and outbound invitation design. Face – Social media research focused on teens. Leapfrog – Understanding the parental view on the challenges of bringing up and caring for teens and the way they view and would approach self-harm if confronted with it. Leith Agency – Design of Talking Taboo identity, report and presentation animation. MedErgy – Discourse analysis reviewing medical journals and research internationally. Stripe – Led and delivered PR media strategy and internal communications. Insight Research Group – Desk research leading to longitudinal GP and HCP research using proprietary tool and healthcare professional community eVillage. RS/MRUK – Representative qualitative phase survey of UK GPs to further explore issues identified and to quantify attitudes, challenges and needs of GPs when dealing with young patients who self-harm. Tangible – Banners and launch event materials. @talkingtaboos ‘talking self-harm’ report available from: www.talkingtaboos.com 17 DIRECTORS’ REPORT The directors present their report and the audited consolidated fi nancial statements of Cello Group plc for the year to 31 December 2012. To the best of their knowledge the Directors’ Report includes a fair view of the business and position of the Group, together with a description of the principal risks and uncertainties faced by the Group. Principal Activities The principal activity of the Group and subsidiary undertakings during the year under review is that of market research, consulting and direct marketing services. The principle activity of the Company during the year under review is that of a holding company. Review of the Business and Future Developments The results for the profit year ended 31 December 2012 are set out in the consolidated income statement on page 28. These show a loss for the year of £0.3m (2011: loss of £0.3m). An interim dividend of 0.58p per share was paid in January 2013 (2011: 0.55p) and a final dividend of 1.42p per share is proposed (2011: 1.17p). The directors are required by the Companies Act to present a business review, repor ting on the development and performance of the Group and the Company during the year and their positions at the end of the year. A review of the development and future prospects of the business and key performance indicators (“KPIs”) are given in the Chairman’s Statement on pages 2 to 7 which are incorporated in this report by reference. The Group’s KPIs are outlined in various sections of this review. Whilst there are many f inancial measures that the Group monitors on a regular basis our core financial objectives are: 18 The Company regularly reviews the risks and uncertainties facing the business through a regular series of board and operational meetings. The directors believe the current largest risks are as follows: 1. UK economy The Group’s business is domiciled in the UK but 37.0 % of the Group’s revenues are from clients based overseas. It is clear that the current economic downturn and the reduction in public sector spending continues to affect the Group and there is a risk that further downturn in any of our markets will have an additional effect. However, the mix of services we are offering is proving resilient as the economy stabilises. 2. Loss of the Group’s key clients Client relationships are crucial to the Group and the strength of them is key to its continued success. The risk is mitigated by our client base being broadly spread and by several of our pharmaceutical clients being subject to longer term master service agreements. The loss of any large client would require replacement. The Group’s client review programmes help mitigate this risk. 3. Loss of key staff The Group’s directors and staff are critical to the servicing of existing business and the winning of new accounts, departure of key staff could be a risk to maintaining client service. With that risk in mind all senior staff are subject to financial lock-ins and long term incentive arrangements, as well as being under contractual non-compete and non-solicit clauses. Directors The directors of the company who were in office during the year and up to the date of signing the financial statements were: • Headline operating profit Mark Scott • Headline operating margin Mark Bentley • Like-for-like gross profit Paul Hamilton • Headline operating cash flow conversion Will David • Headline basic earnings per share Allan Rich DIRECTORS’ REPORT Biographical details of the directors at the date of this report are set out on pages 84 to 85. Directors’ Interests in Shares and Options Directors’ interests in the shares of the Company were as follows: Number of ordinary shares of 10p each At 31 December 2012 Number of ordinary shares of 10p each At 31 December 2011 875,919 35,000 50,000 15,000 977,785 803,219 35,000 50,000 15,000 977,785 Mark Scott Mark Bentley Paul Hamilton Will David Allan Rich Under the rules of the EMI Share Option Scheme (the “EMI Scheme”), the Unapproved Share Option Scheme 2004 (the “Unapproved Scheme 2004”), the PSP Option Scheme 2010 (the “PSP 2010”) and the Approved Share Option Plan 2009 (the “Approved Plan 2009”), the Executive Directors have been granted an interest in options over ordinary shares of 10p each as follows: Mark Scott Mark Scott Mark Scott Mark Scott Mark Scott Mark Scott Mark Bentley Mark Bentley Mark Bentley Mark Bentley Mark Bentley Mark Bentley (1) (2) (3) (4) (3) (3) (1) (2) (3) (4) (3) (3) At 1 January 2012 number of ordinary shares of 10p each Granted in the year number of ordinary shares of 10p each Lapsed in the year number of ordinary shares of 10p each At 31 December 2012 number of ordinary shares of 10p each Date from which exercisable Expiry date Exercise price (pence) 100,000 200,000 430,000 72,000 170,000 – 81,633 81,633 214,000 72,000 130,000 – – – – – – 170,000 – – – – – 130,000 – – – – – – – – – – – – 100,000 200,000 430,000 72,000 170,000 170,000 81,633 81,633 214,000 72,000 130,000 130,000 Nov 2004 Nov 2004 June 2013 June 2013 June 2014 July 2015 June 2008 June 2008 June 2013 June 2013 June 2014 July 2015 Nov 2014 Nov 2004 June 2020 June 2020 June 2021 July 2022 June 2015 June 2015 June 2020 June 2020 June 2021 July 2022 100.0 100.0 10.0 31.5 10.0 10.0 122.5 122.5 10.0 31.5 10.0 10.0 (1) Granted under the EMI Scheme (2) Granted under the Unapproved Scheme 2004 (3) Granted under the PSP 2010 (4) Granted under the Approved Plan 2010 None of the options that have been granted were exercised in the year. There were no changes in directors interests between the year end and the date of signing the Groups accounts. 19 DIRECTORS’ REPORT Substantial Shareholdings Other than the directors’ interests disclosed on the previous page, the Company is aware of the following shareholdings of 3% or more in the issued share capital at 28 February 2013: No. of shares % Ennismore Fund Management Limited 6,367,560 7.71 Octopus Asset Management Limited 5,790,689 7.01 Henderson Global Investors 5,322,555 6.44 Universities Superannuation Scheme 4,012,952 4.86 Vincent Nolan 3,841,545 4.65 Hargreave Hale 3,725,000 4.51 Share Capital Changes to the Company’s share capital during the year are given in note 25 to the consolidated financial statements. Treasury Shares T he tot al numbe r of sha r es in t r ea sur y at 31 December 2012 and 31 December 2011 was 237,000 (0.3% of the issued share capital). The purpose of the treasury shares is to satisfy future earn out payments and/or option awards. Statement of Directors’ Responsibilities The directors are responsible for preparing the Annual Repor t and the f inancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union (“EU”), and the parent 20 company financial statements in accordance with United Kingdom ( “ UK” ) Gener ally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profi t or loss of the Group for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether IFRSs as adopted by the EU and applicable UK Accounting Standards have been followed, subject to any material depar tures disclosed and explained in the Group and parent company financial statements respectively; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. DIRECTORS’ REPORT Employees Research and Development Activities It is the Company’s policy not to discriminate between employees or potential employees on any grounds. Full and fair consideration is given to the recruitment, training and promotion of disabled people and, should staff become disabled during the course of their employment, effor ts are made to provide appropriate re-training. The Company places enormous impor tance on the contributions of its employees and aims to keep them informed of developments in the Company through a combination of meetings and electronic communication. During the year the Group spent £358,000 (2011: £38,000) on the development of new software products which are expected to generate economic benef its in the future. These amounts were capitalised as intangible assets. £167,000 (2011: £145,000) of amor tisation was charged to the income statement during the year. Directors Third Party Indemnity Provisions A qualifying third party indemnity provision was in place for directors throughout the year and at the date of approval of the financial statements. Policy on Payment to Creditors Statement as to Disclosure of Information to the Auditors The directors who were in off ice on the date of approval of these f inancial statements have confirmed that, as far as they are aware, there is no relevant audit information of which the auditors are unaware. Each of the directors has confirmed that he, as far as he is aware, has taken all the steps that he ought to have taken as a director in order to make him aware of any relevant audit information and to establish that the Company’s auditors are aware of the information. The Company agrees the terms and conditions under which business transactions with suppliers are conducted. It complies with these payment terms, provided that it is satisfied that the supplier has provided the goods or services in accordance with agreed terms and conditions. Independent Auditors The effect of the Company’s payment policy is that the number of days credit taken for purchases represents 45 days at 31 December 2012 (2011: 53 days). By order of the Board A resolution to reappoint PricewaterhouseCoopers LLP, Char tered Accountants, as auditors will be proposed at the for thcoming Annual General Meeting. Mark Bentley Company Secretary 12 March 2013 21 CORPORATE GOVERNANCE The Board of Cello Group plc appreciates the value of good corporate governance not only in the areas of accountability and risk management but also as a positive contribution to the business. The Board considers that the Company, whilst trading on the AIM Market, has adopted those requirements of the UK Corporate Governance Code (2010) (the “Code”) as best applicable to the Company given its current size. Board Structure The Board comprises two Executive Directors and three Non-Executive Directors. The roles of Chairman and Chief Executive are separate. The Non-Executive Directors are independent of management and free from any business or other relationship with the Company other than owning shares. The directors’ biographies appear on pages 84 to 85. The Board is scheduled to meet at leas t six times a year and additionally when necessary. At each scheduled meeting of the Board, the Chief Executive and Finance Director repor t on the Group’s operations. The Board is satisfied that it is provided with information in an appropriate form and quality to enable it to discharge its duties. All directors are subject to re-election by shareholders at the first opportunity after their appointment. All directors are required to retire by rotation and one third of the Board is required to seek re-election each year. The Chairman ensures that the directors are permitted to take independent professional advice as required. All directors have access to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. The following committees of the Board have been established to deal with specific aspects of the Company’s affairs. 22 Audit Committee The Audit Committee consists of three NonExecutive Directors; Will David as Chairman, Paul Hamilton and Allan Rich. Will David is considered to have relevant financial experience to chair this Committee. The Committee considers matters relating to the financial accounting controls, the repor ting of results, and the effectiveness and cost of the ex ternal audit. It aims to meet at least twice a year with the Company’s auditors in attendance. Other directors attend as required. The Company Secretary provides secretarial support to the Committee. The terms of reference of the Committee are available on request. Nomination Committee The Nomination Commit tee consis ts of t wo Independent Non- E xecu tive Direc tor s ; Paul Hamilton and Will David. The Committee is chaired by Paul Hamilton and meets as necessary. The Committee is formally constituted with written terms of reference and is responsible for reviewing and mak ing pr oposals to the B oar d on the appointment of directors. The Company Secretary provides secretarial support to the Committee. The terms of reference of the Nominations Committee are available on request. Remuneration Committee T h e R e m u n e r a t i o n C o m m i t t e e i s fo r m a ll y constituted with written terms of reference and makes recommendations to the Board with regard to remuneration policy and related matters. The Remuneration Committee consists solely of two of the Independent Non-Executive Directors, Paul H a mil ton , w ho chair s t he C om mi t te e and Will David. However, the Chief Executive attends as required and has the right to address the Committee. The Committee aims to meet at least twice a year. The terms of reference of the Committee are available on request. CORPORATE GOVERNANCE Remuneration Committee continued Fur ther details of the Company’s policies on remuneration, including details of directors’ share options are given in the Report of the Remuneration Committee on pages 24 to 26. Shareholder Communications T he Company believes in maint aining good communications with shareholders. The Chief Executive and Finance Director meet analysts and institutional shareholders regularly with a view to ensuring that the strategies and objectives of the Company are well understood. The Senior Independent Director will not ordinarily attend such meetings other than at the request of the relevant shareholder. However, he is available to shareholders if they have concerns which the Chairman, Chief Executive or the Finance Director have failed to resolve or for which such contact is inappropriate. business, the Board does not consider it would be appropriate to have its own internal audit function. An internal audit function will be established as and when the Group is of an appropriate size but meanwhile the audit of internal fi nancial controls forms par t of the responsibilities of the Group’s finance function. All the day-to-day operational decisions are taken initially by the Executive Directors or subsidiary directors, in accordance with the Group’s strategy. Where appropriate, the Board or subsidiary directors approve such decisions. The Executive Directors or subsidiary directors are also responsible for initiating all transactions and authorising all payments, save for those relating to their employment. As such, the internal controls primarily comprise: • the segregation of duties; • the review of per tinent f inancial and other information by the Board on a regular basis; • the prior approval of all signif icant strategic decisions; Going Concern • having a formal strategy for business activities. The directors have satisfied themselves that the Company and Group have adequate resources to continue in operational existence for the foreseeable future, and for this reason the financial statements continue to be prepared on a going concern basis. The Environment Internal Control Employees The Board is responsible for ensuring that the Group maintains a system of internal controls and risk management, including suitable monitoring procedures. The objective of the system is to safeguard Group assets, ensure proper accounting records are maintained and that the f inancial information used within the business and for publication is reliable. Any such system can only provide reasonable, but not absolute, assurance against material misstatement or loss. The Group employs nearly 800 employees and places a great deal of emphasis on their training and retention. The central programme for rising talent, “Cello Academy”, is now a well established feature of the Group’s staff development initiatives. Given the Group’s size and the nature of its 12 March 2013 The activities of the Group do not have a high impact on the environment. However, the Group aims to ensure that where waste can be reduced, this is done efficiently, by recycling where viable. On behalf of the Board Mark Bentley Company Secretary 23 REPORT OF REMUNERATION COMMIT TEE The directors have applied the principles of good governance relating to directors’ remuneration as described below: Remuneration Committee The Remuneration Committee is authorised on behalf of the Board to determine the Company’s remuner ation policy on Executive Direc tor s’ remuneration, including pension rights and share option awards, and the terms of their ser vice contracts. The Committee aims to meet at least twice a year and supervises the operation of share schemes and other employee incentive schemes. The remuneration and terms and conditions of appointment of the Non-Executive Directors will be set by the Board. No director shall participate in discussions relating to his own remuneration. The Remuneration Committee consists of two Independent Non- E xecu tive Direc tor s ; Paul H a mil ton , w ho chair s t he C om mi t te e , a nd Will David. Remuneration Policy The policy of the Board is to provide executive remuneration packages designed to attract, motivate and retain directors of the calibre necessary to maintain the Group’s position as a market leader and to reward them for enhancing shareholder value and return on investment. The remuneration should also reflect the directors responsibilities and contain incentives to deliver the Group’s objectives. The main elements of the Executive Directors’ remuneration packages are as follows: • basic salary; • performance-related bonus; • benefi t package – car allowance and health care insurance; • share option incentives – details of share options granted to the Executive Directors are shown on page 19; • contributions to directors’ individual def ined contribution pension schemes. T he Remuner ation Commi t tee r eviews the co m p o n e n t s of e a c h E xe cu t i ve D i r e c t o r ’s remuneration package annually. 24 REPORT OF REMUNERATION COMMIT TEE Directors’ Remuneration Total Benefi ts Emoluments £’000 £’000 Salary/Fees £’000 Bonus £’000 Mark Scott Mark Bentley Allan Rich Paul Hamilton Will David Paul Walton* 255 189 50 30 30 – 63 43 – – – – 13 9 – – – – Total 554 106 22 Pension £’000 Total 2012 £’000 Total 2011 £’000 331 241 50 30 30 – 38 28 – – – – 369 269 50 30 30 – 370 278 50 30 30 200 682 66 748 958 *Resigned on 31 December 2011 Directors’ Titles and Service Arrangements Name Title Date of appointment Notice period Allan Rich Mark Scott Mark Bentley Paul Hamilton Will David Non-Executive Chairman Chief Executive Group Finance Director Senior Non-Executive Director Non-Executive Director 5 April 2005 5 May 2004 1 May 2005 8 October 2004 8 October 2004 3 months 12 months 12 months 6 months 6 months Long Term Incentive Arrangements In 2004 the Company established an EMI Share Option Scheme and an Unapproved Share Option Scheme. Vesting of the share options awarded to Mark Scott in November 2004 under the EMI scheme and the Unapproved Share Option Scheme 2004 are not subject to performance conditions, but the vesting of the share options granted to Mark Bentley in June 2005 under these plans was subject to performance conditions which subsequently have been met. On 4 June 2006 the Board adopted the Cello Group plc Performance Share Plan 2010 (the “PSP 2010”), as the principal long term incentive plan for the Group’s most senior executives. The performance measure for the PSP 2010 is Total Shareholder Return (“TSR”) relative to a comparator group of the Company’s peers over the three years following the date of the award. The proportion of PSP 2010 awards which vest will be calculated as follows: Cello relative TSR performance Below median Median Upper quartile Between median and upper quartile Proportion of award vesting nil 25% 100% interpolation between 25% and 100% On 17 November 20 09 the B oard adopted the Cello Group plc HM Revenue & Customs Approved Share Option Plan 2009 (the “Approved Plan 2009”) and on 15 March 2011 adopted the Cello Group plc Unapproved Option Plan 2010 (the “Unapproved Plan 2010”). Under the Approved Plan 2009 and the Unapproved Plan 2010 (the “Option Plans”) performance conditions will be tailored to each participant according to his or her seniority and responsibilities and will be based on performance as measured against an appropriate combination of Company, Division and Group 25 REPORT OF REMUNERATION COMMIT TEE Long Term Incentive Arrangements continued targets and the extent to which these are achieved or exceeded over the per formance period will determine the propor tion of each par ticipant’s options which vest. Awards under the Option Plans to main Board directors will be subject to the performance conditions which apply to awards under the PSP 2010. The Committee will review the Option Plans on a regular basis and may amend the performance conditions from time to time. Market Value of Shares The market value of the shares at 31 December 2012 was 37.5p and the high and low prices during the year were 45.0p and 32.5p respectively. On behalf of the Board Paul Hamilton Chairman – Remuneration Committee 12 March 2013 26 INDEPENDENT AUDITOR’S REPORT – GROUP We have audited the Group financial statements of Cello Group plc for the year ended 31 December 2012 which comprise the Consolidated Income St a te m e n t a n d C o ns olid a te d St a te m e n t of Comprehensive Income, Consolidated Balance Sheet, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity and the Notes to the Consolidated Financial Statements. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Respective responsibilities of directors and auditors As explained more fully in the Statement of Directors’ Responsibilities set out on page 28, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This repor t, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Par t 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements suff icient to give reasonable assurance that the f ina ncial s t ate me nt s a r e fr ee fr om mate r ial misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed ; t he r ea sona ble ness of signif ic a nt accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the Group financial statements: • give a true and fair view of the state of the Group’s affairs as at 31 December 2012 and of its loss and cash flows for the year then ended; • have been properly prepared in accordance with IFRSs as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the group financial statements are prepared is consistent with the Group financial statements. Matters on which we are required to report by exception We have nothing to repor t in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • cer tain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other matter We have repor ted separ ately on the parent company financial statements of Cello Group plc for the year ended 31 December 2012. David Snell (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 12 March 2013 27 CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2012 Notes Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 Continuing operations Revenue Cost of sales 2 135,141 (70,046) 127,714 (65,910) Gross profit 2 65,095 61,804 Administration expenses 4 (63,079) (59,775) Operating profit 2 2,016 2,029 Finance income Finance costs 3 3 Profit on continuing operations before taxation Taxation 9 Profit/(loss) on continuing operations after taxation 76 (712) 86 (885) 1,380 1,230 (1,224) (1,564) 156 (334) (516) 64 Loss for the year (360) (270) Attributable to: Owners of the parent Non-controlling interests (386) 26 (587) 317 (360) (270) (Loss)/profit from discontinued operations 10 Notes Year ended 31 December 2012 Year ended 31 December 2011 From continuing operations 12 0.16 p (0.90)p From discontinued operations 12 (0.65)p 0.09 p Total basic loss per share 12 (0.49)p (0.81)p From continuing operations 12 0.16 p (0.90)p From discontinued operations 12 (0.65)p 0.08 p Total diluted loss per share 12 (0.49)p (0.81)p Basic earnings/(loss) per share Diluted earnings/(loss) per share 28 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2012 Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 Loss for the year (360) (270) Other comprehensive income: Exchange differences on translation of foreign operations (287) 208 Total comprehensive income for the year (647) (62) Total comprehensive income attributable to: Owners of the parent Non-controlling interest (673) 26 (379) 317 Total comprehensive income for the year (647) (62) Total comprehensive income attributable to owners of the parent arises: From continuing operations From discontinued operations (164) (509) (437) 58 Total comprehensive income attributable to owners of the parent (673) (379) 29 CONSOLIDATED BAL ANCE SHEET 31 DECEMBER 2012 Notes 31 December 2012 £’000 31 December 2011 £’000 13 14 15 24 71,028 1,790 2,289 463 73,823 2,373 2,176 577 75,570 78,949 29,935 4,148 29,131 4,170 34,083 33,301 (29,717) (582) (498) (108) (23) (5) (29,968) (1,190) (959) (2,268) (39) (55) (30,933) (34,479) 3,150 (1,178) 78,720 77,771 (12,320) (280) (26) (498) (10,806) – (43) (799) (13,124) (11,648) 65,596 66,123 8,226 18,188 28,228 50 10,636 343 (124) 7,853 18,104 28,742 50 10,389 209 163 Equity attributable to owners of the parent Non-controlling interests 65,547 49 65,510 613 Total equity 65,596 66,123 Goodwill Intangible assets Property, plant and equipment Deferred tax assets Non-current assets Trade and other receivables Cash and cash equivalents 17 18 Current assets Trade and other payables Current tax liabilities Borrowings Provisions Obligations under finance leases Derivative financial instruments 19 20 21 22 23 Current liabilities Net current assets/(liabilities) Total assets less current liabilities Borrowings Provisions Obligations under finance leases Deferred tax liabilities 20 21 22 24 Non-current liabilities Net assets Equity Share capital Share premium Merger reserve Capital redemption reserve Retained earnings Share-based payment reserve Foreign currency reserve 25 The financial statements on pages 28 to 70 were approved by the Board of Directors on 12 March 2013 and signed on its behalf by: Mark Scott Director Mark Bentley Director 30 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2012 Notes Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 Net cash generated from operating activities before taxation 27 6,835 7,024 (1,874) (1,266) 4,961 5,758 26 (1,432) 75 (358) (2,037) 22 (975) 25 (38) (2,767) (3,726) (3,733) – (1,386) (3,800) (461) 5,500 (50) (911) 2,541 (709) (9,494) (1,430) 11,300 (61) (704) (1,108) 1,443 Tax paid Net cash generated from operating activities after taxation Investing activities Interest received Purchase of property, plant and equipment Sale of property, plant and equipment Expenditure on intangible assets Purchase of subsidiary undertakings 14 Net cash used in investing activities Financing activities Proceeds from issuance of shares Dividends paid to equity holders of the parent Repayment of borrowings Repayment of loan notes Drawdown of borrowings Capital element of finance lease payments Interest paid 11 Net cash (used)/generated in financing activities Net increase in cash and cash equivalents 127 Exchange losses on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at end of the year (149) 4,170 18 4,148 3,468 (95) 797 4,170 31 CONSOLIDATED STATEMENT OF CHANGES IN EQUIT Y FOR THE YEAR ENDED 31 DECEMBER 2012 Capital Merger redemption reserve reserve £’000 £’000 Share capital £’000 Share premium £’000 6,164 15,738 26,741 50 – – – – Currency translation – – – – Total comprehensive income for the year – – – – At 1 January 2011 Retained earnings £’000 Share-based payment reserve £’000 9,187 112 Total Foreign attributable currency to the exchange owners of reserve the parent £’000 £’000 (45) 57,947 Noncontrolling interest £’000 Total equity £’000 296 58,243 Comprehensive income: Loss for the year (587) – – (587) – 208 208 – 208 (379) 317 (270) Other comprehensive income: – (587) – 317 208 (62) Transactions with owners: Shares issued (note 25) 1,689 2,366 4,500 – – – – 8,555 – 8,555 Credit for share-based incentives – – – – – 97 – 97 – 97 Deferred tax on share-based payments recognised directly in equity – – – – (1) – – (1) – (1) Transfer between reserves in respect of impairment – – – – – – – Dividends (note 11) – – – – – – Total transactions with owners 1,689 2,366 2,001 – 1,789 97 – 7,942 As at 31 December 2011 7,853 18,104 28,742 50 10,389 209 163 65,510 – – – – – – Currency translation – – – – Total comprehensive income for the year – – – – (2,499) – 2,499 (709) (709) – – (709) 7,942 613 66,123 Comprehensive income: Loss for the year (386) (386) 26 (360) Other comprehensive income: – (386) – (287) (287) – (287) – (287) (673) 26 (647) Transactions with owners: Shares issued (note 25) 373 84 898 – – – – 1,355 – 1,355 Credit for share-based incentives – – – – – 134 – 134 – 134 Deferred tax on share-based payments recognised directly in equity – – – – 17 – – 17 – 17 Changes in non-controlling interests in shareholdings – – – – 590 – – 590 Transfer between reserves in respect of impairment – – – 1,412 – – – Dividends (note 11) – – – (1,386) – – 373 84 – 8,226 18,188 Total transactions with owners As at 31 December 2012 32 (1,412) – (514) 28,228 – 633 134 50 10,636 343 (124) (1,386) 710 65,547 (590) – – (590) – – (1,386) 120 49 65,596 CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING POLICIES General Information Cello Group plc and its subsidiaries (the “Group”) provides market research, consulting and direct marketing services. Cello Group plc is incorporated in England and Wales under the Companies Act 1985 and is domiciled in the United Kingdom. The company is a public limited company, which is listed on the Alternative Investment Market (“AIM”) of the London Stock Exchange. The address of the Company’s registered office is 11-13 Charterhouse Buildings, London, EC1M 7AP. The consolidated financial statements are presented in UK sterling, which is also the functional currency of the parent company. The following new and revised standards and interpretations have been adopted for the financial year beginning 1 January 2012 but do not have a material impact on the Group: • IFRS 1 (amendment) First-time adoption – fixed dates and hyperinflation • IFRS 7 (amendments) Financial instruments : disclosures – disclosures on transfers of assets • IAS 12 (amendment) Income taxes – deferred tax on investment property A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2012, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group, although the full impact is being assessed by management. Significant Accounting Policies (1) Basis of Preparation The consolidated f inancial statements of Cello Group plc have been prepared in accordance with International Financial Repor ting Standards as adopted by the European Union ( “IFRSs” ), IFRIC interpretations and the Companies Act 2006 applicable to companies repor ting under IFRSs. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The Group’s business activities, performance and position are set out in the Chairman’s Statement on pages 2 to 7 and an assessment of the risks and uncertainties is set out in the Directors’ Report on page 18. During the year the Group generated a prof it before tax on continuing activities of £1.4m and excluding non-recurring restructuring costs and other non-headline charges the Group generated a profit before tax of £7.0m. The Group meets its day-to-day working capital requirements through its bank facilities. The Group’s bank facilities consist of a £4.0m overdraft facility and a £25.0m revolving credit facility which is committed to March 2016. £12.7m of the revolving credit facility is undrawn at 31 December 2012 and the Groups forecasts and projections show that the Group is able to operate within the level of its current facilities. Af ter reviewing the Group’s per formance and forecast future cash flows, the directors consider the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing the Group’s financial statements. (2) Basis of Consolidation The Group’s financial statements consolidate the financial statements of the Company and all of its subsidiary under takings. Subsidiaries are entities controlled by the Group. Control is achieved when the Group has the power to govern the financial and operating policies of an entity which generally accompany a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or conver tible are considered when assessing whether the Group controls another entity. 33 CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING POLICIES Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases. The Group uses the purchase method of accounting to account for the acquisition of subsidiaries. Consideration is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets and liabilities acquired and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. Acquisition related costs are expensed as incurred. Inter-company transactions, balances and unrealised gains are eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The Group treats transactions with non-controlling interests as transactions with equity owners. For purchases of non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains and losses of disposal to non-controlling interests are also recorded in equity. (3) Foreign Currencies Sterling is the functional currency of the Company and the presentation currency of the Group. The functional currency of subsidiaries is the local currency of the primary economic environment in which the entity operates. Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transaction. Foreign exchange gains or losses on monetary assets and liabilities denominated in foreign currencies resulting from the settlement of such transactions and from the translation to the rate prevailing at the year end 34 are recognised in the income statement. The f inancial statements of subsidiaries whose functional currency is different to the presentation currency of the Group are translated into the present ation cur rency of the Group on consolidation. Assets and liabilities are translated at the exchange rate prevailing at the balance sheet date. Income and expenses are translated at the average exchange rate for the year, unless exchange rates fluctuate significantly during the year, in which case the exchange rates at the transaction date are used. Exchange differences arising on consolidation are recognised in other comprehensive income and the cumulative effect of these as a separate component in equity. (4) Revenue, Cost of Sales and Revenue Recognition Revenue compr ises the fair value of the consideration received or receivable from services, provided by the Group in the ordinar y course of the Group’s activities. Ser vices include fees, commissions, rechargeable expenses and sales of materials provided by the Group. Revenue is shown net of Value Added Tax and discounts. Revenue derived from fees is recognised as contract activity progresses, in accordance with the terms of the contractual agreement and the stage of completion of the work. Where recorded revenue exceeds amounts invoiced to clients, the excess is classified as accrued income and where recorded revenue is less than amounts invoiced to clients, the difference is classified as deferred income. Revenue derived from retainers is recognised evenly over the contract period. Revenue derived from commissions, rechargeable expenses and sale of materials is recognised when the risk and rewards have been transferred to the client in line with the individual contract. Cost of sales include amounts payable to external suppliers where they are retained at the Group’s discretion to perform part of a specific client project or service where the Group has full exposure to the benefits and risks of the contract with the client. Cost of sales does not include direct labour costs. CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING POLICIES (5) Pension Contributions T h e G r o u p o p e r a te s d ef i n e d co n t r i b u t io n pension schemes and contributes to the personal pension schemes of cer tain employees or to a Group personal pension plan. The assets of the schemes are held separately from those of the Group in independently administered funds. The amount charged against prof its represents the contributions payable to the schemes in respect of the accounting period. (6) Share-based Payments The Group has applied the requirements of IFRS 2 Share-based payment to both cash-settled and equity-settled share-based employee compensation schemes. This standard has been applied to various types of share-based payments as follows: i. Share options Certain employees receive remuneration in the form of share options. The fair value of the share options granted is measured at the date of grant and expensed to the income statement over the appropriate vesting period, with a corresponding adjustment to equity. The fair value of the share options takes into account market vesting conditions and non-vesting conditions. Non-market vesting conditions are included in assumptions of the number of options expected to vest. At the end of each reporting period the Group revises its estimate of the number of share options expected to vest and recognises the impact of the revisions to previous estimates in the income statement, with a corresponding adjustment to equity. ii. Acquisition related employee remuneration expenses In accordance with IFRS 3 (revised) Business combinations and IFRS 2 Share-based payment, cer tain payments to employees in respect of acquisition arrangements are treated as remuneration within the income statement. These payments are typically payable in cash or shares at the option of the Group so are treated as cash-settled share-based payments. The amount expected to be payable is expensed in the income statement over the appropriate period, with a corresponding adjustment made to amounts payable in respect of acquisitions. (7) Headline Measures The Group believes that reporting non-GAAP or headline measures provides a useful comparison of business performance and this reflects the way the business is reported internally and controlled. Accordingly headline measures of oper ating profi t, finance income, finance costs, profi t before taxation and earnings per share exclude, where applicable, restructuring costs, amor tisation of intangible assets, impairment charges, acquisition accounting adjustments, star t-up losses, share option charges and fair value gains and losses on derivative financial instruments. These are items that, in the opinion of the directors, are required to be disclosed separately, by virtue of their size or incidence, to enable a full understanding of the Group’s financial performance. A reconciliation between repor ted and headline prof it before taxation is presented in note 1. In addition to this, a reconciliation between reported and headline operating profi t is presented in note 2, a reconciliation between reported and headline finance income and costs is presented in note 3 and a reconciliation between reported and headline earnings per share is presented in note 12. Headline measures in this report are not defined terms under IFRSs and may not be comparable with similarly titled measures reported by other companies. (8) Segment Reporting Operating segments are repor ted in a manner consistent with the internal repor ting provided to the chief operating decision maker. The chief operating decision maker, which is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of directors. 35 CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING POLICIES (9) Discontinued Operations A discontinued operation is a component of the Group that has been disposed of or closed. These operations represent a separate line of business or geographical area of operations and can be clearly distinguished operationally and for financial reporting purposes from the rest of the Group. (10) Goodwill Goodwill represents the excess of consideration over the fair value of the Group’s share of the identif iable net a sset s acquir ed at the date of acquisition. Goodwill is carried at cost less accumulated impairment losses. Impairment losses are recognised in the income statement and cannot subsequently be reversed. (12) Internally Generated Intangible Assets – Research and Development Expenditure Goodwill is allocated to cash-generating units for the purposes of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Expenditure on research activities is recognised as an expense in the period in which it is incurred. The carr ying value of goodwill for each cashgenerating unit is reviewed annually for impairment, or more frequently if the events or changes in circumstances indicate a potential impairment. An impairment loss is recognised for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less costs to sell and its value-in-use. i. an asset is created that can be identified (such as software or a new process); (11) Intangible Assets Acquired as Part of a Business Combination In accordance with IFRS 3 (revised) Business combinations, intangible assets acquired in a business combination are recognised at fair value at the acquisition date. Identified intangible assets acquired as par t of a business combination are client contracts and licences. These intangible assets have a finite useful economic life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight line method over the expected life of the asset, which vary from 3 months to 8 years. 36 Intangible assets acquired as par t of a business combination are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. An impairment loss is recognised for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less costs to sell and its value-in-use. Intangible assets acquired as par t of a business combination which have suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Impairment losses and reversal of impairment losses are recognised in the income statement. An internally generated intangible asset arising from the Group’s development expenditure is recognised only when the following conditions are met: ii. it is probable that the asset created will generate future economic benefit; iii. the development cost of the asset can be measured reliably; iv. there is the availability of adequate technical, financial or other resources and an intention to complete the development and to use or sell the development. Internally generated assets are carried at cost less accumulated amor tisation. Amor tisation is calculated using the straight line method over the expected life of the asset. The expected life of internally generated intangible assets are between 3 and 5 years. Where no internally generated intangible asset can be recognised, the development expenditure is recognised as an expense in the period in which it is incurred. Internally generated intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING POLICIES not be fully recoverable. An impairment loss is recognised for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less costs to sell and its value-in-use. Internally generated intangible assets which have suffered an impairment are reviewed for possible reversal of impairment at each reporting date. (13) Property, Plant and Equipment Property, plant and equipment is stated at historical cost less accumulated depreciation. Cost includes the original purchase price of the asset and the costs at tributable to bringing the asset to its working condition for its intended use. Depreciation is provided at rates calculated to write off the cost, less estimated residual value, of each asset, over their estimated useful economic lives as follows: Leasehold improvements Over the remaining term of the lease Motor vehicles 25% pa. straight line Computer equipment 33% pa. straight line Fixtures, fittings and office equipment 25% pa. straight line Proper ty, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Any property, plant and equipment that has suffered an impairment, is reviewed for possible reversal of the impairment at each reporting date. (14) Current and Deferred Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. Current tax is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date. Management periodically evaluates positions taken in tax returns with respect to situations in which the applicable tax regulation is subject to interpretation. It establishes provisions where appropr iate on the basis of amounts expected to be paid to the tax authorities. Deferred tax is income tax recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying value in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill nor from the initial recognition of an asset or liability, other than resulting from a business combination that does not affect the accounting profit or loss or the taxable profit or loss. Deferred tax assets are only recognised to the extent that it is probable that they can be utilised against future taxable profits. Deferred tax is calculated at the tax rates that are enacted or substantially enacted and expected to apply in the period when the liability is settled or the asset is realised. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same tax authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. (15) Leasing and Hire Purchase Commitments When the Group enters into a lease which entails taking substantially all the risks and rewards of ownership of an asset, the lease is treated as a finance lease or similar hire purchase contract. The asset is recorded at fair value (or present value of minimum lease payments if lower) in the balance sheet as proper ty, plant and equipment and is depreciated over the estimated useful life or the term of the lease, whichever is shor ter. Future instalments under such leases, net of finance charges, are included as a liability. Rentals payable are appor tioned between the finance element, which is charged to the income statement, and the capital element which reduces the outstanding obligation for future instalments. All other leases are treated as operating leases and 37 CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING POLICIES rentals payable are charged to the income statement on a straight line basis over the lease term. (16) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle this obligation and a reliable estimate can be made of the amount of the obligation. Expected future cash flows to settle provisions are discounted to present value. Provisions for contingent deferred consideration represent the directors best estimate of amounts expected to be payable on acquisitions before 1 July 2009 and accounted for under IFRS 3 Business combinations (as revised Januar y 20 08) . The provision is discounted to present value at the risk free rate at the acquisition date. Provisions for restructuring costs relate to onerous lease costs and redundancy costs resulting from the restructuring of operations. (17) Financial Instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group has become a party to the contractual provisions of the instrument. i. Trade receivables Trade receivables are classified as loans and receivables and are initially recognised at fair value and subsequently measured at amortised cos t in accordance with IAS 39 Financial instruments: Recognition and measurement. A provision for impairment is made where there is objective evidence (including customers with financial difficulties or in default on payments) that amounts will not be recovered in accordance with original terms of the agreement. A provision for impairment is established when the carrying value of the receivable exceeds the present value of the future cash flow discounted using the original effective interest rate. The carrying value of the receivable is reduced through the use of an allowance account and any impairment 38 loss is recognised in the income statement. ii. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and at bank and other short-term deposits held by the Group with original maturities of less than three months. iii. Financial liabilities and equity A financial liability is a contractual obligation to deliver cash or another financial instrument. Financial liabilities and equity instruments are classif ied according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. iv. Bank borrowings Interest bearing bank loans and overdraf ts are recorded initially at their fair value, net of direct transaction costs. Such instruments are subsequently carried at their amor tised cost and finance charges, including premiums payable on settlement or redemption, are recognised in the income statement over the term of the instrument using an effective rate of interest. v. Trade payables Trade payables are initially recognised at fair value and subsequently measured at amortised cost. vi. Derivative f inancial instruments and hedge accounting The Group’s activities expose the entity primarily to foreign currency and interest rate risk. The Group uses interest rate swap contracts to hedge interest rate exposures. The Group does not use derivative financial instruments for speculative purposes. The interest rate swap contracts do not meet the requirements for hedge accounting so the contracts are initially recognised at fair value on the date the contract is entered into and subsequently remeasured at their fair value. Changes in the fair value are recorded in the income statement. CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING POLICIES (18) Share Capital employee remuneration. Ordinary Shares are classified as equity. The Group has estimated the value of future amounts payable in respect of acquisitions. The estimate is based on management’s estimates of the relevant entities future per formance. If these estimates change in the future as the earn out progresses, the amount of the provision will vary. Any changes to the carrying value of the provision are recognised in the income statement. Incremental costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of tax, from the proceeds. W h e r e a ny G r o u p co m p a ny p u r cha s e s t h e company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs, net of tax, is deducted from equity until the shares are cancelled or revised. Where such shares are reissued, any consideration received, net of any direct attributable incremental costs and related income tax effects, are included in equity. (19) Accounting Estimates and Judgements The Group makes es timates and judgements concerning the application the Group’s accounting policies and concerning the future. The resulting estimates may, by definition, vary from the actual results. Estimates are based on historical experience and various other assumptions that management and the Board of directors believe are reasonable. The directors consider the critical accounting estimates and judgements used in the f inancial statements and concluded that the main areas of judgements are: i. Revenue recognition policies in respect of contracts which straddle the year end. The Group is required to make an estimate of the project completion levels in respect of contracts which straddle the year end for income recognition purposes. Estimates are based on expected total costs and revenues from each contract. This involves a level of judgement and therefore differences may arise between the actual and estimated result. Where immaterial differences arise they are recognised in the income statement for the following repor ting period. Any material changes to these estimates would affect revenue recognised in the financial statements and the level of deferred or accrued income on the balance sheet. ii. Contingent deferred consideration payments in respect of acquisitions and acquisition related As par t of a typical acquisition an amount is also payable to the employees of the acquired company. These acquisition related employee remuneration costs are calculated using the same estimates of the relevant entities future per formance as the deferred consideration payable. If these estimates change in the future, as the earn out progresses, the amount of the employee liability, which is recognised over the earn out period, will vary. Any changes to the carrying value of these liabilities are recognised in the income statement. iii. Valuation and amortisation period of separately identifiable intangible assets on acquisitions. The Group is required to value the separately identifiable intangible assets acquired as part of a business combination. In order to value some of these intangible assets, the Group must make assumptions as to future cash flows derived from these costs and estimate the expected lives of these assets. Changes to these estimates would affect the resulting valuation of goodwill and the amortisation charge recognised in the financial statements. iv. Impairment of goodwill. T h e G r o u p t e s t s g o o d w i l l a n n u a l l y fo r impairment, in accordance with the Group’s accounting policy. The recoverable amount is based on value-in-use calculations, which requires estimates of future cash flows and the discount rate to apply in order to calculate the present values of these cash flows. The estimates used and sensitivity of these assumptions is disclosed in note 13. 39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 1. Reconciliation of Profit on Continuing Operations Before Taxation to Headline Profit Before Taxation Notes Profit on continuing operations before taxation Restructuring costs Start-up losses Acquisition costs Amortisation of intangible assets Acquisition related employee remuneration expense Share option charges Impairment of goodwill Finance cost of deferred consideration Fair value gain on derivative financial instruments Facility fees written off 4 7 4 14 4 4 13 3 3 3 Headline profit before taxation Headline profit before taxation is made up as follows: Headline operating profit Headline finance income Headline finance costs 2 3 3 Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 1,380 1,328 787 – 876 82 134 2,497 – (50) – 1,230 928 163 211 1,198 631 97 2,499 58 (64) 111 7,034 7,062 7,720 26 (712) 7,756 22 (716) 7,034 7,062 2. Segmental Information For management purposes, the Group is organised into two operating groups; Cello Health and Cello Consumer. These groups are the basis on which the Group reports internally to the plc’s board of directors, who have been identified as the chief operating decision makers. During the year the Group has changed its operating segments, in line with the way the Group is managed and reported to the chief operating decision maker. Prior period segmental information has been represented in line with these new operating segments. The principal activities of the operating segments are as follows: Cello Health The Cello Health Division provides market research, consulting and communications services principally to the Group’s pharmaceutical and healthcare clients. Cello Consumer The Cello Health Division provides market research and direct communications services principally to the Group’s consumer facing clients. Revenues derived from the Group’s largest client are less than 10% of the Group’s total revenue. Revenue derived from the largest client in each operating segment also represents less than 10% of external revenue in each segment. 40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 2. Segmental Information continued Sales between segments are carried out at arms-length. The revenue from external parties reported to the chief operating decision maker is measured in a manner consistent with that in the income statement. Consolidation and Unallocated £’000 Cello Health £’000 Cello Consumer £’000 Revenue External sales Intersegment revenue 46,247 100 87,457 88 – (188) 133,704 – Total segmental revenue 46,347 87,545 (188) 133,704 for the year ended 31 December 2012 Start-up revenue 1,437 Total revenue Gross profit Segmental gross profit Group £’000 135,141 31,322 32,735 – Start-up gross profit 1,038 Total gross profit Operating profit Headline operating profit (segment result) 64,057 65,095 6,506 2,995 (1,781) Restructuring costs Start-up losses Amortisation of intangible assets Acquisition related employee remuneration expense Share option charges Impairment of goodwill 7,720 (1,328) (787) (876) (82) (134) (2,497) Operating profit 2,016 Financing income Finance costs 76 (712) Profit before tax on continuing operations 1,380 Other information Capital expenditure 605 843 1 1,449 Capitalisation of intangible assets 102 256 – 358 Depreciation of property, plant and equipment 391 728 8 1,127 41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 2. Segmental Information continued Consolidation and Unallocated £’000 Cello Health £’000 Cello Consumer £’000 Revenue External sales Intersegment revenue 45,104 260 82,550 63 – (323) 127,654 – Total segmental revenue 45,364 82,613 (323) 127,654 for the year ended 31 December 2011 Start-up revenue 60 Total revenue Gross profit Segmental gross profit 127,714 29,225 32,553 – Start-up gross profit Operating profit Headline operating profit (segment result) 61,778 26 Total gross profit 61,804 6,100 3,378 (1,722) 7,756 Restructuring costs Start-up losses Acquisition costs Amortisation of intangible assets Acquisition related employee remuneration expense Share option charges Impairment of goodwill (928) (163) (211) (1,198) (631) (97) (2,499) Operating profit 2,029 Financing income Finance costs 86 (885) Profit before tax on continuing operations Other information Capital expenditure Capitalisation of intangible assets Depreciation of property, plant and equipment 42 Group £’000 1,230 273 733 1 1,007 – 38 – 38 374 651 10 1,035 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 2. Segmental Information continued The Group’s operations are located in the United Kingdom and the USA. The following table provides an analysis of the Group’s revenue by geographical market, based on the location of the client: Geographical UK Rest of Europe USA Rest of the World Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 85,159 17,053 26,172 6,757 84,427 21,808 18,822 2,657 135,141 127,714 Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 3. Finance Income and Costs Finance income: Interest received on bank deposits 26 22 Headline finance income 26 22 Fair value gains on derivative financial instruments 50 64 Total finance income 76 86 Finance costs: Interest payable on bank loans and overdrafts Interest payable in respect of finance leases Finance costs paid on derivative financial instruments 649 6 57 617 9 90 Headline finance costs 712 716 – – 58 111 712 885 Finance costs on deferred consideration Facility fee written off Total finance costs 43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 4. Loss for the Year Loss for the year is stated after charging: Continuing operations Discontinued operations Total Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended 31 December 31 December 31 December 31 December 31 December 31 December 2012 2011 2012 2011 2012 2011 £’000 £’000 £’000 £’000 £’000 £’00 0 Notes Headline administration costs: Staff costs Operating lease rentals Depreciation of property, plant and equipment Loss on disposal of property, plant and equipment Auditors remuneration Net foreign exchange losses/(gains) Other property costs Other administration costs 8 41,816 2,156 40,366 2,120 645 – 1,662 – 42,461 2,156 42,028 2,120 15 1,033 1,017 94 18 1,127 1,035 38 335 83 1,825 9,051 64 289 (15) 1,243 8,938 82 8 5 96 349 – 13 5 86 549 120 343 88 1,921 9,400 64 302 (10) 1,329 9,487 1,328 1,825 – 82 876 2,497 134 928 189 211 631 1,198 2,499 97 – – – – – – – – – – – – – – 1,328 1,825 – 82 876 2,497 134 928 189 211 631 1,198 2,499 97 63,079 59,775 1,279 2,333 64,358 62,108 5 Non-headline administration costs: Restructuring costs 6 Start-up costs 7 Acquisition costs Acquisition related employee remuneration 8 Amortisation of intangible assets 14 Impairment of goodwill 13 Share option costs 8 5. Auditors’ Remuneration Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 Fees payable to PricewaterhouseCoopers LLP for: Audit of Group’s annual report and accounts Audit of subsidiaries 47 198 38 189 Total audit fees 245 227 Non-audit fees: Taxation Interim review Other services 67 10 21 66 9 – Total non-audit fees 98 75 343 302 Total auditors’ remuneration 44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 6. Restructuring Costs Restructuring costs comprise of cost saving initiatives including severance payments, property and other contract termination costs. They are included within administration costs and have been separately identified as a non-headline item because of their size or their nature or because they are non-recurring. In the opinion of the directors, these costs are required to be separately identified, to enable a full understanding of the Group’s financial performance. An analysis of restructuring costs incurred is as follows: Staff redundancies Property costs Other Total restructuring costs Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 730 598 855 – – 73 1,328 928 7. Start-up Losses Start-up losses have been separately identified as a non-headline item because, in the opinion of the directors, separate disclosure is required to enable a full understanding of the Group’s financial performance. Start-up losses are defined as the net operating result in the period of the trading activities that relate to new offices, new products, or new organically started businesses. Activities so defined will cease being separately identified where, in the opinion of the directors, the activities show evidence of becoming sustainably profitable or are closed, whichever is earlier. In any event start-up losses will cease being separately identified after two years from the commencement of the activity. An analysis of start-up losses incurred is as follows: Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 Revenue Cost of sales 1,437 (399) 60 (34) Gross profit 1,038 26 (1,825) (189) (787) (163) Administration costs Start-up losses 45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 8. Staff Costs The average monthly number of persons (including directors) employed by the Group during the year was as follows: Year ended 31 December 2012 Year ended 31 December 2011 296 459 7 273 457 7 762 737 Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 Wages and salaries Social security costs Other pension costs 37,166 4,135 1,160 36,796 4,140 1,092 Employee costs before non-headline charges 42,461 42,028 82 134 631 97 42,677 42,756 Cello Health Cello Consumer Head Office The aggregate staff costs of these persons were as follows: Acquisition related employee remuneration expense Share-based payments – share options Included in the aggregate staff costs are the following amounts paid to the directors: Directors’ emoluments Money purchase pension contributions 682 66 881 77 748 958 Included in the above is £331,000 (2011: £333,000) of emoluments and £38,000 (2011: £37,000) of pension contributions paid or payable to the highest paid director. The number of directors to whom retirement benefits accrued under money purchase pension schemes in the year was 2 (2011: 3). In addition to the directors’ emoluments above, £77,000 was paid to a former director, who resigned on 31 December 2011, in respect of his notice period. This cost is included within restructuring costs. 46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 9. Taxation Year ended 31 December 2012 £’000 Current tax: Current tax on profits for the year Adjustment in respect of prior year 1,499 (132) 1,892 (294) 1,367 1,598 Deferred tax: Origination and reversal of temporary differences Effect of decrease in tax rate on deferred tax assets Adjustment in respect of prior year Tax charge Year ended 31 December 2011 £’000 (98) 21 (66) (256) 19 203 (143) (34) 1,224 1,564 The standard rate of corporation tax in the UK changed from 26% to 24% with effect from 1 April 2012. Accordingly the Group’s profits from the UK are taxed at an effective rate of 24.5% (2011: 26.5%). A further rate reduction to 23% from 1 April 2013 has also been substantially enacted and this rate has been applied in valuing UK deferred tax assets and liabilities. Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdiction. The charge for the year can be reconciled to the profit per the income statement. Profit before taxation Tax at the UK corporation tax rate of 24.5% (2011: 26.5%) Tax effect of expenses not deductible for tax purposes Effect of decrease in tax rate on deferred tax assets Effect of different tax rates of subsidiaries in foreign jurisdiction Prior year corporation tax adjustment Prior year deferred tax adjustment Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 1,380 1,230 338 870 21 193 (132) (66) 1,224 326 996 19 314 (294) 203 1,564 On 5 December 2012, legislation to reduce the main rate of corporation tax in the UK from 23% to 21%, from 1 April 2014, was announced. This change had not been substantially enacted at the balance sheet date and is therefore not included in these financial statements. If applied to the deferred tax balances at 31 December 2012, the 2% reduction in the main rate of corporation tax would increase the net deferred tax liability provided at the balance sheet date by £40,000. 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 10. Discontinued Operations The (loss)/profit from discontinued operations relates to Farm, Magnetic and Leapfrog in America Inc. Farm was a division of Tangible UK Limited, a wholly owned subsidiary of the Group. Magnetic was a division of Brightsource limited, a wholly owned subsidiary of the Group. Leapfrog in America Inc is a wholly owned subsidiary of the Group. The operations of Farm, Magnetic and Leapfrog in America Inc are included as discontinued operations because their activities ceased during the year. In accordance with IFRS 5 Non-current assets held for sale and discontinued operations the income statement for the year ended 31 December 2011 has been re-presented to include income and expenses of the discontinued operations within (loss)/profit from discontinued operations. An analysis of the result of discontinued operations is as follows: Year ended 31 December 2012 £’000 Revenue Cost of sales 2,703 (2,041) Gross profit 662 Administration expenses (1,279) Pre-tax (loss)/profit of discontinued operations Year ended 31 December 2011 £’000 5,819 (3,352) 2,467 (2,333) (617) 134 101 (70) Post-tax (loss)/profit for the year from discontinued operations (516) 64 (Loss)/profit for the year from discontinued operations attributable to: Equity holders of the parent Non-controlling interest (516) – 64 – (516) 64 Taxation In accordance with IFRS 5 Non-current assets held for sale and discontinued operations, cash flows from discontinued operations have been included in the cash flow statement together with cash flows from continuing operations. Cash flows from discontinued operations are as follows: Year ended 31 December 2012 £’000 48 Year ended 31 December 2011 £’000 Operating cash flows Investing cash flows 147 (30) 125 (177) Total cash flows 117 (52) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 11. Equity Dividends Date paid Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 8 July 2011 6 January 2012 6 July 2012 – 429 957 709 – – 1,386 709 The dividends paid in the year were: Final dividend 2010 – 0.905p per share Interim dividend 2011 – 0.55p per share Final dividend 2011 – 1.17p per share A 2012 interim dividend of 0.58p per ordinary share was paid on 6 January 2013 and a 2012 final dividend of 1.42p has been proposed for approval at the Annual General Meeting in 2013. In accordance with IAS 10 Events after the reporting date these dividends have not been recognised in the consolidated financial statements at 31 December 2012. 12. Earnings/(Loss) per Share Loss attributable to ordinary shareholders Loss/(profit) from discontinued operations Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 (386) 516 (587) (64) Earnings/(loss) attributable to ordinary shareholders from continuing operations Non-controlling interests 130 22 (651) 311 Earnings/(loss) from continuing operations 152 (340) Adjustments to earnings/(loss): Restructuring costs Start-up losses Acquisition costs Amortisation of intangible assets Acquisition related employee remuneration expenses Share-based payments charge Impairment of goodwill Finance costs on deferred consideration Fair value gain on derivative financial instruments Facility fees written off Tax thereon 1,328 787 – 876 82 134 2,497 – (50) – (766) 928 163 211 1,198 631 97 2,499 58 (64) 111 (570) Headline earnings for the year 5,040 4,922 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 12. Earnings/(Loss) per Share continued 2012 Number of shares 2011 Number of shares Weighted average number of ordinary shares in issue Less: Weighted average number of treasury shares Weighted average number of shares held in employee benefit trusts 80,720,587 74,111,359 (237,000) (1,367,378) (237,000) (1,739,754) Weighted average number of ordinary shares 79,116,209 72,134,605 1,540,918 5,629,378 80,657,127 77,763,983 3,713,181 89,127 4,097,576 143,885 84,459,435 82,005,444 Dilutive effect of securities: Deferred consideration shares Diluted weighted average number of ordinary shares Further dilutive effect of securities: Share options Contingent consideration shares to be issued Fully diluted weighted average number of ordinary shares Year ended 31 December 2012 Year ended 31 December 2011 Basic earnings/(loss) per share From continuing operations From discontinued operations Total basic loss per share 0.16 p (0.65)p (0.49)p (0.90)p 0.09 p (0.81)p Diluted earnings/(loss) per share From continuing operations From discontinued operations Total diluted loss per share 0.16 p (0.65)p (0.49)p (0.90)p 0.08 p (0.81)p In addition to basic and diluted earnings/(loss) per share, headline earnings per share and fully diluted earnings/ (loss) per share, which are non-GAAP measured, have also been presented. 50 Fully diluted earnings/(loss) per share From continuing operations From discontinued operations Total fully diluted loss per share 0.15 p (0.65)p (0.49)p (0.90)p 0.08 p (0.81)p Headline earnings per share Headline basic earnings per share Headline diluted earnings per share Headline fully diluted earnings per share 6.37 p 6.25 p 5.97 p 6.82 p 6.33 p 6.00 p NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 12. Earnings/(Loss) per Share continued Basic earnings/(loss) per share is calculated by dividing the earnings/(loss) attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding treasury shares and shares in employee benefi t trusts, determined in accordance with the provisions of IAS 33 Earnings per share. Diluted earnings/(loss) per share is calculated by dividing earnings/(loss) attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year adjusted for the potentially dilutive ordinary shares for which the conditions of issue have substantially been met but not issued at the end of the year. The Group’s potentially dilutive shares are shares expected to be issued as deferred consideration on acquisitions and share options issued but not exercised. Fully diluted earnings/(loss) per share is calculated by dividing earnings/(loss) attributable to ordinary shareholders by the weighted average number of shares in issue during the year adjusted for all of the potentially dilutive ordinary shares expected to be issued in future period whether or not the conditions of the issue have substantially been met. This measure is presented to show the dilutive effect on earnings per share of all shares expected to be issued in the future. Headline earnings per share is calculated using headline earnings for the year, which excludes the effect of restructuring costs, start-up losses, amortisation of intangibles, impairments charges, acquisition accounting adjustments, share option charges, fair value gains and losses on derivative financial instruments and other exceptional costs. The calculation also excludes non-controlling interests over which the Group has exclusive options to acquire in the future. 13. Goodwill 2012 £’000 2011 £’000 At 1 January Goodwill arising on acquisitions in the year Adjustment to fair value of deferred consideration Impairment of goodwill Exchange differences 73,823 – (8) (2,497) (290) 71,155 4,687 225 (2,499) 255 At 31 December 71,028 73,823 Goodwill represents the excess of consideration over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill arising on acquisition in the year ended 31 December 2011 relates to the Group’s acquisition of MedErgy HealthGroup Inc. (“MedErgy”). The adjustment to fair value of deferred consideration relates to the changes in estimate to deferred consideration payable under earn out arrangements in accordance with the terms of the relevant acquisition agreements for acquisitions before 1 July 2009 and therefore not accounted for in accordance with the provisions of IFRS 3 Business combinations (as revised January 2008). 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 13. Goodwill continued Goodwill acquired through business combinations is allocated to cash-generating units (“CGUs”) for impairment testing. The goodwill balance was allocated to the following CGUs: 2012 £’000 2011 £’000 Insight Research Group Leapfrog The Value Engineers RS Consulting MSI 2CV Tangible UK Face Opticomm MedErgy 10,224 – 9,526 4,305 7,666 8,276 22,889 3,442 48 4,652 10,224 3,908 9,526 3,364 7,666 8,276 22,419 3,450 48 4,942 Total 71,028 73,823 During the year ended 31 December 2012, as a result of restructuring initiatives which rationalised the Group’s management structure, the goodwill allocations changed. The recoverable amount for each CGU is determined using a value-in-use calculation. This calculation uses pre-tax cash flow projections derived from 2013 budgets, as approved by management, with an underlying growth rate of 3.5% per annum in years two to five, representing economic growth and inflation. After year five a terminal value has been applied using an underlying long term inflation rate of 2.5%. No additional Cello specific growth has been assumed beyond year one. The pre-tax cash flows are discounted to present value using the Group’s pre-tax weighted average cost of capital (“WACC”), which was 10.5% for 2012 (2011: 10.8%). This rate was calculated using the Capital Asset Pricing Model with an estimated cost of debt and equity, with appropriate small company risk factors. The review performed at 31 December 2012 did not result in an impairment of goodwill for any CGU. In addition to this review, a review of the Leapfrog CGU was performed prior to the restructuring of operations. This review resulted in an impairment of goodwill of £2,497,000. The remaining goodwill of the Leapfrog CGU has been allocated to the Tangible UK CGU and the RS Consulting CGU, in line with the restructuring. Sensitivity to changes in assumptions The value-in-use exceeds the total goodwill value across the Group by £52.3m. The impairment review of the Group is sensitive to changes in the key assumptions, most notably the pretax discount rate, the terminal growth rate and projected operating cash flows. Reasonable changes to these assumptions would not result in an impairment to goodwill for any of the Groups CGU’s, with the exception of the Tangible CGU, where an impairment was recognised in the year ended 31 December 2011. 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 13. Goodwill continued Variations required to each of the key assumptions, in isolation, for the value-in-use of the Tangible CGU to equal the carrying value are: Increase in pre-tax discount rate Decrease in projected operating cash flows Decrease in terminal growth rate 0.5% 5.7% 0.5% The table below shows the impairment charge that would be recognised against the carrying value of goodwill in the Tangible CGU, with reasonable variations, in isolation, of the key assumptions used in the value-in-use calculation: Impairment charge £’000 1% increase in pre-tax discount rate 10% decrease in projected operating cash flows 1% decrease in terminal growth rate 2,582 1,178 1,275 14. Intangible Assets Software development costs £’000 Client contracts £’000 Licences £’000 Total £’000 Cost At 1 January 2011 Expenditure on development On acquisition of subsidiaries Exchange differences 654 38 – – 1,280 – 2,348 72 3,209 – – – 5,143 38 2,348 72 At 31 December 2011 692 3,700 3,209 7,601 Expenditure on development Exchange differences 358 – – – 358 (65) At 31 December 2012 – (65) 1,050 3,635 3,209 7,894 Accumulated amortisation At 1 January 2011 Charge for the year 226 145 1,280 825 2,524 228 4,030 1,198 At 31 December 2011 371 2,105 2,752 5,228 Charge for the year 167 481 228 876 At 31 December 2012 538 2,586 2,980 6,104 Net book value At 31 December 2012 512 1,049 229 1,790 At 31 December 2011 321 1,595 457 2,373 At 1 January 2011 428 – 685 1,113 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 15. Property, Plant and Equipment Leasehold improvements £’000 Computer equipment £’000 Fixtures, fi ttings and office equipment £’000 Motor vehicles £’000 Total £’000 Cost At 1 January 2011 Additions On acquisition of subsidiaries Disposals Exchange differences 1,824 258 15 (124) 1 3,149 560 85 (214) 5 1,208 153 60 (504) 3 274 36 – (100) – 6,455 1,007 160 (942) 9 At 31 December 2011 1,974 3,585 920 210 6,689 Additions Disposals Exchange differences 391 (394) – 427 (486) (3) 110 (45) – 1,449 (1,197) (3) At 31 December 2012 1,971 3,834 858 275 6,938 2,437 534 (209) – 762 238 (498) 1 149 60 (90) – 4,331 1,035 (853) – Accumulated depreciation At 1 January 2011 Charge for the year Disposals Exchange differences 983 203 (56) (1) 521 (272) – At 31 December 2011 1,129 2,762 503 119 4,513 Charge for the year Disposals Exchange differences 288 (309) 1 541 (258) 7 231 (392) 3 67 (43) – 1,127 (1,002) 11 At 31 December 2012 1,109 3,052 345 143 4,649 Net book value At 31 December 2012 862 782 513 132 2,289 At 31 December 2011 845 823 417 91 2,176 At 1 January 2011 841 712 446 125 2,124 The net book value of property, plant and equipment of the Group includes £53,000 (2011: £85,000) of motor vehicles and £32,000 (2011: £15,000) of fixtures, fittings and office equipment in respect of assets held under finance leases. 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 16. Subsidiaries Details of the Company’s principal subsidiary undertakings as at 31 December 2012 are as follows: Country of incorporation/ principal operation Class of share Proportion of shares held 2012 Held directly: 2CV Limited Cello Group Inc Cello Business Sciences Limited Chiaros Holdings Limited Fenix Media Limited Insight Medical Research Limited Leapfrog Research and Planning Limited MedErgy Europe Limited Opticomm Media Limited RS Group Limited Tangible Group Limited The MSI Consultancy Limited The Value Engineers Limited England USA England England England England England England England England England England England Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100% 100% 100% 100% 97% 100% 100% 100% 51% 100% 100% 100% 100% 100% 100% 100% 100% 51% 100% 100% 100% 20% 100% 100% 100% 100% Held indirectly: 2CV Inc Blonde Digital Limited Brightsource Limited Insight Research Group USA Inc Labinah Management Training Limited MedErgy Communications Inc MedErgy Healthcare Group MedErgy Marketing Inc RS Consulting Limited Scifluent Communications Inc Stripe PR and Communications Limited Tangible UK Limited USA Scotland England USA England USA USA USA England USA Scotland Scotland Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 84% 100% 100% 100% 100% 100% 100% 100% 100% 76% 100% Company name Proportion of shares held 2011 During the year ended 31 December 2012 the Group increased its proportion in shares held in Fenix Media Limited, Opticomm Media Limited, Blonde Digital Limited and Stripe PR and Communications Limited. These increases were as a result of transactions pursuant to the terms of share purchase agreements in relation to these companies. 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 17. Trade and Other Receivables Trade receivables Other receivables Prepayments and accrued income 2012 £’000 2011 £’000 23,840 1,174 4,921 21,566 1,456 6,109 29,935 29,131 The average credit period taken on the provision of services was 53 days (2011: 53 days). The directors consider that the carrying value of trade and other receivables approximates to fair value. 18. Cash and Cash Equivalents Cash at bank and in hand 2012 £’000 2011 £’000 4,148 4,170 Cash of £278,000 (2011: £830,000) is maintained in a designated account with The Royal Bank of Scotland plc as security for the loan notes issued on acquisitions and is therefore not freely available to the Group. 19. Trade and Other Payables Trade payables Other taxation and social security costs Accruals and deferred income Deferred consideration for acquisitions Acquisition related employee remuneration liability Other payables 2012 £’000 2011 £’000 14,744 1,546 12,416 343 75 593 11,728 1,454 14,710 559 927 590 29,717 29,968 The directors consider that the carrying value of trade and other payables approximates to fair value. 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 20. Borrowings Bank loans Loan notes The borrowings are repayable as follows: – on demand or within one year – within two to five years 2012 £’000 2011 £’000 12,320 498 10,806 959 12,818 11,765 498 12,320 959 10,806 12,818 11,765 Bank loans The Group has a multi-currency debt facility with the Royal Bank of Scotland plc. This facility consists of a £25.0m revolving credit facility which is committed to March 2016. The revolving credit facility bears interest at a variable rate of 1.75% to 2.80% over LIBOR. The average interest rate on the Group’s bank loans in the year was 3.0% (2011: 3.4%). The debt facility is secured by a debenture held by the Royal Bank of Scotland plc over the assets of the Group. At 31 December 2012, the Group has drawn £12.3m (2011: £10.8m) under the revolving credit facility. Loan notes Loan notes have been issued as part of the consideration for certain acquisitions. Secured loan notes are secured on cash deposits and by way of guarantee. Cash deposits provided as security are included within cash and cash equivalents and amount to £278,000 (2011: £830,000). Loan notes bear interest at the following rates: Secured LIBOR less 2% LIBOR 2012 £’000 2011 £’000 447 51 880 79 498 959 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 21. Provisions Contingent deferred consideration for acquisitions Restructuring provision Current Non-current 2012 £’000 2011 £’000 – 388 2,268 – 388 2,268 108 280 2,268 – 388 2,268 Contingent deferred consideration for acquisitions £’000 Restructuring provision £’000 6,415 456 6,871 Adjustments to provisions for additions in prior years Finance costs on deferred consideration Utilisation of provisions 225 58 (4,430) – – (456) 225 58 (4,886) At 31 December 2011 2,268 At 1 January 2011 Additions for the year Adjustments to provisions in prior years Utilisation of provisions At 31 December 2012 – (8) (2,260) – – 388 – – 388 Total £’000 2,268 388 (8) (2,260) 388 The provision for contingent deferred consideration for acquisitions represents the directors’ best estimate of the amount expected to be payable in cash (or loan notes) and shares to be issued on acquisitions before 1 July 2009 and accounted for under IFRS 3 Business combinations (as revised January 2008). The provision is discounted to present value at the risk free rate at the acquisition date. The restructuring provision relates to redundancy costs and onerous lease costs as a result of restructuring of operations within the Cello Consumer Division. 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 22. Obligations under Finance Leases A maturity analysis of obligations under finance leases is shown below: Finance leases which expire: – within one year – in more than one year but not more than five years 2012 £’000 2011 £’000 23 26 39 43 49 82 The Group’s policy is to lease certain of its property, plant and equipment under finance leases. The average lease term is 3 years. The average effective borrowing rate is 10.5% (2011: 9.1%). Interest rates are fixed at the contract date and all leases are on a fixed repayment basis. All lease obligations are denominated in sterling. The fair value of the Group’s obligations approximates to their carrying value. The Group’s obligations under finance leases are secured by the lessors’ rights over the leased assets. 23. Derivative Financial Instruments Interest rate swap at fair value 2012 £’000 2011 £’000 5 55 During the year ended 31 December 2012 the Group had an interest rate swap over £3.3m (2011: £5.3m) of borrowings. This reduced to £1.0m on 31 December 2012 and reduces to £nil on 31 March 2013. The interest rate swap fixes the LIBOR rate at 2.35%. At 31 December 2012 the fair value of this interest rate swap is a liability of £5,000 (2011: £55,000). The interest rate swap is included within Tier 2 as defined in IFRS 7 (Revised) Financial instruments: Disclosures. 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 24. Deferred Taxation An analysis of deferred tax assets and deferred tax liabilities is set out below: Deferred tax assets Decelerated capital allowances Unrelieved share-based payment expense Unrelieved acquisition related employee remuneration expense Unrelieved loss on derivative financial instruments Deferred tax liabilities Accelerated capital allowances Temporary difference between the net book value and the tax value of intangible assets 2012 £’000 2011 £’000 202 85 175 1 203 40 320 14 463 577 (1) (10) (497) (789) (498) (799) (35) (222) The movement for the year is analysed as follows: At 1 January Income statement Recognised in equity Acquired deferred tax balances Foreign exchange differences At 31 December 60 2012 £’000 2011 £’000 (222) 143 17 – 27 768 34 (1) (992) (31) (35) (222) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 25. Share Capital Authorised number of 10p shares Allotted, issued and fully paid number of 10p shares Share capital £’000 At 1 January 2011 Movements in the year 84,600,000 15,400,000 61,644,654 16,882,052 6,164 1,689 At 31 December 2011 Movements in the year 100,000,000 – 78,526,706 3,734,799 7,853 373 At 31 December 2012 100,000,000 82,261,505 8,226 The Company has one class of ordinary shares which carry no right to fixed income. Authorised share capital in the table above represents the number of shares the Company has been given authority to issue by shareholders, including shares already issued, by way of resolution at the Company’s last Annual General Meeting. On 15 March 2011, 5,333,333 ordinary shares of 10p each were issued at a placing price of 52.5p to new and existing shareholders. The proceeds were used to fund the acquisition of MedErgy. On 22 March 2011, 5,804,049 ordinary shares of 10p each were issued at the value of 54.4p to the vendors of MedErgy HealthGroup Inc. pursuant to the terms of the share purchase agreement of that company. On 11 May 2011, 5,744,670 ordinary shares of 10p each were issued at a value of 49.6p to the vendors of 2CV Limited and The MSI Consultancy Limited pursuant to the terms of the share purchase agreements of these companies. On 30 April 2012, 486,219 new ordinary shares of 10p each were issued at a value of 39.7p to vendors of businesses previously acquired by the Group and certain employees of the Group. These shares were issued pursuant to the terms of minority share purchases under the share purchase agreements in relation to Blonde Digital Limited, Stripe PR and Communications Limited and Opticomm Media Limited. On 23 May 2012, 3,248,580 new ordinary shares of 10p each were issued at 35.8p to vendors of businesses previously acquired by the Group and certain employees of the Group. These shares were issued pursuant to the share purchase agreements in relation to Fenix Media Limited (which trades as Face Group) and Red Kite Consulting Group Limited. The Group owns 237,000 (2011: 237,000) of its own shares and these shares are held as treasury shares. The company has the right to re-issue these shares at a later date. 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 26. Share Options The Group has the following share options schemes. EMI Share Option Scheme and Unapproved Share Option Scheme 2004 In 2004, the Company established an EMI Share Option Scheme (the “EMI Scheme”) and an Unapproved Share Option Scheme (the “Unapproved Scheme 2004”). 463,266 share options awarded under these schemes remain outstanding and have vested in full. 300,000 of these share options expire on 1 November 2014 and 163,266 share options expire on 1 June 2015. On 13 March 2006, the Remuneration Committee agreed that no further awards would be made under these plans. The range of exercise prices of options outstanding under these schemes is 100.0p to 122.5p being the market value of the shares at the date of grant of the options. HM Revenue & Customs Approved Share Option Plan 2009 and the Unapproved Option Plan 2010 On 17 November 2009 the Company established the HM Revenue & Customs Approved Share Option Plan 2009 (the “Approved Plan 2009”) and on 15 March 2010 established the Unapproved Option Plan 2010 (the “Unapproved Plan 2010”). Under these plans participants are awarded options over fully paid shares with an exercise price equal to the market value of the shares at the date the awards are granted. The range of exercise prices of options granted under these schemes is 31.5p to 42.0p. Options are exercisable three years, but not later than ten years, after the date of grant subject to performance conditions. Performance conditions are based on Company, Division or Group targets, as appropriate to the participant. PSP Option Scheme 2010 On 4 June 2010 the Company established a new Performance Share Plan (“PSP”). Under this plan participants are awarded options over fully paid shares with an exercise price equal to the nominal value of shares, currently 10p per share. Options are exercisable three years, but not more than ten years, after grant, subject to performance conditions based on the total shareholder return (“TSR”) of the Group. The number of awards that ultimately vest depends on where Cello ranks when compared to the TSR of a list of comparator companies. The following share options were outstanding under these share option schemes at 31 December 2012 and 31 December 2011 31 December 2012 Weighted average Number of share exercise price (pence) options Outstanding at the beginning of the year Granted during the year Lapsed during the year 4,560,842 1,526,866 (503,780) 35 25 35 3,649,266 1,494,576 (583,000) 41 31 65 Outstanding at the end of the year 5,583,928 32 4,560,842 35 463,266 108 463,266 108 Exercisable at the end of the year 62 31 December 2011 Weighted average Number of exercise price (pence) share options NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 26. Share Options continued The options outstanding at the end of the year under the EMI Scheme and Unapproved Scheme 2004 have a weighted average remaining life of 2.1 years (2011: 3.0 years) and options issued under the PSP, Approved Plan 2009 and the Unapproved Plan 2010 have a weighted average remaining life of 8.3 years (2011: 8.4 years). The Group uses a Black Scholes model to calculate the fair value of options. The key inputs for share options granted in the year are as follows: Weighted average share price Weighted average exercise price Expected volatility Expected life Risk free rate Dividend yield 2012 2011 34.0p 25.0p 31.3% 10 years 1.57% 5.26% 42.0p 31.0p 27.6% 10 years 3.3% 3.4% Expected volatility has been determined by calculating the historical volatility of the Group’s share price over the previous 8 years. The expected life used in the model has been adjusted, based on management’s best estimates, for the effects of the non-transferability, exercise restrictions and behavioural considerations. At 31 December 2012, 181,633 options under the EMI Scheme (2011: 181,633) and 281,633 options under the Unapproved Scheme 2004 (2011: 281,633) had vested. None of the options under the PSP, or Approved Plan 2010 or the Unapproved Plan 2011 have vested at 31 December 2012 (2011: nil). The fair value of all options granted in the year was £121,000 (2011: £213,000). 27. Cash Generated from Operations Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 Profit on continuing activities before taxation 1,380 1,230 (Loss)/profit on discontinued operations Financing income Finance costs Depreciation of the property, plant and equipment Amortisation of intangible assets Impairment of goodwill Share-based payment expense Acquisition related employee remuneration expense Loss on disposal of property, plant and equipment Increase in trade and other receivables Increase/(decrease) in trade and other payables (617) (76) 712 1,127 876 2,497 134 82 120 (879) 1,479 134 (86) 885 1,035 1,198 2,499 97 631 64 (324) (339) Net cash inflow from operating activities 6,835 7,024 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 28. Net Debt At 1 January 2012 £’000 Cash and cash equivalents Loan notes Bank loans Finance leases Cash flow £’000 Foreign exchange £’000 Other changes £’000 At 31 December 2012 £’000 4,170 (959) (10,806) (82) 127 461 (1,700) 50 (149) – 186 – – – – (17) 4,148 (498) (12,320) (49) (7,677) (1,062) 37 (17) (8,719) 29. Commitments under Operating Leases The future aggregate minimum lease payments under non-cancellable operating leases are as follows: No later than one year Later than one year and no later than five years Later than five years 64 Land and buildings 2012 £’000 Land and buildings 2011 £’000 Other 2012 £’000 Other 2011 £’000 2,116 5,355 925 1,962 5,491 1,247 151 154 – 215 203 – 8,396 8,700 305 418 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 30. Related Party Transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Remuneration of key management personnel The key management personnel of the Group are considered to be the directors (Executive and NonExecutive). The remuneration paid to the key management personnel is shown below: Salaries and other short-term benefits Post-employment benefits Share-based payments – share options Year ended 31 December 2012 £’000 Year ended 31 December 2011 £’000 770 66 63 995 77 44 899 1,116 Further information about the remuneration of the directors is provided in the Remuneration Report on pages 24 to 26, and in note 8 to the consolidated financial statements. 31. Contingent Liabilities Under the terms of certain acquisition agreements, additional consideration is payable by the Company contingent on the future financial performance of the acquired entities. The estimated amount of such contingent consideration is included in Provisions (note 21 to the consolidated financial statements). 32. Post Balance Sheet Events On 25 January 2013, the Group acquired the entire share capital of Mash Health Limited for an initial consideration of £0.5m of cash and the issue of 333,332 new ordinary shares of 10p each. Additional payments of up to £0.9m may be payable to the vendors, subject to performance conditions. 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 33. Financial Instruments The Group’s principal financial instruments comprise bank loans, bank overdrafts, loan notes, finance leases, deferred consideration for acquisition under IFRS 3 (revised), trade receivables, trade payables and cash. The main purpose of these financial instruments is to provide finance for the Group operations. The Group has other financial assets and liabilities which arise directly from operations. The following table provides an analysis of the Group’s non-derivative financial assets and liabilities at 31 December 2012 and 31 December 2011: 2012 £’000 2011 £’000 Financial assets: Cash and cash equivalents Trade receivables Other receivables Accrued income 4,148 23,840 1,174 3,251 4,170 21,566 1,456 2,815 Total financial assets 32,413 30,007 Financial liabilities: Bank loans Loan notes Finance leases Consideration payable in respect of acquisitions Trade payables Accruals Other payables 12,320 498 49 418 14,744 7,623 593 10,806 959 82 3,754 11,728 8,232 590 Total financial liabilities 36,245 36,151 All non-derivative financial assets are categorised as loans and receivables and all non-derivative financial liabilities are categorised as other financial liabilities at amortised cost. The Group enters into derivative financial instruments in the form of interest rate swaps which are disclosed in note 23. The purpose of these derivative financial instruments is to manage the interest rate risk arising from its sources of finance. The Group does not hold derivative financial instruments for trading purposes. Derivative financial instruments are recognised in the balance sheet at fair value. All other financial assets and liabilities are recognised in the balance sheet at amortised cost. 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 33. Financial Instruments continued Risk management objectives and policies The main risks arising from the Group’s financial instruments are interest rate risk, liquidity risk, credit risk and foreign exchange risk. Interest rate risk The Group’s exposure to interest rate risk arises from the Group’s long term debt obligations with floating and fixed interest rates. Floating rate financial instruments comprise of the Group’s cash and cash equivalents and borrowings. Fixed rate financial instruments comprise of obligations under finance leases. £3.6m (2011: £3.8m) of the Group’s borrowings are denominated in US dollars. All of the Group’s other borrowings and obligations under finance leases are denominated in sterling. Details of the Group’s borrowings are set out in note 20 and details of the Groups obligations under finance leases are set out in note 22. The Group manages interest rate risk with the use of interest rate swaps. Details of the Group’s interest rate swap arrangement is set out in note 23. At 31 December 2012 approximately 8.2% (2011: 26.0%) of the Group’s total borrowings are at a fixed rate of interest as a result of this arrangement. The following table demonstrates the sensitivity to reasonably possible changes in interest rates, with all other variables held constant, on the Group’s profit before tax and equity: 2012 £’000 2011 £’000 Increase in rates of 100 basis points Effect on headline profit before tax Effect on profit before tax and equity (98) (95) (91) (55) Decrease in rates of 50 basis points Effect on headline profit before tax Effect on profit before tax and equity 49 48 45 28 The difference in the effects on headline profit before tax and reported profit before tax is due to estimated differences in the fair value of derivative financial instruments. Liquidity risk The Group manages liquidity risk by maintaining adequate reserves on its available bank facilities and by continuously monitoring forecast and actual cash flows. The Group currently has an agreed committed revolving credit facility (“RCF”) of £25.0m with the Royal Bank of Scotland plc, which matures on 31 March 2016, as set out in note 20. In addition to the RCF, the Group has an overdraft facility of £4.0m with the Royal Bank of Scotland plc, which is reviewed on an annual basis. Both the RCF and the overdraft are available on demand. At 31 December 2012 the Group had an undrawn facility of £12.7m (2011: £14.2m) on the RCF and had cash and cash equivalents of £4.1m (2011: £4.2m). 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 33. Financial Instruments continued The table below summarises the maturity profile of the Group’s non-derivative financial liabilities at 31 December 2012 and 31 December 2011 based on contractual undiscounted payments, including estimated interest payments where applicable: Less than 6 months £’000 Between 6 months and 1 year £’000 Between 1 and 5 years £’000 Total £’000 Bank loans Loan notes Finance leases Consideration payable in respect of acquisitions Trade payables Accruals Other payables 88 498 14 418 14,744 7,623 593 57 – 14 – – – – 12,691 – 26 – – – – 12,836 498 54 418 14,744 7,623 593 Total 23,978 71 12,717 36,766 2011 Less than 6 months £’000 Between 6 months and 1 year £’000 Between 1 and 5 years £’000 Total £’000 Bank loans Loan notes Finance leases Consideration payable in respect of acquisitions Trade payables Accruals Other payables 91 959 25 3,749 11,728 8,232 590 64 – 24 – – – – 11,221 – 42 – – – – 11,376 959 91 3,749 11,728 8,232 590 Total 25,374 88 11,263 36,725 2012 Credit risk Credit risk predominately arises from trade receivables. The Group only trades with recognised creditworthy third parties. Customers who wish to trade on credit terms are generally subject to credit verification procedures. In addition, trade receivable balances are monitored on a continuous basis with the result that the Group’s exposure to bad debt is considered limited. 68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 33. Financial Instruments continued The Group considers the maximum exposure to credit risk is as follows: Trade receivables Accrued income 2012 £’000 2011 £’000 23,840 3,251 21,566 2,815 27,091 24,381 The following table provides an analysis of trade and other receivables that were past due, but not impaired, at 31 December 2012 and 31 December 2011. The Group believes that the balances are ultimately recoverable based on a review of past payment history and the current financial status of customers. There are no material bad debt provisions at either 31 December 2012 or 31 December 2011. Up to three months Up to six months 2012 £’000 2011 £’000 2,209 199 2,081 166 2,408 2,247 The credit risk from other financial instruments arises from default of the counterparty, with a maximum exposure equal to the carrying value of the asset. Foreign exchange risk The Group operates in a number of markets across the world and is exposed to foreign exchange risk arising from various currency exposures in respect of trade receivables and trade payables, in particular with respect to the US dollar and the Euro. The Group mitigates its foreign exchange risk with bank loans and overdrafts denominated in foreign currency under its debt facilities. The Group also has foreign subsidiaries located in the USA. At 31 December 2012 the net foreign assets were £6,478,000 (2011: £8,109,000). Differences that arise from the translation of these assets from US dollar to sterling are recognised in other comprehensive income in the year and the cumulative effect as a separate component in equity. The Group does not hedge this translation exposure to its equity. 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 33. Financial Instruments continued The following table demonstrates the Group’s sensitivity to a 10% increase and decrease in sterling against the US dollar and euro, on the Group’s profi t for the year and on the Group’s equity. This sensitivity represents management’s assessment of the reasonably possible change in foreign exchange rates. US Dollar Strengthening of sterling by 10% On profit for the year On equity Weakening of sterling by 10% On profit for the year On equity Euro 2012 2011 2012 2011 65 (390) (40) (515) (24) (24) (111) (111) (79) 476 48 630 29 29 135 135 Capital management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders through the optimisation of the debt and equity balance. The Group considers its capital to be total equity and net debt. Equity attributable to the owners of the parent comprises of issued share capital, reserves and retained earnings and is disclosed in the balance sheet and in the consolidated statement of changes in equity. Net debt comprises short and long term borrowings (including overdrafts and obligations under finance leases) net of cash and cash equivalents. The ratio of debt to capital ratio at 31 December 2012 and 31 December 2011 is as follows: Total debt Less cash and cash equivalents Net debt Total equity Debt to capital ratio 2012 £’000 2011 £’000 12,867 (4,148) 11,847 (4,170) 8,719 7,677 65,596 66,123 13.3% 11.6% The Group has various financial covenants in connection with its current bank loans. During the year ended 31 December 2012 the Group was compliant with its covenants. 70 INDEPENDENT AUDITOR’S REPORT – COMPANY We have audited the parent company financial statements of Cello Group plc for the year ended 31 December 2012 which comprise the Balance Sheet, the Accounting Policies and the Notes to the Company Financial Statements. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Respective responsibilities of directors and auditors As explained more fully in the Statement of Directors’ Responsibilities set out page 20 the directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent company f inancial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This repor t, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements suff icient to give reasonable assurance that the f ina ncial s t ate me nt s a r e fr ee fr om mate r ial misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the parent company’s circumstances and have been consistently applied and adequately disclosed ; the reasonableness of signif icant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual repor t to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the parent company f inancial statements: • give a true and fair view of the state of the company’s affairs as at 31 December 2012; • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the infor mation given in the Directors’ Report for the financial year for which the parent company f inancial statements are prepared is consistent with the parent company financial statements. Matters on which we are required to report by exception We have nothing to repor t in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • cer tain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the Group financial statements of Cello Group plc for the year ended 31 December 2012. David Snell (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 12 March 2013 71 COMPANY BAL ANCE SHEET AT 31 DECEMBER 2012 Fixed assets Tangible assets Investments Current assets Debtors Cash at bank and in hand Creditors: Amounts falling due within one year Notes 31 December 2012 £’000 31 December 2011 £’000 1 2 3 81,324 10 83,763 81,327 83,773 10,924 754 10,069 830 11,678 10,899 (22,163) (20,370) (10,485) (9,471) 70,842 74,302 (12,320) (10,806) 58,522 63,496 3 4 Net current liabilities Total assets less current liabilities Creditors: Amounts falling due after more than one year 5 Net assets Capital and reserves Called up share capital Share premium account Capital redemption reserve Merger reserve Share-based payment reserve Profit and loss account 8 10 10 10 10 10 8,226 18,188 50 28,228 343 3,487 7,853 18,104 50 28,742 209 8,538 Total shareholders’ funds 11 58,522 63,496 The financial statements on pages 72 to 79 were approved by the Board of Directors on 12 March 2013 and signed on its behalf by: 72 Mark Scott Director Mark Bentley Director COMPANY FINANCIAL STATEMENTS ACCOUNTING POLICIES (1) Basis of Accounting (6) Investments The Company financial statements are prepared on a going concern basis, under the historical cost convention and in accordance with the Companies Act 2006 and applicable to accounting standards in the United Kingdom. The principle accounting policies, which have been applied consistently throughout the year, are set out below. Fixed asset investments are stated at cost less provision for any impairment in value. (2) Profit and Loss Account As permitted by section 408 The Companies Act 2006, the company’s profit and loss account has not been presented. The Company reported a loss in the financial year of £5,077,000 (2011: £2,926,000). The auditor’s remuneration for audit and other services is disclosed in note 5 to the consolidated financial statements. (3) Turnover Turnover is derived from management charges to subsidiary companies. Turnover is recognised on an accruals basis, net of VAT. (4) Pensions The Company operates a defined contribution scheme. The amount charged to the profit and loss account in respect of pensions is the contributions payable in the year. Differences between contributions payable in the year and contributions paid are shown as either other debtors or other creditors. (5) Tangible Fixed Assets Tangible fixed assets are stated at historical cost less accumulated depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is provided at rates calculated to write off the cost, less estimated residual value, of each asset, over their estimated useful economic lives as follows: Computer equipment 33% pa. straight line Fixtures, fittings and office equipment 25% pa. straight line (7) Deferred Taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recoverable against suitable taxable profits in the future. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis. (8) Foreign Currency Transactions denominated in foreign currencies are initially translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date and the resulting gains and losses are recorded in the profit and loss account. 73 COMPANY FINANCIAL STATEMENTS ACCOUNTING POLICIES (9) Share-based Payments (10) Provisions The Company has applied the requirements of FRS 20 Share-based payment to both cash-settled and equity-settled share-based employee compensation schemes. Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle this obligation and a reliable estimate can be made of the amount of the obligation. Expected future cash flows to settle provisions are discounted to present value. Cer tain employees of the Company receive remuneration in the form of share options. The fair value of the share options granted is measured at the date of grant and expensed to the profit and loss account over the appropriate vesting period, with a corresponding adjustment to equity. The fair value of the share options takes into account market vesting conditions and non-vesting conditions. Non-market vesting conditions are included in assumptions of the number of options expected to vest. At the end of each repor ting period the Company revises its estimate of the number of share options expected to vest and recognises the impact of the revisions to previous estimates in the profit and loss account, with a corresponding adjustment to equity. The grant of share options to the employees of subsidiar y under takings is treated as a capital contribution. The fair value of the share options granted is measured at the date of grant and recognised as an increase of cost of investment over the appropriate vesting period, with a corresponding adjustment to equity. 74 (11) Cash Flow Statement The Company has applied the exemption available under FRS 1 (revised) Cash flow statements and has not presented a cash flow statement. A consolidated cash flow statement has been presented in the Group financial statements. NOTES TO THE COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 1. Tangible Fixed Assets Computer equipment £’000 Fixtures, fi ttings and office equipment £’000 Total £’000 Cost At 1 January 2012 Additions 40 – 44 1 84 1 At 31 December 2012 40 45 85 Accumulated depreciation At 1 January 2012 Charged for the year 37 2 37 6 74 8 At 31 December 2012 39 43 82 Net book value At 31 December 2012 1 2 3 At 31 December 2011 3 7 10 2. Fixed Asset Investments Subsidiaries £’000 At 1 January 2012 Adjustment to deferred consideration Impaired in the year Capital contribution in relation to share-based payments 83,763 (8) (2,497) 66 At 31 December 2012 81,324 Subsidiaries: The Company’s principal trading subsidiaries are listed in note 16 to the consolidated financial statements. The directors believe that the carrying value of the investments is supported by their underlying net assets. 3. Debtors Notes Amounts falling due within one year: Amounts owed by subsidiary companies Other debtors Deferred tax asset Corporation tax Prepayments 7 2012 £’000 2011 £’000 10,273 45 34 295 277 9,621 346 18 – 84 10,924 10,069 Amounts owed by subsidiaries are unsecured and repayable on demand. Balances with subsidiaries outside of normal trading terms bear an interest rate of 1.5% (2011: 1.5%). 75 NOTES TO THE COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 4. Creditors: Amounts falling due within one year Notes Bank overdraft Loan notes Trade creditors Amounts owed to Group companies Corporation tax Other taxation and social security costs Consideration payable in respect of acquisitions Other creditors Accruals 6 2012 £’000 2011 £’000 8,305 498 134 12,548 – 274 – 82 322 12,128 1,263 92 3,434 66 145 2,467 102 673 22,163 20,370 Amounts owed to subsidiaries are unsecured and repayable on demand. Balances with subsidiaries outside of normal trading terms bear an interest rate of 1.5% (2011: 1.5%). Bank overdraft The bank overdraft is part of the Group wide overdraft facility with the Royal Bank of Scotland plc, which holds a debenture over the assets of the Company and its subsidiaries. There is a cross-guarantee between the Company and its subsidiaries. The bank overdraft bears interest at a variable rate of 1.75% to 2.80% over LIBOR and is repayable on demand. Loan notes Loan notes have been issued as part of the consideration for certain acquisitions. Secured loan notes are secured on cash deposits and by way of guarantee. Cash deposits provided as security are included within cash at bank and in hand and amount to £278,000 (2011: £830,000). Loan notes are repayable on demand and bear interest at the following rates: Secured LIBOR less 2% LIBOR 76 2012 £’000 2011 £’000 447 51 1,184 79 498 1,263 NOTES TO THE COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 5 . Creditors: Amounts falling due after more than one year Bank loans 2012 £’000 2011 £’000 12,320 10,806 The Company has a debt facility with the Royal Bank of Scotland plc. The debt facility consists of a £25.0m revolving credit facility which is committed to March 2016. The revolving credit facility bears interest at a variable rate of 1.75% to 2.80% over LIBOR. The security over the revolving credit facility is the same as for the bank overdraft (note 4). 6. Consideration Payable for Acquisitions £’000 At 1 January 2012 Settled in the year Adjustment to provision for additions in prior years 2,467 (2,392) (75) At 31 December 2012 – Acquisitions made by the Company typically involve an earn out agreement whereby the consideration payable includes a deferred element that is contingent on the future financial performance of the acquired entity. The provision for contingent consideration for acquisitions represents the directors’ best estimate of the amount expected to be payable in cash or loan notes and shares to be issued. The provision is discounted to present value at the risk free rate at the acquisition date. 7. Deferred Taxation Deferred tax assets: Other timing differences 2012 £’000 2011 £’000 34 18 The deferred tax credit in the year of £16,000 (2011: £10,000) is included in the tax charge in the profit and loss account. 77 NOTES TO THE COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 8. Called Up Share Capital Allotted, issued and fully paid: 82,261,505 ordinary shares of 10p each 2012 £’000 2011 £’000 8,226 7,853 The Company has one class of ordinary shares which carry no right to fixed income. Details of shares issued in the year are given in note 25 to the consolidated financial statements. 9. Share-based Payments Details of share option awards and key inputs into the Black Scholes model to calculate the fair value of options are given in note 26 to the consolidated financial statements. For the year ended 31 December 2012, the Company recognised an expense of £68,000 in the profit and loss account (2011: £47,000) in relation to equity settled share-based payment transactions. 10. Reserves Capital Share premium redemption reserve account £’000 £’000 Company At 1 January 2012 Loss for the year Shared-based payments Dividends paid Transfer between reserves in respect of impairment Share-based payment in subsidiaries Allotment of shares during the year 31 December 2012 78 18,104 – – – 50 – – – – – 84 – – – 18,188 50 Merger reserve £’000 28,742 – – – (1,412) – 898 28,228 Share-based payment Profi t and reserve loss account £’000 £’000 Total £’000 209 – 68 – 8,538 (5,077) – (1,386) 55,643 (5,077) 68 (1,386) – 66 – 1,412 – – – 66 982 343 3,487 50,296 NOTES TO THE COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012 11. Equity Shareholders’ Funds 2012 £’000 2011 £’000 Loss for the year New share capital subscribed Premium on shares issued in the year (net of expenses) Merger reserve on shares issued in the year Dividends paid Expense for share-based incentive schemes Share-based payments in subsidiaries (5,077) 373 84 898 (1,386) 68 66 (2,926) 1,689 2,366 4,500 (709) 47 50 Net addition to equity shareholders’ funds (4,974) 5,017 Opening equity shareholders’ funds 63,496 58,479 Closing equity shareholders’ funds 58,522 63,496 12. Related Party Transactions Transactions with the Company’s directors are disclosed in note 30 to the consolidated financial statements. Further information about the remuneration of the directors is provided in the Remuneration report on pages 24 to 26 and in note 8 to the consolidated financial statements. During the year ended 31 December 2012 the Company earned £41,000 (2011: nil) of turnover from Fenix Media Limited, a subsidiary which is not 100% owned. The Company has applied the exemption available under FRS 8 Related party disclosures not to disclose transactions with its wholly owned subsidiaries. 79 NOTICE OF ANNUAL GENERAL MEETING Notice is hereby given that the Ninth Annual General Meeting of the Company will be held at Buchanan, 107 Cheapside, London EC2V 6DN on Tuesday 14 May 2013 at 12.30pm, for the transaction of the following business: Ordinary Business 1. To receive and adopt the Directors’ Repor t and Financial Statements for the year ended 31 December 2012, together with the auditors’ report thereon. 2. To declare a final dividend of 1.42p per ordinary share for the year ended 31 December 2012. 3. To r e ce i ve a n d a p p r ove t h e D i r e c t o r s’ Remuner ation Repor t for the year ended 31 December 2012. 4. To re-elect Mark Scott as a Director, who resigns in accordance with the Company’s Articles of Association. 5. To re-elect Allan Rich as a Director, who resigns in accordance with the Company’s Articles of Association. 6. To re-appoint PricewaterhouseCoopers as auditors of the Company to hold office until the next General Meeting at which accounts are laid and to authorise the Directors to fix their remuneration. Special Business To consider and, if thought fit, pass the following resolutions of which resolution 7 is an ordinary resolution and resolutions 8 and 9 are special resolutions. 7. That, in substitution for existing authorities to the extent unutilised, the directors be and are hereby generally and unconditionally authorised pursuant to section 551 of the Companies Act 2006 (the “Act” ) to exercise all powers of the Company to allot shares or grant rights to subscribe for or convert any security into shares 80 up to an aggregate nominal amount of £1,740,517 to such persons, at such times and on such terms and conditions as the directors determine, during the period expiring (unless previously renewed, varied or revoked by the Company in General Meeting) on whichever is the earlier of the conclusion of the Annual General Meeting of the Company held in 2014 and the date falling 15 months after the date of the passing of this resolution, but the Company may make an offer or agreement before the expiry of this authority which would or might require shares to be allotted or rights to subscribe for or convert any security into shares to be granted after expiry of this authority and the directors may allot shares or grant rights to subscribe for or convert any security into shares in pursuance of that offer or agreement. Special Resolutions 8. That, subject to the passing of resolution 7 set out in the notice convening this meeting, the directors be empowered pursuant to section 570 of the Companies Act 2006 (the “Act”), to allot equity securities (within the meaning of the Act) of the Company for cash pursuant to the general authority conferred on them by the said resolution 7 as if section 561(1) of the Act did not apply to any such allotment provided that this power shall be limited to: (a) t h e a llot m e n t of e q u i t y s e cu r i t i e s i n connection with an offer of equity securities (whether by way of a rights issue, open offer or otherwise), open for acceptance for a period fixed by the directors, to holders of ordinary shares on the register on any fixed record date in propor tion (as nearly as practicable) to their holdings of ordinary shares, subject to such exclusions or other such arrangements as the directors may deem necessary or expedient in relation to fractional entitlements or legal or practical problems arising under the laws of, or the NOTICE OF ANNUAL GENERAL MEETING requirements of, any regulatory body or any stock exchange in, any territory; and/or (b) the allotment (otherwise than pursuant to paragraph (a) above) of equity securities up to an aggregate nominal amount of £825,948 and the power hereby conferred shall operate in substitution for and to the exclusion of any previous power given to the directors pursuant to section 570 of the Act and shall expire on whichever is the earlier of the conclusion of the Annual General Meeting of the Company held in 2014 and the date falling 15 months after the date of the passing of this resolution, unless such power is renewed or extended prior to such expiry, except that the Company may before the expiry of any power conferred by this resolution make an offer or agreement which would or might require equity securities to be allotted after such expiry and the directors may allot equity securities in pursuance of such offer or agreement as if the power conferred hereby had not expired. This power applies in relation to a sale of shares which is an allotment of equity securities by virtue of Section 560(2) of the Act as if in the f irst paragraph of this resolution the words “pursuant to the general authority conferred on them by the said resolution 7” were omitted. 9. That the Company be and is hereby granted general and unconditional authority (pursuant to section 701 of the Companies Act 2006 (the “Act”)) to make market purchases (as defined in section 693 of the Act) of any of its own ordinary shares of 10p each on such terms and in such manner as the board of directors of the Company may from time to time determine provided that: (b) the maximum price which may be paid for a share is an amount equal to not more than 105% of the average of the middle market quotations for the shares taken from the London Stock Exchange Daily Official List for the five business days before the day on which the purchase is made; (c) the minimum price which may be paid for a share is 10p exclusive of any attributable expenses payable by the Company; and (d) the authority conferred by this resolution shall expire on whichever is the earlier of the conclusion of the Annual General Meeting of the Company held in 2014 and the date falling 15 months after the date of the passing of this resolution, unless such authority is renewed or extended prior to such expiry, whichever is the earlier, except that the Company may, before such expiry, enter into a contract for the purchase of its own shares which may be completed by or executed wholly or partly after the expiration of this authority. By order of the Board Mark Bentley Company Secretary 11 April 2013 Registered Office 11-13 Charterhouse Buildings London EC1M 7AP (a) the maximum number of shares authorised to be purchased is 4,129,742 ordinary shares of 10p each, being 5% of the shares in issue as at 11 April 2013; 81 NOTICE OF ANNUAL GENERAL MEETING Notes To The Notice Of Annual General Meeting 1. As a member of the Company, you are entitled to appoint a proxy to exercise all or any of your rights to attend, speak and vote at the Annual General Meeting and you should have received a proxy form with this notice of meeting. You can only appoint a proxy using the procedures set out in these notes and the notes to the proxy form. 2. A proxy does not need to be a member of the Company but must attend the Annual General Meeting to represent you. Details of how to appoint the Chairman of the Annual General Meeting or another person as your proxy using the proxy form are set out in the notes to the proxy form. If you wish your proxy to speak on your behalf at the Annual General Meeting you will need to appoint your own choice of proxy (not the Chairman) and give your instructions directly to him/her. 3. You may a p poin t m or e t ha n o ne p r ox y provided each proxy is appointed to exercise rights attached to different shares. You may not appoint more than one proxy to exercise rights attached to any one share. 4. A s p e r m i t t e d b y R e g u l a t i o n 41 o f t h e Uncer tif icated Securities Regulations 2001, Shareholder s who hold their shares in uncer tificated form must be entered on the Company’s share register by 12.30pm on 10 May 2013 in order to be entitled to attend and vote at the Annual General Meeting. Such Shareholders may only cast votes in respect of shares held at such time. Changes to entries on the register of members after such time on such date will be disregarded in determining the rights of any person to attend and vote at the Annual General Meeting. 5. To be effective, a proxy form must be duly completed, executed and returned, together with the power of attorney or other authority, if any, under which it is signed, or a notarially 82 certified copy or a copy certified in accordance with the Powers of Attorney Act 1971 of such power of attorney or authority, so as to reach the Company’s registr ar s, Computer share Investor Services PLC, The Pavilions, Bridgwater Road, Bristol, BS99 6ZY by 12.30pm on 10 May 2013, being 48 hours (excluding any part of a day that is not a working day) prior to the time fixed for the meeting or, in the case of an adjournment, as at 48 hours (excluding any part of a day that is not a working day) prior to the time of the adjourned meeting. 6. In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior holder will be accepted. Seniority is determined by the order in which the names of the joint holders appear in the Company’s register of members in respect of the joint holding (the first-named being the most senior). 7. If multiple cor por ate represent atives are appointed, in order to facilitate voting by corporate representatives at the Annual General Meeting, arrangements will be put in place at the Annual General Meeting so that: (i) if a corporate member has appointed the Chairman of the Annual General Meeting as its corporate representative with instructions to vote on a poll in accor dance wi t h the directions of all the other corporate representatives for that member at the Annual General Meeting, then, on a poll, those corporate representatives will give voting directions to the Chairman and the Chairman will vote (or withhold a vote) as corporate representative in accordance with those directions; and (ii) if more than one corporate representative for the same corporate member attends the Annual General Meeting but the corporate member has not appointed the Chairman of the Annual General Meeting as its corporate representative, a designated cor por ate NOTICE OF ANNUAL GENERAL MEETING representative will be nominated, from those corporate representatives who attend, who will vote on a poll and the other corporate representatives will give voting directions to that designated corporate representative. 8. The following documents will be available at the registered office of the Company on any weekday (except Saturday) during nor mal business hours from the date of this notice until the date of the Annual General Meeting: – a copy of the ser vice agreements for the Executive Directors; – a copy of the letters of appointment for the Non Executive Directors; emption conferred by section 561(1) of the Act did not apply: (a) in connection with an offer to existing shareholders in proportion to their existing holdings save that the directors are allowed to offer shares to existing shareholders otherwise than strictly in proportion to their holdings where, for example, overseas regulations make it difficult to offer shares pro rata to existing overseas shareholders or when dealing with fractions of shares, and/or (b) up to a nominal amount of £825,948 being 10% , of the issued share capital of the Company as at 11 April 2013 (to give the directors some flexibility in financing business opportunities as they arise). – the Articles of Association of the Company; and This power would expire on the date of the 2014 Annual General Meeting or 14 August 2014, whichever is the earlier. – the register of interests of the directors (and their families) in the share capital of the Company. Explanation of Resolution 9 (Authority to purchase own shares) These documents will also be available for inspection during the Annual General Meeting and for at least 15 minutes before it begins. Explanation of Special Business at the Annual General Meeting Explanation of Resolution 7 (Authority to allot securities) Resolution 7, which will be proposed as an ordinary resolution, would give the directors authority to allot shares up to a maximum nominal amount of £1,740,517 being approximately 21% of the Company’s issued share capital as at 11 April 2013. The existing authority would be revoked and this new authority would expire on the date of the 2014 Annual General Meeting or 14 August 2014, whichever is the earlier. Explanation of Resolution 8 (Disapplication of pre-emption rights) Resolution 8, which will be proposed as a special resolution, would renew the power of the directors to allot shares for cash as though the rights of pre- In certain circumstances it may be advantageous for the Company to purchase its own shares. Resolution 9, which will be proposed as a special resolution, seeks authority from shareholders to do so, such authority to expire on the date of the 2014 Annual General Meeting or 14 August 2014, whichever is the earlier. The directors intend to exercise this power only if and when, in the light of market conditions prevailing at the time, they believe that the effect of such purchases will be to increase earnings per share and is in the best interests of shareholders generally. Other investment opportunities, appropriate gearing levels and the overall position of the Company will be taken into account before deciding upon this course of action. Any shares purchased in this way will be cancelled and the number of shares in issue will be accordingly reduced. This resolution specif ies the maximum number of shares which may be acquired (being 4,129,742 ordinary shares, which is 5% of the Company’s issued share capital as at 11 April 2013 of 82,594,837 ordinary shares) and the maximum and minimum prices at which they may be bought. 83 DIRECTORS Allan Rich – Non-Executive Chairman Allan Rich has spent all his working life in the advertising business. He co-founded Davidson Pearce Berry and Spottiswood which became one of the most successful agencies in the UK during the late 60’s and early 70’s. In 1975 he founded the first independent media planning and buying company in the UK which he called The Media Business. In 1995 he took the company to the London Stock Market and in 1998 sold his group to Grey Advertising New York in order to create a truly global media organisation, MediaCom. Over the following 4 years MediaCom became the largest media company in the UK and number 5 in the world. Allan is a member of the Audit Committee. Mark Scott – Chief Executive From 1994 to 1998 Mark Scott was a senior executive at WPP Group plc, latterly being appointed Operations Director for the Group with responsibility for the Group’s European and Asian acquisition programme. Post WPP he became Executive Vice President of Lighthouse Global Network LLC where he helped acquire and consolidate more than 15 marketing services companies. From 2000 to 2002 he was appointed a senior executive of Lake Capital Management, a private equity firm, where he was responsible for a range of investments in marketing service firms. He has been a member of the Boards of a number of public companies in the sector including Watermark Group plc, Chime Communications Group plc, Chemistry Communications Group plc and Fitch plc. He obtained his MBA from Harvard Business School and a first class honours degree in English Literature from Oxford University. Mark Bentley – Group Finance Director Mark Bentley joined Cello Group as Group Finance Director in May 2005. He is also Company Secretary. Mark previously worked for Citigate Dewe Rogerson which he joined in 2000 as Financial Controller and spent the next five years in various senior finance roles within Incepta Group plc, including Finance Director of Citigate Dewe Rogerson from February 2001. Whilst maintaining the Finance Director role, he took on wider operational responsibilities when he was appointed Chief Operating Officer in November 2003. From June 2002 he also had the parallel role of Finance Director of the Citigate SMARTS regional network of offices. Prior to Citigate he was Financial Projects Manager at Hodder Headline plc. Mark qualified as a chartered accountant with Coopers & Lybrand in 1996. 84 DIRECTORS Paul Hamilton – Non-Executive Director and Senior Independent Director Paul Hamilton was Senior Independent Director of Wellington Underwriting plc until 31 December 2006. Prior to this Paul worked in both corporate finance at UBS Warburg where he was a Managing Director, and in corporate broking at Rowe & Pitman where he was a Partner. In recent years Paul has also been Chairman of the FSA Listing Rules Committee and a member of the FSA Listing Authority Advisor y Committee and London Stock Exchange Primary Markets Committee. Paul chairs both the Nomination and Remuneration Committee and is a member of the Audit Committee. Will David – Independent Non-Executive Director Will David was Non-Executive Chairman of Polaron plc until March 2007 and Chairman of its Audit and Remuneration Committees, and of Orca Interactive Limited until it was taken over in May 2008. He has more than 20 years experience working in corporate advisory and broking roles for small and mid cap companies. Will has also worked at Investec Henderson Crosthwaite, PricewaterhouseCoopers, Hoare Govett & Co and The London Stock Exchange. During his professional career Will has worked on over twenty flotations for clients across a range of sectors. His experience also includes acquisitions and disposals, public takeovers and secondary fundraisings and provision of advice on corporate governance matters. Will chairs the Audit Committee and is a member of both the Nomination and Remuneration Committees. 85 GROUP DIRECTORY Head Office The Value Engineers – North America 11-13 Charterhouse Buildings, London EC1M 7AP tel: +44 (0)20 7812 8460 www.cellogroup.com Contact: Mark Scott 256 W 38th Street, 15th Floor, New York, NY 10018 USA tel: +1 646 837 8161 www.thevalueengineers.com Contact: Alex Waters Cello Health Insight Research Group 11-13 Charterhouse Buildings, London EC1M 7AP tel: +44 (0)20 7608 9300 www.insightrg.com Contact: Jane Shirley, Nicola Cowland Insight Health US 256 W 38th Street, 15th Floor, New York, NY 10018 USA tel: +1 646 837 8151 www.insightrg.com/insight-health-us Contact: Jessica Cunningham, Kathryn Gallant MedErgy HealthGroup 790 Township Line Road, Suite 200, Yardley, PA 19067 tel: +1 215 504 2082 www. medergygroup.com Contact: Julia Ralston MedErgy Europe Priory House, 8 Battersea Park Road, London SW8 4BG tel: +44 (0)845 130 4576 www.mruk.co.uk Contact: Rachel Cope Mash Health 3 Beverley Court, 26 Elmtree Road, Teddington TW11 8ST tel: +44 (0)20 8977 5358 www.mashhealth.com Contact: Jane Ayton Cello Consumer 2CV Research 35 King Street, Covent Garden, London WC2E 8JG tel: +44 (0)20 7655 9900 www.2CV.com Contact: Vincent Nolan 11-13 Charterhouse Buildings, London EC1M 7AP tel: +44 (0)20 7608 3396 www. medergygroup.com Contact: Mark Vince 2CV US The MSI Consultancy 2CV Asia Pacific Weaver’s Yard, West Street, Farnham, Surrey GU9 7DN tel: +44 (0)1252 748 600 www.msi.co.uk Contact: Jon Bircher 104a Tanjong Pagar Road, Singapore 0088524 tel: +65 6574 5015 www.2CV.com Contact: James Redden RS Consulting Ltd 86/3 Commercial Quay, Commercial Street, Edinburgh EH6 6LX tel: +44 (0)131 526 3030 www.blonde.net Contact: Pete Burns Priory House, 8 Battersea Park Road, London SW8 4BG tel: +44 (0)20 7627 7700 www.rsconsulting.com Contact: Phil Stubington, Chris Stead The Value Engineers Wendover House, 24 London End, Beaconsfield, Buckinghamshire HP9 2JH tel: +44 (0)1494 680999 www.thevalueengineers.com Contact: Owen Williams 86 MRUK 460 Bush Street, Floor 1, San Francisco, CA 94108 tel: +1 415 956 1004 www.2CV.com Contact: Doug Edmonds Blonde GROUP DIRECTORY Brightsource Leithal Thinking (Edinburgh) St James’s House, St James Square, Cheltenham, Gloucestershire GL50 3PR tel: +44 (0)1242 534200 www.brightsource.co.uk Contact: Peter Frings 37 The Shore, Edinburgh EH6 6QU tel: +44 (0)131 561 8600 www.leithalthinking.com Contact: David Amers Cello Business Sciences 7 Midford Place, London W1T 5BG tel: +44 (0)207 881 3260 www.leithalthinking.com Contact: Richard Marsham Weaver’s Yard, West Street, Farnham, Surrey GU9 7DN tel: +44 (0)845 838 6376 www.businesssciences.com Contact: Alex Blyth Face 7 Midford Place, London W1T 5BG tel: +44 (0)20 7874 6599 www.facegroup.com Contact: Andrew Needham Face USA 256 W 38th Street, 15th Floor, New York, NY 10018 USA tel: +1 646 837 8152 www.facegroup.com Contact: Philip McNaughton Face Asia 19th Floor, The Phoenix Building, No.23 Luard Road, Wan Chai, Hong Kong tel: + (852) 64666 749 www.facegroup.com Contact: Andrew Ho, Daniel Tompsett Leapfrog Priory House, 8 Battersea Park Road, London SW8 4BG tel: +44 (0)20 7627 7810 www.leapfrogresearch.co.uk Contact: Kate Anderson Leith 37 The Shore, Edinburgh EH6 6QU tel: +44 (0)131 561 8600 www.leith.co.uk Contact: Richard Marsham Leithal Thinking (London) Opticomm Media 7 Midford Place, London W1T 5BG tel: +44 (0)20 7874 6567 www.opticomm.co.uk Contact: Spencer Stratford, Paul Cox Stripe Communications 86/3 Commercial Quay, Commercial Street, Edinburgh EH6 6LX tel: +44 (0)131 561 8628 www.stripecom.co.uk Contact: Juliet Simpson Tangible Group 37 The Shore, Edinburgh EH6 6QU tel: +44 (0)131 556 8002 www.tangible.uk.com Contact: John Rowley Tangible (Edinburgh) 37 The Shore, Edinburgh EH6 6QU tel: +44 (0)131 556 8002 www.tangible.uk.com Contact: Karen Trickett Tangible (Cheltenham) St James’s House, St James Square, Cheltenham GL50 3PR tel: +44 (0)1242 258700 www.tangible.uk.com Contact: Karen Trickett Tangible (London) 7 Midford Place, London W1T 5BG tel: +44 (0)20 7881 3200 www.tangible.uk.com Contact: Karen Trickett TMI 7 Clarendon Place, Royal Leamington Spa, Warwickshire CV32 5QL tel: +44 (0)1926 462998 www.tmi.co.uk Contact: Gillian James 87 ADVISORS Company Secretary Solicitors Mark Bentley Marriott Harrison Staple Court 11 Staple Inn Buildings London WC1V 7QH Registered Office 11-13 Charterhouse Buildings London EC1M 7AP Principal Banker Independent Auditor PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 1 Embankment Place London WC2N 6RH Nominated Advisor and Broker Cenkos Securities 6.7.8 Tokenhouse Yard London EC2R 7AS 88 Royal Bank of Scotland plc 280 Bishopsgate London EC2M 4RB Registrars Computershare Investor Services plc PO Box 82 The Pavilions Bridgwater Road Bristol BS99 7NH Cello Group plc 11-13 Charterhouse Buildings London EC1M 7AP tel: +44 (0)20 7812 8460 www.cellogroup.com Company Registration No. 05120150